By TIOL News Service

AHMEDABAD, MAY 09, 2013: THE issues before the Bench are - Whether when assessee has transferred the money taken on interest from its sister concern in P&L account, and the sister concern has dissolved without receiving either the interest or principal sum nor has it demanded from the assessee, such sum warrants addition u/s 41(1) in the hand of the assessee - Whether the nature of receipt, which was capital in the beginning, can undergo a change with influx of time and the same can become revenue receipt. And the verdict goes against the assessee.

Facts of the case

Assessee, a firm, is engaged in the business of shroff and cheque discounting. It takes money on interest and advances the same on interest to others. It filed its ROI for A.Y. 2008-09 showing total income of Rs.79,960/-. During assessment, AO determined the income at Rs.9,02,690/- and noticed that the assessee had taken unsecured loan of Rs.8,22,726/- from Om Traders. On perusing the details it was further observed that the firm Om Traders had been dissolved on 31-3-2006. It was also observed that till date the loan had not been squared up and further no interest was paid during the year on the aforesaid loan. It was further noticed that as per dissolution deed, the firm was dissolved after squaring up the accounts. It was further noted that the dissolution deed stated that the Bank account shall be closed after squaring up the accounts of receivable and payable and the bank account of Om Traders was also closed. AO thus held that the loan from “Om Traders” was not proved to be genuine. AO was further of the view that as per the provisions of the Limitation Act loan liability was barred by limitation. It was therefore, concluded that the assessee was not required to pay the liability of Om Traders and therefore, the liability had ceased to be operative. AO held that the liability as cession and accordingly added Rs.8,22,726/- to the income.

On appeal, CIT(A) upheld the order of AO and held that the appellant had submitted that AO had stated that at the time of dissolution of the firm on 31-3-2006 that the accounts had been squared up but it was not correct. The appellant had further submitted that the deposit received from the customers were time barred but in the case of appellant the creditors payment were not time barred because it was shown as a liability in the accounts and therefore, all the partners were agreed to it and it was automatically renewed for the further period. If an amount was received in course of trading transaction, even though it was not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the appellant’s own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands the amount should be treated as income of the appellant. In the instant case, the amounts were taken as loan from M/s. Om Traders (firm.). The loans were not repaid and kept with the appellant and it was to be noted that the firm M/s.Om Traders (Firm) was already dissolved in 2006.The loans were taken in course of the trade. Although the amounts received originally were not of income nature, the amounts remained with the appellant for a long period unclaimed by the trade parties. By lapse of time, the claim of the loan became time barred and the amount attained a totally different quality. It became a definite trade surplus. In the instant case, the loans were received by the appellant in course of carrying on his business. Although it was treated as loans and was of capital nature at the point of time it was received, by influx of time the money had become the appellant’s own money. What remains after adjustment of the deposits had not been claimed by the customers. The claims of the customers had become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profits and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else’s money. Thus, the aforesaid liability of loan of Rs.8,22,726/- was barred by limitation would mean that the appellant was not required to pay the liability to M/s. Om Traders (Firm). Therefore, the liability of Rs.8,22,726/- was treated as cessation of liability u/s. 41(1) and therefore, the addition made by the A.O. was confirmed.

Having heard the matter, Tribunal held that,

++ nothing has been brought on record to demonstrate that the aforesaid loan has been repaid till date. Further the assessee has placed on record the copy of bank statement of Om Traders for the period 1-1-2012 to 31-8-2012 to prove its contention that the bank account has not been closed. However, the bank statement reveals no transactions during the period so as to demonstrate that the assets / liabilities have been settled during the period. Further nothing is on record to prove that what were the assets and liabilities of Om Traders as on the date of dissolution and whether the assets have been recovered and liabilities been repaid from the date of dissolution till date and what is its status as on date. We are of the view that the ratio of the aforesaid decision of Gujarat HC are distinguishable and cannot be applied to the facts of the present case for the reason that in that case, it was not a case where the firm to whom the amount was payable was no more in existence and had ceased to exist. In the case of CIT vs. Agarpara Co. Ltd. the HC has held that assuming that there can be a cessation only on bilateral act by both the creditor and debtor such acts may be inferred from the conduct of the debtor and creditors;

++ in the case of CIT vs. Chipsoft Technology (P) Ltd. (2012-TIOL-565-HC-DEL-IT), HC has held that two aspects are to be noticed in this context. The first is that the view that liability does not cease as long as it is reflected in the books, and that mere lapse of the time given to the creditor or the workman, to recover the amounts due, does not efface the liability, though it bars the remedy. This view, with respect is an abstract and theoretical one, and does not ground itself in reality. Interpretation of laws, particularly fiscal and commercial legislation is increasingly based on pragmatic realities, which means that even though the law permits the debtor to take all defences, and successfully avoid liability, for abstract juristic purposes, he would be shown as a debtor. In other words, would be illogical to say that a debtor or an employer, holding on to unpaid dues, should be given the benefit of his showing the amount as a liability, even though he would be entitled in law to say that a claim for its recovery is time barred, and continue to enjoy the amount. The second reason why the assessee’s contention is unacceptable is because with effect from 1-4-1997 by virtue of Finance Act, 1996 (No.2), an Explanation was added to Section 41 which spells out that “loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof” shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause.” The expression “include” is significant’ Parliament did not use the expression “means”. Necessarily, even omission to pay, over a period of time, and the resultant benefit derived by the employer/assessee would therefore qualify as a cessation of liability, albeit by operation of law.”

++ in the case of CIT vs.T.V. Sundaram Iyenger & Sons Ltd. (2002-TIOL-239-SC-IT) SC observed that if a commonsense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account, The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus, it was pointed out that in Morely’s case, no trading asset was created. Mere change of method of book-keeping had taken place. But, where a new asset came into automatically by operation of law, commonsense demanded that the amount should be entered in the profit and loss account for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee’s own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee;

++ in the present case, the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital in nature at the point of time it was received, by influx of time the money has become the assessee’s own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profits and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else’s money. In fact, as pointed out that what the assessee did was the commonsense way of dealing with the amounts. Thus in the present case considering the fact that the firm is a sister concern of assessee, has dissolved w.e.f. 31-3-2006, no interest paid during the year under review, no material on record to prove that it has demanded the repayment of amount at any time nothing on record to demonstrate that assessee has paid the amount till date, and relying on the aforesaid decisions, we are of the view that on the facts and circumstances of the present case, the A.O’s action of making addition u/s. 41(1) cannot be faulted. We thus dismiss the assessee’s ground.

(See 2013-TIOL-335-ITAT-AHM)