Darshan L. Gandhi, Mumbai vs Department Of Income Tax

ी बी. आर. भा करन, लेखा सद य एवं ी संजय गग , या यक सद य के सम । BEFORE SHRI B. R. BASKARAN, AM AND SHRI SANJAY GARG, JM

आयकर अपील सं./I.T.A. No. 3188/Mum/2012 ( नधा रण वष / Assessment Year: 2008-09)

Income Tax Officer-8(2)2, Darshan L. Gandhi Room No. 212/216A, 2nd Floor, Bunglow No. 7, "Swadhin", Golden Aayakar Bhavan, M. K. Road, बनाम/ Acres Co-op. Society, Ruia Park, Mumbai-400 020 Vs. Military Road, Juhu, Mumbai-400 049 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AACPG 8714 D (अपीलाथ# /Appellant) : ($%यथ# / Respondent)

अपीलाथ# क& ओर से / Appellant by : Shri Love Kumar

$%यथ# क& ओर से/Respondent by : Shri Deepak Tralshawala

सनु वाई क& तार,ख / : 04.03.2015 Date of Hearing घोषणा क& तार,ख / : 13.03.2015 Date of Pronouncement

आदे श / O R D E R Per Sanjay Garg, Judicial Member :

The present appeal has been preferred by the Revenue against the order of the ld. Commissioner of Income Tax (Appeals) (hereinafter referred to as 'CIT(A)') dated 24.02.2012. The Revenue has agitated the action of the ld. CIT(A) in deleting the addition of Rs.42,67,500/-, which was made by the A.O. u/s. 41(1) of the Act on account of cessation of liability of outstanding interest shown as payable by the assessee to his group concern.

2 ITA No. 3188/Mum/2012 (A.Y. 2008-09) ITO vs. Darshan L. Gandhi

2. The brief facts of the case are that the assessee had borrowed the loan from its sister concerned M/s. Lok Financiers Company (LFC), an Association of Persons (AOP) earlier to A.Y. 1997-98. The interest payable on borrowed loan has continuously shown as expenditure as the assessee has been following the mercantile system of accounting. In the year A.Y. 2002-03, the entire capital loan account was paid off/adjusted towards allocation of shares. However, the outstanding accumulated interest of Rs.42,67,650/- pertaining to A.Y. 1999-2000 and A.Y. 2002-03 was shown as outstanding from year to year basis. The said interest had not been paid by the assessee upto the year under consideration and was appearing as outstanding interest in the balance-sheet of the assessee. When asked to explain in this respect, the assessee submitted that LFC has been an AOP and has been in the business of finance. The assessee had borrowed monies from the said AOP. Due to restrictions brought in by the RBI, the said AOP could not carry on its finance business. Whereas the principal amount was repaid by the assessee, the interest payable was still outstanding and that the liability had not ceased till then.

The A.O., however, noticed that the accrued interest was not paid by the assessee for so many years even though the assessee was in the capacity to repay the same. He further observed that LFC, an AOP to whom the interest was payable was managed by the assessee and his family members. He, further, observed that the assessee had adopted the dubious method to avoid payment of interest to the said AOP in such a way that the interest amount would never be offered to tax. He observed that LFL (AOP) had switched over the system of accounting from mercantile to cash w.e.f. A.Y. 1998-99 and the interest which was payable by the assessee to LFC starting from A.Y. 1999-2000 onwards was not shown as 'income', as the same was not paid by the assessee. The assessee on the one hand had claimed the expenditure on accrual basis, whereas, the LFC (AOP) had not claimed its income because of switching over of accounting system from mercantile to cash system. The A.O. also observed that in the balance-sheet and the profit and loss account of LFC for A.Y. 2008-09, the said AOP had distributed the share of profit amongst the five members who are family members of the assessee.

The assessee had also received share of profit of Rs.41,71,321/-. The A.O. observed that on the one hand LFC was making the 3 ITA No. 3188/Mum/2012 (A.Y. 2008-09) ITO vs. Darshan L. Gandhi

payment in the form of share of profit to the assessee but on the other hand the assessee had been showing the accrued interest payable of Rs.42,67,550/- since so many years and thereby preventing it from getting taxed. He observed that had the lender company not changed to cash system, it would have to offer the interest as its receivable income, but, the assessee and his group AOP have managed the affairs in such a dubious way that on the one hand the amount of interest was claimed by the assessee as deduction in his P & L account and on the other hand he had not been letting the amount to be offered to tax by his sister concern, LFC. The A.O. observed that this was a method deployed by the assessee to avoid the tax. He, therefore, treated the said amount as income of the assessee for the year under consideration as it represented an artificial liability which actually had ceased to exist since long with and accordingly added it to the income of the assessee u/s.41(1) of the Act.

3. In the first appeal, the ld. CIT(A) deleted the disallowance so made by the A.O. observing as under:

"2.2. I have considered the submissions of the Ld. Counsel and gone through the assessment order. The appellant had borrowed the loan from M/s. Lok Financiers, A.O.P. earlier to assessment year 1997-98. The interest payable on borrowed loan is being shown as an expenditure as the assessee is following mercantile system of accounting from year to year. In the AY. 2002-03, the entire capital loan amount was paid off/adjusted towards allocation of shares. Therefore, what remains outstanding was accumulated interest of Rs. 42,67.650/- pertaining to A. Y. 1999-2000. 2002-03. This interest has not been paid till date and appearing as the outstanding interest in the latest balance sheet of the appellant.

At the same time, in the case of the financing company M/s. Lok Financiers following the restrictions brought in by the R.B.I. that it could not do the finance business the A.O.P. had stopped its business of finance. Under these circumstances M/s. Lok Financiers Company considered it fit and commercially expedient to switch over to cash system from the mercantile system accounting w.e.f. A.Y. 1998-99. This change has been accepted by the department. On account of the fact that the M/s. Lok Financiers Company is now following an duly accepted by the department - the cash system accounting for the receipt & expenditure the company has 4 ITA No. 3188/Mum/2012 (A.Y. 2008-09) ITO vs. Darshan L. Gandhi

not shown an interest of Rs.42,67,550/- being receivables from the appellant.

On carefully going through the entire facts of the case, I find that because of the cash method of accounting - M/s. Lok Financiers Company has not accounted for the interest receivable and not actually received. The provision of Section 41 (1) of the I.T. Act as invoked by the A.O. will not be applicable for the fact that the amount outstanding as interest of Rs.42,67,550/- has not been written off nor the debt is extinguished. The amount so outstanding is payable as on today and therefore it cannot be regarded as colourable device as stated by the A.O.

In view of the several judicial pronouncements cited by the Ld. Counsel in the cases of :-

(a) ITO vs. Ahuja Graphics Machinery Pvt. Ltd. (2007) 109 ITD 71 (Mum)

(b) CIT vs. T. V. Sundanram Iyengar & Sons Ltd. (1996) 222 ITR 344

(c) CIT vs. Sugauli Sugar Works P. Ltd. 102 Taxman 713

(d) Chief CIT vs. Kesaria Tea Co. Ltd. (2002) 254 ITR 434

and more particularly unreported judgement of Hon'ble Delhi High Court in the case of Dalmia Finance Ltd. (Appeal No. 833/2010. dated 15.07.2010), I hold that the provision of Section 41 (1) cannot be invoked in the present circumstances for the reason that the appellant had neither received any benefit nor any advantage and liability in the form of interest is outstanding and payable as on date. Therefore, the addition of Rs.42,67,550/- is deleted.

Hence, this ground of appeal is allowed.

3. In the result. the appeal is allowed."

4. Aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us.

5. We have heard the rival contentions and have also gone through the record. A perusal of the above reproduced conclusion of the ld. CIT(A) reveals that the ld. CIT(A) has deleted the disallowance observing that since the LFC (AOP) had switched over to cash system from the mercantile system of accounting w.e.f. A.Y. 1998-99, the company had not showed the interest of Rs.42,67,550/- being receivable from the assessee because of the fact that the same was not actually received. He, therefore, has held that the 5 ITA No. 3188/Mum/2012 (A.Y. 2008-09) ITO vs. Darshan L. Gandhi

provision of section 41(1) of the Act are not applicable as the amount of interest payable has not been written off nor the debt has extinguished.

The ld. DR, before us has contended that it was not a case where the debt was payable by the assessee to a third party. The sister concern, i.e., the AOP was managed by the assessee along with his family members. By deliberately changing the accounting method of LFC (AOP), the assessee on the one hand, had shown the liability in his books of account and whereas the corresponding income had not been shown in the hands of the LFC and this practice was continued for so many years. On the other hand, the ld. AR has submitted that the liability of the assessee had not cessed to exist. The assessee had been continuously showing the amount as payable in his books of account. He has further contended that mere lapse of time or due to the fact that due to limitation period of recover the amount through judicial intervention has expired, that itself, is not sufficient to hold that the liability has ceased to exist. To stress his point, he has relied upon a catena of judgments e.g. CIT vs. Jain Exports Pvt. Ltd. [2013] 89 DTR 265 (Del); CIT vs. Kesaria Tea Company Ltd. [2012] 254 ITR 434; CIT vs. Mira Process P. Ltd. [2012] 81 CCT 026 (Guj), etc. The ld. DR on the other hand has relied upon the decision of the hon'ble Delhi High court in the case of CIT vs. Chip Soft Technology (P.) Ltd. [2012] 26 taxmann.com 109 (Del).

So far the reliance of the ld. AR on the case laws as noted above is concerned, we find that the same are not applicable to the case of the assessee. In those cases, the assessee had shown the liability payable in his books of account and the creditor had also not written off the said receivables. The parties to whom the amount was payable were third parties. Under such circumstances, the various higher courts have held that merely because the limitation period to recover the amount through process of court had lapsed, that itself, does not mean that the liability has ceased to exist. The principle led that the enforcement of debt being barred by limitation does not ifso facto lead to the conclusion that there is extinguishment of debt itself. Though on the face of it, there seems to be a force in the contention of the ld. AR, however, when we go through the facts of the present case, we find that same are distinguishable from the facts of the case laws cited 6 ITA No. 3188/Mum/2012 (A.Y. 2008-09) ITO vs. Darshan L. Gandhi

by the assessee. In the case of the assessee, the creditor, AOP is also managed by the assessee and his family members. The said AOP is not a juristic person otherwise, but, different entity for the purpose of Income Tax Act. The assessee on the one had has been receiving profits of his share from the AOP but on the other hand has been showing the liability of interest as payable to the said AOP, without adjustment/setting off the same out of the receivables from the said AOP. By changing the method of accounting of the AOP, the expenditure of interest claimed by the assessee in his P & L a/c is avoided from taxation at the hands of the AOP as the same is not shown as income. The argument that the change of method of accounting of the said AOP has been accepted by the Revenue over the years and that as per the said accounting system, the AOP was not required to show the said receivable as 'income', in our view, is not teneable because of the fact that the AOP has also been managed by the person, who is the debtor of the said AOP and that very person on the one hand is receiving the share in profits of the said AOP and on the other hand is not setting off or adjusting the amount payable to the said AOP and thereby avoiding the payment of tax at the hands of the said AOP for the years together. The above conduct shows that it is a deliberate and intentional act to avoid tax. Had the assessee had any intention to pay the liability, he could have adjusted the same against the share of profits received from the said AOP. The peculiar facts of the present case show that it was not a simple case where the assessee due to some circumstances could not pay the liability but had intention to pay the liability and that the debt had not extinguished, but, it is the case where the assessee had deliberately managed his accounts as well as the accounts of his AOP to avoid the tax. The A.O., therefore, in our view, has rightly held that the assessee had no intention to pay the said liability to the AOP and more over the said AOP had also never made any effort to recover the amount in question from the assessee.

6. At this stage, the ld. AR has vehemently contended that the assessee has paid the liability in the year 2013. He has contended that the payment of the liability in the subsequent year shows that the assessee had the intention to pay the same and which has 7 ITA No. 3188/Mum/2012 (A.Y. 2008-09) ITO vs. Darshan L. Gandhi

ultimately been paid and as such it cannot be said that the assessee had no intention to pay or that the liability had ceased to exist. We find that the liability in this case is pertaining to A.Y. 1998-99. The assessment year under consideration is A.Y. 2008-09 in respect of which, the A.O. noticed that the assessee had continuously avoided the payment of tax by showing the said interest liability as payable, whereas the creditor AOP had not shown it as its 'income' because of the different accounting methods, that too, so managed by the assessee. After the addition has been made by the A.O., and the litigation has started, the assessee to avoid further consequences, has allegedly been paid the said amount in the year 2013. We find that the appeal in this case before us, had been filed on 08.05.2012 and the said liability has allegedly been paid even after the filing of the present appeal by the Revenue. The payment of a liability in the year 2013 by the assessee, in our view, it is nothing but an afterthought to avoid the consequence of addition made by the A.O. during the assessment proceedings for the year consideration. In view of this, we do not agree with the contention of the assessee in this respect. In view of our observation made above, we hold that the A.O. has rightly made the addition u/s.41(1) of the Act in this case and the same is confirmed. The order of the ld. CIT(A) is set aside and that of the A.O. is restored on this issue.

7. So far as the payment of amount in question in 2013 is concerned, the assessee will be at liberty to put his case in this respect in the assessment year relevant to the year of payment before the A.O. and the A.O. will consider the said issue in accordance with the law.

In the result, the Revenue's appeal is hereby allowed.

Order pronounced in the open court on March 13, 2015

Sd/- Sd/- (B. R. Baskaran) (Sanjay Garg) लेखा सद य / Accountant Member या यक सद य / Judicial Member

मंब ु ई Mumbai; 2दनांक Dated : 13.03.2015 8 ITA No. 3188/Mum/2012 (A.Y. 2008-09) ITO vs. Darshan L. Gandhi

व. न.स./Roshani, Sr. PS

आदे श क" # त%ल&प अ'े&षत/Copy of the Order forwarded to : 1. अपीलाथ# / The Appellant 2. $%यथ# / The Respondent 3. आयकर आयु3त(अपील) / The CIT(A) 4. आयकर आयु3त / CIT - concerned

5. 6वभागीय $ त न7ध, आयकर अपील,य अ7धकरण, मुंबई / DR, ITAT, Mumbai

6. गाड फाईल / Guard File आदे शानस ु ार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मंब ु ई / ITAT, Mumbai