By TIOL News Service

NEW DELHI, JAN 02, 2014: THE issue before the Bench is - Whether when the assesse shows certain advance received from its non-resident majority shareholder towards exports in its books for a record 10 years, such a sum cannot be construed as taxable receipt u/s 41(1) unless the same is written off in the books. And the answer goes in favour of the assessee.

Facts of the case

The assessee is engaged in giving advisory services and trading in shares. It was earlier a trader in Superior kerosene oil (SKO). It imported SKO for sale in the domestic market. Under the head 'current liabilities', the assessee had shown an advance against export, received from M/s Amas Mauritius, in 1997, in order to buy goods for export purpose. M/s Amas Mauritius, was a company registered in Mauritius for the purpose of export of goods and a 40 per cent shareholder in the assessee-company. However, the exports could not be made by the assessee as the required goods could not be identified and the balance was still shown as due and payable as on January 31, 2007. The assessee had thus neither made export against the advance nor had this amount been returned till date. Moreover, the assessee had stopped its export business and was in the business of advisory and share dealing. The assessee had also not been able to detail the goods that were to be exported.

The AO held that the assessee had not made any export in lieu of advance received even after ten years of receipt of advance. The assessee was neither required to carry out export in lieu of advance nor was the amount repaid till date. The AO noted that as per FEMA regulations, the assessee was required to ensure that the shipment of goods was made within one year from the date of receipt of advance payment. The assessee had violated these Regulations. The AO thus concluded that the money received by the assessee was not for the purpose of any export to be made to M/s. Amas Mauritius Ltd. but for its own consumption, which the assessee was not able to substantiate. The advance received in foreign exchange was used by the assessee for the purpose other than for export to the entity from whom advance had been received. Therefore advance received was not for the purpose of any export. The assessee had also failed to discharge the onus to prove the identity of the party. The AO thus doubted the genuineness of the transaction, noting that the assessee could not furnish the balance-sheet from M/s. Amas Mauritius, its majority shareholder, to establish that the liability still subsisted. The AO thus treated the advance against export as cessation of liability and taxed the same as income under section 41(1), that was added back to the total income of the assessee.

In appeal, the CIT(A) noted that no documentary evidence had been produced by the assessee to show or prove that the export was intended. The CIT(A) stated that it also transpired that there was no formal agreement between the assessee and the concern advancing the amount. The assessee had not been able to establish the reason for which it had received the money and the origin of the money. After considering Regulation 16 of FEMA, the CIT(A) concluded that the assessee had received a clear cut benefit by way of the advance for a trading liability. This amount was not a notional receipt. The assessee had not been able to establish the trade it had undertaken or was being undertaken and that the liability exists. The CIT(A) thus concluded that the transaction was a sham transaction. The CIT(A) confirmed the addition made by the AO by invoking provisions of section 41(1) read with section 28(iv).

In appeal before the Tribunal, the assessee submitted that, the liability to refund the advance still existed in its books of account and had not been written off. Therefore it could not be added as the income of the assessee under section 41(1) or under section 28(iv) as it had not become money of the assessee because of efflux of time. The assessee also submitted a letter dated December 2011, written to RBI for making the refund of this amount without interest or exchange difference. RBI approval was still awaited.

The Revenue submitted that considering the fact that the advance was received in 1997 and the goods are yet to be exported, the advance had to be treated as income of the assessee by efflux of time and this amount was to be added under section 41(1) and/or 28(iv).

Having heard the parties, the Tribunal held that,

+ it is not in dispute that the said amount is shown as advance in the balance sheet of the assessee. The said liability is also shown as on 31.3.2007. Therefore the liability has been acknowledged by the assessee. Since amount has not been written off by the assessee in its books of account, it cannot be said that the liability has ceased to exist;

+ Madras High Court in the case of Tamilnadu Warehousing Corporation has held that the amount representing liabilities which were shown year after year could not be added back under section 41(1). Bombay High Court has also held in the case of Chase Bright Steel that the issue of limitation is not applicable for cessation of liability for the purpose of section 41(1). In view of above, we agree with assessee that the CIT(A) and AO are not justified to apply provisions of section 41(1);

+ we also observe that the AO has doubted the genuineness of the transaction as well as creditworthiness of the lender/payee. We are of the considered view that since the said amount was received by the assessee in January, 1997 and the same was appearing in the books of account of the assessee, genuineness of the transaction as well as creditworthiness of the party could not be considered in the assessment year under consideration for making the said addition under section 41(1) read with section 28(iv);

+ it is the fact that the assessee has not written back the said amount to its profit and loss account. We are of the considered view that the provisions of section 28(iv) which provides value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, shall be chargeable to Income Tax under the head "profit and gains of business or profession", could not be applied, as the said benefit has not arisen to the assessee because the assessee is showing the said amount as its liability in the balance-sheet year after year. Therefore, we are of the considered view that the said amount cannot be added as income of the assessee under section 28(iv);

+ on identical facts, similar issue has also been considered by the ITAT, Mumbai Bench in the case of M/s. Jayram Holdings wherein the Tribunal has held that the provisions of section 41(1) and/or section 28(iv) cannot be applied to make the said addition of advance received by the assessee in that case in A.Y. 1997-98 if the amount was not written off and the liability still subsist. The decision of ITAT dated 4.7.2012 squarely apply to the facts of the case under consideration before us;

+ in view of above, the grounds of appeal taken by the assessee are allowed by deleting the addition made by the authorities below.

(See 2014-TIOL-07-ITAT-MUM)