The Income Tax Appellate Tribunal( ITAT ) held that any amount received during the trading transaction, remaining with the assessee for a long time unclaimed, changes character and shall be treated as income of the assessee under Sec.41 of the Income Tax Act.
As per facts, AO initiated reassessment proceedings on the basis of the purported ledger account of M/s. Hothur Traders, the appellant in the books of account of M/s. ILC Industries Limited, alleging that the corresponding debit balance of Rs.4,17,71,395 in its books of account was written off, whereas the said amount is reflected as credit balance in the books of account of the assessee. Hence, the appeal was filed challenging the order of CIT(A) affirming the assessment of Assessing Officer, on the ground that it had failed to appreciate that there was no cessation of liability of Rs.4,17,71,395/- as per section 41(1) since the credit balance in the account of M/s ILC Industries Ltd., was not written off in the books of account and there was no intimation of any such write off in the books of account of the said creditor.
Upon perusal of facts and a plethora of decisions, as laid in the case of LogitronicsPvt. Ltd. v. CIT [2011] 333 ITR 386 (Del), Mahindra & Mahindra Ltd. v. CIT [ 261 ITR 501 (Bom.)], CIT v. Phool Chand Jiwan Ram, 131 ITR 37 (Del), Tosha International Ltd., 331 ITR 440 (Del), etc., the Tribunal held that “Since the advance was taken in the course of normal business affairs of the assessee and it was the unclaimed amount and not required to return by the assessee will be its trade receipts. Because of the trading operation, the assessee had received it and it becomes richer by the amount written of by the ILC Industry Limited in its books of account. Though the amount received originally was not of income nature, the amount remained with the assessee for a long period unclaimed by the third parties, i.e., ILC Industries Limited, and become a definite trade surplus and to be treated as taxable income. In other words, if an amount received in the course of trading transaction, even though it is not taxable in the year of receipt as being the revenue character, the amount changes its character when the amount becomes assessee’s own money because of written of by ILC Industry Limited in its books of account and there was no contractual obligation on the part of the assessee to perform its obligation and it should be treated as income of the assessee. Being so, we are of the opinion that the lower authorities are justified in treating the amount of Rs.4,17,71,395 as income of the assessee u/s 41 of the I.T.Act.”
The alternative claim of the appellant seeking deduction under Section 10B of the Income Tax Act on enhanced profit was also rejected by the Tribunal. The claim was raised on the basis of decisions in Yahoo Software Development (P.) Ltd. v. DCIT, (2020) 116 taxmann.com 403 (Bang. Trib) and Anthelio Business Technologies (P.) Ltd. v. ITO, 78 taxmann.com 203 (Mum Trib.). considering the said decisions, the Tribunal held that : “In the above cases, the assessee received business income through convertible foreign exchange and as such reduced the same by claiming various expenditure without deduction of tax at source. Non-disallowance of expenditure increased business income of assessee in actual terms. In the present case, the assessee received amount from the local party, M/s. ILC Industries Ltd. and the assessee has not received the earnings in convertible foreign exchange. Being so, this cannot be equated with disallowance made u/s. 40(a)(i) or 40(a)(ia) of the Act. Therefore, we reject the alternative ground of the assessee also”
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