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Assistant Commissioner of IT, Circle 10(1),New Delhi. Vs. M/s. Delhi State Mineral Development Corporation Ltd.,N-36, Bombay Life Building,Connaught Place, N.Delhi.
June, 26th 2012
                (DELHI BENCH "B" NEW DELHI)

                        ITA No. 4646/Del/2010
                      Assessment Year: 2002-03
Assistant Commissioner of IT,      Vs. M/s. Delhi State Mineral
Circle 10(1),                            Development Corporation Ltd.,
New Delhi.                               N-36, Bombay Life Building,
                                         Connaught Place, N.Delhi.
                                         (PAN: AAACD1236E)
      (Appellant)                          (Respondent)

                   Appellant by: Shri Vikas Suryavanshi, Sr. DR
                   Respondent by: Shri RS Singhvi, CA



      The revenue is in appeal before us against the order of Learned

CIT(Appeals) dated 23.08.2010 passed for assessment year 2002-03. The

grievance of the revenue is that Learned CIT(Appeals) has erred in deleting

the additions made by the Assessing Officer with the aid of section 41(1) of

the Income-tax Act, 1961.

2.    The brief facts of the case are that the assessee is a corporation owned

by the State Government of Delhi. It has filed its return of income on 30th

October 2002 declaring nil income. An assessment order was passed under

section 143(3) on 18.2.2005. The assessee has shown existing liability.

Learned      Assessing Officer harbored a belief that these liabilities have

ceased to exist and, therefore, additions to be made. He made the following

the additions:

      i)      Rs.16,25,575- the liability representing interest payable to
      ii)     Rs.9,16,951- liability representing royalty payable to the State
      iii)    Rs.3,52,278 - salary payable by the assessee;
      iv)     Rs.3,76,507 ­ representing expenses payable by the assessee.

3.    Dissatisfied with the additions, assessee carried the matter in appeal

before the Learned CIT(Appeals). Learned first appellate authority has

deleted the additions on the ground that liability to pay did not cease to exist

and no addition can be made under sec. 41(1) of the Income-tax Act, 1961.

4.    Before us, Learned DR relied upon the order of the Assessing Officer

whereas the learned counsel for the assessee relied upon the order of the

Learned CIT(Appeals). He further pointed out that the issue in dispute is

squarely covered in favour of the assessee by the decision of Hon'ble

jurisdictional High Court rendered in the case of CIT vs. Shri Vardhman

Overseas Ltd. Reported in 69 DTR (Del.) 379.

5.       We have heard the rival contentions and gone through the record

carefully. Before learned first appellate authority, assessee has filed written

submissions wherein it has explained the nature of each liability and how it

is still in existence. The submissions made by the assessee have been

reproduced by the learned first appellate authority and the same read as


         "a)   Interest liability of M/s. DSIDC ­ 16,25,572/-

               This liability is not in the nature of trading liability of the
         company as the liability is relating to loan taken from Government of
         India by M/s. DSIDC which was at that time a merged entity with
         DSMDC. However, when DSMDC was demerged into an
         independent entity, the assets and liability represented by loan and
         interest were transferred to DSMDC along with the corresponding
         liability and same is still appearing in the books of account of
         DSMDC. The DSMDC has no business activities as mining
         operations in Delhi were prohibited by Delhi Administration and it
         has again been decided to merge DSMDC with DSIDC. The merger
         proceedings are in progress and necessary approval has been accorded
         by Board of both the companies and the matter is at the final stage and
         accordingly the action of the Assessing Officer in treating the same as
         cessation of liability in terms of provisions of sec. 41(1) is highly
         uncalled for and arbitrary and against the legal principles as clarified

This is not a case of trading liability and even otherwise the assessee
has not obtained any benefit for claim of deduction and further the
assessee has not written back the amount as non payable in the books
of account and as such provisions of sec. 41(1) are not applicable. The
outstanding balance being relating to the Government undertaking,
there is no case of any presumption or adverse inference.

b)    Royalty Payable (Court permit fee) Rs. 9,16,951/-

The Assessing Officer has not understood the nature and character of
liability and parties involved in the matter. It has been observed and
accepted by the Assessing Officer himself that the royalty is payable
to Delhi Government and as such there cannot be any presumption
that there was any remission or cessation. Further, as against
provisions of the liability, the assessee himself has made advance
payments towards this liability to the extent of Rs.2,46,608 and the
balance of liability is to be paid after proper reconciliation. In fact, the
Assessing Officer himself has observed that the liability is deemed to
be not payable and there is no specific finding that same is not
payable at all or same has been written back. The finding of the
Assessing Officer is without proper appreciation of facts and based on
presumption and surmises. The legal principle explained above shall
be relevant in respect of this item also and accordingly the addition
made by the Assessing Officer is not justified and sustainable.

c)    Salary payable to employees ­ Rs.3,52.278/-

This amount is relating to salary payable to the employees' pending
final settlement of accounts. The liability on account of salary to
employees is a statutory obligations of the employer and when the
claim in respect of the liability has been allowed, there cannot be any
presumption that same is not payable or assessee has obtained any
remission or cessation. The presumption of Assessing Officer that
same is deemed to be not payable is highly uncalled for and same is
contrary to requirement of provisions of sec. 41(1). In the light of
legal principles explained above, the Assessing Officer is not justified
to make addition in respect of the same by invoking provisions of sec.

d)       Expenses payable and other liabilities ­ Rs.3,76,507/-
In respect of this item also the Assessing Officer has made
presumption that same is deemed to be not payable and applied
provisions of sec. 41(1). In this connection, we are pleased to give the
details of outstanding liability as on 31.3.2002 and the fact that each
of the item of liability was examined and assessee itself has written
back the liability to the extent of Rs.7,91,054 as not payable and same
was already declared as income. However, the balance liability was
considered by the management as existing and payable and as such it
is not for the Assessing Officer to make presumption that same is not
payable. This is a case of Government Company and appraisal is
made at every stage in respect of each item of liability and it is on the
basis of final decision or approval based on facts of the case that
appropriate decision is taken. The action of the Assessing Officer
being illegal, arbitrary and contrary to provisions of sec. 41(1) and

      principle laid down by various legal authorities explained above and
      as such there is no basis for any such addition.

      The appellant made another submission vide letter dated 28.4.06 vide
      which copy of account in respect of such outstanding balances have
      been filed. It was further submitted that DSMDC Ltd. is an associate
      concern of Delhi State Industrial Dev. Corporation Ltd. (DSIDC Ltd.)
      and same is in the process of merger with DSIDC Ltd."

6.    Hon'ble Delhi High Court in the case of Vardhman Overseas Ltd.

(supra) has observed that section 41(1) has been incorporated in the Act to

cover a particular facts situation. Section applies where a trading liability

was allowed as a deduction in earlier years in computing the business

income of the assessee and the assessee has obtained a benefit in respect of

such trading liability in later year by way of remission or cessation of the

liability. In such a case, the section says that whatever benefit has arisen to

the assessee in the later year by way of remission of the liability will be

brought to tax in that year. The principle behind the section is that a

provision intended to ensure that the assessee does not get away with a

double befit once by way of a deduction in an earlier assessment year and

again by not being taxed on the benefit received by him in a later year with

reference to the liability earlier allowed as a deduction. In this case, four

years have elapsed and the Assessing Officer took a view that the liability

has ceased to exist. It was held that merely elapse of four years is not

sufficient to say that the liability ceased to exist unless it has been written

back in the books of account. In the present case also, the assessee has not

written back the liability and Assessing Officer failed to demonstrate that

liability has ceased. Learned first appellate authority while deleting the

addition put reliance upon the judgment of the Hon'ble Supreme Court in the

case of CIT vs. Kesaria Tea Co. Ltd. Reported in 254 ITR 435 and CIT vs.

Sugauli Works Ltd. Reported in 236 ITR 518. According to these

judgments, unless the liabilities are written off in the books of account,

provisions of section 41(1) cannot be applied. On due consideration of the

order of the Learned CIT(Appeals) in the light of authoritative

pronouncements of the Hon'ble Supreme Court as well as of Hon'ble Delhi

High Court, we do not see any reason to interfere in the order of the Learned

CIT(Appeals). In view of the above discussion, the appeal of the revenue is


      Decision pronounced in the open court on 22.06.2012

                        Sd/-                             Sd/-
                ( G.D. AGRAWAL )                      ( RAJPAL YADAV )
                 VICE-PRESIDENT                       JUDICIAL MEMBER

Dated: 22/06/2012
Mohan Lal

Copy forwarded to:

1)   Appellant

2)   Respondent

3)   CIT

4)   CIT(Appeals)

5)   DR:ITAT

                     ASSISTANT REGISTRAR
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