Panna S. Khatau vs. ITO (ITAT Mumbai)

DATE: July 3, 2015 (Date of pronouncement)
DATE: July 10, 2015 (Date of publication)
AY: 2008-09
FILE: Click here to download the file in pdf format
S. 56(2)/ 68: Old liabilities, even if treated as genuine in earlier years and even if on capital account, are liable to be assessed as "income" in year of write-back if assessee is unable to provide confirmations and substantiate genuineness of liabilities

(i) Vide sections 56(2)(v) to (vii), provisions recently introduced, provide for receipt without consideration from an unrelated party, except otherwise than in any specified condition, is statutorily presumed to bear the character of income. The same is the second exception to the rule of a capital receipt being not considered as income under the Act and, in that sense, is again a rule of evidence, i.e., as s. 68, etc. The provision/s is harsh on genuine transfers, legislated in view of the propagation and proliferation of ‘gifts’ from unrelated parties. The same, however, is without prejudice to the generality of section 56(1). It would, therefore, be of little consequence even if section 56(2)(vi), the specific provision covering the period under reference, i.e., f.y. 2007-08, is considered as inapplicable in the facts of the case. In fact, section 56(2)(viib), inserted by Finance Act, 2012, duly incorporated in section 2(24) defining income, provides for treating the share premium in excess of the fair market value of the share as income. The apex court in T.V. Sundram Iyengar [1996] 222 ITR 344 (SC) opined in favour of the write back of trade advances as income, de hors the provision of section 56(2), applying the concept of income, consistent with section 2(24), in the facts of the case. The efflux of time, coupled with the write back, so that it was no longer payable, it opined, was sufficient to signify a qualitative change in the nature of the sum as one of receipt of business. The finding of it representing a trade surplus (and, therefore, assessable u/s.28), in view of the trading relationship between the parties, is, though relevant, secondary, in the larger context of the ratio/import of the decision. It may not be of much import in-as-much as it would only alter or impact the head of income under which the income stands to be assessed. The issue before us is not qua the head of income under which the impugned sum would stand to be assessed; it not being even the Revenue’s case that the same is business income, assessing it as ‘income from other sources’ u/s. 56, but as to the nature of the receipt, i.e., if it at all is, or represents, the assessee’s income.

(ii) Section 68 would hold even if the impugned sums represent, as contended by the Revenue, the assessee’s liabilities, assumed in the past, on whatever count. The same no longer representing a liability, there is admittedly a qualitative change therein – its nature transforming from a liability (for goods, services, whatever – which could itself vary over different persons, and remains unspecified) to the assessee’s own money, as signified by the credit to her capital account, which is a fresh credit/s during the year. Both sections 68 and 56(2)(vi) would apply. Qua the latter, the sum of money may have been received earlier, but there is a constructive receipt during the year in-as-much as it is received on own account, while the earlier ‘receipt’ was that by way of incurring a liability for value received (in kind) or even if in the form of money, only for being paid back and, as such, not without consideration. The second receipt, however, is without consideration. Section 68 shall also, as afore-referred, apply in-as-much as there is fresh credit/s in the assessee’s books in the form of credit/s to the capital account. In our view, the particular section is not of much significance considering the amount to be no longer a liability, but accretion the capital during the year, so that even section 56(1) shall hold, quite in the same vein as the hon’ble apex court found the write back to be assessable u/s.28 as business income in the case of T.V. Sundram Iyengar [1996] 222 ITR 344 (SC).

(iii) When an amount, which is stated, claimed and accepted as a payable, is no longer so, the assessee gains to that extent. There is nothing unreal or notional about this gain. It can show that, even so, the same is not chargeable as income or no tax liability is attracted in-as-much as the benefit is not in the nature of income. The assessee offers no such explanation. What is admitted though is that there has been remission/cessation of liability in-as-much as these are no longer payable. Why? No reason is advanced. It is under these circumstances that the law permits the A.O. to draw an adverse inference of it as representing the assessee’s income. As regards the year, there can again be little doubt in the matter. The impugned credit/s, which we have found as a fresh credit/s, is during the current year. The liability was accepted as genuine for and up to the immediately preceding year, while it is no longer payable as at the year-end. The taxable event, in terms of gain, thus, has taken place during the year, even if one considers the passing of the journal entry, recording so, on a particular (single) date in the books, to be a matter of convenience only. It is for these reasons that we find the impugned credit as corresponding and answering to the concept of income under section 2(24) and, further, as standing to fall to be assessed u/ss. 56(1) and 56(2), finding strong support in the decision in the case of T.V. Sundram Iyengar [1996] 222 ITR 344 (SC).

2 comments on “Panna S. Khatau vs. ITO (ITAT Mumbai)
  1. Sher Singh says:

    This has reached the cliff of stupidity & arrogance. As per tribunal any amount can be taxed in any year, hell with the concept of the year of accrual (actual or real), hell with the concept of capital or revenue receipt.
    These days, tribunal does not care if its actions result into enhancements (directly or indirectly). What is need of departmental representatives when such members are sitting on bench. Matters are decided as per whims and fancies without referring them to special bench, even though conflicting decisions are available & cited at bar.

  2. ITAT may be right per se the sections, but ‘adverse’ inference as such is not jurisprudentially correct mechanics for AO if he fails not able to correctly sequence its source that cannot be taken for granted by AO to claim , just because some sections or ss are introduced by some blessed finance Acts, cannot reasonably rightly arm AO for asking a tax or cut for the revenue….if we examine procedure established by law idea of Art 265, that does not say the law created every now and then created by so called Finance Acts but some substantial provisions of law only…in the sequence the Apex court need to do the judicial review of the veracity of some blessed sections are pushed in from time to time just to squeeze moneys from tax payers…after all concept is lest tax…’No taxation without representation’ is the best taxation concept world has before it….there need be humanity and natural justice that is more vital in any democracy after all democracy is a slow process and a cult of incompetence is an accepted reality , how a government push for too many projects, without proper vision would be like ‘Vyapam type scams only that is putting the whole country like 2G spectrum, coalgate, 123 nuclear treaty which just swallowed the hard earned tax payers need to think a lot.. Economic growth might be an idea no proof that simply the best way to see the country progresses as there are so many other ways but if government just like AO using some so called adverse inference that way economic growth could never be made on achieved by ‘adverse ‘ perceptions, when so how could any one government just go on taxing people without tangle results one need to assess that assessment must be made what in real terms there are some tangible economic growth , but not simply saying so by simply increasing the debt liability of the Nation, that is what these few decades of so called economic growth tom tomed by all these great worthies… these worthies could never be allowed siphon of the tax payer real net worth just to personally benefit themselves, like salaries, wages, facilities, government accommodations, conveyances and the like, after all Art 265 need to be holistically understood not just taken for granted making it amenable to these so called mercurial provisions on on off surfacing and disappearing either under retrospective or prospective positions while prospective might be some what aright but so ‘retrospective’ is totally irrational and illogical as these so called retrospective ideas need to be nipped in bud that could be possible if there is a full dress judicial review at the appex court on anvil of the constitutional basic tenets is my considered view.

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