IN HIGH COURT OF KARNATAKA DHARWAD BENCH DATED THIS 27th DAY OF NOVEMBER, 2017 PRESENT HON BLE MRS. JUSTICE S.SUJATHA AND HON BLE Dr. JUSTICE H. B. PRABHAKARA SASTRY INCOME TAX APPEAL No.100016/2014 BETWEEN: 1. COMMISSIONER OF INCOME TAX, C.R. BUILDING, NAVANAGAR, HUBLI. 2. ASST. COMMISSIONER OF INCOME TAX, CIRCLE 2(1), HUBLI. APPELLANTS (BY SRI.Y.V. RAVIRAJ, ADV.) AND: 1. KARNATAKA VIKAS GRAMEEN BANK, HEAD OFFICE, BELGAUM ROAD, DHARWAD. RESPONDENT (BY SRI. A. SHANKAR AND SHASHANK HEGDE, ADVS.) THIS APPEAL IS FILED UNDER SECTION 260A OF INCOME TAX ACT, 1961 AGAINST ORDER PASSED IN ITA NO.113/BANG/2012, ON FILE OF INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH C , APPEAL FILED BY ASSESSEE FOR ASSESSMENT YEAR 2008-09 IS DISMISSED. 2 THIS APPEAL COMING ON FOR ADMISSION THIS DAY, S.SUJATHA J., DELIVERED FOLLOWING: JUDGMENT This appeal is filed by Revenue under Section 260A of Income Tax Act, 1961 (for short, Act ) challenging order of Income Tax Appellate Tribunal, Bengaluru Bench C (for short, ITAT ) in ITA No.113/Bang/2012, dated 28.11.2013 raising following substantial question of law for consideration: Whether on facts and circumstances of case and in law Tribunal was right in holding that addition made by assessing authority under Section 41(1) of Income Tax Act, being addition made account of stale draft and pay orders when records of assessee showed as there was cessation of liability on amount of Rs.13,94,212? 2. respondent-assessee is regional rural bank engaged in business of banking and also making investment in Government and other securities. For A.Y. 2008-09, assessee filed its return of income declaring total income of Rs.93,22,72,000/-. assessment proceedings were taken up by assessing 3 authority by issuing notice under Section 143(2) read with Section 129 of Act on 27.08.2010, which came to be concluded by making various additions. Among various additions made by assessing authority, addition made under Section 41(1) of Act, on account of Stale Draft and Pay orders is subject matter of this appeal. 3. On additions made by assessing authority, assessee preferred appeal before Commissioner of Income Tax (Appeals), which came to be upheld. On further appeal before ITAT, additions made by assessing authority confirmed by Commissioner of Income Tax (Appeals) was set-aside. Being aggrieved, Revenue is in appeal. 4. Sri. Y.V. Raviraj, learned counsel appearing for Revenue would submit that Tribunal has grossly erred in not appreciating that Stale drafts and pay orders represented unclaimed amounts of customers and 4 constituted trading receipt. ITAT ought to have appreciated that there was cessation of liability to extent of Rs.13,94,212/-, which was rightly treated by assessing authority as income of respondent-assessee under Section 41(1) of Act. 5. Sri. A. Shankar and Shashank Hegde, learned counsel appearing for assessee supporting order of ITAT submitted that amount involving remission of liability which is alleged to have ceased subsequently must be necessarily item of expenditure or allowance for which deduction was actually allowed to assessee towards liability incurred. In case of loan representing money borrowed, no deduction whatsoever is allowed or allowable under any provision of income tax and therefore remission of liability in respect thereof arising from write off by creditor and even credit of such amount by assessee-debtor to reserve account cannot attract 5 liability to income tax in hands of debtor. issue has been squarely covered by decision of Division Bench of this Court in ITA No.100014/2014 and connected matter (DD 14.12.2015), whereby this Court has answered substantial question of law in favour of assessee against Revenue. 6. Heard learned counsel for parties and perused material on record. 7. It is not in dispute that substantial question of law raised in this appeal is squarely covered by judgment of this Court rendered by Division Bench of this Court in very same assessee s case for A.Y.2008-09, in ITA No.100014/2014 and connected matter (DD 14.12.2015), has observed as under: 18. careful perusal of above provision leads us to infer that Section 41(1) can be pressed into service when allowance or deduction is sought to be made in respect of loss, expenditure or trading liability is incurred by assessee. In instant 6 case, sum of Rs.58,38,581/- has remained with assessee owing to fact that payees or holders of draft/pay orders had not encashed them. language employed by legislature being unambiguous, it would be incongruous to construe said sum as either loss, expenditure or trading liability incurred by assessee. While dealing with situation of unclaimed amount, Hon ble Supreme Court in case of T.V. Sundaram Iyengar, has held as follows:- 12. We are unable to uphold decision of Tribunal. amounts were not in nature of security deposits held by assessee for performance of contract by its constituents. As it appears from facts of case, amounts were depleted by adjustments made from time to time. CIT(A) found that assessee wrote back to amounts to its P&L a/c because various trading parties did not claim these amounts for long time. amounts represented credit balances in name of trading parties and was taken to its P&L A/c. CIT(A) held that these amounts were not revenue receipts but were of capital nature. provisions of Section 41(1) were not attracted in facts of this case because assessee s liability to pay back amounts to its customers had not ceased. Tribunal agreed with this view. (underlining is by us) 7 19. Tribunal adverting to above ruling has rightly deleted sum of Rs.58,38,581/- added by assessing authority by holding it as unsustainable in law. 8. In view of aforesaid, order of ITAT is justifiable in holding that amount of Rs.13,94,212/- being shown as liabilities on account of stale draft shall not be treated as income liable for tax under Section 41(1) of Act. substantial question of law raised by Revenue is answered in favour of assessee and against Revenue. appeal stands dismissed. Sd/- JUDGE Sd/- JUDGE JTR Commissioner of Income-tax, Hubli / Asst. Commissioner of Income-tax, Circle 2(1), Hubli v. Karnataka Vikas Grameen Bank