8. Advance received for exports – shown in the accounts as a liability for a period of more than 10 years – no addition of the amount shown as a liability u/s. 41(1)

CIT vs. M/s. Aasia Business Ventures Pvt.Ltd. [ Income tax
Appeal no 1010 of 2014, dt : 24/01/2017 (Bombay High Court)].

[M/s. Aasia Business Ventures Pvt. Ltd. vs. ITO. [ITA
No.430/MUM/2011 ; Bench : A ; date:08/11/2013 ; A Y: 2007- 2008. MUM. ITAT ]

The assessee is engaged in giving advisory services and
traded in shares. Earlier, the assessee was a trader in SKO Superior Kerosene
Oil. It imported SKO and was selling the same in domestic market. During the
course of assessment, the AO noticed that an amount of Rs.3.04 crore was
reflected under the head “current liabilities” (being advance against exports)
in its balance sheet for the year ending 31^st March, 2007. On
inquiry, the AO found that the advance had been received as far back as on 24^th
January, 1997 from one Amas Mauritius Ltd. in order to export goods.
However, the exports could not be made till date and the balance is still due
and payable to  Amas Mauritius Ltd. in
the books of assessee. The AO in the above view held that the transaction of
advance from Amas Mauritius Ltd. was not a genuine transaction and it was not
to be repaid. Therefore, an addition of Rs.3.04 crore was made on application
of section 41(1) of the Act as cessation of liability.

The CIT(A) upheld the order of AO. Being aggrieved by the
order of the CIT(A), the assessee filed an appeal to the Tribunal. The assessee
pointed out that it had approached the Reserve Bank of India for permission to
return the amount of Rs.3.04 crore shown as an advance against export to Amas
Mauritius Ltd. However, the approval of RBI had not yet been received. The
Tribunal allowed the assessee’s appeal by following the decisions of this Court
in Commissioner of Income Tax vs. Chase Bright Steel Ltd. 177 ITR 128 to
hold that where an amount is shown as an advance in the balance sheet by the
assessee, it amounts to acknowledgment of liability and it does not cease to
exist. So far as the genuineness of the transaction as well as creditworthiness
of the creditor is concerned, the impugned order holds that the same was appearing
in the books of account for all the earlier assessment years and the same was
accepted by the Revenue as genuine. Further, the ITAT placed reliance upon a
decision of its Co-ordinate bench in Jayram Holdings Pvt. Ltd. (ITA
No.6914/Mum/2010) rendered on 4th July, 2012 wherein in almost identical fact
situation, advance received for exports was also shown in the accounts as a
liability for a period of more than 10 years, the Tribunal took a view that
there can be no addition of the amount shown as a liability either u/s. 41(1)
and/or u/s. 28(iv) of the Act. This is so as long as the liability exists.

Before the High Court, the grievance of the Revenue was that
the above transaction is not genuine. This particularly in view of the fact
that Amas Mauritius Ltd. is a 40% shareholder in the assessee company. Thus
related.

Therefore, the impugned order of the Tribunal requires
consideration by this Court to determine its correctness.

The High Court observed that the issue as arising herein was
also a subject matter of consideration before the Tribunal in the case of M/s.
Jayram Holdings Pvt. Ltd. (supra) and it is relied upon in the impugned
order to conclude that section 41(1) of the Act cannot be applied in the
present facts. The Court noticed that in the above case also, the assessee
therein had received from its sister concern an advance for export and shown in
its books over a period of 10 years as a liability.

However, the Tribunal held that section 41(1) of the Act
cannot be applied so long as the liability is acknowledged. The Court held that
the liability does not cease, so long as the party acknowledges its liability.
The order of the Tribunal in Jayram Holdings Pvt. Ltd. (supra) has been
accepted by the revenue. No distinguishing features in the present case have
been indicated during the course of the hearing.