THE issue is - Whether provisions of section 41(1) cannot be applied where assessee is simply acting on behalf of its customers and getting consultancy fee from the client on account of services rendered. YES is the answer.
Facts of the case
The assessee is a Public Sector Undertaking engaged in providing conceptual studies and management consultancy, healthcare facility, design, project management and logistic installation. It filed return for relevant AY. During assessment procees, AO observed that there were certain old sundry creditors appearing in the assessee's balance sheet as at the end of the year. On being called upon to furnish the details of such creditors exceeding Rs.1 lac and remaining static for past three years, the assessee furnished the list, which has been reproduced on pages 2 and 3 of the assessment order. The assessee was required to give reasons as to why the amounts shown as payable to these parties be not taken as cessation of liability chargeable as income u/s 41(1) of the Act. The assessee submitted that the static creditors were still payable. Unconvinced with the assessee's submissions, the AO made addition. On appeal, CIT(A) deleted the addition. Aggrieved Revenue filed appeal before the Tribunal.
After hearing parties, Tribunal held that,
++ the assessee is simply acting on behalf of customers/clients and Government. On one hand, it receives money from Government of India which is considered as advance and, on the other hand, it floats tenders and issues contracts to the lowest bidder. The excess money, if any, in this process is returned to the Government. The assessee is simply receiving consultancy charges as its income. The creditors appearing in its balance sheet are not its own creditors. In order to invoke the provisions of section 41(1), it is necessary that there should be an allowance or deduction made in the assessment for any year in respect of loss, expenditure or trading liability, etc., incurred by the assessee and then the obtaining of some benefit in respect of such trading liability by way of remission or cessation thereof. It is only then that the amount for which remission or cessation is obtained that it becomes chargeable to tax u/s 41(1) of the Act. Adverting to the facts of the instant case, we find that the assessee was simply acting on behalf of its customers/clients and Government and getting consultancy fee from the client on account of services rendered. The sundry creditors as appearing in its books are actually on account of clients and not of the assessee. In such circumstances, the provisions of section 41(1) cannot be applied. It is further a matter of record that the assessee furnished details about the disputes going on between the two sides for which the payments were not made. The Executive Director of the assessee in his certificate has confirmed that all the outstanding sundry creditors treated as cessation of liability by the AO continue to be part of the assessee's outstanding as per records. The CIT(A) after entertaining the Assessing Officer's report on additional evidence, in our considered opinion, was right in deleting the addition. We uphold his view. This ground is, therefore, not allowed.