2009 (4) TMI 542 - AT - Income Tax

Additions u/s 40A(3) - Remission or cessation of trading liability - Payments made to agents for purchase of raw hides/skins Appellate Tribunal - letters have come back unserved - AO made u/s 40A(3), an addition at the rate of 20 per cent of the total purchases which was worked out. He further made, u/s 41(1), an addition being total credits standing in the balance sheet as not proved - CIT(A) deleted both the additions - Further, addition u/s 41(1), he held that it is not a case of either remission or cessation. Remission is a positive conduct on the part of the creditor as per section 63 of the Indian Contract Act whereas cessation can take place under the statute or judicial pronouncements other than any action from the transacting parties. AO has made addition of entire credit standing in the balance sheet which is neither remission nor cessation. HELD THAT - In our considered view, where letters sent to the creditors/sellers of the goods to the assessee returned back unserved then it will not be proper to draw inference that such creditors/sellers of the goods to the assessee are non-existent. AO must give an opportunity to the assessee to produce them or to provide new addresses on which enquiries should have been directed. When assessee fails to produce them coupled with non-service of the letters/notices, then it can be fairly inferred that the purchases/credits are not genuine and onus will shift back to the assessee to adduce evidence to prove his stand. Therefore, we are unable to accept the findings of AO that purchases made by the assessee are bogus merely because certain letters have come back unserved. We notice that the Circular No. 4 and Circular No. 08/2006 were not made effective retrospectively. Secondly, at the beginning of the assessment year, no such circular was in operation. The field was occupied by rule 6DD( f )( ii ) which allowed exemption to the assessee in case of purchases made directly from the producers of hides and skin without complying with any of the conditions mentioned in Circular No. 08/2006 which supplemented/clarified earlier Circular No. 4. The Circulars sought to impose conditions for claiming exemptions from rigors of section 40A(3) and for getting benefit of rule 6DD( f )( ii ) in case of direct purchases from producers of hides and skin. Retrospective effect of these circulars is not permissible. Rule 6DD( f )( ii ) provided a benefit to the assessee without conditions attached with that Rule. Such conditions not originally provided in the rule create rigors to the assessee and restrict the scope of benefit. It is equivalent to legislation, though subordinate, therefore cannot be retrospective unless specifically provided in the statute or in the circulars. In addition to this, these two Circular also neutralized/withdrew the effect of rule 6DD( l ) which conferred benefit to the assessee if it made purchases from agents by making cash payments. We are of the view that the issue is covered by the decisions of the Tribunal in the cases of Hind Industries Ltd. 2008 (9) TMI 412 - ITAT DELHI-C and Sri Renukeswara Rice Mills 2004 (8) TMI 319 - ITAT BANGALORE-B . The Department has not shown any authority for the proposition that under such circumstances rule 6DD( l ) will not be applicable. Accordingly, entire payment made by the assessee to producers of the raw hides/skins or to their agents for such purchases would not be hit by the provisions of section 40A(3). The ld. CIT(A) has rightly deleted the addition. Addition made u/s 41(1) - We are of the view that the AO has incorrectly invoked this provision. There is neither any remission nor cessation of the liability. AO has simply added all the credits appearing in the balance sheet which could not be hit by section 41(1). The liability to the assessee should cease to exist either due to operation of law or by an order of the Court or by limitation, i.e., for cessation of liability there should be application of some external force. There is no role of the conducting parties in making a liability ceased to exist. They had to abide by the judgment of the Court or the provisions of law or rule of limitation. In remission of liability, there has to be conscious act on the part of the creditor to wave or forgo the liability. There should be evidence on record to show that the creditor has either waived the recovery from the assessee or there is some contractual agreement between the assessee and the creditor thereby entire or part of credit standing in the balance sheet of the assessee is written off or waived. To that extent it can be said that liabilities are remitted by the creditors. Another condition common in both cessation and remission is that such liability must pass through trading account or Profit Loss Account in some earlier year, i.e., it should have been allowed as a deduction. In the present case, the Assessing Officer has not proved that liabilities had passed through Profit Loss Account/Trading account in earlier years. Presuming it to be so no case is made out that it is a remission or cessation. A liability could not be treated as a cessation if it was being merely carried forward for years. A non-genuine non-trading liability standing in the balance sheet can be taxed but u/s 68 if it came in the books in the current year. If such non-genuine non-trading liability came in the books in an earlier year than same cannot be taxed in the current year even u/s 68. A non-genuine trading liability can be considered in the current year if it is related to current year s trading/manufacturing or Profit loss account but not u/s 41(1) or u/s 68. It can be considered only u/s 28, i.e., it can be considered for disallowance while examining the claim of expenses or outgoings against revenue receipts. Current year s genuine trading liabilities, waved/remitted or ceased to exist in the current year itself will not form part of trading/manufacturing or P/L account except a note appended to them as disclosure of information. It is clearly held that where payments were made to small vendors, who came from surrounding villages to sell the skin to the assessee provisions of section 40A(3) could not be invoked. Respectfully following the decision in the case of K.K.S.K. Leather Processors (P.) Ltd. 2007 (2) TMI 197 - MADRAS HIGH COURT , we hold that payment is made in cash for purchases made by the assessee directly from producers would be covered by rule 6DD( f )( ii ) and, therefore, disallowance cannot be made out of such payments u/s 40A(3). Notwithstanding, considering the argument of the ld. DR, even if such additional ground is raised, the Tribunal cannot admit such additional ground because it requires investigation of facts within the meaning of section 68. Further, we cannot brush aside the fact that assessee has repeatedly claimed before AO that he should provide opportunity to produce the concerned persons and which has to be not acceded to. It cannot be said that identity of the creditors is not proved. Further, there is nothing on record to show that how much credit actually appeared during this year as AO has simply chosen to make addition of all the credits standing in the balance sheet and which included the opening balances, i.e., credits in earlier years. As investigation of facts are required for invoking section 68, such additional grounds by way of arguments cannot be admitted in view of the decision of the Hon ble Supreme Court in the case of National Thermal Power Co. Ltd. 1996 (12) TMI 7 - SUPREME COURT . The ld. DR has relied on several authorities as referred above for pressing his argument that Tribunal can consider alternative way of addition. In our considered view, many of these decisions do not support the argument of ld. D.R. Some of them do give an impression that an addition can be upheld under a different section not originally invoked by AO but these judgments were prior to the judgment of Hon ble Supreme Court in National Thermal Power Co. Ltd. s case (supra). Any new argument/additional ground cannot be considered beyond parameters laid down in the decision of Hon ble Supreme Court in National Thermal Power Co. Ltd. s case (supra) and, therefore, power of the Tribunal is confined and restricted by that decision to the extent that where investigation of facts are required no new ground/argument or subject-matter can be admitted for adjudication. Therefore, we reject the argument of the ld. D.R. that Tribunal should set aside the appeal to the file of AO to collect relevant facts to consider addition alternatively under a different head. As a result, we confirm the order of the ld. CIT(A) and dismiss the appeal filed by the revenue.

Summary

Issues Involved:
1. Addition under Section 40A(3) of Rs. 28,29,260.
2. Addition under Section 41(1) of Rs. 1,03,53,805.

Issue 1: Addition under Section 40A(3) of Rs. 28,29,260

The Assessing Officer (AO) disallowed 20% of the total purchases amounting to Rs. 1,14,49,800, resulting in an addition of Rs. 28,29,960 under Section 40A(3) due to payments made in cash exceeding the prescribed limit. The assessee contended that the purchases were made directly from producers or through agents, thus falling under the exceptions provided in Rule 6DD(f)(ii) and Rule 6DD(l). The AO, however, did not accept this explanation, citing non-verifiability of some addresses and non-receipt of replies to letters sent under Section 133(6).

The CIT(A) deleted the addition, relying on the decision of the Madras High Court in CIT v. K.K.S.K. Leather Processor (P.) Ltd. and ITAT decisions in Dy. CIT v. Hind Industries Ltd. and Sri Renukeswara Rice Mills v. ITO, which supported the assessee's claim that payments made to producers or through agents were covered under the exceptions of Rule 6DD.

The Tribunal upheld the CIT(A)'s decision, stating that the AO did not reject the books of accounts and that the purchases were genuine but payments were made in cash due to the nature of transactions with small vendors and producers. The Tribunal also noted that the Circulars issued by CBDT in 2006 could not be applied retrospectively to the assessment year 2004-05.

Issue 2: Addition under Section 41(1) of Rs. 1,03,53,805

The AO added the total credits standing in the balance sheet as unproved liabilities under Section 41(1). The assessee argued that there was neither remission nor cessation of liability, and the CIT(A) agreed, stating that the AO had not established that the liabilities were trading liabilities that had been allowed as deductions in earlier years.

The Tribunal confirmed the CIT(A)'s decision, emphasizing that the AO did not prove that the liabilities had ceased or were remitted. The Tribunal referred to several judicial precedents, including CIT v. Tamil Nadu Warehousing Corpn. and CIT v. Sugauli Sugar Works (P.) Ltd., which clarified that unilateral entries by the assessee or non-service of letters do not constitute cessation or remission of liabilities under Section 41(1).

Conclusion:

The Tribunal dismissed the revenue's appeal, confirming the CIT(A)'s deletion of both additions. The Tribunal held that the purchases made by the assessee were genuine and covered under the exceptions of Rule 6DD, and that the liabilities in the balance sheet had neither ceased nor been remitted, thus not attracting Section 41(1). The Tribunal also rejected the revenue's argument to consider the addition under Section 68, as it would require further investigation of facts not permissible at the Tribunal stage.