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2018 (4) TMI 1949 - AT - Income TaxAddition u/s 41(1) - cessation of liability by the assessee - CIT-A deleted the addition - HELD THAT - CIT(A) categorically come to the conclusion that the provisions of section 41(1) cannot be invoked at all inasmuch as these liabilities does not cease to exist. CIT(A) had verified the balance sheet of the assessee and had found the assessee had made certain payments to one party in AY 2013-14 and with regard to other parties, pursuant to the disputes chose not to pay the dues , and had decided to show the balances payable to these parties even as late as on 31.03.2013. Hence, there cannot be any case to invoke the provisions of section 41(1) on the ground of cessation of liability by the assessee. None of the factual findings given by the Ld. CIT(A) in his order have been controverted by the revenue before us with material contrary evidences. No justifiable reason to interfere in the order of the Ld. CIT(A) in this regard. Accordingly, ground no. 1 raised by the revenue is dismissed. Proportionate disallowance of interest on borrowed funds - CIT-A deleted the addition - HELD THAT - As categorical finding given by the CIT(A) that one partner has allowed his credit balance i.e. own funds to be withdrawn by the another partner of the firm. Hence, there cannot be any utilization of borrowed funds for excess withdrawals made by one of the partners and consequentially, there cannot be any disallowance of interest on borrowed funds on a proportionate basis. There is no provision in the partnership deed to charge interest on the excess withdrawals made by any of the partners from the firm. While this is so, when one partner has accommodated another partner to withdraw the balances, which is only internally made between the two partners without disturbing the borrowed funds of the firm. Hence, it cannot be categorized as withdrawal of the borrowed funds of the assessee firm, so as to warrant disallowance of interest on a proportionate basis. Accordingly, CIT(A) had rightly deleted the disallowance of interest - Decided against revenue.
Issues Involved:
1. Deletion of addition under Section 41(1) of the Income Tax Act. 2. Deletion of proportionate disallowance of interest on borrowed funds. Issue 1: Deletion of Addition under Section 41(1) of the Income Tax Act The first issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in deleting the addition of Rs. 37,46,658/-, in the facts and circumstances of the case. The brief facts of this issue is that the assessee is a builder and promoter of real estate. The assessee is a partnership firm and had filed its return of income for assessment year 2012-13 on 28.09.2012 declaring total income of Rs. 13,24,078/-. In the course of assessment proceedings, the ld. AO issued letters u/s 133(6) to the following sundry creditors: i) Tricon Enterprise ii) Shib Shakti Builders iii) Singh & Singh Associates All these parties replied to the letters issued by the Assessing Officer and stated the balance outstanding as per their books and the same was compared by the ld. AO with the balance shown in the assessee’s books and the following discrepancies were noticed:
The ld. AO observed that the assessee could not furnish any reconciliation of the aforesaid figures before him. The assessee sought for cross-examination of the aforesaid three parties on 09.03.2015 and the date was re-scheduled to 12.03.2015, which opportunity was not availed by the assessee. Accordingly, the ld. AO proceeded to invoke the provisions of section 41(1) of the Act by treating that the liabilities ceased to exist and accordingly added the sum of Rs. 37,46,658/- to the total income of the assessee. The Ld. CIT(A) observed from the assessment records that the ld. AO had only asked for transactions with the assessee during the year from the aforesaid parties. Accordingly, these parties have only reported the transaction during the year mentioning figures or had disclosed NIL transactions, as the case may be. The Ld. CIT(A) observed that the assessee had maintained its accounts in respect of these suppliers ‘project wise’. The entire ledger accounts for the period 01.04.2000 to 31.03.2013 of each project of the aforesaid suppliers were reproduced by the Ld. CIT(A) vide pages 12 to 14 of his order, from which he observed that: a) in respect of Tricon Enterprise, the balance as on 31.03.2010 was Rs. 19,20,779.80 (credit) i.e. payable by the assessee. There were no transactions during the assessment years 2011-12 and 2012-13 with this supplier. Hence the balance outstanding remained in the books of the assessee as on 31.03.2012 i.e. 19,20,779.80 (Credit). b) In respect of Shiv Shakti Builders, the Ld. CIT(A) observed that the balance outstanding as on 31.03.20110 was Rs. 26,61,706.25 (Credit) i.e payable by the assessee. There were no transactions during the assessment years 2011-12 and 2012-13 with this supplier. Hence, the balance outstanding remained in the books of the assessee as on 31.03.2012 i.e. 26,61,706.25 (Credit). c.i) In respect of Singh & Singh Associates, the Ld. CIT(A) observed that the balance outstanding as on 31.03.2010 was Rs. 16,53,577/- credit i.e. payable by the assessee and out of that sum, the assessee had paid the sum of Rs. 16,91,609/- during the financial year 2010-11 relevant to assessment year 2011-12, thereby the closing balance as on 31.03.2011 was Rs. 38,032/- debit i.e. receivable by the assessee from the party in respect of ‘224, S. N. Roy Road Project’. There were no transactions with the said supplier during the assessment year 2012-13 and accordingly the balance was on 31.03.2012 was Rs. 38,032/- debit i.e. receivable by the assessee in respect of ‘224, S.N. Roy Road Project’. c. ii) In respect of ‘303A, S.N. Roy Road Project’ the Ld. CIT(A) observed that the balance outstanding as on 31.03.2010 was Rs. 12,01,609/- credit i.e. payable by the assessee and out of that sum, Rs. 4 lacs. was paid by the assessee during the assessment year 2011-12 and the balance outstanding as on 31.03.2011 was Rs. 801609/- credit. There were no transactions during the assessment year 2012-13 with the said party. Accordingly, the balance outstanding as on 31.03.2012 was Rs. 8,01,609/- credit in respect of 303A, S.N. Roy Road Project. Hence, the total amount payable to Singh & Singh Associates as on 31.03.2012 was Rs. 7,63,577/- credit i.e. (8,01,609 -38,032). The Ld. CIT(A) also observed that the assessee was having transactions with these parties in the preceding years as could be evident from the ledger account for the last 12 years. The Ld. CIT(A) duly appreciated the fact that pursuant to the dispute with the parties consequent to the demolition of 303A, S.N. Roy Road Project by the Kolkata Municipal Corporation, the assessee had chosen not to make payments to the aforesaid parties and had kept it as pending in its books and waiting for settlement of disputes. These facts were duly brought to the notice of the ld. AO vide letter dated 18.03.2015 by the assessee which was also reproduced by the Ld. CIT(A) in his order in page 15 of his order. The main essence of this letter dated 18.03.2015 is that the two projects of the assessee which are adjacent to each other being premises no. 224, S.N. Roy Road, Kolkata and 303A, S.N. Roy Road, Kolkata has been given on contract to be made by the principal owner of the following companies, Mr. Manoj Singh. The premises no. 303, S.N. Roy Road, Kolkata which was almost completed got damaged and declared unsafe by the Kolkata Municipal Corporation prior to obtaining the completion certificate and thereby instructing the assessee to demolish the building in totality. Thereafter Kolkata Municipal Corporation also instructed the assessee to contact certain tests at 224, S.N. Roy Road, Kolkata to ascertain its structural stability, for which the assessee had incurred huge expenditure in strengthening the beams, columns etc. by appointing M/s M.N. Consultants, the most reputed consultants advised by the Kolkata Municipal Corporation, For this reason, the payments for the site at 23, School Row Project for Shiv Shakti Builders and Tricon Enterprise had been kept on hold because the assessee wanted the principal contractor i.e. Mr. Manoj Singh to construct premises no. 303A, S.N. Roy Road project as per new plan and obtain the completion certificate from the consultant authority and complete the pending work at 224, S.N. Roy Road, Kolkata, so that the assessee could release the payments for the unpaid dues as settled between them. The Ld. CIT(A) observed that these crucial factors of existence of disputes between the parties which warranted the non-settlement of the dues by the assessee had resulted in assessee showing outstanding credit balances as on 31.03.2012 in its books. He further observed that essential ingredients for applicability of section 41(1) of the Act is cessation of liability either by operation of law i.e. liability becoming unenforceable at law by the creditor, and debtor unequivocally declaring his intention not to honour his liability. The Ld. CIT(A) categorically observed that when the assessee had disclosed the liability in its audited financial statements, it tantamounts to acknowledgement of debt by the assessee as amounts payable by the assessee to the concerned supplier and hence there cannot be any remission/cessation of liability so as to invoke the provision of section 41(1) of the Act. The Ld. CIT(A) also observed that in respect of Tricon Enterprise, the assessee had made payment of Rs. 469354/- on 18.10.2012 i.e. in assessment year 2013-14 and the balance outstanding in respect of these three parties as on 31.03.2013 were also reflected by the Ld. CIT(A). The Ld. CIT(A) also observed that Manoj Singh has not appeared before the ld. AO pursuant to the summons issued to him is quite natural in view of the existing dispute between the assessee and Mr. Manoj Singh. Moreover, the said requirement of seeking the presence of Mr. Manoj Singh was made by the ld. AO towards the end of the limitation period as could be evident from the assessment records. The Ld. CIT(A) further observed that there was really no need for the party to attend as all the evidences that are required are very much available on record. This is not the case of doubtful expenditure so as to doubt the very basis of the expenditure and consequential creation of liability by the assessee. The Ld. CIT(A) further stated that information sought for in the letter u/s 133(6) of the Act was ambiguous inasmuch as it only sought for the transactions during the year which was duly replied by the certain suppliers that there were no transactions with the assessee during the year. Had the ld. AO sought for
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