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TMI Blog2018 (11) TMI 1541X X X X Extracts X X X X X X X X Extracts X X X X ..... rate of 8%, in the case of the assessee - it would be just, fair and reasonable to estimate the income of the assessee at the Net Profit rate of 5.75% of the gross total receipts of ₹ 15,26,42,919/- [as adopted by CIT(A)]for the year under appeal. Thus, the assessee gets relief of 2.25% in estimation of profit rate on the gross total receipts, as against the 8% net profit rate estimated by the Authorities below. - Decided partly in favour of assessee Addition u/s 41 - outstanding liability in the accounts of trade creditors appearing as payable in the Balance Sheet - Held that:- CIT(A) had not brought anything on record to prove that any amount or benefit had been obtained by the appellant during the year under consideration against liabilities which is allegedly ceased to exist moreso when no such specific allowance in respect of material purchased was allowed in present assessment where income was initially and finally upto this stage is arrived after application of flat rate of profit. It is also an established proposition of law that onus is on the revenue to establish that any benefit has accrued to the appellant against alleged liabilities during the year under cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(a) Because the Ld. CIT(A), Aligarh has grossly erred in law in enhancing and making addition of ₹ 90,33,414/- on account of cessation of liability under section 41(1) of the Income Tax Act, 1961. 2(b) Because the addition of ₹ 90,33,414/- is bad in law and in law having been arrived on the basis of rejected books of accounts. The addition is bad on facts and in law too. 3. Because the CIT(A), Aligarh while estimating income ought to have allowed the statutory claim of depreciation of ₹ 33,89,415/- which was allowed by the AO. Enhancement of income is without considering the law and facts of the case. 4. Because the CIT(A), Aligarh has grossly erred in law in sustaining the addition of ₹ 1,98,983/- on account of Income Tax refund received by the assessee without properly appreciating the facts and circumstances of the case. 5. Because the CIT(A), Aligarh has grossly erred in law in sustaining the addition of ₹ 13,88,945/- on account of Trade Tax refund received by the assessee without properly appreciating the facts and circumstances of the case. 6. Because in any view of the matter the impugned order to the extent makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 11.04.2016 to the effect as to why addition be not made under section 41(1) with regard to Sundry Creditors,treating liability to have been ceased and also on the account as to why allowance of Depreciation be not withdrawn. 5. After considering the submission of the assessee the Ld. CIT(A) held that though separate addition on account of FDR Interest is not called for,however, the action of the AO in invoking section 145(3) of the Act is justifiedand accordingly, confirmed the AO s action in applying N.P rate of 8% and made enhancementof ₹ 90,33,314/- against trade creditors treating cessation of liability assessable under section 41(1) of the Act. The Ld. CIT(A) also withdrew claim of Depreciation amounting to ₹ 33,89,415/- as was separately allowed by the AO. 6. The Ld. Counsel for the assessee submitted that the authorities below, while estimating the income by applying the profit rate at 8% by rejecting the books of account and estimating the income have completely ignored the procedure laid down u/s 145(3) read with sec 144 of the Act , contending that when provisions of sec. 145(3) of the Act are invoked, the assessment has to be completed as per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000/- or more without supporting bills and vouchers and no stock register was maintained by the assessee. The AO also noted that assessee had shown sundry creditors of ₹ 1,09,15,621/-, name and addresses of sundry creditors were also not furnished. In view of the above, assessee was show caused as to why book result may not be rejected and income of the assessee be computed after application of Profit @ 8%, since no reply was furnished by the assessee it was under the aforementioned circumstances that the AO computed the business income after application of Profit at the rate of 8%. 10. We have heard the parties, perused the records in the light of precedents. It is an undisputed fact that books of account were rejected by invoking provisions of Section 145(3) of the Act, such rejection was upheld in first appeal by the Ld CIT(A). The assessee has not objected to the rejection of the books of account. However, the fact remains that neither the authorities below has specified circumstances under which it could have been presumed that the reported rate of profit is low nor has cited any comparable case, in support, for application of high profit rate on gross total receip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by CIT(A)]for the year under appeal. Thus, the assessee gets relief of 2.25% in estimation of profit rate on the gross total receipts, as against the 8% net profit rate estimated by the Authorities below. Thus, the 1st ground of appeal of the assessee is partly allowed. 14. Apropos Ground No.2(a) (b) the assessee has challenged the action of the Ld CIT(A) in making enhancement and thereby making addition of ₹ 90,33,.414/- against outstanding liability in the accounts of trade creditors appearing as payable in the Balance Sheet taking aid of section 41(1) of the Act. The Ld CIT(A) has made the addition by observing as under: As regards issue of sundry creditors, it is observed that out of total 33 creditors only 6 creditors have confirmed their balances. Verified creditors are as under:- S. No. Name of the Sundry Creditors Father Name Amount Address 1. Shri Ajeet Gupta Late K.L. Gupta 4,14,024/- 2/74, Ganesh Prasad, Farrukhabad. 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no addition can be made under that section unless it is shown that the liability had ceased to exist. According to him mere fact that few creditors have chosen not to respond to AO s Letter and few Letters remained undelivered with the postal remark of incomplete address, thisispo facto do not constitute positive evidence of cessation of liability. The assessee relied upon the judgment of the Supreme Court in the case of CIT v. Sugauli Sugar Works (P) Ltd. , (1999), 236 ITR 518 (S.C) and contended that the question whether the liability ceased to exist or not was not a matter to be decided by considering the assessee's conduct alone, but was a matter to be decided only if the creditor also appears before the concerned authority and that in the absence of the creditor it is not possible for the concerned authority to come to the conclusion that the liability has ceased to exists, barred by limitation and had become unenforceable. It was further pointed out on behalf of the assessee that the aforesaid view was reiterated by the Supreme Court in the case of CCIT v. Kesaria Tea Co. Ltd. , (2002) 254 ITR 434 (S.C). Reliance was also placed to the order passed by the co-ordinat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly, chargeable to income-tax as the income of that previous year. 20. Reliance was placed by the AR s to the case of M/s Wasan Co. Vs ACIT (supra) , wherein the action of the revenue authorities in making and sustaining addition under section 41(1) was brought to challenge, where the objections raised by the revenue authorities were as under: (a) Notice under section 133(6) were issued to thirtythree creditors, out of which fourteen notices could only be served, but none of them replied, eighteen Notices were returned with the postal remarks such as incomplete address, left and does not live here; (b) Liabilities standing against above creditors pertains to some twenty years; (c) No correspondence was brought on recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission of revenue was that reliance placed by the Tribunal in case of Shri Vardhman Overseas Ltd., (supra) cannot be applied to the facts of the present case since in the said decision, it was not a case where the party/creditor was not verifiable or that the address was not changed. [Para 6] There are two requirements for invoking the provision of section 41. The sine qua non is, the remission or cessation of the trading liability and the additional requirement is, some benefit in respect of such trade liability is taken by the assessee. If the aforesaid conditions are satisfied, then only section 41(1) could be invoked by the Assessing Officer. [Para 7] Coming to the facts of the present case, it is not the case of the department that, any benefit in respect of such trading liability was taken by the assessee but, the revenue contends that since the burden was not discharged of existence of the liability, it be treated as cessation of the liability and therefore, section 41(1) could be invoked. Further, standof the revenue is that when in respect of debt in question, confirmation was called for a letter was produced of the creditor with its address but, when the same wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is seen that the assessee is still showing these creditors as outstanding liability. Now we examine the provisions of section 41(1) of the Act. We find that as per Explanation- 1 to section 41(1), if the assessee has written back the liability in his accounts then it will be considered that even by unilateral act of theassessee, there is remission or cessation of the liability. But in the present case, the assessee has not written back the liability in his accounts. 12. In the light of the provisions of section 41(1) and the judgment of Hon'ble Apex Court in the case of Kesaria Tea Co. (supra) and another judgment of Hon'ble Apex Court rendered in the case of CIT vs. Sugauli Sugar 236 ITR 518, we hold that the addition made by the Assessing Officer in this regard and confirmed by the CIT(A) is not sustainable. We accept the grievance of the assessee as justified and delete the entire addition of ₹ 1,27,88,607/- in respect of trading liability u/s 41(1) of the Act. 13. In the result, the appeal of the assessee is allowed. 22. There is no dispute with regard to the fact that these liabilities were being shown in the books of accounts of the assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial purchased was allowed in present assessment where income was initially and finally upto this stage is arrived after application of flat rate of profit. It is also an established proposition of law that onus is on the revenue to establish that any benefit has accrued to the appellant against alleged liabilities during the year under consideration. 24. It is also an undisputed fact that the outstanding amount due towards trade creditors was partly paid in subsequent assessment year (A.Y 2013- 14) assessment of which was completed under section 143(3) of the Act vide order dated 31.12.2015 passed by the DCIT, Circle 2(1), Farrukhabad after accepting the books of accounts which bears the details of repayment made to such trade creditors. Under these factual circumstances the view if the Ld. CIT(A) that liability ceased to exist can not withstand. 25. Reliance placed to the Judgment of Hon ble Allahabad High Court in the case of CIT Vs M/s G.S Tiwari Co. , in ITA No. 5 of 2008 is fully misplaced. In the relied upon case the facts before the Hon ble High Court as meticulously noted by their lordships were that assessee claimed telescoping of the Net Profit determined on estima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered view that claim of Depreciation has already been taken care while applying N.P rate of 6% and therefore, no further allowance is called for. Thus Ground No.3 is rejected. 29. In Ground No.4,the assessee has challenged the action of the authorities below in making separate addition of ₹ 1,98,983/-against Income Tax refund. During the course of hearing the Counsel of the assessee fairly conceded that this represents Interest on Income Tax Refund, which is liable for addition. We therefore, confirm the addition of ₹ 1,98,983/-being the Interest on Income Tax refund. Thus, Ground of Appeal No. 4 is rejected. 30. In Ground No.5, assessee has challenged separate addition of ₹ 13,88,945/- towards amounts received as Trade Tax Refund. 31. Heard. We find that VAT has been deducted by various Departments on contract payment and the assessee has claimed debit of ₹ 46,08,996/- against VAT paid. Correspondingly assessee has received Refund of Trade Tax amounting to ₹ 13,88,945/-. Since, no specific deduction has been allowed in respect of VAT paid and being deducted by various Department on the same analogy, Trade Tax Refund cannot be separately adde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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