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TMI Blog2019 (3) TMI 901X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of facts and circumstances surrounding such trading liability. After Explanation was added on Section 41(1), it can be even by the unilateral act on the part of Assessee viz., by writing back or writing off such liability amounting to cessation of liability in his hands attracting Section 41(1) of the Act and attracting tax thereon. Once the Assessee was called upon to prove the credit entries with regard to the Sundry Creditors of its erstwhile business, the burden shifted upon him to establish the current existence of those creditors and their debts due from Assessee and that there was a live link between the creditors and the outstanding debts and therefore, in the absence of Assessee discharging that burden shifted upon him, the case of cessation of liability made out by the Revenue against him so as to bring back those dead debts of the Assessee to tax under Section 41(1) of the Act, was justified. Assessment Year 2003-04 in question has passed by for last 15-16 years by now. When we took up the cases for hearing, we asked the learned counsel for the Assessee that even in past 15-16 years, if any creditor has raised any claim against the Assessee with regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under Section 41(1) in the Assessment Year 2003-04 in question. Accordingly, the appeal of the Assessee is dismissed - Tax Case Appeal No.302 of 2008 - - - Dated:- 11-3-2019 - Dr. Justice Vineet Kothari And Mr. Justice C.V. Karthikeyan For the Appellant : Mr.M.P.Senthil Kumar For the Respondent : Mr.M.Swaminathan Senior Standing Counsel JUDGMENT DR. VINEET KOTHARI, J. The Assessee has filed this appeal under Section 260A of the Act raising the following substantial questions of law arising from the order of the Income Tax Appellate Tribunal dated 19th December 2007. The appeal was admitted by a Coordinate Bench of this Court on the following substantial questions of law on 17.6.2008: 1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in confirming the assessment of ₹ 58,60,105/- as income of the appellant, invoking Section 41(1) of the Income Tax Act? and 2. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in holding that in the absence of confirmation of balances and in the absence of evidence of claim for repayment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant for the recovery of their amounts . The said amounts were being utilised by the appellant for all these years without paying any interest. During the course of assessment as well as the appellate proceedings, the appellant has not been able to file confirmations from any of the above parties. I had given the option to the AR to file confirmation even at this stage but the same has not been availed by the appellant. These facts clearly indicate that the said liability has ceased to exist. 2.7. One of the main condition in Section 41(1) is that there should either be remission or cessation of a liability. In the present case, there is clearly a cessation of the above mentioned liability because there is no claim from any party for the recovery of the said amounts for many years and there is no obligation on the part of the appellant for returning such money to any of the abov mentioned parties. The above money of Rs.58.60 lacs is practically lying with the appellant and being used in the business . Such amounts have not been separately kept in any suspense A/c. or client's A/c. The utilisation of these funds without any intention or legal obligation to return th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s plea that unless the assessee writes off the same in the books of accounts Section 41(1) cannot be invoked, is totally erroneous . Section 41(1) is clearly attracted when there is a remission or cessation of liability. Remission and cessation is a matter which has been perceived on the facts of the case . Explanation 1(a) to Section 41(1) is aimed to bring into the ambit of remission and cessation the writing off of such liability in the accounts. This cannot be interpolated to mean that when the circumstances clearly indicate the remission and cessation of liability, the same would not come under the realm of Section 41(1) until and unless the assessee writes off the same in the books of accounts. We find that the decisions relied upon by the assessee are not applicable on the facts of the case. The implications of those decisions was that, unilateral act of assessee by writing off the amount cannot be a basis of invoking Section 41(1) and also that expiry of the period of limitation prescribed under the Limitation Act would not extinguish the debt. 2.3. In the present case, the circumstances are different. As observed by the learned Commissioner of Income Tax ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Delhi High Court in the case of Commissioner of Income Tax v. Hotline Electronics Ltd. [(2012) 80 CCH 156 Del. HC] , it was held that since the Assessing Officer has not brought on record any evidence or material, including any statement from the creditors that the debts had been extinguished and the liability to pay them had ceased despite the extension of the period of limitation by 'acknowledgment' made in the Assessee's Balance Sheet, Section 41(1) could not be attracted. 8. The learned counsel for the Assessee also relied upon Karnataka High Court decision in the case of Principal Commissioner of Income Tax v. Ramgopal Minerals [(2017) 394 ITR 696 (Kar.)] , to which one of us (Dr.Vineet Kothari,J) was a party. In the said decision, it was held that the burden lies upon the Revenue to establish that the liability of the respondent Assessee towards creditors had ceased in law or has been remitted by creditors finally. It was further held that the burden of the Revenue to summon such creditors or Transporters for establishing that the liability had ceased could not be shifted upon the respondent Assessee and since no such material was brought on record by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of the Assessee, namely the timber business, for which the said trade liabilities were incurred by the Assessee, had been closed by the Assessee about ten years back prior to the present Assessment Year 2003-04 in hand and not only none of the creditors had made any claim from the Assessee with regard to the said dues, but the Assessee also failed to produce the confirmations from these creditors and that the Assessee had changed its business of sending of persons to Gulf countries, which was entirely a different business altogether and in the absence of any continuity of the debt or continued business relationship with those creditors, there was no question of treating the said trade liabilities as perennial and indefinitely continuing forever and for all practical purposes, the liability of the Assessee to pay off those Sundry Creditors, who were suppliers to his timber business, had ceased and therefore, the authorities were justified in bringing the said amount of liability to tax under Section 41(1) of the Act. He submitted that mere book entries in the Balance Sheet or keeping such credit entries alive in the Balance Sheet of the Assessee, even for a different busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trading asset was created. Mere change of method of bookkeeping had taken place. But, where a new asset came into being automatically by operation of law, common sense demanded that the amount should be entered in the profit and loss account for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in course of trading transaction , even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee . 23. In the present case, the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by influx of time the money has become the assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interpretation of laws, particularly fiscal and commercial legislation is increasingly based on pragmatic realities , which means that even though the law permits the debtor to take all defences, and successfully avoid liability, for abstract juristic purposes, he would be shown as a debtor. In other words, would be illogical to say that a debtor or an employer, holding on to unpaid dues, should be given the benefit of his showing the amount as a liability, even though he would be entitled in law to say that a claim for its recovery is time barred, and continue to enjoy the amount. The second reason why the assesse's contention is unacceptable is because with effect from 1-4-1997 by virtue of Finance Act, 1996 (No.2), an Explanation was added to Section 41 which spells out that loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause . The expression include is significant; Parliament did not use the expression means . Necessarily, even omission to pay, over a period of time, and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g interest, which was offered for taxation and therefore, Section 41(1) stood attracted in the facts of the said case. The relevant portion of the said judgment are also quoted below for ready reference. 9. Facts of the present case, as concurrently held by the two Revenue authorities and the Tribunal are somewhat peculiar. The assessee had launched a scheme of sales promotion. Under such scheme, the assessee would enroll a member, who would deposit a sum of ₹ 500/- with the assessee company. If such a member in turn enrolled four members, he would get one black and white TV set manufactured by the assessee company free of cost. Same benefit would be available to the enrolled members if they fulfilled this condition. The scheme was operative for a period of 12 months. In other words, a member would have to enroll four members within such period of 12 months in order to get the benefit of earning a free TV set. Over a span of couple of years, the assessee collected a huge sum of ₹ 7.87 crores by enrollment membership fee of ₹ 500/- each. 10. As is bound to happen, in such a scheme requiring continuous chain reactions, the chain would break at some stage. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... six Sub-sections, the relevant extract of the said provision is quoted below for ready reference. Section 41(1) (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,- (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof , the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b) the successor in business has obtained, whether 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation, but in fact, no creditor came forward to make any claim from the Assessee. The fact that the Assessee had changed its business from timber business to that of sending of manpower to Gulf countries, altogether a different kind of business, but still continued to show its erstwhile Sundry Creditors of its erstwhile timber business in the Balance Sheet of current business also, it did not entitle the Assessee to claim that the liability of such creditors of its timber business still continues in the eye of law, since such creditors are shown in the Balance Sheet. The inference of cessation of liability will not solely depend upon the accounting entries made, by the Assessee nor the omission of the Assessee to make such accounting entries. The accounting entries are not the sole determinative factor, but they may still be relevant. 21. Though the burden lies upon the Revenue to establish that such liability had ceased in law to apply Section 41(1) of the Act, but the initial burden of Revenue in this case was discharged by calling upon the Assessee to produce the written confirmations from such trade creditors and thus, the onus, thereupon shifted on the Assessee to either p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. Dyes Chemical Workers Union [(1960)2 SCR 906] . The relevant paragraph from the said judgment is quoted below for ready reference: 8. Since the company claimed the deduction of depreciation, it stands to reason that the burden of proof that the depreciation claimed by it was the correct amount in accordance with the Income Tax Act was on the Company and that burden the company must discharge once its figures were challenged. But it was contended that once the company produced its auditors' certificate. that should be sufficient and must be accepted and that the Tribunal should not insist either on the auditors proving their certificate or on the company proving depreciation on each and every item of depreciable asset. Such an enquiry before the Tribunal, it was argued, would be a harassing and prolonged enquiry , not contemplated in industrial adjudication and, therefore, the Tribunal ought to have accepted as correct ₹ 28.82 lacs certified by the auditors. Under sec. 23 of the Act the presumption of accuracy is allowed only to the balance sheet and the P L Account of companies. No such presumption is provided for by the Act to auditors' certific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, requires that an opportunity must be given 'to the employees to verify such figures by cross-examination of the employer or his witnesses who have calculated depreciation amount. Notwithstanding the Unions' challenge to the figure of depreciation claimed by the company, the only thing that the company did was to examine Verma, who admittedly had nothing to do with its calculation, and to produce through him the said certificate. In our view, that was neither proper nor sufficient. The proper course for the Tribunal in such a case was to insist upon the company adducing legal evidence in support of its claim instead of taking the figure of depreciation from the P L account which was not worked out in accordance with the Income Tax Act but under sec. 205 of the Companies Act, and saying that the Company had failed to prove that it was a mistaken figure. In our view, the question as to the correct amount of depreciation must go back to the Tribunal for a fresh decision. The Tribunal should give opportunity to the Company to prove its claim for depreciation by reasonable proof and to the Unions to test such evidence by crossexamination or otherwise. (1) [1960] 2 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be presumed in Section 28-B only require the authorities concerned to raise a rebuttable presumption, that the goods must have been sold in the State if the transit pass is not handed over to the officer at the check-post or the barrier near the place of exit from the State. A statutory provision which creates a rebuttable presumption as regards the proof of a set of circumstances which would make a transaction liable to tax with the object of preventing evasion of the tax cannot be considered as conferring on the authority concerned the power to levy a tax which the liegislature cannnot otherwise levy. A rebuttable presumption has the effect of shifting the burden of proof . The authority concerned before levying sales tax arrives at the conclusion by a judicial process that the goods have been sold inside the State and in doing so relies upon the statutory rule of presumption contained in Section 28-B of the Act which may be rebutted by the person against whom action is taken under Section 28-B. The person concerned having opportunity to displace the presumption by leading evidence, there is no unconstitutionallity in it . When once a finding is recorded that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act, was justified. 28. The Assessment Year 2003-04 in question has passed by for last 15-16 years by now. When we took up the cases for hearing, we asked the learned counsel for the Assessee that even in past 15-16 years, if any creditor has raised any claim against the Assessee with regard to these credit entries, he may produce the evidence of the same. But we drew a blank from the learned counsel for the Assessee, despite the grant of an opportunity in this regard. Thus, it is also more fortified now that the liability to pay for these Sundry Creditors had ceased long back and the authorities under the Act, up to the Tribunal, were justified in applying Section 41(1) of the Act and bring to tax the liability to pay back their old debts, as having ceased in law and in fact. 29. A reasonable time line of period has to be drawn while considering the words cessation of trading liability as employed in Section 41(1) of the Act. The lapse of ten years of time, coupled with the fact that there was a change of business altogether by the Assessee, in our opinion, absolutely justified the Assessing Authority to draw an adverse inference against the Assessee about the cessation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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