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TMI Blog2020 (9) TMI 1041X X X X Extracts X X X X X X X X Extracts X X X X ..... g reopening of assessment. Additions made towards cessation of trading liability u/s 41(1) - Once the liability has been paid back during AY 2009-10, then the same cannot be considered as continued in the books of accounts as on 31/03/2010, in order to invoke provisions of section 41(1) on the basis of subsequent enquiries conducted during the course of assessment proceedings. In fact, the evidences filed before the authorities have clearly established the fact that the assessee has paid said liability in AY 2009-10. Therefore, we are of the considered view that liability, if at all is ceased to exist, then said liability had been ceased to exist in the FY 2008-09 relevant to AY 2009-10, but not for the AY 2010-11. AO, as well as the Ld.CIT(A) were erred in, coming to the conclusion that the liability is ceased to exist during AY 2010-11. None of the conditions prescribed therein u/s 41(1) were fulfilled, in order to bring said liability within the ambit of provisions of section 41(1) because neither, the liability is ceased to exist during the impugned assessment year, nor the Ld. AO proved that it is a non-genuine trading liability. On the other hand, the assessee has filed neces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 90/- per share to 174 persons. During the course of survey, a statement was recorded from M/s Sanjeev Khandelwal, Managing Director of the company on 29/09/2016 and in response to question No.31, the Director of the company stated that the company has converted unpaid trading liability of 174 persons into share application money in the financial year 2008-09 and he, further stated that necessary list of creditors as on 31/03/2009, 31/03/2010 and 31/03/2011 shall be furnished. 4. The case has been subsequently, reopened u/s 147 of the Act, on the basis of information gathered during the course of survey and reasons recorded thereon and accordingly, notice u/s 148, dated 30/03/2017 was issued. In response to the said notice, the assessee filed letter dated 19/04/2017 and stated that the return of income filed on 26/09/2010 u/s 139(1) shall be treated as return filed in response to the notice issued u/s 148 of the I.T.Act, 1961. The case has been selected for scrutiny and during the course of assessment proceedings, the Ld. AO called upon the assessee to furnish necessary details, in respect of unpaid trading liability and subsequent conversion of said liability into share appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Accordingly, he opined that an amount of ₹ 15.15 crores become cessation of trading liability u/s 41(1) of the I.T.Act, 1961 and hence, made addition of ₹ 15.15 crores to the total income of the assessee. The relevant findings of the Ld. AO are as under:- 10. The submission of the assessee is considered but not found to be acceptable on the following grounds: i) The assessee claims that the company had hired many parties to carry out the work of handling the process of mining. These parties were asked to consider taking the shares of the company instead of amounts payable to them. To test the claim of the assessee notices u/s 133(6) were issued twice as discussed earlier in the assessment order but they returned unserved or no replies were received, 23 parties even did not acknowledge of making any share application. ii) In annexure -4 of the statement of the director Mr Sanjeev Khandelwal recorded on 29.09.2016 had submitted a list of creditors as on 31.03.2009, 31,03.2010 and 31.03.2011. On perusal of the list the names of the creditors it was observed that no names of share allot tees were present in the creditors. The director had replied that the same may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 persons who are all existing share holders of the company. On the basis of the above points it can be established that the creditors are not genuine. On verification during the reopening assessment it is discerned that the same are not existing and thus being a trading liability which does not exist the amount should be taken as income of the assessee. The same principles are relied upon as reiterated in various judicial pronouncements: [2014] 47 taxmann.com 268 (Punjab AHaryana) HIGH COURT OF PUNJAB AND HARYANA Mrs. Adarsh Sood v. Commissioner of Income-tax, Faridabad Section 41(1) of the Income-tax Act, 1961 - Remission or cessation of trading liability (Trading liability) - Assessment year 1993-94 - Balance in name of three parties were appearing since 1984-87 - Two parties denied to have any amount payable to them while third was found to be nongenuine ~ Whether in respect of amount found credited in books of account of assessee, liability to pay back ceased to exist and, hence, Tribunal had rightly treated it to be assessee's taxable income - Held, yes [Para 8] [In favour of revenue] [2016] 71 taxmann.com 322 (Bombay) HIGH COURT OF BOMBA Y Palkhi Investments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that claim of the assessee that the so called share applicants have gifted their shares to the director of the assessee company in succeeding year, nothing less than an attempt made to convert non-existed liability into shareholders funds. He, further noted that it cannot be logical and practical to hold that a small time creditors have gifted there hard earned money, converted into so called shares capital of ₹ 15.15 crores to the existing shareholders. In other words, ownership in the form of share capital and share premium total into ₹ 15.15 crores has come back to the existing shareholders without any consideration and such claim is a bizarre, which is factually and legally not tenable. Therefore, he opined that there is no error in the findings of the Ld. AO to invoke provisions of section 41(1) of the Act, and accordingly, confirmed additions made by the Ld.AO towards cessation of liability amounting to ₹ 15.15 crores and dismissed appeal filed by the assessee. Aggrieved by the Ld.CIT(A) order, the assessee is in appeal before us. The relevant findings of the Ld.CIT(A) are as under:- 5.1 This is a classic case where out of a huge turnover, ₹ 15.15 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... babilities". Similarly, in a later decision in the case of SumatiDayal v. CIT 1995l 214 ITR 801/80 Taxman 89 (SC),Hon'ble Supreme Court rejected the theory that it is for alleger to prove that the apparent and not real, and observed that, "This, in our opinion, is a superficial approach to the problem. The matter has to be considered in the light of human probabilities". ........................................................Similarly the observation ........................................................that if it is alleged that these tickets were obtained through fraudulent means, it is upon the alleger to prove that it is so, ignores the reality. The transaction about purchase of winning ticket takes place in secret and direct evidence about such purchase would be rarely available ..........................................,....,........ln our opinion, the majority opinion after considering surrounding circumstances and applying the test of human probabilities has rightly concluded that the appellant's claim about the amount being her winning from races is not genuine. It cannot be said that the explanation offered by the appellant in respect of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... voked the provision of section 41(1) of the Act. The reliance of appellant company on certain judgments are absolutely distinguishable on facts and law. The AO's detailed enquiry where the outstanding liability has not been explained /confirmed, conversion of outstanding payables into share application money has not been established. Thus, the cessation of liability u/s. 41(1) of the Act i.e. outstanding liability of ₹ 15.15 crores is upheld and the ground of appeal filed on this issue is dismissed. 7. The Ld. AR for the assessee, at the time of hearing submitted that the Ld. AO has erred in reopening the assessment u/s 147 of the I.T.Act, 1961, without considering fact that there is no escapement of income within the meaning of section 147 of the I.T.Act, 1961. The Ld. AR, further submitted that if, you go through the reasons recorded by the Ld. AO, the reasons clearly indicates escapement of income for AY 2010-11 for allotment of equity shares by conversion of trading liability into share application money on 14/06/2010, whereas the conversion of trading liability had been taken place for AY 2009-10. Therefore, there is no nexus between reasons recorded and escapemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is supported by fresh tangible material gathered during survey proceedings conducted u/s 133A of the Act, where escapement of income has been detected. In this regard, he relied upon the decision of Hon'ble Supreme Court, in the case of ACIT vs Rajesh Jhaveri Stock Brokers Pvt.Ltd. (2007) 291 ITR 500 and Raymond woolen Mills Ltd. vs ITO [236 ITR 34]. 10. The Ld. DR, further, submitted that as regards, additions made towards cessation of liability u/s 41(1) of the Act, the Ld. AO, as well as, the Ld.CIT(A) have brought out clear facts to come to the conclusion that the liability had ceased to exist in the FY 2009-10 relevant to AY 2010-11 and hence, there is no merit in the arguments taken by the assessee. 11. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We have carefully considered case laws relied upon by both the parties. As regards, reopening of assessment, we find no merits in the arguments advanced by the ld. AR for the assesee, because the Ld. AO has reopened the assessment on sound footing, based on fresh tangible material come to his possession after completion of assessment u/s 143(1) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n gathered during the course of survey conducted u/s 133A of the Act and consequent statement recorded from the Director of the company. The Ld. AO had also taken support from investigation carried out during the course of assessment proceedings, including information collected u/s 133(6) of the I.T.Act, 1961. According to the Ld. AO, out of 174 creditors 23 have claimed that they do not aware of investments in share application money of assessee company by conversion of trading liability into share application money. Further, some of the creditors are either not responded to 133(6) notices or notices are returned un-served. Further, some of the creditors have accepted that they have invested in share application money of Assessee Company by conversion of trading liability into equity shares. The Ld AO had also taken support from the fact that the so called shareholders have gifted their shares in subsequent financial year to directors and their relatives. Therefore, he opined that liability shown in books of accounts in the name of so called creditors is either non-existence or the same has been ceased to exist during FY 2009-10 relevant to AY 2010-11. 13. It was the claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowances should be allowed towards said liability in the previous assessment years (ii) the assessee should derived benefit in cash or in any other form by remission or cessation of liability (iii) the said liability should be ceased to exist during relevant assessment year. In the background of above factual and legal background, if you examine the case of the assessee, one needs to understand, whether the ld. AO was right in invoking provisions of section 41(1) of the Act to trading liability for the year under consideration. 15. The facts borne out from records clearly indicate that the assessee has converted trading liability into share application money in the FY 2008-09 relevant to AY 2009-10. This fact has been supported by financial statement of the assessee for the relevant financial years produced before us, as per which the assessee has transferred trading liability into share application money on 31/03/2009. Subsequently, the share application money has been converted into equity share capital by allotment of equity shares to above subscribers on 14/06/2010. These are undisputed facts. From the above, it is clear that the liability does not seize to exist in the book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO u/s 41(1) of the Act, because in order to invoke provisions of section 41(1) of the Act, three conditions enumerated therein should be fulfilled. Unless, the conditions prescribed therein are not fulfilled, the Ld. AO cannot make additions u/s 41(1) of the Act. In this case, on perusal of facts available on record, we find that none of the conditions prescribed therein u/s 41(1) of the I.T.Act, 1961 were fulfilled, in order to bring said liability within the ambit of provisions of section 41(1) of the Act, because neither, the liability is ceased to exist during the impugned assessment year, nor the Ld. AO proved that it is a non-genuine trading liability. On the other hand, the assessee has filed necessary evidences to prove that the liability was existed in the books of accounts up to 31/03/2009 and on 31/03/2009 said liability has been fully paid back by converting, the same into share application money with the consent of creditors. We, therefore, are of the considered opinion that the Ld. AO, as well as the Ld.CIT (A) was completely erred in making additions towards cessation or remission of liability u/s 41(1) of the Act, towards share application money of ₹ 15.15 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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