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TMI Blog2018 (8) TMI 2025X X X X Extracts X X X X X X X X Extracts X X X X ..... question nowhere formed part of assessee s deduction claim(s) pertaining to impugned assessment year 2013-14. We affirm the CIT(A) s findings under challenge on this count alone. Disallowance of expenditure made in the course of assessment - CIT-A deleted the addition - HELD THAT:- We notice herein as well that Revenue s has no case on merits since the assessee; who had not derived any business income in the relevant previous year, incurred the impugned expenditure alike telephone, electricity charges and other expenses for running its business whose details already formed part of record before the Assessing Officer. We thus reject Revenue s instant third substantive ground as well. Addition of cessation of liability u/s 41(1) - AO stand appears to have taken note of the only fact that these liabilities continued to exist for the last many years - CIT A deleted the addition - HELD THAT:- We find no merits in the instant argument. We quote this tribunal s co-ordinate bench s decision in ACIT vs. M/s Soorajull Nagarmull [ 2018 (7) TMI 2063 - ITAT KOLKATA ] where in held that the mere fact of a liability having continued to be shown for very many years would not attract section 41(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts in deleting u/s 43B disallowance of ₹12,64,109/- made during the course of assessment. We notice herein as well that there is no rebuttal on Revenue s part qua the CIT(A) s clinching finding that the amount in question nowhere formed part of assessee s deduction claim(s) pertaining to impugned assessment year 2013-14. We affirm the CIT(A) s findings under challenge on this count alone. 4. The Revenue s third substantive ground challenges correctness of the CIT(A) s order deleting the disallowance of expenditure to the tune of ₹1,33,880/- made in the course of assessment. We notice herein as well that Revenue s has no case on merits since the assessee; who had not derived any business income in the relevant previous year, incurred the impugned expenditure alike telephone, electricity charges and other expenses for running its business whose details already formed part of record before the Assessing Officer. We thus reject Revenue s instant third substantive ground as well. 5. Next Revenue s last substantive ground that the CIT(A) has erred in law as well as on facts in deleting u/s 41(1) addition of cessation of liability involving sums of ₹43,35,622/- and &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these years. There was o evidence to prove that such liability still exists. When asked by this office letter why this shall not be treated for cessation of liability, the assessee did not give any reply. The total liability as stated above is treated as income due to cessation of liability. Penalty u/s. 271(1)(c) of the Act initiated for the same. 8.1 The appellant has submitted the following written submissions:- Due to financial crisis, assessee company unable to repay the advance received from party of ₹ 1,5,30,000/- since long back. It is pertinent to mention herein that the said advance received from party of ₹ 1,25,30,000/- are not related to the assessment year 2013-14 and there are no transactions during the assessment year 2013-14 in this regard. The said amount is brought down since long back. Assessee also did not write back the amount and the said amount still reflecting in the liability side of the balance sheet for the assessment year 2013-14. Hon'ble High Court at Kerala in the case of Commissioner of Income-Tax v. V.T. Kuttappu Sons 96 ITR 327 held as under:- The question in regard to the sum of ₹ 6,725 is whether there had been a cessation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied on by counsel for the revenue in Commissioner of Income-tax v. Gangadhar Banerjee and Co. (Private) Ltd., [[1995] 57 .T.R. 176 (SC)] and Associated Banking Corporation of India Ltd. v. Commissioner of Income-tax [[1965] 56 I.T.R 1 (SC)], have any application to the facts of this case. The decision of the Andhra Pradesh High Court in Semakurti Somanna v. Vankadari Subbrao [[1958] S.C.R. 1122 (SC)] 33 I.T.R. 116 (AP)] has also no application. The relevant decision seems to be that of the Supreme Court in Bombay Dyeing Manufacturing Co. Ltd v. State of Bombay [[1958] S.C.R. 1122 (SC)] referred to by the Tribunal for the proposition that under the law a debt notwithstanding that its recovery had been barred by limitation does not imply or import an admission that the liability ceased to exist. The other ruling that is important is the one also relied on by the Tribunal of the Bombay High Court in K.Chemicals td. V. Commissioner of Income-tax [[1966] 62 I.T.R. 34 (Bom.)]. The decision is exactly on all fours with the facts of this case though an additional ground is mentioned in that case for holding that the liability continued to exist. Even without this additional ground the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acknowledged his liabilities as per the books of account. Section 41(1) of the IT Act is attracted when there is cessation or remission of a trading liability. The AO shall have to prove that the assessee has obtained the benefits in respect of such trading liabilities by way of remission or cessation thereof. Merely because the assessee obtained benefit of deduction in the earlier years and balances re carried forward in the subsequent year, would not prove that the trading liabilities of the assessee have become nonexistent. Hence, as long as the assessee under the provisions of Section 41(1) of the Income Tax Act, 1961. The appellant has relied upon the judgement of Commissioner of Income-tax v. V.T. Kuttappu Sons 96 ITR 327. The cases cited are similar with the facts of this case though an additional ground is mentioned in that case for holding that the liability continued to exit. Even without this additional ground the court was willing and did come to the conclusion that there was no cessation of liability. Hence I find force in the contention of the appellant and delete the addition made by the AO of ₹ 43,35,622/-- and ₹ 1,25,30,000/- as cessation of liability. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellate order passed u/s 250 dated 31.03.2008, the Ld. C!T(A: deleted both the additions made by the AO. Against this appellate order, the Department preferred an appeal before the Hon'ble ITAT, Kolkata. The said appeal was adjudicated by the 'C' Bench of Hon'ble ITAT, Kolkata on 04.03.2014 in ITA No. 1326/Kol/2008. After giving consideration to the arguments put forth by the Revenue as well as the appellant, the Hon'ble ITAT set aside the matter back to the file of the Assessing Officer. I have therefore carefully examined the applicable legal provisions and the judicial decisions available on the subject and relied upon by both, the Ld.AO and the Ld.A.Rs for the appellant-firm. As such it is the second round of litigation and the scope of the present proceedings are restricted to directions contained in the appellate order of the Hon'ble Tribunal. The relevant observations of the Hon'ble ITAT, Kolkata are as under: [quote] The question arises under Sec. 41(1)(a), on whom the onus lies to prove whether the liability has been remitted or ceased. The AO, in this case, has made inquiry and given opportunity to the Assessee to produce the evidence to prove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne this issue afresh and give proper and sufficient opportunity to the Assessee to prove that the interest payable which are more than 3 decades old are still liability in praesenti. The AO is also directed that while deciding the issue afresh, to look into the relevant provisions of the Income Tax Act as well as the relevant case laws on the issue for ascertaining on whom the burden to prove lies u/s 41.(1.)(a). In the result, this ground of appeal is allowed for statistical purposes. [unquote] 3. In the impugned order, it is to be seen whether both parties, as required by the Hon'ble Tribunal carried out these directions appropriately and only thereafter the Ld.AO could have sustained the addition u/s 41(1) as made in the original assessment u/s 147/143(3). In the present case the facts on record bring forth that in the assessee's Balance Sheet, it had disclosed outstanding current liabilities of ₹ 12,97,47,322/- which were added by the AO u/s 41(1) of the Act on the ground that there was cessation or remission of liability. The addition so made in the original order was deleted by first Appellate Authority on the ground that no material was brought on record by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee had declared the details of outstanding liabilities due to sundry creditors. Besides disclosing the liabilities in Annual Financial Statements, the assessee-firm had supported existence of liabilities by producing balance confirmations of the parties for the year ended 31.03.2001. The Ld. A.R for the assessee was directed to file copies of the assessment orders for the years prior to AY 2000-01 to substantiate that in the earlier years when the liabilities accrued, no adverse inference was drawn by any of the AOs under Section 41(1). In response the Ld. A.R of the assessee produced copies of the assessment orders for AYs 1998-99, 2000-01, 2002-03 and 2003-04. From these assessment orders it is apparent that even though the same set of creditors had appeared in the appellant's books of accounts upto 31.03.2000, the Ld. AO had not disbelieved or doubted the genuineness of the liabiliti.es and accordingly no inference with regard to remission or cessation of liability was drawn. All these years, had been subjected to scrutiny and orders were passed u/s 143(3) of the Income Tax Act. On the other hand, these assessment orders demonstrated that even though the same set of creditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mons u/s 131 on sample basis to six creditors. From the impugned order it is observed that all the summons were served upon all the six creditors. The summons was also complied with by four creditors. The remaining two creditors did not personally appear but furnished the details as sought by the Ld.AO by way of a letter which was submitted in receipt / by post. The statements which were recorded on oath by the Ld.AO from the four creditors have been extensively reproduced in the assessment order at Pages 17 to 24. After carefully perusing the statements u/s 131 of the Income Tax act, 1961, it is to be noted that that none of the creditors denied the, facts that the debts were due by the appellant. None of the persons admitted or stated that the liabilities due to them had ceased to exist or stood remitted. In the said context, it is to be noted that the Directors of the Creditor Companies who had appeared before the Ld.AO were appointed on the Board of the companies much after F.Y. 2000-01, and therefore they had expressed their inability to explain the financial transactions of their respective companies conducted a few years back in the F.Y 2000-01. Based on such statements ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooks of the relevant year or provide explanations with regard transaction of FY 2000-01 then no adverse view appears to be permissible in law. The mere fact that the persons who had appeared were not aware of the transactions which had occurred more than 15 years back cannot be taken as an admission by them that the liabilities due by the appellant had ceased or they were remitted by the creditors. I therefore, hold that the conclusions drawn by the Ld.AO from the statements u/s 131 was wholly unjustified. On the contrary, I find that the enquiries conducted by the Ld.AO actually advance the case for the appellant-assessee. Admittedly the summons u/s 131 were served upon the creditors and were also complied with. The Directors of the creditor companies had personally appeared and their statements on oath was recorded. None of the creditors had denied the liabilities due by the appellant nor had they admitted that they had granted remission of the amounts due from the appellant either in FY 2000-01 or at any time. These facts therefore go on to point that no inference could have been drawn by the Ld. AO to the effect that the creditors of the appellant which were brought forward fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 respect of the trading liability referred to in clause (e) 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. Explanation 1. -For the purposes of this sub-section, the expression 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 (a) or the succ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese facts therefore the Hon'ble High Court held that the unpaid dues of employees, whose recovery had got time barred, legally ceased to be the employer's liability and therefore it was rightly assessed as income by the AO u/s 41(1) of the Act. Applying the decision rendered by the Delhi High Court in the above said factual content the Ld. AO justified the addition of ₹ 12,97,47,322/- the outstanding liabilities of the appellant which remained outstanding for several years. The Ld. A.Rs for the appellant, in the submission in appeal, however, in my considered view have correctly aptly pointed out that this decision was distinguishable since the facts involved in appellant's case were different. The Ld.A.Rs submitted that in the case before the Hon'ble Delhi High Court, the outstanding liabilities were workmen dues which had become time-barred under the relevant labour Law. These facts are however not involved in the appellant' case. It was explained that the outstanding liabilities did not involve a single rupee of labour dues. Instead all the liabilities were trading liabilities It was explained by the Ld. A.Rs that under the Limitation Act, 1903 which g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it was illogical that wages of workman would remain unpaid for a long duration of time and therefore held that the liability should be considered as having ceased. The present case is a case of trading liability, which cannot stand on the same footing as due to workman. We are therefore of the view that the decision relied upon by the learned counsel for the Revenue would not be of any assistance to the plea of the Revenue. (Emphasis supplied) 8. I further note that this judgment of the ITAT, Bangalore was thereafter upheld by the Karnataka High Court the relevant decision is reported as CIT Vs Alvares Br. Thomas (239 taxman 456). The relevant findings of High Court were as follows: 7. As in the above referred order of the Tribunal, the relevant portion of Section 41 is reproduced, we may not reproduce the same. But, the relevant aspect is that, 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ason of operation of the respective law. In the said judgment the Supreme Court referred to the decision of Hon'ble Bombay High Court in J.K. Chemicals Ltd. v. CIT (62 ITR 34), the relevant observations are as under: The question to be considered is whether the transfer of these entries brings about a remission or cessation of its liability. The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by his own unilateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor. It is not in dispute, and it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the operation of law, i.e., on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to Honour his liability when payment is demanded by the creditor, or a contract between the parties, or by discharge of the debt the debtor making payment thereof to his credito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessarily arise on account of remission of the liability. The Court noted that the assessee had not transferred the outstanding amounts from the creditors' account to its Profit Loss Account but the amounts were shown as liabilities in the Balance Sheet and the assessee had acknowledged the debts as due to the creditors. The High Court therefore held that Section 41(1) was not applicable. I find that the facts involved in the decision of Delhi High Court were similar Rather facts involved in assessee's case brings its case on much stronger footing because in this case the assessee not only acknowledged liability in the Balance Sheet but was able to file confirmations from creditors as well. The decision of the Hon'ble Delhi High Court in the case of Vardhaman Overseas Ltd is therefore fully applicable in the present case. 11. The ratio laid down by the Hon'ble Delhi High Court in the case of CIT Vs Vardhaman Overseas Ltd (supra) was reiterated by coordinate Bench of the same Court in a subsequent decision in the case of CIT Vs Jain Exports (P) Ltd (217 taxman 43) which was rendered after the decision of the same Court in the case of CIT Vs Chipsoft Technology (P) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it or gain of the assessee's business, which would otherwise not be the assessee's income. It has been further found as fact that the assessee had filed the copies of accounts of sundry creditors signed by the concerned creditors. In view of this fact, in our opinion, the ITAT has rightly come to the conclusion that confirmation from the creditors were produced. 5. In view of the above, we do not find any illegality in the impugned order passed by the ITAT and in our opinion, no substantial questions of law, as raised by the revenue in this appeal, arise from the order of the ITAT. 13. This decision of the Punjab Haryana High Court was followed by another Bench of the same High Court in the subsequent judgment rendered in the case of CIT Vs Speedways Tyre Ltd (364 ITR 401). Moreover, it is to be noted that the Hon'ble Gujarat High Court in the case of CIT Vs Nitin 5 Garg (208 Taxman 16) came to identical conclusions. In the case decided by the Hon'ble Gujarat High Court facts involved were almost similar to facts involved in the appellant's case. While decide the appeal the High Court took note of the fact that the assessee had not written back the outstanding l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. The CIT(A) ITAT however held that so long as the assessee disclosed the amounts outstanding in its Balance Sheet and had acknowledged the liabilities as due, provisions of Section 41(1) had no application and therefore additions were not tenable. From the legal principles as culled out in the above judgments, the position which emerges is that before the deeming provisions of Section 41(1) are invoked, the burden is cast on the Ld.AO to bring on record some tangible and credible material to prove that the assessee had in fact enjoyed benefit in the form of remission granted by the Creditor(s). Moreover it is also necessary for the Assessing Authority to show that benefit in the form of remission was derived by the assessee during the relevant previous year. It is observed that in the present case the assessee has never denied its obligation to pay the outstanding amounts to the creditors. The material fact which was apparent from the audited accounts was that the assessee never claimed that it had no legal obligation to pay to the sundry creditors. Applying the ratio laid down in these decisions to the appellant's case, I therefore find that both on facts as well as in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fact that above random creditors had supported its case as per their written replies in response to the respective summons. All this failed to convince the Assessing Officer. He noticed that one of the said written replies did not contain even concerned party s signatures. He thereafter narrated the entire backdrop and quoted four of the tested check parties statements to conclude that the impugned liability was not genuine one so as to be taken as subsisting upto impugned assessment year. He took cognizance of the fact the that said four directors had expressed their complete ignorance about any corresponding transactions to have taken place in the past. Relevant intervening period had also not seen any payment from the taxpayer s side for a very long period of time as per the Assessing Officer. He was therefore of the view that neither the creditors in question had taken any steps to recover their respective dues nor the instant taxpayer had discharged even a single penny of the impugned liability. All this formed sufficient reason for him to opine that the assessee had no intention to pay that money in question. He alleged creditors non confirmation as well as lack of their i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this belated stage carries no weight. Hon'ble Karnataka high court s decision in CIT vs. Alvares Thomas (2010) 69 Taxman 257 (Kar) holds that mere none verification of such a liability for or for that any doubt raised thereupon does not attract cessation of liability principle u/s 41(1) of the Act as the same has to be a case of cessation in law only. Hon'ble Gujarat high court s judgment in CIT vs. Nitin S Garg (2012) 22 Taxman 59 (Guj) has placed reliance on much a celebrate judgment of hon'ble apex court in CIT vs. Sugauli Sugar Works (P) Ltd. (1999) 236 ITR 518 (SC) to hold that the mere fact of a liability having continued to be shown for very many years would not attract section 41(1) since it is for the Assessing Officer has who has to show that concerned assessee has drawn any benefit by way of cessation or remission thereof. We further make it clear that CIT(A) s above extracted detailed discussion has examined all the facts as well as the relevant legal position at length which has nowhere been rebutted from the Revenue side. We therefore conclude that the CIT(A) has rightly reversed the assessment findings holding the amount in question of ₹12,97,47,322 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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