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TMI Blog2021 (9) TMI 887X X X X Extracts X X X X X X X X Extracts X X X X ..... - Decided in favour of assessee. Unexplained credits u/s 68 - advances or cash received against which goods is supplied - assessee could not produce the confirmation from party HELD THAT:- The assessee furnished confirmation account, bank details, purchase and sale bills. Upon perusal of these details and evidences furnished by the assessee, we agree with the assessee s claim. The assessee has produced copy of confirmation before the lower authorities duly reflecting the creditor s name along with its address, PAN, advance amount etc. - advances or cash received against which goods is supplied subsequently is not a cash credit as contemplated by section 68 of the Act. Simply because, the assessee could not produce the confirmation from this party, the genuineness of transaction cannot be doubted. All the relevant details proving the transaction as genuine were available on record despite that, the A.O s mere emphasis was on the production of the confirmation from this party. In fact, the name and addresses were mentioned in the copies of bills of sale and purchase. Besides, the assessee by way of various documents duly proved that he had already supplied the goods against the adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... condoned. 4. The brief facts of the case are that the assessee is proprietor of M/s Nandi International and engaged in import and trading of Glass Chaton, Glass beads and silver jewellery. The assessee filed his return of income on 27/09/2014 declaring total income of ₹ 9,01,270/-. The case of the assessee was selected for limited scrutiny under CASS. The A.O. passed the assessment order U/s 143(3)/144 of the Income Tax Act, 1961 (in short, the Act) on 24/12/2016 determining total income of the assessee at ₹ 3,18,99,110/- by making addition U/s 41(1) and 68 of the Act. 5. Being aggrieved by the order of the A.O., the assessee carried the matter before the ld. CIT(A), who after considering the submissions of both the parties and material available on record, allowed the appeal of the assessee. Against the said order of the ld. CIT(A), the Revenue is in further appeal before the ITAT on the grounds mentioned above. 6. The 1st grounds raised by the Revenue relates to challenging the order of the ld. CIT(A) in deleting the addition of ₹ 2,59,97,837/- on account of non-genuine creditors u/s 41(1) of the Act. In this regard, the ld CIT-DR has vehemently supported th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.[Para 20] · Though the burden lies upon the revenue to establish that such liability had ceased in law to apply section 41(1), 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 produce the written confirmations or to produce the creditors t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question has passed by for last 15-16 years by now. The assessee on being asked to produce evidence with regards to any creditor who may have raised claim against assessee even in past 15-16 years was unable to produce any evidence, 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) and bring to tax the liability to pay back their old debts, as having ceased in law and in fact.[Para 28] · A reasonable time line of period has to be drawn while considering the words 'cessation of trading liability' as employed in section 41(1). The lapse of ten years of time, coupled with the fact that there was a change of business altogether by the assessee, absolutely justified the Assessing Authority to draw an adverse inference against the assessee about the cessation of liability, especially when the assessee failed to produce the written confirmation from such trade creditors of its erstwhile timber business, despite grant of opportunity to the Assessee. The debts had n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks from 3 to 25 years. Surely, the same raises considerable doubts as to the existence of the liability/s. True, they stand not written back and continue to outstand in the assessee's books, but that is precisely the reason for the same being, questioned by the Revenue, or entertaining doubts about the same. The doubt can by no means be considered as not valid, being in accord with the common practice and, thus, discharging the onus that law places on the Revenue. The accounting entries or the treatment that the assessee accords to an asset or liability in its books is not determinative of the matter. Again, the presumption would only be of the same representing the true state of affairs, but the inordinate delay in discharging the same raises considerable and valid doubt as to the existence of those liabilities as at the relevant year-end, i.e., as a fact. The onus on the Revenue, thus, gets discharged and shifts to the assessee, who is in effect only being called upon to show that the position as stated in its accounts reflects the true and correct position. A trading liability would normally get settled within a period of one or two months of its arising, while in the insta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has drawn balance-sheet based on its books of account in which the above amounts were being claimed as liabilities due to the various parties as at the end of the accounting year under dispute. However, the assessee failed to establish the genuineness of these liabilities by citing credible evidence. Simply the liabilities being reflected against certain names in its books of account would not establish the genuineness of such liabilities. On the other hand, the Assessing Officer went to the root of the issue and came to the conclusion that the alleged creditors were not genuine. The assessee was not able to establish the existence of these liabilities. In the circumstances, the lower authorities are justified in treating the liabilities as income under section 41(1) of the Income-tax Act. Being so, the lower authorities are justified in holding that such liabilities did not exist at the end of the accounting year under dispute and rightly added the said liabilities which had ceased to exist. Hence, we do not find any infirmity in the orders of the lower authorities and accordingly, this ground of the assessee is rejected. Accordingly, the assessee appeal in I.T.A. No. 803/Coch/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied himself that neither in the last so many years those parties had ever been seen by anybody, nor any known address of them was available, there was never any demand of payment by any of the above named parties from the assessee for the last more than 10 years, no income tax returns had been filed by them, only then he concluded that the liability of the assessee, in fact, had ceased to exist. …..In our view, merely because the assessee now has offered the said amount as income, that itself, does not support the case of the assessee that the liability had not ceased to exist in the year under consideration, rather, this fact supports, the case of the Revenue that even after passing of further 5 years from the date of assessment, the assessee could not trace his creditors. We, therefore, do not find any infirmity in the well-reasoned order of the Ld. CIT(A) in this respect. There being no merit in the appeal of the assessee, the same is accordingly dismissed. The assessee, however, if so advised, will be at liberty to claim the refund/adjustment of the taxes paid subsequently, in relation to the additions made/confirmed during the year under consideration to avoid double ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue to Creditor) (F indicates VAT free sale) Till the accounts of the above creditors were settled, these were continuously shown and admitted as liabilities in Assessee's Balance sheets as per following details: S.No. Year ended on Admission of Liability Paper book page 1. 31.03.2014 Yes 38 2. 31.03.2015 Yes 39 4. 31.03.2016 Yes 40 5. 31.03.2017 Yes 41 & 41A When it is so, no addition could be made by applying provisions of sec. 41(1) of IT Act. Reliance is placed on the judicial pronouncements: (1) CIT Vs. Sigauli Sugar Works (P) Ltd (1999) 236 ITR 518 (SC): Remission of liability-Condition precedent for application of sec. 41(1). Obtaining benefit of virtue of remission or cessation of liability. Mere unilateral transfer entry in accounts. No benefit obtained. Section 41(1) was not applicable. (P.B. 1 to 7 of II) (2) CIT Vs. Shri Vardhman Overseas Ltd. (2012) 343 ITR 408 (Del): Remission or cessation of trading liability. Scope of sec. 41. Liability to creditors outstanding for more than four years. Liability shown in accounts of Assessee Company. Amount not assessable under section 41(1). (P.B. 8 to 11 of II). (3) Pr. CIT Vs. Matrupra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck by the assessee. Assessee having not written back liabilities to creditors to its P & L account but on the other hand, having shown the liabilities as existing in the next financial year. (P.B. 56 to 60 of II) (Copies of above judicial pronouncements are submitted as per II paper book) The trade creditors were repaid, partly by a/c. payee cheque, partly through sale of goods. In case of foreign creditor- adjusted against amount due from its sister concerns (per creditor's instructions). The sale of goods to different creditors in the month of March 2017 was out of the following imports/purchases: Date Import/purchase Exporter/seller Amount P.B. page 10.01.2017 Import Yiwi Harvest Intt. Trading Co. 38,34,644.00 42 21.01.2017 Import Shining Life Co. Ltd. 34,07,354.00 43 14.02.2017 Import Yiwu Yong Yang Jewellery Co. 36,81,493.00 44 22.02.2017 Import Shining Life Co. Ltd. 12,84,276.00 45 27.02.2017 Import Shining Life Co. Ltd. 8,51,394.64 46 07.03.2017 Import Shining Life Co. Ltd. 9,78,164.00 47 16.03.2017 Import Shining Life Co. Ltd. 11,76,326.61 48 Total import of goods in A.Y. 2017-18 1,52,13,652.25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the AO for his comment. The AO in this remand report opposed the admission of additional evidence. For the sake of clarity, Rule 46A of the I.T. Rules regarding production of additional evidence before the Commissioner (Appeals) is reproduced as below: "Production of additional evidence before the [Deputy Commissioner (Appeals)] [and Commissioner (Appeals)]. 46A. (1) The appellant shall not be entitled to produce before the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)], any evidence, whether oral or documentary, other than the evidence produced by him during the course of proceedings before the [Assessing Officer], except in the following circumstances, namely :- (a) where the [Assessing Officer] has refused to admit evidence which ought to have been admitted ; or (b) where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the [Assessing Officer]; or (c) where the appellant was prevented by sufficient cause from producing before the [Assessing Officer] any evidence which is relevant to any ground of appeal ; or (d) where the [Assessing Officer] has made the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TJ (Asr) 852, ITO Vs Dwarka Prasad (1998) 60 TTJ (Pat) 292 and various other cases it was held that in exercise of powers under section 250, CIT(A) is entitled to admit additional evidence which he may think necessary for facilitating further enquiry, also in view of clauses (b) and (c) of Sub-rule (1) of rule 46A the appellate authority is empowered to allow the assessee to produce additional evidence where the assessee was prevented by sufficient cause from producing the evidence during assessment proceedings. The facts of the appellant's case are quite similar to the facts of the cases cited supra and the ratio laid down therein is squarely applicable to the instant case. Keeping in view the factual and legal position, it is held that the appellant was prevented by sufficient cause to produce this evidence before the AO and hence, the same is admitted. 5.4 As regards the merits of case, the AO treated sundry creditors amounting to ₹ 2,59,97,8371- as non-genuine after summons issued/sent to these parties were returned back unserved and none of the party appeared before the AO. The AO held that these sundry credits are no longer payable and liable to be added u/s. 41 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts." Section 41(1) of the Act can be applied, provided the following conditions are fulfilled: - In the assessment of any assessee, an allowance or deduction has been made in respect of any loss, expenditure or trading liability incurred by him; - any amount is obtained in respect of such loss or expenditure; or any benefit is obtained in respect of such trading liability by way of remission or cessation thereof; - such amount or benefit is obtained by the assessee; - such amount or benefit is obtained in a subsequent year Thus, where a debt due from the assessee is foregone by the creditor in a later year, it can be taxed under section 41(1) of the Act in such later year when it was foregone. Section 41(1) of the Act, therefore, contemplates existence of a debt/liability and the remission or cessation thereof in the year under consideration. Therefore, for the purpose of taxing any income on account of remission or cessation of lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efit had been obtained in respect of such trading liabilities by way of remission or cessation thereof; under the circumstances, the requirements of section 41(1) of the Act are not satisfied in the present case. Moreover, any such cessation or remission of liability has to be in the previous year relevant to the assessment year under consideration, in the facts of the present case, it is not the case of the AO that these liabilities ceased to exist in the previous year relevant to the assessment year under consideration. In fact, the AO has doubted the very genuineness of such liabilities, therefore, the question of taxing any income on the ground that there was remission or cessation of such non-existent liabilities would not arise. 5.5 The provisions of section 41(1) have been interpreted by the Hon'ble Supreme Court in the case of Sugauli Sugar Works (P) Ltd. wherein the court concurred with the reasoning adopted by a Full Bench of the Gujarat High Court in the case of CIT v. Bharat Iron & Steel Industries [1993] 70 Taxman 353/199 ITR 67, and held thus: '9. One aspect of the matter has been completely ignored by the judgment of the Division Bench of the Bombay High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Atara) (2014] 43 taxmann.com 55/222 Taxman 313) held as under: "We are in agreement with the view of the Tribunal . Section 41(1) of the Act as discussed in the above three decisions would apply in a case where there has been remission or cessation of liabil ity during the year under consideration subject to the conditions contained in the statute being ful filled. Additionally, such cessation or remission has to be during the previous year relevant to the assessment year under consideration. In the present case, both elements are missing. There was nothing on record to suggest there was remission or cessation of liabili ty that too during the previous year relevant to the assessment year 2007-08 which was the year under consideration. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. The Assessing Officer undertook the exercise to verify the records of the so cal led creditors. Many of them were not found at al l in the given address. Some of them stated that they had no dealing with the assessee. In one or two cases, the response was that they had no deal ing with the assessee nor did they know him. Of course, these inquiries were made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earing in the balance sheet is a strong acknowledgment of the debts payable by the assessee. The liability shown in the balance sheet is a clear case of acknowledging the liability and such liability cannot be treated to have ceased so as to attract section 41(1). That being so, where is the question of holding the said liabilities as ceased to exist, more so when assessee herself is acknowledging the liabilities to be paid? How can a third party that too a quasi-judicial authority hold in the absence of any material that the liability is not payable by the assessee? Therefore, the addition made on the basis of the presumption does not have either factual or legal lags to stand. [Para 6.2] * It is settled law that the cessation of the liability can be done not by the unilateral act but it can certainly be so by the bilateral act. So long as the assessee is recognizing her liability to pay to these creditors, where is the question of a quasi-judicial authority to intervene and to say on behalf of sundry creditors or on behalf of the assessee that amount is not payable by the assessee? Here is not even unilateral act, let alone the bilateral act. Therefore also, action of Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not depend on the action of Assessing Officer in selecting a case in scrutiny of that year. Merely because Assessing Officer chose to enquire about the creditors in this year and if assessee fails to establish the existence of the liability in this year (even if it is so assumed) then also it cannot be said that the liability ceased to exist only in this year and not before. Nobody can be permitted to fix the year of taxability by a conscious design or omission, be he an assessee or an Assessing Officer. Therefore, viewed from any angle, the addition made by Assessing Officer is liable to be deleted. [Para 6.8]" The Hon'ble ITAT Ahmedabad Bench 'A" in the case of Babul Products (P.) Ltd. vs. ACIT[2017] 87 taxmann.com 79 (Ahmedabad - Trib.) held that additions under section 41(1) could not be made unless liability in accounts had been written off. The head note is reproduced as under:- "II. Section 41(1) of the Income-tax Act, 1961 - Remission or cessation of trading liability (Cessation of liability) - Assessment year 2009-10 - Whether in view of judgment in case of CIT v. Bhoghital Rarnjibhai Atara 12014) 43 taxmann.com 55/222 Taxman 313 (Gui.), ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the year under consideration. Nothing has been brought on record by the AO to show that some benefit has actually accrued to the appellant during the year under consideration. I find that the case of the present appellant is more stronger on the facts as the appellant has adduced evidences before me to prove that he made the payments to these sundry creditors in subsequent years (details are duly enclosed as Annexure- A to this order). The appellant has also furnished confirmed copies of account of these parties. All the facts, details and evidences duly establish the appellant's claim that there were no amounts outstanding against names of these parties in subsequent years and purchases and sales are duly verified from invoices and bills furnished. In view of the facts discussed above, legal position and judicial precedents cited supra, it is held that the AO is not justified in invoking the provisions of sec. 41(1) of the Act in respect of sundry creditors of ₹ 2,59,97,837/-, the addition made at ₹ 2,59,97,8371- is directed to be deleted. The ground no. 1 raised by the appellant regarding this issue is allowed." 9. From perusal of the record, we observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act are not satisfied in the present case. Moreover, any such cessation or remission of liability has to be in the previous year relevant to the assessment year under consideration, in the facts of the present case, it is not the case of the AO that these liabilities ceased to exist in the previous year relevant to the assessment year under consideration. In fact, the AO has doubted the very genuineness of such liabilities, therefore, the question of taxing any income on the ground that there was remission or cessation of such non-existent liabilities would not arise. The assessee's case is squarely covered by the decision of the Coordinate Bench of ITAT Delhi Bench `G' in the case of Satpal & Sons (HUE) vs. ACIT [2017] 85 taxmann.com 283 (Delhi - Trib.) wherein the Coordinate Bench had held that where assessee had shown outstanding sundry creditors for last three years in its balance sheet and no provision was made to write off outstanding liabilities in its books of account, there would be no remission or cessation of liability under section 41(1) even if sundry creditors were not in existence at address provided and PAN of creditors were found to be invalid, addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sheets every year till goods was sold to M/s. Avi Enterprises in March 2017. In the case of Pr. CIT Vs. Dutta Automobiles (P) Ltd. (2016) 287 CTR (Cal) 684, (P.B. page 61 to 64 of second paper book) Hon'ble Calcutta High Court has held that where advance was received from customer for sale of goods which was eventually adjusted against sale price and that no bogus liability was created as per the AO, section 68 is not applicable." 12. We have heard the ld. Counsels of both the parties and have perused the material placed on record. From perusal of the record, we found that the ld. CIT(A) has dealt with the issue at para 6.2 of his impugned and the same is reproduced as under: "6.2 I have considered the facts of the case, assessment order and appellant's submissions. The AO, in absence of any details from the appellant to prove the genuineness of transaction of ₹ 50,00,000/- (advance for sale), treated the same as unexplained credit u/s. 68 of the Act. During the remand proceedings also, since summons issued to this party returned back unserved by postal authorities, therefore, the AO stated that the addition on account of unexplained credit was rightly made. The appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 68 is called for. The Hon'ble Gujarat High Court in the case of DCIT vs. Rohini Builders [2003] 127 TAXMAN 523 (GUJ.) deleted the addition made u/s. 68 of the Act by observing that the assessee had discharged the initial burden by providing the identity of the creditor by giving their complete address, PAN and other details, the head note is reproduced as under:- "Section 68 of the Income-tax Act, 1961 - Cash credits - Assessing Officer made addition of ₹ 12,85,000 as unexplained cash credits in respect of loans taken by assessee from 21 parties - Assessee had discharged initial onus by providing identity of all creditors by giving their complete addresses, GIR numbers/permanent account numbers and copies of assessment orders wherever readily available - Assessee had also proved capacity of creditors by showing that amounts were received by account, payee cheques drawn from bank accounts of creditors - Repayment of loans and interest thereon was also made by account payee cheques by assessee and tax also had been deducted at source on interest payments and remitted - Whether assessee was not expected to prove genuineness of cash deposited in bank accounts of cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst which delivery of goods was made to them." Similarly, the Hon'ble ITAT, Nagpur Bench in the case of Mis Heera Steel Limited vs ITO (2005) 4 IT J 437 held that "Both the lower authorities failed to appreciate the case of the assessee that these were the trade advances and not cash credits and against such advance, the assessee has supplied the material in due time as per details available on record. In view of the above, there is no justification for the revenue authorities to treat these cash advances as unexplained cash credit u/s 68". The Hon'ble ITAT, Mumbai Bench in the case of ITO vs. Surana Traders, (2005)93 TTJ 875: (2005)92 ITD 212, while dealing with a similar issue, observed as under:- "So merely because for the reasons that the purchaser parties were not traceable, the assessee could not be penalized. In the sales documents, the assessee has made available all necessary details, i.e. the total weight sold as well as the rate per kilogram. Undisputedly, the assessee has maintained complete books of accounts alongwith day to day and kilogram to kilogram stock register. These were produced before the AO by the assessee. The assessee also su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iling confirmation account of the party, however the AO did not give any cognizance to the same and only on the basis of returning of notice as unserved, doubted the genuineness of transaction. The assessee pointed out that he received an amount of ₹ 50,00,000/- as advance for sale and the same was cleared by sale on 28-03-2017. In this regard, the assessee furnished confirmation account, bank details, purchase and sale bills. Upon perusal of these details and evidences furnished by the assessee, we agree with the assessee's claim. The assessee has produced copy of confirmation before the lower authorities duly reflecting the creditor's name along with its address, PAN, advance amount etc. From the above, it is evident that the advances or cash received against which goods is supplied subsequently is not a cash credit as contemplated by section 68 of the Act. Simply because, the assessee could not produce the confirmation from this party, the genuineness of transaction cannot be doubted. All the relevant details proving the transaction as genuine were available on record despite that, the A.O's mere emphasis was on the production of the confirmation from this party. In fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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