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TMI Blog2022 (11) TMI 1215X X X X Extracts X X X X X X X X Extracts X X X X ..... f the creditors even after 31.03.2001. Thus the assessee has fulfilled the duty cast upon them to provide evidence that the liability exist at the end of the year. The duty on AO is to prove that the liability has ceased to exist which in our considered view has been miserably failed to be established. We find that the learned tribunal rightly declined to interfere with the orders passed by the CIT(A) by dismissing the appeal filed by the revenue. - THE HON BLE MR. JUSTICE T.S. SIVAGNANAM And THE HON BLE MR. JUSTICE HIRANMAY BHATTACHARYYA Mr. Vipul Kundalia, Senior Standing Counsel. Mr. Amit Sharma, Adocate. Mr. Anurag Ray, Advocate. . .For the Appellant Mr. Pratyush Jhunjhunwala, Advocate. Mr. Dipankar Chowdhury, Advocate. Mr. S. Bhattacharya, Advocate. ..For the Respondent JUDGMENT ( Judgment of the Court was delivered by T. S. SIVAGNANAM, J. ) 1. There is a delay of 627 days in filing this appeal and the revenue has filed GA 01 of 2020 to condone the delay. The respondent assessees have filed their affidavit-in-opposition objecting to the prayer for condonation. Reply affidavit has been filed by appellant revenue to the averments set out in the affi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout considering the provisions of the Limitation Act, 1963? 5. We have heard Mr. Vipul Kundalia, leaned Senior Standing Counsel and Mr. Amit Sharma, learned standing counsel for the appellant department and Mr. Pratyush Jhunjhunwla, learned advocate assisted by Mr. Dipankar Choudhury and Mr. S. Bhattacharya, advocates for the respondent assessee. 6. The assessee filed its return of income for the assessment year under consideration A.Y. 2001-02 reporting a loss of Rs. 18,740/-. The case was reopened by issuance of the notice under Section 148 of the Act wherein among other things, it was observed by the Assessing Officer that the assessee while preparing their return of income could not include profit and the loss of Shri Hanuman Jute Mills and Siliguri Godown as the figures thereon have not been received and of the input division and Vardhal Lubricant as the figures thereof have not been received. In response to the notice under Section 148, the assessee filed revised return reporting loss of Rs. 83,923/-. There after notices under Section 143(2) and 142(1) of the Act were issued and the case was discussed with the authorised representative of the assessee. The assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l was allowed by order dated 18.07.2016. Challenging the same, the revenue preferred appeal before the tribunal which was dismissed by the impugned order. 7. The issue which falls for consideration is whether the assessing officer was right in applying Section 41(1) after treating the assessee s liability to the tune of Rs. 12,97,47,322/- to be a case of cessation of liability. The assessee among other things contended that the assessing officer fell in error in not appreciating that there was evidence on record to show that the assessee firm made payments to its loan creditors towards its outstanding liabilities for interest and the liability continues to reflect as outstanding liability in the subsequent balance sheets year after year and no portion thereof can be alleged to have ceased to exist for the assessment year under consideration within the meaning of Section 41(1)(a) of the Act. It was further contended that the burden of proof as to the satisfaction of condition set out in Section 41(1)(a) was on the revenue and not on the assessee and such burden has not been discharged by the revenue and in the absence of any material on record to the effect that conditions referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Income Tax Versus Chipsoft Technology Private Limited (2012) 210 Taxman 173 (Del) . Before we go into the legal issues involved, certain facts which are undisputed need to be brought on record. 8. At the very first instance before the assessing officer, the assessee had furnished complete details of the outstanding creditors as on 31.03.2001. The details included the names, address and the amount due to each of the creditors. These details were once again filed when the matter was remanded by the tribunal to the assessing officer for a fresh decision. It is also not disputed that the assessee offered explanation as to why these sum were outstanding for 20 years, furnished copies of audited financial statements for the financial years 2003-2004 to 2009-2010 along with the list of creditors which were reflected as outstanding at the end of the year. Further the assessee acknowledged the liability in subsequent years till the financial year 2010-2011 having written back the same in the books of account. The assessee had placed the copies of the assessment order under Section 143(3) for the subsequent years to show that the assessing officers never drew any adverse inference with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Supreme Court agreed to the view expressed by the High Court of Bombay in J.K. Chemicals Limited Versus Commissioner of Income Tax (1966) 62 ITR 34 (Bom) wherein it was held as follows: There is another judgment of the Bombay High Court which was rendered much earlier in J.K. Chemicals Limited Versus CIT. The Bench observed: 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 wither 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 creditor. Trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the customers, the amounts were transferred to the assessee to the profit and loss account. In such fact situation, the Hon ble Supreme Court held that the amount changes its character when the amount becomes assessee s own money because of limitation or by any other statutory or contractual right. 11. In the preceding paragraphs, we have noted the facts situation in the case on hand to which the decision in T.V Sundaram Iyengar cannot be applied. Reliance was placed on the decision in Commissioner of Income Tax, Calcutta Versus Karam Chand and Others (1996) 10 SCC 575 wherein the Hon ble Supreme Court pointed out that when no demand for payment was made, common sense requires that such amount should be entered into profit and loss account for the year and to be treated as taxable. 12. In the said decision on facts, it was held that the conduct of the assessee goes to show that the assessee himself did not treat the amount as trust money and the amount was not shown as a liability nor was it kept in a suspense account. The fact in the case before us is entirely different and the said decision cannot applied. In Chief Commissioner of Income Tax, Cochin Versus Kesaria Tea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranted 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 creditor. Transfer of an entry is neither an agreement between the parties nor payment of the liability The Supreme Court held that the principle that the expiry of the period of limitation prescribed under the Limitation Act would not extinguish the debt but, would only prevent the creditor from enforcing the debt, has been well settled. If that principle were to be applied, a mere entry in the books of account made unilaterally without any act on the part of the creditor was held not to entitle the debtor to say that the liability has been extinguished. In the circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit and loss account. The assessee could not explain why the balance was taken to its profit and loss account even though the money belonged to somebody else. It was in these circumstances that the Supreme Court applied a common sense view of the matter and held that the assessee had become richer by the amount transferred to the profit and loss account. The matter was thus decided on general principles and on the footing that the assessee committed and overt act indicating that it had appropriated the balances in the deposit amounts belonging to its customers as its own monies and was not able to explain why it took the step. The general principles and the common sense point of view were applied to decide the case. Section 41(1) specifically deals with amounts that were allowed as deduction in the past assessments as trading liabilities, which in a later year cease or are remitted by the creditors. If and when there is evidence in a particular later year to show that the liability has ceased or has been remitted, the same can be brought to tax as provided in Section 41(1). In this manner the statute prescribes that a deduction for a trading liability allowed earlier can be brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent case, the assessee did not write back the sundry creditors to its profit and loss account, a finding which is not disputed by the Revenue. The judgment of this Court in Jay Engineering Works Ltd. v. CIT (supra) is therefore distinguishable. 14. Lastly the decision of this court in the case of Goodricke Group Limited Versus Commissioner of Income Tax II, Kolkata (2011) 11 Taxmann.com 210 (Cal) has also elaborately discussed all the decisions on the points and it was held that in the absence of the creditors it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. Relevant paragraphs are quoted herein below: The Supreme Court had, in the case of Sugauli Sugar Works (P.) Ltd.'s case (supra) the occasion to consider the effect of section 41 of the Act. In that context, it was held that the mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not enable the Department to say that section 41 would apply and the amount should be included in the total income of the assessee. It was further held therein that it could not be said that the liability had come to an end as period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oever, any amount in respect of such loss or expenditure in the past. As rightly observed by the Division Bench in the context in which these words occur, no other meaning is possible. We are in agreement with the said reasoning. The aforesaid provisions of the Income-tax Act came up for further consideration before a Larger Bench of the Apex Court in the case of the Kesaria Tea Co. Ltd.'s case (supra) where the Supreme Court reiterated the views taken in the case of Sugauli Sugar Works (P.) Ltd. (supra). The following observations of the Court are relevant and quoted below: It may be noted that the provision was made in the books of account towards purchase tax which was under dispute and the benefit of deduction from business income was availed of in the past years in relation thereto. The same was sought to be reversed by the assessee during the year ending on 31-3-1985 for whatever reason it be. The question is whether the circumstances contemplated by section 41(1) exists so as to enable the revenue to take back what has been allowed earlier as business expenditure and to include such amount in the income of the relevant assessment year i.e., 1985-86. In ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 : 236 ITR 518). We, therefore, find no substance in the contention advanced on behalf of the appellant. Incidentally, we may mention that the controversy relates to the period anterior to the introduction of Explanation 1 to section 41(1). The case before us also relates to the period anterior to the introduction of the Explanation 1 to section 41(1) of the Act. In the case of T.V. Sundaram Iyengar Sons Ltd. (supra) relied upon by Mr. Bhowmick appearing for the revenue, the principle that was enunciated has been reflected from the following observations made therein: In other words, the principle appears to be that it 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. In the case before us, it has not been established that for non-encashment of the cheques in question, the money involved has become the money of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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