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Income Tax Appellate Tribunal, “B” BENCH, KOLKATA
Before: SHRI SANJAY GARG, HON’BLE & DR. MANISH BORAD, HON’BLE
PER DR. MANISH BORAD, ACCOUNTANT MEMBER :
The present appeal is directed at the instance of the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter the “ld. CIT(A)”) dt. 28/07/2022, passed u/s 250 of the Income Tax Act, 1961 (‘the Act’), for Assessment Year 2017-18. 2. Brief facts of the case are that the assessee is a limited company. Income of Rs.2,53,38,150/- declared in the return filed on 07/11/2017 pertaining to Assessment Year 2017-18. Case selected for scrutiny through CASS followed for serving of notices u/s 143(2) and 142(1) of the Act. During the course of assessment proceedings the first issue dealt by the ld. Assessing Officer was regarding cessation of liability u/s 41 of the Act. The ld. Assessing Officer noted that in the 3CD report, the auditor has mentioned about the application of Section u/s 41(1) of the Act for the unpaid liability of Rs.47,19,644/-. The ld. Assessing Officer also examined the other outstanding liabilities and noticed that regarding outstanding credit of Rs.1,13,76,781/-, pertaining to ten parties, assessee failed to provide any detail about the transactions carried out with these parties i.e., Assessment Year: 2017-18 Senbo Engineering Limited 2 whether any transactions have taken place in the past three years or whether any transactions took place subsequent to 31st March, 2017. Since there was no satisfactory reply by the assessee. Thus, the ld. Assessing Officer made an addition u/s 41 of the Act towards cessation of liability at Rs.1,13,76,781/-. The ld. Assessing Officer further on observing that there is a delay in deposit of employees’ contribution towards PF & ESI amounting to Rs.7,49,098/-, the same was disallowed u/s 36(1)(va) of the Act and added to the income of the assessee u/s 2(24)(x) of the Act. Further disallowance of personal expenses of Rs.13,22,566/- and disallowance u/s 14A of the Act at Rs.17,81,398/- were made. Income assessed at Rs.5,73,97,130/-.
Aggrieved the assessee preferred appeal before the ld. CIT(A) and partly succeeded.
Now, the assessee is in appeal before the Tribunal.
The ld. Counsel for the assessee vehemently argued reiterating the submissions made before the lower authorities. The ld. D/R supported the orders of the lower authorities.
We have heard rival contentions and perused the material placed on record.
As far as Ground No. 1 is concerned, regarding disallowance of Rs.1,13,76,781/- u/s 41(1) of the Act, we notice that the same pertains to the following parties:- Assessment Year: 2017-18 Senbo Engineering Limited 3 SI. No. Name of the party
Dynamic Scaffolding & Equipment Co.
Aman Manufacturing Co.
M & M Foundation
N.S. Construction
Tapan Sana (Suresh Patra)
A.K. Enterprise (1)
Oceantrans Services 8.. J. Sattar
Pradip Das (H.O)
Tapan Pahari
During the course of assessment proceedings, the ld. Assessing Officer gave sufficient opportunity to the assessee to file the details of the above stated creditors as to why they are unpaid for such a long time and whether any subsequent transactions have taken place with these parties or whether any legal case has been filed by these parties against the assessee for any recovery of loan or any litigation is pending. However, the assessee was not able to give any satisfactory reply. Even before the ld. CIT(A), the submissions made by the assessee are general in nature and there is no specific indication for the reason of non-payment of such liability. Before the ld. CIT(A), submissions made by the assessee on this particular issue reads as follows:-
“The appellant vide its letter dated 05/12/2019 gave details of the concerned Trade Creditors along with their respective addresses, PANS and VAT Numbers. The appellant explained that it had been executing the works relating to the Metro Railways of Kolkata and Delhi as well as the Flyovers Assessment Year: 2017-18 Senbo Engineering Limited 4 at Kolkata. It was submitted by the appellant that on the basis of the allotment of contracts by the concerned Governments, the appellant had to appoint suppliers for materials as well as sub-contractors to carry out certain portions of the works allotted to the appellant. It had been arranged with the concerned suppliers and sub-contractors that as and when the appellant would be receiving payments from the concerned Governments towards its bills raised for the works executed, the sub-contractors would be paid towards their bills raised on the appellant. It was submitted before the Assessing Officer that in some of the cases in view of not having been paid by the concerned governments the relevant matters had been referred to Arbitration and on the basis of the Arbitration Awards made from time to time payments were being released to the appellant and only thereafter the appellant could make payments to its suppliers and sub-contractors. Copies of the respective ledger Account of the concerned suppliers and sub- contractors were submitted to the Assessing Officer. I was explained before, the Assessing Officer that due to the long delays in the Arbitration proceedings the bills of the appellant were not being released from the concerned Governments and thereby delays had occurred in releasing the payments to some of the suppliers and sub-contractors. It was also shown on the basis of the supporting documents that the liabilities of the appellant to the concerned suppliers and/or sub-contractors and not ceased and thereby there should not have arisen any question of cessation of liabilities in those cases. However, the Assessing Officer did not make any attempt to appreciate the facts and circumstances of the case. The Assessing Officer remarked that PAN and VAT Numbers had allegedly not been furnished in case of certain Creditors wherein the aggregate liabilities was Rs. 1,13,76,781/-. The Assessing Officer held that out of the above-referred aggregate Trade liabilities of Rs.1,96,45,763.81/-, in his opinion the liabilities aggregating to Rs.1,13,76,781/- had allegedly ceased to exist as on 31/03/2017. On the basis of his above-mentioned assumption the Assessing Officer made an addition allegedly u/s 41 of Rs.1,13,76,781/- to the income of the appellant. The appellant submits that there having been no remission or cessation of the liabilities aggregating to Rs. 1,13,76,781/-, the provisions of section 41(1) of the Income-tax Act, 1961 could not have been applied in the appellant's case. Information regarding PAN and VAT Numbers for almost all the Creditors had been furnished by the appellant and those were noted by the Assessing Officer himself in his Assessment Order. The appellant further submits that just because of the fact that certain liabilities had remained unpaid for long time, assumption could not be made of an alleged remission or cessation and on the basis of such wrong assumption if any addition would be made u/s 41(1) then the said addition should be held to be unjustified. In this regard the appellant refers to the Hon'ble Delhi High Court's decision in the case of Assessment Year: 2017-18 Senbo Engineering Limited 5 CIT v. Hotline Electronics Ltd. [(2012) 205 Taxman 245 (Del)]. The appellant further submits that when there still remained liabilities as disclosed in the balance sheet of the appellant, even if payment of such liabilities could not be enforceable on account of provision of law of limitation, it could not be considered to be any alleged cessation or remission and therefore section 41(1) could not be applied in such cases. In this regard reference is made to the Hon'ble Gujarat High Court's decision in the case of CIT v. Silver Cotton Mills Co. Ltd., [(2002) 125 Taxman 741 (Guj)]. On the basis of the above facts and the above-referred decisions of the Hon'ble High Courts, the appellant submits that the addition of Rs.1,13,76,781/- made by the Assessing Officer allegedly u/s 41, should be held to be unjustified and accordingly the appellant submits that the said addition of Rs.1,13,76,781/- may kindly be deleted.” 7.1. 1. The above submission of the assessee needs to be examined in the light of Section 41(1) of the Act and since it has a direct bearing on the issue on hand, we reproduce Section 41(1) of the Act:-
“41. (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 obtained19, whether in cash or in any other manner whatsoever, any amount in respect of such19 loss or expenditure19 or some benefit in respect of such trading liability19 by way of remission or cessation thereof19, the 19amount 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 obtained19, 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 (a) by way of remission or cessation thereof19, the amount obtained19 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. Assessment Year: 2017-18 Senbo Engineering Limited 6 [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 successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.] [Explanation 2].—For the purposes of this sub-section, "successor in business" means,— (i) where there has been an amalgamation of a company with another company, the amalgamated company; (ii) where the first-mentioned person is succeeded by any other person in that business or profession, the other person; (iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm;] (iv) where there has been a demerger, the resulting company.”
Now examining the facts of the case in light of the above provisions, we notice that the alleged sum is towards trading liability and the same has not been disputed by the assessee. For how much time they have remained unpaid though, is not available on record but prima facie it seems that for the last 3-4 years, there were no transactions between these parties. Even subsequent to financial year 2016-17, the assessee could not file any documents to show that the alleged sum is a live liability and payments have been made to the said creditors or any other transactions have taken place with these parties. It is an admitted fact that if the assessee on its own write off the trading liability which is not payable, then the same is credited to the profit and loss account as income for the year and there remains no question for the applicability of Section 41(1) of the Act. Only those trading liabilities which have remained unpaid for a long time and there is no communication that such liabilities have to be paid by the assessee which still appears in the books of accounts, that is a case where Section 41(1) of Assessment Year: 2017-18 Senbo Engineering Limited 7 the Act comes into play. We also note that various creditors which were standing in the balance sheet of the assessee have also been referred by its auditor to be audited u/s 41(1) of the Act and the assessee has accepted the same. Similarly, for the rest of the trade creditors, the assessee failed to file any evidence/documents to show that the said creditors are active and the assessee still carries out any business transactions with these parties and that the said liabilities have been paid in the subsequent period. We, therefore, are of the considered view that the said addition made u/s 41(1) of the Act at Rs.1,13,76,781/-, is rightly confirmed by the ld. CIT(A). Further, we hold that, in case the said sum is subsequently paid to the respective creditor, then the assessee shall be eligible to claim it as an expenditure in the profit and loss account during the year in which such sum is paid. Thus, no interference is called for in the finding of the ld. CIT(A). Accordingly, Ground Nos. 1 & 2 of the assessee are dismissed.
Ground Nos. 3 & 4, are regarding the disallowance of Rs.7,49,098/- u/s 36(1)(va) of the Act, on account of delay in deposit of employees’ contribution to PF & ESI. It remains an admitted fact that the same has been deposited after the due date prescribed under the PF & ESI Act. Recently, the Hon’ble Supreme Court in the case of Checkmate Services (P.) Ltd. v. Commissioner of Income-tax-1 [2022] 143 taxmann.com 178 (SC), dealing with this issue has settled down the controversy deciding in favour of the revenue holding that strict compliance with Section 36(1)(va) r.w.s. 2(24)(x) is a must to claim deduction and provisions of Section 43B of the Act cannot be applied on employees’ contribution to PF & ESI and further held that the High Court rulings favouring the assessee had not laid down the correct law and further held that the position of law stands well settled and such employees’ contribution towards PF & ESI if not deposited before the due date prescribed under the relevant Act governing PF & ESI, then in view of Assessment Year: 2017-18 Senbo Engineering Limited 8 the provisions u/s 36(1)(va) r.w.s. 2(24)(x) of the Act, all such amounts shall be added to the income of the assessee. Therefore, respectfully following the ratio of law laid down by the Hon’ble Supreme Court in the case of Checkmate Services (P.) Ltd. (supra), we uphold the findings of the ld. CIT(A) in this respect and dismiss Ground No. 3 & 4 raised by the assessee.
Ground No. 5, regarding club expenses amounting to Rs.13,22,566/-. We find that the assessee has filed complete details of the said expenses. The disallowance is only made for the reason that they have mentioned the amount under the head personal expenses in the audit report. However, the details filed before the lower authorities show that they include club expenses, fees towards subscription and other facilities. Considering the facts that the assessee is a limited company and for the purpose of business meetings and other related expenses, the same have been incurred and it is not a case that they are for the personal expenses of the Directors. We thus, find merit in the contention of the assessee that the alleged expenses are in the nature of the business expenditure and the same deserves to be allowed u/s 37 of the Act. Thus, Ground No. 5 raised by the assessee is allowed.
Ground No. 6 is in respect of the disallowance made u/s 14A of the Act. We notice that the assessee has not earned any exempt income during the year. Recently, the Hon’ble Delhi High Court PCIT Vs. Era Infrastructure (India) Ltd. (ITA 204/2022) judgment dt. 20/07/2022, has held that the amendment made in Section 14A of the Act by Finance Act, 2022, will be applicable prospectively and also held that disallowance u/s 14A of the Act should not exceed the exempt income earned by the assessee during the year. Therefore, since the assessee has not earned any exempt income during the year as stated by the ld. Counsel for the assessee and this fact Assessment Year: 2017-18 Senbo Engineering Limited 9 being observed by the lower authorities, we thus reverse the finding of the ld. CIT(A) and delete the alleged disallowance made u/s 14A of the Act.
Ground No. 7 is general in nature.
In the result, appeal of the assessee is partly allowed. Order pronounced in the Court on 22nd February, 2023 at Kolkata. (SANJAY GARG) ACCOUNTANT MEMBER Kolkata, Dated 22/02/2023 *SC SrPs आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant
""यथ" / The Respondent संबं"धत आयकर आयु"त / Concerned Pr. CIT 3. 4. आयकर आयु"त ( अपील ) / The CIT(A)- "वभागीय ""त"न"ध ,आयकर अपीलीय अिधकरण, कोलकाता/DR,ITAT, Kolkata, 5. गाड" फाईल /Guard file. 6. आदेशानुसार/ BY ORDER,