DCIT, CIR.4(2),, AHMEDABAD vs. SHRI NRUPAL NARENDRA SHAH, AHMEDABAD

आदेश / O R D E R

PER MAHAVIR PRASAD, JUDICIAL MEMBER:

3.1. It was submitted to the Id. AO that the Appellant is engaged into the business providing IT enabled services like Data Entry, Documents DCIT vs.Nrupal Narendra Shah Asst.Year – 2014-15 - 3 - Scanning & digitization, OMR scanning, various kinds of printing, supply of various kind of stationary, confidential printing & packing, software application development etc. It was also submitted that outstanding liability towards such creditors were in fact with regard to amount to be paid to the temporary staff deployed by the Appellant on various project sites including Government departments. It was also submitted and explained to the Id. AO that in fact such payment has been made in the subsequent years i.e A.Ys.2015-16 and 2016-17. The chart thereof is reproduced on pg. no.5 of the assessment order. In other words, the liability towards such creditors has not been lapsed or ceased and therefore provisions of 8.41(1) of the Act cannot be applied in the present case. However, the Id. AO did not appreciate the facts of the case and made huge addition of Rs.2,24,78,519/- u/s 41(1) of the Act in the hands of the Appellant.

3.2. Insofar as the observations made by the AO are concerned, it is most respectfully submitted that such observations are neither here nor there to invoke provisions of S.41(l) of the Act. The Appellant has kept complete set of accounts and required register to maintain the work carried out by the Appellant. The books of accounts of the Appellant are audited u/s 44AB of the Act and no defect in maintaining of books of accounts or required registered are found by the Auditors much less by the Id. AO. With regard to observation made in the order, it is most respectfully submitted that the Appellant has duly made payment to such creditors in A.Ys.2015-16 and 2016-17, a chart of which is produced on DCIT vs.Nrupal Narendra Shah Asst.Year – 2014-15 - 4 - pg. no.5 of the assessment order. It is further submitted that the payment has been made in cash / cheque to the respective parties in the subsequent years. With regard to observations made in the assessment order, it is most respectfully submitted that expenditure with respect to such outstanding liabilities were incurred in A.Y.2012-13 and the case for the said assessment year was taken up for scrutiny assessment and the Id. AO had made disallowance of Rs.10,00,000/-. In the said assessment year, the Id. AO had duly noted that the Appellant has placed on record various vouchers and bills for Data entry charges, which were verified by him and it was noted by him that the nature of business of the Appellant is such that it cannot be run without the help of the data entry operators, and accordingly, the Id. AO on lump-sum basis made ad-hoc disallowance of Rs.10,00,000/-. Therefore, it is most respectfully submitted that in the earlier year, such expenditure has been found genuine and acceptable looking to the nature of business of the Appellant, therefore in the year under consideration, there is no scope of doubting the genuineness of the amount outstanding with respect to the expenditure which has already been accepted by the ld. AO in earlier assessment year.

3.3. Insofar as existence of liabilities is concerned, it is most respectfully submitted that there, is nothing which has happened in the previous year relevant to the AY under consideration so as to call for the invocation of provisions of S. 41(1) of the Act. DCIT vs.Nrupal Narendra Shah Asst.Year – 2014-15 - 5 - 3.4. As a matter of fact the appellant has not even written back these liabilities in its books of accounts or passed any such entries or offered the same for income in any manner so as to treat the said liabilities as ceased liability. The appellant therefore submits that in the absence of any such write back in the books of accounts, it is not open to the Id. AO to add these amounts as cessation of liabilities u/s 41(1) of the Act.

3.5. In order to invoke provisions of S. 41(1) of the Act, it is obligatory to fulfill twin conditions viz. "during the assessment year in question, the assessee must have received some benefits by way of cessation or remission of liability and the amounts must have been allowed as deduction or allowance in respect of these expenditure or trading liability incurred by the assessee". So both the conditions must be fulfilled to invoke the provisions of S. 41(1) of the Act. In the present case, admittedly the Appellant has not received any benefit by way of cessation or remission of liability not any accounting entry to the said effect has been passed. Under the circumstances, provisions of S. 41(1) of the Act have no applications whatsoever.

3.6. Addition u/s 41(1) of the Act cannot be made until and unless it is found that there was remission / cessation of the liability that too during the previous year, relevant to the assessment year in question; Even though the identity, creditworthiness and genuineness of the creditors is found to be doubtful or suspicious; Merely because the liabilities are outstanding for last many years, it cannot be inferred that the said DCIT vs.Nrupal Narendra Shah Asst.Year – 2014-15 - 6 - liabilities have seized to exist; It is to be established by the AO that the assessee has written back the outstanding liability in its books of accounts. In the present case, admittedly the Appellant has not received any benefit by way of cessation or remission of liability not any accounting entry to the said effect has been passed. Under the circumstances, provisions of S. 41(1) of the Act have no applications whatsoever.

“15. In the case before us, it is not been established that the assessee has written off the outstanding liabilities in the books of account. The Appellate Tribunal is justified in taking the view that as assessee had continued to show the admitted amounts as liabilities in its balance sheet the same cannot be treated as assessment of liabilities. Merely because the liabilities are outstanding for last many years, it cannot be inferred that the said liabilities have seized to exist. The Appellate Tribunal has rightly observed that the Assessing Officer shall have to prove that the assessee has obtained the benefits in respect of such trading liabilities by way of remission or cessation thereof which is not the case before us. Merely because the assessee obtained benefit of reduction in the earlier years and balance is carried forward in the subsequent year, it would not prove that the trading liabilities of the assessee have become non-existent.

DCIT vs.Nrupal Narendra Shah Asst.Year – 2014-15 - 7 -

“8. 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 liability during the year under consideration subject to the conditions contained in the statute being fulfilled. 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 liability 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 underlook the exercise to verify the records of the so called creditors. Many of them were not found at all 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 DCIT vs.Nrupal Narendra Shah Asst.Year – 2014-15 - 8 - had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex part and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi-parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income under section 41(c) of the Act. This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of section 41(1) of the Act there is no cure for it. Be that as it may, insofar as the orders of the Revenue authorities are concerned, the Tribunal not having made any error, this Tax Appeal is dismissed.”