THE ITO., WARD-2(1)(1),, AHMEDABAD vs. GAYATRI INTERMEDIATES PVT. LTD.,, AHMEDABAD

This appeal filed by the Revenue is directed against the order of the Ld. CIT(A)-2, Ahmedabad dated 28.08.2015 pertaining to A.Y. 2012-13 and following grounds have been taken:

Facts of the case are as emanated from the assessment order: 3 Cessation of Liability U/S 41(1) Over verification of balance sheet, it is noticed that the assessee company has shown trades payable of Rs 20,773,910/- . It was also observed that the the assessee had shut operations in March 2005 and for the assessment year under consideration, almost 7 years have past after its closure.Perusal of balance sheet revealed that all the assets and liabilities are shown unchanged over the last year. Therefore the assessee was asked to submit proof regarding the existing liabilities on account of trade payable. 3.1 In response, assessee filed reply dtd. 15.12.2014 in which the assessee produced a list of trade payables as under:-

Hindustan Petroleum Corp Ltd 45685 3 . A.Y. 2012-13 7 Krupa Trading Corporation 165868 8 Mangalam Cargo Movers 24200 9 Patel Service 24500 10 Premier Clearing Agency 29545 11 Sapphire Exim Agency 54964 12 Sarr Freight Clearing Agency 116223 13 Shree Jalaram Enterprise 96104 14 Shree Shakti Roadways 24072 15 S.K.Punjabi 38144 16 S.P.U Consultants 18894 17 Surendra Industries 15548 18 Ambica Products 38063 19 ATC International 539250 20 Bahubali Enterpirse 428074 21 Balaji Enterprise 471210 22 Balaji Formalin Ltd 64511 23 Bhimani Chemicals Pvt Ltd 220559 24 Bholenath Chemicals 50099 25 Chemical Corporation 870724 4 . A.Y. 2012-13 26 Chemical Corporation=Bombay 662400 27 Chemlndia Enterprise 1098083 28 Chemi Organic Chem P Ltd 29000 29 Chemsol Corporation 60478 30 Dhanlaxrni Industries 516825 32 Parth Enterprise 802218 33 Kahan Chemicals 525161 34 Sandri Trading Co. 21414 35 Shah Bhimani Chemicals 35100 36 Shaiman Chemicals Pvt Ltd 144795 37 Shalibhadra Dyechem Pvt Ltd 187250 38 Shalibhadra Int Pvt Ltd 131368 39 Shraddha Finechem Pvt Ltd 110081 40 Shreeji Chemical Industries 35755 41 Shreeji Ice Factory 675733 42 Shree Krishna Sulphite Pvt Ltd 32761 43 Shree Rasayan Enterprise 331279 44 Shree Sumkit Enterprise 42731 5 . A.Y. 2012-13 45 Siddhi Intermediaries Pvt Ltd 1642450 46 Simaline Chemicals Ind Ltd 133491 47 Sun Chem India 170037 48 Sun Sient Technical Colours 26217 49 Supan Traders 40800 50 Outstanding Expense 500658 Miscellaneous 51 Tradex Corporation 350554 52 Traxpro Enterprise Pvt Ltd 1666560 53 Trilok Chemcials Pvt Ltd 363386 54 Uday Chemicals 140669 55 Umang Acid Chem Pvt Ltd 316875 56 Umiya Chem Industries 31381 57 Vimal Chemicals 57507 58 Vishal Traders 175500 59 Win International 663108 60 Cosmic Dye Chem Pvt Ltd 148669 61 Gayatri International 1427433 62 Rachna Captial Securties Ltd 748933 6 . A.Y. 2012-13 63 Others 2719769

Against the addition of Rs. 1,79,75,009/-, assessee preferred first statutory appeal before the ld. CIT(A) who granted relief to the assessee with following observation: 3.3 I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made the addition of Rs.l,79,75,009/- invoking the provisions of Section 41(1) of I.T. Act in respect of 8 . A.Y. 2012-13 the amount outstanding in the books of the appellant in the name of various parties noted at Page No. 2 to 4 of assessment order. The AO observed that the amount in respect of the aforesaid parties were outstanding even before March, 2005. The AO has observed that the assessee could not bring any confirmation from the creditors nor could it produce supporting evidences to prove the liability in respect of balance creditors totalling to Rs.l,79,75,009/-. Further, AO also observed that the appellant could not clearly state when the liability would possibly be paid and also could not produce any relevant documents showing whether the creditors have filed any claim before the court or any other agency. The onus was on the appellant to prove the complete details since only he has special knowledge of the liability and only on furnishing of such information, the AO could examine whether the liability still existed or not. The onus was on the appellant to state that any liability for which deduction had been claimed in earlier years is continuing and it still continues to exist. The appellant has failed to discharge its onus and, therefore, as per AO an adverse inference was to be drawn against the appellant. 3.4. On the other side, the appellant claimed that the company was engaged in the business of manufacture of dyes, intermediates. But it became defunct and not carried out any business operations since March, 2005. There being no business activity, there was no income or expenditure. It was submitted to the AO also that the liability was on account of money payable to the creditors in respect of goods and services supplied by them prior to March, 2005 and that during the year under appeal, there has been no cessation or remission of any trade liability and that the appellant has not obtained any benefit either in cash or otherwise on account of cessation or remission of trading liability. Thus, the provisions of section 41 (1) of I. T. Act are not applicable to the facts of the appellant's case. It was further submitted that during the year under appeal, there had been no remission or cessation of liability as erroneously presumed by the AO. The liability on account of sundry creditors was very much in existence and the appellant was under legal obligation to make payment of such liability. During the year under appeal, the appellant has not obtained any benefit in respect of such liability by way of remission or cessation thereof. Even in the assessment order, the AO has not recorded any finding or fact to the effect that there was remission / cessation of liability. The appellant further argued that unless notices were issued to the concerned creditors and they had confirmed that they had given up the claims against the assessee, no decision could be taken by the AO merely on the ground that the debts remained unpaid in the books of accounts for a number of years that the liability had ceased or had been remitted. Thus, it was mentioned by the 9 . A.Y. 2012-13 appellant that the conditions specified under the provisions of section 41(1) of the I. T. Act, 1961 is not complied with and hence the same are not applicable over the facts of the case. 3.5. In respect of the applicability of the provisions of Section 41(1) of the Act, the appellant has relied upon the various judgments of different Courts including the Hon'ble Gujarat High Court and according to that no addition u/s.41(l) could be made on these facts. In the year under consideration, neither any amount has been recovered in respect of the unsecured loans nor any benefit is obtained by the appellant company by way of any remission or cessation of such liability. The liability towards the parties still subsisted which was further evident from the fact that the impugned amounts were still reflected as outstanding in the books of the appellant. No written off of such balances has been made. 3.6. The various Hon'ble Court's have analyzed the provisions of Section 41 (1) of the I.T. Act and held no addition to be made unless the creditors had foregone their debts in favour of debtor. Some of the decisions are briefly as unden- 3.6.1. It has been held by the Hon'ble Gujarat High Court in Tax Appeal No.770 of 2013 in the case of CIT Vs. Hardik Fabrics that the decision of the Tribunal on the facts over the issue was correct and the Revenue's appeal was dismissed. The Tribunal in the aforesaid case has observed that the Revenue had not brought anything on record to show that the sundry creditors had forgone their debts in favour of the assessee. 3.6.2. Further, the Hon'ble Gujarat High Court in the case of CIT Vs. Bhogilal Ramjibhai Atara 222 Taxman 313 has held that unclaimed liabilities of earlier years which are shown as payable in the accounts are not taxable as income even if creditors are untraceable and liabilities are non-genuine. In view of the aforesaid recent judgment of the Hon'ble Gujarat High Court, no addition u/s.41 (1) can be made over the facts of the case as the liabilities had not been written back in the accounts by the appellant. The relevant portion of the finding of the Hon'ble Gujarat is as under:- "S.41(l) would apply in a case where there has been remission or cessation of liability during the year under consideration. In the present case, there was nothing on record to suggest there was remission or cessation of liability in the AY 2007-08. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. The AO undertook 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 had no dealing with the assessee nor did they know 10 . A.Y. 2012-13 him. Of course, these inquiries were made ex parfe 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 u/s.41(l) 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 s. 4] (1) of the Act there is no cure for it." 3.6.3. Further in the case of CIT Vs. Miraa Processors (P) Ltd. (2012) 208 Taxman 93 (Guj.) in which Division Bench of this Court observed as under:- "14. As pointed out in the case of Sugauli Sugar Works (P) Ltd. (supra), vide the last five lines of the paragraph-6 of the judgment, the question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee's case alone but has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act." 3.6.4. Further in the case of CIT Vs.Nitin S. Garg, (2012) 208 Taxman 16 (Guj.), it was observed as under:- "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." 3.6.5. Further in the case of CiT Vs. G.K. Patel & Co. (2013) 212 Taxman 384 (Guj.), in which a Division Bench of this court held and observed as under: 'To the extent the said decision holds that a unilateral act on the part of the debtor cannot bring about a cessation of his liability, the same would not be applicable to the facts of the present case, in view of the insertion of Explanation 11 . A.Y. 2012-13 1. However, at the cost of repetition it may be stated that in this case there is no unilateral act on the part of the debtor so as to bring about a cessation of its liability. Therefore, the other part of the decision would still apply to the facts of the present case, namely that the cessation of liability has to be either by reason of 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. In the present case, admittedly there is no declaration by the assesse that it does not intend to honour its liabilities nor is there any discharge of the debt. In the aforesaid premises, as no event had taken place in the year under consideration to indicate remission or cessation of the liabilities in question, the provisions of section 41(1) of the Act could not have been invoked. The reasoning adopted by the Tribunal while holding that section 41(1) would not be applicable to the facts of the present case is in the line with the principles enunciated in the above decision. The Tribunal, therefore, committed no legal error so as to give rise to any question of law warranting interference by this court." 3.6.6. Further in the case of CIT Vs. Willard India Ltd. (2008) 302 ITR 221 (All),it has been held as under:- Business income - Profits chargeable to tax under s. 41(1) - Time-barred debts taken to P & L a/c - Unilateral act of assessee debtor in writing back time-barred debts does not amount to cessation of liability, hence not chargeable under s. 41 (1)- CIT vs. Sugauli Sugar Works (P) Ltd. (1999) 2 SCC 355 relied on. 3.6.7. Further in the case of Ambica Mills Ltd. Vs. CIT (1964) 54 ITR 167 (Guj.), it has been held as under:- Business income- Profits chargeable to tax under s. 10(2A) - Unpaid and unclaimed wages due to and payable by the company to its workers - Amount acknowledged as liability in the balance sheet every year - Does not became time barred - cannot be added to income as profits chargeable to tax. F38. In view of the aforesaid discussion, it is on record that the AO has not brought anything on record to say that the appellant has derived any benefit in cash or otherwise due to cessation or remission of liabilities, if any. Further, such cessation or remission has actually taken place in the year under consideration has not been established by the AO. Moreover, no written off the liability has been done in the books of accounts. Thus, both the elements of the provisions of Section 41 (1) are not complied with, and therefore, the provisions u/s. 41 (1) of the Act is not applicable on the facts of the case. Consequently, the addition 12 . A.Y. 2012-13 made by the A.O. is found not correct, and therefore, the same is directed to be deleted.

Now Revenue has come before us.

We have gone through the relevant record and impugned order. Ld.A.O. has made addition of Rs. 17975009/- invoking provisions of section 41(1) of Income Tax Act. The A.O. has observed that assessee could not bring any confirmation from the creditors nor could it produce supporting evidences to prove the liability in respect of balance creditors totaling to Rs. 1,79,75,009/-.

In support of its contention, assessee cited an order of Hon’ble Jurisdictional High Court in the case of Dattatray Poultry Breeding Farm (P.) Ltd. [2019] 104 taxmann.com 366 (Guj.) :

And apart from that assessee cited an order of Hon’ble Jurisdictional High Court in the matter of CIT vs. Bhogilal ramjibhai Atara [2014] 43 taxmann.com 55 (Guj.): “Section 41(1) of the Income-tax Act, 1961 - Remission or cessation of trading liability (Cessation of liability) - Assessment year 2007-08 - In return of income for assessment year 2007-08, assessee had shown a certain amount by way of his debts - He supplied details of 27 different creditors - Assessing Officer undertook exercise to verify records of so called creditors and found that creditors had no dealing with assessee - Assessing Officer further having found that debts were outstanding since several years applied section 41(1) and added above amount in income of assessee as deemed income - There was nothing on record to suggest that there was remission or cessation of liability that too during previous year relevant to assessment year 2007-08 - Whether in peculiar facts of case amount in question could not be added back in income of assessee as 14 . A.Y. 2012-13 deemed income under section 41(1) - Held, yes [Para 8] [In favour of assessee]”

In our considered opinion, ld. CIT(A) has passed a detailed and reasoned order and Hon’ble Gujarat High Court also supported the case of the assessee. We thus see no substantive error in the order of ld. CIT(A).

In the result, appeal filed by the Revenue is dismissed.