M/S RAMA STEEL ROLLING MILLS AND GEN ENG vs. I T O WARD-3 JAIPUR

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ITA/578/2011HC RajasthanRJHC02060429201111 December 2012Author: BELA M. TRIVEDI,AJAY RASTOGI4 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the matter was based on a factual matrix. It agreed with the principle that a liability at the end of the year, if not proved, can be added under Section 41(1) of the Income Tax Act. The Court noted that the assessing authority was still left open to examine the issue and the assessee had an opportunity to produce the creditor or provide an exact address. If the assessee was unable to do so, it would be open for the assessing authority to add back the amount as per law. The High Court found no substantial question of law arising from the facts and circumstances of the case that required consideration. Consequently, the appeal was dismissed.

What were the facts?

The assessee, M/s Rama Steel Rolling Mills & General Engineering Works, is a partnership firm. For assessment year 2007-2008, the assessee showed Rs. 41,01,012/- as sundry creditors, of which Rs. 34,91,181/- was in the name of M/s Tirupati Steels. The Assessing Officer (AO) asked for confirmation of this sundry creditor. The assessee failed to provide it. A notice under Section 133(6) was issued to M/s Tirupati Steels, but it was reported that no such entity existed at the given address. Consequently, the AO made an addition of Rs. 34,91,181/- to the assessee's total income under Section 41(1) of the Income Tax Act, 1961, treating it as remission or cessation of liability. The Income Tax Appellate Tribunal (ITAT) observed that the outstanding balance of Rs. 34,91,181/- was from April 2003 and no payment was made till the end of the accounting period. The ITAT noted that if a liability at the end of the year is not proved, it can be added, and the assessee had not claimed any subsequent payment. The ITAT remitted the matter to the assessing authority to verify discharge of liability till the date of fresh assessment, leaving it open to add back the amount if the liability was found to be ceased.

What were the issues?

1. Whether the Tribunal erred in holding that a substantial question of law arises regarding the effect of Section 41(1) of the Income Tax Act, 1961, concerning the remission or cessation of a trade liability standing in the books of account? (Question of law) Assessee's Contention: The assessee argued that a substantial question of law arises concerning the effect of Section 41(1) of the Income Tax Act, 1961, on trade liabilities appearing in the books of account, which could result in remission or cessation. Revenue's Contention: The revenue did not explicitly record arguments in the judgment. However, the AO's actions and the Tribunal's observations suggest the revenue's position was that the liability was indeed ceased or remitted due to the non-existence of the creditor and failure to prove the genuineness of the liability, thus warranting addition under Section 41(1).

Which sections of the Income-tax Act were involved?

Section 260A,Section 41(1),Section 133(6)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JAIPUR BENCH M/s Rama Steel Rolling Mills & General Engineering Works Versus The I.T.O. Ward -3 (1) Date of Order : 11.12.2012 HON'BLE MR. JUSTICE AJAY RASTOGI HON'BLE MS. JUSTICE BELA M. TRIVEDI Mr. Gunjan Pathak, for appellant. ******* The present appeal has been filed under Section 260A of the Income Tax Act, 1961 assailing order of Income Tax Appellate Tribunal, Jaipur dated 20.05.2011 for the assessment year 2007-2008. The appellant as alleged is a partnership firm and had purchased goods from M/s Tirupati Steels during the financial years 2001-2002 & 2002-2003. However, it is alleged that on account of short supply and period calculated there was a dispute between the appellant-firm and M/s Tirupati Steels and the appellant failed to make payment of Rs.34,91,181/-to M/s Tirupati Steels and that amount was suitable to sundry creditors and balance was standing for the sundry trade creditor in the books of account of the appellant-firm. After the case of the appellant was selected for scrutiny during the assessment proceedings and on perusal of balance sheet it was observed that Rs.41,01,012/- was shown as sundry creditors, for goods supply and out of the total sundry creditors, Rs.34,91,181/- stood in the name of M/s Tirupati Steels but the assessee firm was asked to furnish confirmation of account of the above sundry creditor shown in the balance sheet to prove the genuineness of the sundry creditor. However, since it failed to submit confirmation statement, to ascertain the genuineness of the trade liability notice under Section 133(6) of the Act of 1961 was issued requiring complete copy of the account of the appellant-firm for the financial year 2006-2007 as appearing in the books of accounts of M/s Tirupati Steels. But it was reported that no such entity existed on the given address of M/s Tirupati Steels and accordingly the assessment was made after taking note of addition of Rs.34,91,181/- in view of Section 41(1) of the Income Tax Act, 1961 adding the same to the total income of the appellant. However, the matter was travelled to the Income Tax Appellate Tribunal and it was observed that there has been a credit on account of three bills in April 2003 and the outstanding balance of Rs.34,91,181/- on 13.04.2003 and no payment has been made till the end of the accounting period relevant to the assessment year under consideration. It was further observed that liability at the end of the year if not proved can be added and it was not the case of the assessee at any later stage that the payment has been made and thus the Tribunal observed that the liability in respect of M/s Tirupati Steels remain the same for a number of years and it could not be held that amount cannot be added u/s 41(1) of the Act. However while remitting it was left open for the the assessing authority to verify the discharge of liability till the date of fresh assessment and if the liability has been discharged till date then there will be remission or cessation of the liability and if the assessee fails to produce the creditor or unable to give the exact address then such liability will stand ceased during the year and the assessing authority will be free to add back the same as per law. Counsel for the appellant submits that in the facts of the given case, a substantial question of law arises for consideration regarding the effect of Section 41(1) of the Income Tax Act resulting into remission or cessation of the trade liability standing in the books of accounts. In our opinion, it is based on factual matrix of the matter and the liability in the end of the year if not proved can certainly be added u/s 41(1) of the Act but it is still left open for the assessing authority to examine and opportunity is available before the assessing authority to produce the creditor and if unable to give the exact address, it will be open for the assessing authority to add back the same as per law. We do not find any substantial question of law arises in the facts & circumstances of the case which may require any consideration. Consequently, the appeal is devoid of merits and accordingly stands dismissed. [BELA M. TRIVEDI], J. [AJAY RASTOGI], J. R.Vaishnav

61.

Certificate: “All corrections made in the judgment/order have been incorporated in the judgment/order being emailed.” Ramesh Vaishnav Jr.P.A.

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