ITO 19(1)(1), MUMBAI vs. SHRI. AMIT VIRENDRA PATEL, MUMBAI

This appeal in A.Y.2015-16 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-18, Mumbai in appeal No.CIT(A)-18/IT-10234/ITO-19(1)(1)/17-18 dated 29/11/2019(ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 27/12/2017 by the ld. Income Tax Officer-19(1)(1), Mumbai (hereinafter referred to as ld. AO).

The only issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in deleting the addition made in sum of Rs. 207,90,576 u/s.41(1) of the Act on account of cessation of liability, in the facts and circumstances of the instant case.

We have heard the rival submissions and perused the materials available on record. We find that assessee is an individual carrying on the business of dealing and manufacturing of cut and polished diamonds and had filed his return of income for the A.Y.2015-16 on 30/09/2015 declaring total income of Rs.13,25,010/-. During the course of scrutiny assessment proceedings, the ld. AO on perusal of the balance sheet observed that assessee had shown sundry creditors totalling to Rs.2,62,98,194/- in respect of eight parties. The ld. AO issued show-cause notice to the assessee to confirm the sundry creditors as per Balance Sheet. The ld. AO also sought to issue independent notice u/s.133(6) of the Act to the sundry creditors totalling to Rs.2,07,90,576/- in respect of six creditors as under:- Name Amount M/s. Bahubali Diamond 30,44,787 M/s. Mona Gems 42,29,572 M/s. Sangham Diamonds P. 40,90,969 Ltd M/s. Parul Diamonds Pvt. 55,26,274 Ltd., M/s. Shree Bhairav 27,92,674 Diamonds P. Ltd., M/s. Rajshree Impex 11,06,300 2,07,90,576 3.1. Since, the notice u/s 133(6) of the Act were not responded by the creditors and no confirmations were received from the aforesaid parties, the ld. AO sought to treat the said sundry creditors as “liability no longer required” and sought to invoke the provisions u/s.41(1) of the Act. The assessee however, submitted before the ld. AO the ledger account of the each of the creditors as appearing in its books for the year under consideration as well as the subsequent years in which payments have been fully made to the concerned sundry creditors; copy of bank statements of the assessee showing payments to each sundry creditors in subsequent years and ledger account of each of the creditors for the year under consideration duly confirmed by each creditor. Vide letter dated 30/11/2017, the assessee also filed a detailed note as to how the provisions of Section 41(1) of the Act could not be made applicable to the facts of the instant case. It was also pointed out that all these parties had valid PAN and in view of severe depression in diamond market and insolvency of numerous parties, several parties had shut down their businesses and shifted their place of business. It was also pointed out that except for M/s Sangham Diamonds having outstanding balance of Rs.40,90,969/-, the assessee had furnished the confirmation together with the ledger account of all the remaining creditors. The assessee also placed reliance on the decision of the Hon’ble Apex Court in the case of CIT vs. Sugauli Sugar Works Pvt. Ltd, reported 236 ITR 518, CIT vs. Kesaria Tea Co. Ltd., reported in 254 ITR 434, among other decisions. The ld. CIT(A) gave a categorical finding in his order stating that the assessee had not written back to income the sundry creditors payable in its books, hence, the liability payable to these sundry creditors had not ceased to exist. The ld. CIT(A) also observed that from the ledger account of the sundry creditors produced by the assessee, it could be seen that the sundry creditors are related to the new purchases made in the preceding previous year and the same have been duly discharged by the assessee in the subsequent assessment years. He observed that the liability had not ceased to exist and hence, the provisions of Section 41(1) of the Act could not be made applicable at all. Aggrieved by this, the Revenue is in appeal before us.

In the result, appeal of the revenue is dismissed.