JOHARIMAL BHANWAR LAL JEWELLERS PVT. LTD.,JAIPUR vs. ITO, JAIPUR

PER: BHAGCHAND, A.M.

This is an appeal filed by the assessee emanates from the order of the ld. CIT(A)-I, Jaipur dated 24/11/2015 for the A.Y. 2012-13,

wherein the assessee has raised sole effective ground of appeal, which is as under:

“1. That the authorities below erred in making an addition of Rs. 43,66,283/- on account of alleged liabilities of sundry creditors of following creditors considering the same as having ceased to exist during the year under consideration and added back to the income of the petitioner income U/s 41(1) of the IT Act, 1961. (i) M/s Coral Gems Rs. 19,96,783/- (ii) M/s Hem Gems, Mumbai Rs. 20,50,500/- (iii) M/s Priya Jewels Rs. 75,000/- (iv) M/s United Gems India Rs. 2,44,000/- Rs. 43,66,283/-

of Rs.43,66,283/- on account of liabilities of sundry creditors as per the Assessing Officer the same have ceased to exist hence added back U/s 41(1) of the Income Tax Act, 1961 (in short the Act).

engaged in the business of trading of precious and semi precious

stones. However, during the year under consideration, the assessee

has not carried out any business activity. The Assessing Officer

observed that assessee has shown sundry creditors to the tune of Rs.87,50,051/- as on 31.03.2012.The Assessing Officer observed that the assessee failed to file confirmation from 5 creditors amounting to Rs.46,24,283/-.He issued notice u/s 133(6) to these parties (except

M/s Hem Gems as no address was provided). Notice was served only

to M/s Kings of Jewels. The credit in the name of M/s Kings of Jewels

was verified by the AO from the copy of account filed by M/s Kings of Jewels. The A.O. added the following outstanding liabilities:

M/s Coral Gems Rs. 19,96,783/- M/s Hem Gems, Mumbai Rs. 20,50,500/- M/s Priya Jewels Rs. 75,000/- M/s United Gems India Rs. 2,44,000/-

Officer. Now the assessee is in appeal before the ITAT. While pleading

on behalf of the assessee, the ld AR has submitted as under:

In this case, where the creditor was appearing in the books of the assessee for past 7 to 8 years, Hon’ble Court considering the decision of Delhi High Court in case of Vardhaman CIT Vs. G.K. Patel & Co. (2012) 212 Taxman 384 (Guj.) (HC)

AO finds that assessee had not paid money to many of creditors for years together & thus added the same as income under provisions of sec 41(1). It was held that cessation of liability has to be either by reason of operation of law, i.e., on liability becoming unenforceable at law by creditor and debtor declaring unequivocally his intention not to honour his liability when payment is demanded by creditor, or a contract between parties, or by discharge of debt. In the present case, since there was no declaration by assessee that it did not intend to honour its liabilities nor was there any discharge of debt, provisions of sec. 41(1) could not be invoked. 408/ 69 DTR 379 (Del.)(HC) Amounts standing in the names of sundry creditors for more than four years shown as outstanding and not unilaterally written back to P&L a/c cannot be brought to tax u/s 41(1). Argument of Revenue that the non-payment or non-discharge of the liability in favour of the sundry creditors resulted in “some benefit in respect of such trading liability” in a practical sense or common sense and, therefore the section was rightly invoked, overlooks the words following the quoted words, namely, “by way of remission or cessation thereof’. (P&H) (HC)

Held that "It is the conceded position that in the assessee's balance sheet, the impugned liabilities have been shown, which are payable to the sundry creditors. Such liabilities, shown in the balance-sheet, indicate the acknowledgment of the debts payable by the assessee. Merely because such liability is outstanding for the last six years, it cannot be presumed that the said liabilities have ceased to exist. It is also conceded position that there is no bilateral act of the assessee and the creditors, which indicates that the said liabilities have ceased to exist. In absence of any bilateral act, the said liabilities could not have been treated to have ceased. In view of these facts, the CIT(A) as well as the Tribunal has rightly come to the conclusion that the AO has wrongly invoked the Expln. 1 of s. 41(1) and made the addition on the basis of presumption, conjectures and surmises. It has been further found that the AO failed to show that in any earlier year, allowance or deduction had been in respect of any trading liability incurred by the assessee. It was also not proved that any benefit was obtained by the assessee concerning such trading liability by way of remission or cessation thereof during the concerned year. Thus, there did not accrue any benefit to the assessee which could be deemed to be the profit or gain of the assessee's business, which would otherwise not be the assessee's income. It has been further found as fact that the assessee had filed the copies of accounts of sundry creditors signed by the concerned creditors. In view of this fact, the Tribunal has rightly come to the conclusion that confirmation from the creditors was produced. In view of the above, there is no illegality in the impugned order passed by the Tribunal and, no substantial questions of law, as raised by the Revenue in this appeal, arise from the order of the Tribunal."

In view of above, the addition made by AO be directed to be deleted.

to year basis. The assessee claims that the amount was payable and these liabilities were never ceased. It was claimed that there was no cessation of the liability. For invoking the provisions of Section 41,

there must be two conditions fulfilled (i) there should be cessation/remission of liability and (ii) it should be ceased during the previous years relevant to assessment year under consideration. Even

when the amount remained unclaimed for considerable period but it remains to be payable then there is no cessation or remission of such liability. Further it is also not established that the assessee was not having intention to repay these liabilities. These liabilities were clearly

reflected in the accounts of the assessee thus the assessee continued

to acknowledge the liability payable by him. Therefore, merely on the fact that the liability is outstanding for many years shall not amount to cessation or remission of the liability. It is pertinent to note that in the case of Coral Gems, purchases were made in F.Y. 2001-02, it is evident from page No. 5 & 12 of the paper book, against those

purchases, an amount of Rs. 32,50,000/- was paid in F.Y.2004-05 and an amount of Rs. 19,96,783/- was outstanding as evident from page

No. 4 of the paper book. Coral Gems demanded the balance amount

on 15/5/2008, which is evident from page No. 6 of the paper book.

These facts suggest that the liability was not ceased to exist. Similarly

in the case of Priya Jewels, which is a proprietory concern of Shri

Govind Johari and its new address was provided i.e. C-7, Prithiviraj

Road, C-Scheme, Jaipur. Govind Narayan Johari was assessed to income tax at Central Circle-III, Jaipur. The other proprietory concern

of Shri Govind Johari was M/s King of Jewels. The liability of the same

was accepted by the Assessing Officer as genuine and payable,

therefore, there is no reason to disbelieve the liability of M/s Priya

Jewels of Rs. 75,000/-. PAN of Shri Govind Johari was also provided.

Similarly in the case of United Gems India, purchases were made on 20/06/2004 against which payment of Rs. 2,58,000/- was made on 02/08/2005 and the balance was still payable. The same is the case Sugar Works (P) Ltd., the Hon’ble Supreme Court held as under:

Sec. 41 contemplates the obtaining by the assessee of an amount either in cash or in any other manner whatsoever or a benefit by way of remission or cessation and it should be of a particular amount obtained by him. Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is sine qua non for the application of this section. The mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not enable the Department to say that s. 41 would apply and the amount should be included in the total income of the assessee. Just because an assessee makes an entry in his books of accounts unilaterally, he cannot get rid of his liability. 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 it is a matter which 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 unenforceable. 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. The principle that expiry of period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt, has been well settled. If that principle is applied, it is clear that mere entry in the books of accounts of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by the Section- CIT vs. Sugauli Sugar Works (P) Ltd. (1981) 23 CTR (Cal) 226 : (1983) 140 ITR 286 (Cat) :”

Considering the factual position and the case laws, I direct to delete the addition.

Order pronounced in the open court on 06/10/2017. ¼Hkkxpan½ (BHAGCHAND) ys[kk lnL;@Accountant Member

Tk;iqj@Jaipur fnukad@Dated:- 06th October, 2017 *Ranjan आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू vihykFkhZ@The Appellant- M/s Joharimal Bhanwar Lal Jewellers

सहायक पंजीकार@Aेेज. त्महपेजतंत