GIRISH RAGHAVAN,MUMBAI vs. ASSTT. CIT-26(1), MUMBAI

The AO has noticed that an amount of Rs.2,04,71,565/- shown as payable under the head ‘Sundry Creditors’ was outstanding since assessment year 2012-13. In such circumstances, the appellant was asked to furnish the details of the transaction entered with the said entity in assessment year 2012-13 and as to how the same is accounted for in the books of the appellant and the justification for still showing the amount as payable since financial year 2011-12 (assessment year 2012-13). The appellant filed his response on 16.12.2016. The relevant portion of the same is reproduced as under: -

The AO has noticed that inspite of assessee having substantial income during the assessment years 2012-13, 2013-14, 2014-15 and 2015-16, no payment was made to Rockfort Gulf FZE and the liability remained as it is although the expenses were booked in financial year 2011-12 (assessment year 2012-13). In such circumstances, the AO vide a show cause notice dated 15.12.2016 under Section 142(1) of the Act required the appellant to explain as to why the said liability should not be treated as ‘cessation of liability’ in accordance with Section 41(1) of the Act.

The assessee, in response, submitted as under :-

The AO found that in assessment year 2012-13 the deduction was allowed towards the amount payable to Rockfort Gulf FZE, which is in respect of a trading liability. The AO has found that the said liability has ceased to exist, which should be treated as deemed profit and gains of business for the assessment year in question in this appeal. It is in these circumstances that the AO has made the disallowance under Section 41(1) of the Act of Rs.2,04,71,565/-.

The second disallowance is towards hotel charges and travel expenses of Rs.6,04,043/- under Section 37(1) of the Act.

In appeal, the First Appellate Authority has found that the appellant has not established that the said amount has been paid and has not furnished any confirmation from the creditor Rockfort Gulf FZE indicating that the ITA 6955/Mum/2025 Girish Raghavan liability still exists. The First Appellate Authority has observed that the appellant has not claimed that the said amount was paid and, thus, it is subject matter of certain dispute and the appellant did not intend to pay the same. The learned CIT(A) has, therefore, confirmed the disallowance under Section 41(1) of the Act.

So far as the hotel and travel expenses are concerned, an ad hoc disallowance has been made restricting the amount to Rs.3,02,022/-.

It is this order which is the subject matter of challenge in this appeal.

We have heard the learned AR for the appellant and the learned DR representing the Revenue. With their assistance, we have gone through the record.

The learned AR has submitted that merely because the liability was shown as subsisting from assessment year 2012-13, the disallowance cannot be made during assessment year 2014-15. It is submitted that during the assessment year in question, only two years had elapsed from the date on which the expense was first booked in assessment year 2012-13. It is submitted that even assuming that as on the date of assessment order four years had elapsed, still then merely on account of the fact that the remedy to recover the amount was barred, the right itself was not lost. Reliance is placed on the decision of Supreme Court in Bombay Dyeing & Manufacturing Co. Ltd. vs. State of Bombay [1958] SCR 1122 in order to submit that the limitation only bars the remedy and not the right. The learned AR has placed reliance on the decision of Bombay High Court in Kohinoor Mills Co. Ltd. (49

Insofar as the disallowance under Section 37(1) of the Act is concerned, it is submitted that no such ad hoc disallowance could be made for which reliance is placed on the following decisions:

The learned DR has supported the impugned order. It is submitted that the burden to establish that the trading liability still subsists is on the assessee which has not been discharged in this case. It is submitted that merely because the liability is shown subsisting in the books of account is not sufficient, particularly when at the time, the assessment order was passed, the limitation to enforce recovery of the liability had expired. It is thus, submitted that the authorities below were justified in making the disallowance on account of cessation of liability.

In respect of the hotel expenses and travelling expenses, it is submitted that the CIT(A), in the circumstances of the case, had reduced the disallowance made by the Assessing Officer and restricted it to Rs.3,02,022/-

We have considered the submissions made. The disallowance u/s. 41(1) of the Act on account of alleged cessation of liability, in our opinion, cannot be sustained. It is necessary to note that the liability was incurred by the appellant towards Rockfort Gulf FZE in F.Y. 2011-12 relevant to A.Y. 2012-13. The impugned disallowance has been made for A.Y. 2014-15. Although on the date of the passing of the assessment order i.e. on 26.12.2016 more than three years had elapsed, the fact remains that the disallowance pertains to A.Y. 2014-15 which cannot be said to be beyond three years from A.Y. 2012-13, in which the liability is said to be incurred. That apart, it is now well-settled that the expiry of limitation only bars the remedy and not the right [see the decision of Supreme Court in Bombay Dyeing & Manufacturing Co. Ltd. (supra)]. Thus, even assuming for the sake of argument that the date of the assessment order would be relevant, the mere fact that the period of limitation for enforcing recovery of the liability had expired, cannot ipso facto lead to the conclusion, that there is cessation of liability within the meaning of sub-section (1) of section 41 of the Act. A bare perusal of clause (a) of sub-section (1) of section 41 [which applies in this case] would indicate that the said clause can be invoked only when the assessee (first-mentioned person) has obtained, either in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof. The learned AR pointed out that there is a confirmation letter dated 01.04.2012 from M/s. Rockfort Gulf FZE, which was produced before the AO.

A useful reference in this regard can be made to the decision of Bombay High Court in the case of Kohinoor Mills Co. Ltd.(supra). In that case certain amount towards wages due to the labourers and workmen was not ITA 6955/Mum/2025 Girish Raghavan paid by the assessee as none of the labourers and workmen had turned up to receive them. The AO had made the impugned addition of the amount payable to said labourers and workmen on account cessation of liability u/s. 10(2A) of the Income tax Act 1922 which is in pari materia to section 41(1) of the Act. The Bombay High Court placing reliance on the decision of the Supreme Court in Bombay Dyeing & Manufacturing Co. Ltd. (supra) held that the fact that by reason of expiry of three years [as liability was incurred in 1952 and the addition was made in relation to year 1955] and that the remedy of the labourers and workmen to recover the amount was barred, cannot lead to the conclusion that there was cessation of liability. In that view of the matter, we find that the impugned addition made u/s. 41(1) of the Act cannot be sustained.

In so far as the disallowance made on account of Hotel expenses and Travelling expenses are concerned, various decisions of co-ordinate Benches referred in para 13 above have held that adhoc disallowances in such case cannot be made. It is not necessary to multiply authorities on the point. Thus, the said disallowance also cannot be sustained.

In the result, the appeal is allowed. The impugned additions stand deleted.