HARSHAD HIMMATLAL RUPANI,PUNE vs. ITO WARD 5(2), PUNE

31 The learned CIT(A) erred in confirming an addition of Rs. 1,06,940/- alleging that contract receipts to that extent were unaccounted in the books of accounts.

3.1) The learned AO/CIT(A) failed to appreciate that the appellant has recorded only the net receipts of Rs. 11,90,868/ out of gross receipts of Rs. 12,97,808/- in the books as income on basis of actual receipts in the bank account. The difference of Rs. 1,06,940/-was deducted by the payee on account of Royalty, Insurance, VAT & TDS etc. which was otherwise allowable as expenses and thus, no addition was warranted for the same.

41 The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal

” 2 Submission of Ld.AR :

2. Ld.Authorised Representative (ld.AR) for the assessee filed paper book. Ld.AR submitted that ld.CIT(A) has erred in confirming part of the addition. Ld.AR submitted that confirmations were filed. He invited attention to page 39-58 of the paper book which contained confirmations of the creditors. Ld.AR submitted that the creditors which were new and pertaining to current year were all paid in subsequent years. This fact was brought to the notice of ld.CIT(A) and AO.Ld.AR submitted that evidences were filed.Ld.AR took us through the chart.

2.1 Ld.AR submitted that all other creditors were old and hence no addition can be made in current year.

Submission of Departmental Representative : 3. Ld.Departmental Representative (DR) submitted that AO has made addition u/s 41(1) of the outstanding creditors. Ld.DR relied on the order of CIT(A).

Findings and Analysis : 4. We have heard both the parties and perused the records.

4.1) In this case Assessee is having Proprietary Concern called M/s.H.H.Rupani and it is into business of Civil Contractor. In the Assessment Order the Assessing Officer(AO) made addition of Rs.50,55,020/- as bogus Sundry Creditors. It is important to mention here that in the Assessment Order No Names of alleged Bogus Sundry Creditors have been mentioned by the Assessing Officer, ITO Ward-5(3), Pune.

4.2) The ITO also made addition of Rs.12,97,808/- on account of difference in TDS credit.

4.3) Aggrieved by the Assessment Order the Assessee filed appeal before Ld.Commissioner of Income Tax(Appeal).Assessee also filed certain documents before CIT(A) who called for Remand Report as per rule 46A of the Income Tax Rules from the AO. The AO submitted Remand Report. The Ld.CIT(A) finally held as under with reference to Sundry Creditors: “4.4 From the perusal of the above stated remand report of the AO, it is clear that some of the sundry creditors to which notices u/s 133(6) has been issued by the AO, have submitted their confirmation letter in respect of such transactions. The relevant pages of the remand report are reproduced as under "All the submissions filed by the assessee in the additional 4 evidence in support of the above Sundry Creditors are verified. It [A] is observed that the most important supporting document required to sustainable genuineness of the transaction in confirmations/letters from the Sundry Creditors which have not been submitted by the assessee in any of the above case. Further, in some cases ledger accounts are submitted, but they are neither signed copies not duly stamped by either the assessee or the party concerned. In a few cases, copies of invoices filed, but they are found to be not pertaining to year under consideration from which outstanding balance as on 31/03/2014 cannot be ascertained. Under these circumstances, in my opinion all the aforesaid Sundry Creditors aggregating to Rs. 11,55,891/- are required to be added to the assessee's Total Income for the AY 2014-15."

4.5 In view of the above stated facts and circumstances as reported in the remand report submitted by the AO, out of total addition of Rs.50,55,020/-, addition of Rs.11,55,891/- is hereby sustained and balance addition of Rs.38,99,129/- hereby deleted.”

4.4) The ld.CIT(A) also sustained Addition of Rs.1,06,940/- on account of difference in Contract Receipt.

5) Aggrieved by the Order of Ld.CIT(A) the Assessee filed appeal before this ITAT.

Issue of Sundry Creditors : 6) Ld.CIT(A) has sustained the addition of Rs.11,55,891/-. The list of these creditors and the comments of the assessee as appearing in the order of the Ld.CIT(A) is reproduced here under : 5 Name of the party O/s. as on Amount to Appellant’s Comments 31.03.2012 be added as per RR Bharat Paints 13651 13651 1. old Creditors prior to AY 2012-13 2. Ledger signed by party is already attached 3. Accepted in remand report for AY 2012-13 D.G.Vartale 73871 73871 1. old Creditors prior to AY 2012-13 2. Ledger signed by party is already attached 3. Accepted in remand report for AY 2012-13 RDC Concrete ----- 64523 1. Running account for (India) Pvt. Ltd. the year 2. All invoices are already attached 3. Payment made in subsequent year FY 14- 15 Sanas Engineering 425196 137196 1. Old Creditors prior to AY 2012-13 2. O/s.Balance as on 31.03.2014 as per assessee is Rs.350196/- and as per party confirmation is Rs.323596/- 3. Difference is only Rs.26600/- and not Rs.137196/- as stated in RR 4. Maxzimum disallowance may be Rs.26600 5. Accepted in remand report for AY 2012-13 Shriram Sales 238420 238420 1. old Creditors prior to AY 2012-13 2. Ledger signed by party is already attached 6 3. Accepted in remand [A] report for AY 2012-13 Shinhgad ----------- 19500 1. Running account for Scaffolding the year 2. All invoices already attached 3. Payment made in subsequent year FY 14- 15 Sonai Machinery --------- 3583 1. Running account for & Steel Traders the year 2. All invoices are already attached 3. Payment made in subsequent year FY 14- 15 Dynamic Hiring 77147 57147 1. old Creditors prior to Services AY 2012-13 2. Already8 added as income in remand report for AY 2012-13 Administrative 35000 35000 1. old Creditors prior to Services Centre AY 2012-13 (Prof, fees 2. Ledger signed by Payable) party is already attached 3. Accepted in remand report for AY 2012-13 Jagiwala & Co 162000 205000 1. old Creditors prior to (Audit Fees AY 2012-13 Payable) 2. Ledger singed by party is already attached.

6.3) Section 41(1) of the Act is reproduced here as under : Profits chargeable to tax. 41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first- mentioned person) and subsequently during any previous year,— (a) the first-mentioned person has obtained, whether 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 amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or 8 [A] profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year. Explanation 1.—For the purposes of this sub-section, the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of any liability by a unilateral act by the first-mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts. Explanation 2.—For the purposes of this sub-section, "successor in business" means,— (i) where there has been an amalgamation of a company with another company, the amalgamated company; (ii) where the first-mentioned person is succeeded by any other person in that business or profession, the other person; (iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm; (iv) where there has been a demerger, the resulting company.

6.3.1) Section 41(1) is for cessation of liability. In this case the Assessee has submitted Ledger Accounts duly signed by the creditors. It means the creditors have admitted that the impugned liability was outstanding. Assessee has also submitted that theses creditors are business creditors and were outstanding at that point of time due to financial difficulties.

6.4) The proposition of Law explained by Hon’ble High Courts and Hon’ble Supreme Court is discussed here onwards.

6.5) Hon’ble Bombay High Court in the case of PCIT Vs. Batliboi Environmental Engineering Ltd. [2022] 446 ITR 238 (Bombay)[10-06-2022] held as under : Quote,“5. As regards second question of law is concerned, it was argued by the Appellant- Revenue that since the Respondent-Assessee had around 25 creditors whose payments were outstanding for more than three years and some transactions which are eight to nine years old, the same were barred by the provisions of the Limitation Act, 1963 and, therefore, they will have to be treated as Assessee's income and to be added under section 41(1) of the Income-tax Act. This issue has been dealt with by both the Commissioner (Appeals) and the Tribunal relying upon the decision of the Gujarat High Court in the case of CIT v. G.K. Patel &Co.[2013] 29 taxmann.com 248/212 Taxman 384 and the decision of the Delhi High Court in the case of CIT v. Jain Exports (P.) Ltd. [2013] 35 taxmann.com 540/217 Taxman 54 (Mag.). 10 6. The Delhi High Court in the case of Jain Exports (P.) Ltd. (supra) has relied upon the decisions of the Supreme Court in the case of Bombay Dyeing and Manufacturing Co. Ltd. v. State of Bombay AIR 1958 SC328 and CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 102 Taxman 713/236 ITR 518. In Sugauli Sugar Works(P.) Ltd. (supra), the Supreme Court has referred to the decision of the Division Bench of this Court in the case of Kohinoor Mills Co. Ltd. v. CIT [1963] 49 ITR 578. The Delhi High Court, after following these decisions concluded that merely because the liability is barred by limitation, it does not cease to be a debt. This view is also taken by this Court in the case of CIT v. Indian Rayon and Industries Ltd. [2011] 336 ITR479. Therefore, the submission made by the Appellant that because the liability is barred by the period of limitation the same would be treated as income and added under section 41(1) of the Act cannot be accepted as no other decision contrary to the above is shown to us. Thus, the second question of law does not survive for consideration.

6.6) Hon’ble Gujarat High Court in the case of PCIT Vs. Adani Agro P Ltd [2020] 273 Taxman 430 (Gujarat)[10-02-2020] held as under : Quote, “10. As per the aforesaid provisions of section 41(1) of the Act, 1961, there has to be remission or cessation of trading liability. Merely because the liability has remained outstanding for more than three years and the same is not written back in profit and loss account, application of provisions of section 41(1) of the Act, 1961cannot be made to consider such liability as income of the year under consideration without there being any remission or cessation of liability.”Unquote. 11 6.7) Hon’ble Supreme Court in the case of CIT Vs. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518 (SC) has held as under : Quote, “8. There is another judgment of the Bombay High Court which was rendered much earlier in J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34. The Bench observed :

". . . The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by his own unilateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor. It is not in dispute, and it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the 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. Transfer of an entry is neither an agreement between the parties nor payment of the liability . . .." (p. 41)

6.8) Hon’ble Gujarat High Court held in the case of CIT Vs. G K Patel & Co [2013] 212 Taxman 384 (Gujarat)[16-10-2012]as under : Quote, “In the present case, admittedly there in no declaration by the assessee 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 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” Unquote.

6.9) Hon’ble Gujarat High Court in the case of CIT vs Nitin Garg Gujarat)/[2012] 208 Taxman 16 (Gujarat)[11-04-2012] has held as under though in that case admittedly Nitin Garg failed to provide detail address of creditors : 13

(1) The assessee, respondent herein is one of the key persons of the group comprising of the Agarwal (alsoknown as Garg) family of Surat and Vadodara, engaged mainly in the business of transportation of petro-product and trading of sarees, bitumen etc. A search operation was conducted under Section 132 of the Act at the residential premise of the assessee on 31/05/2006. During the course of assessment proceedings Under Section 143(3) read with Section-153 of the Act, the Assessing Officer noticed from the balance sheet that various creditors (other than family concerns) are very old and no interest has been paid on these loans. Despite the fact, the Assessing Officer gave various opportunities to the assessee to furnish details of such creditors viz. confirmation as well as creditworthiness, the assessee failed to produce the necessary information and details in this regard. The assessee also failed to furnish the postal addresses, PAN, confirmations of outstanding balance etc. Accordingly the Assessing Officer held that the liability incurred in regard to the purchase from the parties as claimed (i.e. Rs. 38,17,601/-, Rs. 1,65,090/-, Rs. 40,032/- and Rs. 1,32,118/- for the Assessment Year 2001-02, 2002-03, 2003-04 and 2006-07 respectively) have seized to exists.

6.10) Thus the Hon’ble Supreme Court and Hon’ble High Court has laid down the preposition of law that for invocation of Section 41(1) 15 Income Tax Act, debtor cannot announce cessation of liability of his own. The onus is on AO to prove that the Creditor has written off the liability in its book. Just because the address was not made available by the assessee does not mean that the Liability has ceased to exist.

6.11) In the case of the Assessee Harshad H Rupani, the assessee had submitted confirmations of outstanding creditors as noted by the Ld.CIT(A). The Assessee has shown these creditors as outstanding in his books of account. The AO has not brought on record any evidence that those Creditors have written off the liabilities in their books. In these facts and circumstances of the case , respectfully following the decisions of Hon’ble Supreme Court (supra) and Hon’ble High Courts (supra), we hold that the addition sustained by ld.CIT(A) of Rs.11,55,891/- u/s.41(1) is unsustainable .Hence we direct the AO to delete the impugned addition of Rs.11,55,891/-.

6.12) In this case since the liabilities pertain to earlier year those amounts cannot be added u/s.68 of the Act.

6.13) Accordingly, for all the reasons discussed above, Ground Number 2 raised by the Assessee is allowed. 16 Addition of Rs.1,06,940/- : 7) There was difference in Receipt as per 26AS and Receipt shown by the Assessee. During the Remand proceedings the Assessee has tried to reconcile the same, the AO has accepted reconciliation except for the amount of Rs.1,06,940/- . The Assessee claimed that the said amount was not paid by the Municipal Corporation. The Assessee submitted that the amount has been deducted by the Municipal Corporation on account of VAT, Insurance, TDS etc. Assessee claimed that since these expenditures are allowed as business expenditure, no addition should be made. The AO in the remand report submitted that Assessee has not filed any evidence.

8) In these facts and circumstances of the case, we set aside the issue of Rs.1,06,940/- for verification to the AO. Assessee shall file all the documents to prove that the amount pertains to VAT, Insurance etc. If it pertains to VAT, Insurance or any other expenditure which is allowable as business expenditure, then AO shall allow it after verification.

8.2) Ground Number 4 is general in nature hence no adjudication is required. Accordingly dismissed.

9) In the result, Appeal of the Assessee is Partly Allowed. Order pronounced in the open Court on 28 January, 2026.