Loading judgment…
Facts
The Assessing Officer (AO) made three additions: Rs. 1,05,69,417/- for cessation/remission of long-term/short-term borrowings, trade payables, and other current liabilities, Rs. 1,05,57,313/- for reduction in trade receivables, and Rs. 3,84,82,411/- for unexplained creditors and other liabilities. The CIT(A) deleted all these additions. The Revenue appealed against the CIT(A)'s order.
Held
The Tribunal upheld the CIT(A)'s deletion of additions related to cessation of liabilities (Rs. 1,05,69,417/-) and reduction in trade receivables (Rs. 1,05,57,313/-), concluding that these adjustments were either against trade payables or eligible as bad debt deductions under section 36(2). However, for the addition of Rs. 3,84,82,411/- for unexplained creditors, the Tribunal found that the assessee failed to provide confirmations and remitted the matter back to the AO for fresh verification, allowing the assessee an opportunity to file relevant details.
Key Issues
Whether the CIT(A) correctly deleted additions related to cessation of liabilities and reduction in trade receivables. Whether the CIT(A) was justified in deleting additions for unexplained creditors and other liabilities without proper verification.
Sections Cited
41(1)(a), 36(2), 68
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘C’, NEW DELHI
Before: Sh. Saktijit DeyDr. B. R. R. Kumar
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the Revenue against the order of ld. CIT(A)-36, New Delhi dated 16.12.2019.
Following grounds have been raised by the Revenue:
“1. On facts & circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition made by assessing officer on account of cessation/remission of liabilities u/s 41(1)(a) of Rs.1,05,69,417/- by ignoring the findings of assessing officer that there was remission/cessation in the long term and short term borrowings, trade payables as well as other current liabilities aggregating to Rs. 1,05,69,417/- whereas same was not reflected in the bank accounts of the assessee.
2. On facts & circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition made by assessing officer on account of reduction in trade receivable to the tune of Rs.1,05,57,313/- by ignoring the findings of assessing officer that there was reduction in trade receivable and there was no credit/receipt in the bank account.
2 Jagdamba Foods Ltd.
On facts & circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition made by assessing officer on account of unexplained creditors, long term liabilities & other current liabilities amounting to Rs.3,84,82,411/- as assessee failed to file details/confirmation during assessment proceedings.”
3. The Assessing Officer made addition on account of reduction of long term liabilities, short term borrowing, trade payables and other current liabilities of Rs.1,05,69,471/-. The Assessing Officer held that there was remission in the trading liabilities and hence the same is taxable u/s 41(1). The ld. CIT(A) deleted the addition after examining the facts and concluded that there was no cessation of liabilities during the year as assumed by the ld. CIT(A) but it was discharged the liabilities against the trade receivables. The ld. DR relied on the order of the Tribunal in the case Bharat Dana Bera Vs. ITO (56 Taxmann 388). The ld. AR relied on the order of the ld. CIT(A) and the following judgments:
PCIT Vs. Sri B.T. Nagraj Reddy, 2019 (5) TMI 1204 dated 01.04.2019 (Kar. HC) ACIT Vs. Foot Mart Retail India Pvt. Ltd., 2022 (5) TMI 1551 dated 31.05.2022 (ITAT Del.) ACIT Vs. M/s Milroc Good Earth Property and Developers LLP, 2022 (4) TMI 493 dated 06.04.2022 (ITAT Panaji) Aarvee Denims and Exports Vs. DCIT, 2022 (4) TMI 96 dated 30.03.2022 (ITAT Ahd.) Arvind Ltd. Vs. DCIT, 2021 (11) TMI 766 dated 30.09.2021 (ITAT Ahd.)
3 Jagdamba Foods Ltd. 4. The relevant part of the ld. CIT(A) on this issue is as under:
As regards the addition of Rs.1,05,57,313/- in respect of trade receivable, I note that the said addition was made by the Assessing Officer merely on the ground that there is a reduction in the trade receivable to this extent during the year and there is no transaction in the bank account. As discussed hereinabove while adjudicating ground no. 4 regarding addition made on account of reduction in liabilities, the Assessing Officer has failed to appreciate that the reduction in trade receivable is on account of reduction in trade payable and other liabilities. Thus, there was corresponding reduction in trade receivable consequent to adjustment of such receivable against the amount payable. Even otherwise reduction in trade receivable cannot be assumed to be the income of the assessee so as to call for the addition on this account. The trade receivable represents the sales made in earlier year which obviously stood included in the income of earlier years. Any reduction in such trade receivable even as per Assessing Officer's allegation without being any payment received will be eligible as a deduction on account of amount written off as bad debt. Thus, by no stretch of imagination such reduction in trade receivable can be considered as income of the assessee. Accordingly, this addition is directed to be deleted. The alternative contention of the AR is also justified that in case it is being assumed by the Assessing Officer that there has been a cessation of liability to the extent of reduction in liabilities/creditors during the year and the same is income under section 41(1) then there is a corresponding reduction in trade receivable which will be allowable deduction as bad debt. And both these amounts will become part of the profit and loss account. The reduction in liability will be the income under section 41(1) and the reduction in trade receivable will be an allowable deduction under section 36(2) of the IT Act. Thus, either way these amount cannot be considered as an income of the assessee. Hence, the ground no. 4 and 6 are hereby allowed.
4 Jagdamba Foods Ltd. 5. We have examined the fact that there was an outstanding balance of Rs.4,95,12,689/- during the year out of which the liabilities of Rs.1,05,69,416/- was adjusted of by the debtors. The details of debtors and creditors have been duly examined by the ld. CIT(A) and hence, we decline to interfere with the well reasoned order of the ld. CIT(A) on this issue.
The AO has also made addition of Rs.3,84,82,400/- on account of unexplained creditor, long term liabilities and other liabilities on the grounds that the assessee failed to prove the genuineness of brought forward trade creditors. The ld. CIT(A) deleted the addition on the grounds that there was no cessation of liabilities and hence, the same cannot be added u/s 41(1) of the I.T. Act. The provisions of Section 41(1) are as under:
“Profits chargeable to tax.
[(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 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 5 Jagdamba Foods Ltd. 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.]”
In the instant case, the assessee could not file any confirmation before the AO with regard to the sundry creditor whether they are still outstanding or not. There were no details about the intention of the assessee to pay the outstanding liabilities nor any reminders from the creditors seeking payment of the amounts due. The details of the litigation or any Court case have not been brought before us. The ratio of the ld. CIT(A) that the liabilities brought forward from earlier years, hence, the provisions of Section 68 are not applicable is not emanating from the record. To that extent, the ld. CIT(A) erred in adjudicating on the Section which is not a subject matter of Assessment Order. Hence, we are of the considered view that the matter should go back to the Assessing Officer for due verification as to the existence of the parties, writing of these liabilities as bad debts in their books or not and to afford an opportunity to the assessee to file the confirmations and the relevant details before the Assessing Officer. The appeal of the Revenue on this ground is allowed for statistical purpose.
6 Jagdamba Foods Ltd. 8. In the result, the appeal of the Revenue allowed for statistical purpose. Order Pronounced in the Open Court on 23/07/2024.