DAS ENTERPRISE,KOLKATA vs. ITO, WD-49(3), KOLKATA, KOLKATA

The sole addition disputed before me in this case is the addition u/s 41(1) of the Income Tax Act, 1961 (Act). The AO noticed that the assessee has disclosed a sum of Rs.29,75,823/- as amount due from M/s. C.D.Steel Pvt. Ltd, in its list of sundry creditors. M/s. C.D.Steel Pvt. Ltd in response to notice issued u/s 133(6) of the Act on 11.11.2010 stated that the balance in its books was only Rs.9,23,416/-. The AO directed the assessee to explain the discrepancy in the balance which amounts to Rs.20,52,407/-. The assessee submitted that M/s C.D.Steel P.Ltd. has debited M/s. Alishan Steel Pvt. Ltd for the sum of Rs.20,52,406/-, instead of the assessee company and it does not know the reason for the same. The AO made an addition u/s 41(1) of the Act. On appeal the First Appellate Authority upheld the same.

After hearing the rival contentions I held as follows : Before me the assessee relies on a number of decisions and submits that section 41(1) of the Act cannot be attracted in the facts and circumstances of the case. I find that no addition can be made of any sundry creditor or loan brought forwarded from the earlier year, just because the assessee has not been able to furnish the required details as held by the Hon'ble Delhi High Court in the case of CIT vs Shri Vardman Overseas Ltd. (2012) 343 ITR 408. 4. The Hon''ble ITAT 'A 'Bench of Bangalore Tribunal in for A.Y.2009-10 in the case of Glen Williams vs ACIT order dated 07.08.2015 analyses section 41(1) and held as follows :- "14. As far as applicability of section 41 (1) of the Act is concerned, the question before us is limited to the applicability of Section 41 (1) of the Act. The section in so far as it is relevant for our purpose is as below: "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 5 Assessment Year: 2011-12 Das Enterprise 13. In Bombay Dyeing & Mfg. Co. Ltd. vs. State of Bombay AIR 1958 SC 328 the legal position was summarized by T.L. Venkatarama Aiyar, J., in the following manner: "It has been already mentioned that when a debt becomes time-barred, it does not become extinguished but only unenforceable in a Court of law. Indeed, it is on that footing that there can be statutory transfer of the debts due to the employees, and that is how the board gets title to them. If then a debt subsists even after it is barred by limitation, the employer does not get, in law, a discharge therefrom. The modes in which an obligation under a contract becomes discharged are well- defined, and the bar of limitation is not one of them. The following passages in Anson's Law of Contract, 19th Edition, p. 383, are directly in point,' "At Common Law lapse of time does not affect contractual rights. Such a right is of a permanent and indestructible character, unless either from the nature of the contract, or from its terms, it be limited in point of duration. But though the right possesses this permanent character, the remedies arising from its violation are withdrawn after a certain lapse of time; interest reipublicaeut si finis litium. The remedies are barred, though the right is not extinguished.' And if the law requires that a debtor should get a discharge before he can be compelled to pay, that requirement is not satisfied if he is merely told that requirement is the normal course he is not likely to be exposed to action by the creditor." (underlining, italicised in print, ours) This was also the view taken by the Supreme Court in CIT vs. Sugauli Sugar Works (P) Ltd. (supra).

Since the Tribunal has relied on the judgment of the Supreme Court in the case of CIT vs. Sugauli Sugar Works (P) Ltd. (supra) we may usefully refer to the decision in order to appreciate the controversy therein and the ratio laid down. That was a case of a private limited company. In respect of the asst. yr. 1965-66, it transferred a sum of 3,45,000 from the suspense account running from 1946-47 to 1948-49 to the capital reserve account. The ITO found that a sum of 1,29,000 out of the above amount repaymented deposits and advances which were paid back by the assessee. He, therefore, deducted this amount from the amount of 3,45,000 and the balance of 2,56,529 was brought to assessment under s. 41 (1) of the Act. The assessee appealed unsuccessfully to the AAC and thereafter carried the matter in further appeal to the Tribunal. Its contention before the Tribunal was that the unilateral entry of transferring the amount from the suspense account to the capital reserve account would not bring the said amount within s. 41(1). The contention was accepted by the Tribunal whose decision was affirmed by the Calcutta High Court CIT vs. Sugauli Sugar Works (P) Ltd. (1981) 23 CTR (Cal) 226 : (1983) 140 ITR 286 (Cal). The Revenue carried the matter in the appeal to the Supreme Court. The contention of the Revenue (as noted at p. 520 of 236 ITR) was that on the facts of the case, the liability came to an end as a period of more than 20 years had elapsed and the creditors had not taken any steps to recover the amount and consequently there was a cessation of the debt which would bring the matter within the scope of s. 41(1). It may be noted that the contention of the Revenue in the case before us is precisely the same. To recapitulate, the learned standing counsel contended before us that since a period of more than 4 years has admittedly elapsed from the debt on which the debts 7 Assessment Year: 2011-12 Das Enterprise before them, and observed as under while upholding the judgment of the Calcutta High Court : "This judgment has been quoted by the High Court in the present case and followed. We have no hesitation to say that the reasoning is correct and we agree with the same. To reinforce the conclusion, the Supreme Court also noticed its earlier judgment in Bombay Dyeing & Mfg. Co. Ltd. vs. State of Bombay AIR 1958 SC 328 wherein it was held that the expiry of the period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt.

In our opinion, the judgment of the Supreme Court in CIT vs. Sugauli Sugar Works (P) Ltd. (supra) is a complete answer to the contention of the learned standing counsel. In the case before the Supreme Court for a period of almost 20 years the liability remained unpaid and this fact formed the basis of the contention of the Revenue before the Supreme Court to the effect that having regard to the long lapse of time and in the absence of any steps taken by the creditors to recover the amount, it must be held that there was a cessation of the debts bringing the case within the scope of s. 41(1). In the case before us, the identical contention has been taken on behalf of the Revenue, though the period for which the amount remained unpaid to the creditors is much less. It was held by the Supreme Court that a unilateral action cannot bring about a cessation or remission of the liability because a remission can be granted only by the creditor and a cessation of the liability can only occur either by reason of operation of law or the debtor unequivocally declaring his intention not to honour his liability when payment is demanded by the creditor, or by a contract between the parties, or by discharge of the debt."

In the case on hand, the reason why M/s. C.D.Steel chose to debit the account of M/s. Alisha Steel P. Ltd., is not known. The AO should have examined this issue. Just because the accounts have not been reconciled, the AO cannot make an addition u/s 41(1) of the Act.

Respectfully following the propositon of law laid down by the Hon'ble Delhi High Court in the case of CIT vs Shri Vardman Overseas Ltd 343 ITR 408 (Del) and the Bangalore Bench of the ITAT in the case of M/s Glen Williams (supra) , I delete this addition and allow this ground of the assessee.”