DCIT CIR 3(3)(2), MUMBAI vs. TRANS FREIGHT CONTAINERS LTD, MUMBAI

आदेश / O R D E R PER R.C.SHARMA (A.M):

M/s. Trans Freight Containers Ltd., 2. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition made by the AO u/s 41(1) of the IT Act without appreciating the fact that during the course of assessment proceedings the assessee failed to file any information/correspondence from the said creditors in respect of their claims, which are pending in the assessee's books for a long period." 3. "The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored." 4. "The appellant craves leave to amend or alter any ground or add a new ground which may be necessary."

M/s. Trans Freight Containers Ltd., Without prejudice to the above it was submitted that in the event it is not agreeable to the factual position that the liability towards such creditors does not ceased to exist and wants to tax the same by invoking the provisions of section 41(1) of the Act, in such event penalty u/s 271(l)(c) of the Act, should not be initiated. The submission of the assessee was not acceptable to the AO as the creditors which are still outstanding are very old one and the assessee failed to bring on record the proper reasons for showing such creditors over such a long period. Further, the assessee failed to file any confirmations / correspondences from the said creditors in respect of their claim. In absence of any confirmation and evidence in respect of such claim from the creditors, though the dues are long pending, the claim of the assessee to pay such liability ceased to exist. Thus, there is no liability on the assessee to pay such creditor. Hence, the same has been considered as deemed income u/s 41(1} of the Income Tax Act by placing the reliance on the decision of Polyflex India Pvt Ltd vs. CIT(2O02) 257 ITR 343{SC). Thus, an addition of Rs.7,52,781/- is made to the total income of the assessee u/s 41(1) of the ITAct,1961, thereafter applied provisions of Section 50C and made an addition of Rs.2,66,12,234/-.

M/s. Trans Freight Containers Ltd., 5.1.2. At para-5.1, the AO observed, “During the year under consideration, the assessee has sold immovable property viz. leasehold land situated at Plot No.H-2 in Tarapur Industrial area...."Thus, it is clear that the AO himself has not disputed that the transaction was in respect of "lease hold land". He has also not given any justification for treating the same as capital asset. 5.1.3 Under the circumstances, I find that the ratio of Hon'ble ITAT Mumbai in the case of Atul G Puranik vs ITO, 11 Taxmann 92 cited by the appellant applies with full force in the instant case. Provisions of section 50C{1) of Income Tax Act, 1961 pertains to capital assets .only. As per the ratio of jurisdictional ITAT mentioned above, leasehold land is not capital asset. Therefore, respectfully following the decision of Hon'ble ITAT, ground No.1 is allowed. In view if this, ground No. 2 is infructuous

is allowed.

8. Learned AR also placed on record the order of the Tribunal in assessee’s own case dated 21/06/2017 for the A.Y.2009-10 wherein the order of CIT(A) for deleting the addition made u/s.41(1) was confirmed by the Tribunal after observing as under:-

7. We have heard the ld. Counsels appearing for the parties and perused the material on record. As could be seen, the AO himself in the assessment order has stated that the sundry credits amounting to Rs.7.29 crores originated in assessment years 1997-98 to 2002-03 and continuing unchanged till the impugned assessment year. Therefore, the AO has assessed the liability since it continued in the books of account of the assessee for such a long period without being paid off by the assessee hence, such liability have ceased to exist and to be treated as income of the assessee. He further held that the assessee has failed to prove genuineness of the sundry creditors by furnishing the confirmations or any other documentary evidences. As far as the second allegation of the AO is concerned, we are unable to accept the same. When the AO accepts that the liabilities were created in assessment years 1997-98 to 2002-03, the genuineness of such transactions have to be examined in those assessment years and not in assessment year under consideration. The sundry creditors shown by the assessee in the year of origin having been accepted by the department, the genuineness of such transactions cannot be called into question in the impugned assessment year. As far as the allegation of the AO that liability on account of sundry creditors has ceased to exist in the assessment year in terms of section 41(1), on plain reading of the provisions of section 41(1) of the Act, we are of the view that before treating the amount outstanding towards sundry creditors as deemed income of the assessee u/s 41(1) on account of remission/cessation of liability, the AO is duty bound to examine whether the condition laid down u/s 41(1) are fulfilled or not. As per the reading of section 41(1) along with explanation (1) to section 41(1), the liability ceases to exist M/s. Trans Freight Containers Ltd., in the books of account of the assessee in a particular previous year, if the person showing such liability had obtained benefit either in cash or in any other manner in respect of such liability. It further provides that such remission or cessation of liability is also acceptable by unilateral act of writing off such liability in its account by the person showing such liability. Thus, before applying the provisions of section 41(1), it is necessary to establish on record that the assessee has obtained a benefit either in cash or in any form in respect of such liability in the relevant previous year. Thus, when in AO’s own admission liability continued from past so many years, what prompted the AO to conclude that the assessee has obtained benefit in respect of such liability in the impugned assessment year must be clearly brought on record. In absence of any material to establish that the assessee has obtained any benefit in respect of the liability on account of sundry creditors in the impugned assessment year merely on surmises and assumptions it cannot be said that there is remission/cessation of liability in the impugned assessment year. More so, when there is no unilateral act by the assessee in writing off of liability in its books of accounts. Further, it is evident from the material on record that in course of assessment proceedings the assessee had furnished the necessary details and submitted that part of the liability has already been written off or paid back in the subsequent years. However, the AO without any valid reasons has failed to recognise such facts. In fact, as pointed out by the ld. AR, such repayment or writing off of the liability in subsequent years was prior to the query raised by the AO on 07.12.2011 for invoking the provisions of section 41(1) of the Act. Thus, the Act of the assessee in repaying a part of the sundry creditors of writing off the liability in its books of account cannot be held to be an afterthought but has to be considered to have been done in good faith. Moreover, a part of the liability is due to Government agencies. Unless there is any communication by the Government giving tie-up its right to recovery of the debt there cannot be remission of the liability. The Hon’ble Delhi High Court in the case of Jain Exports (P) Ltd (supra) held as under : “21. Although, enforcement of a debt being barred by limitation does not ipso facto lead to the conclusion that there is cessation or remission of liability, in the facts of the present case, it is also not possible to conclude that the debt has become unenforceable. It is well settled that reflecting an amount as outstanding in the balance sheet by a company amounts to the company acknowledging the debt for the purposes of Section 18 of the Limitation Act, 1963 and, thus, the claim by M/s Elephanta Oil & Vanaspati Ltd. can also not be considered as time barred as the period of limitation would stand extended. Even, otherwise, it cannot be stated that M/s Elephanta Oil & Vanaspati Ltd. would be unable to claim a set-off on account of the amount reflected as payable to it by the assessee. Admittedly, winding up proceedings against M/s Elephanta Oil & Vanaspati Ltd. are pending and there is no certainty that any claim that may be made by the assessee with M/s. Trans Freight Containers Ltd., regard to the amounts receivable from M/s Elephanta Oil & Vanaspati Ltd. would be paid without the liquidator claiming the credit for the amounts receivable from the assessee company. It is well settled that in order to attract the provisions of Section 41(1) of the Act, there should have been an irrevocable cession of liability without any possibility of the same being revived. The assessee company having acknowledged its liability successively over the years would not be in a position to defend any claim that may be made on behalf of the liquidator for credit of the said amount reflected by the assessee as payable to M/s Elephanta Oil & Vanaspati Ltd.

22. We may also add that, admittedly, no credit entry has been made in the books of the assessee in the previous year relevant to the assessment year 2008- 2009. The outstanding balances reflected as payable to M/s Elephanta Oil & Vanaspati Ltd. are the opening balances which are being carried forward for several years. The issue as to the genuineness of a credit entry, thus does not arise in the current year and this issue could only be examined in the year when the liability was recorded as having arisen, that is, in the year 1984- 1985. The department having accepted the balances outstanding over several years, it was not open for the CIT (Appeals) to confirm the addition of the amount of Rs.1,53,48,850/- on the ground that the assessee could not produce sufficient evidence to prove the genuineness of the transactions which were undertaken in the year 1984-85. 23.The present appeal does not disclose any substantial question of law for our consideration and is, accordingly, dismissed.”

8. In the case of Matruprasad C Pandey (supra), the Hon’ble Gujarat High Court has held as under : “6.1 At the outset, it is required to be noted that the Assessing Officer made the addition of Rs. 56,96,645/- invoking Section 41(1) of the Income Tax Act by doubting certain sundry creditors amounting to Rs. 56,96,645/- appearing in the balance sheet of the assessee since past several years. However, it is required to be noted that as such those sundry creditors mentioned in the balance sheet of the assessee were shown as sundry creditors since past several years from the relevant assessment year and at no point of time earlier the Assessing Officer doubted the creditworthiness and/or identity. In any case the addition on the aforesaid ground under Section 41(1) of the Act cannot be made unless and until it is found that there was remission and/or cessation of the liability that too during the previous year, relevant to the assessment year in question, there cannot be any addition invoking the provision of Section 41(1) of the Act. Identical question came to be considered by the Division Bench of this Court in the case of Nitin S. Garg (supra) and in the similar set of facts and circumstances of the case when the addition was made invoking Section 41(1) of the Act by doubting the creditworthiness and/or identity of the sundry creditors mentioned in the balance sheet and it was found that those sundry creditors were very old and no interest had been paid on those loans, M/s. Trans Freight Containers Ltd., the Division Bench has deleted such addition made under Section 41(1) of the Act. In paragraph 15 the Division Bench has observed and held as under; “ 15. In the case before us, it is not been established that the assessee has written off the outstanding liabilities in the books of account. The Appellate Tribunal is justified in taking the view that as assessee had continued to show the admitted amounts as liabilities in its balance sheet the same cannot be treated as assessment of liabilities. Merely because the liabilities are outstanding for last many years, it cannot be inferred that the said liabilities have seized to exist. The Appellate Tribunal has rightly observed that the Assessing Officer shall have to prove that the assessee has obtained the benefits in respect of such trading liabilities by way of remission or cessation thereof which is not the case before us. Merely because the assessee obtained benefit of reduction in the earlier years and balance is carried forward in the subsequent year, it would not prove that the trading liabilities of the assessee have become non existent.” “6.2 The aforesaid decision of the Division Bench in the case of Nitin S. Garg (supra) has been considered and followed by the Division Bench of this Court in the case of Bhogilal Ramjibhai Atara (supra) and the addition made under Section 41(1) of the Act in the similar facts and circumstances of the case is ordered to be deleted. In paragraph 8 the Division Bench has observed and held as under; "We are in agreement with the view of the Tribunal. Section 41(1) of the Act as discussed in the above three decisions would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year relevant to the assessment year under consideration. In the present case, both elements are missing. There was nothing on record to suggest there was remission or cessation of liability that too during the previous year relevant to the assessment year 2007-08 which was the year under consideration. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. The Assessing Officer undertook the exercise to verify the records of the so called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through biparte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income under section 41(c) f the Act. This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of section 41(1) of the Act there is no cure M/s. Trans Freight Containers Ltd., for it. Be that as it may, insofar as the orders of the Revenue authorities are concerned, the Tribunal not having made any error, this Tax Appeal is dismissed." In the present case there was no remission and/or cessation of the liability during the previous year relevant to the assessment year under consideration. As such, there is no remission and/or cessation of the liability during the year under consideration subject to the conditions contained in the statute being fulfilled. In the present case, both the aforesaid elements are missing.”

9. Thus, applying the ratio laid down in the aforesaid decisions to the facts of the present case, we are of the view that there is no remission or cessation of liability of the sundry creditors appearing in the books of assessee in the impugned assessment year. In view of the aforesaid factual position, we do not consider it necessary to dwell much upon the decisions relied upon by the ld. DR. Thus, in the ultimate analysis, we do not find any infirmity in the order of ld. CIT(A) which is accordingly confirmed.

10. Ground raised

in the present appeal is dismissed.

11. In the result, the appeal of the department is dismissed.