RITEPLAZA TRADING COMPANY PRIVATE LIMITED ,MUMBAI vs. INCOME TAX OFFICER 1(3)(1), MUMBAI

4 ITA 5558/Mum/2017 be sustained u/s 68 nor u/s 41(1) of the Act as the assessee is still admitting the liability towards repayment of loan. The assessee further submitted that to make addition u/s 68, the amount of loan should be received during the year whereas in this case it has received loan in the financial year 2007, therefore, there is no reason for the AO to invoke provisions of section 68 of the Act. The assessee further contended that to invoke provisions of section 41(1) to treat remission or cessation of liability, the assessee should either get cash or kind benefit during the year under consideration by way of write off of liability. The liability written off in the books of account of the creditor is no longer relevant to decide whether the assessee has got some benefit in the form of remission or cessation of liability.

4. The CIT(A), after considering relevant submissions of the assessee and also relying upon certain judicial precedents observed that it is a clear case of cessation of liability to which the assessee has no obligation to discharge towards loan received from M/s Om Metals Infraprojects Ltd. The CIT(A) further observed that the creditor categorically stated in its letter addressed to the AO that it has already written off the liability as bad debt in its books of account and hence, the provisions of section 41(1) comes into operation the moment, the assesee derives certain benefit out of remission or cessation of liability either on its own or on account of unilateral write back of liability in the 5 ITA 5558/Mum/2017 books of account of the creditor. The AO has brought out clear facts to the effect that the liability is no longer payable and the assessee derives benefit out of write off of liability by the creditor for which the assessee had not produced any evidence to counter the findings of the AO.

Therefore, he opined that the addition made by the AO towards loan received from M/s Om Metals Infraprojects Ltd is required to be added u/s 41(1) but not u/s 68 as held by the AO. With these observations, he confirmed addition made by the AO and dismiss the appeal filed by the assessee. Aggrieved by the order of CIT(A), assessee is in appeal before us.

6 ITA 5558/Mum/2017 year 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. In this case, the assessee has received loan from the creditor which has been continued in the account of the assessee. It is irrelevant whether the creditor has written off the liability in its books of account or not. What is to be seen is whether the assessee has derived any benefit out of remission or cessation of liability and such liability is on account of trading liability or not. The liability towards loan is on account of capital account for which no benefit has been derived by the assessee in the earlier year. Therefore, there is no reason for the AO to treat such liability as a trading liability for which the assessee has got certain benefit by way of remission or cessation.

The Ld.AR further submitted that even the addition made by the AO cannot be sustained u/s 68 of the Act as the provisions of section 68 is applicable to a case where the loan or any other credit arising during the year under consideration. In this case, the assessee has raised loan in the year 2007. Therefore, there is no reason for the AO to invoke the provisions of section 68 to make addition. In this regard, the Ld.AR relied on the following decisions:-

1.Ambica Mills 54 ITR 167 (Guj)

7 ITA 5558/Mum/2017 3. Sugauli Sugar Works (P) Ltd 236 ITR 518 (SC)

10.Suretech Hospital & Research Centre Ltd 293 ITR 53 (Bom)

11.Prabhavati S Shah 231 ITR 1 (Bom)

6. On the other hand, the Ld.DR supporting the order of CIT(A) submitted that the assessee derived benefit out of remission or cessation of liability towards loan received from M/s Om Metal Infraprojects Ltd which is evident from the fact that the creditor has accepted before the AO tht it has unilaterally written off the liability as bad debt. The Ld.DR further submitted that the moment the assessee derived certain benefit whether in cash or in any other manner, by way of remission or cessation thereof, whether such remission or cessation is on account of unilateral write off of liability by the creditor or by the assessee in its books of account, as long as there is a remission or cessation of liability, the assessee certainly derived certain benefit and accordingly, the CIT(A) was right in confirming the addition made by the AO u/s 41(1) of the Act.

8 ITA 5558/Mum/2017 7. We have heard both the parties and perused the materials available on record. The AO made addition towards loan received from M/s Om Metal Infraprojects Ltd on the basis of confirmation received from the creditor wherein the creditor confirmed that it has written off the liability in its books of account as bad debt. According to the AO, even though the creditor wrote off the liability, the assessee continue to claim the liability in its books of account, therefore, he opined that the credit appeared in the books of account of the assessee is unexplained as the assessee failed to explain with necessary evidences the genuineness of transactions. The Ld.CIT(A) confirmed addition made by the AO has applied the provisions of section 68; the addition made by the AO is sustainable u/s 41(1) as the assessee has derived certain benefit out of remission or cessation of liability. It is the contention of the assessee that the addition made by the AO neither can be sustained u/s 41(1) nor could it be sustained u/s 68 of the Act as the AO has made addition of loan on the basis of confirmation received from the creditor without appreciating the legal position with regard to such credit. The assessee further contended that the additions made by the AO u/s 68 cannot be sustained because the provisions of section 68 applies to any credits found in the books of account of the assessee for which the assessee offers no explanation. The addition made by the AO cannot be sustained even u/s 41(1) as the provisions of section 41(1) applies to a 9 ITA 5558/Mum/2017 trading liability for which an allowance or deduction has been made in the assessment for any year and subsequently during any previous year the person has obtained whether in cash or in any other manner, whatsoever some benefit in respect of such liability by way of remission or cessation thereof. According to the assessee, the liability towards loan from the creditor is continued in its books of account and it is bound to repay the loan. Merely the creditor wrote off the loan in its books of account, it cannot be said that the assessee’s obligation towards repayment of loan ceased to exist. The assessee further contended that though the creditor has written off the loan in its books of account as bad debt but it has addressed a letter to the assessee. The outstanding balance of Rs.2.25 crores is still payable which is evident from the fact that the creditor has addressed two letter on 04-01-2017 and 09-01- 2017.

10 ITA 5558/Mum/2017 or in any other manner, whatsoever, towards a liability by way of remission or cessation thereof, such liability is liable to be taxed under the Act and to that extent there is no controversy. In the present case, the AO obtained the confirmation from the creditor to find true status of the liability shown by the assessee. The correct facts emerged from confirmation filed by the creditor shows that the creditor has written off the outstanding loan in its books of account as the assessee has not paid the amount over a long period. We further observe that even though the assessee knew of the write off of liability by the creditor, it has continued to claim the liability in its books of account without making payment towards loan. Therefore, we are of the considered view that loan transaction appears to be non genuine or sham transaction. But, fact remains that assessee has filed two letters dated 04-01-2017 and 09-01-2017 issued by creditor as per which the creditor states that liability towards loan is still payable by the assessee and which has been reiterated by the assessee. Therefore, we are of the considered view that the issue needs to be re-examined by the AO in the light of additional evidences in form of letters of creditor to ascertain genuineness of loan transaction. The AO is directed to cause all possible enquiries to ascertain true nature of transactions. Hence, we set aside the issue to the file of the AO and direct him to pass de novo assessment in accordance with law in light of our observation above.

11 ITA 5558/Mum/2017 9. In the result, appeal filed by the assessee is allowed for