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Income Tax Appellate Tribunal, A Bench, Mumbai
Before: Shri D.T. Garasia & Shri Rajesh Kumar
This appeal has been filed by the assessee against the order of the CIT(A)-12, Mumbai dated 13.12.2012 for A.Y. 2008-09.
The only issue raised by the assessee in the present appeal is against confirmation of addition of `1 crore by the CIT(A) as made by the AO by invoking provisions of Section 41(1) of the Income Tax Act, 1961 (hereinafter “the Act”) towards cessation of liability.
The facts in brief are that the AO observed from the Balance Sheet that a sum of `1,00,00,000/- was shown as payable to M/s. JSW Steel Ltd. and `29,95,187/- to M/s. Sun Investment P. Ltd. which were outstanding since 31.03.1996. The said amounts were shown as payable on account of interest payable to the above two parties. Accordingly the AO issued show cause notice by calling upon the assessee as to why the interest payable to the said parties should not be written back in the books of account as per section 41(1) of the Act as M/s. JSW Steel Ltd. and M/s.
M/s. Kamshet Investments P. Ltd. Sun Investment Pvt. Ltd. have written off the interest in their respective books of account. The assessee replied to the AO that even though the interest receivable by the above parties was written off in their respective books of account but the said parties have not foregone their claims to receive the said interest. It was further stated that the said interest could not be paid due to severe liquidity problems in the business of the assessee. The assessee also submitted before the AO that by mere writing off of the claim in the books of account of the creditors would not extinguish the legal rights for recovering the said amounts nor have the parties given up their claims. The reply of the assessee did not find favour with the AO and he ultimately disallowed the claim of `1,29,95,187/- on account of cessation of liability under Section 41(1) of the Act by framing the assessment under Section 143(3) of the Act vide order dated 02.12.2010 assessing the total income at `1,25,59,637/-.
In the appellate proceedings the CIT(A) partially allowed the appeal of the assessee by deleting the disallowance to the tune of `29,95,187/- due to M/s. Sun Investment P. Ltd. while sustaining the addition of `1,00,00,000/- by observing as under: -
“4.2 I have carefully considered the issue. It is seen that the submission of the appellant to establish that the invocation of section 41 (I) of the Income-tax Act by the assessing officer related to interest due to M/s JSW Steel Limited is a general one which does not address the issues raised by the AO in the assessment order at all. It is seen that the said concern, M/s JSW Steel Ltd. has written off the interest due from the appellant and has also not taken any legal action against the appellant for recovery of the said interest. It is also seen that the appellant has claimed benefit of the interest payable to M/s JSW Steel Ltd. in its computation of income for the earlier years. Under the circumstances, I find there is no infirmity in the order of the AO, wherein the AO has invoked section 41(1) of the Act and made the said addition. Section 41(1) deals with profits chargeable to tax. The said section provides that when allowance or a deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year, the assessee 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
M/s. Kamshet Investments P. Ltd. paid or the value benefit accruing to him shall be deemed to be profits, and, accordingly chargeable to income tax. What the section envisages is that the liability of the appellant should have ceased. In this case it is seen that the creditors have written off the dues as 'bad debt' and have taken no action legal or otherwise to recover the amount due to them for a long period. Cessation of liability would need to be inferred. Reliance is placed in the case of CIT v/s Hides & Leather Product Pvt. Ltd. (1975) 101 1TR 61 (Gujarat). The cessation of liability can also be inferred when the creditor voluntarily gives up the claim. In this case it is seen by claiming the amount as bad debt and by not resorting to any legal action, M/s JSW Steel Ltd. has voluntarily given up the claim of receiving it. It is seen that the AO has established the fact that section 41(1) was applicable in the case of the appellant and therefore discharged the burden that lay upon the Department to prove the same. It was for the appellant to establish that this was not so. In the case of Sun Investment Pvt. Ltd. the appellant has succeeded in establishing that section 41(1) is not warranted. But however, in the case of M/s JSW Steel Ltd. this is not so. Under the circumstances, I find that the addition made by the AO cannot be held as incorrect. The addition of Rs. 1 crore made by invoking section 41(1) of the Income-tax Act, 1961 is, therefore, confirmed and upheld and this ground of appeal dismissed.” The learned A.R. submitted before the Bench that the liability of `1 5. crore was shown as payable to M/s. JSW Steel Ltd. on account of interest payable to them in the Balance Sheet as on 31.03.2008. The learned A.R. further submitted that mere writing off of the claim of interest in the books of M/s. JSW Steel Ltd. would not tantamount to extinguishment of the lawful claim of the said party. The learned A.R. brought to the notice of the Bench the ledger account in the books of the assessee and confirmation of the claim received from M/s. JSW Steel Ltd. which is placed at page 18 of the paper book. The learned A.R. took us to the contents of the confirmation sent by M/s. JSW Steel Ltd. which clearly stated that an amount of `1,01,15,721/- is due and recoverable from the assessee on account of interest on Optionally Convertible Debentures for the period ending 31st March, 1996. The assessee was called upon to pay the dues forthwith besides reserving the right for recovery of the said amount notwithstanding the fact that the amount was written off in the books of account in accordance with the applicable accounting principles and prudence. The learned A.R. stated that on similar ground the learned CIT(A) allowed the appeal of the assessee for the second amount of M/s. Kamshet Investments P. Ltd. disallowance of `29,95,187/- due to M/s. Sun Investment P. Ltd. The learned A.R. contended that nothing has happened during the year which makes the liability as non-existent and not payable as the assessee continue to show the liability in the books of account notwithstanding the fact that the said amount stood written off by the creditor in the earlier year. Finally the learned A.R. also brought to the notice of the Bench that in A.Y. 2014-15 the said amount was finally written back in the books of the assessee and offered to tax by placing before the Bench a copy of the annual account, ITR and computation of total income evidencing the fact of having written off of the said liability. The A.R. relied on the decision of the Coordinate Bench of the Tribunal in the case of Shri Gaurav Triyugi Singh vs. Income Tax Officer in for A.Y. 2010-11 order dated 11.05.2017 wherein the Coordinate Bench has decided similar issue in favour of the assessee. In view of the above arguments the learned A.R. prayed before the Bench that the addition of `1 crore be deleted as it could not have been made under Section 41(1) of the Act, more so when the said amount has also been offered to tax in A.Y. 2014-15.
The learned D.R., on the other hand, relied heavily on the orders of the Authorities below and contended that since the amount has been written off by the creditor in its books of account, the liability of the assessee stands automatically extinguished and ceased and therefore was rightly brought to tax. The learned D.R. requested the Bench to confirm the order of the CIT(A) on these facts.
We have heard the rival contentions and perused the material on record. The facts of the case are that the assessee showed in its Balance Sheet as on 31.03.2008 a sum of `1 crore as interest payable to M/s. JSW Steel Ltd. on account of Optionally Convertible Debentures which was standing since 31.03.2006. The creditor, M/s. JSW Steel Ltd. has written off this amount in its books of account and in the confirmation letter issued by the said creditor it even called upon the assessee to make payment immediately and also reserved the right on the said interest notwithstanding the fact that the amount was written off in the books of M/s. Kamshet Investments P. Ltd. account in accordance with the applicable accounting principles and prudence. Consequently the assessee suo motto wrote back the said amount in A.Y. 2014-15 and was offered to tax. In our opinion since the assessee was showing the liability outstanding in its books of account and during the year no development has taken place which could render the liability to have ceased during the year notwithstanding the amount was written off by the creditor in the earlier year. As is evident from the fact that in the confirmation letter issued, which is placed at page 18 of the paper book, the creditor called upon the assessee to make the payment notwithstanding the fact of writing off of the said amount in its books of account. Further we noted that the said amount has been offered to tax in A.Y. 2014-15 by writing back the same as is evident from the copy of computation of income and copy of audited accounts filed by the assessee during the course of hearing. The case of the assessee is fully covered by the decision relied upon during the course of hearing in the case of Shri Gaurav Triyugi Singh (supra). The relevant portion of the decision is reproduced below: -
18. We have heard both the parties and perused the material available before us including orders of authorities below on the issue. We find that the assessee has shown sundry creditors and advances from sundry debtors in the balance sheet on liability side. We further find that the assessee has suomotu written back an amount of Rs. Rs.7,04,240/- in the assessment year 2011-12 which ceased to exist for which the trading liability has extinguished. In our opinion, the action of the ld.CIT(A) in making enhancement u/s 41(1) of the Act is contrary to the provisions of law in view of the fact when the assessee himself was showing the liability as existing on the balance sheet date and the ld. FAA has no locus standi to assess the income of the assessee under section 41(1) of the Act. The case of the assessee finds supports from the decision of the Jurisdictional High Court in the case of CIT V/s Enam Securities Ltd reported in 345 ITR 64 (Bom), wherein an identical issue has been decided by the Hon’ble High Court in favour of the assessee. We, therefore, respectfully following the ratio laid down in the said judgment set aside the order of the ld.CIT(A) and direct the AO to delete the addition.
In view of the facts as stated herein above and also the decision of the Coordinate Bench we are of the considered view that the addition made
M/s. Kamshet Investments P. Ltd. by the AO and sustained by the CIT(A) is wrong and accordingly ordered to be deleted. The AO is directed accordingly.
In the result, the appeal filed by the assessee is allowed.