ACIT,CIRCLE-36, KOLKATA, KOLKATA vs. M/S SOORAJMULL NAGARMULL, KOLKATA

O R D E R

PER S.S.Godara, Judicial Member:

2. We notice at the outset that CIT(A)’s detailed discussion on the above sole issue of cessation of liability u/s 41(1)(a) of the Act reads as follows:- “06. DECISION: 1. I have carefully considered the action of the Ld.AO in adding an amount of Rs.12,97,47,322/- u/s. 441(1) of the Income Tax Act, 1961, on grounds that there was a cessation of liability on the part of the assessee for the impugned amount, and that therefore it would constitute part of the income of the assessee-firm. It is to be observed that this is the 2nd round of the assessment order for the A.Y 2001-02, and ACIT, Cir-36, Kol. Vs. M/s Soorajmull Nagarmull Page 2 in the first round the matter had travelled to the Hon'ble ITAT. Briefly, the facts are that the appellant is a very old partnership firm and has been carrying Sundry Creditors over an extended passage of time.

is allowed for statistical purposes. " [unquote]

3. In the impugned order, it is to be seen whether both parties, as required by the Hon'ble Tribunal carried out these directions appropriately and only thereafter the Ld.AO could have sustained the addition u/s 41(1) as made in the original assessment u/s 147/143(3). In the present case the facts on record bring forth that in the assessee's Balance Sheet, it had disclosed outstanding current liabilities of Rs.12,97,47,322/- which were added by the AO u/s 41(1) of the Act on the ground that there was cessation or remission of liability. The addition so made in the original order was deleted by first Appellate Authority on the ground that no material was brought on record by the Ld.AO to demonstrate that the assessee-appellant was actually granted remission of the impugned liabilities. However when the matter travelled before the Hon'ble Tribunal, it issued the directions as have been incorporated in the order, and these were required to be carried out both by the assessee-appellant, as well as the Ld.AO. I find that in the first instance the assessee was directed to demonstrate with evidence that there existed valid liability and these were properly accounted in its books of accounts. From the submissions made by the Ld. A.R before the AO as also in this forum, it is to be observed that the appellant had furnished the complete details of outstanding liabilities as on 31.03.2001 amounting to Rs.12,97,47,322/-. The details furnished inter-alia included the names and complete addresses of the Creditors and the amounts due to each of them. The assessee also furnished copies of the Balance Sheet of the assessee-firm and the detailed list of sundry creditors for the AY.s 2000-01, 2004-05, 2005-06, 2006-07, 2007-08, 2008-09, 2009-10, 2010-11, 2011-12, 2012-13 & 2013-14. With reference to these details, the Ld. A.R of the assessee demonstrated that the liability of Rs.12,97,47,322/- which is the subject matter of dispute in the impugned proceedings was consistently disclosed by the assessee on its liability side and by including the amounts due to the said parties in its financial statements filed with the tax authorities the assessee had acknowledged that the liabilities were subsisting and outstanding. In making the complete declaration in the form of liabilities shown in the Balance Sheet, the assessee was acknowledging that it had obligation to pay these amounts to the Sundry Creditors named in the financial statements and the liabilities had not ceased to exist. From the perusal of the assessment order as also from the details available in record, I find that the assessee had not only furnished the detailed list of sundry creditors outstanding as on 31.03.2001, but the assessee had also filed letters of confirmations issued by the parties wherein they had confirmed the balances shown outstanding as per assessee's books of accounts. I thus find that as per the Balance Sheets of the assessee for the immediate preceding year as also for the relevant assessment year, and for the subsequent years till AY 2013-14, the assessee had declared the details of outstanding liabilities due to sundry creditors. Besides disclosing the liabilities in Annual Financial Statements, the assessee-firm had supported existence of liabilities by producing balance ACIT, Cir-36, Kol. Vs. M/s Soorajmull Nagarmull Page 4 confirmations of the parties for the year ended 31.03.2001. The Ld. A.R for the assessee was directed to file copies of the assessment orders for the years prior to AY 2000-01 to substantiate that in the earlier years when the liabilities accrued, no adverse inference was drawn by any of the AOs under Section 41(1). In response the Ld. A.R of the assessee produced copies of the assessment orders for AYs 1998-99, 2000-01, 2002-03 and 2003-04. From these assessment orders it is apparent that even though the same set of creditors had appeared in the appellant's books of accounts upto 31.03.2000, the Ld. AO had not disbelieved or doubted the genuineness of the liabiliti.es and accordingly no inference with regard to remission or cessation of liability was drawn. All these years, had been subjected to scrutiny and orders were passed u/s 143(3) of the Income Tax Act. On the other hand, these assessment orders demonstrated that even though the same set of creditors appeared in the assessee's books, the Ld. AO had accepted these liabilities to be genuinely outstanding and due to the Creditors, as listed. Similarly in the subsequent assessments also the AO never disputed nor disbelieved the assessee's transactions with these sundry creditors when the assessee had made payments against outstanding balances due as on 31.03.2001. I also find that even though the same set of sundry creditors were shown outstanding as on 31.03.2004, in the assessment framed u/s 143(3) for AY 2004-05, the Ld.AO had not made any adverse comment about the genuineness of the outstanding liabilities. An assessee in the ordinary course of its dealing with the creditors is expected to maintain the basic records in support of the transactions with the parties. When called upon to substantiate the transaction, the assessee is required to furnish names and addresses and the details of financial transactions conducted. Further the assessee may also support the transactions by producing the party confirmations. Therefore with reference to the set of facts and documentary evidences as discussed, I am inclined to observe and hold that the assessee had discharged its onus of proving that as of 31.03.2001, that the assessee had subsisting liability to pay Rs.12,97,47,322/- to sundry creditors; details whereof were not only furnished before the Ld.AO but the assessee had also furnished confirmations from these creditors. In the light of the aforesaid facts, I therefore hold that the assessee had duly discharged the onus cast upon it of proving the fact that the assessee had subsisting and genuine obligation to pay Rs.12,97,47,322/- to the sundry creditors. The directions contained in the order Hon'ble ITAT, Kolkata which the assessee was required to comply were thus satisfactorily carried out by the assessee and therefore the onus of carrying out the other directions of the Hon'ble ITAT, Kolkata shifted on the Revenue, more specifically the Ld A.O. 4.From perusal of the assessment order, it is observed that the Ld. AO had also carried out enquiries and investigation into the details of creditors as furnished by the appellant. It is noted that the Ld. AO had identified the parties who had large outstanding sums which together accounted for more than 850/0 of the outstanding liability considered as income u/s 41(1) and had issued summons u/s 131 on sample basis to six creditors. From the impugned order it is observed that all the summons were served upon all the six creditors. The summons was also complied with by four creditors. The remaining two creditors did not personally appear but furnished the details as sought by the Ld.AO by way of a letter which was submitted in receipt / by post. The statements which were recorded on oath by the Ld.AO from the four creditors have been extensively reproduced in the assessment order at Pages 17 to 24. After carefully perusing the statements u/s 131 of the Income Tax act, 1961, it is to be noted that that none of the creditors denied the, facts that the debts were due by the appellant. None of the persons admitted or stated that the liabilities due to them had ceased to exist or stood remitted. In the said context, it is to be noted that the Directors of the Creditor Companies who had appeared before the Ld.AO were appointed on the Board of the companies much after F.Y. 2000-01, and therefore ACIT, Cir-36, Kol. Vs. M/s Soorajmull Nagarmull Page 5 they had expressed their inability to explain the financial transactions of their respective companies conducted a few years back in the F.Y 2000-01. Based on such statements therefore the Ld. AO had inferred that the inability of the Directors of the creditor companies to explain the transactions with the appellant in F.Y. 2000-01 established that the liabilities had ceased to exist in terms of Section 41(1) of the Act. In this factual matrix, it is observed that, firstly, the Ld. AO had attempted to comply with the directions of the ITAT, Kolkata as when the appellant had discharged its onus of establishing that the liabilities of Rs.12,97,47,322/- were genuine and subsisting as on 31.03.2001, the Ld.AO conducted enquiries from such creditors to ascertain whether the liabilities actually existed or not. However on careful perusal of statements u/s 131 and the facts as available on record, I note that the conclusions drawn by the Ld.AO based on the statements recorded u/s 131 was without proper and complete consideration of the circumstances eminent. From the statements u/s 131, it is observed that none of the creditors had denied the fact that the debts were not outstanding nor had they stated that the liabilities due by the appellant had ceased to exist. It is further material to note that the letters of confirmations issued by these parties were filed before the Ld.AO, genuineness of which was never denied or disputed by the Directors when they were examined on oath by the Ld.AO. The Directors who had appeared on behalf of the Creditor Companies had only expressed their inability to explain the transactions which were conducted with the appellant during FY 2000-01 since they were not on the Board of Directors back then and that such old books of accounts were not available with them. Taking into account the fact that these Directors were not the Directors during the relevant previous year and also that more than 15 years had elapsed since then, I find myself in agreement with the contentions of the Ld. A.Rs for the appellant that the inability of the Directors to explain the transactions conducted by their companies with the appellant in F.Y 2000-01 could not be viewed adversely. I also note that even under the Companies Act, 1956; the corporate creditors were required to maintain and preserve the books of accounts and other records of their business transactions for period not exceeding 8 years and therefore in view these legal provisions if the Directors of the creditor companies expressed their inability to produce the books of the relevant year or provide explanations with regard transaction of FY 2000-01 then no adverse view appears to be permissible in law. The mere fact that the persons who had appeared were not aware of the transactions which had occurred more than 15 years back cannot be taken as an admission by them that the liabilities due by the appellant had ceased or they were remitted by the creditors. I therefore, hold that the conclusions drawn by the Ld.AO from the statements u/s 131 was wholly unjustified. On the contrary, I find that the enquiries conducted by the Ld.AO actually advance the case for the appellant-assessee. Admittedly the summons u/s 131 were served upon the creditors and were also complied with. The Directors of the creditor companies had personally appeared and their statements on oath was recorded. None of the creditors had denied the liabilities due by the appellant nor had they admitted that they had granted remission of the amounts due from the appellant either in FY 2000-01 or at any time. These facts therefore go on to point that no inference could have been drawn by the Ld. AO to the effect that the creditors of the appellant which were brought forward from the earlier year had granted any remission or cessation of liability during FY 2000-01, so as to constitute as benefit contemplated in Section 41(1) of the Act. Therefore from the facts as were gathered in the course of assessment proceedings, I find that the material collected by the Ld.AO sufficiently indicate that the impugned liabilities of Rs.12,97,47,322/- as reflected in the Balance Sheet for FY 2000-01 had not ceased to exist. For the reasons set out in the foregoing, and in light of the aforesaid facts as discussed, I hold that although the Ld. AO had enquired into the liabilities as reflected by the appellant as outstanding as on 31.03.2001, but the enquiries did not in any manner suggest or prove that the liabilities had ceases to exist or that the sundry creditors ACIT, Cir-36, Kol. Vs. M/s Soorajmull Nagarmull Page 6 had granted remission of the liabilities to the appellant during the relevant previous year so as to assess the income under the deeming provisions of Section 41(1) of the Income Tax Act.

5. For the reasons discussed in the foregoing therefore, the second direction of the Hon'ble ITAT, Kolkata to the Ld.AO was not fully complied with as no convincing material or irrefutable evidence was brought on record to prove that the Sundry Creditors had granted remission of the amounts due or otherwise the assessee's liability due to the sundry creditors had ceased by 31.03.2001.

6. Further, it is to be observed that in the appellate order dated 04.03.2014, the Hon'ble ITAT had further directed the Ld.AO to bring on record clinching evidence to show that the liabilities if existed, the same were remitted during the relevant year or there was a cessation of the liability during the FY 2000-01 so as to constitute as appellant's income chargeable for AY 2001-02. In this regard I find that the relevant provision of the Act reads as follows: "(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 the trading liability referred to in clause (e) 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. " A plain reading of Section 41(1) shows that the before the deeming provisions thereof are invoked, it is necessary for the Ld. AO to demonstrate with tangible material and admissible evidence that in reality the creditors had granted remission of the liabilities and such remission was granted during the relevant previous year. Since Section 41(1) is a deeming provision of the Act, in terms of which cessation or remission of a trading liability is deemed to be assessee's income; the onus is on the Revenue to prove that in fact there was a remission or cessation of the liability and secondly such remission or cessation occurred during the relevant previous year consequent to which the income accrued to the assessee. For this reason the ACIT, Cir-36, Kol. Vs. M/s Soorajmull Nagarmull Page 7 Hon'ble ITAT in its order dated 04.03.2014 had required the Ld. AO to bring on record not only the fact the liability was remitted or there was a cessation of liability, but further the AO was required to bring on record sufficient material to prove that such remission or cessation of the liability was granted or occurred during the FY 2000-01 being the relevant previous year for AY 2001-02. From a careful perusal of the impugned assessment order, however I find that the Ld. AO did not bring on record any evidence or document which proved that the assessee derived the benefit in the form of remission granted by the creditor during FY 2000-01 so as to constitute as income under Section 41(1) of the Act.

7. The last direction of the Hon'ble ITAT, Kolkata required the Ld. AO to consider the scope of Section 41(1) of the Income Tax Act, 1961 in light of the prevailing judicial views on the subject. It is observed that In the impugned order the Ld.AO referred to a solitary judgment of the Delhi High Court in the case of CIT Vs Chipsoft Technology (P) Ltd (26 taxmann.com 109) for justifying invocation of S. 41(1) of the Act. On analysis of this decision it was noted that in the decided case, unpaid dues of the employees had remained outstanding in assessee's books for more than 7-8 years. It was therefore the Revenue's case that under the Industrial Disputes Act, the workmen's dues had become time-barred and therefore there was a cessation of liability within the meaning of Section 41(1) of the Act. On these facts therefore the Hon'ble High Court held that the unpaid dues of employees, whose recovery had got time barred, legally ceased to be the employer's liability and therefore it was rightly assessed as income by the AO u/s 41(1) of the Act. Applying the decision rendered by the Delhi High Court in the above said factual content the Ld. AO justified the addition of Rs.12,97,47,322/- the outstanding liabilities of the appellant which remained outstanding for several years. The Ld. A.Rs for the appellant, in the submission in appeal, however, in my considered view have correctly aptly pointed out that this decision was distinguishable since the facts involved in appellant's case were different. The Ld.A.Rs submitted that in the case before the Hon'ble Delhi High Court, the outstanding liabilities were workmen dues which had become time-barred under the relevant labour Law. These facts are however not involved in the appellant' case. It was explained that the outstanding liabilities did not involve a single rupee of labour dues. Instead all the liabilities were "trading liabilities" It was explained by the Ld. A.Rs that under the Limitation Act, 1903 which governed such liabilities, since the appellant had acknowledged the liabilities in its books of accounts, they had not become time-barred but remained subsisting and outstanding. After perusing the judgment of Hon'ble Delhi High Court and the facts involved therein vis-a-vis the facts of the appellant's case, I therefore find merit in the contentions of the Ld.A.Rs. I find that, in the present case, undeniably the outstanding liabilities are not workmen's dues and therefore not governed by Industrial Dispute Act. I find that unlike the facts involved in the judgment of Hon'ble Delhi High Court, there is no material on record that the liabilities of Rs.12,97,47,322/- had become time-barred or there was a cessation thereof in the relevant year. In the course of appellate hearing, the Ld.A.Rs for the appellant filed copy of a decision of Hon'ble ITAT, Bangalore in the case of Asst. CIT Vs Alvares & Thomas (62 taxman.com 286) wherein this particular aspect was considered by the Hon'ble Tribunal. In the decided case also the liabilities of the assessee had remained outstanding for several years. Before the Hon'ble Tribunal the Revenue relied on the judgment of the Delhi High Court in the case of CIT Vs Chipsoft Technology (P) Ltd (supra) to claim that the liabilities had become time barred and therefore there was a cessation of liability. The Tribunal however distinguished the said judgment as it found that the liabilities involved were not workmen dues but they were trading liabilities and therefore the judgment of Hon'ble Delhi High Court had no application to the facts of the assessee's case. The relevant findings of the ITAT, Bangalore in this regard were as follows:

ACIT, Cir-36, Kol. Vs. M/s Soorajmull Nagarmull Page 8 "The learned DR placed reliance on a decision of the ITAT Mumbai in the case of ITO v. Shailesh D. Shah [IT Appeal No. 7012 (Mum) of 2010, dated 11-12-2013}. We have perused the said decision and we find that was a case where the liability in question was outstanding labour charges in the case of an Assessee engaged in the business of civil construction. The Tribunal followed the decision of the Hon'ble Delhi High Court in the case of CIT v. Chipsoft Technology (P.) Ltd. [2012J 26 taxmann.com 109/210 Taxman 173 (Delhi) wherein the Hon'ble Delhi High Court on the facts of that case where the outstanding liability was wages of workman, expressed the view that it was illogical that wages of workman would remain unpaid for a long duration of time and therefore held that the liability should be considered as having ceased. The present case is a case of trading liability, which cannot stand on the same footing as due to workman. We are therefore of the view that the decision relied upon by the learned counsel for the Revenue would not be of any assistance to the plea of the Revenue. " (Emphasis supplied) 8. I further note that this judgment of the ITAT, Bangalore was thereafter upheld by the Karnataka High Court & the relevant decision is reported as CIT Vs Alvares Br. Thomas (239 taxman 456). The relevant findings of High Court were as follows: "7. As in the above referred order of the Tribunal, the relevant portion of Section 41 is reproduced, we may not reproduce the same. But, the relevant aspect is that, there are two requirements for invoking the provision of Section 41. The Sine qua non is, the remission or cessation of the trading liability and the additional requirement is, some benefit in respect of such trade liability is taken by the Assessee. If the aforesaid conditions are satisfied, then only Section 41(1) could be invoked by the Assessing Officer.

9. In our view, even if we accept the contention of the Revenue that the party could not be traced and therefore debt could not be verified then also, by no stretch of imagination can it be held that it would satisfy the requirement of cessation of liability. In legal parlance, merely because the creditor could not be traced on the date when the verification was made, same is not a ground to conclude that there was cessation of the liability. Cessation of the liability has to be cessation in law, of the debt to be paid by the assessee to the creditor. The debt is recoverable even if the creditor has expired, by the legal heirs of the deceased creditor. Under the circumstances, in the present case, it can hardly be said that the liability had ceased. If the liability had not ceased or the benefit was not taken by the assessee in respect of such trade liability, in our view, the conditions precedent were not satisfied for invoking Section 41(1) the Act in the instant case.

10. I further note that in another decision of the Hon'ble Delhi High Court in the case of CIT Vs Vardhaman Overseas Ltd (343 ITR 408) facts involved were similar to one involved in the appellant's case. Facts involved in this case were; the liabilities in question were trading liabilities and not workmen dues. Before the AO, the assessee was unable to furnish confirmations from the creditors which appeared to be old and the assessee was unable to furnish the complete addresses of all the creditors. The outstanding creditors were therefore assessed as income u/s 68. On appeal the CIT(A) though deleted addition u/s 68 but confirmed the addition by invoking Section 41(1) of the Act. On appeal the ITAT found that in the assessee's books, the amounts payable to the creditors were not written back but shown as outstanding to the parties and therefore Section 41(1) was held inapplicable. On appeal the High Court observed that to invoke Section 41(1) it was necessary to show that the assessee was actually granted remission of trading liabilities for which deduction was earlier allowed. The High Court further held that it was not enough that the assessee ACIT, Cir-36, Kol. Vs. M/s Soorajmull Nagarmull Page 10 derived some benefit of trading liability but such benefit should necessarily arise on account of remission of the liability. The Court noted that the assessee had not transferred the outstanding amounts from the creditors' account to its Profit & Loss Account but the amounts were shown as "liabilities" in the Balance Sheet and the assessee had acknowledged the debts as due to the creditors. The High Court therefore held that Section 41(1) was not applicable. I find that the facts involved in the decision of Delhi High Court were similar Rather facts involved in assessee's case brings its case on much stronger footing because in this case the assessee not only acknowledged liability in the Balance Sheet but was able to file confirmations from creditors as well. The decision of the Hon'ble Delhi High Court in the case of Vardhaman Overseas Ltd is therefore fully applicable in the present case.

ACIT, Cir-36, Kol. Vs. M/s Soorajmull Nagarmull Page 11 5. In view of the above, we do not find any illegality in the impugned order passed by the ITAT and in our opinion, no substantial questions of law, as raised by the revenue in this appeal, arise from the order of the ITAT."

ACIT, Cir-36, Kol. Vs. M/s Soorajmull Nagarmull Page 14 6. Learned Departmental Representative vehemently argues in the light of Assessing Officer’s findings that assessee’s impugned liability is not a genuine one first of all as per the four parties’s directors’ statements. He thereafter submits that it can be safely assumed that the liability in question as ceased u/s. 41(1) of the Act. We do not find merit in either of these two arguments. Case file revealed that the assessee has throughout been claiming the impugned liability for a time span of almost three decades without any such objection from department. Relevant sundry creditors list runs into 96 parties; amount and address-wise, particularly in paper book pages 55 to 56 as on 31.03.2001. The assessee partly paid the sum in case of five of the said parties involving gross amount of ₹21,95,04,000/-. Paper book pages 93 to 95 and 57 to 59 contains the summarized statement of liability in question as to 31.03.2000 and from 01.04.1989 to 31.03.2013 involving the sum of ₹12,87,24,079/-; respectively.