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Income Tax Appellate Tribunal, BENCH ‘SMC’ KOLKATA
Before: Hon’ble Shri J.Sudhakar Reddy, AM]
ORDER PER J.SUDHAKAR REDDY, AM:
This is an appeal filed by the assessee directed against the order of the Commissioner of Income Tax-(A)-2, Kolkata relating to A.Y. 2008-09.
The assessee filed an application for admission of additional grounds. It is related to the disallowance made u/s 14A of the Income Tax Act, 1961 (Act). The assessee had already taken ground no.2, 3 and 4 in connection from the same disallowance. Hence in my view these are not additional grounds but only arguments on the issue u/s 14A of the Act.
After hearing the rival contentions I hold as follows:- Ground No.1 is against the addition of Rs.2,42,530/- u/s 41(1) of the Act. The AO had at page 4 of his order held that the assessee had enjoyed the benefit of the said unclaimed loan during the regular business activity and he held that the assessee had taken the loan for the purpose of business. He further observed that the loan was taken more than twenty years back and interest was charged at the preliminary stage only. The ld. CIT(A) upheld this addition in a cryptic manner. Before me the assessee relies on a number of decisions and submits that section 41(1) of the Act cannot be applied 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 Vijay Kumar Daga A.Y.2008-09 2 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 .
The Hon’ble ITAT ‘A ‘Bench of Bangalore Tribunal in ITA N.1078/Bang/2014 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 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 xxxx xx xx xxxxxx xx xxxxxx xx
[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.]
Explanation 1 which was inserted w.e.f. 1.4.1997 is not attracted to the present case since there was no writing off of the liability to pay the sundry creditors in the assessee's accounts. The question has to be considered de hors Explanation 1 to Section 41 (1). In order to invoke clause (a) of Sec.41 (1) of the Act, it must be first established that the assessee had obtained some benefit in respect of the trading liability which was earlier allowed as a deduction. There is no dispute in the present case that the amounts due to the sundry creditors had been allowed in the earlier assessment years as purchase price in computing the business income of the assessee. The second question is whether by not paying them for a period of four years and above the assessee had obtained some benefit Vijay Kumar Daga A.Y.2008-09 3
in respect of the trading liability allowed in the earlier years. The words "remission" and "cessation" are legal terms and have to be interpreted accordingly. In the present case, there is nothing on record to show that there was either remission or cessation of liability of the assessee. In fact, there is no reference either in the order of the AO or CIT(A) to the expression "remission or cessation of liability". In such circumstances, we are of the view that the provisions of section 41 (1) of the Act could not be invoked by the Revenue. In fact the decision of the Hon'ble Delhi High Court in the case of Vardhaman overseas Ltd. (supra) clearly supports the plea of the Assessee in this regard. On identical facts, the Hon'ble Delhi High Court on the applicability of Sec.41 (1) of the Act, held: "12. That takes us to the next question as to what constitutes remission or cessation of the liability. It cannot be disputed that the words "remission" and "cessation" are legal terms and have to be interpreted accordingly. In State of Madras vs. Gannon Dunkerley & Co. AIR 1958 SC 560 Venkatarama Aiyyar J. explained the general rule of construction that words used in statutes must be taken in their legal sense and observed:
"The ratio of the rule of interpretation that words of legal import occurring in a statute should be construed in their legal sense is that those words have, in law, acquired a definite and precise sense and that, accordingly, the legislation must be taken to have intended that they should be understood in that sense. In interpreting an expression used in a legal sense, therefore, we have only to ascertain the precise connotation which it possesses in law".
In our opinion, this rule should be applied to the interpretation and understanding of the words "remission" and "cessation" used in the section.
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,' Vijay Kumar Daga A.Y.2008-09 4
“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 were incurred and since the creditors had not taken any steps to recover the amount, there was a Vijay Kumar Daga A.Y.2008-09 5
cessation of the debts which brought the matter under s. 41 (1). Turning back to the judgment of the Supreme Court, we find that the judgment of the Calcutta High Court under appeal was affirmed for two reasons. The first reason was based on a judgment of the Full Bench of the Gujarat High Court in CIT vs. Bharat Iron & Steel Industries (1992) 105 CTR (Guj)(FB) 331 : (1993) 199 ITR 67 (Guj)(FB). It was held by the Supreme Court that the Gujarat High Court was right in saying that in order to attract taxability under s. 41(1) the assessee should have obtained, whether in cash or in any other manner whatsoever, any amount in respect of the loss or expenditure earlier allowed as a deduction. This part of the reasoning, in the light of the amended cl. (a) of sub-so (1) of S. 41 may not be relevant after substitution of the said clause by the Finance Act, 1992 w.e.f, 1st April, 1993, by which the words "some benefit in respect of such trading liability by way of remission or cessation thereof' were inserted. After the amendment, therefore, it is not necessary that in respect of a trading liability earlier allowed as a deduction, the assessee should have received any amount, in cash or otherwise, but it is necessary that the assessee should have received "some benefit" in respect of such trading liability. However, we have already seen that this benefit in respect of trading liability should be "by way of remission or cessation of the liability" , after the amendment made to the clause w.e.f. 1st April, 1993. The second part of the reasoning of the Supreme Court in CIT vs. Sugauli Sugar Works (P) Ltd. (supra) is based on the interpretation of the words "cessation or remission" of the trading liability. The Supreme Court noticed a judgment of the Bombay High Court in J.K. Chemicals Ltd. vs. CIT (1996) 62 ITR 34 (Born) in which it was explained as to what could bring out a cessation or remission of the assessee's liability. The observations of the Bombay High Court in the judgment cited above are as under:
"The question to be considered is whether the transfer of these entries brings about a remission or cessation of its liability. The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by his own unilateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor. It is not in dispute, and it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the operation of law, i.e., on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to Honour his liability when payment is demanded by the creditor, or a contract between the parties, or by discharge of the debt the debtor making payment thereof to his creditor. Transfer of an entry is neither an agreement between the parties nor payment of the liability. We have already held in Kohinoor Milfs Co. Ltd. vs. CIT (1963) 49 ITR 578 (Born) that the mere fact of the expiry of the period of limitation to enforce it, does not by itself constitute cessation of the liability. In the instant Vijay Kumar Daga A.Y.2008-09 6 case, the liability being one relating to wages, salaries and bonus due by an employer to his employees in an industry, the provisions of the Industrial Disputes Act also are attracted and for the recovery of the dues from the employer, under s. 33C(2) of the Industrial Disputes Act, no bar of limitation comes in the way of the employees. "
15. The Supreme Court noticed that the above observations of the Bombay High Court were quoted by the Calcutta High Court in the judgment under appeal 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."
16. From the ratio laid down in the aforesaid decision, we are of the view that there is nothing on record to show any cessation or remission of liability by the creditor or even an unilateral act by the Assessee in this regard. In view of the above, we are of the view that the impugned addition cannot be sustained and the same is directed to be deleted.”
Vijay Kumar Daga A.Y.2008-09 7
In this case the addition has been made u/s 41(1) of the Act on the ground that it is an unclaimed loan. The presumption of the AO is that this loan will never be claimed. Such a presumption cannot be made. Respectfully following the proposition 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 order by the Bangalore Bench of the ITAT in the case of Glen Williams vs ACIT (Supra) I delete this addition and allow this ground of the assessee.
All other grounds relate to the disallowance u/s 14A r.w.r.8D of the Act. I find that the dividend earned by the assesse is only Rs.5,280/-. The disallowance made by the AO is Rs.4,73,913/-. The Hon’ble Delhi High Court in the case of CIT v Shri Vardaman Overseas Ltd held that the quantum of disallowance cannot exceed the dividend income which is exempt from tax. Hence I restrict the disallowance to Rs.5,280/- which is the exempted income in this case. The balance disallowance is hereby deleted.
In the result the appeal of the assessee is allowed in part.
Order pronounced in the Court on 13.04.2018.