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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
PER SAKTIJIT DEY, J.M.
Captioned appeal by the Revenue is directed against the order dated 25th August 2014, passed by the learned Commissioner (Appeals)–18, Mumbai, for the assessment year 2011–12.
2 M/s. Shiraz Developers Pvt. Ltd.
Grounds raised by the Revenue are against the solitary issue of 2. deletion of addition of ` 3,62,94,913, made by the Assessing Officer under section 41(1) of the Income-tax Act, 1961 (for short "the Act").
Brief facts are, the assessee a resident company is engaged in 3. the business of trading in shares, securities and derivatives. For the assessment year under dispute, the assessee filed its return of income on 29th September 2011, declaring total income of ` 21,99,770, after claiming set–off of brought forward losses of ` 41,690. During the assessment proceedings, the Assessing Officer on verifying the details of sundry creditors furnished by the assessee found that certain trading liabilities have remained outstanding for a pretty long period, the details of which are as under:–
i) Coronet Estate Pvt. Ltd. ` 2,50,000 ii) Outstanding Liability ` 3,60,44,913
The Assessing Officer called upon the assessee to explain why such liability shown should not be added back since such liability has ceased to exist in terms of section 41(1) of the Act. In response to the show cause notice issued by the Assessing Officer the assessee submitted that the liability has not ceased to exist since recovery of the amount has been stayed by the Hon'ble Chief Minister, Maharashtra Government. It was further submitted, since the assessee
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has not claimed any expenditure of the said amount, the provisions of section 41(1) of the Act would not apply. The Assessing Officer brushed aside the submissions of the assessee by stating that the assessee was unable to submit any confirmation from the concerned party to show the existence of the liability. He further observed that the documentary evidence produced by the assessee does not substantiate assessee’s claim that the amounts shown as liability is under dispute. He, therefore, held that the outstanding liability shown at ` 3,62,94,913, has ceased to exist within the meaning of section 41(1) of the Act, hence, to be treated as income of the assessee. Accordingly, he added back the amount to assessee’s total income. Being aggrieved of the addition so made, the assessee preferred appeal before the learned Commissioner (Appeals).
Challenging the addition made by the Assessing Officer, it was submitted by the assessee before the first appellate authority that the outstanding liability comprises of the following items:–
i) ` 2,50,000 payable to Coronate Estate Pvt. Ltd. ii) ` 3,01,44,913, payable to the Government of Maharashtra; iii) ` 59,00,000 payable to The Bombay Xaverian Corporation Pvt. Ltd.
As far as the amount of ` 2,50,000 is concerned, it was submitted, the said amount has already been shown as income in the return of income filed for the assessment year 2012–13. As far as the
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amounts of ` 3,01,44,913, as well as ` 59,00,000 are concerned, it was submitted, The Bombay Xaverian Corp. Pvt. Ltd., a public charitable trust had acquired certain land on lease from Government of Maharashtra. It was submitted, on 7th May 1992, the said charitable trust entered into an agreement with the assessee for acquiring Transferable Development Right (TDR) relating to the said land on the condition that the assessee would carry out certain acts in the matter of construction of technical institution for the trust. As per the terms of agreement, the assessee was required to do the following acts:–
i) To approach Brihan Mumbai Corp. for TDR / DRC at its own cost;
ii) To incur the cost of construction of the building for technical institution for the trust;
iii) To pay fees / premium charge to Government of Maharashtra, the lessor, as per the lease agreement between the Government of Maharashtra and the trust.
It was submitted, as per the lease agreement the trust was under obligation to pay 50% of the unearned income derived from sale of TDR. Since, the trust entered into an agreement with the assessee for carrying out construction work and for generating TDR, thereby,
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entitling the assessee to acquire the TDR, 50% of the unearned income from the sale of TDR which the trust was obliged to pay to the Government become a liability of the assessee. It was submitted, the said 50% of unearned income on sale of TDR payable to Government still remains outstanding and is shown as payable. It was submitted by the assessee, in terms of the agreement dated 7th May 1992, the assessee performed its obligation and earned TDR from financial year 1996–97 till 2005–06 and the profit and loss derived from sale of TDR was duly shown by the assessee and accepted by the Department. The unsold TDR continued to be shown in the account of the assessee. It was submitted, after expiry of 10 years from the date of issue of TDR the value became nil and the same could not be exploited. The liability to Government of Maharashtra remained unpaid because there was some dispute in working out the basis of unearned income. It was submitted, the Collector, Mumbai City, initiated action for recovery of the said amount against the trust and the trust had approached the Chief Minister of Maharashtra the Chief Minister of Maharashtra vide order dated 29th June 1999, granted stay of recovery. It was submitted, as a result of stay granted by the Chief Minister of Maharashtra, the assessee had no other alternative but to keep back the payment to be made to the Government of Maharashtra. However, the liability to pay the amount continued. The assessee submitted,
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liability of ` 59,00,000 to the trust remains outstanding out of ` 1 crore agreed to be paid by the assessee to the trust out of sale proceeds of TDR. He submitted, the liability of ` 59,00,000 still exists and it is payable to the trust, The Bombay Xaverian Corp. Pvt. Ltd. In this context, the assessee submitted a letter from the trust confirming the liability of ` 59.40 lakh. Thus, it was submitted by the assessee that the outstanding liability shown by the assessee has neither ceased to exist nor there is a remission of such liability in terms of section 41(1) of the Act.
On the basis of submissions made by the assessee and evidences produced, learned Commissioner (Appeals) called for a remand report from the Assessing Officer and after perusing the remand report in the context of facts and materials on record as well as submissions of the assessee held that as far as the amount of ` 2.50 lakh is concerned, the assessee having shown the amount as income in assessment year 2012–13 no addition could be made in the impugned assessment year. As far as the amount of ` 3.01 crore is concerned, the learned Commissioner (Appeals) held that the amount since, remains payable to the Government of Maharashtra and has not been paid due to a stay order of the Hon'ble Chief Minister of Maharashtra, it cannot be said that liability has ceased to exist. As far as the balance amount of ` 59.40 is concerned, learned Commissioner (Appeals) observed, since,
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the creditor has acknowledged the liability and it remains payable it cannot be said that the liability has ceased to exist in terms of section 41(1) of the Act. Accordingly, the learned Commissioner (Appeals) deleted the addition made by the Assessing Officer.
Learned Departmental Representative, relying upon the observations of the Assessing Officer submitted the outstanding liability was shown by the assessee continuously for past so many years which indicates that creditors have given up their claim over the said liability. He submitted, the assessee had not proved that the outstanding liability shown by the assessee is still liable for recovery by the concerned parties. He submitted, merely because stay was granted to the assessee in respect of payments to be made to the Maharashtra Government, it cannot be said that the liability still exists when there is no indication that the assessee is going to discharge the liability by making payments. He, therefore, submitted the provisions of section 41(1) of the Act being applicable the Assessing Officer was justified in adding back the outstanding liability as there is remission / cessation of such liability.
The learned Sr. Counsel, Shri S.E. Dastur, appearing for the assessee made detailed submissions supporting the order of the
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learned Commissioner (Appeals). The submissions / propositions made by the learned Sr. Counsel are as under:–
A) The outstanding liability shown by the assessee is a trading liability. It is irrelevant that the period of limitation has expired as such expiry bars the remedy of creditor to enforce his right against the debtor but does not extinguish the debtor liability to fulfill his obligation. Therefore, it does not result in remission / cessation of liability which is the basic condition to be fulfilled to attract the provisions of section 41(1) of the Act. In support of such submissions, he relied upon the following decisions:–
i) Kohinoor Mills Ltd. v/s CIT, 49 ITR 578; ii) J.K. Chemical v/s CIT, 62 ITR 34; iii) CIT v/s Sugauli Sugar Works Ltd. 236 ITR 518; iv) CIT v/s Jain Exports Pvt. Ltd, 89 DTR 265; v) CIT v/s Wardhaman Overseas Ltd., 343 ITR 408; and vi) Principal CIT v/s Matru Prasad Pandey, 377 ITR 363.
An entry in the Balance Sheet of assessee constitutes B) acknowledgement of assessee’s liability to honour his obligation and therefore, does not result in expiry of the period of limitation even assuming that mere expiry of the period of litigation is at all relevant. For this proposition, he relied upon the following decisions:–
i) CIT v/s Jain Exports Pvt. Ltd, 89 DTR 265; and
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ii) CIT v/s Wardhaman Overseas Ltd., 343 ITR 408.
C) Remission of liability implies that the creditor specifically waives his right against the debtor and cessation implies the occurrence of an event which puts an end to the liability. In support of this contention, he relied upon the following decisions:–
i) CIT v/s Bharat Iron & Steel Industries, 199 ITR 67. ii) CIT v/s Sugauli Sugar Works Ltd. 236 ITR 518; and iii) CIT v/s Wardhaman Overseas Ltd., 343 ITR 408.
D) Mere expiry of even a lengthy period of time the liability having been discharged by the person liable is wholly irrelevant. In this context, the learned Sr. Counsel relied upon the following decisions:–
i) CIT v/s Sugauli Sugar Works Ltd. 236 ITR 518; ii) CIT v/s Jain Exports Pvt. Ltd, 89 DTR 265; and iii) CIT v/s Wardhaman Overseas Ltd., 343 ITR 408.
E) Even, where the debtor has unilaterally transferred in his books of account the amount from the liability account, that does not result in remission or cessation of liability as per the substantive part of section 41(1)(a) of the Act. In support of such contention, learned Sr. Counsel relied upon the decision in Sugauli Sugar Works Ltd. (supra).
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F) Section 41(1) of the Act can be applied only where the Department establishes that the trading liability has ceased or has been remitted and such remission or cessation has taken place in the year in which section 41(1) of the Act is sought to be invoked. For this proposition, learned Sr. Counsel relied upon the following decisions:–
i) CIT v/s Sugauli Sugar Works Ltd. 236 ITR 518; ii) Principal CIT v/s Matru Prasad Pandey, 377 ITR 363; iii) CIT v/s Wardhaman Overseas Ltd., 343 ITR 408.
G) The benefit regarding the trading liability has to be in the manner prescribed by remission / cessation thereof and not as per vague practical or common sense point of view. For such proposition, he relied upon the decision in CIT v/s Vardhaman Overseas Ltd., 343 ITR 408.
H) The burden of establishing that the provisions of section 41(1) of the Act are attracted is on the Revenue which has not been discharged in the case of the assessee by the Revenue.
Learned Sr. Counsel submitted, as far as the liability of ` 2,50,000 payable to Coronet Estate Pvt. Ltd. is concerned, undisputedly, the assessee itself has offered it as income in the subsequent assessment year i.e., assessment year 2012–13. Therefore, it cannot be added in the impugned assessment year. He
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submitted, as far as the outstanding liability of ` 3,01,04,913, payable to Maharashtra Government is concerned, admittedly, the Collector, Bombay City, has issued a notice for recovery of the said amount from the assessee. He submitted, only because of a stay granted by the Chief Minister of Maharashtra, the said amount has not been paid and is being shown as a liability in the books of the assessee. He submitted, though, in the remand report the Assessing Officer has accepted the fact that the liability shown is not payable because of the stay order, however, only on the reasoning that such liability continues for a period of 15 years, he says that it will amount to remission and cessation of liability in terms of section 41(1) of the Act. He submitted, once the assessee has shown the amount as liability in the Balance Sheet, it amounts to acknowledgment of debt, hence, cannot be brought within the purview of section 41(1) of the Act. He submitted, as far as the balance amount of ` 59,40,000, payable to The Bombay Xaverian Corporation Pvt. Ltd. is concerned, undisputedly, the concerned party has confirmed that such liability is still outstanding and payable to him. Therefore, there is no material to suggest that there is a cessation / remission of the outstanding liability. As far as the observations of the Assessing Officer that the payment to be made to Government being a statutory liability can be claimed as deduction under section 43B of the Act on actual payment, the learned Sr.
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Counsel submitted, the liability is not a statutory liability but a contractual liability, therefore, the provisions of section 43B of the Act would not apply. Finally, the learned Sr. Counsel submitted, the grounds raised by the Revenue are also misconceived.
We have patiently and carefully considered the rival submissions and perused the materials on record. We have also applied our mind to the decisions relied upon before us. At the outset, we must observe, the Assessing Officer has made the impugned addition in a lackadaisical manner without properly discussing the relevant facts. From the assessment order, it is not forthcoming on whose account the outstanding liabilities have been shown. The Assessing Officer has not at all discussed the relevant facts properly. Be that as it may, the facts emerging from record reveal that a charitable trust in the name and style of The Bombay Xaverian Corporation Pvt. Ltd. entered into a lease agreement with Government of Maharashtra in respect of plot of land. As per the terms of the said agreement, the trust was required to pay 50% of the unearned income from the TDR value of the said land to the Government of Maharashtra. Subsequently, the said charitable trust entered into an agreement with the assessee for development of a building for the technical institution of the trust. As per the said agreement, the assessee was authorised to apply for and obtain TDR and sell it for a consideration of ` 2.50 crore out of which 50% as un–
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earned income is to be paid to the Collector, Bombay City. Further, as per the development agreement, the assessee developed a building of 40,000 sq.ft. for built–up area of the trust the value of the building as per Collector’s letter dated 28th May 1999 as on 10th July 1995, was ` 2,45,62,000, out of which 50% un–earned income was to be paid to the Collector, Bombay City. Thus, as per the terms of the agreement as on 28th May 1999, an amount of ` 2,47,81,000, along with interest accrued thereon was to be paid to the Government of Maharashtra by the assessee. Admittedly, this amount along with the interest which subsequently increased to the disputed amount of ` 3.01 crore has not been paid by the assessee to the Government of Maharashtra and continued to be shown as outstanding liability in the Balance Sheet over the years. On 28th May 1999, the Collector, Bombay City, issued a notice to the trust for deposit of the amount of ` 2,47,81,000 before him. As it appears, the trust after receiving the notice from the Collector, Bombay City, made a representation to the Chief Minister of Maharashtra on 18th June 1999 seeking waiver of payment of 50% un– earned income on new building under construction to the Maharashtra Government. Pending consideration of assessee’s representation, the Chief Minister, Maharashtra Government stayed the recovery of the payment as demanded by the Collector, Bombay City, vide order dated 29th June 1999. Thus, as could be seen, the outstanding liability
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payable to the Maharashtra Government is still alive pending consideration of assessee’s representation to the Chief Minister of Maharashtra. It is stated before us that till date the representation has not been disposed off.
As far as the amount of ` 2,50,000 payable to Coronet Estate Pvt. Ltd., there is no dispute that the assessee has offered it as income in assessment year 2012–13. Therefore, it cannot be taxed in the impugned assessment year. Learned Departmental Representative has also accepted the aforesaid factual position. Insofar as the amount of ` 59,40,000 payable to The Bombay Xaverian Corp. Pvt. Ltd., it is accepted factual position that before the learned Commissioner (Appeals) as well as the Assessing Officer in the course of remand proceeding, the assessee has furnished a confirmation from The Bombay Xaverian Corp. Pvt. Ltd. acknowledging the existence of the liability. Therefore, as far as the aforesaid two amounts are concerned viz., ` 2.50 lakh and ` 59.40 lakh, there cannot be any doubt that they continue to exist as outstanding liability in the books of the assessee and there is no remission / cessation with regard to the said liability in the impugned assessment year. Thus, the only dispute remains with regard to the outstanding liability of ` 3,01,44,913, payable to the Government of Maharashtra. It is a fact on record that as far as the issue that the amount was payable to the Maharashtra Government is
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not disputed by the Department. The only objection raised by the Assessing Officer during the remand proceeding is, the liability has remained outstanding for 15 years, hence, by law of limitation, it is no more recoverable. Therefore, there is remission / cessation of liability in terms of section 41(1) of the Act in respect of such amount. In this context, it is necessary to refer to the provisions of section 41(1) of the Act. A plain reading of the aforesaid provision would make it clear that for coming to the conclusion that there is remission / cessation of a liability three conditions have to be fulfilled. Firstly, it must be a trading liability, secondly, the person showing such liability has obtained some benefit either in cash or in any other manner in respect of such liability and thirdly, such benefit by way of remission / cessation has accrued to the assessee in the relevant financial year. If we examine the facts of the present case in the context of the provisions contained under section 41(1) of the Act, it would be seen that the liability shown by the assessee are trading liability. So, first condition is fulfilled. However, as far as second and third conditions are concerned, they are not fulfilled. As discussed earlier, in respect of outstanding liability of ` 2.50 lakh and ` 59.40 lakh the assessee has brought on record cogent material to indicate that no benefit by way of cash or otherwise was received by the assessee in respect of such liability in the impugned assessment year. In fact, as far as the
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amount of ` 2.50 lakh is concerned, the assessee has offered it as income in assessment year 2012–13. As far as amount of ` 59.40 lakh is concerned, the creditor has confirmed the existence of such liability which was produced before the Assessing Officer in the course of remand proceeding and the Assessing Officer has not made any adverse comment on the same. It is also required to be observed, as per the letter dated 20th May 1997 of Collector, Bombay City, the Government was taking steps for recovery of 50% un–earned income payable to the Government of Maharashtra in terms with the lease agreement. As yet, no step has been taken by Government to waive off the amount payable by the assessee, though, it may be a fact that the assessee has made a representation for waiver of the said payment vide letter dated 18th June 1999. The Chief Minister of Maharashtra, has only granted a stay of recovery of the demand which continues till date. Thus, as could be seen, the assessee has not obtained any benefit either by cash or any other way in respect of the said liability. Unless the payment of the amount is waived by the Government it is liable for recovery from the assessee. Thus, only because the amount is pending for 10–15 years, it cannot be said that there is remission / cessation of liability with regard to the said amount. More so, when all the creditors are existing and identifiable persons and they have not written–off the amount payable by the
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assessee. Moreover, when the Assessing Officer admits that the amount has remained outstanding for more than 15 years, what prompted the Assessing Officer or what are the material or evidence in possession of the Assessing Officer which lead him to conclude that the assessee has obtained a benefit either in cash or in some other form resulting in remission / cessation of liability in the impugned assessment year is not known. The Assessing Officer has not brought any material on record to establish that the liability has ceased to exist in the impugned assessment year. At least, nothing has been brought to our notice to establish this fact. A reading of the provisions contained under section 41(1) of the Act, indicates that the onus is on the Assessing Officer to prove that conditions of section 41(1) of the Act have been fulfilled to treat a liability as an income in a particular assessment year. In the facts of the present case, the Assessing Officer has failed to demonstrate that the conditions enshrined under section 41(1) of the Act factually exist to come to a conclusion that there is remission / cessation of liability in respect of the amount payable to Government of Maharashtra. Therefore, in our considered opinion, the provisions of section 41(1) of the Act are not applicable in respect of the outstanding liability shown by the assessee. In this context, we may refer to the decision in the case of Sugauli Sugar Works Ltd. (supra), wherein the Hon'ble Supreme Court had an
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occasion to interpret the provisions contained under section 41(1) of the Act. The Hon'ble Supreme Court while approving the decision of the Hon’ble Gujarat High Court in CIT v/s Rashmi Trading, 103 ITR 312, held that obtaining a benefit in cash or in any other manner would mean actually receiving of the cash of that amount either through cash or by an adjustment entry or a credit note or in any other form when the cash or equivalent of cash can be said to have been received by the assessee. While concluding, the Hon'ble Supreme Court held that the principle of expiry of 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 case of Vardhaman Overseas Ltd. (supra), the Hon'ble Delhi High Court following the decision of the Hon'ble Supreme Court in Sugauli Sugar Works Ltd. (supra) held as under:– “16. In our opinion, the judgment of the Supreme Court in CIT v. 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 Section 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
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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.”
The other decisions cited by learned Sr. Counsel also express similar view. Thus, on a conspectus of legal proposition laid down in the decisions referred to above read in the context of section 41(1) of the Act, would suggest that as per the conditions of section 41(1) of the Act, the assessee must have obtained a benefit either by way of cash or in some other form with regard to the existing liability and such benefit was received or accrued to the assessee in the relevant financial year. Unless these conditions are fulfilled it cannot be held that there is remission / cessation of liability merely because the amount remains outstanding for a long period. Therefore, it is further relevant to observe, in the facts of the present case none of the conditions of section 41(1) of the Act exist. Therefore, in our considered view, the learned Commissioner (Appeals) was justified in deleting the addition made by the Assessing Officer. However, before parting, we make it clear, if Maharashtra Government after considering the representation of the assessee waives off the payment of 50% un– earned income, the Assessing Officer will be at liberty to consider applicability of section 41(1) of the Act in accordance with law. With the aforesaid observations, grounds raised are dismissed.
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In the result, Revenue’s appeal is dismissed. Order pronounced in the open Court on 18.10.2017
Sd/- Sd/- SAKTIJIT DEY RAMIT KOCHAR ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 18.10.2017 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary
(Dy./Asstt. Registrar) ITAT, Mumbai
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Date Initial 1. Draft dictated on 19.09.2017 Sr.PS 2. Draft placed before author Sr.PS 21.09.2017 Draft proposed & placed 3. before the second – – JM/AM member Draft discussed/approved 4. – – JM/AM by Second Member Approved Draft comes to 5. Sr.PS 24.10.2017 the Sr.PS/PS 6. Date of pronouncement 18.10.2017 Sr.PS File sent to the Bench 7. Sr.PS 24.10.2017 Clerk Date on which file goes to 8. the Head Clerk 9. Date of dispatch of Order