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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SH. H.S. SIDHU & SH. O.P. KANT
ORDER PER O.P. KANT, A.M.: These two appeals by the assessee are directed against two separate orders dated 15/01/2013 and 17/05/2013 of the learned Commissioner of Income-tax (Appeals)-III, New Delhi for assessment year 2009-10 and 2010-11 respectively. As both the appeals are related to the same assessee and one ground is common in both the appeals, same are heard together and disposed of by this consolidated order.
First we take up the appeal in wherein the grounds raised
are as under:
1. The learned CIT(A) has erred in law and facts of the case in confirming the addition made by the Assessing Officer for arriving at the satisfaction for the purposes of invoking rule 8D read with sec. 14A of the IT Act which is arbitrary, baseless, unjustified and bad in law.
2 & 4397/Del/2013 AY: 2009-10 & 2010-11 2. Notwithstanding the ground no. 1 the learned CIT(A) has erred in law and facts of the case in confirming the addition of Rs. 34,01,563/- on account of disallowance by applying rule 8D read with sec 14A of the IT Act which is arbitrary, unjustified, baseless and bad in law. 3. The assessee craves to have the right to add, amend or modify the grounds of appeal.
3. The facts relevant to the issue in dispute are that the assessee company made investment in its subsidiary and other companies during the year as well as in earlier assessment years, however, no exempt income was earned by the assessee company from investments made and, the assessee did not make any disallowance in terms of section 14A of the Income Tax Act, 1961 (in short ‘the Act’). The Assessing Officer invoked rule 8D of the Income Tax Rules, 1962 and made disallowance of Rs. 26,75,508/- under rule 8D(2)(ii) and disallowance of Rs. 7,26,055/- under rule 8D(2)(iii) of the Income Tax Rules. Thus, total disallowance of Rs. 34,01,563/- was made under section 14A of the Act read with rule 8D of the Income Tax Rules. The Ld. Commissioner of Income-tax (Appeals) relying on the various judicial pronouncement including the decision of the Tribunal, Special Bench of Delhi in the case of Cheminvest Ltd. Vs. Income Tax Officer, (317 ITR 86) dated 05/05/2009, upheld the disallowance made by the Assessing Officer. Aggrieved, the assessee is in appeal before the Tribunal.
Before us, the learned Authorized Representative of assessee submitted that the issue in dispute was covered in the favour of the assessee by the judgment of the Hon’ble Jurisdictional High Court in the case of Cheminvest Ltd Vs. CIT reported in (2015) 378 ITR 33 (Del.). 5. The learned Senior Departmental Representative, on the other hand, supported the order of the authorities below. 5. We have heard the rival submissions and perused the material on record. It is undisputed that no exempt income was earned by the assessee in the year under consideration. We find that in the case of Cheminvest Ltd. Vs.
3 & 4397/Del/2013 AY: 2009-10 & 2010-11 Commissioner of Income Tax (supra), the question before the Hon’ble Delhi High Court for consideration was as under: “Whether disallowance under Section 14A of the Act can be made in a year in which no exempt income has been earned or received by the Assessee?” 6. The Hon’ble High Court relying upon the case of CIT Vs. Holcim India Private Limited in ITA No. 486/2004 answered the question as under:
23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression ‘does not form part of the total income’ in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.
In view of the binding precedents, respectfully following the findings of the Hon’ble Jurisdictional High Court in the case of Cheminvest Vs. CIT (supra), we hold that no disallowance under section 14A of the Act is called for in the case of the assessee as no exempt income was received or receivable during the year under consideration. Accordingly, the grounds No. 1 and 2 of the appeal are allowed.
The ground no. 3 being general in nature, not required to be adjudicated upon by us.
Thus, appeal of the assessee is allowed.
ITA No. 4397/Del/2013 for AY: 2010-11
10. Now we take up the appeal in in which following grounds are raised:
4 & 4397/Del/2013 AY: 2009-10 & 2010-11 1. The learned CIT(A) has erred in law and facts of the case in confirming the addition made by the Assessing Officer for arriving at the satisfaction for the purpose of invoking rule 8D read with sec 14A of the IT Act which is arbitrary, baseless, unjustified and bad in law.
2. Notwithstanding the ground no. 1 the learned CIT(A) has erred in law and facts of the case in confirming the addition of Rs. 34,52,252/- on account of disallowance by applying rule 8D read with sec 14A of the IT Act which is arbitrary, unjustified, baseless and bad in law.
The learned CIT(A) has erred in law and facts of the case in confirming the addition of Rs. 3,20,055/- by alleging that the unchanged liabilities are no longer in existence and the assessee company has obtained the benefit in respect of the said sums by way of cessation which is incorrect, arbitrary, baseless, unjustified and bad in law.
4. The assessee craves to have the right to add, amend or modify the grounds of appeal
11. The facts in respect of grounds No. 1 & 2 of the appeal are identical to grounds of the appeal of the assessee for assessment year 2009-10. Since we have already allowed the grounds of the appeal in assessment year 2009-10 in Para Nos. 4 to 7 above, the grounds No. 1 and 2 of this appeal are also allowed accordingly.
11. In ground No. 3, the assessee has challenged confirming of addition of Rs. 3,20,055/- by the Ld. Commissioner of Income-tax (Appeals) for cessation of liability under section 41(1) of the Act.
12. The facts in respect of the issue in dispute are that Assessing Officer found following creditors as outstanding for more than three years: Sl. No. Particular Financial year 2007-08 2008-09 2009-10 1. Jattinder Grewal & Ajit, Arjun 1,55,293 1,55,293 1,55,293 Singh 2. Blue Star Ltd. 1,13,273 1,13,273 1,13,273 3. Migrani Envirotech Engineers 50,000 50,000 50,000 Pvt. Ltd. 4. M. Paul Friedberg Associates 1,489 1,489 1,489 Pvt. Ltd. Total 3,20,055 3,20,055 3,20,055
5 & 4397/Del/2013 AY: 2009-10 & 2010-11 13. According to the Assessing Officer, the assessee failed to provide their addresses or confirmation from the above creditors and on the basis of these observations, the Assessing Officer concluded that aforesaid persons were either no longer existed or have written off the amount into their books of accounts and, thus, liabilities were no longer in existence and assessee company had obtained benefit in respect of aforesaid sums by way of cessation of liability. The Ld. Commissioner of Income-tax (Appeals) also observed that the assessee failed to produce the confirmed copy of accounts from the above four parties before him and, thus, he confirmed the finding of the Assessing Officer.
Before us, the learned Authorized Representative of the assessee submitted that confirmations from third-party were beyond the control of the assessee company and the Assessing Officer should have obtained the same exercising the powers under section 133(6) of the Act. He further submitted that addition was made by the Assessing Officer on the presumption that either the parties no longer exist or have written off the amount from their books of accounts, whereas the assessee company did not receive any benefit by way of remission, hence the provisions of section 41(1) were not applicable. The learned Authorized Representative further submitted that assessee company being a limited company, even if the balance has remained same for three years, the balance of creditors could not be added to the income of the assessee on the ground of the expiry of limitation, hence the addition made on account of cessation of liability was arbitrary, unjustified and bad in law. In support of the proposition, he relied on the decisions of the Tribunal in the case of Sh. Vardhman Overseas Ltd. Vs. Assistant Commissioner Of Income Tax reported in (2008) 24 Sot 393(Del) and Income Tax Officer Vs. Janak Steel Tubes (P) Ltd Reported in 31 TTJ 384(Del).
On the other hand, the learned Senior Departmental Representative supported the findings of the authorities below.
6 & 4397/Del/2013 AY: 2009-10 & 2010-11 16. We have heard the rival submissions and perused the material on record. We find that as far as addition under section 41(1) of the Act is concerned, the two conditions, i.e., (1) allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability; (2) the assessee has obtained cash, or any amount in respect of such a loss or expenditure, or some benefit in respect of such trading liability by way of remission or cessation thereof. Further, the Explanation-1 to the section 41(1) of the Act as laid down that cessation of remission of liability by unilateral Act of the debtor or the successor by way of writing off such liability in his accounts will also amount to benefit in respect of such trading liability by way of remission of cessation thereof. In the facts of the instant case, we find that the assessee has not remitted the liability in its books of accounts. It is the Assessing Officer who has presumed that those parties no longer existed or have written off the amounts in their books of accounts. The Assessing Officer has not verified from those parties whether they have forgone their claim or the liability has become unenforceable at law by the creditor and the debtor declared unequivocally his intention not to honour his liability when payment is demanded by them. As we find that the assessee has not remitted the credit balances in respect of the above parties, the assessee has not obtained any benefit in respect of such trading liability and, therefore, provisions of section 41(1), are not applicable to the facts of the case in hand. In the case of Shri Vardhman Overseas Ltd. Vs. Assistant Commissioner of Income Tax (supra), the Tribunal has expressed similar views. The relevant findings of the Tribunal in the said case are as under:
We have carefully considered the rival submissions in the light of the material placed before us. From the perusal of copy of account of all the parties with regard to which the addition has been made, it revealed that no new amount has been credited by the assessee in their account during the year under consideration. Therefore, applicability of s. 68 is ruled out and addition could not be made under s. 68. Now, coming to the applicability of s. 41(1), it is observed that assessee company is a limited company and its accounts are accessible to general public. The balances 7 & 4397/Del/2013 AY: 2009-10 & 2010-11 are brought forward balances. If the same are added on account of their non-genuineness, then also these amounts cannot be added to the income of the assessee for the year under consideration as the question of genuineness thereof can be examined only in the year in which they were credited in the account of the assessee. The amount also cannot be considered to be the income of the assessee on the ground of expiry of limitation as, according to well settled law explained by Hon'ble Supreme Court in the case of Sugauli Sugar Works (P.) Ltd. (supra) in the absence of creditor, it is not possible for the Department to come to the conclusion that the debt is barred and has become unenforceable and there may be some circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act. It will be relevant to reproduce these observations of their Lordships from the said decision:- "The question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee's case alone but it is a matter which has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act."
In view of the above observations of Hon'ble Supreme Court, in the absence of creditor, it cannot be concluded by the Department that the debt is barred and has become unenforceable more particularly when the assessee is a limited company whose accounts are accessible to general- public. In the case of Sugauli Sugar Works (P.) Ltd. (supra) the assessee had credited the amount which was added to its income under s. 41(1) of the Act, but in the case of the assessee such amount has not even been credited to the P&L a/c. Thus, the case of the assessee is on sound footing than the case of the assessee in that case. Therefore, on the ground of expiry of limitation, the addition upheld by the CIT(A) under s. 41(1) cannot be held justified.
Their Lordships of Hon'ble Supreme Court in the case of Kesaria Tea Co. Ltd. (supra) have examined the provisions of s. 41(1) and it was observed that for the application of s. 41(1) following points are to be kept in view :- "(1) In the course of assessment for an earlier year, allowance or deduction has been made in respect of trading liability incurred by the 8 & 4397/Del/2013 AY: 2009-10 & 2010-11 assessee; (2) subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the year in which such event occurred; (3) in that situation the value of benefit accruing to the assessee is deemed to be the profit and gains of business which otherwise would not be his income; and (4) such value of benefit is made chargeable to IT as the income of the previous year wherein such benefit was obtained." It was further observed that resort to s. 41(1) could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it.
According to the above decision the requirements for application of s. 41(1) are that the assessee himself should acquire the benefit by way of remission or cessation of that trade liability during the year in which such event occurred and such value of benefit is made chargeable to IT as the income of the previous year wherein such benefit was obtained and s. 41(1) will be applicable only if such liability of the assessee can be said to have ceased finally without the possibility of reviving it.
14. If the facts of the present case are considered in the light of the above mentioned observations of their Lordships, it will be inferred that it has not been shown by learned CIT(A) that the assessee has acquired any benefit from this particular liabilities which are still outstanding in the balance sheet of the assessee and it has also not been shown that these liabilities have ceased finally without the possibility of revival. In our opinion, the onus has wrongly been shifted by the Revenue on the assessee. The assessee has shown these liabilities outstanding in its balance sheet. Therefore, there was no occasion to treat the said amount as taxable under s. 41(1) of the Act and if Department intends to assess the same by applying the provisions of s. 41(1), then the onus will be on the Revenue to show that the liability which is appearing in the balance sheet has ceased finally and there is no possibility of the revival of the liability.
Further in the case of Income Tax Officer Vs. Janak Steel Tubes (P) Ltd (supra), the Tribunal held that credit outstanding for more than three years cannot be added to the income of the assessee merely because the origin of the liability was beyond three years and it cannot be said that the limitation has run out. The relevant paragraph of the decision of the Tribunal is reproduced as under:
15. The last ground in the appeal for 1982-83 is in regard to deletion of an addition made by the IAC. The addition was Rs. 7,686. The assessee were due to the following three parties of amounts mentioned in respect of them- (i) Supreme Rs.704 General India, Hissar (ii) Rs.6,300 Bharatiya Cutler Hammer Pvt. Ltd., Faridabad. (iii) Wesman Rs. 682 Engg.Works, Calcutta. The IAC made an addition on the sole reason that the assessee is under no legal obligation to pay the amount since the outstandings are more than three years. In the appeal, the CIT (A) deleted the addition disagreeing with the reason given by IAC.
We have heard the learned Department representative on the issue. For the assessee, reliance was placed upon the decision of the Rajasthan High Court in the case of CIT vs. Sadul Textiles Limited (1987) 59 CTR (Raj) 98: (1987) 167 ITR 634 (Raj) . First, it cannot be said that limitation has run out merely because the origin of the liability is beyond three years. Assuming for argument sake that limitation has run out, it only bars the remedy in a Court of law but the liability as such is not wiped out. This is not a case where there has been a cessation or remission of liability or abandonment of the claim by the creditor. (1987) 167 ITR 634 (Raj) (supra) is in point. The finding of the CIT (A) is in order and we affirm the same.
In the light of above discussion and respectfully following the above decisions, we hold that the assessee has not obtained any benefit in 10 & 4397/Del/2013 AY: 2009-10 & 2010-11 respect of the creditors by way of remission or cessation thereof and, therefore, no addition can be made in the assessment year under consideration under section 41(1) of the Act. Accordingly, the ground of the appeal is allowed.
In the result, both the appeals of the assessee are allowed.
The decision is pronounced in the open court on 14th July, 2016.