S. SAMPATHRAJ,CHENNAI vs. ACIT, CHENNAI

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER

- 2 - ITA No.2211/Mds/2016 u/s.143(3) dated 28.01.2015. During the course of assessment proceedings, the AO made an addition of Rs.36,91,089/- relating to the outstanding liability in respect of M/s.Sangeetha Jewellery u/s.41(1) of the IT Act. The AO called for the details and the assessee explained that the liability arose on account of purchases made from M/s.Sangeetha Jewellery, a family concern and the liability related to the assessment year 2000-01. M/s.Sangeetha Jewellery has closed the business due to police action. Hence, the AO formed an opinion that the creditor has no intention to recover its money and the assessee also has no intention to pay the debt amounting to Rs.36,91,089/-.

Hence, the AO made the above addition to the returned income.

3.1 Aggrieved by the order of AO, the assessee filed an appeal before the Tribunal. Appearing for the assessee Shri M. Karunakaran, Advocate argued that the liability relating to M/s.Sangeetha Jewellery has not ceased and there was no remission or cessation of liability merely because of the creditor has closed its business. The A.R. further submitted that the assessee has completely re-paid the entire amount due to the creditor in the subsequent year and the CIT(A) has not - 3 - ITA No.2211/Mds/2016 considered the above evidence which was produced before him.

Hence, the Ld.A.R contended that there is no cessation or remission of liability and the AO cannot make any addition on account of the cessation of liability u/s.41(1) of the Act, unless it is established that the liability has been ceased.

“This Tribunal is of the considered opinion that merely because the time limit provided under the Limitation Act expired, that does not mean the creditor could not recover the money from the assessee. What is prohibited under the Limitation Act is initiation of legal proceedings for recovery of the amount. The Limitation Act or any law of the land does not prohibit the creditor to recover the money from the assessee by any other modes. In the course of the activities, the creditor came to possession of the assessee’s money, he can always retain the money and adjust the same against the outstanding amount. When such is the position in law, this Tribunal is of the considered opinion that merely because the assessee credited the money unilaterally in the capital account that cannot be reason to make addition in the hands of the assessee. Therefore, this Tribunal is of the considered opinion that the CIT(A) has rightly deleted the addition made by the Assessing Officer”.

5.1 Referring to the decision of Hon’ble ITAT ‘F’ Bench New Delhi, in dated 22/04/2015 on similar issue the Ld.A.R invited our attention to para No.7 of the order which reads as under:

“The Hon’ble Jurisdictional High Court in the case of CIT Vs. Shri Vardhman Overseas Ltd., (2012) 343 ITR 408 (Del.), has dealt with the issues of taxability under section 41(1) of the Act in a case where long outstanding sundry creditors were treated as taxable. The Hon’ble High Court after referring to the decisions of Hon’ble Supreme Court in the cases of CIT(Chief) Vs. Kesaria Tea Co. Ltd., (2002) 254 ITR 434(SC) and CIT Vs. Sugauli Sugar Works P. Ltd., (1999) 236 ITR 518 (SC, has held that such amounts cannot be brought to tax under Section 41(1) of the Act. The Hon’ble Supreme Court in the case of CIT Vs. Sugauli Sugar Works P. Ltd. (supra) held 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”.

- 5 - ITA No.2211/Mds/2016 5.2 Further on the similar issue of addition u/s 41(1) was considered by the Hon’ble high court of Gujarat reported in [2015] 59 taxmann.com 428 (Gujarat) in the case of Pr. Commissioner of Income-tax, Ahmadabad v.

Matruprasad C Pandey Hon’ble Gujarat High Court held as under:

“At the outset, it is required to be noted that the Assessing Officer made the addition of Rs. 56,96,645/- invoking Section 41(1) of the Income Tax Act by doubting certain sundry creditors amounting to Rs. 56,96,645/- appearing in the balance sheet of the assessee since past several years. However, it is required to be noted that as such those sundry creditors mentioned in the balance sheet of the assessee were shown as sundry creditors since past several years from the relevant assessment year and at no point of time earlier the Assessing Officer doubted the creditworthiness and/or identity. In any case the addition on the aforesaid ground under Section 41(1) of the Act cannot be made unless and until it is found that there was remission and/or cessation of the liability that too during the previous year, relevant to the assessment year in question, there cannot be any addition invoking the provision of Section 41(1) of the Act. Identical question came to be considered by the Division Bench of this Court in the case of Nitin S. Garg (supra) and in the similar set of facts and circumstances of the case when the addition was made invoking Section 41(1) of the Act by doubting the creditworthiness and/or identity of the sundry creditors mentioned in the balance sheet and it was found that those sundry creditors were very old and no interest had been paid on those loans, the Division Bench has deleted such addition made under Section 41(1) of the Act. In paragraph 15 the Division Bench has observed and held as under;

In the case before us, it has not been established that the assessee has written off the outstanding liabilities in the books of account. The Appellate Tribunal is justified in taking the view that as assessee had continued to show the admitted amounts as liabilities in its balance sheet the same cannot be treated as assessment of liabilities. Merely because the liabilities are outstanding for last many years, it cannot be inferred that the said liabilities have seized to exist. The Appellate Tribunal has rightly observed that the Assessing Officer shall have to prove that the assessee has obtained the benefits in respect of such trading liabilities by way of remission or cessation thereof which is not the case before us. Merely because the assessee obtained benefit of reduction in the earlier years and balance is carried forward in the subsequent year, it would not prove that the trading liabilities the assessee have become non-existent.

The aforesaid decision of the Division Bench in the case of Nitin S. Garg (supra) has been considered and followed by the Division Bench of this Court in the case of Bhogilal Ramjibhai Atara (supra) and the addition made under Section 41(1) of the Act in the similar facts and circumstances of the case is ordered to be deleted. In paragraph 8 the Division Bench has observed and held as under;

We are in agreement with the view of the Tribunal. Section 41(1) of the Act as discussed in the above three decisions would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled.

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Additionally, such cessation or remission has to be during the previous year relevant to the assessment year under consideration. In the present case, both elements are missing. There was nothing on record to suggest there was remission or cessation of liability that too during the previous year relevant to the assessment year 2007-08 which was the year under consideration. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. The Assessing Officer undertook the exercise to verify the records of the so called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi- parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income under section 41(c) f the Act. This is one of the strange cases where even if the debt itself is found to be non- genuine from the very inception, at least in terms of section 41(1) of the Act there is no cure for it. Be that as it may, insofar as the orders of the Revenue authorities are concerned, the Tribunal not having made any error, this Tax Appeal is dismissed.

In the present case, there was no remission and/or cessation of the liability during the previous year relevant to the assessment year under consideration. As such, there is no remission and/or cessation of the liability during the year under consideration subject to the conditions contained in the statute being fulfilled. In the present case, both the aforesaid elements are missing.

Under the circumstances, as such, no error has been committed by the learned Tribunal in deleting the additions made under Section 41(1) of the Act. The proposed substantial questions of law (A) and (B) with respect to deleting the addition made under Section 41(1) of the Act are answered against the revenue”.

- 7 - ITA No.2211/Mds/2016 during the year under consideration. Further, the assessee has submitted in his arguments that the liability was repaid in the subsequent year. Therefore, we set aside the orders in the lower authorities and delete the addition made by the AO.

Order pronounced in the open court on 25th November, 2016, at Chennai.