ITO 12 12(1)4,MUMBAI vs. GAUTAM K NEMANI, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order dated 04/01/2013,of the CIT(A)-21,Mumbai, the assessee has filed the present appeal. Assessee, an individual, filed his return of income on 31/10/2007, declaring income at Rs.(-)1.75 lakhs.The Assessing Office(AO) completed the assessment u/s.143(3) of the Act,on 30/ 12/ 2009,determining the income of the assessee at Rs. 2,51, 09, 397/-.

2.Effective ground of appeal is about deleting the addition of Rs.2.52 crores, made on account of cessation of liabilities within the meaning of section 41. (1) of the Act. During the assessment proceedings, the AO found that the assessee had shown sundry creditors of Rs. 2, 52,84,405/-in his balance sheet. He directed the assessee to provide the age–wise breakup of the sundry creditors. As per the AO the assessee did not file the details in respect of the sundry creditors.Vide order sheet noting, dated 20/11/2009, he again directed the assessee to comply with the directions issued on earlier occasion.One more opportunity was given to the assessee by the assessee vide order sheet noting dated 03/12/2009. On 29/12/2009,he asked the assessee as to why the details of sundry creditors had not been provided.In response to the query by the AO, he stated that sundry creditors were 12 years old,that against that there were sundry debtors recover -able in his books of accounts, that as long as the recovery from the debtors was not materialising it was not possible to pay the creditors. As nothing was placed on record by the assessee during the course of assessment proceedings to verify the position of those creditors,the AO decided the issue considering the available material.He held that the business dealing with the creditors had come to an end, that there was no recent dealing with 2607/M/13 Gautam K. any of them,that the non-furnishing of the latest address of the sundry creditors proved that assessee was not aware of the latest addresses,that the onus to prove that the creditors appearing in the books of the assessee were genuine had not been discharged by him,that he had not provided the last known address to make further verification, that the assessee was granted enough time to furnish the details, that he had not produced any evidence whatsoever to show that the creditors were pursuing their demands, that no evidence had been placed on record to show that the creditors were genuinely outstanding as on 31/03/2007, that it would be just and fair to treat the liabilities of the assessee towards the creditors as cessation of the liabilities within the meaning of section 41(1)(a) of the Act.

3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA).Before him,the assessee contended that he was hospitalised during the assessment proceedings, that necessary details could not be gathered and produced before the AO. He filed an application before the FAA and requested her to admit the additional evidences. He relied upon the case of case of Kesaria Tea Co. Ltd. (254 ITR 434) and argued that even if certain parties were not traceable or such amounts were not outstanding in the books of the creditors it would not amount to remission of liabilities, that the provisions of section 41(1) of the Act stipulated that a benefit had to be obtained in the earlier years.The assessee also filed the balance sheets and profit and loss account from the assessment years 2002-03 to 2009-10.

4.After considering the submission of the assessee and the assessment order, the FAA held that the scrutiny of the profit and loss accounts, filed by the assessee, prove that the assessee had debited or credited the net loss/profit on account of share trading transactions, that in the P&L accounts of different years he had not debited the opening stock and purchase of the shares during that particular year, that he had also not credited the closing stock and sales of the shares in the P&L account, that he had debited to P&L account only either the net loss or the profit and on share trading activity, that though the purchases on account of shares had not been debited in the P&L account but that did not mean that he had not debited the trading liability in the P&L account, that there were two methods of preparing the accounts, that the assessee had rightly argued that he had not taken any benefit of allowance or deduction in respect of the trading liability in the P&L account, that during the assessment proceedings the AO had given repeated opportunities to the assessee for furnishing details of sundry creditors which the assessee had failed to furnish,that he had filed details of sundry debtors account for 2607/M/13 Gautam K. the period 01/ 04/ 2004 to 31/03/2007.Analysing the sundry creditors account, the FAA held that there was no transaction during the years and the opening balance as on 01/ 04/ 2004 was appearing as closing balance as on 31/03/2007, that there were certain creditors,that one of the major creditor was paid substantial amounts in the earlier years, that though sundry creditors were outstanding for many years they could not be paid on account of non - availability of funds, that sundry debtors were also outstanding from many years.Referring to the provisions of section 41 (1) of the Act and relying upon the case of Sagauli Sugar Works Private Ltd.(236 ITR518), the FAA held that the credits were pending for more than 10 years, that it could not be assumed that assessee was not to pay the amount, that some of the creditors had filed cases before the Hon’ble High Court for recovery. Finally, she deleted addition made by the AO u/s.41 (1) of the Act.

5.During the course of hearing before us,the Departmental Representative(DR) argued that the AO had provided ample opportunities to the assessee to prove its claim,that he did not file any evidence before the AO during the assessment proceedings. The Authorised Representative(AR) contended that assessee had filed the necessary details before the FAA, that the assessee had not availed any benefit in the earlier years, that the amounts in question were trade liabilities. On a query by Bench, he stated that cases were pending before the Hon’ble Bombay High Court instituted by two of the creditors.

6.We have heard the rival submissions and perused the available material on recod.We find that the AO had directed the assessee to file details of creditors,that he did not furnish any detail in that regard,that before invoking the provisions of section 41(1)of the Act,he gave two more chances to it to file explanation in that regared,that he made an application before the FAA to admit the additional evidences,that the FAA admitted additional evidences produced by the assessee, that she had decided the issue without following the mandate of Rule 46A of the Income tax Rules, 1962,(Rules).The assessee had claimed that because of hospitalization necessary details could not be filed before the AO.In our opinion, that could be one of the reasonable causes for admitting additional evidences during appellate proceedings. But, the evidences have to be admitted as per sub-Rule 3 or sub Rule -4.We do not find any reference to Rule 46A(4) of the Rules in the order of the FAA. In our opinion, the FAA should have called for a remand report before taking the final decision-especially when the assessee had not produced the evidences before the AO.The facts have to be examined at the level of the AO only. If the FAA , having co-terminus power of the AO, 3

2607/M/13 Gautam K. wants to utilize the additional evidences produced during appellate proceedings then he should adhere to sub-Rule-4 of the Rule-46A, as stated earlier.Consideirng the peculiar facts and circumstances of the case, we are of the opinion that in the interest of justice the matter should be restored back to the file of the AO for fresh adjudication.He is directed to afford a reasonable opportunity of hearing to the assessee. Effective Ground of appeal raised by AO is decided in his favour, in part.