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Income Tax Appellate Tribunal, MUMBAI BENCHES “E, ‘MUMBAI
Before: SHRI RAJENDRA, HON’BLE & SHRI C.N. PRASAD, HON’BLE
PER C.N. PRASAD, JUDICIAL MEMBER
This appeal is filed by the Revenue against the order of the ld.CIT(A)-41, Mumbai dated 25/04/2012 for the Assessment Year 2009-10 arising out of the assessment order passed under section 143(3) of the Act.
The only grievance of the Revenue in its appeal is that the ld.CIT(A) erred in deleting the addition of Rs. 1,27,00,000/- made on account of cessation of liability.
Brief facts of the case are that assessee is an individual, who filed his return of income on 27/10/2009 declaring income of Rs. 1,88,840/-. The assessment was completed by order dated NIL under section 143(3) determining total income at Rs. 1,29,15,922/-. While completing the assessment, the Assessing Officer added Rs.1,27,00,000/- as income of the assessee by treating it as cessation of liability. The Assessing Officer observed that the assessee has shown this amount as due to M/s. Nirma Consultancy Pvt. Ltd. under the head ‘liabilities’. He also observed that the assessee’s son is the Director of M/s. Nirma Plastic Tiles Pvt. Ltd. and M/s. Nirma Plastic Tiles Pvt. Ltd. is a defunct company and the assessee need not pay back the liability to the said company. Therefore, he was of the view that there is a cessation of liability and accordingly, made the addition.
On appeal, ld. CIT(A) considering the fact that the assessee has repaid the liability during the current year and since the assessee has not claimed the said amount as deduction and since the liability is outstanding for last ten years and the assessee’s son is Director in the company, he held that it cannot be a reason for invoking the provisions of section 41(1) of the Act.
Departmental Representative supported the order of the Assessing Officer, whereas Authorized Representative of the assessee placed reliance on the order of the ld. CIT(A).
We have heard the rival submissions and perused the orders of the authorities below. This issue has been elaborately considered by the ld. CIT(A) with reference to the averments of the Assessing Officer, the submissions of the assessee and the evidence placed on record. The ld. CIT(A) held that there is no cessation of liability and therefore the provisions of section 41(1) of the Act cannot be invoked by observing as under:-
“2.4 I have considered the submissions of the appellant, order of the A.O. and facts of the case carefully, it is noticed that the A.O.
Rs. 1.27 crores which is outstanding since A.Y. 2001-02. Secondly, the A.O. has observed that M/s. Nirma Plastic Tiles Pvt. Ltd. is a defunct company and therefore virtually non-existence. Thirdly, it was noticed that the company was owned by son of the assessee. In view of these facts, the A.O. has given a shown cause notice to the assessee to explain why the outstanding liability may not be treated as ceased to exist and added back to the taxable income. In response to this show cause notice, the A.R. of the appellant has submitted its reply before the A.O. and submitted the confirmations of M/s. Nirma Plastic Tiles Pvt. Ltd. along with balance sheet of the company and argued that the liability shown by the assessee is reflected in the balance sheet of the company and both the parties are reflecting this entry in their books of accounts and no one has written off, therefore the provision of section 41(1) are not applicable. But the A.O. has not accepted the reply of the assessee and held that the company was a defunct company and owned by son of the assessee and the liability was outstanding in the A.Y. 2001-02, therefore treated it as ceased to exist and added back to the taxable income.
2.5 On the other hand, the A.R. of the appellant has submitted that the confirmations of the company along with balance sheet were duly submitted before the A.O. to prove that the outstanding liability of the assessee is duly reflected in the balance sheet of the company and it was not written off by any of the party, therefore the provision of section 41(1) is not applicable. The A.R. of the appellant has also relied on the decision of the Hon'ble Supreme Court in the case of Suguali Sugar Works Pvt. Ltd. (Supra) and also the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Hotline Electronics Ltd. in which the decision of the Hon'ble Supreme Court was relied on. Thus it was argued that the facts of the present case are squarely covered by the Hon'ble Supreme Court, therefore no addition is called for.
2.6 From the perusal of the submissions of the appellant and facts of the case it is better to read out the provision of section 41which is reproduced as under:
"41. Profits chargeable to tax. (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 the 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 (b) .............. . Explanation 1………… Explanation 2………..” 2.7 The gist of the decision of the Hon'ble Supreme Court in the case of Suguali Sugar Works Pvt. Ltd. which is followed by the Hon'ble Delhi High Court in the case of CIT vs. Hotline Electronics Ltd. (Supra) is reproduced as under:
“ In our opinion, the interpretation placed by the Tribunal on Section 41 (1) of the Act is in conformity with the legal position that unless there is evidence to show that the creditor has remitted the debt or otherwise by operation of law the liability to pay him has ceased, there can be no benefit arising to the assessee within the meaning of clause (a) of Section 41 (1). The Tribunal is also right in its view that unless notices were issued to the creditors and they had stated that they have given up the claims against the assessee, no decision can be taken by the income tax authorities, merely on the ground that the debts remained unpaid in the assessee's books for a number of years, that the liability has ceased or has been remitted. In the present case the Assessing Officer has not issued "any notice to the creditors to confirm from them whether they have given up their dues from the assessee. It must be remembered that the debts were not written back in the assessee's accounts as found by the Tribunal. Except for the fact that the amounts were outstanding there was no material or evidence to show that there was remission or cessation of liability. It is the Assessing Officer who has invoked Section 41(1). It is he who has stated that there was a remission or cessation of the assessee's liability. It was, therefore, incumbent upon him to make inquiry and bring on record material. By virtue of the powers vested in him under Section 133(6) or any other provision of the Income Tax Act to seek clarification or confirmation from the creditors, the said material/evidence could have been ascertained. The assessee herein is a limited company and as per the legal position the acknowledgment of the liability in favour of the creditors in its balance sheet extends the period of limitation for the purpose of Section 18 of the Limitation
Act. It is the assessee's claim that the debts are subsisting and it continues to be liable to pay the creditors. It is not open to the income tax authorities to draw the conclusion that the creditors have remitted the liability or that the liability has otherwise ceased without evidence or material when the assessee acknowledges a liability in the balance sheet and Explanation-l is not applicable. In the present case, the liability to the creditors continues to be shown in the assessee's books of accounts and the accounts of the creditors have not been written back. This finding of fact by the Tribunal is not under challenge. " "In CIT v. Sugauli Sugar Works (P) Ltd.(1999) 236 ITR 518, the Supreme Court disapproved the reasoning of the Bombay High Court in CIT v. Bennett Coleman & Co. Ltd. (1993) 201 ITR 1021. In this judgment, the Bombay High Court had distinguished its earlier judgment in Kohinoor Mills Co. Ltd. v. CIT (1963) 49 ITR 578 by holding that cessation of liability can take place even as a result of an unilateral act and where a debt has become barred by limitation by operation of law, the unilateral act of the assessee transferring the same to his profit and loss account and thereby treating as his income would attract the provisions of Section 41(1) of the Act. The Bombay High Court had also observed that there was a cessation of the liability due to the expiry of period of limitation to enforce the same. Disapproving the line of reasoning of the Bombay High Court in CIT v. Bennett Coleman & Co. Ltd. (supra) the Supreme Court held as under:-"We are unable to accept the reasoning of the Bombay High Court in that case. Just because an assessee makes an entry in his books of account unilaterally, he cannot get rid of his liability. 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 the expiry of the normal period of limitation as provided in the Limitation Act. "
"It may be observed that in the present case, as noted earlier, the Assessing Officer has not brought on record any evidence or material, including any statement from the creditors, that the debts had been extinguished and the liability of the assessee to pay them has ceased, despite the extension of the period of limitation by acknowledgment made in the assessee's balance sheet.
Section 41(1) (a) cannot be invoked on these facts". 2.8 From the plain reading of section 41 it is clear that, following conditions should be fulfilled. d) It should have claimed the alleged amount as deduction in respect of loss, expenditure or trading liability in the assessment for any year; and e) It should have received 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; and f) That the liability has ceased to be' 'payable 2.9 The facts of the present case are that the' creditor has claimed the amount in its balance sheet and the confirmation was. also filed' along with the balance sheet before the A.O. The liability has also shown as outstanding in the balance sheet of the assessee and no party has written off of in the books of accounts. No doubt the liabilities outstanding since A.Y. 2001-02 and the assessee's son is a director in the company but these facts cannot overrule the conditions laid down in the provisions of section 41. Moreover, the appellant has also submitted that the liability has been repaid during the current year. Therefore, these three conditions that the assessee has not claimed this amount as deduction, secondly the liability has not ceased to exist and thirdly it is shown as payable & receivable respectively by both the parties. Thus none of the condition is fulfilled by the assessee. The facts of the present case are squarely covered by the decision of the Hon'ble Supreme Court and the Hon'ble Delhi High Court (Supra), therefore it is concluded that since the liability is outstanding in the balance sheet of both the parties and there is no information with the A.O. that any party has written it off in the books of accounts. Therefore merely on the basis of that the liabilities outstanding for the last 10 years and the assessee's son is a director in the company cannot be a reason for invoking the provision of section 41(1) of the LT. Act. Since both the parties are reflecting the entry in the balance sheet and moreover has been repaid in the current year, therefore the addition made by holding it as liability ceased to exist is not sustainable, hence deleted. Ground of appeal is allowed.”
On a careful reading of the ld. CIT(A)’s order, we find that neither of the parties have been reversed the entries in their books of account. None of the parties have written off the amounts in the books of account and it is also the fact that the assessee has not claimed this amount as deduction, the liability has not ceased to exist and this amount has been shown as payable and receivable by both the parties. It is the finding of the ld. CIT(A) that none of the conditions for invoking the provisions of section 41(1) have been established by the Assessing Officer. It is the finding of the ld. CIT(A) that simply because the liabilities are outstanding for more than 10 years and the assessee’s son is one of the Director’s of the recipient company, this cannot be a reason for invoking the provisions of section 41(1) of the Act. We endorse this view of the ld. CIT(A). Further, we find that the assessee also submitted that the liability has been discharged during the accounting year 2008-09. None of the above observations have been reverted by the Revenue. In these circumstances, we do not find any valid reason to interfere with the order of the ld. CIT(A), which is hereby confirmed and we dismiss the grounds of appeal of the Revenue.
In the result, appeal of the Revenue stands dismissed.
Order Pronounced in the open Court on 19th October, 2016