ITO 13(2)(3), MUMBAI vs. PARESH CHEMICALS, MUMBAI

सुनवाई क� तार�ख / : 05.7.2016 Date of Hearing घोषणा क� तार�ख / : 15.7.2016 Date of Pronouncement आदेश / O R D E R Per Sanjay Arora, A. M.: This is an Appeal by the Revenue directed against the Order by the Commissioner of Income Tax (Appeals)-24, Mumbai (‘CIT(A)’ for short) dated 19.3.2014, allowing the assessee’s appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the assessment year (A.Y.) 2008-09 vide order dated 28.12.2010.

(A.Y. 2008-09) ITO vs. Paresh Chemicals 2. None appeared for and on behalf of the assessee respondent when the appeal was called out for hearing. There being similarly no representation by the assessee on the earlier dates (of hearing) as well, the Bench had directed service of notice of hearing through the ld. Departmental Representative (DR). Even this has not, however, yielded any positive result in-as-much as there is no proof of service on record, with the ld. DR also being unable to state if the said service could be effected, which the non service being, as it appears, on account of change of address. Under the circumstances, we only consider it proper to dispose the Revenue’s appeal ex parte the assessee, i.e., on merits, on the basis of the material on record and after hearing the party before us.

Credit Balance of Kochi Refineries Ltd. in the books of the assessee as at 31/3/2008 92,35,837/- Add: Delayed payment charges debited by M/s. Kochi Refineries Ltd. but not accounted by the assessee during f.y. 2006-07 4,01,871/- 96,37,708/- (A.Y. 2008-09) ITO vs. Paresh Chemicals Less: 1. Bank guarantee en-cashed & credited by Kochi Refineries Ltd. but not considered by the assessee (evidenced by copy of bank advices) 53,33,000 2. Pay orders directly deposited by third parties with Kochi Refineries Ltd. & which were credited by M/s. Kochi Refineries Ltd. to the account of the assessee, however, no corresponding entry was passed by the assessee (evidenced by copy of ledger accounts) 31,42,505 [(1) + (2)] 84,72,505 Debit Balance as per Kochi Refineries Ltd. confirmation (96,37,708 – 84,72,505) 11,65,203 The issue, however, is not of any unexplained difference in account, which the ld. CIT(A) has confused it as. Section 41(1) gets attracted on the cumulative satisfaction of two events, i.e.:

(a) cessation of trading liability (in respect of which the assessee had at any time in the past claimed and been allowed deduction); and (b) any benefit (in cash or in kind) stands obtained by the assessee on account of the said cessation.

In the instant case, the credit of KRL in the assessee’s accounts is a trade liability qua which it has, by way of purchase cost of goods (toluene), secured deduction in the computation of its’ business income. The actual liability thereto as at 31.3.2008 is Rs.7,63,332/- (i.e., Rs.11,65,203 – as per the accounts of KRL (–) Rs.4,01,871, not accounted for by the assessee). There is, thus, an admitted cessation of trading liability to the extent of Rs.84,72,505/- (Rs. 92,35,837 - Rs.7,63,332). The first limb of section 41(1) is thus satisfied. Where the discharge of liability is recorded in the assessee’s books of account, the source thereof, recorded therein, can be ascertained with reference thereto, and explanation qua the same, where and to the extent deemed necessary, sought. In the instant case, however, the discharge having not been (A.Y. 2008-09) ITO vs. Paresh Chemicals recorded in the assessee’s accounts, it was incumbent to inquire about the source of the said discharge, so as to ascertain if any benefit has inured to the assessee, and if there is thus a case for application for section 41(1) to any extent. This, latter, aspect has not been enquired into by the ld. CIT(A); he resting content with an explanation with regard to and on being satisfied of there being no unexplained difference (between the two parties) in the amount standing per their respective accounts as on 31.3.2008, i.e., out of the total credit of Rs.92.36 lacs reflected in the assessee’s books of account as on that date. That, rather, confirms of their being a cessation of liability (for Rs.84.73 lacs), one of the ingredients for the invocation of section 41(1), so that the same ought to have been followed by an enquiry qua the second aspect thereof. This is more so as the non-passing of the entries by the assessee is itself quizzical, with the ld. CIT(A) himself recording (at para 3.4.4 of his order) of it being inexplicable as to why the assessee, supplying goods through M/s. Jay Pee Trading Co., with which it shared common business premises, had not passed the necessary entries in its books of account. What would be, or could be, those entries, we need not speculate at this stage, depend as it would on the facts and circumstances of the case – the sources where-from the liability – to that extent, stands discharged. The fallacy in the approach of the ld. CIT(A) gets reflected in his stating that either the assessee or someone else on his behalf had paid the balance amount (Rs.84.73 lacs). If the assessee has paid the amount, he should state so, along with the sources wherefrom the payment stands made, and as regards someone else, why, we wonder, would someone pay on the assessee’s behalf. Then, again, who is this ‘someone else’? The Revenue’s case, rather, could not be limited to the application or otherwise of section 41(1), and may well extend to any of the other provision/s, as where it finds, as a result of its’ enquiries, any undisclosed assets with the assessee; its’ purview being the assessment of total income. Coming to the facts of the case, Rs.31.42 lacs has been explained as paid directly by a trade debtor, M/s. Ash Chemicals, to whom goods were sold. The debit (A.Y. 2008-09) ITO vs. Paresh Chemicals balance of the said firm in the assessee’s books of account, arising out of the sales thereto, would therefore stand to be reduced to that extent. What are those sale bills/invoices? Do they stand accounted for in the assessee’s accounts? If so, is the amount sufficient to absorb the said reduction, and does the reduced balance agree with that as per the books of the said party? Where so, the source of payment, ascribed to the said party, gets fully explained with reference to the assessee’s accounts, so that all that was required is a passing of a journal entry adjusting the account of the debtor and the creditor to that extent (Rs.31,42,505), non-passing of which can by no means be regarded as fatal. As regards the payment by bank on the invocation of bank guarantee issued by the assessee in its’ favour by KRL, surely the bank would not pay without securing itself, paying presumably only out of funds made available by the assessee thereto, or the like. Bank-guarantee is an off-balance sheet item, with the assessee’s accounts not reflecting its’ invocation, or payment thus, only whereupon could the source thereof be known. Is it that the bank has released a line of credit in the assessee’s favour? Or is it that the assessee has placed funds at the disposal of the bank, to be so applied in case of such a contingency (i.e., of non-payment). The source of payment of Rs.53.33 lacs is completely unexplained, and which would therefore also require being examined, necessitating a remission to the A.O. Finally, we may consider the last component of the impugned sum of Rs. 92.36 lacs, i.e., the ‘balance’ outstanding as at the year-end, or Rs.7.63 lacs, reflected, again, as a liability in the assessee’s accounts, which corresponds with the accounts of the creditor. Though, therefore, prima facie suggestive or indicative of a liability, that by itself could not be conclusive of the matter, particularly considering that we have found the assessee’s books of account as not reflecting the actual state of affairs. Similarly, the non write off of the debt by KRL, which may be hopeful of recovery, would also not conclude or be determinative of the matter. The principal question, despite legal obligation, i.e., assuming so, is: Does the assessee intend of pay the same? Going by the assessee’s conduct, it does not. Or else it would not have stopped (A.Y. 2008-09) ITO vs. Paresh Chemicals paying KRL, which appears to be for long, compelling it to charge delayed payment charges and, finally, invoke the bank guarantee in its’ favour. A good part of the amount outstanding stands paid directly by a customer. Why? The supplier (KRL), it needs to be borne in mind, is selling a licensed item (through registered dealers), and recovers, as a matter of policy, payment of goods in advance (refer Ground # 2 before the ld. CIT(A), reproduced at pg. 1 of the impugned order), i.e., does not extend any credit to its’ customers. It is for these reasons that we regard the establishment of intent by the assessee as relevant; the creditor having already, as it appears, exhausted the bank guarantee issued in its’ favour. How would the assessee establish its intent to pay the said amount, as implied by its’ holding out the same as a subsisting liability, we cannot predicate, being in fact a matter of evidence. Does the company have any means to recover except, of course, by initiating a legal process? Has it done so at any time? When does the same get barred by time? Has any part of liability been discharged subsequent to 31.3.2008? These and other related questions arise, on the basis of answers to all of which only would it be possible to say if there has occurred, or not so, a cessation of liability qua the said balance amount of Rs.7.63 lacs, i.e., as on 31.3.2008.