Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R.K. PANDA & SHRI S.S. GODARA
आदेश / ORDER PER S.S. GODARA, JM :
This Revenue’s appeal for AY 2018-19 arises against the NFAC, Delhi’s order dated 31.05.2023 passed in case No. ITBA/NFAC/S/ 250/2023-24/1053345968(1) in proceedings under Section 250 of the Income Tax Act, 1961, in short ‘the Act’.
This Revenue’s appeal raises the following substantive grounds: “1. On the facts and the circumstances and in law, the Ld.CIT(A) erred in allowing the appeal of the assessee on the issue of unproved creditors, despite failure on the part of the assessee in providing complete details in this aspect during the course of assessment proceeding before the Assessing Officer.
Indus Biotech Pvt. Ltd.
On the facts and the circumstances and in law, the Ld.CIT(A) erred in facts of the case that the Assessing Officer has made addition u/s.41(1) of the Act, when clearly in para 3 of the assessment order u/s 143(3) r.w.s. 144B of the Act dtd. 20.04.2021, the Assessing Officer has made his intentions clear about the impugned addition being made on account of non substantiation by the assessee of the identity, creditworthiness & genuineness of the creditors in its books of accounts.
On the facts and the circumstances and in law, the Ld.CIT(A) erred on the facts of the case that addition was made by the Assessing Officer u/s 41(1) of the Act and therefore, the ld.CIT(A) has failed to deliberate on the three key parameters required to be substantiated by the assessee with respect to sundry creditors in its books of accounts viz. identity, creditworthiness & genuineness.
On the facts and the circumstances and in law, the Ld. CIT(A) erred in law by not providing an opportunity to the Assessing Officer to investigate additional evidences submitted by the assessee during the course of appellate proceedings by calling for a remand report in this regard.”
Both the learned representatives next invited our attention to the CIT(A)/NFAC’s relevant detailed discussion reversing the Assessing Officer’s assessment findings, adding sundry credits of Rs.3,92,87,487/- in his assessment order dated 20.04.2021, as under :
“6.1 Facts of the case: The facts of the case are outlined in para 2a to 2d of this order. The undersigned has gone through the assessment order and written submissions filed by appellant. The GOA No.1 is discussed and decided in subsequent paras of this order.
7.1 Finding on ground of appeal no. 1 a) In this GOA the appellant has contended that AO erred in making addition of Sundry Creditors of Rs.3,92,87,487/- as unproved Sundry Creditors. The AO has not mentioned sec. 41(1) of Act while making the said addition. As a fact, the addition on account of unproved Sundry Creditors has to be made u/s 41(1) of Act by holding that existence of liabilities is not proved. b) The gist of addition made by AO as unproved Sundry Creditors of Rs.3,92,87,487/- is outlined in para 2c and 2d of this order. c) i) AO has made the addition of unproved Sundry Creditors for the reason that Appellant filed details of Sundry Creditors on 09.04.2021 so he did not have any time to make verification of genuineness of Creditors. AO simply added the closing balance of S. Creditors as on 31.03.2018 to total income. AO has not even specified the relevant section of the Act under which the said addition was made. ii) On other hand the Appellant contended that delay was due to the worldwide Covid Pandemic. On 09.04.2021 the Appellant filed following details: • List of S. Creditors with names and amount due • PAN of S. Creditors • Ledger a/cs of high value S. Creditors As per Appellant, the AO had time till 30.04.2021 to make verification and pass the order u/s.143(3). Due date of passing order was extended up to 30.04.2021 vide notification of CBDT dated 27.02.2021. It was further extended to 30.06.2021 and then to 30.09.2021. Thus, as per appellant the AO had sufficient time to pass the order u/s.143(3) after making verification. iii) As per Appellant these S. Creditors are genuine trade payables and corresponding amounts were paid off in subsequent AY's. In majority of cases of these S. Creditors the outstanding payment was made in the subsequent AY only. These payments substantiate the fact that these S. Creditors are genuine. iv) The outstanding balance as on 31.03.2018 includes the balance payable from previous years as well. v) Appellant contended that he provided the names, Pan, total amount due and ledger accounts of these S. Creditors before the AO vide submission dated 09.04.2021. All transactions are through banking channels. Hence, the appellant proved the identity, creditworthiness and genuineness of transaction before the AO. There was no incriminating evidence before the AO to prove that these S. Creditors are bogus. vi) Appellant relied on judgement in case of Smt. Sudha Loyalka Vs. ITO (2018) 97 taxmann.com 303 where the AO added the closing balance (credit) as on 31.03.2012. It was held that non- mentioning of precise provision of law makes the impugned addition bad in law, Apart from above the Appellant also relied on • Steel and Geneva Mills Co. Ltd. Vs. CIT (1974) 96 ITR 438(Del) • Ambica Mills Ltd. Vs. CIT (1964) 54 ITR 167(Guj)
Appellant held that AO passed the order without any application of mind and without providing any basis for making addition of Outstanding Creditors to total income of Appellant.
7.2 a) The issue of Remission or cessation of a trading liability i.e. applicability of clause (a) of subsection (1) of section 41 of the Act has been discussed and decided in detail by Hon'ble Delhi High Court in CIT- II vs. Shri Vardhman Overseas Ltd for AY 2002-03 vide order dated 23.12.2011. The relevant part of the judgement is reproduced as under:
"12. That takes us to the next question as to what constitutes remission or cessation of the liability. It cannot be disputed that the words remission // and cessation // are legal terms and have to be interpreted accordingly. In State of Madras v. Gannon Dunkerley & Co., AIR 1958, SC 560, Venkatarama Aiyyar J. explained the general rule of construction that words used in statutes must be taken in their legal sense and observed: The ratio of the rule of interpretation that words of legal import occurring in a statute should be construed in their legal sense is that those words have, in law, acquired a definite and precise sense and that, accordingly, the legislation must be taken to have intended that they should be understood in that sense. In interpreting an expression used in a legal sense, therefore, we have only to ascertain the precise connotation which it possesses in law //. In our opinion, this rule should be applied to the interpretation and understanding of the words remission and cessation // used in the section.
In Bombay Dyeing & Manufacturing Co. Ltd. v. State of Bombay, AIR 1958 SC 328, the legal position was summarized by T.L.Venkatarama Aiyar, J., in the following manner:-
-It has been already mentioned that when a debt becomes time- barred, it does not become extinguished but only unenforceable in a Court of law. Indeed, it is on that footing that there can be statutory transfer of the debts due to the employees, and that is how the Board gets title to them. If then a debt subsists even after it is barred by limitation, the employer does not get, in law, a discharge therefrom. The modes in which an obligation under a contract becomes discharged are well-defined, and the bar of limitation is - At Common Law lapse of time does not affect contractual rights. Such a right is of a permanent and indestructible character, unless either from the nature of the contract, or from its terms, it be limited in point of duration.
But though the right possesses this permanent character, the remedies arising from its violation are withdrawn after a certain lapse of time; interest reipublicaeutsifinislitium. The remedies are barred, though the right is not extinguished.// And if the law requires that a debtor should get a discharge before he can be compelled to pay, that requirement is not satisfied if he is merely told that requirement is the normal course he is not likely to be exposed to action by the creditor.//(underlining ours) This was also the view taken by the Supreme Court in CIT v. Sugauli Sugar Works (P) Ltd. (supra).
Since the Tribunal has relied on the judgment of the Supreme Court in the case of CIT v. Sugauli Sugar Works (P) Ltd. (supra) we may usefully refer to the decision in order to appreciate the controversy therein and the ratio laid down. That was a case of a private limited company. In respect of the assessment year 1965-66, it transferred a sum of 3,45,000/- from the suspense account running from 1946-47 to 1948-49 to the capital reserve account. The Income Tax Officer found that a sum of 1,29,000/- out of the above amount repayment deposits and advances which were paid back by the assessee. He, therefore, deducted this amount from the amount of 3,45,000/- and the balance of 2,56,529/- was brought to assessment under Section 41(1) of the Act. The assessee appealed unsuccessfully to the Appellate Assistant Commissioner and thereafter carried the matter in further appeal to the Tribunal. Its contention before the Tribunal was that the unilateral entry of transferring the amount from the suspense account to the capital reserve account would not bring the said amount within Section 41(1). The contention was accepted by the Tribunal whose decision was affirmed by the Calcutta High Court [reported as CIT v. Sugauli Sugar Works (P) Ltd. (1983) 140 ITR 286]. The revenue carried the matter in the appeal to the Supreme Court. The contention of the revenue (as noted at page 520 of 236 ITR) was that on the facts of the case, the liability came to an end as a period of more than 20 years had elapsed and the creditors had not taken any steps to recover the amount and consequently there was a cessation of the debt which would bring the matter within the scope Indus Biotech Pvt. Ltd. of Section 41(1). It may be noted that the contention of the revenue in the case before us is precisely the same. To recapitulate, the learned standing counsel contended before us that since a period of more than 4 years has admittedly elapsed from the debt on which the debts were incurred and since the creditors had not taken any steps to recover the amount, there was a cessation of the debts which brought the matter under Section 41(1). Turning back to the judgment of the Supreme Court, we find that the judgment of the Calcutta High Court under appeal was affirmed for two reasons. The first reason was based on a judgment of the Full Bench of the Gujarat High Court in Commissioner of Income-Tax v. Bharat Iron and Steel Industries (1993) 199 ITR 67. It was held by the Supreme Court that the Gujarat High Court was right in saying that in order to attract taxability under Section 41(1) the assessee should have obtained, whether in cash or in any other manner whatsoever, any amount in respect of the loss or expenditure earlier allowed as a deduction. This part of the reasoning, in the light of the amended clause(a) of sub-section (1) of Section 41 may not be relevant after substitution of the said clause by the Finance Act, 1992 with effect from 1st April, 1993, by which the words -some benefit in respect of such trading liability by way of remission or cessation thereof were inserted. After the amendment, therefore, it is not necessary that in respect of a trading liability earlier allowed as a deduction, the assessee should have received any amount, in cash or otherwise, but it is necessary that the assessee should have received some benefit // in respect of such trading liability. However, we have already seen that this benefit in respect of trading liability should be - by way of remission or cessation of the liability, after the amendment made to the clause with effect from 1st April, 1993. The second part of the reasoning of the Supreme Court in CIT v. Sugauli Sugar Works (P) Ltd. (supra) is based on the interpretation of the words -cessation or remission //of the trading liability. The Supreme Court noticed a judgment of the Bombay High Court in J.K. Chemicals Ltd. v. CIT (1966) 62 ITR 34 in which it was explained as to what could bring out a cessation or remission of the assessee's liability. The observations of the Bombay High Court in the judgment cited above are as under:-
The question to be considered is whether the transfer of these entries brings about a remission or cessation of its liability.
The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by his own unilateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor. It is not in dispute, and it indeed cannot be disputed, that it is not a case of Indus Biotech Pvt. Ltd. remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the operation of law, i.e., on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor, or a contract between the parties, or by discharge of the debt -the debtor making payment thereof to his creditor. Transfer of an entry is neither an agreement between the parties nor payment of the liability. We have already held in Kohinoor Mills' case [1963] 49 ITR 578 (Bom) that the mere fact of the expiry of the period of limitation to enforce it, does not by itself constitute cessation of the liability. In the instant case, the liability being one relating to wages, salaries and bonus due by an employer to his employees in an industry, the provisions of the Industrial Disputes Act also are attracted and for the recovery of the dues from the employer, under section 33C(2) of the Industrial Disputes Act, no bar of limitation comes in the way of the employees.
The Supreme Court noticed that the above observations of the Bombay High Court were quoted by the Calcutta High Court in the judgment under appeal before them, and observed as under while upholding the judgment of the Calcutta High Court:
-This judgment has been quoted by the High Court in the present case and followed. We have no hesitation to say that the reasoning is correct and we agree with the same. To reinforce the conclusion, the Supreme Court also noticed its earlier judgment in Bombay Dyeing and Manufacturing Company Ltd. v. State of Bombay AIR 1958 SC 328 wherein it was held that the expiry of the period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt.
In our opinion, the judgment of the Supreme Court in CIT v. Sugauli Sugar Works (P) Ltd. (supra) is a complete answer to the contention of the learned standing counsel. In the case before the Supreme Court for a period of almost 20 years the liability remained unpaid and this fact formed the basis of the contention of the revenue before the Supreme Court to the effect that having regard to the long lapse of time and in the absence of any steps taken by the creditors to recover the amount, it must be held that there was a cessation of the debts bringing the case within the scope of Section 41(1). In the case before us, the identical contention has been taken on behalf of the revenue, though the period for which the amount remained unpaid to the creditors is Indus Biotech Pvt. Ltd. much less. It was held by the Supreme Court 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".
b) From the ratio laid down in the aforesaid decision, I am of the view that there is nothing on record to show any cessation or remission of liability by the creditors or even an unilateral act by the appellant in this regard. c) This issue of remission or cessation of liability has been discussed and decided in detail by Hon'ble Karnataka High Court in CIT vs. Alvares and Thomas (2016) reported in 394 ITR 647 (Karnataka). The relevant part is reproduced as under:
"7. As in the above referred order of the Tribunal, the relevant portion of section 41 is reproduced, we may not reproduced the same. But the relevant aspect is that there are two requirements for invoking the provision of section 41. The Sina qua non is the remission or cessation of the trading liability and the additional requirement is, some benefit in respect of such trade liability is taken by the assessee. If the aforesaid conditions are satisfied, then only section 41(1) could be invoked by the AO.
Examining of the facts of the present case reveals that, it is not the case of the Department that, any benefit in respect of such trading liability was taken by the assessee but, the Revenue contends that since the burden was not discharged of existence of the liability, it be treated as cessation of the liability and therefore, section 41(1) could be invoked. Further, stand of the Revenue is that, when in respect of debt in question, confirmation was called for, a letter was produced of the creditors with its address but, when the same was verified, the report was that, party could not be traced and therefore, it was not verifiable.
In our view, even if we accept the contention of the Revenue that the party could not be traced and therefore debt could not be verified than also, by no stretch of imagination can it be held that is would satisfy the requirement of cessation of liability. In legal parlance, merely because the creditor could not be traced on the date when the verification was made, same is not a ground to conclude that there was cessation of the liability. Cessation of the Indus Biotech Pvt. Ltd. liability has to be cessation in law, of the debt to be paid by the assessee to the creditor. The debit is recoverable even if the creditors has expired, by the legal heirs of the deceased creditor. Under the circumstances, in the present case, it can hardly be said that the liability had ceased. If the liability had not ceased or the benefit was not taken by the assessee in respect of such trade liability, in our view, the conditions precedent were not satisfied for invoking section 41(1) of the Act in the instant case.
The Tribunal has rightly relied upon the decision of Delhi High Court in case of Vardhman Overseas Ltd. The discussion of the decision of Delhi High Court was relevant, for consideration of the facts of the case in order to find out as to under what circumstances it could be said that there is cessation of liability. Further, the decision of Delhi High Court is after considering the view taken by the Apex Court in case of CIT vs. Sugauli Sugar Pvt. Ltd. (1999) 236 ITR 518 (SC)."
d) This issue was also decided by Hon'ble Karnataka High Court in case of PCIT vs. Ramgopal Minerals (2017) reported in 394 ITR 696 (Kar.). The relevant part of judgement is as under:
"8. We are satisfied that the judgment relied upon by the learned counsel for the respondent-assessee in the present case applies to the facts of the present case on all fours. We are further of the opinion that the burden lies upon the Revenue to establish, before applying Section 41(1) of the Act, to make additions or disallow the deduction under Section 41(1) of the Act to establish that the liability of the respondent-assessee towards such creditors has ceased in law or so has been remitted by the creditors finally".
8.1 There is no evidence that the liability has ceased to exist and that too in the year under appeal. The very fact these amounts are being shown as payable in the balance sheet of the appellant go to establish that there was no cessation of the liability. Impugned liabilities are very much payable by the appellant and these are bound to be shown as outstanding. The very fact that these liabilities are appearing in the balance sheet is a strong acknowledgement of the debts payable by the appellant as has been held in the case of CIT vs Tamilnadu Warehousing Corporation 292 ITR 310 (Mad). It has also been held in the case of Ambica Mills Ltd vs CIT 54 ITR 167 (Guj) that liability shown in the balance sheet is a clear case of acknowledging the liability and such liability cannot be treated to have ceased so as to attract section 41(1). That being so, where is the question of holding the said liabilities as ceased to exist, more so when appellant itself is acknowledging the liabilities to be paid. Reliance is also placed on the decision of Sita Devi Juneja 325 ITR 593(P&H).
8.2 It is settled law by number of decisions including the decision of the Hon'ble Apex Court in the case of Sugauli Sugar Works vs CIT 236 ITR 518 (SC) that the cessation of the liability can be done not by the unilateral act but it can certainly be so by the bilateral act. So long as the appellant is recognizing its liability to pay to these creditors, then it cannot be held that these liabilities cease to exist. 8.3 Section 41(1) of the Act is a deeming fiction according to which an amount which does not have any trace of income is treated as income. Therefore, as per the established canons of law, the burden to prove that a particular amount falls within the four corners of section 41(1) is on the shoulder of the Assessing Officer. The first pre-requisite for the applicability of section 41(1) is there must be a trading liability in respect of which the deduction has been claimed and allowed and burden to prove the twin conditions to the effect of the above facts, it goes without saying, is on revenue. There is not even an iota of whisper as to whether the impugned creditors were in respect of trading liability for which any deduction was ever claimed and allowed and if allowed, in which year was it allowed so on so forth. This is evident from a plain reading of the assessment order. There could very well be the possibility of the loan creditors or advances from the business constituents under the head of sundry creditors for which there could never be any claim of deduction having been allowed. The A.O. has not established with evidence that the liability in respect of the above outstanding balances has ceased to exist. Section 41(1) does not envisage any such presumption of cessation and fix the incidence of tax thereon. In the absence of any material having been brought on record to establish that the deduction was claimed or credit balance has been remitted, addition cannot be made u/s 41 (1) in view of the following decisions: • Steel and General Mills Co. Ltd vs CIT 96 ITR 438 (Del) • CIT vs Nathubhai Desha Bhai 130 ITR 238 (MP) • Liquidator, Mysore Agencies P Ltd vs CIT 114 ITR 853(Karn) • K.V. MoosaKoya & Co vs CIT 175 ITR 120,124 (Ker) • CIT vs Pranlal P Doshi 201 ITR 756 (Guj)
8.4 The third burden which was on A.O. was to establish that cessation if at all has happened, has happened in the year under appeal. After all, liability to tax can be fixed in the year to which it pertains and to no other year. Merely because A.O. chose to enquire about the creditors in this year and if assessee fails to establish the existence of the liability in this year (even if it is so assumed) then also it cannot be said that the liability ceased to exist only in this year and not before. a. It is not clear that appellant had claimed deduction towards these liabilities. The other dispute is whether the same can be brought to tax u/s 41(1) of the Act on account of cessation of liabilities or unexplained liabilities as done by the AO. b. The appellant has not written back these creditors in P & L account liabilities not payable. Thus, there is no unilateral write back of the creditors to the P & L account by the appellant. This leads to conclusion that that these liabilities have not ceased to exist. The appellant has acknowledged his debt by accepting these sundry creditors liability to be discharged in future. Hence, there cannot be any cessation of liability as on 31.03.2018. c. To invoke the provisions of section 41(1) there should be a clear finding that these liabilities had ceased to exist as on 31.03.2018. No such finding has been recorded by the AO. In absence of such a finding, the invocation of provisions of section 41(1) of the Act as deemed income does not arise in the hands of appellant. d. The appellant has not obtained any benefit in respect of these liabilities and has duly acknowledged the debt payable to these parties in the books of accounts. e. Thus, in the present case the AO has not discharged the onus cast on him to establish that liability of appellant towards creditors has ceased in law and some benefit in respect of such liability has been taken by the appellant or so has been remitted to the creditor finally. The AO has not brought any finding to show that the said creditors are fake or incorrect. f. Thus, conditions precedents were not satisfied for invoking section 41(1) of the Act in this case. g. Without prejudice to above, the non-mentioning of the precise provision i.e. Sec 41(1) of the Act while making addition makes the said addition as bad in law in view of the judgment in the case of Smt. Sudha Loyalka vs. ITO (2018) 97 taxmann.com 303. In this case the AO added the closing balance of Sundry Creditors as on 31.03.2018 to total income without mentioning the precise provision of law. In the said judgement, the impugned addition was held as bad in law due to non-mentioning of precise provision by the AO.
Indus Biotech Pvt. Ltd. 10.1 In view of the above facts and discussion and respectfully following the judgements outlined in Paras 7.2 to 9 of this order the addition of Rs.3,92,87,487/- made by the AO as unproved creditors is hereby deleted. Ground of appeal no. 1 is allowed.”
4. We have given our thoughtful consideration to vehement rival submissions against and in support of the NFAC’s foregoing lower appellate discussion. Mr. Murkunde vehemently argued inter alia that not only the learned NFAC herein has erred in law and on facts in deleting section 41(1) addition which was infact made u/s.68 of the Act as unexplained cash credits but also he failed to comply with Rule 46A of the Income-tax Rules, 1962 in admitting the additional evidence submitted by the taxpayer, thereby not seeking the Assessing Officer’s remand report. His further case is that the assessee had not filed any details proving genuineness of the impugned sundry creditors which made the Assessing Officer to treat the said sum as lacking genuineness, followed addition u/s.68 of the Act.
5. The assessee on the other hand has filed its twin paper books wherein the former one contains 177 pages comprising of all the factual details followed by a catena of case law in the latter one that section 41(1) cessation of liability addition is not warranted in such an instance.
We have considered the foregoing vehement rival submissions and find no merit in Revenue’s arguments. It emerges from the assessment discussion in paragraphs 2 to 5 that the Assessing Officer had held the assessee not to have proved identity, creditworthiness and genuineness despite availing various opportunities. He therefore concluded in para 5 of the impugned credits lacked genuineness which inturn, represented the assessee’s sundry credits only, in the regular course of business. Learned departmental representative could hardly dispute the clinching fact Indus Biotech Pvt. Ltd. emerging from the assessee’s paper book that it had duly filed all the relevant details of the said sundry credits which also had been having opening balances as well as settlement(s) finalized in the relevant previous year and afterwards.
Sofaras the Revenue’s endeavour to invoke section 68 herein is concerned, we do not find any discussion in the assessment order as to how the assessee’s relevant details had failed to discharge its onus even if it is presumed that this not an instance of cessation of liability u/s.41(1) of the Act. We conclude in these peculiar facts and circumstances that be it section 41(1) cessation of liability addition or that section 68 unexplained cash credits, the learned Assessing Officer could not have made the impugned addition in assessee’s hands on both counts. Rejected accordingly.
This Revenue’s appeal is dismissed.
Order pronounced in the Open Court on 22nd October, 2024.
Sd/- Sd/- (R.K. PANDA) (S.S. GODARA) VICE PRESIDENT JUDICIAL MEMBER पुणे Pune; �दनांक Dated : 22nd October, 2024 Satish