Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI ABRAHAM P. GEORGE
Per N.V. Vasudevan, Judicial Member
This is an appeal by the Revenue against the order dated 14.8.2013 of the CIT(Appeals), Mysore relating to assessment year 2010-11.
In this appeal, the Revenue has challenged the order of CIT(Appeals), whereby he deleted the addition made by the Assessing Officer Rs.81,40,232. The sum of Rs.81,40,232/- represents liability of the Assessee to M/S.Durga Traders to the Assessee. This was shown as sundry creditors in the balance sheet. It is not dispute that none of the transactions with the creditor took place during the previous year. In other words, the balances were opening balances of the earlier financial years and no balance arose out of the transactions during the previous year.
The AO called upon the Assessee to furnish confirmation from M/S.Durga Traders. The assessee gave confirmations from the creditor dated 14.3.2012. The address of M/s.Durga Traders as given in the confirmation was Shop No.1/2, Gurukrupa Housing Complex, Cutinho Road, Karwar-581 301. The AO on 7.8.2012 issued a commission u/s.131(1)(d)of the Act to the ITO, Ward-1, Karwar, to examine the creditor. The ITO, Ward-1, Karwar reported that on enquiry no concern/enterprise by name M/S.Durga Traders existed at the address given and hence no enquiry could be carried out.
The AO informed the assessee about the non-availability of M/s.
Durga Traders at the given address. The AO also informed the assessee that in the given circumstances, it could be presumed that liability of the assessee to pay M/s. Durga Traders ceased to exist and therefore the said outstanding amount should not be brought to tax, treating it as a benefit received by the assessee on cessation of liability u/s. 41(1) of the Act.
The assessee submitted before the AO that in the year 2010, there was a ban on iron ore transaction because of which iron ore industry had come to a standstill. It was therefore possible that M/s. Durga Traders had shifted their office from the given address and moved to some other address. The assessee pleaded its inability to give the correct address.
The AO, however, was of the view that there was a cessation of liability and he brought the amount in question to tax u/s. 41(1) of the Act. The following were the relevant observations of the AO:-
“5.4 It is seen from the records that the liability against the name of M/s Durga Traders in the form of sundry creditors to the extent of Rs. 81,40,232/- is appearing in the books of the assessee for the last 7 to 8 years. The assessee has not produced any proof to show that M/s Durga Traders has insisted on the payment at any point of time during assessment proceedings or initiated any legal action against the assessee. Though the amount is outstanding for quite a long time, there is no interest charged on the amount by M/s Durga Traders. It was also ascertained that M/s Durga Traders was a proprietorship and it is, therefore, inexplicable as to how an individual ran his business despite having such a huge amount payable to him over such a long period of time. 5.5 In view of the above factual position, it is abundantly clear that the liability claim of the assessee towards M/s Durga Traders amounting to Rs. 81,40,232/- does not exist and the liability is treated as cessassion of liability u/s 41(1) of the Income Tax Act and accordingly, the same is brought to tax.”
On appeal by the assessee, the CIT(Appeals) held that if the original transaction was doubted by the AO, then the addition ought to have been made for the relevant assessment year. He was of the view that since there was no transaction during the previous year, no addition could be made in A.Y. 2010-11 on the ground that the transaction giving rise to liability of the assessee was itself not genuine. The CIT(A) on the question of applicability of section 41(1) of the Act, was of the view that just because liability was more than 7 years old, that cannot be the basis to conclude that liability of the assessee ceased to exist. In coming to the aforesaid conclusion, the CIT(A) placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT v. Sugauli Sugar Works Pvt. Ltd., 236 ITR 518 (SC). The CIT(A) finally concluded that there was no evidence on record to show that there was cessation of liability and therefore addition u/s. 41(1) could be sustained.
Aggrieved by the order of CIT(A), The Revenue has preferred the present appeal before the Tribunal.
We have heard the submissions of the ld. counsel for the assessee and the ld. DR. The submission of the ld. counsel for the assessee was that addition u/s. 68 of the Act could not be made because, admittedly, the credits in question did not relate to the previous year relevant to AY 2009-
10. In this regard, the fact that the creditors did not have any transactions during the relevant previous year is admitted by the AO in para 2 of the assessment order. According to him, therefore the provisions of section 68 will not be attracted. The ld. counsel thereafter drew our attention to the decision of the Hon’ble Delhi High Court in CIT v. Sri Vardhaman Overseas Ltd., dated 23.12.2011 343 ITR 408 (Del), wherein on identical facts, the Hon’ble High Court held that neither section 68 nor section 41(1) of the Act would be attracted. In this regard, we have already observed that neither the order of the AO nor the order of CIT(A) is clear as to whether the impugned addition is being made u/s. 68 or 41(1) of the Act. U/s. 41(1) of the Act, if there is a cessation of liability of the assessee, then the same should be brought to tax, subject to other requirements to be satisfied u/s. 41(1). On the question of cessation of liability, ld. counsel for the assessee submitted that there is no evidence brought on record to show that liability of the assessee vis-à-vis creditors has ceased to exist. It was therefore submitted by the ld. counsel for the assessee that the impugned additions cannot be sustained in law and the same will have to be deleted.
The ld. DR, on the order, placed reliance on the orders of the Revenue authorities.
We have given a careful consideration to the rival submissions. On almost identical facts, the Hon’ble Delhi High Court in the case of Shri Vardhaman Overseas Ltd. (supra), has clearly laid down that neither section 41(1) nor section 68 of the Act can be applied. On the applicability of section 68, we are of the view that those provisions will not apply as the balances shown in the creditors account do not arise out of any transaction during the previous year relevant to AY 2009-10. The provisions of sec. 68 are clear inasmuch as they refer to “sum found credited in the books of account of an assessee maintained for any previous year”. Since the credit entries in question do not relate to previous year relevant to AY 2009-10, the same cannot be brought to tax u/s. 68 of the Act. The proper course in such cases for the Revenue would be to find out the year in which the credits in question were credited in the books of account and thereafter make an enquiry in that year and make an addition in that year, if other conditions for applicability of section 68 are satisfied.
As far as applicability of section 41(1) of the Act is concerned, the question before us is limited to the applicability of Section 41(1) of the Act. The section in so far as it is relevant for our purpose is as below:
“Profits chargeable to tax. 41. (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 that 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 xx xx xx xx xxxx xx xx xxxx xx xx [Explanation 1 — For the purposes of this sub-section, the expression ―loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.” (underlining ours)
13. Explanation 1 which was inserted w.e.f. 1.4.1997 is not attracted to the present case since there was no writing off of the liability to pay the sundry creditors in the assessee’s accounts. The question has to be considered de hors Explanation 1 to Section 41(1). In order to invoke clause (a) of Sec.41(1) of the Act, it must be first established that the assessee had obtained some benefit in respect of the trading liability which was earlier allowed as a deduction. There is no dispute in the present case that the amounts due to the sundry creditors had been allowed in the earlier assessment years as purchase price in computing the business income of the assessee. The second question is whether by not paying them for a period of four years and above the assessee had obtained some benefit in respect of the trading liability allowed in the earlier years. The words “remission” and “cessation” are legal terms and have to be interpreted accordingly. In the present case, there is nothing on record to show that there was either remission or cessation of liability of the assessee. In fact, there is no reference either in the order of the AO or CIT(A) to the expression “remission or cessation of liability”. In such circumstances, we are of the view that the provisions of section 41(1) of the Act could not be invoked by the Revenue. In fact the decision of the Hon’ble Delhi High Court in the case of Vardhaman overseas Ltd. (supra) clearly supports the plea of the Assessee in this regard. On identical facts, the Hon’ble Delhi High Court on the applicability of Sec.41(1) of the Act, held:-
“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 vs. 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 & Mfg. Co. Ltd. vs. 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 not one of them. The following passages in Anson’s Law of Contract, 19th Edition, p. 383, are directly in point : "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 reipublicaeut si finis litium. 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, italicised in print, ours) This was also the view taken by the Supreme Court in CIT vs. Sugauli Sugar Works (P) Ltd. (supra).
Since the Tribunal has relied on the judgment of the Supreme Court in the case of CIT vs. 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 asst. yr. 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 ITO found that a sum of 1,29,000 out of the above amount repaymented 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 s. 41(1) of the Act. The assessee appealed unsuccessfully to the AAC 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 s. 41(1). The contention was accepted by the Tribunal whose decision was affirmed by the Calcutta High Court CIT vs. Sugauli Sugar Works (P) Ltd. (1981) 23 CTR (Cal) 226 : (1983) 140 ITR 286 (Cal). The Revenue carried the matter in the appeal to the Supreme Court. The contention of the Revenue (as noted at p. 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 of s. 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 s. 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 CIT vs. Bharat Iron & Steel Industries (1992) 105 CTR (Guj)(FB) 331 : (1993) 199 ITR 67 (Guj)(FB). It was held by the Supreme Court that the Gujarat High Court was right in saying that in order to attract taxability under s. 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 cl. (a) of sub-s. (1) of s. 41 may not be relevant after substitution of the said clause by the Finance Act, 1992 w.e.f. 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 w.e.f. 1st April, 1993. The second part of the reasoning of the Supreme Court in CIT vs. 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. vs. CIT (1996) 62 ITR 34 (Bom) 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 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 Co. Ltd. vs. CIT (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 s. 33C(2) of the Industrial Disputes Act, no bar of limitation comes in the way of the employees."
15. 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 & Mfg. Co. Ltd. vs. 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 vs. 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 s. 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 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.”
14. From the ratio laid down in the aforesaid decision, we are of the view that there is nothing on record to show any cessation or remission of liability by the creditor or even an unilateral act by the Assessee in this regard. In view of the above, we are of the view that the impugned addition cannot be sustained and the same was rightly directed to be deleted by the CIT(A). The order of the CIT(A) is therefore confirmed.
The learned DR placed reliance on a decision of the ITAT Mumbai in the case of ITO Vs. Shri Shailesh D.Shah order dated 11.12.2013. We have perused the said decision and we find that was a case where the liability in question was outstanding labour charges in the case of an Assessee engaged in the business of civil construction. The Tribunal followed the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Chipsoft Technology Pvt.Ltd. 210 Taxman 173 (Delhi) wherein the Hon’ble Delhi High Court on the facts of that case where the outstanding liability was wages of workman, expressed the view that it was illogical that wages of workman would remain unpaid for a long duration of time and therefore held that the liability should be considered as having ceased. The present case is a case of trading liability, which cannot stand on the same footing as due to workman. We are therefore of the view that the decision relied upon by the learned counsel for the Revenue would not be of any assistance to the plea of the Revenue.
16. The appeal of the revenue is accordingly dismissed.
Pronounced in the open court on this 14th day of August, 2015.