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Income Tax Appellate Tribunal, DELHI BENCH: ‘E’: NEW DELHI
Before: SHRI INTURI RAMA RAO & SHRI KULDIP SINGH
ORDER PER INTURI RAMA RAO, A.M.: The present appeal by the assessee is directed against the order of CIT(A), Ghaziabad, dated 06.08.2012 passed for the assessment year 2008-09. The assessee raised the following grounds of appeal: i. That the Hon'ble Commissioner of Income Tax (Appeals) has erred in law as much as on the facts of the case in sustaining the unwarranted addition made by the learned Assessing Officer of Rs.13,20,560/- to tax u/sec.
41. (1) of the Income Tax Act, 1961. ii. That the Hon'ble Commissioner of Income Tax (Appeals) has erred in law as much as on the facts of the case in not properly appreciating the difference between the cessation of the liability and the remission of liability. iii. That the Hon’ble Commissioner of Income Tax (Appeals) while sustaining the impugned addition of Rs.13,20,560/- to tax u/sec.
41. (1) of the Act, has held that it is a clear cut case of cessation of liabilities even if the assessee has not written back these balances, but he failed to bring on 2 record that the alleged cessation of liability of Rs.13,20,560/- was made during the year under appeal. In the absence of such positive findings and evidence on record, sustaining or addition u/sec. 41(1) of the Act in the year under appeal is totally invalid ill law. iv. That the Hon'ble Commissioner of Income Tax (Appeals) while sustaining the addition of Rs. 13,20,560/- u/sec. 41(1) of the Act has further erred in law as much as on the facts of the case in also not bringing on record that during the year under appeal the appellant has obtained whether in cash or in any manner whatsoever, any amount in respect of such loss or expenditure or such benefit in respect of such trading liability by way of remission or cessation thereof even not written off in the books of accounts. Without prejudice to the above, even if it is to be treated as deemed profit or gain, then it should have been taxed u/sec. 68 of the Income Tax Act, 1961 in the year when the liability was created. v. That the appellant assail her right to amend, alter, made addition in the above grounds of appeal with the permission of the Hon'ble Tribunal. The appellant accordingly humbly pray that the unwarranted impugned addition or Rs.13,20,560/- erroneously made by the learned Assessing Officer and also erroneously sustained by the Honble Commissioner of Income Tax (Appeals) may kindly be deleted after providing an opportunity of being hard to the appellant.
2. The brief facts of the case are that the assessee is an individual. The return of income for the assessment year 2008-09 was filed on 28th July, 2008, disclosing total income of Rs. 1,32,476/-. Subsequently, the case was taken for scrutiny assessment and the assessment was completed at a total income of Rs. 21,13,916/- vide order dated 20th December, 2010 passed under Section 143(3) of the Income-tax Act, 1961 (for short “the Act”). During the course of assessment proceedings, the Assessing Officer noticed that at the end of the accounting year, there were long outstanding current liabilities to the extent of Rs. 13,20,560/-. The Assessing Officer was of the opinion that these liabilities have been brought forward from the very old years and the liabilities ceased to exist and therefore he treated as a remission of trading liabilities and brought to 3 tax the same. Being aggrieved, an appeal was preferred before the ld. CIT(A), Ghaziabad, who vide order dated 06.08.2012, confirmed the addition by giving the following findings: “ In my view, if there is any case that liabilities have not ceased; then Section 41(1) should not be applied. But, in the present facts and circumstances, to reiterate, it is a clear-cut case of cessation of liabilities, on all practical yardsticks, even if the assessee has not written back these balances. So the facts and circumstances of this present case are distinguishable and it is imperative that section 41(1) is applied to these old balances being shown in the balance sheet but for which there is no identity of any creditor nor there are any claimants. These have been rightly taxed by the A.O. u/s 41(1) of the Act.” Being aggrieved, the assessee is before us with the present appeal.
The learned Authorized Representative submitted that the issue in appeal is covered by the decision of this Hon’ble Tribunal in the case of Perfect Paradise Emporium Pvt. Ltd. Vs. ITO, in for AY 2007-08, dated 22.04.2015.
On the other hand, ld. DR relied on the orders of the lower authorities.
We heard the rival submissions and perused the material on record. Undisputedly, the sundry creditors are being brought forward from the earlier years which means that the credits to the sundry creditors account was not made in the year under appeal. Even assuming that the sundry creditors are bogus and are not payable, the question of addition in the year under appeal does not arise as per the ratio laid down by this Hon’ble Tribunal in the case of Perfect Paradise Emporium Pvt. Ltd. Vs. ITO, in ITA No. 159/Del/2011, for AY 2007-08, dated 22.04.2015 to which the Accountant Member is the 4 author of the order. The Hon’ble Tribunal after reviewing several precedents on the issues, held as follows: “6. Having held that the sundry creditors are not payable and fictitious, the next question that comes up for our consideration is the year in which the amount is taxable under what provisions of law either under Section 41(1) or 68 of the Act. We are required to examine whether this amount should be brought to tax in the year in which credit was made first time in the books of account or in the year in which these are found not payable. An identical issue had come up for consideration before the Hon’ble Gujarat High Court in the case of CIT Vs Bhogilal Ramjibhai Atara in Tax Appeal No. 588 of 2013, dated 04.02.2013, in which it was held as under: “Section 41(1) of the Act as discussed in the above three decisions would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year relevant to the assessment year under consideration. In the present case, both elements are missing. There was nothing on record to suggest there was remission or cessation of liability that too during the previous year relevant to the assessment year 2007- 08 which was the year under consideration. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. The Assessing Officer undertook the exercise to verify the records of the so called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi- parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income under section 41(c) f the Act. This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of section 41(1) of the Act there is no cure for it.”
7. The Hon’ble Jurisdictional High Court in the case of CIT Vs. Shri Vardhman Overseas Ltd., (2012) 343 ITR 408 (Del.), has dealt with the issues of taxability under section 41(1) of the Act in a case where long outstanding sundry creditors were treated as taxable. The Hon’ble High Court after referring to the decisions of Hon’ble Supreme Court in the cases of CIT(Chief) Vs. Kesaria Tea Co. Ltd., (2002) 254 ITR 434(SC) and CIT Vs.
5 Sugauli Sugar Works P. Ltd., (1999) 236 ITR 518 (SC), has held that such amounts cannot be brought to tax under Section 41(1) of the Act. The Hon’ble Supreme Court in the case of CIT Vs. Sugauli Sugar Works P. Ltd. (supra) held 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.
Applying the ratio in the cases mentioned supra, we hold that the amount in question cannot be brought to tax in the year under appeal under the provisions of Section 41(1) of the Act. It is trite law that an addition under Section 68 can be made only in the year in which credit was made to the account of the creditors in the books of account maintained. Kindly refer to the Hon’ble Supreme Court in the case of Damodar Hansraj Vs. CIT, (1969) 71 ITR 427 (SC). Admittedly, in this case the credit to the account of creditors was made in the earlier years and therefore, the amount even cannot be brought to tax under Section 68 in the year under appeal. However, it is open to the Department to levy tax on such amount by resorting to the remedies available under the provisions of Act by duly following the procedure known to the law. This disposes of ground nos. 1 to 5.”
Applying ratio laid down in the above case, we delete the addition made by the Assessing Officer of Rs. 13,20,560/- and allow the appeal filed by the assessee.
In the result, the appeal of the assessee is allowed. The decision is pronounced in the open court on 14th October, 2015.