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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI C.N. PRASAD & SHRI RAJESH KUMAR
PER C.N. PRASAD, JM: These two appeals by the Revenue are filed against the very orders of the Ld. CIT(A)-21, Mumbai dated 23.06.2011 pertaining to assessment years 2006-07 & 2008-09. 2. The common ground in both these appeals of the Revenue is that the Ld. CIT(A) erred in holding that the provisions of Sec. 41(1) of the Act are not applicable in respect of the amount payable by the assessee company to 5 creditors.
The Assessing Officer while completing the assessment made addition of Rs. 1,10,40,890/- and Rs. 32,68,454/- for the assessment years 2006-07 and 2008-09 respectively u/s. 41(1) of the Act treating the same as cessation of liability. The AO stated that sundry creditors as on 31.3.2005 which stood at Rs. 2,92,71,073 as against Rs. 2,65,48,762/- as on 31.3.2004 and no details of the sundry creditors were available on record. He was also of the view that debtors as on 1.4.2005 amounted to Rs. 2,12,36,856/- got reduced to Rs. 80,05,080/- as on 31.3.2006 and this shows that the assessee collected its dues from the debtors and at the same time not made any payments to the creditors. Therefore, he inferred that either the creditors have ceased to exist or the corresponding payments are no more payable, therefore, he brought to tax the said amount as cessation of liability u/s. 41(1) of the Act.
On appeal , the Ld. CIT(A) deleted the addition stating that the assessee has furnished all details in respect of the creditors and the inferences drawn by the AO that since assessee was able to realize from debtors and no payment was made to creditors and thus creditors are not in existence is not correct.
The Ld. Departmental Representative vehemently supports the orders of the AO in treating the balance of sundry creditors as income u/s. 41(1) of the Act as cessation of liability.
The Ld. Counsel for the assessee strongly supports the orders of the Ld. CIT(A). He further placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT Vs Sugauli Sugar Works (P) Ltd., 236 ITR 518 and submits that the Hon’ble Supreme Court held treated as income/cessation of liability u/s. 41(1) of the Act. He also placed reliance in the case of CIT Vs Indian Rayon & Industries Ltd. 38 DTR 313 (Bom).
Heard both sides, perused the orders of the lower authorities and the case laws relied on by the Ld. Counsel. It is the contention of the AO that assessee has not furnished any details in respect of sundry creditors and therefore he came to the conclusion that creditors are not in existence and made addition u/s. 41(1) of the Act. It was the submission of the assessee that complete details were furnished in respect of the creditors by letter dated 5.11.2008 and therefore there is no justification in stating that no details were furnished. The Ld. CIT(A) deleted the addition observing that the assessee has furnished all the details and the AO failed to prove that the liability in respect of the trade creditors ceased to exist. He further held that simply because the assessee has realized amount from debtors and no payment was made to the creditors, it cannot be inferred that creditors are ceased to exist.
We agree with the findings of the Ld. CIT(A). The Hon’ble (supra) held that mere unilateral entry made by the assessee in accounts, there is no cessation of liability. In the case on hand, the assessee has not even written back the creditors in its accounts. The Hon’ble Bombay High Court in the case of Indian Rayon & Industries (supra) held that there is no remission or cessation of liability within the meaning of Sec. 41(1) of the Act on unilateral entry of write back of the unclaimed credit balances by the assessee. In view of the above, we hold that the addition made by the AO u/s. 41(1) of the Act is to be deleted. Thus, we affirm the order of the Ld. CIT(A) on this issue.
The next issue in the appeal of the Revenue for assessment year 2008-09 is that the Ld. CIT(A) erred in deleting the addition of Rs. 1 crore made towards decrease in stock.
The brief facts are that the assessee which is engaged in the business of exports of shoes and readymade garments reported sales in its profit and loss account at Rs. 7,76,000/-. The AO noted that there is decrease in stock of Rs. 1,15,00,000/- during this assessment year. The assessee was required to explain why the stock got reduced to the extent of Rs. 1.15 crores and sales are only Rs. 7,76,000/-.
The assessee submitted that stock of shoes were damaged and not in a condition to sell in the market due to heavy rains in July, 2005, the stock dumped in water and the same was not in a position to sell in the market. It was submitted that the entire business activity was closed down in the earlier financial year and also the Delhi office which the prime place for this market and there was no option left but to dispose of entire stock in one lot. Therefore in this financial year in the month of May, 2007, entire stock was sold at a lumpsum price of Rs. 7.78 lacs only to M/s. Susen, M.G. Road, Bhavnagar. However, the AO rejecting the submissions of the assessee brought to tax at Rs. 1 crore towards decrease on stock.
On appeal, the Ld. CIT(A) deleted the disallowance against which the Revenue is in appeal.
The Ld. DR vehemently supports the orders of the AO in making disallowance towards decrease in stock.
The Ld. Counsel for the assessee while supporting the orders of the Ld. CIT(A) reiterating the submissions made before him submits that the disallowance may be deleted.
Heard both sides, perused the orders of the lower authorities. This aspect of the matter has been considered by the Ld. CIT(A) with reference to the averments of the AO and submissions of the assessee and deleted the disallowance holding as under:
“During appellate proceedings, the appellant explained that during July 2005, there was heavy downpour in Mumbai and not only the stock of shoes of the appellant stored in Bhiwandi godown was damaged heavily and goods have to be sold as slump sale to the party in Gujarut. The stock was lying for 3 years almost and it became un salable to sell and as damaged goods were disposed off for negligible amount for Rs.7,78,000/-. These details were filed before AO. It was further explained that the sales in the year 2006-07, i.e. prior to the year under consideration, it had to sell the stock at throw away price to reduce loss which was evident from the statement of sales. The appellant further explained that the fact of heavy loss due to heavy rains of 25th July 2005, in its godown in Bhiwandi, had also been explained to the Sales Tax authorities which had been accepted by them. The appellant filed a copy of order u/s.29(8) of Maharashtra Value Added Tax Act dated 21.04.2009 in support of its claim of heavy loss due to rains and consequently suffering of heavy loss. The appellant requested that the disallowance made by AO should be deleted.
I have considered the facts of the case. The appellant has claimed reduction in stock on account of damage of stock in the heavy rains and selling of' goods on minimal prices. The fact of loss to appellant on account of heavy rains occurred in Mumbai, in July 2005, and consequently damage of appellant's stock was also subject matter of appeals of earlier years. In A.Y. 2006-07, the appellant's claim of gross loss of Rs.8.25 crore was disallowed by the AO. In appeal order, the disallowance made by AO was deleted. The Sales Tax Authorities have also considered the effect of heavy rains of 2005, on appellant's business and loss to the appellant in their sales tax assessment order. It has been mentioned in such sales tax assessment order that the Insurance Company also rejected the appellant's claim and the dealer (appellant] closed down its business. In the facts and circumstances, the appellant's claim of selling the stock at throwaway price appears to be convincing. Moreover, the AO has not brought on record any evidence that the appellant sold the stock outside the books of accounts. In the facts and circumstances, there was no case for rejecting the appellant’s claim. The disallowance made by AO is therefore, deleted. This ground of appeal is allowed.”
On going through the order of the Ld. CIT(A) and the observations thereon, we do not find any valid reason to interfere with the findings of the Ld. CIT(A). The Revenue could rebut the findings with evidence. Therefore, we sustain the order of the Ld. CIT(A) on this issue.
In the result, the appeals filed by the Revenue are dismissed.
Order pronounced in the open court on 10th February, 2016. (RAJESH KUMAR) (C.N. PRASAD ) लेखा सद"य / ACCOUNTANT MEMBER "या"यक सद"य/JUDICIAL MEMBER मुंबई Mumbai; "दनांक Dated :10th February, 2016 व."न.स./ Rj , Sr. PS आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : अपीलाथ" / The Appellant
""यथ" / The Respondent. 2. आयकर आयु"त(अपील) / The CIT(A)- 3. आयकर आयु"त / CIT
"वभागीय ""त"न"ध, आयकर अपील"य अ"धकरण, 5. मुंबई / DR, ITAT, Mumbai गाड" फाईल / Guard file. 6. आदेशानुसार/ BY ORDER, स"या"पत ""त //// उप/सहायक पंजीकार (Dy./Asstt.