ITO 16(1)(3), MUMBAI vs. PUKHRAJ S. JAIN, MUMBAI

During hearing of this appeal Ld. DR Shri Pradeep K Singh, advanced his arguments which are identical to the ground raised by contending that provisions of section 41(1) of the Act was rightly invoked by the Assessing Officer and also the Ld. Commissioner of Income Tax (Appeals) admitted additional evidence, without providing sufficient opportunity to the Assessing Officer, thus, it is violation of Rule 46A of the Rules. On the other hand, Shri Piyush Chaturvedi, Ld. Counsel for the assessee defended the conclusion arrived at in the impugned order.

We have considered the rival submissions and perused the material available on record. Facts in brief are that the assessee is engaged in the business of Ferrous and non Ferrous metals, declared total income of Rs. 32,799/- in its return of income filed on 30.09.2010, which was completed on 21.03.2013, determining total income at Rs. 1,81,72,450/, u/s 143(3) of the Act. During assessment proceedings, the Assessing Officer asked the assessee to furnish the details of sundry creditors which were outstanding for more than three years. The assessee vide letter dated 7.12.2012, 10.01.2013 and 21st Jan 2013 furnished the details. After going through these letters, the Assessing Officer asked the assessee as to why the liabilities of overseas creditors, which are continuously outstanding, should not be taxed as income of the assessee as per the 3 Shri Pukhraj S. Jain 41(1) of the Act. The explanation of the assessee was that the due to financial constraints the assessee could not pay the said sums to the overseas parties. However, periodical payments to such parties were made from time to time. The assessee also opposed invoking section 41(1) of the Act on the plea that merely because period of limitation has already expired, it cannot be invoked as the limitation period only prevents the creditors from enforcing – against the assessee. The assessee also explained before the Assessing Officer that for the last four to five years the financial position of the assessee is bad and the assessee has also started repaying the creditors from subsequent assessment years. However, the Assessing Officer, not satisfied with the explanation of the assessee, invoked the provisions of section 41(1) of the Act.

On appeal, before the Ld. Commissioner of Income Tax (Appeals), the facts were examined and following the various decisions from Hon’ble Jurisdictional High Courts and Apex Court decided in favour of the assessee by holding that the addition made by the Assessing Officer was not justified. The Revenue is aggrieved and is in appeal before this Tribunal.

If observation made in the assessment order, conclusion drawn in the impugned order, material available on record, and the assertions made by the Ld. respective Counsels, if, kept in juxtaposition and analyzed. We note that the Ld. Assessing Officer made the addition to the total income as he found that there were huge sundry creditors outstanding for 4 Shri Pukhraj S. Jain a substantial period of almost more than three years and that too to the overseas party. There is no dispute to the fact that the assessee furnished the details as called for and explained the reason of non-payment/part payment or delay which was claimed to be due to losses in the business. The assessee also explained as to why the provisions of section 41(1) of the Act should not be imposed. We find that major import from the overseas parties was during financial year 2007-08, during which the sales turnover of the assessee was Rs. 16.93 crores and out of that sales proceeds (sundry debtors) was to be recovered only Rs. 1.19 crore. In subsequent year ( A.Y. 2009-10), the assessees showed sundry creditors of Rs. 3.10 crores and the sale proceeds to be recovered were only to the tune of Rs. 27.89 lacs. During the year, the assessee had only business of Rs. 1.12 crores and the sale proceeds to be recovered was only Rs. 11.24 lacs only. It clarify the position of the assessee that to clear off the liabilities, no current asset had left with the assessee. It is also noted that before the Ld. First Appellate Authority, the assessee filed additional evidence, containing 36 pages (including invoices, debit vouchers, direct invoice of import, direct remittance of HDFC Bank for US dollars in respect of five parties to whom the payments were due for many years) under rule 46A of the Rules, which was duly forwarded for the comments, objections and report from the Assessing Officer. This additional evidence was duly sent to the Assessing Officer who vide report dated 22.01.2014 was duly considered. The assessee also filed rejoinder to the report, which has been 5 Shri Pukhraj S. Jain 10 onwards of the impugned order, therefore, not repeated in this order, being matter of record. Thus, so far as the contention of the Ld. DR that there is a violation of Rule 46A of the Rules, is concerned, we find no such violation as the opportunity was granted to the Assessing Officer and in-turn, duly report was sent. Even otherwise, as per the provisions of the Act, the Ld. First Appellate Authority is entitled to admit additional evidence and further to decide in accordance with law. Our view is fortified by the decision and ratio laid down therein in CIT Vs. Ranjit Kumar Choudhary 288 ITR 179 (Gauhati) and Byramji & Company Vs. CIT 11 ITR 286 (Nagpur), CIT Vs. P.S. Jain & Company Ltd 322 ITR 320 (Del.), Smt. Prabhavati S. Shah Vs. CIT 231 ITR 1 (Bom.)

So far as invoking section 41 of the Act is concerned. The assessee has explained the reasons for making the payments which were on account of lack of funds and further the assessee established that the creditors to the tune of Rs. 1.54 crores out of Rs. 1.79 crores were actually paid in later years and further demonstrated that the liability has never ceased. In view of this factual position, we are satisfied with the conclusion drawn by the Ld. Commissioner of Income Tax (Appeals) that invocation of section 41(1) was merely based on arbitrary decision of the Ld. Assessing Officer. Our view finds support from the decision in CIT Vs. Jain Exports Pvt. Ltd., from Hon’ble Delhi High Court (ITA No. 235/2013) order dated 24.05.2013, wherein, the decision from Hon’ble Apex 6 Shri Pukhraj S. Jain Court in Sugauli Sugar Works Pvt. ltd. 236 ITR 518 (SC), Bombay Dying & Mfg. Ltd. Vs. State AIR 1958 (SC) 328 and J.K. Chemicals Vs. CIT 62 ITR 34 (Bom.) were duly considered. The provision and invocation of section 41 (1) has been duly explained by Hon’ble Apex Court in Sugauli Sugar Works Ltd. (supra). The crux of the aforesaid decision is that cessation of liability may occur either by the reason of liability becoming unenforceable in law by the creditor coupled with debtor declaring his/their intention not to owner his liability or by a contract between the parties or by discharge of the debt. We note that the Ld. Assessing Officer invoked the provisions of section 41(1) by adding a sum being aggregates of amounts, shown as payable, to various sundry creditors as income u/s 41(1). The Ld. Assessing Officer came to a particular conclusion only on the premise that since the outstanding balances remained static, in the books of the assessee, for several years, therefore, there was no possibility of any claim being made by the creditors, therefore, he added to the income of the assessee. We further note that the genuineness of the transactions entered in the books has not been questioned by the Assessing Officer herself. For invoking the provisions of section 41, there should be an irrevocable cessation of liability without any possibility of being revived. In the present appeal, the assessee having acknowledges liability successively over the years reflected in his books as payable, therefore, we find no infirmity in the conclusion of the Ld. Commissioner of Income Tax (Appeals), therefore, his stand is affirmed.