Case Law Details
ITO Vs Issan Overseas Pvt Ltd (ITAT Ahmedabad)
The Income Tax Appellate Tribunal (ITAT), Ahmedabad, partly allowed the Revenue’s appeal concerning Assessment Year 2014-15. The dispute arose from proceedings initiated following investigations into transactions conducted on the National Spot Exchange Ltd. (NSEL) platform. The assessee had originally filed a return declaring a loss of ₹5,00,031. However, the Assessing Officer completed the assessment under Sections 144 read with 153C of the Income-tax Act, determining income at ₹4,22,50,296. This included a protective addition of ₹2,73,63,612, an addition of ₹1,43,86,653 under Section 41(1) relating to alleged cessation of liabilities, and disallowance of the claimed loss.
The Commissioner of Income-tax (Appeals) [CIT(A)] had deleted the protective addition after noting that a substantive addition covering the same amount had already been confirmed in the hands of another taxpayer. According to the CIT(A), sustaining the protective addition in the assessee’s hands would amount to double addition. The CIT(A) also deleted the addition under Section 41(1), observing that the liabilities continued to appear in the books of account and that recovery proceedings initiated by creditors indicated that the liabilities had not ceased. However, the CIT(A) upheld the disallowance of the assessee’s loss claim on the ground that the transactions were found to be merely paper transactions.
Before the Tribunal, the Revenue argued that the protective addition should not have been deleted because the substantive addition had not attained finality and remained under challenge. It also contended that liabilities outstanding for several years justified invocation of Section 41(1).
The assessee submitted that deletion of the protective addition was justified because the same amount had already been considered elsewhere, and retaining both additions would result in double taxation. Regarding Section 41(1), the assessee relied on evidence showing that the liabilities were continuously reflected in its books and remained the subject of active recovery proceedings.
The Tribunal held that the CIT(A) was not justified in deleting the protective addition. Since the corresponding substantive addition had not yet attained finality, removal of the protective addition at that stage was considered premature. Accordingly, the Tribunal restored the protective addition of ₹2,73,63,612 made by the Assessing Officer.
On the issue of Section 41(1), the Tribunal upheld the CIT(A)’s order deleting the addition of ₹1,43,86,653. It noted that the liabilities were consistently reflected in the books and that documentary evidence, including recovery proceedings and proceedings before authorities constituted pursuant to directions of the Supreme Court, demonstrated that creditors continued to pursue recovery. As there was no evidence of remission or cessation of liability during the relevant year, the provisions of Section 41(1) were held to be inapplicable.
As a result, the Revenue’s appeal was partly allowed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal has been filed by the Revenue against the order dated 29.08.2019 passed by the Learned Commissioner of Income-tax (Appeals)-11, Ahmedabad (hereinafter referred to as the “Ld. CIT(A)” for short), under Section 250 of the Income-tax Act, 1961 (hereinafter referred to as the “Act” for short) for Assessment Year 2014-15.
2. The Revenue has raised the following grounds of appeal:
1. The Ld. CIT(A) erred in law by deleting the protective addition solely relying on the decision in substantive addition when the issue of substantive addition has not attained finally and is being contested by the assessee before ITAT.
2. The Ld. CIT(A) erred in law and on fact by deleting the addition u/s. 41(1) of the Act.”
3. The brief facts of the case are that a survey u/s 133A of the Act was carried out on 22.08.2013 in the case of M/s Swastik Overseas Corporation based on information received from the Investigation Wing, Mumbai regarding irregularities in transactions conducted on the platform of National Spot Exchange Ltd. (NSEL). Subsequently, a search u/s 132 of the Act was carried out on 03.09.2013 in the group cases. Consequent to the search, proceedings u/s 153C were initiated in the case of the assessee. The Assessing Officer issued notices u/s 143(2) and 142(1) of the Act. The assessee filed its return of income u/s 139(1) declaring a loss of Rs.5,00,031/-. Thereafter, the assessment was completed u/s 144 r.w.s 153C on 18.03.2026 determining total income at Rs.4,22,50,296/- as against the total loss of Rs.5,00,031/-. The addition of Rs.2,73,63,612/- was made on protective basis on the allegation that the assessee had received funds routed through M/s Swastik Overseas Corporation as part of the NSEL transactions. An addition of Rs.1,43,86,653/- was also made u/s 41(1) of the Act, treating certain outstanding liabilities as ceased. The loss claimed by the assessee was also disallowed.
4. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the Ld. CIT(A). The Ld. CIT(A), after considering the submissions and material on record, deleted the protective addition of Rs.2,73,63,612/- observing that the substantive addition has already been confirmed in the hands of Smt. Falguni R. Mehta and therefore sustaining the protective addition would amount to double addition. The Ld. CIT(A) also deleted the addition made u/s 41(1) of the act, holding that the liabilities were still shown as liability in the books of accounts and there was no cessation. The Ld. CIT(A), however, confirmed the disallowance of loss of Rs.5,00,031/- as the assessee was found to be involved only in paper transactions. The relevant observations made by the Ld. CIT(A) in this regard are reproduced hereunder:-
“5 Submission of the appellant and the assessment order has been carefully considered. The First ground of appeal is against the additions of Rs. 2,73,63,612/-made by the AO on protective basis considering the transactions of the appellant as non-genuine. The AO made substantive additions of the same amount in the hands of Smt Falguni R. Mehta Prop of M/s Swastik Overseas Corporation. During the course of appellate proceedings, the AR of the appellant vide letter dated 28.8.2019 submitted that the CIT(A)-7, Ahmedabad has decided appeal in the case of Smt. Falguni R. Mehta for AY 2014-15 vide order dated 31.07.2019. In the aforesaid appeal order, the CIT(A)-7, Ahmedabad has confirmed additions of Rs 97,83,77,378/- made in the hands of Smt. Falguni R Mehta on substantive basis. The order of the CIT(A)-7, Ahmedabad is placed on record and it is found that additions on substantive basis has been confirmed in the hands of Smt. Falguni R. Mehta. The additions of Rs 2,73,63,612/- made by the AO in the hands of the appellant on protective basis is part of the substantive additions made in the hands of Smt. Falguni R. Mehta and same have been confirmed in her hands, therefore, the protective additions in the hands of the appellant are nothing but double additions Therefore, the additions made by the AO amounting to Rs 2,73,63,612/- on protective basis are deleted. This ground of appeal is allowed.
6. The next ground of appeal is against the additions of Rs. 1,43,86,653/-made by the AO considering cessation of liability u/s 41(1)(a) of the Act. The AO stated that the appellant has shown credit balance from Vishal Export Overseas Ltd for Rs. 1,18,86,213/- and Vishal Plastomer P Ltd for Rs.2500440/- since FY 2007-08 As these payments are outstanding for more than 7 years, the AD considered it as cessation of liability and made the additions u/s 41(1)(a) of the Act. The appellant contended that there is no cessation of liability because there is litigation going on in the judicial Court by both the parties before the Chief Judicial Magistrate, Mirzapur, Ahmedabad The appellant further contended that these liabilites are being shown in the regular books of accounts of the appellant continuously, hence, it cannot be said as cessation of liability. The appellant cited several binding case laws in support of these contentions Keeping in view the facts of the case that both the creditors have filed the case against the appellant for recovery of dues and the amount is still shown as liability in the books of accounts of the appellant and as decided by the several higher judicial authorities which are binding upon the undersigned, this is not a case of cessation of liability which can be added u/s.41(1)(a) of the Act. Hence, the additions of Rs 1,43,86,653/- made by the AO are deleted. This ground of appeal is allowed.
7. The next ground of appeal is against the disallowance of loss of Rs 5,00,031/- as claimed by the appellant. The AO disallowed this loss as the appellant has been found involved only in paper transactions, hence, the loss disallowed by the AO is found justified. Therefore, the additions made by the AO are confirmed. This ground of appeal is dismissed.
5. Aggrieved by the relief granted by the Ld. CIT(A), the Revenue is now in appeal before us.
6. Before us, the Ld. DR supported the assessment order and submitted that the Ld. CIT(A) erred in deleting the protective addition despite the fact that the substantive addition has not attained finality. It was contended that the assessee was one of the beneficiaries of funds routed through M/s Swastik Overseas Corporation in the NSEL transactions and, therefore, the protective addition was rightly made to safeguard the interest of the Revenue. On the issue of section 41(1), the Ld. DR submitted that the liabilities were outstanding for several years without any movement, justifying the addition.
7. The Ld. AR, on the other hand, supported the order of the Ld. CIT(A) and submitted that the impugned amount represents genuine business transactions duly recorded in the books and supported by evidences. The Ld. AR submitted that the addition would result in double taxation as the same amount has been considered in the hands of Smt. Falguni R. Mehta. With respect to section 41(1) of the Act, The Ld. AR submitted that the liabilities are continuously shown in the books and subject to ongoing litigation, and hence there is no cessation of liability.
8. The Ld. AR also submitted that during the course of hearing on 25.02.2026, the Bench had permitted the assessee to file additional evidences in support of its contentions. Pursuant thereto, the assessee has placed on record copies of recovery proceedings initiated by Vishal Exports against the assessee, including proceedings before the Debt Recovery Tribunal, to demonstrate that the liabilities are actively pursued by the creditors. It was submitted that these documents clearly establish that there is no cessation or remission of liability under section 41(1) of the Act. The Ld. AR further submitted that, in respect of the outstanding balance pertaining to M/s Swastik Overseas Corporation (proprietor Smt. Falguni R. Mehta), the Bench had specifically inquired about recovery proceedings against the assessee. In response, the assessee has filed a copy of the order dated 25.06.2022 passed by the Supreme Court Committee, constituted pursuant to directions of the Hon’ble Supreme Court in W.P.(C) No. 995/2019, wherein the name of the assessee appears as a judgment debtor. It was contended that this also evidences that recovery proceedings are ongoing and the liability continues to subsist.
9. We have heard the submissions of both the parties and perused the material available on record including the assessment order, the order of the Ld. CIT(A) and order dated 25.06.2022 passed by the Supreme Court Committee, constituted pursuant to directions of the Hon’ble Supreme Court in W.P.(C) No. 995/2019.
9.1 Protective Addition of Rs.2,73,63,612/-
It is an admitted position that the addition in question was made on a protective basis in the hands of the assessee, whereas a substantive addition of the same nature was made in the hands of Smt. Falguni R. Mehta. The Ld. CIT(A) deleted the protective addition on the ground that the substantive addition stood confirmed at the first appellate stage. Upon careful consideration of the facts and material available on record, we find that the Ld. CIT(A) was not justified in deleting the protective addition of Rs.2,73,63,612/-. The said addition was made to safeguard the interest of the Revenue in view of the substantive addition made in the connected case, which has admittedly not yet attained finality. In such circumstances, deletion of the protective addition at this stage is premature. Accordingly, the order of the Ld. CIT(A) on this issue is set aside and the addition made by the Assessing Officer is restored.
In view of the above, ground of appeal raised by the Revenue on this issue, i.e. Ground No.1, is allowed.
9.2 Addition under Section 41(1) of the Act – Rs 1,43,86,653/-
So far as the addition of Rs.1,43,86,653/- u/s 41(1) is concerned, we find that the liabilities have been consistently reflected in the books of account and the assessee has also placed on record evidences demonstrating that recovery proceedings have been initiated by the concerned creditors. Before us, the assessee has filed additional evidences, including recovery proceedings initiated by Vishal Exports Overseas Ltd against Issan Overseas Ltd, DRT recovery records wherein Issan Overseas Ltd is a party and Order dated 25.06.2022 passed by the Supreme Court Committee, constituted by the order dated 04.05.2022 of the Hon’ble Supreme Court in W.P.(C) No. 995/2019, wherein Issan Overseas Pvt. Ltd. is specifically named as a judgment debtor. The above evidences clearly establish that the recovery proceedings are ongoing and no waiver, remission, or cessation has occurred. These facts clearly establish that the liabilities are subsisting and have neither been remitted nor ceased during the year under consideration. In absence of any material indicating cessation or remission, the provisions of section 41(1) of the Act are not attracted. We, therefore, find no infirmity in the order of the Ld. CIT(A) in deleting the said addition, which is hereby upheld.
Ground of appeal raised by the Revenue on this issue, i.e. Ground No.2, is thus dismissed.
10. In the result, the appeal of the Revenue is partly allowed.
Order pronounced in the open Court on 29.04.2026.
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