Case Law Details
Brief of the Case
ITAT Jaipur held In the case of M/s Brothers Pharma Pvt. Ltd. vs. ITO that the case laws referred by the CIT (A) are squarely distinguishable on the ground that there was a written off either by the assessee or bilaterally, but in the given case no such w/off has been made by the party nor it was agreed between the parties. A bare reading of Section 41(1) makes it clear that the underlying idea behind introduction of this provision is that the legislature wanted to tax the amount of deductions/allowances which an assessee had already taken/allowed in the earlier years but the liability relating thereto was not discharged. However, in case of loan taken, there is no question of the appellant having taken the advantage of any deduction/allowance in the past inasmuch as it was not at all an expenditure claimed and allowed in the earlier years. Hence no addition u/s 41(1) is sustainable.
Facts of the Case
Addition on account of cessation of liability U/s 41(1)
The Assessing Officer observed that the assessee had shown number of outstanding since long, therefore, he asked to file the confirmation during the course of assessment proceedings. Assessee submitted confirmations received till date and confirmed that some balance have already w/off and some balance related to security deposits and remaining confirmation will be submitted as soon as possible. After considering the assessee’s reply the Assessing Officer held that he issued notice U/s 133(6) to M/s Healmen Pharmaceuticals, which has been returned back with postal remark “Firm Closed hence returned”. Therefore, the claim of the assessee was not verifiable. The entries subsequently written off during F.Y. 2008-09 has been excluded.
As far as other creditors are concerned the assessee had failed to submit confirmation from these persons, even their addresses were not provided by the assessee so that verification could be made by the Assessing Officer himself. The assessee had not paid above amounts which clearly indicate the cessation of above liability and thus provisions of Section 41(1) is clearly attracted in the case of assessee. He further held that outstanding liability already allowed in earlier year, therefore, in absence of any evidence/document/material/correspondence from the assessee’s side to prove that the claimed liabilities were still subsisting. Accordingly, he treated Rs. 9,41,353.99 as income of the assessee.
As far as issue of security deposit is concerned, he held that the assessee failed to submit copy of agreement with these persons; therefore, terms of security deposits were uncertain able. The assessee failed to furnish addresses of these persons. Therefore, the security deposits to the tune of Rs. 3,60,000/- has been treated as income U/s 41(1).
As far as claim of assessee regarding unsecured loans is concerned, the same is verifiable from past records of assessee that the money was received by them from those persons but it is not verifiable that whether these were unsecured loans or advance against supply of medicines. The assessee had not furnished name and address of the cash creditors during the assessment proceedings. The assessee failed to furnish confirmation from these persons. The assessee had not paid any interest on these amounts. Therefore, he presumed that these amounts were received by the assessee for supply of medicines but no medicine was supplied by the assessee. Hence, money became assessee’s own money. Therefore, he made addition of Rs. 18,05,000/- U/s 41(1)(a. Thus, total addition of was made at Rs. 31,06,335.99.
Contention of the Assessee
Addition on account of cessation of liability U/s 41(1)
The ld counsel of the assessee submitted that such type of credit balances does not fall u/s 41(1). It is undisputed fact that these amounts were unsecured loan in the nature of cash credit as contemplated U/s 68. A bare reading of Section 41(1) makes it clear that the underlying idea behind introduction of this provision is that the legislature wanted to tax the amount of deductions/allowances which an assessee had already taken/allowed in the earlier years but the liability relating thereto was not discharged or in other words, was not paid. However, in case of loan taken, there is no question of the appellant having taken the advantage of any deduction/allowance in the past inasmuch as it was not at all an expenditure claimed and allowed in the earlier years. These loans were taken in A.Y. 1999 and assessment year 2000-01 was scrutinized U/s 143(3) vide order dated 25/3/2003.The Assessing Officer had not made any addition u/s 68 in scrutiny assessment. Meaning thereby there was no doubt on the fact of genuineness of these loans.
It is a trite law that there has to be a bilateral waiver meaning thereby, there has to be a specific and admitted position of fact from the side of the debtors and the creditors that they have reached a common consensus of waiving off/forgiving the liabilities between them. The law does not permit to draw any inference or presumption based upon the lapse of time or on some other factors that the creditors did not exist or they were not pressing/waived the liability. It does not mean that liability not existed or waived by the creditor. The number of Hon’ble High Courts held that mere unilateral reversal of entries by one party will not amount to cessation of liability and that 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. Mere entry in the books of accounts of the debtor, made unilaterally without any act on the part of the creditor, will not enable the debtor to say that the liability has ended. The revenue had not proved the waiver by the creditor even there is not a case of unilateral waiver of the subjected liability.
He further submitted that Rs. 9,41,354/- were received from the customer, which was paid in the later years, which proved that the related liabilities totaling to Rs. 7,91,354/- towards these Sundry creditors did exit in the subjected year. The ld CIT(A) was wrongly held Rs. 9,41,354/- was claimed by the assessee in earlier year. Non-service of notice in the case of M/s Healmen Pharmaceuticals is irrelevant as balance has already paid/adjusted. Latest address available with the assessee was provided to the ld Assessing Officer during the course of assessment proceedings, the ld Assessing Officer has not confronted observation made by the postal authority with the assessee. He further relied on the decision in the case of CIT Vs. Bhawan Path Nirman (Bohra) & co. (2002) 258 ITR 440 (Raj.) on cessation liability u/s 41(1) with regard to sales tax refund which has been held by the Hon’ble Jurisdictional High court that amount of sales tax refund could not deemed to be income merely by drawing inference that it might have been allowed as deduction in the earlier assessment years.
The ld AR further submitted that deposits of Rs. 3,60,000/- were having the nature of security deposits. Similar additions were made in A.Y. 1996-97 at Rs. 2.10 lacs which has been again reconsidered by the Assessing Officer for addition U/s 41(1). The matter was contested before the ld CIT (A), who deleted the .The department had not challenged the ld CIT(A)’s order for A.Y. 1996-97 before the Hon’ble ITAT, therefore, this issue in hand has become final with respect to the legal position as also on the facts. The CIT (A) has not whispered any word even any specific submission made by the assessee during the course of appellate proceedings. Hence no addition is called for. The remaining amount was pertained to M/s Swastik Distributors, the assessee filed confirmation for Rs. 1,64,472.72 which includes Rs. 1 lacs security deposit . The ld Assessing Officer had not made any inquiry on it. Therefore, the ld Assessing Officer do not have any contrary evidence against the assessee, the addition is uncalled for. He further relied on the decision in the case of CIT vs. Sadul textiles Ltd. 59 CTR 98 (Raj.), which is directly applicable on this issue wherein it has been held that onus was on the Assessing Officer that there was a bilateral waiver of liability.
He further relied on the decision in the case of CIT Vs. Eid. Mohd. Nizammudin (2007) 294 ITR 139 (Raj.). The Hon’ble Supreme Court in the case of Chief CIT Vs. Kesaria tea Co. Ltd. (2002) 173 CTR 394 (SC) has held that unilateral action on the part of the assessee by way of writing off liability in its account, does not necessary mean that the liability has ceased in the eye of law. The amount written back is not chargeable to tax U/s 41(1). He further relied on the following case laws:-
(i) CIT Vs. Jain Exports Pvt. Ltd, (2013) 85 CCH 0066 (Del.) (ii) CIT Vs. Sugauli Sugar Works (P) Ltd. (1999) 152 CTR 46 (SC), (iii) ITO Vs. Bansi Lal Gupta (2008) 113 TTJ 898 (Asr), (iv) Thomas Cook (India) Ltd. Vs. D/JCIT (2006) 105 TTJ 317 (Mum) and (v) Bindal Duplex Ltd. Vs. ITO (ITA No. 352/Del./2012.
Contention of the Revenue
Addition on account of cessation of liability U/s 41(1)
The ld counsel of the revenue supported the order of the lower authorities and argued that the liability already ceased to be existed. Therefore, order of the CIT (A) may please be upheld.
Held by CIT (A)
Addition on account of cessation of liability U/s 41(1)
CIT (A) rejected the appeal of the assessee and confirms the addition. It was held that Regarding creditors to the tune of Rs. 9,41,354/-, security deposit Rs. 3,60,000/- and unsecured loan of Rs. 18,05,000/-, the assessee could not submit the complete address of the alleged creditors. The assessee was very prompt in writing off bad debts as the same principle was not applied to the outstanding credit balances. It is a settled law that when an assessee ceases to be liable to pay something that it was legally bound to pay, then in effect, it gains the amount that it was bound to pay. The case of the appellant is distinguishable from other cases inasmuch as the deposits/loans/liabilities are outstanding for more than 12 to 13 years and there is not even a whisper that the assessee intends to return these amounts.
He further held that even the unsecured loans are taxable under the head “profits and gains of business or profession” because the loans were taken for the purpose of business. A perusal of the definition of Section 2(24) ,which defines income would include the value of any benefit or perquisite, whether convertible into money or not, that would arise from the business. He further relied on the decision in the case of Solid Containers Ltd. Vs DCIT 308 ITR 417, which was applied in TV Sundaram Iyengar and Sons Ltd. 222 ITR 344, had distinguished its decision in Mahindra and Mahindra Ltd. Vs. CIT 261 ITR 501 and held that on waiver of loan taken for business purposes, the amount was retained in the business and as such, the amount that initially did not have the character of income became income liable to tax.
In the case of T V Sundaram Iyengar & Sons Ltd. the assessee had accepted his deposits. The assessee has written off these deposits. The Assessing Officer treated these deposits as revenue receipts, which was held capital receipt by the CIT (A) and Hon’ble ITAT. However, the Hon’ble Supreme Court held that these receipts were originally capital receipt but change its character by efflux of time. The Hon’ble Supreme Court relying upon its judgment in the case of Punjab Distilling Industries Ltd. Vs CIT 35 ITR 519 by applying the above said principle; it was held that the assessee because of trading operations had become richer by the amount transferred to its profit and loss account. He further relied on the decision in the case of CIT Vs. Karam Chand Thapar 222 ITR 112 (SC), Rollatainers Ltd. Vs. CIT 339 ITR 54, Logitronics Pvt. Ltd. Vs. CIT 333 ITR 386 (Del) and Jay Engineering Works Ltd. Vs. CIT 311 ITR 299. Accordingly, he confirmed the addition.
Held by ITAT
Addition on account of cessation of liability U/s 41(1)
It is undisputed fact that the assessee had not written off any liability on account of loan creditor, trade creditor or security creditor during the year under consideration. The assessee had furnished required details before the Assessing Officer as well as CIT (A). Also it is fact that these amounts were very old, it is possible that the creditor has closed or shifted the business from the given address.
The assessee had produced copy of balance sheet and it is claimed by the assessee that to the tune of Rs. 18,05,000/- are unsecured loan from earlier years, which has not been claimed as deduction or allowances in earlier year by the assessee. The lower authorities also had not able to establish their case that the assessee had deducted or allowed these advances as deduction in earlier years. As the case laws referred by the assessee including Hon’ble Supreme Court and Hon’ble Jurisdictional High Court held that burden is on the revenue to prove that the assessee has taken deduction in earlier year and there is a write-off bilateral. In assessee’s case, even unilateral written off has not been claimed by the company.
The other creditors were advance received from the customer to the tune of Rs. 9,41,354/-, which was paid of in later years. The AR of the assessee filed relevant evidences for repayment in subsequent year, which proved that the assessee’s liability was in existence. The revenue has not brought on record any adversary evidence to establish that liability was not inexistence or not paid in the subsequent year.
The assessee has shown Rs. 3.60 lacs as security deposit out of this Rs. 2.10 lacs were added by the Assessing Officer in A.Y. 1996-97, which has been deleted by the CIT (A). No appeal had been filed by the revenue before the ITAT, therefore, issue is settled. Further remaining amount, the assessee filed confirmation and the Assessing Officer had not made any inquiry and established the case that liability is not inexistence. The case laws relied upon by the assessee are squarely applicable particular Hon’ble Supreme Court decision in the case of Chief CIT Vs. Kesaria Tea Co. Ltd. (2002) 173 CTR.
The case laws referred by the CIT (A) are squarely distinguishable on the ground that there was a written off either by the assessee or bilaterally. After careful consideration of all the facts and circumstances of the case and written submissions made by the AR on Section 41(1), we do not find any reason to confirm the order of the CIT (A). Accordingly, the addition confirmed by the CIT (A) is deleted. This ground of assessee’s appeal is allowed.
Accordingly appeal disposed of.
