Case Law Details
ITO Vs Mohinder Pal Singla (ITAT Chandigarh)
The amount was never debited to the profit and loss account as an expenditure in the year they were received also the amount has not been written off. Said amount not taxable u/s 41(1)
Facts-
During the course of assessment proceedings, AO noted that the assessee had raised unsecured loans amounting to Rs. 2,11,37,381 of which Rs. 1,12,37,381 had been raised from M/s Aadi Krishna Agro Foods, Sunam, and Rs. 99,00,000 had been raised from M/s Track Tech Engineering Ludhiana. In the assessment year 2012-13, these amounts were shown under ‘sundry creditors’, subsequently due to some mistake, these amounts were shown as ‘unsecured loans’. AO issued notice proposing to add back the amount of Rs. 2,11,37,381.
Being aggrieved, assessee preferred appeal before CIT(A), who allowed the appeal on merits. The revenue is now in appeal before Tribunal.
Conclusion-
Held that AO acknowledges that the impugned amount was never debited to the profit and loss account as an expenditure in the year they were received. It is fact that the assessee had received the impugned advances through banking channels and also that these amount were shown as sundry creditors up to assessment year 2012-13 and as unsecured loans during the captioned assessment year. It has further been observed by the CIT(A) that mere change of nomenclature, deliberate or mistaken notwithstanding, would not tantamount to credit in the books of account of the assessee. Thus, after duly considering the facts of the case, the Ld. CIT(A) reached the conclusion that the impugned amount was not taxable u/s 41(1) of the Act. We further note that these amounts were still shown as outstanding at the end of the relevant captioned assessment year and it is not the case of the Department that these amounts had been written off by the assessee so as to fall within the purview of rigors of section 41(1) of the Act.
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
This appeal is preferred by the Department against order dated 04.02.2019 passed by the Ld. Commissioner of Income Tax (Appeals), Patiala [hereinafter referred to as ‘CITA)’] and pertains to assessment year 2013-2014.
2.0 The brief facts of the case are that during the year under consideration, the assessee was a partner in M/s Rajesh Rice Mills, Sunam and was also engaged in the business of trading. The return of income was filed declaring an income of Rs. 3,12,490/- and subsequently, after the processing of return u/s 143(1) of the Income Tax Act, 1961 (hereinafter called ‘the Act’), the case was selected under CASS guidelines for scrutiny.
2.1 During the course of assessment proceedings, the Assessing Officer (AO) noted that the assessee had raised unsecured loans amounting to Rs. 2,11,37,381/- of which Rs. 1,12,37,381/- had been raised from M/s Aadi Krishna Agro Foods, Sunam and Rs. 99,00,000/-had been raised from M/s Erack Tech Engineering Ludhiana. The assessee was required to explain the same and it was the submission of the assessee that these credits pertained to the period 2003-04 and 200506 and since then they have been appearing in the balance sheets. It was further submitted that up to the assessment year 2012-13, these amounts were shown under ‘sundry creditors’, however, subsequently due to some mistake, these amounts were shown as ‘unsecured loans’. The AO deputed the Inspector of Income Tax to conduct field inquiries and it was reported by the Inspector that no firm was existing at the address provided. Therefore, the AO issued a show case notice to the assessee proposing to add back the impugned amount of Rs. 2,11,37,181/- as income of the assessee. The assessee submitted another reply before the AO stating that these credits pertained to earlier years and due to some dispute with these parties, the assessee was no longer having any business dealings with these two parties. It was also submitted that the liability to pay back the amount still existed and it was not a case of cessation of liability in terms of section 41(1) of the Act and, therefore, the amount was not liable to be added to the income of the assessee. However, it was the view of the AO that the explanations and submissions given by the assessee were not acceptable and that the assessee had drafted the balance sheet to suit his personal needs and, therefore, the amount was liable to the added to the income of the assessee. Accordingly, after adding the amount of Rs. 2,11,37,381/- the assessment was completed at an income of Rs. 2,14,49.871/-.
2.2 The assessee carried the matter before the Ld. First Appellate Authority challenging the addition. There was a delay in filing the appeal before the Ld. CIT(A) because it was the contention of the assessee before the Ld. CIT(A) that the assessment order had not been served upon him. The Ld. CIT(A) condoned the delay in filing the appeal before him and also allowed the appeal of the assessee on merits.
2.3 Against the condonation of delay by the Ld. CIT(A) and against the deletion of impugned addition on merits, the Department has now approached this Tribunal challenging the order of the Ld. CIT(A) by raising the following grounds of appeal:-
1. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in concluding that amounts shown under head ‘Sundry Creditors’ were never debited to Profit & Loss Account of the assessee in any year.
2. Whether on the facts 85 in the circumstances of the case, the Ld. CIT(A) was right in allowing condonation of delay for filing of appeal in this case.
3. Whether on the facts 85 in the circumstances of the case, the Ld. CIT(A) has failed to take cognizance of fact that the Sundry Creditors were found not existent at their addresses and the assessee himself failed to file confirmed copies.
4. It is prayed that the order If Ld. CIT(A) be set aside and that of the Assessing Officer be restored.
5. The appellant craves leave to add or amend any grounds of appeal before the appeal is heard and finally disposed of.
3.0 At the outset, the Ld. Sr. Departmental Representative (Sr. DR) submitted that the Ld. CIT(A) had wrongly condoned the delay by recording a finding that the assessment order was not served or deemed to have been served either at the address as per the PAN data base or at the address as appearing in return of income and, therefore, the assessee was prevented by a sufficient case in not filing the appeal in time. The Ld. Sr. DR vehemently argued that this observation of the Ld. CIT(A) was factually incorrect and as per records, the assessment order had been duly served on the assessee. The Ld. Sr. DR argued that the Ld. CIT(A) had erred on facts in condoning the delay and, therefore, the order of the Ld. CIT(A) was invalid in eyes of law and was liable to the set aside at the very threshold itself.
3.1 On merits, the Ld. Sr. DR relied on the observations and findings of the AO in this regard and submitted that since the assessee had himself admitted that he had no business activities with these parties any longer due to disputes and also that he did not have further information about the two parties, it was apparent that the assessee had raised fictitious liabilities and had introduced his own unaccounted money into the books account under the garb of unsecured loans. It was further argued by the Ld. Sr. DR that it was improbable that the two parties would not be making any efforts to recover the amount due from the assessee and would rather be sitting quietly even after there had been some alleged dispute between the assessee and those parties. It was also argued by the Ld. Sr. DR that the assessee had not filed any documentary evidences before the AO to establish the fact of dispute with these concerns. It was also highlighted by the Ld. Sr. DR that the assessee had not filed any confirmed copy of account with these parties and that these two parties had also not been filing any Income Tax Returns and, therefore, it was very much apparent that the impugned additions had been rightly made by the AO but the Ld. CIT(A) had grossly erred in deleting the addition.
4.0 In response to the arguments of the Ld. Sr. DR, the Ld. Authorised Representative (AR) submitted that as far as the issue of condonation of delay by the Ld. CIT(A) was concerned, the same had been condoned by the Ld. CIT(A) after duly considering the facts on record. He drew our attention to the pages 4 and 5 of the order of the Ld. CIT(A) and submitted that the Ld. CIT(A) has given a categorical findings in this regard that the assessment order was neither served nor deemed to have been served either on the address as per the PAN data or at the address as per the return of income, therefore, and the assessee had a sufficient cause for not filing the first appeal within the period of limitation. The Ld. AR submitted that the Ld. CIT(A) had rightly condoned the delay and had also observed that if the date of supply of the copy of the assessment order is to be considered, then there was no delay in filing the appeal by the assessee.
4.1 On merits of the case, the Ld. Authorised Represented (AR) submitted that all the credits pertained to earlier assessment years as have also been noted by the AO in the assessment order. It was also submitted that these were not trading liabilities and there was no deduction of these amounts by the assessee in earlier assessment years. The Ld. AR relied on numerous judicial precedents in support of his contention.
5.0 We have heard the rival submissions and have also perused the material on record. The Department has challenged the impugned order on two grounds viz. (i) the condonation of delay by the Ld. CIT(A) and (ii) on the merits of the case. As far as ground No.2 challenging the condonation of delay by the Ld. CIT(A) is concerned, a perusal of the impugned order shows that the Ld. CIT(A) has given a categorical finding that the assessee was not served with the assessment order and as the same was not served or deemed to have been served or deemed to have been served at the address as per the PAN data based or at the address as appearing in the return of income. The Ld. CIT(A) went on to hold that, thus, due to non-service of the assessment order, the assessee was prevented by a reasonable cause in filing the appeal before the Ld. CIT(A). This categorical finding, although has been challenged by the Ld. Sr. DR during the course of proceedings before us, however, she could not bring any document or evidence on record to establish that these findings of the Ld. CIT(A) regarding non-service of assessment order were perverse. In fact, when the Bench inquired from the Ld. Sr. DR if the Department was willing to challenge findings of Ld. CIT(A) vis-à-vis the non-service of assessment order by filing an Affidavit on behalf of the Department in this regard, the Ld. Sr. DR replied in the negative. In such a situation, we are of the considered view that the Department is merely trying to grab at straws to somehow make a case that the condonation of delay being bad in law would nullify the First Appellate Order on the merits of the case. Therefore, we out- rightly reject this contention of the Department that the Ld. CIT(A) had wrongly condoned the delay as the same is not established by any documentary evidence. We are of the considered view that the condonation of delay lies within the discretionary powers of the Ld. First Appellate Authority and he has exercised the same in favour of the assessee after duly considering the facts and record. Accordingly, ground No.2 of the Department’s appeal stands dismissed.
5.1 Coming to the grounds challenging the deletion of addition on merits viz. Ground Nos. 1 and 3, it is seen that the Ld. CIT(A) has given a categorical finding in this regard inPara 5.2 of the impugned order that even the AO acknowledges that the impugned amount were never debited to the profit and loss account as an expenditure in the year they were received. The Ld. CIT(A) has also given a categorical finding that the assessee had received the impugned advances through banking channels in previous years relevant to assessment years 2003-04 and 2006-07 which was a matter of record and not in dispute. It has also been observed by the Ld. CIT(A) that these amount were shown as sundry creditors up to assessment year 2012-13 and as unsecured loans during the captioned assessment year and this fact is also a matter of record and not in dispute. It has further been observed by the Ld. CIT(A) that mere change of nomenclature, deliberate or mistaken notwithstanding, would not tantamount to credit in the books of account of the assessee. Thus, after duly considering the facts of the case, the Ld. CIT(A) reached the conclusion that the impugned amount was not taxable u/s 41(1) of the Act. We further note that these amounts were still shown as outstanding at the end of the relevant captioned assessment year and it is not the case of the Department that these amounts had been written off by the assessee so as to fall within the purview of rigors of section 41(1) of the Act. Therefore, in our considered view, there is not fault in the action of the Ld. CIT(A) in deleting the impugned addition.
5.2 It will also be relevant to make a reference to the provision of section 41(1) of the Income Tax Act, 1961. The relevant extracts of the same are being reproduced here under:
“Profits chargeable to tax.
(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year —
the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or…
…Explanation 1:- For the purposes of this subsection, the expression “loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof” shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.”
5.3 On perusal of the aforesaid section, it could be said that the above provision enacts adjustment provisions whereby the revenue takes back what it has already been allowed if the following two conditions come to pass and as such, the under noted conditions need to be fulfilled in order to treat the cessation of a liability as income under section 41 (1) of the Act:
(i) The assessee has to avail an allowance or deduction in an earlier year in respect of loss, expenditure or trading liability; and –
(ii) In subsequent year, the assessee has to obtain benefits in cash or any other kind in respect of such loss, expenditure and trading liability by way of remission or cessation of liability.
5.4 In the present case, the assessee had not debited the aforesaid liability to its Profit and Loss account in any of the earlier years (admitted by the AO at Pg-7 and by Ld. CIT(A) at pg-9) and thus, the question of receiving any benefit, allowance or deduction by the assessee in earlier years, as specified in (i) above, has not been fulfilled in the instant case and, therefore, there lies no application of section 41 (1) in the instant case. Further, the assessee had also not received any benefit either in cash or otherwise during the relevant year. In fact the said sum will decrease the cash inflows of the assessee in the subsequent years. The assessee has not written back the liability during the relevant year and the said liability continued to appear as the closing liability and has been carried forward to next year. Thus, condition (ii) above has also not been fulfilled.
5.5 Therefore, it can be said that both the conditions needed for the application of section 41(1) of the Act have not been fulfilled in the instant case and, therefore, the addition made under section 41(1) of the Act would have no legs to stand and has been rightly deleted by the Ld. CIT(A).
5.6 The Hon’ble Apex Court in the case of Mahindra and Mahindra Ltd. as reported in 404 ITR 1, explained the provisions of the section 41(1) as under:-
“15. On a perusal of the said provision, it is evident that it is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under Section 41 of the Income Tax Act. The objective behind this Section is simple, it is made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability…
xxx
It is important to note that the said purchase amount had not been debited to the trading account or to the profit or loss account in any of the assessment years… Hence, we find no force in the argument of the Revenue that the case of the Respondent would fall under Section 41 (1) of the IT Act.”
5.7 The Hon’ble Punjab & Haryana High Court in the case of CIT Vs. G.P International Ltd in ITA No. 618 of 2009 has held that since the assessee was showing the aforesaid liabilities in his books and has not written off the same, the provisions of section 41(1) are not applicable.
5.8 Further, in the case of CIT Vs. Sugauli Sugar Works (P) Ltd. 236 ITR 518 (SC), the Hon’ble Apex Court held as under: (Head Notes)
“Business Income-Profits chargeable to tax under s. 41(1)-Transfer of amount to capital reserve account-Obtaining by assessee of a benefit by virtue of remission or cessation is sine qua non for application of s. 41(1) – Mere fact that assessee has made an entry of transfer unilaterally will not enable the department to apply s. 41(1)- Assessee cannot get rid of his liability by making an unilateral entry- Expiry of period of limitation cannot extinguish the debt- section 41(1) not applicable.”
5.9 The Hon’ble Delhi High Court in the case of CIT Vs. Vardhman Overseas Ltd. 343 ITR 408 (Del.) by following the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Sugauli Sugar Works (P) Ltd. (supra) has held as under:-
“It is also necessary to bear in mind that in the case of CIT Vs. Sugauli Sugar Works (P) Ltd. (supra) a contention was in fact advanced before the Supreme Court on behalf of the Revenue that the liability to the creditors remained unpaid by the assessee for more than 20 years and there was practically a cessation of the debt which resulted in a benefit to the assessee which should be brought to tax under s. 41(1). This argument was not given effect to by the Supreme Court, nor did it consider fit to apply s. 28(iv).
It was further held in the above said cases that section 41(1) was to come into play only when the assessee had obtained the deduction in earlier year in computing the business income and in the case of appellant, no benefit has been claimed.”
5.10 Therefore, in view of the aforesaid cited judicial precedents, we find no reason to interfere with the findings of the Ld. CIT(A) on the issue and we uphold the same. Accordingly, ground Nos. 1, 3 and 4 are also dismissed.
6.0 In the final result, the appeal of the Department stands dismissed.
Order pronounced on 14.06.2022.
Author Bio
