ITAT, `B’ BENCH – AHMEDABAD
Nitin S. Garg Vs. ACIT ,
APPEAL NO: ITA Nos. 169, 170, 171 and 172/Ahd/2009,
DECIDED ON June 4, 2010
PER BHAVNESH SAINI, JM:
All the appeals by the assessee are directed against different orders of the learned CIT (A)-II, Ahmedabad dated 01-10-2009 for the above assessment years.
2. In ITA No. 172/Ahd/2009 for assessment year 2006-07, the learned Counsel for the assessee did not press Ground Nos. 4, 5 and 6, these grounds are accordingly dismissed being not pressed.
3. In all the appeals the assessee challenged the orders of the learned CIT(A) in confirming the additions u/s 41(1)(a) of the IT Act on old and outstanding liabilities of Rs.38,17,601/-, Rs.1,60,090/-, Rs. 40,032/- and Rs.1,32,118/- respectively observing that the said liability had ceased to exist irrespective of the fact that the assessee had not written it off in its books of account. It is further stated in the grounds of appeal that the learned CIT(A) erred in not considering that in the regular assessment for the assessment year 2002-03 and 2005-06, no addition was made in respect of these liabilities.
4. We have heard the learned representatives of both the parties, perused the findings of the authorities below and the materials available on record.
5. Briefly, the facts of the case are that the AO made the above additions in all the assessment years respectively u/s 41(A) of the IT Act as cessation of liabilities. The AO made the additions on the basis that the assessee had shown the liabilities in respect of the expenditure incurred during the years but he has not given the details and addresses of the parties and thus are not verifiable, hence, the liabilities claimed in respect of the expenditure incurred, has ceased and income is liable to tax u/s 41 (1) of the IT Act. The assessee submitted before the learned CIT(A) that these are very old creditors and hence does not have Permanent Account Numbers and confirmations of these parties. Further, there was no remission or cessation of liabilities and in the books of account the assessee has not written off these amounts. Hence, these are not covered u/s 41(1) of the IT Act. The assessee relied upon the decisions in the cases of Parmeshwar Bohra 301 ITR 404 (Raj.), CIT Vs Tamilnadu Warehousing Corporation 292 ITR 310 (Mad.) and Natversingh Chauhan Vs ITO (Ahmedabad Bench). It was also submitted that the amount of Rs.1,60,590/- and Rs.1,10,520/- out of the amounts pertaining to assessment year 2001-02 has been paid to Royal Engineering Works in financial year 2008-09. Therefore, these amounts are not to be disallowed. The learned CIT(A) considering the submissions of the assessee and material on record confirmed all the above additions. The findings of the learned CIT(A) are similar in all the assessment years. The same is reproduced as under as is taken from Para 5.2 from ITA No.169/Ahd/2007:
“5.2 I have considered the facts and the submissions. I do not agree with the appellant’s view. When the parties are not traceable and the expenditure is not verifiable, the addition has to be made. When the liability itself is not to be paid as the party is not traceable, and the appellant has claimed the expenses in the earlier years, the same has to be taxed u/s. 41(1) of the I. T. Act irrespective of the fact that the appellant has written it off or not. The ratios of the case laws relied upon are not applicable as facts are different. In the case of Natversingh Chauhan vs ITO, the parties were existing but here, the parties are not traceable. In the case of CIT vs Parmeshwar Bohra, it was held that carry forward amount of previous year, did not become an investment or cash credit generated during the year and cannot be assessed as income. Here the issue is application of section 41(1) for cessation of liabilities which is different. Further, for the amount to be paid to Royal Engg. Works, the party has not confirmed that this was the receipt of amount relating to A. Y.2001-02. Hence, the additions are confirmed and this ground is rejected”.
6. The learned Counsel for the assessee reiterated the submissions made before the authorities below. He has filed copies of the balance sheets of assessment years 2000-01 to 2007-08 in the paper book and demonstrated that on the same issue there was outstanding liability of Rs. 1,29,83,564/- in assessment year 2000-01 (PB -2), which was reduced in the subsequent assessment years by making the payments to the parties. The list of the parties is filed at page 1 of the paper book and separate chart is also filed. The learned Counsel for the assessee, therefore, demonstrated that since it was old liability in earlier years and outstanding balances/liabilities have been carried forward in assessment years under appeal, therefore, no addition u/s 41(1) of the IT Act can be made. He has submitted that it is admitted fact that all the above amounts in question under appeal pertain to the earlier years in which the AO did not disputed genuineness of the expenditure and even outstanding balances against names of several parties have also not been doubted by the AO in the preceding assessment year in which outstanding balances were reflected in the balance sheet. Therefore, opening balances of the existing liabilities in the assessment years in question cannot be added u/s 41(1) of the IT Act. He has relied upon the following judgments in support of his contentions:
1) CIT Vs Tamilnadu Warehousing Corporation (292 ITR 310)
2) CIT Vs Smt. Sita Devi Juneja (187 Taxman 96)
3) N. R. Chauhan Vs ITO (ITAT Ahmedabad– dated 23-01-2009)
4) DCIT VI, Kanpur Vs Alied Leather Industries (P) Ltd.(32 SOT 549)
5) General Industries Corporation Vs ITO (33 ITD 524)
6) CIT Vs Parmeshwar Bohra (301 ITR 404)
7) ACIT Central Circle 32, Mumbai Vs VIP Industries Ltd. (30 SOT 254)
8) DSA Engineers (Bombay) Vs ITO (30 SOT 31)
The learned Counsel for the assessee further submitted that the same details are also incorporated by the AO at page 12 of the assessment order in respect of which the assessee has filed details at PB-1 and the chart submitted during the course of arguments. The learned Counsel for the assessee further submitted that the amount of Rs.1,60,590/- is added in the assessment year 2002-03 is the same amount which is reflected in the preceding assessment year 2001-02 in respect of the same party namely Royal Engineering Works which is also added in the assessment year 2001-02, therefore, it would amount to double addition in the assessment year 2002-03. The learned Counsel for the assessee further submitted that in assessment year 2003-04 the addition is made of Rs.40,032/- in respect of 3 parties namely Sanjaya Spal, Ankit Engineering and Motilalji which are new liabilities in this assessment year under appeal. Further in assessment year 2006-07 the liabilities of Rs.1,32,118/- pertain to Mahalaxmi Roadways and Nihal Roadways which were debit balance in the assessment year 2005-06 which is also explained in the chart filed for consideration. The learned Counsel for the assessee, therefore, submitted that the AO was not justified in applying provisions of section 41(1) of the IT Act in those assessment years particularly when the genuineness of the expenditure has not been doubted by the AO in respect of these parties whose amounts were shown as liabilities in the balance sheet. Copies of the accounts of the parties are filed in the paper book. The learned Counsel for the assessee further submitted that ultimately the income of the assessee is computed by the learned CIT(A) by applying the provisions of section 44AE of the IT Act. Therefore, no addition u/s 14(1) of the IT Act could be made. He has relied upon the decision in the case of Tirunelveli Motor Bus Service Co. P. Ltd. Vs CIT 78 ITR 55. He has further submitted that once the income is computed u/s 44 AE of the IT Act, provisions of section 41(1) of the IT Act would not apply.
7. On the other hand, the learned DR relied upon the orders of the authorities below. The learned DR submitted that the expenses were claimed by the assessee in respect of outstanding liabilities in the earlier years and deductions have been allowed. The learned DR submitted that liabilities have however, still existing in the books of the assessee being sundry creditors. The learned DR submitted that the assessee has failed to furnish addresses of the parties, their Permanent Account Numbers and confirmations of outstanding balances. The learned DR submitted that the AO because of the above facts found that the said trading liabilities have ceased as no evidence and confirmation of existence of the parties have been filed. The learned DR submitted that since the assessee failed to produce relevant material on record, therefore, adverse inference shall have to be drawn against the assessee. Therefore, the AO would be justified in applying provisions of section 41(1) of the IT Act because the issue would arise as to on what date the liability is ceased. Since no proof is filed by the assessee, therefore, the authorities below were justified in rejecting the claim of the assessee. The learned DR submitted that the AO has given a categorical finding that the assessee has claimed certain deduction against the income earned during earlier year. Therefore, non-existing liabilities in the subsequent year would amount to cessation of liabilities. The learned DR submitted that since the assessee has not paid any amount towards outstanding liabilities for several years and carried forward the balances to the assessment years under appeal, it would prove intention of the assessee that the assessee has no longer wanted to pay off the debts. The learned DR relied upon the decision of the Hon’ble Calcutta High Court in the case of Kesoram Industries and Cotton Mill Vs CIT 196 ITR 845 in which it was held that “unclaimed wages written back in the profit & loss account is assessable under Income Tax Act”. The learned DR submitted that burden is upon the assessee to prove that the details filed in the return of income is true and correct. The learned DR relied upon the decision of the Hon’ble Supreme Court in the case of L. H. Sugar Factory and Oil Mills (P) Ltd. Vs CIT 125 ITR 293 in which it was held that “when expenses were not wholly and exclusively laid out for the purpose of assessee’s business same is not allowable deduction”. The learned DR also relied upon the decision of the Hon’ble Gauhati High Court in the case of Assam Pesticides and Agro Chemicals Vs CIT 227 ITR 846 in which it was held that “payment of commission not made out of commercial consideration not allowable deduction”. The learned DR submitted that the figures given in the chart filed by the assessee’s counsel shows that the figures are static in assessment year 2001-02 as compared with earlier year and no amount is paid. The learned DR submitted that there is no movement in any of the years, therefore, by applying the principle of preponderance of probabilities which is applicable to the IT Act, it could be reasonably inferred that the assessee has no intention to make the payment against the outstanding liabilities. The learned DR submitted that the assessee has not made any offer to pay the parties. Similarly, no effort is made by the parties whose outstanding balances are reflected in the balance sheet of the assessee to make recovery against the assessee. Therefore, these are squared up liabilities and should be treated as liabilities against unknown parties for which no evidence has been filed. Therefore, provisions of section 41(1) of the IT Act have been rightly applied in the matter. The learned DR submitted that since the assessee claimed deduction, therefore, onus is upon the assessee to prove that deduction is admissible for the purpose of the business. The learned DR in his concluding submissions submitted that the assessee has no liabilities to make the payment as on date. The assessee has no evidence whatsoever to back up its claim and he failed to produce the creditors before the AO for verification. Therefore, it is clear that liability to make the payment to the outstanding creditors has ceased. Therefore, addition was rightly made u/s 41(1) (a) of the IT Act.
8. We have considered the rival submissions and material available on record. Section 41 (1) (a) of the IT Act reads as under: “41. (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,—
(a) 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”
8.1 Hon’ble Madras High Court in the case of Tamilnadu Warehousing Corporation (supra) held as under:
“The assessee filed its return for the assessment year 1989-90 and assessment eras completed under section 143(3) of the Income-tax Act, 1961. The assessee had surrendered the Group Gratuity Scheme with LIC and received a sum of Rs.8,22,925/- during the year relevant to the assessment year 1989-90. As there was no proper enquiry made by the Assessing Officer in the assessment completed on January 21,1992, the Commissioner passed order under section 263 of the Act and set aside the assessment with a direction to the Assessing Officer to assess the said amount under section 41(1) of the Act for the assessment year 1989-90. The Tribunal set aide the order of the Commissioner. On appeal to the High Court: Held, that the assessee had continued to show the admitted amount of Rs.8,22,925 as liability in the balance-sheet. The undisputed fact was that it was a liability reflected in the balance-sheet. Once it was shown as liability by the assessee, the Commissioner was wrong in holding that it was assessable under section 41(1) of the Act. Unless and until there is a cessation of liability, section 41 is not applicable”.
8.2 Hon’ble Punjab and Haryana High Court in the case of Smt. Sita Devi Juneja (supra) held as under:
“It is the conceded position that in the assessee’s balance sheet the aforesaid liabilities have been shown, which are payable to the sundry creditors. Such liabilities, shown in the balance sheet, indicate the acknowledgement of the debts payable by the assessee. Merely because, such liability is outstanding for the last six years, it cannot be presumed that the said liabilities have ceased to exist. It is also conceded positin that there is no bilateral act of the assessee and the creditors, which indicates that the said liabilities have ceased to exist. In absence of any bilateral act, the said liabilities could not have been treated to have ceased”.
8.3 ITAT Ahmedabad Bench in the case of N. R. Chauhan (supra) held as under:
“The ld. Counsel for the assessee specifically drawn our attention to the account copies and stated that these are outstanding as on date and this amount are not written off in the books of account. Accordingly, the same cannot be added u/s. 41(1) of the Act as the liability of outstanding and the parties are in existence.
We are in full agreement with the argument of the Ld. Counsel for the assessee, as is seen from the documents and papers filed before us that the parties do exist and these amounts are outstanding in the books of the assessee as payable. In view of these facts and circumstances, we feel that these amounts cannot be added either u/s. 68 or 41(1) of the Act. We delete the addition and this issue of the assessee’s appeal is allowed”.
8.4 ITAT Lucknow Bench in the case of DCIT Vs Allied Leather Finishers (P) Ltd. (supra) held as under:
“21.7 A liability could not be treated as a cessation if it was being merely carried forward for years. A non-genuine non-trading liability standing in the balance sheet can be taxed but under section 68 if it came in the books in the current year. If such nongenuine non-trading liability came in the books in an earlier year than same cannot be taxed in the current year even under section 68. A non-genuine trading liability can be considered in the current year if it is related to current year’s trading/manufacturing or Profit & loss account but not under section 41(1) or under section 68. It can be considered only under section 28, i.e. it can be considered for disallowance while examining the claim of expenses or outgoings against revenue receipts. Current year’s genuine trading liabilities, waved/remitted or ceased to exist in the current year itself will not form part of trading/manufacturing or P/L account except a note appended to them as disclosure of information.
21.10 Even in a case where a liability ceased to exist due to limitation i.e. the claim of the creditor is barred by limitation under Limitation Act of 1963 but if the liability subsist or has not been written off by the assessee, or the assessee does not absolve himself from the liability, though not legally enforceable, it cannot be taxed under section 41(1)”.
8.5 The Hon’ble Rajasthan High Court in the case of CIT VS Prameshwar Bohra (supra) has held as under:
“The assessee on the first day of the previous year relevant to the assessment year 1993-94 i.e. on April 1, 1992, credited an amount of investment/cash credit of Rs.1,55,316 in his books of account. The Assessing Officer added this amount in the income of the assessee as unexplained investment in the assessment year 1993-94. The Tribunal held that this was not a case of cash credit entered in the books of account of the assessee during the year but it was a case in which the assessee had invested the capital in the business and this amount was shown as a closing capital as on March 31, 1992 and on April 1, 1992, it was an opening balance. Therefore the Tribunal held that what was already credited in the books of account ending on March 31, 1992, for financial year 1991-92 relevant to assessment year 1992-93 could not be unexplained cash credit or investment in the books of account maintained for the financial year 1992-93, the accounting period for which ended on March 31, 1993. On appeal: Held, dismissing the appeal, that the carried forward amount of the previous year did not become an investment or cash credit generated during the relevant year 1993-94. This alone was sufficient to sustain the order of the Tribunal in deleting the amount of R.1,55,316 from the assessment for the assessment year 1993-94”.
8.6 ITAT Mumbai Bench in the case of ACIT Vs VIP Industries (supra) held as under:
“Section 41(1) is attracted when there is cessation for remission of a trading liability. Simply because a period of three years has expired and the creditor cannot lawfully enforce his claim, it does not mean that there is a cessation or remission of liability. There may be several situations when the money is not claimed or paid by one party to another within three years and thereafter the claim is made and honoured by the other. So, simply because a particular amount is outstanding for a period of more than three years, that does not constitute income under section 41(1)”.
9. Considering the facts of the case in the light of the above provisions and the decision referred to above, it is clear that the expenditure claimed as deduction in the earlier year have not been disallowed in the earlier year in which they were claimed. Even the AO in the earlier year has not doubted the existence of the parties. The learned Counsel for the assessee filed copies of balance sheet of the all years under appeal, as well as proceedings earlier assessment years which prove that the outstanding liabilities from earlier years were carried forwarded to the assessment years under appeal starting from assessment year 2001-02. The liabilities in assessment year 2000-01 were in a sum of Rs.1,29,83,564/-. The particulars of those parties against whom the liabilities were shown is mentioned at PB-3, 4 and 5. The same parties continued in the assessment year 2001-02 under appeal but the balances of some of the parties have reduced which would show that part payments have been made to them. The above facts would show that the liabilities shown in the balance sheet in the assessment year under appeal i.e. 2001-02 which are opening balances which are carried forward fro the preceding assessment year. The liabilities have been shown in the balance sheet of the assessee which would show that the assessee acknowledged the liabilities of the outstanding amounts. The balances were thus carried forward from earlier years. In assessment year 2002-03, the AO made addition of Rs.1,60,590/- in respect of Royal Engineering Work whose balance was also outstanding in the assessment year 2000-01 and 2001-02. It would, therefore, show that similar addition is made in the assessment year 2002-03 which would amount to double addition in respect of the same party. In assessment year 2003-04 the AO made addition of Rs.40,032/- in respect of Sanjay Spal , Rs.32/-, Ankit Engineering Rs.20,000/- and Motilalji Rs.20,000/-. These amounts were not carried forward from earlier years as per the details filed in the paper book. It would show that these are the current liabilities of the assessee in the assessment year 2003-04. Similarly, in assessment year 2006-07 the AO made addition of Rs.1,32,118/- in respect of amount of Rs.45,409/- and Rs.86,709/- in respect of Mahalaxmi Roadways and Nihal Roadways. These were the credit balances in the assessment year under appeal which were carried forward in the preceding assessment year 2005-06 and in that year there were debit balances against these parties as per the details submitted by the learned Counsel for the assessee. These facts would show that the authorities below have not applied their mind to the facts of the case that these are not the fit cases for invoking the provisions of section 41(1) of the IT Act in the matter as done by the AO.
9.1 Considering the facts of the case as noted above it is clear that the assessee had continued to show the admitted amounts as liabilities in its balance sheet. The liabilities reflected in the balance sheet cannot be treated as cessation of liabilities. Merely because the liabilities are outstanding for last many years, it cannot be inferred that the said liabilities have ceased to exist. It is also a fact that the assessee has not written off the outstanding liabilities in the books of account and the outstanding liabilities are still in existence would prove that the assessee acknowledged his liabilities as per the books of account. Section 41(1) of the IT Act is attracted when there is cessation or remission of a trading liability. The AO shall have to prove that the assessee has obtained the benefits in respect of such trading liabilities by way of remission or cessation thereof. Merely because the assessee obtained benefit of deduction in the earlier years and balances are carried forward in the subsequent year, would not prove that the trading liabilities of the assessee have become non-existent. It may also be noted here that the assessee has not claimed any deduction of the expenditure in all the assessment years under appeal. The decisions cited by the learned Counsel for the assessee squarely apply to the facts of the case. Therefore, we are of the view that provisions of section 41 (1) (a) of the IT Act have been wrongly applied in the matter. We may also note here that the learned Counsel for the assessee has filed details of particulars of payments of liabilities in subsequent years which are in the nature of adjustment through journal entry, cash payment and some payments by banking channel. The learned DR objected to the filing of such details at this stage and further submitted that the payment by cash and journal entry would not prove genuineness of the payments. We do not agree with the submission of the learned DR because those details were called for by the Bench during the course of hearing and even payment by cheques and/or journal entry would not absolve the AO for making out a case u/s 41 (1) (a) of the IT Act. The last contention of the learned Counsel for the assessee was that since income of the assessee is computed u/s 44AE of the IT Act, therefore, provisions of section 41(1) of the IT Act would not apply. However, considering the finding given above that provisions of section 41 (1) would not apply to the facts and circumstances of the case; there is no need to give further findings on this issue.
10. On consideration of the above discussion, we find that the authorities below were not justified in making the additions against the assessee in all the assessment years under appeal of the above amounts with the aid of section 41(1)(a) of the IT Act. As a result, we set aside the orders of the authorities below and delete the entire additions.
11. In view of the above findings, the decisions cited by the learned DR would not support the case of the Revenue.
12. As a result, these grounds of appeal of the assessee in all the appeals are allowed.
13. In the result, the appeals of the assessee in ITA No. 169, 170 and 171/Ahd/2009 are allowed whereas the appeal of the assessee in ITA No. 172/Ahd/2009 is partly allowed.