ITO Vs. Thadaram Khaldas Tolani (ITAT Mumbai)
It is evident, merely on the reasoning that liability in respect of some of the sundry creditors have remained outstanding for about three years the assessing officer has concluded that they have to be treated as income of the assessee in the impugned assessment year as they have ceased to exist as per section 41(1) of the Act.
However, as could be seen from the facts on record, in course of assessment proceedings, the assessee not only furnished the names and addresses of the sundry creditors but also furnished the details of outstanding liability against each of those creditors. The assessee has also submitted that he was having business transactions with the concerned creditors, therefore, the sundry creditors represent trading liability of the assessee.
The assessee also brought to the notice of the assessing officer payments made to the concerned creditors subsequent to the financial year relevant to the assessment year under dispute. However, the assessing officer has not found merit in the aforesaid submissions of the assessee.
At this stage, it is necessary to have a look at the provisions of section 41(1) of the Act. A plain reading of the aforesaid provisions would make it clear that before coming to the conclusion that a liability has ceased to exist or there is remission/cessation of a particular liability, three conditions are to be fulfilled. Firstly, it must be a trading liability; secondly, the person showing such liability must have obtained some benefit either in cash or in any other manner in respect of such liability and thirdly, such benefit by way of remission/cessation has accrued to the assessee in the relevant financial year.
If we juxtapose the facts of the present case against the conditions of section 41(1) of the Act, it will become clear that the liability shown by the assessee is no doubt a trading liability as the assessing officer has not disputed the claim of the assessee that it has business transaction with the concerned parties.
As far as accrual of any benefit either by way of cash or some other manner to the assessee in respect of such liability, there is nothing on record to show that either the creditors have written-off the liabilities in their books of account or the assessee has refused to pay the amount to them. Therefore, it cannot be said that any benefit on account of the liability has accrued to the assessee. The third condition which is very much crucial is, whether the liability has ceased to exist in the impugned assessment year. As per assessing officer’s own admission, the sundry creditors have remained outstanding for more than three years.
Therefore, what prompted the assessing officer to conclude that the liability has ceased to exist in the impugned assessment year has not been expressed by the assessing officer. At least, no valid reasons have been provided by the assessing officer to indicate what led him to conclude that the liability has ceased to exist in the impugned assessment year.
A reading of the provisions contained under section 41(1) of the Act would also make it clear that the burden is on the assessing officer to prove that conditions of section 41(1) of the Act have been fulfilled to treat a liability as an income on account of remission or cessation of liability in a particular assessment year.
In the facts of the present case, it is evident, in the course of assessment proceedings itself, the assessee has furnished evidence before the assessing officer to demonstrate that payments have been made to the concerned creditors subsequent to the relevant financial year.
Surprisingly, the assessing officer has glossed over the contention of the assessee on the presumption that the assessee might have issued bearer cheques in the name of the concerned parties. In our view, aforesaid conclusion of the assessing officer without making any inquiry with the concerned bank or from any other source cannot be given much weight age.
When the assessee has furnished names and addresses of the sundry creditors and other relevant details the assessing officer could have conducted necessary inquiry with the concerned creditors for ascertaining the fact whether the liability is still continuing or not.
Without making any such inquiry, the assessing officer cannot presume cessation of liability. More so, when the evidence brought on record indicate that the assessee has continued payment to the concerned parties subsequently to discharge the liability.