Unless there is positive act on part of creditor in current year providing benefit to assessee by way of remission, outstanding credit liability cannot be held to have been remitted in favour of assessee

IN THE ITAT AHMEDABAD BENCH ‘B’

Income-tax Officer, Ward 1(1), Surat

v.

Bhavesh Prints (P.) Ltd.

BHAVNESH SAINI, JUDICIAL MEMBER

AND D.C. AGRAWAL, ACCOUNTANT MEMBER IT APPEAL NO. 1302 (AHD.) OF 2010

[ASSESSMENT YEAR 2007-08]

JUNE 17, 2011

ORDER

D.C. Agrawal, Accountant Member. –

This is an appeal filed by the revenue raising following ground :—

(1) On the facts and in the circumstances of the case and in law, the ld. CIT(A)-I, Surat has erred in deleting addition of Rs. 18,09,757 out of the total addition made by the Assessing Officer of Rs. 56,42,593 on account of cessation of liabilities under section 41(1) of the Act.

2. The facts of the case are that assessee has stopped functioning for last 3 to 10 years and only shown opening stock of raw material with it during the year under consideration. Total opening stock shown was of Rs. 7,74,283 and it was sold for a consideration of Rs. 7,97,772. The Assessing Officer found that assessee had outstanding sundry creditors, total amounting to Rs. 56,42,593 from 52 parties as per list given by him from pages 3 to 5 of his order. The Assessing Officer initiated enquiries and found that notice under section 133(6) issued to first nine parties (from Sl. Nos. 1-9) were returned unserved. Similarly in respect of other parties no confirmation was filed or no fresh interest was provided by the assessee; or it was only that no balance is outstanding or a different amount is outstanding. On this basis, the Assessing Officerheld that there is a remission of liability taxable under section 41(1). He accordingly made an addition of Rs. 56,42,593.

3. The matter came up before ld. CIT(A). He examined the issue afresh and found that amount in respect of some parties can be held subsisting, therefore, he had deleted the addition made in respect to them. In respect to the sum relating to some other parties, he held that if assessee has not filed any confirmation or there is no movement for last six years then it can be said that the amount was subsisting. He accordingly confirmed the addition. Thus in all the ld. CIT(A) deleted an addition of Rs. 18,09,757 out of Rs. 56,42,593 made by the Assessing Officer against which the Revenue is in appeal.

4. The ld. DR submitted that in respect of many parties to whom the notices under section 133(6) were issued have replied that there is no outstanding balance in the name of the assessee as on 3 1-3-2007. Further these balances were outstanding since 1994-95 meaning thereby that these balances are about 15 years old and most of the creditors would have written off the balance in their books of account. Further the assessee failed to furnish any evidence to prove that the liabilities in spite of sundry creditors had not ceased to exist. The assessee had failed to discharge his onus. The Assessing Officer had carried out enquiries and most of the notices issued by the Assessing Officer were returned unserved and thus the assessee failed to prove the existence of the creditors as on 31-3-2007. The assessee also failed to produce any evidence to prove that either assessee or any group concern had any business dealing with the above parties in the year under consideration or in the immediate past. Further there is no evidence that any of these parties are demanding the alleged outstanding balance from the assessee. There is also no evidence that any of these parties have instituted any legal proceedings against the assessee for recovery of their dues. The onus is on the assessee to provide the new addresses or confirmations so as to support its arguments that amount is still legally outstanding. If certain parties have written off the amount in their books of account and certainly no liability would exist to be paid by the assessee and hence it has ceased to exist and therefore, taxable under section 41(1).

5. Against this, the ld. AR for the assessee submitted that conditions laid down under section 41(1) are not satisfied. There is neither cessation nor any remission of liability. Balances are old and outstanding in the books and creditors can demand the same at any time. Even in a case of time barred debt which, the creditor would not be able to recover, by enforcing his right in the court, his right as such will not come to an end therefore liability will not cease to exist. A liability against the assessee does not cease merely because liability has become barred by limitation. Cessation would take place if not only liability is barred by limitation but also assessee expresses an unequivocal intention not to own the liability even when demanded. He referred to the decision of Hon’ble Kerala High Court in Liquidator, Mysore Agencies (P.) Ltd. v. CIT [1978] 114 ITR 853 and that Hon’ble Bombay High Court in the case of CIT v. Chase Bright Steel Ltd. [1989] 177 ITR 128/42 Taxman 146 and that Hon’ble Bombay High Court in the case of J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34 wherein it is held that remission has to be granted by the creditor. A unilateral on the part of the debtor i.e., the assessee cannot bring about a cessation on his liability. A cessation of the liability may occur either by reason of the operation of law i.e., when liability becomes unenforceable through law and also debtor clearly declare his intention not to honour his liability when payment is demanded by the creditor. The cessation may also occur through a contract between the parties or by discharge of the debt i.e., debtor making part payment thereof to his creditor.

6. We have heard the parties and carefully perused the material on record. The undisputed facts are that these liabilities standing in the books of the assessee are very old and as found by the ld. CIT(A), as old as 15 years and outstanding since 1994-95. In the current year the Assessing Officer thought to enquire as to why these liabilities are outstanding for so long and found that notices issued by him either remained un-served or no confirmation was filed in respect of others. The ld. CIT(A) examined the issue and found that in some cases transactions had taken place as late as assessment year 2005-06 and, therefore, liabilities could not be said to be not subsisting. He, therefore, deleted the addition of Rs. 18,09,757 and retained the rest of addition made by the Assessing Officer. Thus apparently nothing had happened this year in respect of the sum outstanding in the books of the assessee and in respect of which addition was originally proposed by the Assessing Officer or in respect of which addition was sustained by the ld. CIT(A). Neither the creditor has taken any action nor has the debtor done anything. Thus in fact no event has taken place during the current year. Thus apparently there was no occasion to hold that the outstanding balances have become profit chargeable to tax under section 41(1) except enquiries carried out by the Assessing Officer For the sake of convenience we reproduce section 41(1) as under :—

“Section 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 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

(b)      the successor in business has obtained whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession and accordingly chargeable to Income-tax as the income of that previous year;

Explanation 1—For the purposes of this sub-section, 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 the business under clause (b) of that sub-section by way of writing off such liability in his accounts.

Explanation 2—For the purposes of this sub-section “successor in business” means—

(i)      where there has been an amalgamation of a company with another company, the amalgamated company;

(ii)       where the first-mentioned person is succeeded by any other person in that business or profession, the other person;

(iii)       where a firm carrying on a business or profession is succeeded by another firm, the other firm;

(iv)     where there has been a demerger, the resulting company.

The first condition required to be satisfied for treating a sum taxable under section 41(1) is that an allowance or deduction has been made in respect of that sum in the current assessment year or in earlier assessment year as a loss, expenditure or trading liability. In other words, liability should relate either to trading account or to profit and loss account which must have been debited in the current year or in an earlier Asst. Year while computing the income of the assessee. Merely because certain amounts were outstanding in the books of the assessee does not lead to the inference that this amount would relate to a trading liability or to a sum already debited in the profit and loss account in any earlier year or in the current year.

The second condition required to be satisfied is that assessee must have obtained either in cash or in other manner some benefit in respect of such trading liability either by way of remission or cessation thereof.

The concept of cessation in section 41(1) implies that liability of the assessee has ceased to exist in the year under consideration, either by operation of law, or by mutual contract between the parties. Operation of law would indicate that liability has become unenforceable at law i.e., the limitation prescribed for recovery of the dues by the creditor has expired or there is a court decree or order finally against the creditor thereby he loses his right to recover the money from the debtor i.e., the assessee.

Thus it is either expiry of limitation or a decree of a court that would make the liability ceased to exist. However, a further condition is imposed where limitation is expired. It is that the debtor i.e., the assessee should unequivocally declare his intention not to honour his liability when payment is demanded by the creditor. Further, if there is a contract between the parties and the creditor discharges the debtor of the debt either fully or partly then to the extent the debt is discharged by the creditor without payment by the assessee, liability would cease to exist. Thus, there has to be an event for cessation of liability to take place. If nothing happens during the assessment year then it cannot be said that liability has ceased to exist. In case of remission there has to be a waiver by the creditor in favour of the assessee either unilaterally or through contractual agreement. To the extent such remission or waiver of the liability is granted assessee would get benefit and accordingly to that extent same would be taxable under section 41(1) subject to the basic condition that such liability remitted has been taken into account in the trading account or in the profit and loss account in the current year or in an earlier year. Thus there has to be a positive act on the part of the creditor in the current year which would provide the benefit to the assessee by way of remission. If no such act on the part of creditor takes place then there is no case for holding that a liability has been remitted in favour of the assessee.

7. Merely because certain amount is outstanding for number of years will not be case for holding that there is a cessation or remission. Hon’ble Punjab & Haryana High Court in the case of CIT v. Sita Devi Juneja [2010] 325 ITR 593/187 Taxman 96 held that if Assessing Officer failed to show that in any earlier year allowance of deduction has been made in respect of any trading liability incurred by the assessee or if he fails to show that any benefit was obtained by the assessee in respect of such trading liability by way of remission or cessation thereof, during the current year then it cannot be said that any benefit accrued to the assessee. Hon’ble Punjab & Haryana High Court in CIT v. GP International Ltd. [2010] 325 ITR 25/1 86 Taxman 229 held that provisions of section 41(1) and explanation thereto are not applicable where assessee is still showing same amount as liability in its books and has not written off the same. In Chief CIT v. Kesaria Tea Co. Ltd. [2002] 254 ITR 434/122 Taxman 91 (SC) it was held that for applying provisions of section 41(1) following conditions are required to be satisfied :—

“( 1) In the course of assessment for an earlier year, allowance or deduction has been made in respect of trading liability incurred by the assessee ;

(2) Subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the year in which such event occurred ;

(3) In that situation the value of the benefit accruing to the asses see is deemed to be the profit and gains of business which otherwise would not be his income ; and