Conclusion: Addition by AO under section 41(1) as liability of ‘Trade Payables’ written off was not justified as the balance-sheets filed by assessee were neither signed by the Auditor nor by the Director and, therefore, the same were not reliable and assessee had failed to produce any confirmation to the effect that the assessee received payment from M/s. Omac as interest free unsecured loan.
Held: Assessee-company was engaged in the real estate business and for the year under consideration filed return of income on 30/03/20 12, declaring loss of ₹ 1,25,440/-. The case was selected for scrutiny assessment and notice under section 143(2) was issued and complied with. The scrutiny assessment was completed under section 143(3) after making addition of ₹ 2,02,27,914/- under section 41(1) as liability of ‘Trade Payables’ written off. On further appeal, CIT(A) rejected the contention of the assessee and confirmed the addition in dispute. It was held that various balance-sheets filed by assessee were neither signed by the Auditor nor by the Director and, therefore, the same were not reliable. Assessee had failed to produce any confirmation to the effect that the assessee received payment from M/s. O as interest free unsecured loan. Assessee had neither filed any agreement for obtaining unsecured loan from said party. In the facts and circumstances of the case and in the substantial interest of the justice, it was appropriate to restore this matter to the file of AO with the direction to the assessee to produce following documents and direction to AO to carry out enquiries deemed fit and then decide whether the remission of the liability in question was liable to be income under Section 41(1) of the Act in accordance with law.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal by the assessee is directed against order dated 07/11/2016 passed by the Learned CIT(Appeals)-7, New Delhi [in short ‘the Ld. CIT(A) ’] for assessment year 2011-12 raising following grounds:
1. That, the learned Commissioner of Income Tax (Appeals) has grossly erred in law and on facts in passing an order under section 250(6) of the Act by dismissing the appeal of the appellant ex parte, thereby, violating the principles of natural justice.
2. That the Id. Commissioner of Income tax(Appeals) has ignored the judicial ruling in Gujrat Themis Biosyn Ltd. (74 ITD 339 Ahd. ITAT), wherein it was held that section 250(6) makes it obligatory for the Commissioner of income tax (Appeals) to pass a speaking order deciding the points raised in appeal, stating his reasons for the decision, as such.
3. That on the facts and circumstances of the case the order passed by the Learned Commissioner of Income tax (Appeals) is bad both in the eyes of law and on facts.
4. That on facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) has erred on facts and in law and not justified in upholding an addition of Rs. 2,01,02,470/- to the business income of the assessee by considering the same as trade payables.
5. That on facts and circumstances of the case, the charging interest u/s 234A,B,C is illegal, arbitrary and against the settled law on the subject.
6. That the appellant craves to reserve to itself the right to add, alter, amend, substitute and vary any ground of appeal at and before the time of hearing.
It is, therefore, prayed that the additions/disallowances made as above be deleted. The interest as charged be cancelled and the appeal be allowed.
2. Briefly stated facts of the case are that the assessee company was engaged in the real estate business and for the year under consideration filed return of income on 30/03/20 12, declaring loss of ₹ 1,25,440/-. The case was selected for scrutiny assessment and notice under section 143(2) of the Income-tax Act, 1961 (in short ‘the Act’) was issued and complied with. The scrutiny assessment was completed under section 143(3) of the Act on 27/03/20 14 after making addition of ₹ 2,02,27,914/- under section 41(1) of the Act as liability of ‘Trade Payables’ written off. On further appeal, the Ld. CIT(A) rejected the contention of the assessee and confirmed the addition in dispute. Aggrieved, the assessee is in appeal before the Tribunal raising the grounds as reproduced above.
3. In ground No. 1 the assessee has challenged the impugned order as passed ex-party, in violation of the principle of the natural justice.
3.1 The learned Counsel supported the grounds raised by the assessee, whereas the learned DR referred to para 2 of the impugned order, wherein the Ld. CIT(A) has mentioned the opportunities provided to the assessee, but not availed by the assessee. According to learned DR, the Learned CIT(A) cannot faulted for non-appearance or representation, despite so many opportunities provided.
3.2 We have heard the rival submission of the parties on the issue in dispute. The relevant para of the Ld. CIT(A) is reproduced as under :
“2. First notice was issued on 19.08.2014 scheduling date of hearing on 09.09.2014 On this date, adjournment was sought and case was adjourned to 13.10.2014. On this date, none attended. On 28.10.2014 another notice was issued fixing the appeal for hearing on 20.11.2014. There was no compliance. A fresh notice was issued on 15.05.2015 fixing the case for hearing on 28.05.2015. On this date, the AR of the appellant attended and filed part submission and the case was adjourned to 26.06.2015. On 26.06.2015, a letter was filed for adjournment and the case was adjourned to 16.0 7.2015. On this date, adjournment was sought and the hearing date was re-fixed for 03.08.2015. On this date, adjournment was sought and the case was adjourned to 26.08.2015. On this date, none attended. Notice was again issued on 10.09.2015 fixing the hearing on 08.10.2015. As there was no compliance, notice was reissued 20 10.2015 scheduling the hearing date for 05.11.2015. On this date, a letter for adjournment was filed by a different AR and the case was adjourned to 23.11.2015. On this date, none attended. Notice was issued on 07.01.2016 affording final opportunity for 25.01.2016. This notice was returned back un-served. However, a letter was filed seeking time to file written submissions and power of attorney. On 05.02.2016 yet another notice was issued to the appellant fixing the hearing on 22.02.2016. On this date, power of attorney along with request for adjournment was filed and the case was re-fixed for 02.03.2016. Since hearing could not be conducted on this date, request for adjournment was filed on 04.03.2016 and the appeal was re-fixed for 18.03.2016. None attended on this date and yet again a letter was filed on 29.03.2016 requesting for adjournment and the case was re-fixed for 05.04 2016. The AR vide letter dated 13.04.2016 filed some written submission stating the same to be additional evidence and sought adjournment which was allowed and appeal was re-fixed for 26.04.2016. None attended on this date On 17.05.2016, a letter was filed by one Rajiv Saxena & Co. stating that they had been engaged by the appellant to represent the appeal and therefore, the matter may be adjourned. A fresh notice was issued on 18 07.2016 scheduling the hearing date on 02.08.2016. On this date neither anyone attended nor any request for adjournment was received. Notice was again issued on 21.10.2016 scheduling the date of hearing of 28.10.2016. This notice which was issued on the same address to which all the other notices were issued and served as the appellant was seeking continuous adjournments, however, came back un-served. No communication is on record regarding any change on address from the appellant. Given history of non compliance, it is evident that the appellant has chosen not to accept the latest notice for reasons best known to it.”
3.3 It is evident from the above paragraph of the impugned order, that numerous opportunities have been provided by the Learned CIT(A) to the assessee, however, the assessee has avoided the hearings and did not avail the opportunities to represent before the Ld. CIT(A). In such circumstances, the action of the Ld. CIT(A) in passing the order on the basis of the material on record, cannot be said to be unjustified or in violation of the principle of the natural justice. Accordingly, this ground of the appeal of the assessee is dismissed.
In ground No. 2, the assessee has challenged that impugned order is non-speaking and unreasoned.
4.1 We have heard both parties on this issue. We do not agree with the grounds raised by the assessee. We find that the CIT(A) has decided the issue in para 4.2 of the impugned order and supported his finding with the reasoning, which we will be referring while deciding the ground on merit of the addition. This ground of the appeal of the assessee is accordingly dismissed.
5. The ground No. 3 of the appeal being general in nature, we are not required to adjudicate separately.
6. In ground No. 4, the assessee has challenged the addition of ₹ 2,02,02,470/- (wrongly mentioned as ₹ 2,01,02,470/-) on
6.1 The facts in brief qua the issue in dispute are that in the balance-sheet as on 31/03/2011, the amount of general reserve was increased by ₹ 2,02,27,914/- by transferring the amount from the ‘trade payables’. This fact was noticed by the Assessing Officer from the ‘notes on accounts’ following the part of the balance-sheet of the assessee, wherein at Sr. No. 8, it has been stated that unclaimed ‘trade payables’ amounting to ₹ 2,47,27,914/- have been transferred to general reserve. The Assessing Officer also found that an advance of ₹ 45,00,000/- (which was offered as advance in earlier years by the assessee) was adjusted with the ‘trade payables’ resulting into net increase of ₹ 2,02,27,914/- to the general reserve. The Assessing Officer called upon the assessee to show-cause, as to why this amount may not be treated as income in terms of section 4 1(1) of the Act.
6.2 The Authorized Representative of the assessee submitted that the assessee company had taken unsecured loan during previous year 2002-03 from ‘M/s Omax’ and same has been transferred to general reserve. But the assessee was not aware of treatment of the same in the books of accounts of M/s Omax and no confirmation was filed by the assessee from M/s Omax.
6.3 The Assessing Officer issued notice under section 133(6) of the Act to M/s Omaxe. The said company vide letter, which was received by the Assessing Officer on 06/03/20 14, stated that the company had dealt with the assessee company during assessment year 2001-02 to assessment year 2005-06 and whatever the amount was due written off well before the assessment year 2005-06.
6.4 In view of the reply from M/s Omaxe, the learned Assessing Officer rejected the contention of the assessee that the amount was outstanding against the loan borrowed from M/s Omaxe and held that the assessee company had made certain transaction with M/s Omax and the outstanding amount was shown as ‘trade payable’ in its books of accounts and thus it was outstanding against purchases made from M/s Omaxe, which now has been transferred to general reserve.
6.5 The Ld. CIT(A) upheld the addition of observing that in independent verification under section 133(6), the Assessing Officer found that M/s Omaxe had already written off the amount, which was due from the assessee and the assessee failed to lead any evidence to substantiate that impugned amount was an unsecured loan and not part of the trade payables as disclosed in the balance-sheet.
6.6 Before us, the learned Counsel of the assessee has filed a paper-book containing pages 1 to 75 and referred to various pages to support the case of the assessee. In the paper-book, the assessee filed balance-sheet of the assessee company as on 31/03/2004; 31/03/2005; 31/03/2006; 31/03/2007; 31/03/2008; 31/03/2009; 31/03/2010. All these balances are unsigned, i.e., not signed either by the Auditor or by the Director of the company. The assessee has also filed financial statement for financial year 2010-1 1 relevant to assessment at 2011- 12 but the notes to accounts has not been appended.
6.7 Before us, the learned Counsel of the assessee, referred to page 24 of the paper-book which contains scheduled of the balance-sheet as on 31/03/2003 and 31/03/2004. According to the schedule of current liability, advance from customers received was shown at ₹ 2,01,82,725/- as on 31/03/2003 which has increased further to ₹ 5,30,38,073/- as on 31/03/2004. Similarly, the security deposit from M/s Omxe was shown at ₹ 4,00,00,000/- as on 31/03/2003, which decreased to ₹ 53,14,877/-. The learned Counsel referred that the amount mentioned in balance-sheet as advance from customers was actually the amount received from M/s Omxe as interest free unsecured loan and was wrongly shown as advance from the customer. He submitted that out of said loan, Rs. 5.00 crores has been utilized towards repayment to loan of holding Company.
6.8 The learned Counsel further referred to the page 31 of the paper-book, which is a copy of the balance-sheet as on 3 1/03/2005. The learned Counsel submitted that in the balance-sheet amount relevant to 31/03/2004 have been shown as liability of ₹ 5,83,52,950/- payable to Omaxe. He submitted that in the year under consideration the assessee has repaid amount of Rs.2,60,65,685/- leaving a closing balance of Rs. 3,22,87,265/-.
6.9 The Ld Counsel referred to balance sheets for other years ending and also ledger accounts of M/s Omaxe appearing in books of the assessee, copies of which have been filed at pages 60 to 67 of the paper-book. The learned counsel submitted that assessee has repaid the loan amount back to M/s. Omaxe in various years leaving a balance of Rs.2,47,27,9 14/- as on 31/3/2009. He submitted that said balance of unsecured loan amount has been transferred to the general reserved account in the year under consideration but the accountant has by mistake given the narration as trade payables transferred.
6.10 The learned Counsel, further in support of his claim that waiver of loan does not amount to cessation of trading liability so as to apply section 41(1) of the Act, relied on the decision of Coordinate Bench of the Tribunal in the case of Wasan Exports P Ltd, reported in (2019) 106 taxmann.com 21 (Delhi-Trib.). He also relied on following decisions:
1. Commissioner Vs. Mahindra And Mahindra Ltd.,  93 com 32 (SC);
2. Principal Commissioner of Income-tax -1 Vs. Babul Products (P.) ,  96 taxmann.com 82 (Gujarat);
3. Commisioner of Income-tax Vs. Compaq Electric Ltd.  101 com 400 (SC);
4. Luxor Writing Instruments (P.) Ltd., Vs. Dy. Commissioner of Income-tax, Circle 4(1), New Delhi,  31 com 408 (Delhi – Trib.);
5. CIT Vs. ICC India P. ltd., ITA No. 396/2012 (Dated: 20th November, 2012) (Delh-HC)
6. Logitronics (P.) Ltd. Vs. Commissioner of Income Tax,  197 TAXMAN 394 (Delhi);
7. Sutlej Cotton Mills Ltd. Vs. Commissioner of Income Tax,  116 ITR 1 (SC);
8. Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. Commissioner of Income Tax,  93 Taxman 502 (SC)
6.11 On the other hand, learned DR relied on the order of the lower authorities and submitted that even during the appellate proceedings, the assessee has failed to file any confirmation from M/s. Omax to substantiate the claim of the assessee that the liability in dispute was an interest free unsecured loan not related to any trading liability. Further, he submitted that the balance-sheet filed by the assessee for various years are not signed either by the Auditors or by the Directors and, therefore, the same were not reliable. He further submitted that the assessee did not avail the opportunity granted by the learned CIT(A) and, therefore, now the assessee should not be allowed to file the balance-sheets for the earlier years which were never filed before the Assessing Officer.
6.12 We have heard the rival submissions of the parties and perused the relevant material on record. Regarding the contention of the learned DR, that the documents, i.e., balance-sheets for various years filed from page 21 to 59, were never filed before the Assessing Officer, but on perusal of the paper-book, we find that the Authorized Representative, Shri Shyam Sunder, has certified all the documents in the paper-book, as were filed before the learned Assessing Officer and learned CIT(A). In view of the certificate, we accept the documents as filed before the Assessing Officer. The issue in dispute in the case is whether the liability which was appearing in the balance-sheet and transferred to general reserve by the assessee in the year under consideration, was liability to be charged as income under Section 41(1) of the Act. As per Section 41(1) of the Act, where any allowance or deduction has been made in the assessment for any year in respect of the loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year the asessee has obtained whether in cash or any other manner any amount in respect of such loss or expenditure or benefit in respect of such trading liability by way of remission or cession, then such amount obtained or the value of the benefit accruing to him is deemed to be profit and gains of the business or profession.
6.13 Before us, the lower authorities has on the basis of books of account/financial statements along with notice thereon has held that the amount of Rs.2,47,27,9 14/- was trade payables and remission thereof is an income under Section 41(1) of the Act. Though the assessee contended that the liability was an interest free unsecured loan received from M/s. Omax, however, could not file any confirmation from the said party. The Assessing Officer issued notice under Section 133(6) of the Act to the said party and found that such liability was in respect of trading transactions and whatever balance amount payable to that party was already written off by the said party prior to the financial year 2005-06. Before the learned CIT(A), the assessee did not appear. Before us, now the assessee has filed balance-sheet as on 3 1.03.2004 to 31.03.20 10 and also the copy of the Ledger account of M/s. Omax in the books of account of the assessee form 0 1.04.2004 to 31.03.2011. In the Ledger account, it is shown that the assessee has out of liability of Rs.5,83,52,950/-, has paid various amounts through bank leaving closing balance of Rs.2,47,27,914/- as on 31.03.2010 and in the year under consideration this amount has been remitted back. The contention of the learned counsel is that such amount being in the nature of the loan it does not amount to cessation of the trading liability. The findings of the Coordinate Bench of Tribunal in the case of Wasan Exports (P.) Ltd. (supra), relied upon by the assessee, is reproduced as under:
“14. We have considered the rival submission and perused the material available on record. Section 41(1) of the Income Tax Act, 1961 provides “where an allowance or deduction has been made in the assessment for any year in respect of loss expenditure or trading liability incurred by assessee and subsequently during any previous year (-) the (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 the benefit accruing it 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 amounts or deduction has been made is in existence in that year or not.” The Learned Counsel for the Assessee relied upon the decision of the Hon’ble Supreme Court in the case of Mahindra and Mahindra Ltd., (supra) in which the Income Tax Officer after perusal of the return concluded that with the waiver of the loan amount, the credit represented the income and not liability. The assessing officer, therefore, held that a sum of Rs.57, 74,064/- was taxable under section 28 of the Income Tax Act. The point for consideration before the Hon’ble Supreme Court was that “Whether in the present facts and circumstances of the case, the sum of Rs.57, 74,064/- due by the respondent to Keiser Jeep Corporation which later on waived-off by the lender constitute taxable income of the respondent or not ?. The Hon’ble Supreme Court after considering the issue in detail held that “in such circumstances, Section 28(iv) of the Income Tax Act is not applicable.” The Ld. CIT(A) also in the present case held that “Section 28(iv) is not attracted in the present case”. The Hon’ble Supreme Court in the case of Mahindra and Mahindra Ltd., (supra) also held that “Section 41(1) of the Income Tax Act does not apply since waiver of loan does not amount to cessation of trading liability. It is a matter on record that the respondent has not claimed any deduction under section 36(1)(iii) of the Income Tax Act qua the payment of interest in any previous year”. In the present case, the authorities below have not given any finding of fact whether the whole amount of loan had been utilised either for the purpose of acquiring a capital asset or for the purpose of business activity or trading activity. There is also no finding of fact whether assessee had claimed any deduction in respect of interest on loan in earlier years. This matter requires finding of fact in the light of Judgment of Hon’ble Supreme Court in the case of Mahindra and Mahindra Ltd., (supra). Learned Counsel for the Assessee, therefore, rightly contended that matter may be remitted back to the file of assessing officer for reconsideration of the issue as per Law. In view of the above discussion, we set aside the orders of the authorities below and restore the matter in issue to the file of assessing officer with a direction to re-decide the issue strictly in accordance with Law, by giving reasonable, sufficient opportunity of being heard to the assessee. In the result, this ground of appeal of assessee is allowed for statistical purposes.”
6.14 We find that various balance-sheets filed by the assessee are neither signed by the Auditor nor by the Director and, therefore, the same are not reliable. The assessee has failed to produce any confirmation to the effect that the assessee received payment from M/s. Omax as interest free unsecured loan. The assessee has neither filed any agreement for obtaining unsecured loan from said party. In the facts and circumstances of the case and in the substantial interest of the justice, we feel it appropriate to restore this matter to the file of the Assessing Officer with the direction to the assessee to produce following documents and direction to the Assessing Officer to carry out enquiries deemed fit and then decide whether the remission of the liability in question is liable to be income under Section 41(1) of the Act in accordance with law:
(i) The certified copy of the balance-sheets duly signed by the Auditor and the Director of the company and by the assesssee for year ending on 31.03.2003 to 03.2011.
(ii) The duly certified Leger accounts of M/s. Omax in the books of the assessee from the financial year in which the payment was received till 31.03.2011.
(iii) Copy of confirmation from M/s. Omax stating the nature of the transactions and year-wise account of the assessee in the books of M/s. Omax.
(iv) Copy of the agreement in respect of the payment received by the assessee.
6.15 Since the assessee has not cooperated before the learned First Appellate Authority it is its responsibility to produce all the documents required by the Assessing Officer and cooperate in the proceedings. Thus, ground no. 4 of the assessee is allowed for statistical purposes.
7. The ground no. 5 being consequential in nature and ground 6 being general in nature, need not to be adjudicated.
8. In result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 28th February, 2020.