Case Law Details

Case Name : Nama Properties Ltd. Vs DCIT (ITAT Hyderabad)
Appeal Number : ITA No. 1831/Hyd/2017
Date of Judgement/Order : 05/03/2020
Related Assessment Year : 2012-13
Courts : All ITAT (7466) ITAT Hyderabad (384)

Nama Properties Ltd. Vs DCIT (ITAT Hyderabad)

In the decisions relied upon by the learned Counsel for the assessee it was held that the genuineness of the trade payables or creditors has to be examined in the year in which they originate and that unless the liability becomes unenforceable or is written off by the assessee or is given up by the other party or something is brought on record that there is cessation of liability, the same cannot be brought to tax u/s 41(1) of the Act. Therefore, they are very much applicable to the facts of the case before us and respectfully following the same, since there is no evidence that there is a cessation of liability during the relevant A.Y, we hold that it cannot be brought to tax u/s 41(1) of the Act during the relevant A.Y. The addition is accordingly deleted.

Cessation of Liability

FULL TEXT OF THE ITAT JUDGEMENT

This is assessee’s appeal for the A.Y 2012-13 against the order of the CIT (A)-12, Hyderabad, dated 10.08.2017

2. Brief facts of the case are that the assessee company filed its return of income for the A.Y 2011-12 electronically on 28.09.2012 declaring total loss of Rs.25,802/-. During the assessment proceedings u/s 143(3) of the Act, the AO observed from the balance sheet of the company, that there are trade payables to the extent of Rs.19,63,11,404/- out of which Rs.19,62,86,726/- is lying outstanding since several years against the suppliers. When the assessee was questioned, the assessee submitted that he has executed civil contract works during the year ending 31.03.2006 & 31.03.2008 relevant to the A.Ys 2006-07 & 2008-09 and that the amount could not be paid due to shortage of funds. It was further submitted that the assessee company was to get lot of money from the main contractor and the amount payable will be cleared as and when the receivables are collected from the main contractor. The assessee was directed to furnish the details of the creditors including the name & address, PAN and ledger a/c. The assessee furnished a common ledger a/c for the year 1.4.2011 to 31.3.2012 consisting of 195 pages, each page containing the names of 14 creditors and the details included only the name of the alleged creditor and the amount. In the narration, it was simply stated that as “the balance brought forward” and almost all the entries were below Rs.1.00 lakh. It is also observed that the creditors included filling stations, auto services, mechanical works, etc., Therefore, the assessee was asked to produce further details including address, PAN and an individual ledger a/c for the year in which the credit was originated. In response to the said notice, the assessee vide reply dated 22.12.2014 stated that the creditors are mobile people who works in the work-sites of the company and are not confined only to the assessee company and that they were not readily traceable and the assessee was still in the process of obtaining detailed addresses and PANs of the sundry creditors. It was further stated that out of the total balance of Rs.19,62,86,726/-an amount of Rs.1,03,61,448/- was paid by the assessee to some of the creditors in the subsequent A.Y leaving a balance of Rs.18,59,25,278/- as on 31.03.2013. The AO did not accept the contention of repayment of the amount on the ground that it was not verifiable. He held that the amount of Rs.19,62,86,726/- is nothing but cessation of liability u/s 41(1) of the Act. He accordingly brought it to tax. Aggrieved, the assessee preferred an appeal before the CIT (A) who confirmed the order of the AO and the assessee is in second appeal before us by raising the following grounds of appeal:

“1. The order of the Ld. CIT (A)-12, Hyderabad is erroneous both on facts and in law.

2. The Ld. CIT (A) erred in dismissing the appeal.

3. The Ld. CIT (A) erred in confirming the addition of Rs.19,62,78,726/ – made u/s 41(1) of the Act.

4. The Ld. CIT(A) erred in holding that the AO was correct and justified in treating the amount of Rs.19,62,86,726/ – as ceased liability and in bringing it to tax u/ s 41(1) of the I.T.Act,1961.

5. The Ld. CIT (A) erred in concluding that the creditors for Rs.19,62,86,726/-shown by the appellant as outstanding are nothing but bogus entries, are non-genuine, non-verifiable and not in existence.

6. The Ld. CIT (A) ought to have appreciated that the provisions of sec 41(1) of the Act are not applicable in respect the liability of Rs. 19,62,86,726/- which was existing in the Balance Sheet as on 31-03-2012.

7. The Ld. CIT(A) ought to have appreciated that the amount of Rs.19,62,86,726/does not represent any deduction claimed in respect of any loss, expenditure incurred by the assessee or trading liability by way of remission of cessation thereof for the assessment year under consideration.

8. The Ld. CIT(A) ought to have appreciated that merely because the liability of Rs.19,62,86,726/ – has been outstanding for the last more than eight years, it cannot be held that the liability has ceased to exist as on 31-3-2012.

9. The Ld. CIT (A) ought to have appreciated that obtaining of a benefit by the assessee by virtue of remission or cessation is sine qua non for invoking the provisions of section 41(1) of the I.T.Act, 1961.

10. The Ld. CIT (A) ought to have appreciated that the AO has invoked the provisions of section 41(1) of the Act, without establishing that there is remission or cessation of the liability in the year under consideration.

11. The Ld. CIT (A) ought to have appreciated that the amount of Rs. 19, 62, 86, 726/represents sundry creditors that are brought forward from earlier assessment years.

12. The assessee may add, alter or modify or substitute any other point to the Grounds of appeal at any time before or at the time of hearing of the appeal”.

3. The learned Counsel for the assessee, while reiterating the submissions made before the authorities below submitted that there is no cessation of liability during the relevant A.Y, as the assessee company is still liable to pay liabilities to the creditors in future and the assessee also has not written off the outstanding liabilities in its books of account. He submitted that the AO has made the addition u/s 41(1) without corroborative evidence that the said liabilities no more exists. According to the learned Counsel, merely because the liability is being carried forward for years and the assessee is not able to completely prove the genuineness of the trading liability at the time of complying with the provisions of section 41(1) of the Act, it cannot be treated as cessation of liability.

4. The assessee had also filed the additional evidence in the form of Paper Book II from 112 to 119 pages and sought admission of the same. These are the additional evidence in the form of confirmation letter from M/s. Madhucon Projects Ltd regarding (i) confirmation of balance; (2) provisional financials of M/s. Nama Properties Ltd as on 31.01.2017 and (3) Trial Balance of M/s. Nama Properties Ltd as on 31.10.2017.

5. The learned Counsel for the assessee also placed reliance upon them following decisions in support of his contentions that provisions of section 41(1) cannot be involved in the case of the assessee for the relevant A.Ys.

a) ITAT Hyderabad in the case of Das D.Y in ITA No.365/Hyd/2013.

b) Hon’ble Gujarat High Court in the case of Bhogilal Ramjibhai Atara 43 com 55 (Guj.).

c) ITAT Mumbai in the case of Maharashtra State Coop. Consumers Federation Ltd, 13 com 163 (Mum).

d) ITAT Delhi in the case of Sri Vardhman Overseas Ltd 24 SOT 393 (Del.)

e) Hon’ble Delhi High Court in the case of Sri Vardhman Overseas Ltd (16 com 350).

f) Hon’ble Delhi High Court in the case of Jain Exports (P) Ltd 35 com 540

g) Hon’ble Gujarat High Court in the case of Matruprasad C Pandey, 59 com 428

h) ITAT Kolkata in the case of Jashojit Mukherjee 93 com 366

6. The CIT (DR) had objected to the admission of such additional evidence and also had called for a report from the AO on the additional evidence filed by the assessee. The AO has filed the remand report stating that the assessee was given sufficient opportunity to substantiate the nature of the creditors during the assessment as well as first appellate proceedings, but the assessee has been unable to avail the said opportunities. On the merits of the additional evidence filed, the AO submitted that this did not contain any documentary evidence or the circumstances enabling M/s. Madhucon Projects Ltd to take over the trade liability from the assessee company nor does it clarify the nature of the balance receivable by the assessee company. It is also submitted that nothing is available on record or additional evidence submitted in the Paper Book to prove that M/s. Madhucon Projects Ltd is the parent company of the assessee nor that they owned up trading liability of M/s. Nama Properties Ltd. It is also submitted that there is nothing in the additional evidence to prove that the liabilities are still existing in the books of account of the assessee company.

7. The learned DR has also filed written submissions along with the report of the AO on the additional evidence filed by the assessee and placed reliance upon the following case law:

a) ITAT Ahmedabad Bench in the case of ACIT vs. Dattatray Poultry Breeding Farm (P) Ltd, 95 com 130

b) Bombay High Court in the case of Palki Investments & Trading Co. (P) Ltd vs. ITO Mumbai 71 com 322

c) Hon’ble’ Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons Ltd (1996) 88 Taxmann 429 (S.C)

d) Hon’ble Rajasthan High Court in the case of Rama Steel Rolling Mills & General Engg. Works (2013) 35 com 262

e) Hon’ble Gujarat High Court in the case of Gujtron Electronics (P) Ltd vs. ITO, 83 com 389

f) Hon’ble Delhi High Court in the case of CIT vs. Chipsoft Technology (P) Ltd 26 com 109.

g) ITAT Mumbai Bench in the case of Bharat Dana Bera vs. ITO, 56 com 388

h) ITAT Mumbai Bench in the case of ITO vs. Sajjan Kumar Didwani, 47 com 381

i) Andhra Pradesh High Court in the case of A.K. Babu Khan vs. CWT 102 ITR 757

8. Having regard to the rival contentions and the material on record, we find that the details of the trade payables/liabilities were produced before the AO and the AO has not doubted that they are the liabilities of the earlier A.Ys i.e. A.Y 2006-07 and 2008-09 respectively. The trading payables are continued as payables since then, and the relevant A.Y before us is A.Y 2012-

13. if there is cessation of liability, it is for the assessee to write off the payables and offer it to tax u/s 41(1) of the Act. Since the payables are pending for many years, the AO during the relevant A.Y, wanted to examine the veracity of payables and since the assessee failed to produce necessary details of the trade payables, he decided that there is cessation of the liability during the relevant A.Y and to brought it to tax u/s 41(1) of the Act. U/s 41(1) of the Act, where an allowance or deduction has been made any year in respect of loss, expenditure or trading liability incurred by the assessee, and in the subsequent year, the liability ceased or there is a remission of such liability, then the same is to be brought to tax u/s 41(1) of the Act. In the case of the assessee before us, the assessee has been claiming it as trade payables. Thus, the assessee must have been allowed expenditure in the year in which it had accrued to the assessee and can be brought to tax in the year in which it ceases to exist. It is pointed out by the learned Counsel for the assessee that the liability is still existing in the books of account of the assessee. It is the case of the assessee that subsequently, its sister concern Madhucon Projects Ltd has taken over the liability of the assessee company and to this effect, the confirmation of M/s. Madhucon Projects Ltd is filed, wherein it is confirmed that a sum of Rs.14,49,60,055/- is receivable from the assessee. In his report, AO has expressed that there is nothing available on record to prove that M/s. Madhucon Projects Ltd is the parent company of the assessee, nor that they have owned up the trade liabilities of the assessee company. In reply to this report of the AO, the learned Counsel for the assessee has filed the Annual Report of Madhucon Projects Ltd for financial year 2012-13 wherein, in the list of related party transactions, the name of the assessee is mentioned under the head “Enterprises where significant Influence Exists”. The AO can examine the genuineness of the expenditure in the year in which it is claimed to have accrued to it and can only bring it to tax in the year there is cessation of liability. The genuineness or otherwise of the expenditure should have been questioned by the AO in the year in which it is claimed by the assessee. As far as the A.Y 2012-13 is concerned, we find that the AO has invoked only the provisions of section 41(1) of the Act and the same can be invoked only if there is a cessation of liability and the AO cannot unilaterally treat it as cessation of liability without there being any evidence that such liabilities cannot be enforced on the assessee or that the assessee has written it off. Therefore, assessee’s appeal is treated as allowed.

9. The assessee has relied upon the following decisions in support of its contention that the genuineness or otherwise of the trade liability should have been considered in the year in which they are claimed as liability and unless and until there is a remission of liability of cessation of liability, it cannot be brought to tax u/s 41(1) of the Act:

i) Das D.Y in ITA No.365/Hyd/2013, the SMC Bench of ITAT Hyderabad in this case, has held as under:

“8. Having heard the learned DR and having considered the material on record, I find that the only basis for making addition u/s 41(1) of the Act by the AO is the presumption by him that the liability of the assessee under ‘sundry creditors’ has ceased to be liability due to long duration of time after the credit became a liability and also because the assessee was not having any further transactions with the said parties. It is observed that there can be cessation of liability only when the creditor gives up his claim or the assessee recognizes the cessation of liability. Further, I find that the assessee has submitted receipts from the sundry creditors as proof of having received the amounts outstanding from him, before the CIT(A) and that there is no cessation of liability as presumed by the AO. Further, the CIT(A) has followed the order of his predecessor in assessee’s own case for AY 2008- 09 wherein similar addition u/s 41(1) has been deleted. The learned DR has not been able to produce any evidence on record to rebut the finding of the CIT(A). In view of the above discussion, I do not find any reason to interfere with the order of the CIT(A) and, accordingly, the order of the CIT(A) is hereby upheld dismissing the ground raised by the revenue on this count”.

ii) Hon’ble Gujarat High Court in the case of Bhogilal Ramjibhai Atara 43 com 55 (Guj.).

Section 41(1) of the Income-tax Act, 1961 – Remission or cessation of trading liability (Cessation of liability) – Assessment year 2007-08 – In return of income for assessment year 2007-08, assessee had shown a certain amount by way of his debts – He supplied details of 27 different creditors – Assessing Officer undertook exercise to verify records of so called creditors and found that creditors had no dealing with assessee – Assessing Officer further having found that debts were outstanding since several years applied section 41(1) and added above amount in income of assessee as deemed income – There was nothing on record to suggest that there was remission or cessation of liability that too during previous year relevant to assessment year 2007-08 – Whether in peculiar facts of case amount in question could not be added back in income of assessee as deemed income under section 41(1) – Held, yes [Para 8] [In favour of assessee]

iii) ITAT Mumbai in the case of Maharashtra State Coop. Consumers Federation Ltd, 13 com 163 (Mum).

i. Section 41(1) of the Income-tax Act, 1961 – Remission or cessation of trading liability – Assessment year 2005-06 – During assessment proceedings, Assessing Officer observed that there was a liability of Rs. 10,85,531 pending for more than 5 years on assessee and same had not been claimed by creditors; therefore, he added this amount to total income of assessee presuming that assessee’s liability had seized – Whether in absence of any contrary materials placed on record by revenue to show that no such liability existed in books of account or assessee had obtained any benefit by cash or in any manner, merely because said liability was more than 5 years old it could not be said that there was cessation of liability – Held, yes [In favour of assessee]

iv) ITAT Delhi in the case of Sri Vardhman Overseas Ltd 24 SOT 393 (Del.) held as under:

Section 68 of the Income-tax Act, 1961 – Cash credits – Assessment year 2002-03 – During relevant assessment year, Assessing Officer asked assessee-company to prove genuineness of certain sundry creditors – Assessee could not file confirmations from said creditors; therefore, Assessing Officer treated credit balance appearing in assessee’s books of account as unexplained credits under section 68 – On appeal, Commissioner (Appeals) confirmed additions under section 41(1) – Whether since no new amount had been credited in accounts of creditors during year under consideration, addition could not be made under section 68 – Held, yes

Section 41(1) of the Income-tax Act, 1961 – Remission or cessation of trading liability – Assessment year 2002-03 – Whether in view of facts stated under heading ‘cash credits’, since amounts-in-question were brought forward balances, they could not be added to income of assessee for year under consideration, as question of genuineness thereof could be examined only in year in which they were credited to account of assessee – Held, yes – Whether, even otherwise since revenue had failed to show that liabilities which were appearing in balance-sheet had ceased finally and there was no possibility of their revival, impugned addition could not be made under section 41(1) – Held, yes

v) Hon’ble Delhi High Court in the case of Jain Exports (P) Ltd 35 com 540 held as under:

Section 41(1) of the Income-tax Act, 1961 – Remission or cessation of trading liability [Cessation of liability] – Assessment year 2008-09 – During scrutiny, Assessing Officer added amounts shown as credit balances of creditors, outstanding for several years under section 41(1) – Commissioner (Appeals) confirmed addition only in respect of creditor ‘E’ as assessee could not prove genuineness of transaction, but deleted addition in respect of other creditors – Whether, as per section 41(1), cessation of liability may occur either by reason of it becoming unenforceable in law by creditor coupled with debtor’s intention not to honour his liability, or by a contract between parties or by discharge of debt – Held, yes – Whether, establishment of genuineness of transaction was required in year when liability had arisen and addition could not be made on such ground, treating it as cessation of trading liability, when assessee had acknowledged its liability successively over several years – Held, yes [Para 22] [In favour of assessee]

vi) Hon’ble Gujarat High Court in the case of Matruprasad C Pandey, 59 com 428 held as under:

Section 41(1) of the Income-tax Act, 1961 – Remission or cessation of trading liability (Cessation of trading liability) – Assessment year 2007 08 – Assessing Officer observed certain liabilities (sundry creditors) in balance sheet of assessee, which were very old – As assessee failed to furnish complete identity, creditworthiness of creditors, etc., as sought by Assessing Officer, he treated said creditors as no longer payable and made addition under section 41(1) – Whether addition under section 41(1) cannot be made unless and until it is found that there was remission and/or cessation of liability that too during relevant assessment year – Held, yes – Whether since there was no remission and/or cessation of liability during year under consideration, addition made under section 41(1) was liable to be deleted – Held, yes [Para 6.2] [In favour of assessee]

vii) ITAT Kolkata in the case of Jashojit Mukherjee 93 com 366 held as under:

i. Section 41(1) of the Income-tax Act, 1961 – Remission and cessation of trading liability (Cessation of liability) – Assessment year 2012-13 – Assessee had shown provision for sundry creditors – Assessing Officer held that since present whereabouts of creditors were not known to assessee, sum claimed towards sundry creditors were to be treated as deemed income of assessee under section 41(1) on account of cessation of liability – It was noted that assessee had shown balances outstanding towards sundry creditors even in next assessment year – Assessee had not written back these creditors in his profit and loss account as liabilities no longer payable – Hence, there was no unilateral write back of creditors to his profit and loss account by assessee and from same it could be safely concluded that assessee had proved that liabilities had not ceased to exist – Whether since assessee had duly acknowledged his debt by accepting creditors liability to be discharged in future, there could not be any cessation of liability under section 41(1), thus impugned, additions to income of assessee was unjustified – Held, yes [Para 5] [In favour of assessee]

10. The learned DR has relied upon the following decisions in support of his contention where the assessee is not able to prove the genuineness of the liability, they can be brought to tax u/s 41(1) of the Act.

a) In the case of ACIT vs. Dattatray Poultry Breeding Farm (P) Ltd, 95 com 130, ITAT Ahmedabad Bench held as under:

“Section 41(1) of the Income-tax Act, 1961 – Remission and cessation of trading liability (Creditor’s confirmation) – Assessment year 2010-11 – Whether liability cease to exist in terms of section 41(1) where it is outstanding for a long period without any payment, despite it being reflected in books of account – Held, yes – Assessee company, had shown sundry creditors outstanding for six to twenty years – Assessing Officer made inquiries under section 133(6) about said creditors in which it was found that certain creditors had categorically denied that they had not made any transaction with assessee – Notices in some cases had returned unserved – Assessee had failed to produce said creditors as directed – Assessee had not even furnished correct address of all creditors, their PAN numbers and confirmation – Whether, on facts, Assessing Officer was justified in holding that there was cessation of liability and making additions to income of assessee under section 41(1) – Held, yes – Whether merely because liabilities were shown in books of account by assessee as outstanding and not written back, would not, tie down revenue to hold such liabilities to be subsisting liability – Held, yes [Paras 9 and 10] [In favour of revenue]”.

b) In the case of Palki Investments & Trading Co. (P) Ltd vs. ITO Mumbai 71 com 322, Hon’ble Bombay High Court held as under:

Section 271(1)(c), read with section 41(1), of the Income-tax Act, 1961 – Penalty – For concealment of income (False claims) – Assessment year 2005-06 – During assessment proceedings Assessing Officer made certain additions under section 41(1) in respect of trade liabilities which had ceased to exist – Penalty under section 271(1)(c) was also levied for furnishing inaccurate particulars of income – Facts revealed that in quantum proceedings Tribunal recorded that one of creditors had denied any amount to be due to it from assessee and some of creditors named by assessee were not found available at addresses given – Further, in penalty proceedings all three authorities had concurrently arrived at a finding of fact that claim made by assessee with regard to its outstanding liabilities for subject assessment year was false – Whether showing a non-existent liability as an existing liability and not offering same to tax amounted to furnishing inaccurate particulars of income and, therefore, penalty was justified – Held, yes [Para 8] [In favour of revenue]

c) Hon’ble’ Supreme Court in the case of CIT vs. T.V. Sundaram Iyengar & Sons Ltd (1996) 88 Taxmann 429 (S.C) held as under:

Section 28(i) of the Income-tax Act, 1961 – Business income – Chargeable as – Assessment years 1982-83 and 1983-84 – Assessee received certain deposits from customers in course of its business which were originally treated as capital receipt – Unclaimed credit balances which were time barred were written back by assessee to its profit and loss account – Assessing Officer treated such amount as its trading receipt and made addition – Whether if an amount is received in course of trading transaction, even though it is not taxable in year of receipt as being of capital character, amount changes its character when amount becomes assessee’s own money because of limitation or by any other statutory or contractual right and such amount should be treated as income of assessee – Held, yes – Whether therefore amount representing unclaimed credit balances written back to profit and loss account by assessee during assessment year under consideration, could be treated as assessee’s income and liable to be taxed – Held, yes

d) Hon’ble Rajasthan High Court in the case of Rama Steel Rolling Mills & General Engg. Works (2013) 35 com 262 has held as under:

Section 41(1), read with section 260A, of the Income-tax Act, 1961 – Remission or cessation of trading liability [Unproved credits] – Assessment year 2007-08 – During financial years 2001-02 and 2002-03, assessee had purchased goods from one ‘T’ – There was dispute between assessee and ‘T’ and assessee failed to make payment of Rs. 34 lakhs to ‘T’ – In balance-sheet of assessee for year ending on 31-3­-2007 aforesaid amount of Rs. 34 lakhs stood in name of ‘T’ – Assessing Officer added said amount to income of assessee for assessment year 2007-08 in view of provisions of section 41(1) – Tribunal held that liability of Rs. 34 lakhs in respect of ‘T’ at end of year as on 31-3-2007 if not proved could be added to income of assessee under section 41(1) – While remitting matter to Assessing Officer, it was left open for Assessing Officer to verify discharge of liability till date of fresh assessment and if liability had been discharged till date then there would be remission or cessation of liability and if assessee failed to produce creditor or unable to give exact address then such liability would stand ceased during year and Assessing Officer would be free to add back same as per law – Whether liability of Rs. 34 lakhs in respect of ‘T’ at end of year if not proved could certainly be added to income of assessee under section 41(1) – Held, yes – Whether in facts and circumstances of case no substantial question of law arose for consideration regarding effect of section 41(1) resulting into remission or cessation of trade liability standing in books of account – Held, yes [Paras 3 & 4] [In favour of revenue]

e) Hon’ble Gujarat High Court in the case of Gujtron Electronics (P) Ltd vs. ITO, 83 com 389 held as under:

Section 41(1) of the Income-tax Act, 1961 – Remission or cessation of trading liability (Customer advances) – Assessment year 2012-2013 – Under a sales promotion scheme launched during financial year 1986-­87, assessee company collected a sum of Rs 500 from each of its customer by sale of coupons – Assessee collected a huge sum under said scheme – Since then, assessee had been showing such sum as outstanding trade liability under head customer advances – During relevant assessment year, Assessing Officer held that there was cessation of liability and, therefore, added such sum to income of assessee – It was found that scheme was valid only for period of twelve months – There was no activity at hands of assessee in connection with scheme for past several years – Not a single customer had demanded money back nor assessee had made any attempt to repay same – In all invoices, signatures of member customers were missing – Their addresses were not sufficient – Over years, company had also invested such amount and earned interest and used such interest for its purpose – Whether on facts, there was cessation of trading liability, thus, Assessing Officer was justified in adding impugned amount to income of assessee – Held, yes [Paras 10 & 12] [In favour of revenue]

f) Hon’ble Delhi High Court in the case of CIT vs. Chipsoft Technology (P) Ltd 26 com 109 held as under:

Section 41(1) of the Income-tax Act, 1961 – Remission or cessation of trading liability – Assessment year 2006-07 – Unpaid dues of employees had been outstanding for 6-7 years and recovery of such dues was time barred – Whether assessee could not claim benefit of showing said amount as a liability – Held, yes – Whether there was cessation of such liability and, hence, said amount had to be added to income of assessee – Held, yes [Paras 9 & 10] [In favour of revenue] Words & Phrases : Word ‘Include’ occurring in Explanation to section 41(1) of the Income-tax Act, 1961 Interpretation of statute : Rule of pragmatic construction.

g) ITAT Mumbai Bench in the case of Bharat Dana Bera vs. ITO, 56 com 388

i. Section 41(1) of the Income-tax Act, 1961 – Remission or cessation of trading liability (Cessation of liability) – Assessment year 2007-08 – Assessee was engaged in business of manufacturing and trading in readymade garments – In return of income, assessee declared certain amount payable to creditors on account of purchases made from them – Assessing Officer issued notices to various creditors which were returned unserved with remarks not known – He thus taking a view that creditors in question were not genuine, made addition to assessee’s income under section 41(1) – Whether since liability towards creditors remained in existence for a long time and, moreover, assessee failed to establish genuineness of those liabilities by producing supporting evidence, impugned addition was to be confirmed – Held, yes [Para 7] [In favour of revenue]

h) ITAT Mumbai Bench in the case of ITO vs. Sajjan Kumar Didwani, 47 com 381 held as under:

i. Section 41(1) of the Income-tax Act, 1961 – Remission or cessation of trading liability (Cessation of trading liability) – Assessment year 2009-10 – Assessee’s books showed trading liabilities which worked out to approx. 40 per cent of purchase and were outstanding for a period of almost six years – Entertaining doubts with regard to genuineness of outstanding liabilities, notices were issued to four parties – One party gave its confirmation and other notices were received as unserved – Assessing officer observed that said liabilities ceased to exist and invoked section 41(1) – Whether since, confirmation was furnished by one party, application of section 41(1) was unjustified and matter needed re-adjudication – Held, yes – Whether as regards other liability, since no confirmation or any other material furnished and no claims were made same would be said to be clearly unproved and section 41(1) was rightly invoked – Held, yes [Para 4.3] [Partly in favour of revenue]

i) The Hon’ble Andhra Pradesh High Court in the case of A.K. Babu Khan vs. CWT 102 ITR 757 held as under:

Section 24 of the Wealth-tax Act, 1957, read with rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 – Appellate Tribunal – Orders of – Assessment years 1959-60 to 1963-64 – WTO made ex-parte assessments for relevant assessment years on ground that assessee did not submit returns in any one of assessment years despite several notices issued in that regard – AAC upheld said assessment – Even before AAC though assessee took time to adduce evidence but no evidence was produced by him in support of his case – After death of assessee his legal representatives filed appeal before Tribunal and filed an application to adduce further evidence – Tribunal, however, rejected application for adducing further evidence – Whether there was any infirmity in order of Tribunal – Held, no

11. Having considered the above case law relied upon by the learned DR, in the case of Dattatray Poultry Breeding Farm (P) Ltd, we find that the sundry creditors were outstanding for 6 to 20 years and during the enquiry made by the AO u/s 133(6) of the Act, some of the creditors categorically denied that they had made any transaction with the assessee while in some cases, the notices were returned unserved. It was in these circumstances that the AO had held that there was a cessation of liability and the addition was made u/s 41(1) of the Act.

12. In the case of Palky Investments & Trading Co. (P) Ltd, the Hon’ble Bombay High Court was dealing with the case of levy of penalty u/s 271(1)(c) of the Act for alleged concealment of income with respect to addition made u/s 41(1) of the Act on account of cessation of liabilities. The Hon’ble High Court has considered that in the case in the penalty proceedings, all the three authorities had concurrently arrived at a fact that claim made by assessee with regard to its outstanding liabilities for subject A.Y was false. Therefore, the facts of this case are different and distinguishable from the facts before us and therefore, cannot be applied to the case on hand.

13. In the case of CIT vs. TV Sundaram Iyengar & Sons Ltd, the Hon’ble Supreme Court was considering the case where certain deposits from customers in course of its business were originally treated as capital receipts by the assessee and unclaimed credit balances, which were time barred, were written back by the assessee to its P&L A/c and were treated as assessee’s income and were held to be liable to tax. Thus, in the said case, the assessee therein had recognized the cessation of its liability and the issue was whether capital receipts can thereafter be treated as revenue receipt. In the case before us, the assessee has not recognized the cessation of liability as in the case of TV Sundaram Iyengar & Sons and hence the case is distinguishable on facts. Therefore, the said judgment cannot be applied to the facts of the case before us.

14. In the case of Rama Steel Rolling Mills & General Engg. Works, the Hon’ble Rajasthan High Court has held that the liability at the end of the year, if not proved could certainly be added u/s 41(1) of the Act but still it is open for the AO to verify the discharge of liability and if liability had been discharged till the date of assessment, then there would be no remission or cessation of liability, but if assessee failed to produce the creditor or was unable to give exact address of the creditors, then such liability would stand ceased during the year and AO would be free to add back same as per law.

15. In the case of Gujtron Electronics (P) Ltd, the Hon’ble Gujarat High Court held that where there is limitation period in claiming the amount back and if there is absolutely no movement or correspondence between the assessee and its members with respect to the claim or with respect to deposit amount, the same can be brought back to tax u/s 41(1) of the Act.

16. Thus, it can be seen that the facts of the case relied upon by the learned DR are distinguishable from the facts of the case before us. In the decisions relied upon by the learned Counsel for the assessee it was held that the genuineness of the trade payables or creditors has to be examined in the year in which they originate and that unless the liability becomes unenforceable or is written off by the assessee or is given up by the other party or something is brought on record that there is cessation of liability, the same cannot be brought to tax u/s 41(1) of the Act. Therefore, they are very much applicable to the facts of the case before us and respectfully following the same, since there is no evidence that there is a cessation of liability during the relevant A.Y, we hold that it cannot be brought to tax u/s 41(1) of the Act during the relevant A.Y. The addition is accordingly deleted.

17. In the result, assessee’s appeal is allowed. Order pronounced in the Open Court on 5th March, 2020.

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