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Perfect Paradise Emporium Pvt. Ltd vs. ITO (ITAT Delhi)

COURT:
CORAM: ,
SECTION(S): ,
GENRE:
CATCH WORDS: , ,
COUNSEL:
DATE: April 22, 2015 (Date of pronouncement)
DATE: July 27, 2015 (Date of publication)
AY: 2007-08
FILE: Click here to download the file in pdf format
CITATION:
S. 41(1)/ 68: Unclaimed liabilities to creditors, even if fictitious and bogus, cannot be assessed u/s 41(1) in the absence of a write-back. The bogus credits can be assessed u/s 68 only in the year the credits were made and not in the year they are found to be not payable

(i) Having held that the sundry creditors are not payable and fictitious, the next question that comes up for our consideration is the year in which the amount is taxable under what provisions of law either under Section 41(1) or 68 of the Act. We are required to examine whether this amount should be brought to tax in the year in which credit was made first time in the books of account or in the year in which these are found not payable. An identical issue had come up for consideration before the Hon’ble Gujarat High Court in the case of CIT Vs Bhogilal Ramjibhai Atara in Tax Appeal No. 588 of 2013, dated 04.02.2013, in which it was held that that even if the debt itself is found to be non-genuine from the very inception there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income under section 41(1) of the Act. The Jurisdictional High Court in the case of CIT Vs. Shri Vardhman Overseas Ltd., (2012) 343 ITR 408 (Del), has dealt with the issues of taxability under section 41(1) of the Act in a case where long outstanding sundry creditors were treated as taxable. The High Court after referring to the decisions of Hon’ble Supreme Court in the cases of CIT(Chief) Vs. Kesaria Tea Co. Ltd., (2002) 254 ITR 434(SC) and CIT Vs. Sugauli Sugar Works P. Ltd (1999) 236 ITR 518 (SC, has held that such amounts cannot be brought to tax under Section 41(1) of the Act. The Hon’ble Suprme Court in the case of CIT Vs. Sugauli Sugar Works P. Ltd. (supra) held that a unilateral action cannot bring about a cessation or remission of the liability because a remission can be granted only by the creditor and a cessation of the liability can only occur either by reason of operation of law or the debtor unequivocally declaring his intention not to honour his liability when payment is demanded by the creditor, or by a contract between the parties, or by discharge of the debt.

(ii) Applying the ratio in the cases mentioned supra, the amount in question cannot be brought to tax in the year under appeal under the provisions of Section 41(1) of the Act. It is trite law that an addition under Section 68 can be made only in the year in which credit was made to the account of the creditors in the books of account maintained. Kindly refer to the Supreme Court in the case of Damodar Hansraj Vs. CIT, (1969) 71 ITR 427 (SC). Admittedly, in this case the credit to the account of creditors was made in the earlier years and therefore, the amount even cannot be brought to tax under Section 68 in the year under appeal. However, it is open to the Department to levy tax on such amount by resorting to the remedies available under the provisions of Act by duly following the procedure known to the law.

2 comments on “Perfect Paradise Emporium Pvt. Ltd vs. ITO (ITAT Delhi)
  1. Sher Singh says:

    41(1) is a too rotten matter due to myopic views of members especially at Mumbai who have failed to obey orders of High Court & Apex Court brazenly. But, a welcome decision & sound reasoning by Delhi Bench

  2. Nem Singh says:

    Its a good recent judgment of the hon’ble Tribunal on applicability of section 41 (1) but the department take the decision without considering the judicial pronouncement on the subject matter and issue. The brief discussion along with IMP judgments is as under:

    The question of making addition u/s 41(1) of the Income Tax Act by treating the audited Balance Sheet’s outstanding liabilities as income of the year does not arise at all in the case of appellant.

    A. Relevant provisions of section 41(1) of the Income Tax Act, 1961:

    “Profits chargeable to tax
    S.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 the 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 loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount of 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”

    (I) On a careful reading of section 41(1) it is opinioned that it creates a fiction. Further for invoking section 41(1) of the Act the following conditions must be satisfied:

    (i) In respect of assessment of an assessee, an allowance or deduction has been made in respect of any loss, expenditure, or trading liability incurred by him
    (ii) Any amount is obtained by the assessee in respect of such loss or expenditure or,
    (iii) Any benefit is obtained by the assessee in respect of such trading liability by way of remission or cessation thereof.
    (iii) Such amount or benefit is obtained in a subsequent year.

    When above conditions are satisfied then-

    (i) The amount so obtained by the assessee or the value of benefit so received by him is deemed to be the profits and gains of business or profession which otherwise would not have been his income,
    (ii) Such amount or value of benefits would be chargeable as income of the previous year when such amount was obtained or benefit had accrued to him.
    (iii) It is immaterial whether the business or the profession of the assessee was in continuation or not in the year of receipt of benefit by way of remission or cessation.
    (iv) Such benefit or amount can be in cash or in kind or by way of book entries,
    (iv) The deeming fiction cannot be invoked for a receivable benefit. It should be shown by the revenue that benefit has been actually received,

    (II) The meaning of remission or cessation:
    (i) The word remission means a positive act on the part of the creditor to wave or forgo his right to recover the debt from the assessee. Some agreement with or letter from the creditor, or some agreement with or letter from the creditor whereby recovery of debt by him is forgone or waived directly or by necessary implication has to be shown.
    (ii) The word cessation means the termination by operation of law or by an order of a court, of legal obligation of the assessee to pay to the creditor. A contractual agreement between the parties, approved by a court to wave the debt or terminate the legal obligation of the assessee will also cease the liability to exist.
    Therefore, 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 U/s 41(1).

    B. In this regard reliance is placed on the following judgments of the Hon’ble Courts wherein it has been held that to attract the provisions of Section 41(1) of the Act, it is necessary that there should have been a cessation or remission of liability by the assessee.
    1. CIT vs Shri Vardhaman Overseas Ltd. 343 ITR 408 (Del): In this case the Ld AO discovered certain credits and held that the creditors were not genuine and therewas no genuine outstanding in their accounts and added Rs.1,25,46,534/- which represented the credit balances in the accounts of nine parties u/s 68 of the Act. On appeal, the CIT(A) held that the liabilities had ceased to exist and therefore, the addition of Rs.1,25,46,534/- made by Ld AO was justified and confirmed it under section 41(1) of the Act.
    On further appeal the Tribunal held that the applicability of section 68 was ruled out since no fresh amounts were credited in the accounts of the creditors under consideration during the relevant accounting year. It also held that the assessee was a limited company whose accounts were accessible to general public and that the balances in the accounts of the sundry creditors were only brought forward balance therefore the plea of the assessee that there was no cessation of any liability to the sundry creditors in the relevant accounting year and, hence, the provisions of section 41(1) of the Act were not attracted is accepted in the light of the judgment of Supreme Court in the case of Sugauli Sugar Works (P) Ltd . The tribunal also applied the judgment of the Supreme Court in the case of Kesaria Tea Co. Ltd and held that resort to section 41(1) can be had only if liability of the assessee ceased finally in the relevant accounting year without the possibility of being revived. It was also noted by the tribunal in paragraph 11 of its order that the decision of Supreme Court in Sagauli Sugar Works (P) Ltd would apply with greater force to the assessee’s case because in the said decision the assessee had credited the profit and loss account with the amounts standing to the credit of the sundry creditors, whereas in the present assessee’s case the amounts payable to the sundry credits were not credited to its profit and loss account for the year and were still shown as outstanding as on 31.03.2002.
    On appeal to the High Court after due consideration of advanced argument of department and several judgments of both sides the hon’ble court has held that section 41(1) does not apply if the amount is not written back in the books of accounts.
    “Held, dismissing the appeal, that the assessee had not unilaterally written back the account of the sundry creditors in its profit and loss account. The liability was shown in the balance-sheet as on March 31, 2002. The assessee being a limited company, this amounted to acknowledging the debt in favour of the creditors for purposes of section 18 of the Limitation Act, 1963. The assessee’s liability to the creditors, thus, subsisted and did not cease nor was it remitted by the creditors. The liability was enforceable in a court of law. The amount was not assessable under section 41(1) of the Act.”
    2. CIT Vs SUGAULI SUGAR WORKS PVT. LTD. (1991) 236 ITR, 518(SC) In this case the Hon’ble Calcutta High Court observed (reported (1983) 140 ITR 286 (Cal) (page 292)) that:
    “The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by his own unilateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor. It is not in dispute and it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the may occur either by reason of the operation of law, that is, on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor or a contract between the parties, or by discharge of the debt-the debtor making payment thereof to his creditor. Transfer of an entry is neither an agreement between the parties nor payment of the liability.”
    The Hon’ble Supreme Court after considering views of various High Courts judgments such as CIT vs Rashmi Trading (1976) 103 ITR 312 (Guj), J. K. Chemicals Ltd Vs CIT (1966) 62 ITR 36 (Bom) which quoted by the hon’ble High Court and followed. Held, We have no hesitation to say that the reasoning is correct and we agree with the same.

    “The principle that expiry of the period of limitation prescribed under the limitation Act could not extinguished the debt but it would only prevent the creditor from enforcing the debt, has been well settled. It is enough to refer to the decision of this court in Bombay Dyeing & Manufacturing Co. Ltd vs State of Bombay, AIR 1958 SC 328. If that principle is applied, it is clear that mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. Apart from that that will not by itself confer any benefit on the debtor as contemplated by the section.” Dismissed the appeal of the department and affirmed the decision of Calcutta High Court.
    The aforesaid view was reiterated by the supreme court in the case of CIT Vs Kesaria Tea Co, Ltd. (2002) 254 ITR 434 (S.C) after considering its earlier decision in CIT Vs T.V Sundaram Iyenger & Sons Ltd. (1996) 222 ITR 344 (S.C) and distinguished the same on the ground that factual matrix and the provisions of law considered therein were entirely different.
    3. CIT Vs. Jain Esports Pvt. Ltd., ITA No. 235/2013, order date 24.05.2013, Delhi High Court: In this case during assessment proceedings u/s 143(3) for the AY 2008-09 the Ld AO has examined the balance sheet of the assessee for the relevant period and noted that the balance sheet disclosed a sum of Rs.1,57,54,011/- as sundry creditors and found that an amount of Rs.1,53,48,850/- is outstanding in the books since 1984-1985 in the name of M/s Elephanta Oil & Vanaspati Ltd. and after due verification a sum of Rs.1,57,15,137/- added to the income of the assessee. The CIT(A) deleted the part addition on the ground that the assessee has continued to reflect the liabilities against the name of criditors in subcequent period ie ended on 31.03.2009 and 31.03.2010 held that as the assessee company continued to reflect amounts payable to those creditors there was no cessation or liability and consequently, the provisions of section 41(10 of the Act were inapplicable. However, upheld the addition of Rs.1,53,48,850/- on the ground that there was cessation of liabilities, but on the basis that the assessee had failed to established the genuineness of the liability towards Elephanta Oil & Vanaspati Ltd.
    On further appeal by the assessee, the Tribunal accepted the contention of the assessee that a sum of Rs.1,57,10,690.53 was owed by M/s Elephanta Oil & Vanaspati Ltd. to the assessee company and thus, the net effect of the same would be that no amount would be payable by the assessee to M/s Elephanta Oil & Vanaspati Ltd. and a sum of Rs.3,61,840.78 would be receivable after setting off the amount of Rs. 1,53,48,849/- which was standing to the credit of M/s Elephanta Oil & Vanaspati Ltd. The Tribunal was of the view that it was not correct to only accept the figure relating to the amount that was receivable by the assessee company while rejecting the amount payable by the assessee company to M/s Elephanta Oil & Vanaspati Ltd.
    The department has preferred an appeal before the High Court, dismissed the appeal of the revenue department. The relevant paras of the order is as under:
    “20. In order to attract the provisions of Section 41(1) of the Act, it is necessary that there should have been a cessation or remission of liability. As held by the Bombay High Court, in the case of J. K. Chemicals Ltd. (supra), cessation of liability may occur either by the reason of the liability becoming unenforceable in law by the creditor coupled with debtor declaring his intention not to honour his liability, or by a contract between parties or by discharge of the debt. In the present case, the assessee is acknowledging the debt payable to M/s Elephanta Oil & Vanaspati Ltd. and there is no material to indicate that the parties have contracted to extinguish the liability. Thus, in our view it cannot be concluded that the debt owed by the assessee to M/s Elephanta Oils & Vanaspati Ltd. stood extinguished.
    21. Although, enforcement of a debt being barred by limitation does not ipso facto lead to the conclusion that there is cessation or remission of liability, in the facts of the present case, it is also not possible to conclude that the debt has become unenforceable. It is well settled that reflecting an amount as outstanding in the balance sheet by a company amounts to the company acknowledging the debt for the purposes of Section 18 of the Limitation Act, 1963 and, thus, the claim by M/s Elephanta Oil & Vanaspati Ltd. can also not be considered as time barred as the period of limitation would stand extended. Even, otherwise, it cannot be stated that M/s Elephanta Oil & Vanaspati Ltd. would be unable to claim a set-off on account of the amount reflected as payable to it by the assessee. Admittedly, winding up proceedings against M/s Elephanta Oil & Vanaspati Ltd. are pending and there is no certainty that any claim that may be made by the assessee with regard to the amounts receivable from M/s Elephanta Oil & Vanaspati Ltd. would be paid without the liquidator claiming the credit for the amounts receivable from the assessee company. It is well settled that in order to attract the provisions of Section 4 1(1) of the Act, there should have been an irrevocable cession of liability without any possibility of the same being revived. The assessee company having acknowledged its liability successively over the years would not be in a position to defend any claim that may be made on behalf of the liquidator for credit of the said amount reflected by the assessee as payable to M/s Elephanta Oil & Vanaspati Ltd.
    22. We may also add that, admittedly, no credit entry has been made in the books of the assessee in the previous year relevant to the assessment year 2008- 2009. The outstanding balances reflected as payable to M/s Elephanta Oil & Vanaspati Ltd. are the opening balances which are being carried forward for several years. The issue as to the genuineness of a credit entry, thus does not arise in the current year and this issue could only be examined in the year when the liability was recorded as having arisen, that is, in the year 1984-1985. The department having accepted the balances outstanding over several years, it was not open for the CIT (Appeals) to confirm the addition of the amount of ` 1,53,48,850/- on the ground that the assessee could not produce sufficient evidence to prove the genuineness of the transactions which were undertaken in the year 1984-85.”
    4. CIT vs Bhogilal Ramjibhai Atara, ITA No. 588/2013 order dated 04.02.2014 (Guj-HC): held that even if there is unclaimed liability of earlier years where even creditors are untraceable and liabilities are non-genuine, then also the addition cannot be made u/s 41(1) since assessee has not written it back in books of account.
    In AY 2007-08 the assessee showed an amount of Rs. 37.52 lakhs as being due to various creditors. The AO issued summons to the creditors. Some of the creditors were not found at the given address and some stated that they had no concern with the assessee. The AO took the view that there was a “cessation” of the liabilities and assessed the said liabilities to tax u/s 41(1). The CIT(A) confirmed the addition though the Tribunal deleted it on the basis that as the liabilities had not been written back in the accounts, s. 41(1) did not apply. On appeal by the department to the High Court HELD dismissing the appeal:
    “Section 41(1) would apply in a case where there has been remission or cessation of liability during the year under consideration. In the present case, there was nothing on record to suggest there was remission or cessation of liability in the AY 2007-08. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. The AO undertook the exercise to verify the records of the so-called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi-parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income u/s 41(1) of the Act. This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of s. 41(1) of the Act there is no cure for it.”
    5. CIT vs Tamilnadu Warehousing Corporation 292 ITR 310 (Mad): In this case assessment was completed under section 143(3) of the Act. Further the CIT passed an order under section 263 of the Act and set aside the assessment with a direction to the AO to assesss the said amount under section 41(1) of the Act for the assessment year 1989-90. In this case the assessee has admitted the amount of Rs.8,22,925 as liability in the balance sheet. The hon’ble tribunal while deciding the appeal against the order u/s 263, canceled the order passed u/s 263 and restore the assessment order passed by the Assessing Officer and held that:
    “it is clear that the assessee has continued to show the admitted amount of Rs.8,22,925/- as liability in the balance sheet. The undisputed fact is that it is a liability reflected in the balance-sheet. Once it is shown as liability by the assessee, the Commissioner of Income Tax is wrong in holding that the same is assessable under section 41(1) of the Act. Unless and until there is a cessation of liability, section 41 will not be pressed in to service.”
    On appeal to High Court:
    “Held, in view of the foregoing reasons, we find the reasoning by the Tribunal was based on valid materials and evidence and hence there is no error or legal infirmity in the order of the tribunal so as to warrant interference.”
    6. The Hon’ble Jurisdictional ITAT in the case of Navneet Singh Sahni vs Asstt. CIT, ITA No.444/Del/2012 order dated 13.04.2012 considering the facts of the case and decisions relied upon by the assessee the Hon’ble tribunal held that the facts of the assessee case are similar to the facts in the case of CIT vs Shri Vardhaman Overseas Ltd wherein the assessee has been granted the relief by the hon’ble jurisdiction High Court the relevant part of the order is as under:
    “5. We have heard both the sides in detail. In the assessee’s case the liability was outstanding since 2002 and same as reflected in the balancesheet of the assessee for subsequent years. The assessee has not credited the amount in the Profit & Loss A/c as it has been done in the case of T.V. Sundaram Iyengar & Sons Ltd. cited supra. Therefore, in our considered view the ratio laid down by the Hon’ble Supreme Court in that case is not applicable to the facts of the assessee’s case. Further we have also found that the facts of the assessee’s case are similar to the facts in the case of CIT Vs. Shri Vardhman Overseas Ltd. cited supra wherein the assessee has been granted the relief by the Hon’ble jurisdictional High Court, where Hon’ble High Court has held as under:-
    “Section 41(1), read with section 68, of the Income-tax Act, 1961 – Remission or cessation of trading liability – Assessment year 2002-03 – Assessee was a company engaged in manufacture of rice from paddy – It was also selling rice after purchasing same from local market – In course of assessment, Assessing Officer wanted to verify sundry creditors shown in books of account – He, therefore, called upon assessee to submit confirmation letters from sundry creditors – On failure of assessee to submit confirmation letters, Assessing Officer added amount in question to assessee’s income under section 68 – On appeal, Commissioner (Appeals) held that liabilities/credits had ceased to exist and, therefore, addition made by the Assessing Officer was justified but he confirmed same under section 41(1) – Tribunal held that applicability of section 68 was ruled out since no fresh amounts were credited in accounts of creditors during relevant accounting year – Tribunal further found that amounts payable to sundry creditors were not credited to assessee’s profit and loss account for year and those amounts were still shown as outstanding at end of relevant year – Tribunal therefore held that provisions of section 41(1) were not attracted to case – Whether in view of fact that assessee had not unilaterally written back accounts of sundry creditors in its profit and loss account, Tribunal was justified in deleting impugned addition made under section 41(1) – Held, yes [In favour of assessee]”.
    7. The ITAT, Delhi Bench `D’ in the case of Kaps Advertising vs. ITO (2011) 14 taxmann.com 183 (Delhi-ITAT), has held as under:-
    “In the case of CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518/102 Taxman 713, the Supreme Court came to the conclusion that after expiry of limitation period, a debt does not stand extinguished, but it only bars the creditors from taking recourse to a legal remedy for enforcement of the debt. Therefore, even where an entry is made in the accounts of the debtors unilaterally without any act on the part of the creditor, it will not lead to a conclusion that the liability has ceased to exist. Such an act will also not confer any benefits on the debtor as contemplated in section 41(1). [Para 12]
    The decision in the case of Suguali Sugar Works (P.) Ltd. (supra) is applicable to the facts of the case more so when the liability has not been written off in the accounts of the assessee. In such circumstances, non-availability of the creditor and lack of any correspondence with them does not obliterate the debt, as the assessee continues to show the same in its books of account. Thus, the provisions contained in section 41(1) is not applicable. It is an undisputed fact that the assessee has not written off the amount to the credit of the profit and loss account. Thus, it has not treated the money as its own money. Accordingly, it has not become richer by the impugned amount as it continues to hold out that it is indebted to the aforesaid creditors. [Para 13]”
    7. Considering all these facts and circumstances of the case, we set aside the order of the CIT(A) and allow the appeal filed by the assessee.”

    It is further submitted that there are different views on the issue of “waiver of loan” some courts says that if the loan for capital assets provisions of section 41 not applicable. If it is for working capital or cash credit for day to day business activities it covered u/s 41(1) of the Act. But in my views the Loan is always loan and considered as capital receipts at the time when it was received…..algnsinghad@gmail.com
    Regards
    Nem Singh
    Advocate

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