|CORAM:||G. C. Gupta (VP), Inturi Rama Rao (AM)|
|CATCH WORDS:||cessation, remission, unclaimed liabilities|
|COUNSEL:||S. M. Mathur|
|DATE:||April 22, 2015 (Date of pronouncement)|
|DATE:||July 27, 2015 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|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.