Income Tax Appellate Tribunal - Ahmedabad
New Commercial Mills Co. Ltd. vs Dy. Cit on 18 October, 2001
Equivalent citations: (2001)73TTJ(AHD)893
ORDER
Anandilal Gehlot, A.M. This appeal of the assessee is directed against the order of Commissioner (Appeals), Ahmedabad, for assessment year 1991-92. The assessee has raised several grounds of appeal in which the main controversy sought for is in respect of confirmation of addition of Rs. 68,56,871 under section 41(1) of Income Tax Act, 1961.
2. The assessee is a limited company which was engaged in manufacturing of cloth but since 1980, no manufacturing has been done. The return of income relating for assessment year 1991-92 has been filed on 30-12-1991 declaring a loss of Rs. 76,25,086, Audited statements of accounts have also been submitted along with return. The business of the assessee-company pertaining to the year under appeal was trading of cloth. The books of account of the assessee-company was not subject to tax audit as its turnover was less than Rs. 40 lakhs.
3. During the course of assessment proceedings, the assessing officer noticed from balance sheet as on 31-3-1991, that sundry creditors of Rs. 1,32,60,255 as compared to creditors of Rs. 1,31,95,364 in the last year. The assessing officer required certain details through his letter dated 15-10-1993, which was supplied by the assessee through its letter dated 21-10-1993. The assessing officer produced the relevant facts related to questions and answers in his order at per pages 4 and 5 and at per pages 8 and 9 out of which some important facts are reproduced below :
Gist of notice For the details of sundry creditors, 15 days time to submit the details was requested on the ground that old records have to be verified in respect of these creditors. However, the undersigned had verified the old records of the assessee and found the position of sundry creditors as under :
Year Amount (Rs) as on 31-3-1985 1,12,14,171 as on 31-3-1986 1,12,27,408 as on 31-3-1987 1,29.14,148 as on 31-3-1988 1,24,49,706 as on 31-3-1989 1,27,63,972 as on 31-3-1990 1,31,95,364 as on 31-3-1991 1,32,60,255 Further, assessee's old records were examined and found that the business activity of the assessee-company has been dull since last 8 to 10 years, which suggests that these liabilities are very old and no claim appears to have been filed by the creditors to recover the amount. Under these circumstances, its explanation was required as to why these liabilities should not be treated as ceased liabilities under section 41(1) of the Act and should be taxed accordingly.
In response to this notice, the assessee submitted as under vide its letter dated 21-10-1993:
"As regards creditors we submit herewith the list of outstanding as on 31-3-1991. On verification of the records, we have found out that the dues are old prior to 24-11-1980 when we have sold plant, machinery, land, building, etc. Some of them are under dispute and some payments have been done as shown in the remarks column.
In regard to your show-cause notice for applying section 41(1) please note that the condition precedent for the said section to apply is that the assessee must have obtained whether in cash or in any other manner any amount in respect of such trading liability by way of remission or cessation thereof. Now, we know it for a fact as much as you know it for a fact that we have not received any amount as aforestated; nor there has been any remission or cessation of any trading liability. Therefore, our reply is as simply as stating that the aforesaid condition precedent for the application of section 41(1) is not fulfilled. In spite of the receipt of this reply your adverse opinion persists, please let us know the facts on the basis of which you can state or assert that the above factual condition precedent is fulfilled. At the cost of repetition because we and, therefore, we say that the condition precedent is not fulfilled.
Please note that even if time-barred debt is written back, it is not income because only the remedy of going to the court for recovering is time-barred and not that the liability to pay comes to an end and, therefore, such written back liabilities are not income. There is ample authority in case law in favour of the assessee even in such extreme cases of the liabilities being written back because they become time-barred and credited as income. Such case law is as follows :
(i) Bombay Dyeing & Mfg. Co. Ltd. v. State of Bombay AIR 1958 SC 328 wherein it is held that the debit or liability subsists notwithstanding that its recovery is barred by limitation.
(ii) CIT v. Kutappu & Sons (1974) 96 ITR 327 (Ker). Wherein it is held that obligation continues though the recovery is barred;
(iii) Baroda Traders (P) Ltd. v. CIT (1965) 57 ITR 490 (Guj);
(iv) Gannon Dunkerley & Co. v. CIT (1976) 102 ITR 428 (Bom);
(v) CIT v. Chase Bright Steel Ltd. No. 2 (1989) 75 CTR (Bom) 67 : (1989) 77 ITR 128 (Bom);
(vi) Kohinoor Flour Mills Co. Ltd. v. CIT (1963) 49 ITR 578 (Bom); and
(vii) J.K. Chemicals Ltd. v. CIT (1966) 62 ITR 34 (Bom).
You may please note that in view of the above binding Supreme Court and Gujarat High Court decisions. It will not be proper for you to decide to the contrary.
It bears repetition that we have not written back or credited any of these liabilities, On the contrary, as is well established by our showing it in our accounts from year-to-year we are going on acknowledging it and, therefore, every year it gets a lease of three years to be time-barred (vide Ambica Mills Ltd. v. CIT (1964) 54 ITR 167 (Guj)).
Further the remark column shows that Rs. 6,66,02.75 have been paid on 7-5-1993, to various creditors. This is sufficient to prove that the process of payment still continues and the liability is still recognised.
Under these circumstances, we submit that for the outstanding creditors of Rs. 1,32,60,255 section 41(1) of the Act is not applicable".
The submission of the assessee was perused and various case laws quoted therein were also gone through.
10. I agree with the assessee that section 41(1) can only be invoked if the concerned liability of the assessee must have ceased finally. There must be no possibility of the liability being revived in any future time. If there is any such possibility then the cessation is not complete and section 41(1) is not attracted. Further, it has also been held in various judgments that remission of liability arises only when the creditor voluntarily gives up the claim. The cessation of such liability arises only when it ceases to exist in the eye of law for all intends and purposes (Liquidator, Mysore Agencies (P) Ltd. v. CIT (1978) 114 ITR 853 (Karn)). There is another aspect of the matter. If the unclaimed liability is shown as a subsisting one in the annual balance sheet of the assessee, such action on the part of the assessee amounts to acknowledgment by the assessee within the meaning of section 19 of Limitation Act, 1908, In the case of Motilal Ambaidas v. CIT (1977) 108 ITR 136 (Guj), it has been held that section 41(1) is not a charging provision and, therefore, it cannot be contended that it should be strictly construed. It has to be construed in such a manner as to make the levy of the taxes effective and to make the machinery of assessment workable. Further, in order to bring a case under section 41(1), it has to be shown by the department that there has been remission or cessation of the liability (Liquidator, Mysore Agencies (P) Ltd. in view of the above-mentioned decisions which are in favour of the assessee, since onus to prove that there is a cessation of liability, the assessee was required vide notice under section 142(1) dated 25-10-1993, to submit the current/postal addresses of the creditors".
The assessee submitted its reply in receipt section vide letter dated 2-12-1993, as under :
"You were in the midst of the assessment for the above assessment year when you asked us to supply the addresses of some parties and the confirmations of some of these parties regarding the credit balances in their accounts. Now, let us humbly submit that we can immediately understand that on record of these addresses you will address letters to them and this will create lot of difficulties in our business. The same is true for our giving and getting confirmations from some of these parties. In all humility, we want to bring to your notice that in respect of these parties nothing has happened either on the credit side or the debit side of their accounts in this year and, therefore, these accounts, addresses or confirmations are all of no consequence or result so far as income computation of this year is concerned. Therefore, we humbly request you not to press the above requisition on us and save us from resultant hardship not at all beneficial to you."
4. The assessee-company produced the books of accounts as mentioned in assessing officer's order at page 9 and some required details have also been submitted by the assessee and these details discussed by the assessing officer in his order in para 16 at page 11 which are reproduced below :
"In the course of assessment proceedings, the assessee has submitted the list of sundry creditors (copy of which is enclosed herewith). The assessee has put them in three categories :
Rs.
(i) Creditors for cotton purchases 31,90,938
(ii) Creditors for stores supplies 22,87,694
(iii) Other miscellaneous creditors 77,81,621 Total 1,32,60,253 Creditors for cotton purchases are in respect of 28 persons and creditors for stores supplies are of 205 parties and the other miscellaneous creditors are mainly of Ahmedabad Municipal Corpn. insurance, unpaid salary of 1967-68 to 1980-81, sales-tax of 1980-81, family, pension fund, excise duty, brokerage, commission, education cess, provision of penalty of control cloth packed and production of automatic looms, unpaid bonus of 1967-68 to 1978, unpaid remuneration of committee and export promotion fund, unpaid electric power consumption, etc."
5. On verification of details, the assessing officer found that out of total for which he proposed to invoke section 41(1), part were paid in subsequent years and part were fund sub judiced. After deducting these amounts, balance of Rs. 68,56,871 added as deemed income under section 41(1) of the Act. The relevant details narrated by the assessing officer in his order are as under :
Rs.
Liabilities paid in subsequent years 18,17,953 Sub judice liabilities 45,85,429 Balance added under section 41(1) 68,56,871 1,32,60,253
6. The assessing officer recorded the reasons for invoking section 41(1) at page 10 of his order which are reproduced as under :
"14. The plea of the assessee that there are debit as well as credit in the books, hence confirmation, addresses, etc., of no consequence, is also not valid. The person from whom the assessee has to recover the amount may be in existence whereas to whom the assessee has to pay, may not be in existence, after the gap of a long period of 10 to 14 years. However, this claim of the assessee is not bona fide that it intends to make the payment to, creditors out of debit balances. As has been discussed hereinabove that the assessee has claimed bad debts in the year under consideration so the intention of the assessee to make the payments to its creditors is also doubtful.
15. By not providing the postal addresses, the assessee has failed to discharge the onus on it, by which it was required to prove that the creditors against whom the assessee has shown liabilities to pay, are still in existence to recover the amount due to them. "
7. The Commissioner (Appeals) has sustained the addition with some observations which are reproduced below :
"A. I have considered the facts and I find that the liabilities worth Rs. 68,56,871 have not been proved and they ceased to exist, in absence of these liabilities, the assessee gets a clear benefit for such amount in respect of these liabilities. If these are removed from the liability side, there is an increase in the assets upto this extent and the assessee is benefitted for this amount. I, therefore, hold that the provisions of section 41(1) are applicable to the facts of this case.
5. Regarding the year of which the liabilities ceased to exist, I requested the learned counsel of the appellant to file before me the copies of accounts and the addresses so that the year in which it ceased, can be ascertained. In appeal proceedings also, the copies of accounts of these parties till date or even the full addresses were not supplied. Due to non-cooperation on the part of the assessee, the correct year in which the different liabilities ceased to exist, cannot be worked out. The only alternative is to make the addition in this year under section 41(1) of the Act. The provisions have been reproduced in the assessment order. The assessing officer has also discussed the case law directly applicable and the assessee has not been able to prove that these liabilities still exist in this relevant year. The addition is, therefore, upheld."
8. The learned authorised representative of the assessee reiterated the arguments and submissions before us which were made before the revenue authorities. He drew our attention on the list of which amount has been taken as deemed income under section 41(1) in which his name has also appeared. He vehemently argued that the assessing officer has committed a gross mistake in invoking section 41(1), it is his contention that in the circumstances, section 41(1) is not applicable at all, therefore, the addition made be quashed. In support of his contention, he referred number of decisions out of which certain decisions are as follows :
(i) CIT v. Sugauli Sugar Works (P) Ltd. (1999) 236 ITR 518 (SC); and
(ii) Ambica Mills Ltd. v. CIT (1964) 54 ITR 167 (Guj).
9. The learned Departmental Representative has supported the orders of the revenue authorities. He also referred and relied upon the decision of Tribunal Jabalpur Bench in Dy. CIT v. Bhagawandass Shobhalal Jain (1997) 60 ITD 118 (Jab-Trib).
10. We have considered the rival submissions of the parties, perused the records and orders of revenue authorities and gone through the decisions cited by the parties. In short the controversy in the instant appeal is that the assessing officer required postal addresses of all sundry creditors simply on the basis that these were old liabilities and same will not be paid by the assessee. On failure to give postal address, assessing officer held that the assessee failed to prove existence of these liabilities, therefore, the same was treated as deemed income under section 41(1) of Income Tax Act. Two important questions are for consideration, firstly whether the action of the assessing officer for treating cessation of liabilities is correct and secondly whether the year under consideration is correct year of cessation of liabilities. The assessing officer has admitted the fact that these liabilities were carried forward from the last 10 to 15 years, then why the year under consideration has been chosen to tax these liabilities. We do not find any cogent reason and material evidence in support that these liabilities have been ceased in the year under consideration in the orders of revenue authorities. With this fact, it is very difficult for us to agree with the revenue authorities to tax such liabilities under section 41(1) in the year under consideration. Apart from this, generally income tax is levied on taxable income earned by the assessee in financial year, where necessary, the legislature has made an exception. An instance is to be found in section 41(1). At the relevant time, inter alia, provided that "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 and subsequently during any previous year, the assessee 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 him or 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. Thus, wherever there is remission of an amount or cessation of a trading liability, the amount received in the previous year can become assessable to tax. Hence, the important words are 'remission' and cessation. Remission has to be granted by the creditors and the cessation of the liability may occur either by reason of the operation of law, that is, on the liability becoming uneforceable at law by the creditor and the debtor declaring unequivocably his intention not to honour his liability when payment is demanded by the creditor or contract between the parties or by discharge of the debt the debtor making payment thereof to his creditor. The relevant provisions have been considered by a Full Bench of Gujarat High Court in details in the case of CIT v. Bharat Iron & Steel Industries (1993) 199 ITR 67 (Guj)(FB). The relevant headnote of the judgment is reproduced as under :
"The key words in section 41(1) of the Income Tax Act, 1961 are 'the assessee 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'. It is the obtaining in 'cash or in any other manner whatsoever any amount ............... or some benefit in respect of such trading liability .............. which is contemplated by the legislature when it used the words 'has obtained', section 41(1) introduces a fiction by which 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 and subsequently during any previous year the assessee 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 him or the value of benefit accruing to him shall be deemed to be profits and gains of the business or profession and, accordingly, chargeable to income-tax as 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. The fiction is an indivisible one. It cannot be enlarged by importing another fiction, namely, that if the amount was obtained or was receivable during the previous year, it must be deemed to have been obtained or received during that year. The amount may be actually received or it may be adjusted by way of an adjustment entry or a credit note or in any other form when the cash or the equivalent of cash can be said to have been received by the assessee. But it must be the obtaining of the actual amount which is contemplated by the legislature when it used the words 'has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure in the past'. In the context in which these words occur, no other meaning is possible."
The learned authorised representative of the assessee has referred a judgment of Hon'ble Supreme Court reported in (1999) 236 ITR 518 (SC)(supra). The headnote of the decision is reproduced as under :
"The following words in section 41(1) of the Income Tax Act, are important; 'the assessee had 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 him'. The section contemplates the obtaining by the assessee of an amount either in cash or in any other manner whatsoever or a benefit by way of remission or cessation and it should be of a particular amount obtained by him. Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is the sine qua non for the application of this section. The mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not enable the department to say that section 41(1) would apply and the amount should be included in the total income of the assessee.
The principle that expiry of the period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt, has been well settled. 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."
11. The learned Departmental Representative has also referred and relied on a decision of Tribunal, Jabalpur Bench (supra), this case is not applicable in the instant case since the facts and the circumstances are quite different. In that case, the revenue has established the cessation of liability. It has also been held by the Tribunal in the said decision that for applying section 41(1), onus is on the revenue to establish that the liability has ceased. It is pertinent to mention here that in the year under, consideration, no such onus has been discharged by the revenue in proving that the impugned liabilities have been ceased in the year under consideration.
12. In view of the totality of facts and the circumstances of the case and in view of the above discussions and observations, the orders of revenue authorities are set aside and the addition of Rs. 68,58,871 made under section 41(1) of the Act is deleted.
13. In the result, the appeal of the assessee is allowed.