Income Tax Appellate Tribunal - Ahmedabad
Patel Chandulal Chhotalal, , Ahmedabad vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "C"
[BEFORE SHRI MAH AVIR SINGH,JM & SHRI A N P AHUJ A, AM]
ITA No.3443/Ahd/2004
(Assessment Year:-2001-02)
Assistant Commissioner of V/s M/s Patel Chandulal
Income-tax, Circle-9, Chhotalal, F.T.D., A-4,
Ahmedabad Swami Gunatit Society,
Memnagar, Ahmedabad
[PAN : AABFP 1577 E]
[Appellant] [Respondent]
Revenue by :- Shri B D Barot, DR
Assessee by:- None
O R D E R
A N Pahuja: This appeal by the Revenue against an order dated 22- 09-2004 of the ld. CIT(Appeals)-XV, Ahmedabad, raises the following grounds:-
1 "The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.8,27,776/- made on account of cessation of liability u/s 41(1) of the Act in the case of 15 creditors whose identity could not be established.
2 The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.1,59,990/- made u/s 41(1) of the Act in the case of Ex-Partner Mr. C.C. Patel as the liability had ceased on the death of the person concerned.
3 The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.4,85,036/- made on account of difference in freight receipt.
4 On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer.
5 It is, therefore, prayed that the order of the ld. CIT(A) may be set aside and that of the order of the Assessing Officer be restored to the above extent."
2 At the outset, the Bench rejected the request for adjournment on behalf of the assessee and proceeded to dispose of the appeal after hearing the ld. DR.
ITA No.3443/Ahd/2004M/sPatel Chandulal Chhotalal
3. Adverting first to ground nos. 1 & 2 of the appeal, facts,in brief, as per relevant orders are that return declaring income of Rs. 3,14,480/- filed on 30.10.2001 by the assessee was taken up for scrutiny with the issue of notice u/s 143(2) of the Income-tax Act,1961[hereinafter referred to as the 'Act;] on 16.10.2002. During the course of assessment proceedings, the Assessing Officer [AO in short] noticed that the assessee had shown liabilities of Rs.19.79.494/- in Schedule-K of the balance sheet as payable to creditors for supplies. Since the assessee was not able to give the addresses and establish the identity of the 15 parties mentioned on page 2 of the assessment order nor could adduce reasons for non- payment of these amounts for more than eight years, the AO brought to tax the amount of Rs.8,27,776/-, having recourse to provisions of sec. 41(l) of the Act, even when the amounts had not been written off in the books of accounts nor was there cessation or remission of these liabilities. The AO rejected the contentions of the assessee that they still owed these amounts to the concerned creditors with the observations that the assessee did not establish the genuineness of these dormant creditors nor was required to discharge the liability shown in the books, the recovery of the amount having been barred by limitation after expiry of 3 years from the date of their occurrence. The AO also observed that writing off of the liability was a mere formality and accordingly, brought to tax the amount of Rs.8,27,776/- + Rs. 1,59,990/-on the ground of cessation of liability.
4. On appeal, the assessee while reiterating their submissions before the AO, contended that the provisions of section 41(1) of the Act were not applicable in their case. While relying upon the decisions in the case of Tirunelveli Motor Bus Service Co. (P.) Ltd. vs. CIT (1970) 78 ITR 55 (SC), CIT Vs. Rashmi Trading (1996) 103 ITR 312 (Guj.),C1T Vs. Sugauli Sugar Works Pvt. Ltd. (1999) 236 ITR 518 (SC),CIT Vs. Bharat Iron and Steel Industries (1993) 199 ITR 67 2 ITA No.3443/Ahd/2004 M/sPatel Chandulal Chhotalal (Guj) (FB), Dy. CIT Vs. Tribeni Tissues Ltd. (2001) 77 ITD 67 (Cal.), CIT Vs. Silver Cotton Mills Co. Ltd. (2001) 170 CTR 377 (Guj.) and Dy.CIT Vs. Assam Tribune (2001) 71 TTJ 52 (Gauhati) (Mag.),the assessee pleaded that there was no actual remission or cessation of the liability and therefore provisions of sec. 41(1) can not be invoked. In the light of these submissions, the ld. CIT(A) deleted the addition holding as under:-
"2.2 I have carefully considered the observations and of the Assessing Officer as well as the arguments and submissions of the appellant I have gone through the decisions relied upon by the Assessing Officer and the appellant. On verification of the 'balance sheet of the appellant I find that the liability of Rs.8,27,776/- has been shown as by the appellant and has not been written off in its books of accounts. Hence, there is neither a case of actual remission or cessation of nor it can be said that the 'appellant has obtained any benefit whether in cash or any manner whatsoever of, any amount in respect of such .trading, liability by way of remission or cessation thereof. I agree with the arguments of appellant that section 41(1) of the Act contemplates actual remission or cessation of liability as well as obtaining of an amount either in cash or in any other manner whatsoever or benefit by way of remission or cessation and it should be of a particular amount. The above argument of the Authorized Representative finds support from various decisions cited by the appellant including of Hon'ble Apex court wherein it has been held that obtaining by the assessee of a benefit by virtue of remission or cessation is sine qua non for the application of this section. In the appellant's case it is not the appellant who has written off the liability in its books of account but it is the AO who is of the opinion that the appellant is not required to discharge the liability on the ground that the creditors are not identifiable and that the debts have got barred by time as per law of limitation. Further, it has also not been conclusively established by the Assessing Officer that an allowance or deduction has been made in the assessment in any previous year in respect of the liability In question for which onus is on the revenue as held by the Hon'ble Supreme Court in the case of Tirunelveli Motor Bus Service Co. Ltd vs. CIT (78 ITR 55). Coming to the issue of the debts being barred by law of limitation,the jurisdictional court of law i.e. Hon'ble Gujarat High Court in the case of CIT Vs. Silver Cotton Mills (170 CTR
377) as well as the Hon'ble Apex court in the case of CIT Vs. Sugauli Sugar Works Pvt. Ltd (236 ITR 518) has categorically held that simply because the period of limitation has come to an end for the purpose of filing a suit for recovery of the said amount or for taking appropriate action against the assesses, it cannot be said that there was a cessation of liability. The liability still remains, though it may not be enforceable at law on account of the provisions of law on account of the provisions of law limitation. As regards the identity and genuineness of the creditors in question, I agree with the argument of Authorized Representative that 3 ITA No.3443/Ahd/2004 M/sPatel Chandulal Chhotalal since the liability is very old, rather having been created more than 8 years back as also observed by the Assessing Officer and since the same having been accepted as genuine in the year of creation as well as subsequent years by the department, the question of genuineness of the creditors at this stage in my opinion is neither justified nort open to the revenue as per the provisions of law. The only issue, which is to be decided, is in respect of applicability of the provisions of section 41(1) of the Act. I am of the considered opinion that once the appellant has shown the liability as outstanding in its books of account and such creditors having been accepted as genuine m the earlier years, it is not open for the revenue to suo motto treat the said liabilities as not required to be discharged merely on the ground that the appellant firm could not identify the whereabouts of the said creditors for the reason that the same was in the knowledge of the partner of the firm who expired way in 1995 and the present partners were not fully aware of the whereabouts of the creditors.
Nonetheless, the said fact alone is not sufficient to conclude that the liabilities ceased to exist and the appellant is no longer required to discharge the same in future. Keeping in view the above facts in totality and following the ratio laid down by various courts of law including the Hon'ble Supreme Court and the Hon'ble Gujarat High Court, the addition of Rs.8,27,776/- on account of cessation of liability is hereby deleted."
4.1 Likewise, the ld. CIT(A) deleted the addition of Rs. 1,59,990/- on account of liability in the name of shri Chandulal Patel..
5. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The learned DR supported the order of the AO.
6 W e have heard the ld. DR and gone through the facts of the case. The provisions of sec. 41(1)(a) stipulate 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 obtains, 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 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 4 ITA No.3443/Ahd/2004 M/sPatel Chandulal Chhotalal existence in that year or not. Undisputedly, the assessee did not receive any benefit nor the amount has been transferred to profit and loss account nor even written off and thus, the amount did not become the assessee's own money. In these circumstances, as concluded by the Hon'ble jurisdictional High Court in Bharat Iron and Steel Industries(supra), the provisions of sec. 41(1)(a) are not attracted.
6.1 Hon'ble jurisdictional High Court in the case of CIT Vs. Silver Cotton Mills Co. Ltd., 254 ITR 728(Guj) held that simply because the period of limitation had come to an end for the purpose of filing a suit for recovery of the said amount or for taking appropriate action against the assessee, it cannot be said that there was a cessation of liability. The liability still remains, though it may not be enforceable at law on account of the provisions of the law of limitation. Relying upon the decision in the case of Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR
518.SC), Hon'ble jurisdictional High Court further held that unless there is a cessation of liability or there is a remission of liability by the creditor, the liability subsists and, therefore, even if the entries are made to write back the expenditure, the amount so written back cannot be added in the income of the assessee as per the provisions of section 41(1) of the Act.
6.2 Hon'ble Bombay High Court in another case of CIT Vs. Chase Bright Steel Ltd.,177 ITR 128(Bombay) while relying upon their judgment in J. K. Chemicals Ltd. Vs. CIT, [1966] 62 ITR 34 held that the liability of an assessee does not cease merely because the liability has become barred by limitation. The liability ceases when it has become barred by limitation and the assessee has unequivocally expressed its intention not to honour the liability even when demanded.
6.3 Hon'ble Supreme Court in the case of Bombay Dyeing & Manufacturing Co. Ltd. v. State of Bombay, AIR 1958 SC 328, in para 23 of their decision observed as follows :
" 23. It has been already mentioned that when a debt becomes time barred, it does not become extinguished but only unenforceable in a court of law. "5 ITA No.3443/Ahd/2004
M/sPatel Chandulal Chhotalal 6.4 Hon'ble Supreme Court in the case of Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518 held that unless there is a cessation of liability, income cannot be added as per the provisions of section 41(1) of the Act. Similarly, Hon'ble Gujarat High Court in the case of CIT Vs. Chetan Chemicals Pvt. Ltd. 267 ITR 770 (Guj) held that:
"On a reading of the provisions, it is apparent that before the section can be invoked, it is necessary that an allowance or a deduction has been granted during the course of assessment for any year in respect of loss, expenditure or trading which is incurred by the assessee, and subsequently during any previous year the assessee obtains, whether in cash or in any other manner, any amount in respect of such trading liability by way of remission or cessation of such liability. In that case, either the amount obtained by the assessee or the value of the benefit occurring to the assessee can be deemed to the profits and gains of business or profession and can be brought to tax as income of the previous year in which such amount or benefit is obtained. In the facts of the case on hand, without entering into the aspect as to whether the liability to repay the loans would be a trading liability or not, it is an admitted position that there had been no allowance or deduction in any of the preceding years and, hence, there is no question of applying the provision as such.
Section 28 of the Act deals with profits and gains of business or profession and clause (iv) thereof says that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable as income under the head "Profits and gains of business or profession." In the facts of the present case, it cannot be said that the assessee-company was carrying on business of obtaining loans and that the remission of such loans by the creditors of the company was a benefit arising from such business."
6.5 In the light of view taken by the Hon'ble Supreme Court and jurisdictional High Court in the aforesaid decisions, it is apparent that unless there is a cessation of liability or there is a remission of liability by the creditor, the liability subsists and, therefore, even if the entries are made to write back the expenditure, the amount so written back cannot be added in the income of the assessee as per the provisions of section 41(1) of the Act . In the instant case, there is nothing to suggest that the assessee has obtained any benefit either by way of remission or cessation of any liability while the aforesaid liabilities are continually admitted by the assessee in their balalncesheet . In these 6 ITA No.3443/Ahd/2004 M/sPatel Chandulal Chhotalal circumstances, we have no alternative but to uphold the findings of the ld. CIT(A) . Therefore, ground nos. ground nos. 1 & 2 in the appeal of the Revenue are dismissed.
7. As regards ground no.3 relating to the addition of Rs.4,85,036/-, the AO noticed that the assessee had shown freight income of Rs.71,13,171/- in the return of income whereas as per the TDS certificates filed by the assessee, the receipts worked out to Rs.73,76,321/-.Thus, there was a difference of Rs.2,63,150/-. On reconciliation and considering the provisions made in the accounts in the year under consideration and in earlier years, the difference worked out to Rs.4,85,036/-. Accordingly, the AO added the amount to the income of the assessee.
8. On appeal, the learned CIT(A) deleted the addition of Rs.4,85,036/-, holding as under:-
"5.1 Disputing the said addition, the Authorized Representative of the appellant submitted that addition was based solely on gross misunderstanding of the facts of the case by the Assessing Officer. It was submitted that the Assessing Officer initially raised the query on account of difference of Rs.2,63,150/- in freight income shown in the P&L Account and as worked out on the basis of TDS certificates filed with the return of income. The appellant vide letter dated 20/02/2004 furnished a reconciliation explaining the reasons for the difference in the freight income offered in the accounts and as worked out on the basis of fee TDS certificates and submitted during the year under consideration, the appellant had worked for GNFC and IOC on contract basis. The income was booked on the basis of bills passed by GNFC and IOC every month. It was further submitted that in case of GNFC, the appellant has booked the income in the month in which the bill was raised. However, as per the practice followed by GNFC they are giving credit of the same in the following month in their books of accounts and they also deduct the TDS in the next month. However, as stated hereinabove, since the appellant is following mercantile system of accounting, the bills of March i.e. the last month of the financial year are being provided for and is shown as receivable from; GNFC though the TDS on such income has been deducted by GNFC in the' following month i.e. April. The Authorized Representative submitted that the Assessing Officer having reproduced 7 ITA No.3443/Ahd/2004 M/sPatel Chandulal Chhotalal the reconciliation statement in respect of the income as per books of accounts and as per TDS certificates and having considered the same has failed to appreciate and understand the same. As can be seen from the reconciliation reproduced by the Assessing Officer at page No. 7 and 8 of the assessment order, the income offered in the books of accounts for the year under consideration as well as earlier year is more that the income as per the TDS certificates. The Assessing Officer while considering the income as per books of accounts as per the said reconciliation statements in case of GNFC and IOC at Rs.49,67,475/- and Rs.26,30,732/- respectively aggregating to Rs.75,98,207/- and comparing the same with the income of Rs.71,13,171/-offered in the Profit & Loss A/c. for the year under consideration has ignored the fact that the figure of Rs.75,98,207/- is inclusive of Rs.5,88,693/- already offered in the earlier year i.e. AY. 2000-01 and only the TDS of which has been deducted during the year under consideration by GNFC. Thus, if Rs.5,88,693/- is excluded from the figure of Rs.75,98,207/-, the net figure would come to Rs.70,09,514/- which is less than the income of Rs.71,13,171/- offered in the P & L A/c. The Assessing Officer however, without considering and understanding the facts in respect of the provisions made and income offered in each year, mechanically took the figure of Rs.49,67,475/- as per the reconciliation statement as income from GNFC during the under consideration while ignoring the feet that the same is inclusive of Rs,5,88,693/- which has already been offered as income in the earlier year as evident from the Sheet of earlier year but only TDS in respect of which has been deducted during the year as stated hereinabove. Thus, the Assessing Officer has failed to appreciate the fact that the said reconciliation was solely for the, purpose of reconciling the figure as per TDS certificates, it was submitted that considering the effect of provision of income by the appellant in each year, there was no difference as alleged by the Assessing Officer. The Authorized Representative argued that both GNFC and IOC are government concerns and hence even otherwise the question of any difference as alleged by the Assessing Officer does not arise and that the difference, if any in the income as per TDS certificates and as shown in the books of accounts in each year is on account of the difference in accounting method adopted by the appellant and the said concerns. Accordingly, it was submitted that the addition of Rs.4,85,036/- on account of alleged difference in freight receipt requires to be deleted, the same being based on gross misunderstanding of the fact of the case.
5.2 I have carefully considered the observations and findings of the Assessing Officer as well as the arguments and submissions put forth by the appellant. On perusal of the accounts and the TDS certificates, copy of which has been filed with the written submissions, it is seen that the appellant has offered freight income of Rs.71,13,171/- in the P&L Account while the income as per TDS certificates works out to Rs.73,76,321/- resulting in a difference of Rs.2,63,150/-. The appellant in order to explain the said difference between the income offered in the books of account sad as worked out on the basis of TDS certificates has filed detailed 8 ITA No.3443/Ahd/2004 M/sPatel Chandulal Chhotalal reconciliation which have been reproduced by the AO in the assessment order. On perusal of the said reconciliation statement in respect of GNFC, it is seen that the same is inclusive of an amount of Rs.5,88,693/- which pertains to provision made by the appellant in the earlier year relevant to AY. 2000-01 and the said income was already offered in the earlier year while debiting the party account and showing the same as receivable from the said party. The said fact is evident from balance sheet of earlier years, copy of which has been filed with the written submissions which shows a figure of Rs.5,88,640/- appearing as outstanding in the name of GNFC under the head 'Sundry debtors'. This being the case, I agree with the argument of the Authorized Representative that the Assessing Officer has ignored the said feet while taking the figure of income from GNFC and IOC at Rs.49,67,475/- and Rs.26,30,732/- respectively to Rs.75,98,207/- on the basis of the .reconciliation statements and comparing the same with the income of Rs.71,13,171/- offered in the P&L Account for arriving at the difference of Rs.4,85,036/-. I also agree with the contention of the appellant that if the figure of Rs.5,88,693/- being the income already offered in the earlier year is excluded from the figure of Rs.75,98,207/- , the net figure of Rs.70,09,514/- so arrived will be less than the income of Rs.71,13,171/- offered in the P&L Account and accordingly, no adverse inference is warranted. Thus, in my opinion the Assessing Officer has made the addition without proper verification of the facts and figures Available on record aid accordingly, the addition of Rs.4,85,036/- is hereby deleted."
9. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The learned DR supported the order of the AO.
10. W e have heard the ld. DR and gone through the facts of the case. The ld. DR appearing before us could not dispute the findings of the ld. CIT(A) recorded after perusal of the accounts, the relevant balancesheets , the TDS certificates and the reconciliation statement in respect of GNFC that the an amount of Rs.5,88,693/- pertained to provision made by the assessee in the earlier year relevant to AY. 2000-01 and the said income was already offered to tax in the earlier year and that if the figure of Rs.5,88,693/- is excluded from the figure of Rs.75,98,207/- , the net figure of Rs.70,09,514/- so arrived would be less than the income of Rs.71,13,171/- offered in the P&L Account.. In the light of these undisputed findings of facts recorded by the ld. CIT(A) , there is no basis for taking a different view in the matter. Therebeing no 9 ITA No.3443/Ahd/2004 M/sPatel Chandulal Chhotalal illegality or infirmity in the order of the CIT(A),we uphold the order of the CIT(A).Therefore, ground no. 3 in the appeal is also dismissed.
11. Ground nos. 4 & 5 being general in nature, do not require any separate adjudication and are, therefore dismissed.
12 In the result, appeal is dismissed.
Order pronounced in the open court today on 17-05-2010 Sd/- Sd/-
(MAH AVIR SINGH) (A N P AHUJ A) JUDICI AL MEMBER ACCOUNTANT MEMBER Date : 17-05-2010 Copy of the order forwarded to :
1. M/s Patel Chandulal Chhotalal, F.T.D., A-4, Swami Gunatit Society, Memnagar, Ahmedabad
2. The ACIT, Circle-9, Ahmedabad
3. CIT concerned
4. CIT(A)-XV, Ahmedabad
5. The DR, ITAT, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABAD 10