Gujarat High Court
The Principal Commissioner Of Income ... vs M/S Vishal Exports Overseas Ltd on 14 June, 2024
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/TAXAP/776/2023 ORDER DATED: 14/06/2024
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 776 of 2023
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THE PRINCIPAL COMMISSIONER OF INCOME TAX - 3 AHMEDABAD
Versus
M/S VISHAL EXPORTS OVERSEAS LTD
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Appearance:
MR KARAN SANGHANI ADVOCATE WITH MRS KALPANA K RAVAL(1046)
for the Appellant(s) No. 1
for the Opponent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE NIRAL R. MEHTA
Date : 14/06/2024
ORAL ORDER
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) [1] This Tax Appeal is filed by the appellant - Revenue under Section 260A of the Income Tax Act, 1961 (for short, "the Act") arising out of the order dated 19th May 2023 passed by the Income Tax Appellate Tribunal, "D" Bench, Ahmedabad (for short, "the Tribunal") in ITA No.1847/Ahd/2014 for the Assessment Year 2007-08.
[2] The appellant - Revenue has proposed the following substantial question of law for the consideration of this Court: Page 1 of 12 Downloaded on : Fri Jun 28 21:34:28 IST 2024
NEUTRAL CITATION C/TAXAP/776/2023 ORDER DATED: 14/06/2024 undefined "(A) Whether on the facts and circumstances of the case and in law, the order of the Appellate Tribunal is ex facie perverse, because the Appellate Tribunal has deleted the addition of Rs.2,05,06,635/- made u/s. 41(1) of the Act without appreciating the entire gamut of evidence on brought on record by the AO?"
[2] The brief facts of the case are that during the course of assessment, the AO observed that from perusal of the list of sundry, in respect of several parties, the amount payable which was outstanding was constant for the last thee years. Accordingly, after taking the submissions of the assessee on record, the AO made additions in respect of six parties under Section 41(1) of the Act on the ground that as per the Limitation Act, the parties do not have legal remedy to enforce the outstanding demand and therefore, the right to recovery of the said amount has become time barred by limitation. Accordingly, by invoking the provisions of Section 41(1) of the Act, the AO made addition of Rs.75,38,74,413/- in respect of six parties. The six parties (creditors) are as below:
Name of the creditor Amount Rs. Page 2 of 12 Downloaded on : Fri Jun 28 21:34:28 IST 2024 NEUTRAL CITATION C/TAXAP/776/2023 ORDER DATED: 14/06/2024 undefined Presidential trading - FZC 733367778 Purchase difference 169978 Sonoma Exports Pvt Ltd. Tirupur 874500 Allure Jewel 11994266 FIRC 7460839 Pest Mortem (India) Pvt. Ltd 7052 [3] Being aggrieved, the assessee filed appeal before the
CCIT(A), who by 11th March 2014, confirmed the additions with respect to each of these parties under Section 41(1) of the Act observing as under:
"It is therefore, I am inclined with A.O. that total liability of Rs. 75,38,74,413/- for substantial amount does not reflect it as liability, the same is either discharged liability (presidential trading FZC) or receipt of amount which appellant claimed to be towards export but not able to reconcile the same till date i.e. no such liability exist. The appellant failed to submitted necessary evidences about party (M/s Sonoma exports Pvt. Ltd. Tirupur) or transaction and therefore falled to substantiate that these liabilities are existing which give presumption that appellant already paid such liability.
It is therefore, though addition u/s 41(1)of the Act may not be legally justified, but on the facts of the details & Page 3 of 12 Downloaded on : Fri Jun 28 21:34:28 IST 2024 NEUTRAL CITATION C/TAXAP/776/2023 ORDER DATED: 14/06/2024 undefined explanation with tax auditor's qualifying remarks about balances of creditors are subjected to confirmation, such addition made by A.O. is justified. I am inclined with A.O. the ratio of cases relied on by him are applicable in the case of appellant. The appellant failed to establish that such liability exists / subsist and therefore as per accounting principle required to added as income. The addition of Rs. 75,38,74,413/- is upheld confirmed. This ground is dismissed."
[4] The assessee, therefore, challenged the order passed by the CIT(A) before the Tribunal. The Tribunal deleted the addition pertaining to the following five parties:
Name of the creditor Amount Rs. Purchase difference 169978 Sonoma Exports Pvt Ltd. Tirupur 874500 Allure Jewel 11994266 FIRC 7460839 Pest Mortem (India) Pvt. Ltd 7052 [5] So far as the addition pertaining to Presidential Trading -
FZC is concerned, the Tribunal has remanded back to the CIT(A) to examine the record a fresh and to ascertain as to whether the assessee is liable to pay the said amount to the bank as the recovery Page 4 of 12 Downloaded on : Fri Jun 28 21:34:28 IST 2024 NEUTRAL CITATION C/TAXAP/776/2023 ORDER DATED: 14/06/2024 undefined proceedings were pending before the Debts Recovery Tribunal. [6] The appellant - Revenue has, therefore, challenged the order passed by the Tribunal qua deletion of the amount of Rs.2,05,06,635/-.
[7] Learned advocate Mr. Karan Sanghani for the appellant - Revenue submitted that the decision of the Tribunal is erroneous and perverse because as per the Limitation Act, the creditors have no legal remedy available to enforce the recovery of demand as the cause of action is beyond three years and the respondent - assessee has to prove that in fact, the liability subsists. It was submitted that the conduct and surrounding circumstances demonstrate that the amount has been remitted or forgone or the sum has ceased to be claimable against the assessee and therefore, it would be clear case of remission or cessation of the liability of the assessee. [8] It was, therefore, submitted that the Tribunal ought not to have deleted the addition as the right to recovery of the said amount has become time barred and therefore, the Assessing Officer has rightly invoked the provisions of Section 41(1) of the Page 5 of 12 Downloaded on : Fri Jun 28 21:34:28 IST 2024 NEUTRAL CITATION C/TAXAP/776/2023 ORDER DATED: 14/06/2024 undefined Act by making addition for cessation of the liability of the assessee. [9] Section 41(1) of the Act reads as under:
"Profits chargeable to tax.
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 any 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 trading liability by way of remission or cessation thereof, the amount 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
(b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first- mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or Page 6 of 12 Downloaded on : Fri Jun 28 21:34:28 IST 2024 NEUTRAL CITATION C/TAXAP/776/2023 ORDER DATED: 14/06/2024 undefined cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year. [Explanation 1. - For the purposes of this sub-section, the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.] [Explanation 2]. -For the purposes of this sub-section, "successor in business" means,-
(i) where there has been an amalgamation of a company with another company, the amalgamated company;
(ii) where the first-mentioned person is succeeded by any other person in that business or profession, the other person;
(iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm;] [(iv) where there has been a demerger, the resulting Page 7 of 12 Downloaded on : Fri Jun 28 21:34:28 IST 2024 NEUTRAL CITATION C/TAXAP/776/2023 ORDER DATED: 14/06/2024 undefined company.] "
[10] The provisions of Section 41(1) of the Act provides for the liability and there can be cessation of liability only when the assessee has returned of such liability in its books of account and the provisions of Section 41(1) of the Act cannot be invoked under the circumstances on the ground that the payment of liability has become barred by limitation and there is no legal right or remedy to enforce such liability against the assessee. [11] The Tribunal has, therefore, rightly deleted additions made by the Assessing Officer invoking the provisions of Section 41(1) of the Act inasmuch as the assessee has never claimed any allowance or deduction in respect of loan, expenditure or trading liability which the assessee has subsequently recovered and any benefit of remission or cessation thereof is availed by the assessee. [12] The Tribunal, after considering the facts of the case, has held as under qua each of the parties for which addition is deleted on the basis of record and the documents available on record:
"7. We have heard the rival contentions and perused the Page 8 of 12 Downloaded on : Fri Jun 28 21:34:28 IST 2024 NEUTRAL CITATION C/TAXAP/776/2023 ORDER DATED: 14/06/2024 undefined material on record. We are of the considered view that is in well settled low that additions under section 41(1) of the Act cannot be made simply on the basis that the claim of the parties are barred by limitation and therefore, the liability to pay ceases to exist so far as assessee is concerned. So far as the merits of each of the additions is concerned, in respect of addition of Rs.1,69,978/- on account of purchase difference being outstanding differential amount towards marine exports, section 41(1) of the Act cannot be invoiced in the first instance since the original party has not been doubted by the assessing officer. With respect to Senoma Exports (Rs.8,74,500/-), we are of the view that in this case, it cannot be presumed that the liability has ceased to exist and the Department has not brought forth any conclusive evidence in support of the same. With respect to Allure jewels (Rs.1,19,94,266/-), we observe that the assessee has furnished complete ledger account with respect to the aforesaid party in order to support the fact that the liability to make such payment exists in the assessee's books of accounts. Accordingly, this addition in also liable to be deleted. So far as addition on account of FIRC is concerned, we are in agreement with the counsel for the assessee that no expenditure has been incurred by the assessee in this case and it in a case of export sales and therefore, addition could not be sustained under section 41(1) of the Act. Similarly, no addition is called for in the case of Pest Mortem (Rs.7,052/-) Page 9 of 12 Downloaded on : Fri Jun 28 21:34:28 IST 2024 NEUTRAL CITATION C/TAXAP/776/2023 ORDER DATED: 14/06/2024 undefined in respect of which the assessee had furnished copies of ledger account and the same is a carry forward balance from earlier years.
Accordingly, in respect of the aforesaid amounts, in our considered view, no addition is called for under 41(1) of the Act. We note that in the case of Bhogilal Ramjibhai Atara 43 taxmann.com 55 (Gujarat), the Gujarat High Court held that where assessee in return of income for assessment year 2007- 08 had shown certain amount by way of his debts and Assessing Officer applying provisions of section 41(1) added back said amount to income of assessee as deemed income, since there was nothing on record to suggest that there was remission or cessation of liability and that too during assessment year 2007- 08, above amount could not be added back to the income of assessee. In the case of Dattatray Poultry Breeding Farm (P.) Ltd. 104 taxmann.com 366 (Gujarat), the Gujarat High Court held that where existence of liabilities was doubted, same could have been disallowed in year in which it was claimed, or could have been treated as unexplained cash credit in hands of assessee under section 68, but same could not be taxed under section 41(1), inasmuch as if liability itself was not genuine, question of remission or cessation thereof would not arise."
[13] Thus, finding of fact arrived at by the Tribunal in respect of Page 10 of 12 Downloaded on : Fri Jun 28 21:34:28 IST 2024 NEUTRAL CITATION C/TAXAP/776/2023 ORDER DATED: 14/06/2024 undefined the five parties for addition of Rs.2,05,06,635/- after examining the relevant copy of ledger account placed on record, it was also found from the record that so far as addition of Rs.1,59,978/- is concerned, the same was on account of purchase difference being outstanding differential amount towards marine exports and with respect to addition of Rs.8,74,500/- of amount payable to Sonoma Exports Pvt. Ltd. Tirupur, it cannot be presumed that the liability has ceased to exist in absence of any evidence for the same. Similarly, addition of Rs.1,19,94,266/- with respect to Allure Jewel, the Tribunal has examined complete ledger account purchased by the assessee to arrived at a finding of fact to make such payment exists in the assessee's books of account. So far as addition on account of FIRC is concerned, the Tribunal arrived at a finding that no expenditure has been incurred by the assessee as it is a case of export sales. With respect to addition of Rs.7,052/- in the case of Pest Mortem, the Tribunal has found that from the ledger account, it was a carry forward balance from earlier years. Therefore, considering the decisions of this Court in the case of Bhogilal Ramjibhai Atara (supra) and Dattatray Poultry Breeding Farm (P) Ltd (supra), the Tribunal has held that the provisions of Section Page 11 of 12 Downloaded on : Fri Jun 28 21:34:28 IST 2024 NEUTRAL CITATION C/TAXAP/776/2023 ORDER DATED: 14/06/2024 undefined 41(1) of the Act cannot be invoked where the existence of liability was doubted as such the addition could have been made in the year in which it was claimed or it could have been treated as unexplained cash credit in hands of the assessee under Section 68 of the Act as there is nothing on record to suggest that there is remission or cessation for the year under consideration. [14] In view of the above, we are of the opinion that the Tribunal has not committed any error in deleting the addition of Rs.2,05,06,635/- by arriving at a finding of fact that the said amount pertaining to five parties, there was nothing on record to suggest that there was remission or cessation of such liability of the respondent - assessee so as to invoke the provisions under Section 41(1) of the Act. Therefore, no question of law much less any substantial question of law arises from the impugned order of the Tribunal. The appeal is, accordingly, dismissed.
(BHARGAV D. KARIA, J) (NIRAL R. MEHTA,J) CHANDRESH Page 12 of 12 Downloaded on : Fri Jun 28 21:34:28 IST 2024