(Per : HONOURABLE MR.JUSTICE J.B.PARDIWALA)
1. This Appeal under Section-260(A) of the Income Tax Act, 1961 (for short "the Act") is at the instance of the Revenue and is directed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad, "D" Bench in I.T.A.No.1680/Ahd/2006 for the Assessment Year 2003-04 and thereby the Tribunal below partly allowed the appeal of the Revenue while dismissing the cross appeal preferred by the assessee.
2. The facts giving rise to present appeal can be summed up thus:
2.1. The assessee respondent is a company engaged in the business of processing of cloth. The assessee stopped its business and production activity since 30/11/1999. The assessee filed return of income declaring total income as nil on 30/04/2004 for Assessment Year 2003-04. The said return was initially processed under Section-143(1) of the Act and thereafter was selected for scrutiny assessment for which a notice under Section-143(2) of the Act was issued and thereafter notice under Section-142(1) of the Act was issued upon the assessee.
2.2. The Assessing Officer after taking into consideration the evidence and material on record vide assessment order dated 30/12/2005 determined total income of the assessee at Rs.32,72,429/-. While passing the assessment order, the Assessing Officer added Rs.18,72,697/- on account of sundry creditors under Section-41(1)(a) of the Act.
2.3. The assessee being dissatisfied by the said order dated 30/12/2005 passed by the Assessing Officer, preferred appeal against the same before the Commissioner of Income Tax (Appeals)-I, Surat. The CIT (Appeals) vide order dated 27/02/2006 partly allowed the appeal of the assessee and deleted addition of Rs.18,72,697/- made by the Assessing Officer under Section-41(1)(a) of the Act.
2.4. The Revenue feeling aggrieved and dissatisfied by the order dated 27/02/2006 passed by the CIT (Appeals) preferred appeal before the Income Tax Appellate Tribunal, Ahmedabad. The Appellate Tribunal confirmed the order passed by the CIT (Appeals) so far as deleting the addition of Rs.18,72,697/- under Section-41(1)(a) of the Act is concerned.
6. The Revenue being dissatisfied by the order of the Appellate Tribunal has come up before this Court by way of this Appeal under Section-260(A) of the Act.
7. The Revenue has proposed the following substantial questions of law for their determination:
Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in deleting addition of Rs.18,72,697/- made by the Assessing Officer under Section 41(1)(a) of the Income Tax Act?
Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal has committed an error in not considering the fact that the assessee has failed to discharge the onus of burden of proof, which lies on it, to prove its claim?
Whether, on the facts and in the circumstances of the case, the order of the Income Tax Appellate Tribunal is contrary to the evidence and material on the record of the case and, hence perverse or not?"
Contentions of the Revenue:-
8. Learned Senior Standing Counsel Ms.Mauna Bhatt appearing for the Revenue vehemently submitted that impugned order passed by the Tribunal is illegal, unlawful, unjust and deserves to be quashed and set aside. Ms.Bhatt submitted that the Appellate Tribunal and the CIT (Appeals) as well has completely ignored the material evidence on record. Ms.Bhatt submitted that the claim of the assessee in so far as the amount of Rs.18,72,697/- shown as outstanding credit in the name of five parties is false and concocted for the simple reason that when the Assessing Officer called upon the assessee to submit the addresses of the five parties, the assessee was unable to furnish their addresses. Learned Senior Standing Counsel Ms. Bhatt submitted that the assessee was able to give details of only two parties and when notices were issued by the Assessing Officer under Section-133(6) of the Act to the said two parties, the said notices were returned as unserved. The assessee failed to give any confirmation letter from any of the parties and therefore, the Assessing Officer was justified in making addition of Rs.18,72,697/- under Section-41(1)(a) of the Act. Learned Senior Standing Counsel Ms. Bhatt submitted that the Appellate Tribunal and the CIT (Appeals) have wrongly relied upon the judgments of this High Court in the case of CIT vs. Silver Cotton Mills Company Ltd., reported in 254 ITR 728 (Guj.) and CIT vs. Bharat Iron and Steel Industries, reported in 1999 ITR 67 and the judgment of the Apex Court as well in case of CIT vs. Sugauli Sugar Works Pvt. Ltd., reported in 236 ITR 518. Learned Senior Standing Counsel Ms. Bhatt contended that the Tribunal below has committed a substantial error of law in holding that Section-41(1) of the Act was not applicable from the materials on record.
9. In order to appreciate the aforesaid questions, it will be profitable to refer to the provisions contained in Section-41(1) of the Act which is quoted below:
"41.
Profits chargeable to tax.--[(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 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."
10. The Supreme Court had, in the case of Commissioner of Income-tax, Calcutta Vs. Sugauli Sugar Works (P) Ltd reported in AIR 1999 SC 1144 the occasion to consider the effect of Section 41 of the Act. In that context, it was held that the mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not enable the Department to say that S. 41 would apply and the amount should be included in the total income of the assessee. It was further held therein that it could not be said that the liability had come to an end as period of more than 20 years had elapsed and creditor had not taken any steps to recover amount. Expiry of period of limitation, the Supreme Court pointed out, did not extinguish the debt but only prevented the creditor from enforcing the debt.
11. The following observations of the Supreme Court, approving an earlier Full Bench decision of the Gujarat High Court in that case, are relevant and quoted below:
"As pointed out already, the crucial words in the Section require that the assessee has to obtain in cash or in any other manner some benefit. That part of the Section has been omitted to be considered by the Division Bench of the Bombay High Court. The said words have been considered by a Full Bench of Gujarat High Court in detail in The Commissioner of Income-tax, Gujarat-II, Ahmedabad v. M/s. Bharat Iron and Steel Industries, Bhavnagar, 1993 Tax LR 188. The following passages in the judgment brings out of the reasoning of the Full Bench succinctly (At Pp. 195 and 196 of Tax LR): "11. In our opinion, for considering the taxability of amount coming within the mischief of S. 41(1) of the Act, the system of accounting followed by the assessee is of no relevance or consequence. We have to go by the language used in S. 41(1) to find out whether or not the amount was obtained by the assessee or whether or not some benefit in respect of trading liability by way of remission or cessation thereof was obtained by the assessee and it is in the previous year in which the amount or benefit, as the case may be, has been obtained that the amount or the value of the benefit would become chargeable to income-tax as income of that previous year.
"12.
We fully agree with the view taken by the Division Bench in CIT v. Rashmi Trading, 1977 Tax LR 520 (Gujarat) (supra) that the only meaning that can be attached to the words "obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure" incurred in any previous year clearly refer to the actual receiving of the cash of that amount. 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 the 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". As rightly observed by the Division Bench in the context in which these words occur, no other meaning is possible."
We are in agreement with the said reasoning."
(Emphasis supplied by us).
12. The aforesaid provisions of the Income Tax Act came up for further consideration before a larger Bench of the Apex Court in the case of the Chief Commissioner of Income-tax, Cochin Vs. M/s. Kesaria Tea Co. Ltd reported in AIR 2002 SC 1473 where the Supreme Court reiterated the views taken in the case of Commissioner of Income-tax, Calcutta Vs. Sugauli Sugar Works (P) Ltd (supra). The following observations of the Court are relevant and quoted below:
"It may be noted that the provision was made in the books of account towards purchase tax which was under dispute and the benefit of deduction from business income was availed of in the past years in relation thereto. The same was sought to be reversed by the assessee during the year ending on 31-3-1985 for whatever reason it be. The question is whether the circumstances contemplated by Section 41(1) exists so as to enable the Revenue to take back what has been allowed earlier as business expenditure and to include such amount in the income of the relevant assessment year i.e. 1985-86. In order to apply Section 41(1) in the context of the facts obtaining in the present case, the following points are to be kept in view : (1) In the course of assessment for an earlier year, allowance or deduction has been made in respect of trading liability incurred by the assessee; (2) Subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the year in which such event occurred; (3) in that situation the value of benefit accruing to the assessee is deemed to be the profit and gains of business which otherwise would not be his income; and (4) such value of benefit is made chargeable to income tax as the income of the previous year wherein such benefit was obtained. The High Court, agreeing with the Tribunal, rightly held that the resort to Section 41(1) could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it. On the facts found by the Tribunal, the Tribunal as well as the High Court were well justified in coming to the conclusion that the purchase tax liability of the assessee had not ceased finally during the year in question. Despite the finality attained by the judgment in Neroth Oil Mills' case, the other issues having bearing on the exigibility of purchase tax still remained and the dispute between the assessee and the sales-tax department was still going on. There is no material on record to rebut these factual observations made by the Tribunal. Nor can it be said that the reasons given by the Tribunal are irrelevant.
The learned senior counsel appearing for the Income-tax Department has contended that the assessee itself took steps to write-off the liability on account of purchase tax by making necessary adjustments in the books, which itself is indicative of the fact that the liability ceased for all practical purposes and therefore, the addition of amount of Rs. 3,20,758/- deeming the same as income of the year 1985-86 under Section 41(1) is well justified of the Act. But, what the assessee has done is not conclusive. As observed by the Tribunal, an unilateral action on the part of the assessee by way of writing-off the liability in its accounts does not necessarily mean that the liability ceased in the eye of law. In fact, this is the view taken by this Court in CIT v. Sugauli Sugar Works (P) Ltd. (236 ITR 518). We, therefore, find no substance in the contention advanced on behalf of the appellant. Incidentally, we may mention that the controversy relates to the period anterior to the introduction of Explanation 1 to Section 41(1)."
13. The CIT (Appeals) on the basis of material on record recorded a finding that the assessee had not claimed cessation of any kind of liability relating to the parties as mentioned by the Assessing Officer in its assessment order to the tune of Rs.18,72,697/-. The CIT (Appeals) also recorded a finding of fact that the assessee has been showing the liability over the years i.e. during the subsequent assessment orders after the closer of its business in 2000-01. The CIT (Appeals) recorded a finding that addition of Rs.18,72,597/- under Section-41(1) of the Act was not tenable in law as this amount has been continuously shown by the assessee company in its balance sheet and cannot be construed as ceased so as to bring it within the mischief of Section-41(1) of the Act. This finding of the CIT (Appeals) came to be confirmed by the Appellate Tribunal in the following words:
"5.4. In view of the foregoing, it is not, therefore, correct to hold that there was cessation of the liability of the assessee in respect of the said amount of 18,72,597/-, simply by reason of the law of limitation. In the instant case, since there is nothing to suggest that the assessee has obtained any benefit either by way of remission or cessation of any liability while the ld. CIT (A) concluded that the liability is continually admitted by the assessee in their balance sheet and the Revenue have not referred us to any material controverting these findings of facts recorded by the ld. CIT (A), we are not inclined to have a different view in the matter. Therefore, ground Nos.1 and 2 in the appeal of the Revenue are dismissed."
14. As pointed out in the case of Sugauli Sugar Works (P) Ltd. (supra), vide the last five lines of the paragraph-6 of the judgment, the question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee's case alone but has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act.
15. We, thus, find that the view taken by the Tribunal is absolutely consistent with the one taken by the Supreme Court in the case of Sugauli Sugar Works P. Ltd. (supra) and other decisions which have been referred to in the judgment. We do not find any error much less an error of law in the judgment and order of the Tribunal.
16. In absence of substantial question of law arising in this appeal, the appeal deserves to be dismissed and is accordingly dismissed in limine. However, there shall be no order as to costs.
(Bhaskar Bhattacharya, Acting C.J.) (J.B.Pardiwala, J.) (ila) Top