(Per : HONOURABLE MR.JUSTICE AKIL KURESHI) Revenue is in appeal against judgement of the Tribunal dated 8.1.2010 raising following question for our consideration :
"Whether on the facts and in the circumstances of the case, the Tribunal was right in law in reversing the decision of the CIT(A) confirming the addition to the extent of Rs.26,02,684/- u/s. 41(1) on account of disallowance of claim of non-genuine creditors, especially when the trading liabilities shown by the assessee were either not confirmed by the respective creditors or could not be verified for lack of any details submitted by the assessee?
We have heard learned counsel for the Revenue and perused the orders on record. For the assessment year under consideration namely, assessment year 2002-2003, Assessing Officer during the course of assessment found that in balance sheet of assessee, assessee has shown creditors of Rs.52.53 lakhs(rounded off) which included number of creditors brought forward from earlier years and were shown as outstanding even in later returns furnished by the assessee including the year 2004-2005. Assessing Officer inquired into such liability and called upon the assessee to provide complete names, addresses and PAN card of creditors along with the details of outstanding amount. The assessee furnished only list of creditors without their addresses and PAN numbers. Assessing Officer was of the opinion that despite opportunity given to the creditors with respect to some of them, confirmation of outstanding balance was not forthcoming. On that basis Assessing Officer concluded that these creditors were not genuine. To that extent the Assessing Officer invoked Section 41(1) of the Income Tax Act, 1961 and added a sum of Rs.46.56 lakhs(rounded off) to the income of the assessee. Interestingly while invoking Section 41(1) of the Act, he recorded that alternatively such amount is liable to be added in assessee's income on account of unexplained income in assets.
Assessee approached CIT(Appeals) against the order of the Assessing Officer. CIT(Appeals) partly allowed the appeal, reduced the addition to RS. 26.02 lakhs (rounded off). Thereupon assessee as well as Revenue both filed cross appeals before the Tribunal. Tribunal allowed the assessee's appeal and rejected the appeal of Revenue. Tribunal formed an opinion that in facts of the case, provisions of Section 41(1) of the Act would not apply. Tribunal relied on decision of Apex Court in case of CIT v. Sugauli Sugar Works(P) Ltd. reported in 236 ITR 518, as also subsequent decisions in case of Commissioner of Income-tax v. Silver Cotton Mills Co. ltd. reported in 2002 (254) ITR 728 and in case of Commissioner of Income-tax v. Chetan Chemicals Pvt. Ltd reported in 2004 (267) ITR 770.
Having considered the materials on record, we are of the opinion that Tribunal committed no error. Tribunal in its order has recorded as under :
9. We have heard both the parties and gone through the facts of the case as also the decisions relied upon. The provisions of sec.41(1)(a) stipulated 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 existence in that year or not. The ld. CIT(A) without even adverting to the decisions cited on behalf of the assessee, sustained the addition made by the AO u/s 41(1) of the Act. Undisputedly, the assessee did not receive any benefit nor the amount has been transferred to profit and loss account 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.
9.1 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.
(9.4) 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 liability 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 accruing to the assessee can be deemed to be the profits and gains of a 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."
9.5 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 provision 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 balance sheet. In these circumstances,we have no alternative but to vacate the findings of the ld. CIT(A) and delete the addition sustained by the ld. CIT(A). Therefore, ground nos. 3 to 5 in the appeal of the assessee are allowed while ground nos 1 & 2 in the appeal of the Revenue are dismissed."
In fact, we are of the opinion that if Revenue's case is that there was no genuine credit, section 41(1) of the Act would naturally not apply. Section 41(1) applies in a case 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 he has obtained whether in cash or in any other manner any amount in respect of such loss or expenditure or trading liability by way of remission or cessation thereof, the amount obtained. In the present case, Revenue's case is that there was no genuine trading liability incurred by the assessee. Question of remission or cessation thereof would not arise.
With respect to alternative fleeting reference by the Assessing Officer with respect to unexplained investment by the assessee in any asset, the same admittedly would not relate to the previous year relevant to the assessment year 2002-2003. Such liability was being carried forward year after year. Admittedly, such liability was not claimed for first time for the year under consideration. In that view of the matter, question of unexplained investment for the present assessment would not arise.
In view of above, Tax Appeal is dismissed.
(Akil Kureshi,J.) (Ms.
Sonia Gokani,J.) (raghu) Top