ITA no. 6708/Del/2014
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `D' NEW DELHI
BEFORE SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
ITA No. 6708/DEL/2014 ( A.Y 2009-10)
Lok Nath Narang, Prop. Vs ITO
C/o. M/s. RRA Tax India, Ward-2(1)
D-28, South Extension, Part-I Gurgaon
New Delhi
PAN : ADRPN8014H
(APPELLANT) (RESPONDENT)
Appellant by Sh. Rakesh Gupta, Adv., Sh.
Rohit Gupta, Adv.
Respondent by Smt. Naina Soin Kapil, Sr.
DR
Date of Hearing 02.01.2019
Date of Pronouncement 03.01.2018
ORDER
PER SUCHITRA KAMBLE, JM
This appeal is filed against the order dated 03.11.2014 passed by
CIT(A)-II, Faridabad by the assessee for the assessment year 2009-10.
2. The grounds of appeal are as under:-
"1. That having regard to the facts and circumstances of the case,
Ld. CIT(A) has erred in law and on facts in not deleting the addition of
Rs. 37,95,928/- fully as made by Ld. AO on account of sundry creditors
and has further erred in sustaining the addition to the extent of Rs.
22,73,232/- by applying the provisions of section 41(1) whereas Ld. AO
made the impugned addition u/s 68 of the Act and the impugned
addition has been made by recording incorrect facts and findings and
without giving adequate opportunity of hearing and without considering
ITA no. 6708/Del/2014
the submissions/evidences of the assessee.
2. That in any case and in any view of the matter, action of Ld.
CIT(A) in not deleting the addition of Rs. 37,95,928/- fully as made by
Ld. AO on account of sundry creditors and sustaining the same to the
extent of Rs. 22,73,232/- and passing the impugned assessment order is
illegal, bad in law, void ab initio, unjustified, contrary to facts & law and
based upon recording of incorrect facts and finding, without giving
adequate opportunity of hearing, in violation of principles of natural
justice and the same deserves to be quashed.
3. That having regard to the facts and circumstances of the case,
Ld. CIT(A) has erred in law and on facts in not reversing the action of Ld.
AO in charging interest u/s 234A, 234B and 234C of Income Tax Act,
1961.
4. That the appellant craves the leave to add, modify, amend or
delete any of the grounds of appeal at the time of hearing and all the
above grounds are without prejudice to each other."
3. The assessee is having income from trading business. Returned
declaring an income of Rs. 1,35,750/- was filed on 30.09.2009 which was
processed u/s 143(1) of the Income Tax Act, 1961. The case was selected for
scrutiny and statutory notice u/s 143(2) of the Income Tax Act, 1961 was
issued on 28.09.2010 which was duly served upon the assessee. Notice u/s
142(1) along with the detailed questionnaire was issued on 24.06.2011.
Requisite information was furnished by the assessee and assessment
proceeding was attended by the advocate of the assessee from time to time.
During the proceedings, the Assessing Officer observed that the assessee
had reflected sundry creditors at Rs. 73,07,477/-. The assessee was asked
to submit copy of account of all the sundry creditors along with the
complete addresses and individual confirmations of creditors having
balances exceeding Rs. 1,00,000/-. The Assessing Officer further observed
that all the notices u/s 133(6) was returned back due to non availability
and non-existence of concern creditors at the given addresses. The Inspector
of the revenue personally visited and made due inquiries at the given
ITA no. 6708/Del/2014
addresses and returned that no such concerns were available at the given
addresses not their whereabouts could be located. Therefore, the Assessing
Officer held that credit balances totaling to Rs. 37,95,928/- should be
treated as the assessee's income from undisclosed sources and added back
the same to the income of the assessee for continuous & willing failure of
assessee to get the same verified.
4. Being aggrieved by the assessment order the assessee filed appeal
before the CIT(A). The CIT(A) partly allowed the appeal of the assessee by
making an observation that the four sundry creditors i.e. M/s. Delite
Trading Company, M/s. Ganesh Enterprises, M/s. Krishna Trading
Company and M/s. Nanak Enterprises has not filed any confirmation and
hence due to non-availability of any evidences and amount received from
these creditors in the preceding years the Assessing Officer instead of
applying Section 68 of the Act should have applied the provisions of Section
41(1) of the Income Tax Act to make the addition. Therefore the CIT(A) made
additions u/s 41(1) of the Income Tax Act.
5. The Ld. AR submitted that the only effective issue in the present
appeal is sustaining the addition of Rs. 22,73,232/- out of total addition of
Rs. 37,95,928/- out of sundry creditors made by the Assessing Officer u/s
68 but sustained by CIT(A) u/s 41(1) the Assessing Officer made addition
u/s 68 in response of the parties mentioned in the Assessing Officer. The
CIT(A) deleted some of the additions but sustained the balance 6 creditors.
The Ld. AR submitted that the impugned liabilities are very much payable
by the assessee as to when demanded and unless it is demanded, these are
bound to be shown as outstanding. The very fact that these liabilities are
appearing in the balance sheet is strong acknowledgement of the dates
payable by the assessee as held in the case of CIT vs. Tamil Nadu
warehousing Corporation, 292 ITR 310 (Mad.). In case of Ambica Mills vs.
CIT 54 ITR 167 (Guj.) it is held that liability shown in the balance sheet is a
clear case of acknowledging the liability of such liability cannot be treated to
have ceased so as to attract Section 41(1) of the Act. The Ld. AR further
ITA no. 6708/Del/2014
submitted that being so, where is the question of holding the said liabilities
as ceased to exist, more so when assessee herself is acknowledging the
liabilities to be paid? How can a third party that too a quasi-judicial
authority hold in the absence of any material that the liability is not payable
by the assessee? Therefore, the Ld. AR submitted that the addition made on
the basis of the presumption does not have either factual or legs to stand.
The Ld. AR submitted that the Hon'ble Apex court in case of Sugauli Sugar
Works vs. CIT 236 ITR 518 (SC) held that the cessation of the liability can
be done not by the unilateral Act, but it can certainly be so by the bilateral
act. The Ld. AR submitted that so long as the assessee is recognizing
his/her liability to pay to these creditors, whereas the question of quasi
judicial authority to intervene and to say on behalf of sundry creditors or on
behalf of the assessee that amount is not payable by the assessee?
6. The Ld. AR further submitted that Section 41(1) Section 41(1) creates
a deeming fiction in which burden to prove that the three ingredients of
section 41(1) are there in this case rests on the shoulders of the Assessing
Officer. These ingredients are that the credit is in respect of as an expense
which has been allowed as deduction in any year. The second component is
that the liability has ceased to exist and the last one is that the liability has
ceased to exist in the year in which the addition is made. The Ld. AR
submitted that even in law, the addition is not sustainable for more than
one reason. Section 41(1) is a deeming fiction according to which an amount
which does not have any trace of income is treated as income liable to suffer
the brunt of tax. Therefore, as per the established canons of law, the burden
to prove that a particular amount falls within the four corners of section
41(1) is on the shoulder of the Assessing Officer without which the addition
cannot be made and if made is liable to be deleted. The Ld. AR further
submitted that the first pre-requisite for the applicability of section 41(1) is
that there must be a trading liability in respect of which the deduction has
been claimed and allowed and burden to prove the twin conditions to the
effect of the above facts, it goes without saying, is on revenue. The Ld. AR
submitted that there is not even an iota of whisper as to whether the
ITA no. 6708/Del/2014
impugned creditors were in respect of trading liability for which any
deduction was ever claimed and allowed and if allowed, in which year was it
allowed so on so forth. This is evident from a plain reading of the
assessment order. Therefore, the Assessing Officer miserably failed to
discharge the said burden in view of the following decisions and therefore
this addition is liable to be deleted on this short ground alone. The Ld. AR
submitted that the Assessing Officer has not established with evidence that
the liability in respect of the above outstanding balances has ceased to exist.
The Assessing Officer has gone on presumption and that too by placing the
burden wrongly on the shoulders of the assessee. Section 41(1) does not
envisage any such presumption of cessation and fix the incidence of tax
thereon. In the absence of any material having been brought on record to
establish that the deduction was claimed or credit balance has been
remitted, addition cannot be made u/s 41(1) in view of the following
decisions :
i. Steel and General Mills Co. Ltd. vs. CIT 96 ITR 438 (Del)
ii. CIT vs. Nathubhai Desha Bhai 130 ITR 238 (MP)
iii. Liquidator, Mysore Agencies P. Ltd. vs. CIT 114 ITR 853 (Karn)
iv. K.V.Moosa Koya & Co vs. CIT 175 ITR 120, 124 (Ker)
v. CIT vs. Pranlal P Doshi 201 ITR 756 (Guj)
7. The Ld. AR submitted that the Assessing Officer failed to establish
that cessation if at all has happened, has happened in the year under
appeal as held by Delhi Bench of Tribunal in the case of Madan Lal
Brothers. After all, liability to tax can be fixed in the year to which it
pertains and to no other year. Liability to tax any ceased liability in a
particular year does not depend on the action of the Assessing Officer in
selecting a case in scrutiny of that year. Merely because the Assessing
Officer chose to enquire about the creditors in this year and if assessee fails
to establish the existence of the liability in this year (even if it is so
assumed) then also it cannot be said that the liability ceased to exist only in
this year and not before. Nobody can be permitted to fix the year of
taxability by a conscious design or omission, be he an assessee or an
ITA no. 6708/Del/2014
Assessing Officer. Therefore, viewed from any angle, the addition made by
the Assessing Officer is liable to be deleted. The Ld. AR also relied upon the
following direct decisions :-
i. Uttant Air Products P Ltd vs DCIT 99 TTJ 718 (Del)
ii. New Commercial Mills Co. Ltd vs DCIT 73 TTJ 893 (Ahd)
iii. ABC India Ltd vs DCIT 57 TTJ 349(Gau)
iv. CIT vs Sadul Textiles Ltd 167 ITR 634(Raj)
v. CIT vs Pre Stressed Concrete P Ltd 162 ITR 314(Mad)
The Ld. AR submitted that a plain reading of the assessment order would
show that none of these three ingredients is available in the case of the
assessee nor has it been proved by the Assessing Officer with the help of any
evidence. Therefore, the addition u/s 41(1) could not be made as held by
Hon'ble Punjab & Haryana High Court in the case of CIT vs. Sita Devi
Juneja 325 ITR 593.
8. The Ld. AR further submitted that the assessee was having opening
balances and the same is confirmation by the parties directly to the
Assessing Officer, therefore, the addition cannot be made. The Ld. AR relied
upon the decision of the Hon'ble Delhi High Court in case of Pr. CIT vs. New
World Synthetics Limited (ITA no. 806/2018 order dated 27.08.2018)
9. The Ld. DR submitted that commencing with a brief background that
the Assessing Officer made addition u/s 68 on account of sundry creditors
of Rs. 37,95,928/- the CIT(A) sustained addition of Rs. 22,73,232/- which
the assessee is agitating. The Ld. DR submitted that as regards M/s. Delite
Trading Co.-Rs. 7,16,903, M/s. Ganesh Enterprises-Rs. 4,75,883, M/s.
Krishna Trading Co.-Rs. 2,33,844 and M/s. Nanak Enterprises-Rs. 1,14,966
are concerned there was wrong PAN, no confirmations filed, and notices
issued u/s. 133(6) twice remain uncompiled with, Inspector's spot inquiry
by personally visiting and making inquiries at given address and from the
occupants / neighbors reported that no such concerns are available at the
given addresses nor their whereabouts could be located. During the remand
proceedings details of confirmations filed were examined and PAN was again
ITA no. 6708/Del/2014
found to be wrong by the AO, so identity of the creditor remains profusely
doubtful, creditworthiness and genuineness of transaction also not proved
in absence of any evidence. As regards to M/s. S.B.Industries Rs.
4,00,351, the Ld. DR submitted that notice was issued u/s 133(6) but not
complied with both the times, even during remand proceedings confirmation
could not be furnished by the assessee, other corroborative evidences also
not produced. As regards to M/s. Vee Kay Enterprises Rs. 3,31,285, the
copy of A/c of the assessee in their books reflected Nil balance. This sundry
creditor denied of having any transaction between him and the assessee
since 2005. It is corroborated by the inquiry conducted by the Inspector
wherein it was informed by Sh. Vinod Bansal that M/s. Vee Kay Enterprises
did not have any debtor named M/s. Loknath Narang. The Ld. DR relied
upon the following case laws :
1. Konark Structural Engineering (P) Ltd. vs. DCIT [2018]96
taxmann.com255 (SC)
Konark Structural Engineering (P) Ltd. vs. DCIT [2018] 90
taxmann.com 56 (Bombay)
2. DRB Exports (P) Ltd. vs. CIT [2018] 93 taxmann.com 490
(Calcutta)
3. CIT vs. Ultra Modern Exports (P) Ltd. (40 taxmann.com 458, 220
Taxman 165)
4. CIT vs. Frostair (P.) Ltd. (26 taxmann.com 11, 210 Taxman 221)
5. CIT vs. Empire Builtech (P.) Ltd. (336 ITR 110)
10. We have heard both the parties and perused all the relevant material
available on the record. From the perusal of the records it can be seen that
all the relevant records were produced by the assessee before the Assessing
Officer as well as before the CIT(A). The submissions made by the Ld. DR
about the evidences are contrary to what is on record. The assessee is in
trading business and the figures appearing in the assessment order are that
of opening balances therefore, Section 68 as well as Section 41(1) will not be
applicable in the present case. Since the assessee is challenging the order of
ITA no. 6708/Del/2014
the CIT(A) wherein the addition has been done u/s 41(1) the same does not
sustain in light of the decision of the Hon'ble Delhi High Court in case of
New World Synthetics Ltd. wherein it is held as under :-
"3. It is an undisputed and admitted fact that the respondent-assessee
had an outstanding liability of Rs.2,61,72,160/- due and payable to
M/s. P.T. Polysindo, Jakarta, Indonesia since 31st March, 2003. This
liability was shown and acknowledged in the balance-sheet and the
accounts prepared by the respondent-assessee for the year ending 31st
March, 2006, and filed with the Registrar of Companies and the Income
Tax department. M/s. P.T. Polysindo, was shown and recorded as a
sundry creditor, to whom the respondent-assessee was liable to pay
Rs.2,61,72,160/-.
4. While liability to pay was not disputed and doubted by the
respondent- assessee, albeit, the Revenue insists and claims that there
was cessation of liability as Rs.2,61,72,160/- had remained outstanding
and unpaid since 31st March, 2003 till 31s March, 2006. The debt due to
M/s. P.T. Polysindo, it is stated, had become barred by limitation.
Further there was no likelihood of the respondent-assessee making the
said payment as the respondent-assessed had incurred huge losses and
stopped business operations during the period relevant to the
Assessment Year 2000-01.
5. Section 41(1) of the Act, for the sake of convenience is reproduced
below:
"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
ITA no. 6708/Del/2014
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.
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;
ITA no. 6708/Del/2014
(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 company."
The provision states that when an assessee makes an allowance or
deduction in respect of loss, expenditure or trading liability incurred, any
amount obtained in cash or in any other manner; or when there is
remission or cessation, the amount obtained or the value of benefit
accruing by way of remission and cessation shall be deemed to be profit
and gain of the business or profession. The word "cessation" in common
parlance and in context in which it is used in Section 41(1) of the Act
connotes that the debt has become extinct, has come to an end or it has
been forfeited. "Remission" implies cancellation or extinguishment of all
or part of the financial obligation on part of the creditor.
6. Explanation to the Section states that the loss or expenditure or
some benefit in respect of any such trading liability by way of remission
or cessation thereof, shall include remission and cessation of any
liability by unilateral act of the first mentioned person i.e. the assessee.
The explanation therefore refers to the conduct of the assessee. We need
not refer to Clause (b) to Section 41(1) for the said clause is not
applicable.
7. In the present case there was no unilateral act by way of remission or
cessation by the assessee, for the respondent-assessee had not written
off the outstanding amount of Rs.2,61,72,160/- payable to M/s. P.T.
Polysindo. This is also not a case where benefit in any form or in cash
was received by the respondent-assessee. Hence the first part of Clause
(a) to Section 41(1) of the. Act, would not apply.
8. Whether the debt had ceased to exist, was forfeited, or was extinct or
whether there was remission in whole or part, would normally be a
question of fact, unless there was cessation or remission by operation
of law. When it comes to facts, the conduct and understanding of the
ITA no. 6708/Del/2014
parties is relevant and important. For the conduct would reveal
existence or extinction and forfeiture of the liability.
9. Non-payment of outstanding liability which is admitted and
acknowledged as due and payable by an assessee does not indicate
remission or cession of liability. When an assessee suffers losses,
payments and debts due including those due to financial institutions
are not paid. Delay or nonpayment, even when the Assessing Officer is
of the opinion that likelihood of payment was remote as business has
stopped, would by itself not denote and mean cessation or remission of
liability. In the winding up or bankruptcy proceedings, payments are
made, mostly partly, on sale of assets.
10. In Bombay Dyeing & Manufacturing Company Limited Vs. State of
Bombay & Ors., AIR 1958 SG 328, it was held and observed that the
debt or liability may subsist notwithstanding its recovery was barred
by limitation for the law of limitation merely bars the creditor from
invoking legal remedy. In Commissioner of Income Tax Vs. Sugauli
Sugar Works (P) Ltd. ,(1999) 2 SCC 355, it was elucidated that expiry of
period of limitation as prescribed in the Limitation Act does not
extinguish the debt but only prevents the creditor from enforcing the
debt. This is the right and correct position in law as held by the
Bombay High Court in Kohinoor Mills Co. Ltd. Vs. Commissioner of
Income-tax [1963] 49 ITR 578 (Bom.) and Bhagwat Prasad and Co. Vs.
Commissioner of Income-tax (1975) 99 ITR 111 (All). In this context the
admission and acknowledgement of the debt and liability by the
respondent- assessee is significant and important.
11. The patent flaw in the argument raised by the Revenue is to ignore
and overlook admission of liability to pay as the respondent-assessee
had acknowledged that Rs.2,61,72,160/- was due and payable to
M/s.P.T. Polysindo. This liability was accepted and acknowledged in
the books of accounts and the returns filed with the Registrar of
ITA no. 6708/Del/2014
Companies and with the Income-tax department. Debt acknowledged
and admitted in the balance- sheet and accounts filed with the
Registrar of Companies is an acknowledgement within the meaning of
Section 18 of the Limitation Act, so as to give a fresh period of the
limitation as has been held in Ambica Mills Ltd. Ahmedabad Vs.
Commissioner of Income-tax, Gujarat, Ahmedabad AIR 1964 Guj. 208.
The Supreme Court in Uttam Singh Duggal & Co. Ltd. Vs. United Bank
of India & Ors. (2000) (7) SCC 120 has reflected and pronounced
cwradmission in the balance sheet and accounts for the purpose of
Order XII, Rule 6 of the Code of Civil Procedure.
12. Decision in the case of Polyflex (India) Pvt. Ltd. Bangalore Vs.
Commissioner of Income Tax Karnataka (2002) 7 SCC 188, is
distinguishable, as in the said case assessee had received and
obtained an amount in cash, which amount received was earlier
recorded and treated as expenditure in the profit and loss account. In
the said case excise duty paid had been refunded, though the Revenue
had preferred an appeal and the decision on refund had not attained
finality. The Supreme Court therefore drew distinction between receipt
of cash or amount; and remission or cessation of liability in respect of
loss or expenditure under the second part of clause (a) of Section 41(1)
of the Act. In the present case the respondent-assessee has not
obtained any money or benefit under the first part or the deeming part
of Clause (a) to Sub-section 1 to Section 41 of the Act.
13. There was no remission or cessation of liability."
This decision of the Jurisdictional High Court is applicable in the
present case therefore, the order of the CIT(A) does not sustain. From the
perusal of the records it can be seen that the Assessing Officer has not
established with evidence that the liability in respect of the above
outstanding balances has ceased to exist. The case laws referred by the Ld.
DR are factual distinguished by the Ld. AR and will not be applicable in the
present case. The appeal of the assessee is allowed.
ITA no. 6708/Del/2014
11. In the result appeal of the assessee is allowed.
Order pronounced in the Open Court on 3rd January, 2019.
Sd/- Sd/-
(N.K.BILLAIYA) (SUCHITRA KAMBLE)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 03/01/2019
Binita
Copy forwarded to:
1.Appellant
2. Respondent
3. CIT
4.CIT(Appeals)
5.DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
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