THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 24.05.2013
+ ITA No.235/2013
THE COMMISSIONER OF INCOME TAX DELHI-II ..... Appellant
versus
JAIN EXPORTS PVT. LTD. .... Respondent
Advocates who appeared in this case:
For the Appellant : Mr Sanjeev Sabharwal, Advocate
For the Respondent : None.
CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE VIBHU BAKHRU
JUDGMENT
VIBHU BAKHRU, J
1. This appeal is filed, on behalf of the revenue under Section 260A of the
Income Tax Act, 1961 (hereinafter referred to as "the Act"), challenging the
order dated 30.03.2012 passed by Income Tax Appellate Tribunal, setting aside
the addition of sum of ` 1,53,48,850/- made by the Assessing Officer on account
of purported cessation of liability.
2. The assessee is a company incorporated under the Companies Act, 1956.
The assessee company was engaged in the business of trading in agricultural
commodities, however, the assessee did not conduct any business in the year
2007-2008 relevant to the assessment year 2008-2009. The assessee filed its
ITA No.235/2013 Page 1 of 13
return of income, on 25.09.2008, for the assessment year 2008-2009 showing a
loss and declaring taxable income as nil. The return was initially accepted under
Section 143(1) of the Act, however, subsequently, the return was selected for
scrutiny. The Assessing Officer examined the balance sheet of the assessee
company for the relevant period and noted that the balance sheet disclosed a sum
of ` 1,57,54,011/- as sundry creditors. The said amount comprised the following
outstanding credit balances:-
S.No. Name Amount
1 M/s Elephanta Oil &Vanaspati Ltd. ` 1,53,48,850/-
2 M/s Geo-chem Laboratories (P) Ltd ` 41,231/-
3 M/s Jain House, Calcutta ` 30,210/-
4 M/s Ramji Lal Investments (P) Ltd ` 38,874/-
5 Sh. Sohan Lal Ghai ` 2,94,846/-
3. The credit balances against the aforementioned creditors have been
outstanding since several years. In the case of M/s Elephanta Oil & Vanaspati
Ltd., the amount of ` 1,53,48,850/- was outstanding in the books since 1984-
1985. The Assessing Officer called upon the assessee to provide confirmations
from the creditors regarding the balance outstanding to their credit. The assessee
filed a balance confirmation from M/s Ramji Lal Investments (P) Ltd. but could
not provide confirmations from any of the other aforementioned creditors. The
Assessing Officer also issued notices under section 133(6) of the Act to the
creditors, for the purpose of verifying the credit balance outstanding against their
names. The notice issued to M/s Elephanta Oil & Vanaspati Ltd., M/s Geo-chem
Laboratories (P) Ltd., M/s Jain House, Calcutta and Sh. Sohan Lal Ghai were
returned un-served.
ITA No.235/2013 Page 2 of 13
4. The Assessing Officer accepted the amount of ` 38,874/- outstanding to
the credit of M/s Ramji Lal Investments (P) Ltd., but held that the balance
liabilities in respect of other sundry creditors, which were lying unclaimed since
several years, were liable to be added back to the income of the assessee under
Section 41(1) of the Act. The Assessing Officer was of the view that there was
cessation of these liabilities as there was no possibility of the creditors claiming
the same in the near future. Accordingly, the aggregate of the balances
outstanding to the credit of the aforementioned four creditors (i.e. M/s Elephanta
Oil & Vanaspati Ltd., M/s Geo-chem Laboratories (P) Ltd., M/s Jain House,
Calcutta and Sh. Sohan Lal Ghai) amounting to sum of ` 1,57,15,137/- were
added back to the income of the assessee.
5. Aggrieved by the assessment order dated 01.11.2010 passed by the
Assessing Officer, the assessee preferred an appeal before the CIT (Appeals),
inter-alia, on the ground that there was no cessation of liabilities as the assessee
continued to be liable for the amounts shown as outstanding against various
creditors. In respect of the amount payable to M/s Elephanta Oil & Vanaspati
Ltd., the assessee explained that M/s Elephanta Oil & Vanaspati Ltd. also owed a
sum of ` 1,57,10,690.53/- to the assessee which was reflected as receivable in the
balance sheet of the assessee company and thus in net terms M/s Elephanta Oil &
Vanaspati Ltd. owed the assessee company a sum of ` 3,61,840.78. The amount
payable to M/s Elephanta Oil & Vanaspati Ltd. was liable to be adjusted against
the amount receivable from M/s Elephanta Oil & Vanaspati Ltd. and thus there
could not be any cessation of liability towards the said creditor. The assessee
company also provided its final accounts for the years ended on 31.03.2009 and
31.03.2010 which indicated the balances outstanding to the various sundry
creditors continued to be reflected in the balance sheets of the assessee company
for the subsequent years. It was, thus, contended by the assessee that, since the
ITA No.235/2013 Page 3 of 13
assessee continued to acknowledge the credit balances in the subsequent period
also, there could be no cessation of its liability to pay the creditors.
6. It was also submitted on behalf of the assessee that the amounts payable
to M/s Elephanta Oil & Vanaspati Ltd. were on account of certain bank
guarantees which had been furnished by M/s Elephanta Oil & Vanaspati Ltd., on
behalf of the assessee company, to the custom authorities. The assessee also
gave details of the bank guarantees that had been issued by the bank against
certain imports that had been made by the assessee company in the year 1984-85.
M/s Elephanta Oil & Vanaspati Ltd. had become a sick company and had filed a
reference before the Board of Industrial and Financial Reconstruction (BIFR).
The BIFR was of the opinion that M/s Elephanta Oil & Vanaspati Ltd. be wound
up and accordingly, winding up proceedings have been initiated in this Court and
the official liquidator has been appointed as the provisional liquidator to take
over possession of the books and accounts and other records of the M/s Elephanta
Oil & Vanaspati Ltd.
7. The CIT (Appeals) deleted the addition made by the Assessing Officer
with regard to the balance outstanding to the credit of M/s Geo-chem
Laboratories (P) Ltd., M/s Jain House, Calcutta and Sh. Sohan Lal Ghai on the
ground that the assessee had continued to reflect the liabilities against the names
of these creditors in the subsequent period i.e. in the final accounts for the years
ended on 31.03.2009 and 31.03.2010. The CIT (Appeals) held that as the
assessee company continued to reflect amounts payable to those creditors there
was no cessation of liability and consequently, the provisions of Section 41(1) of
the Act were inapplicable. However, in the case of M/s Elephanta Oil &
Vanaspati Ltd., the CIT (Appeals) upheld the addition made by the Assessing
Officer, not on the ground that there was cessation of liability, but on the basis
ITA No.235/2013 Page 4 of 13
that the assessee had failed to establish the genuineness of the liability towards
M/s Elephanta Oil & Vanaspati Ltd. The decision of the CIT (Appeals) was,
inter-alia, based on the fact that the assessee had not been able to trace or
produce any evidence with regard to the bank guarantees on account of which the
liability to pay a sum of ` 1,53,48,850/- had arisen. The contention of the
assessee that the transaction related back to the year 1984-1985 and had been
accepted as genuine by the revenue through a series of scrutiny assessment made
in the past, was not accepted. The plea of the assessee that, since the matter
related to 1984-1985, the assessee could not produce the evidence of the initial
transaction, was also not found to be acceptable by the CIT (Appeals).
8. While, the decision of the CIT (Appeals) was accepted by the revenue, the
assessee preferred an appeal before the Income Tax Appellate Tribunal, inter-
alia, challenging the confirmation of addition of ` 1,53,48,850/- by the CIT
(Appeals). The Tribunal accepted the contention of the assessee that a sum of `
1,57,10,690.53 was owed by M/s Elephanta Oil & Vanaspati Ltd. to the assessee
company and thus, the net effect of the same would be that no amount would be
payable by the assessee to M/s Elephanta Oil & Vanaspati Ltd. and a sum of `
3,61,840.78 would be receivable after setting off the amount of ` 1,53,48,849/-
which was standing to the credit of M/s Elephanta Oil & Vanaspati Ltd. The
Tribunal was of the view that it was not correct to only accept the figure relating
to the amount that was receivable by the assessee company while rejecting the
amount payable by the assessee company to M/s Elephanta Oil & Vanaspati
Ltd.
9. Aggrieved by the order passed by the Tribunal, the revenue has preferred
the present appeal. It is contended before us on behalf of the revenue that there
has been a cessation of liability of ` 1,53,48,849/- and the Tribunal has erred in
ITA No.235/2013 Page 5 of 13
setting aside the addition made on that account. It is further urged that the
Tribunal was in error in taking note of the amount receivable from
M/s Elephanta Oil & Vanaspati Ltd. while, considering the provisions of Section
41(1) of the Act. Whilst, it was conceded before us that the genuineness of the
initial transaction was not in challenge, it was contended that the fact that the
amount payable to M/s Elephanta Oil & Vanaspati Ltd. has been outstanding for
25 years indicated that the liability has ceased. It has been pleaded on behalf of
the revenue that the following questions arise for our consideration:
1. "Whether ITAT erred in setting aside an amount of
` 1,53,48,850.00 holding that there was no cession of
liability?"
2. "Whether while considering provisions of section 41(1) the
net liability that after providing for receivables is to be
considered or is relevant?"
10. We are unable to appreciate the stand taken on behalf of the revenue,
which has, apparently, not been consistent. The Assessing Officer, inter-alia,
added a sum of ` 1,57,15,137, being the aggregate of the amounts shown as
payable to various sundry creditors, as income under Section 41(1) of the Act.
Whilst the Assessing Officer held that the liabilities due to the sundry creditors
had ceased, the genuineness of the initial transaction on account of which the
amounts were payable to various creditors was not made an issue. The only issue
raised by the Assessing Officer was that since the outstanding balances had
remained static on the books of the assessee for several years (in the case of M/s
Elephanta Oil & Vanaspati Ltd. for over 25 years), there was no possibility of
any claim being made by the creditors and the amount of liabilities outstanding
were liable to be added as income of the assessee.
ITA No.235/2013 Page 6 of 13
11. The CIT (Appeals) did not accept the reasoning of the Assessing Officer
and deleted the addition made by the Assessing Officer with respect to amounts
reflected as payable to various sundry creditors on the ground that assessee
company continued to reflect the amounts payable even in the subsequent
periods. The CIT (Appeals) held that there could be no cessation of liability as
the assessee company continued to acknowledge its debt towards the creditors.
However, the CIT (Appeals) concluded that the amount outstanding to the credit
of M/s Elephanta Oil & Vanaspati Ltd. was not genuine as the assessee could not
produce any confirmation or evidence of the original transaction which was
undertaken in 1984-1985. It is relevant for us to notice that the revenue did not
prefer any appeal against the order of the CIT (Appeals), and thus, accepted his
decision that there was no cessation of liability in cases where the assessee
company continued to acknowledge the amount owed by it to its creditors.
12. The question whether there had been any cessation of liability was thus
not before the Tribunal as the Tribunal was only considering the correctness of
the decision of the CIT (Appeals) wherein the transaction giving rise to the
liability payable to M/s Elephanta Oil & Vanaspati Ltd. had been doubted. The
Tribunal came to the conclusion, and rightly so, that the books of the assessee
had been examined in the past and it would not be correct to accept a part of the
account relating to a party and rejecting another part of the account. Whereas,
the part of the account relating to dealings with M/s Elephanta Oil & Vanaspati
Ltd. which resulted in the amount being receivable from M/s Elephanta Oil &
Vanaspati Ltd. was accepted by the CIT (Appeals), the amount payable to the
same entity was rejected. Accordingly, the Tribunal deleted the addition of `
1,53,48,850/- confirmed by the CIT (Appeals).
ITA No.235/2013 Page 7 of 13
13. The genuineness of the transaction entered into by the assessee in 1984-85
with M/s Elephanta Oils & Vanaspati Ltd. is not being assailed before us and the
only controversy sought to be raised before us is whether there has been cessation
of liability owed by the assessee to M/s Elephanta Oil & Vanaspati Ltd. In our
view, that question doesn't arise in the present case since the decision of the CIT
(Appeals) that there is no cession of liability in cases where the debt has been
acknowledged by the assessee company has already been accepted by the
revenue. However, as the question whether there is any cessation of liability in
the relevant previous year warranting an addition in terms of Section 41(1) of the
Act has been urged on behalf of the revenue, we consider it appropriate to
examine the same.
14. Section 41(1) of the Act is relevant and 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
ITA No.235/2013 Page 8 of 13
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."
15. Indisputably, Explanation 1 to section 41(1) of the Act, which was
inserted, w.e.f. 01.04.1997 is not applicable, as the assessee has not written off
the liability to pay M/s Elephanta Oil & Vanaspati Ltd. in its books of accounts.
16. The Supreme Court in the case of CIT v. Sugauli Sugar Works (P). Ltd.:
[1999] 236 ITR 518 (SC) has held that section 41(1) of the Act contemplates
obtaining by the assessee an amount either in cash or any other manner or any
benefit by way of cessation or remission of liability. In order to come within the
sweep of section 41(1) it is necessary that the benefit derived by an assessee
results from cessation or remission of a trading liability. The relevant extract
from the decision of the Supreme Court in the case of CIT v. Sugauli Sugar
Works (P.) Ltd. (supra) is quoted below:
"3. It will be seen that the following words in the section
are important: `the assessee 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
him'. Thus, the section contemplates obtaining by the assessee of
an amount either in cash or in any other manner whatsoever or a
benefit by way of remission or cessation and it should be of a
particular amount obtained by him. Thus, the obtaining by the
ITA No.235/2013 Page 9 of 13
assessee of a benefit by virtue of remission or cessation is sine
qua non for application of this section."
17. The only issue that needs to be considered is whether the liability towards
M/s Elephanta Oil & Vanaspati Ltd. has ceased on account of efflux of time.
18. The Supreme Court in the case of `Bombay Dyeing and Manufacturing
Co. Ltd.' v. State of Bombay: AIR 1958 SC 328 has clearly held that even in
cases where the remedy of a creditor is barred by limitation the debt itself is not
extinguished but merely becomes unenforceable. The Court observed as under:-
"The position then is that, under the law, a debt subsists
notwithstanding that its recovery is barred by limitation.........."
19. This view has also been taken by the Supreme Court in the case of CIT v.
Sugauli Sugar Works P. Ltd. (supra). In the said case, it was contended on
behalf of the revenue that the liability has come to an end as the creditors in the
said case had not taken any action to recover the amounts due to them for twenty
years. The Supreme Court affirmed the decision of the Bombay High Court in the
case of J. K. Chemicals Ltd. v. CIT: [1966] 62 ITR 34 (Bom) wherein the words
"cessation or remission" had been interpreted. The Supreme Court quoted the
following passage from the judgment of the Bombay High Court in the said case
of J. K. Chemicals Ltd. v. CIT (supra): -
"The question to be considered is whether the transfer of
these entries brings about a remission or cessation of its liability.
The transfer of an entry is a unilateral act of the assessee, who is a
debtor to its employees. We fail to see how a debtor, by his own
unilateral act, can bring about the cessation or remission of his
liability. Remission has to be granted by the creditor. It is not in
dispute, and it indeed cannot be disputed, that it is not a case of
remission of liability. Similarly, a unilateral act on the part of the
debtor cannot bring about a cessation of his liability. The
ITA No.235/2013 Page 10 of 13
cessation of the liability may occur either by reason of the
operation of law, i.e., on the liability becoming unenforceable at
law by the creditor and the debtor declaring unequivocally his
intention not to honour his liability when payment is demanded by
the creditor, or a contract between the parties, or by discharge of
the debt-the debtor making payment thereof to his creditor.
Transfer of an entry is neither an agreement between the parties
nor payment of the liability. We have already held in Kohinoor
mills' case [1963] 49 ITR 578 (Bom) that the mere fact of the
expiry of the period of limitation to enforce it, does not by itself
constitute cessation of the liability. In the instant case, the
liability being one relating to wages, salaries and bonus due by an
employer to his employees in an industry, the provisions of the
Industrial Disputes Act also are attracted and for the recovery of
the dues from the employer, under section 33C(2) of the Industrial
Disputes Act, no bar of limitation comes in the way of the
employees."
After quoting the above passage, the Supreme Court held as under:-
"This judgment has been quoted by the High Court in the
present case and followed. We have no hesitation to say that the
reasoning is correct and we agree with the same."
20. In order to attract the provisions of Section 41(1) of the Act, it is
necessary that there should have been a cessation or remission of liability. As
held by the Bombay High Court, in the case of J. K. Chemicals Ltd. (supra),
cessation of liability may occur either by the reason of the liability becoming
unenforceable in law by the creditor coupled with debtor declaring his intention
not to honour his liability, or by a contract between parties or by discharge of the
debt. In the present case, the assessee is acknowledging the debt payable to M/s
Elephanta Oil & Vanaspati Ltd. and there is no material to indicate that the
parties have contracted to extinguish the liability. Thus, in our view it cannot be
concluded that the debt owed by the assessee to M/s Elephanta Oils & Vanaspati
Ltd. stood extinguished.
ITA No.235/2013 Page 11 of 13
21. Although, enforcement of a debt being barred by limitation does not ipso
facto lead to the conclusion that there is cessation or remission of liability, in the
facts of the present case, it is also not possible to conclude that the debt has
become unenforceable. It is well settled that reflecting an amount as outstanding
in the balance sheet by a company amounts to the company acknowledging the
debt for the purposes of Section 18 of the Limitation Act, 1963 and, thus, the
claim by M/s Elephanta Oil & Vanaspati Ltd. can also not be considered as time
barred as the period of limitation would stand extended. Even, otherwise, it
cannot be stated that M/s Elephanta Oil & Vanaspati Ltd. would be unable to
claim a set-off on account of the amount reflected as payable to it by the assessee.
Admittedly, winding up proceedings against M/s Elephanta Oil & Vanaspati
Ltd. are pending and there is no certainty that any claim that may be made by the
assessee with regard to the amounts receivable from M/s Elephanta Oil &
Vanaspati Ltd. would be paid without the liquidator claiming the credit for the
amounts receivable from the assessee company. It is well settled that in order to
attract the provisions of Section 41(1) of the Act, there should have been an
irrevocable cession of liability without any possibility of the same being revived.
The assessee company having acknowledged its liability successively over the
years would not be in a position to defend any claim that may be made on behalf
of the liquidator for credit of the said amount reflected by the assessee as payable
to M/s Elephanta Oil & Vanaspati Ltd.
22. We may also add that, admittedly, no credit entry has been made in the
books of the assessee in the previous year relevant to the assessment year 2008-
2009. The outstanding balances reflected as payable to M/s Elephanta Oil &
Vanaspati Ltd. are the opening balances which are being carried forward for
several years. The issue as to the genuineness of a credit entry, thus does not
arise in the current year and this issue could only be examined in the year when
ITA No.235/2013 Page 12 of 13
the liability was recorded as having arisen, that is, in the year 1984-1985. The
department having accepted the balances outstanding over several years, it was
not open for the CIT (Appeals) to confirm the addition of the amount of `
1,53,48,850/- on the ground that the assessee could not produce sufficient
evidence to prove the genuineness of the transactions which were undertaken in
the year 1984-85.
23. The present appeal does not disclose any substantial question of law for
our consideration and is, accordingly, dismissed.
VIBHU BAKHRU, J
BADAR DURREZ AHMED, J
MAY 24, 2013
MK
ITA No.235/2013 Page 13 of 13
|
