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INCOME TAX APPELLATE TRIBUNAL,MUMBAI “I” BENCH

Case Law:
ITA No.751/Mum/2013 Assessment Year-2009-10
Income tax Officer (Appellant) vs. M/s. Indo Shares & Fintrade Ltd (Respondent)
Date of Order: 29-01-2016

ORDER

PER RAJENDRA, AM-
Challenging the order dated 21.11.2012 of CIT-8, Mumbai the Assessing Officer (AO) has filed the present appeal.

Assessee company was a member of Bombay Stock Exchange and was engaged in the business of share and stock broking. It filed return of income 30.9.2009 declaring loss of Rs.14,316/-.The AO completed the assessment on 8.12.11 u/s. 143(3) of the Act determining the income of the assessee at Rs.68,34,970/-

2. The effective Ground of appeal is about deleting the addition of Rs.41,26,997/- u/s.41(1) of the Act. During the assessment proceedings the AO called for confirmation letters alongwith the copies of PAN cards to verify the genuineness of creditors appearing in the Balance sheet of the assessee.He issued notice u/s. 133(6) of the Act to the creditors. However, he received confirmation from only 3 creditors appearing in its books of account. As per the AO assessee did not submit the required information. Therefore, he held that assessee was not able to substantiate its claim of business liability, that an amount of Rs.41,26,997/- had to be added to the total income of the assessee.

3. Aggrieved by the AO, the assessee preferred an appeal before the First Appellate Authority (FAA).Before him, it was argued that assessee was not carrying out any business activities for last so many years, that the debtors and creditors continued the same as per the earlier balance sheet, that no liability had ceased, that the AO had to make addition without any basis, that the whole of the outstanding amount was payable to respective parties, that the assessee had not taken revenue benefit, that it had not credited the above amount in the books of account, that the provisions of section 41(1) dealt with trading liability and not any other type of liability. It relied upon the case of (Enam Securities Pvt. Ltd. (345ITR 64) and Vardhman Overseas (343ITR408) of Bombay and the Delhi High Court respectively. It was further argued that the assessee was working as broker on behalf of the clients, all the creditors were the customers of the assessee on whose behalf he would sell the share, that the amounts were never claimed as expenses in any year in the P&L Account. After considering the submission of the assessee and the assessment order the FAA held that the provisions of section 40(1) could be invoked only when the liability ceased to exist, that the assessee had not written off the existing liability in the books it was showing the liabilities in the balance sheet, it could not be treated as recession of liabilities, that merely because the liability were outstanding for last many years it could not be inferred that the said liabilities had ceased to exist, that the AO had failed to prove that the assessee had obtained any benefit in respect of such trading liabilities. Finally, he allowed the appeal filed by the assessee.

5. Before us, the DR argued that there was cessation of liabilities, that the AO had rightly invoked the provisions of section 41(1) of the Act. As stated earlier none appeared on behalf of the assessee.

We have considered the material available with us. We find that the AO had made the addition invoking provisions of section 41(1) of the Act, that while making disallowance he has not mentioned whether any deduction or benefit had occurred to the assessee in earlier years, that the FAA has give a categorical finding of fact that amounts in question were not trading liabilities. Considering the fact that liabilities were part of the financial statement of the assessee and it had not availed any benefit in that regard, we are of the opinion that the order of the FAA does not suffer from any legal infirmity. In the case of Vardhman Overseas (supra) the Hon'ble Delhi High Court has held as under :-

“It cannot be disputed that the words "remission" and "cessation" are legal terms and have to be interpreted accordingly.

13. In Bombay Dyeing & Mfg. Co. Ltd. vs. State of Bombay AIR 1958 SC 328 the legal position was summarized by T.L. Venkatarama Aiyar, J., in the following manner :

"It has been already mentioned that when a debt becomes time-barred, it does not become extinguished but only unenforceable in a Court of law. Indeed, it is on that footing that there can be statutory transfer of the debts due to the employees, and that is how the board gets title to them. If then a debt subsists even after it is barred by limitation, the employer does not get, in law, a discharge therefrom. The modes in which an obligation under a contract becomes discharged are well-defined, and the bar of limitation is not one of them. The following passages in Anson’s Law of Contract, 19th Edition, p. 383, are directly in point :

"At Common Law lapse of time does not affect contractual rights. Such a right is of a permanent and indestructible character, unless either from the nature of the contract, or from its terms, it be limited in point of duration. But though the right possesses this permanent character, the remedies arising from its violation are withdrawn after a certain lapse of time; interest reipublicaeut si finis litium. The remedies are barred, though the right is not extinguished.’

And if the law requires that a debtor should get a discharge before he can be compelled to pay, that requirement is not satisfied if he is merely told that requirement is the normal course he is not likely to be exposed to action by the creditor."

This was also the view taken by the Supreme Court in CIT vs. Sugauli Sugar Works (P) Ltd. (supra).

16. In our opinion, the judgment of the Supreme Court in CIT vs. Sugauli Sugar Works (P) Ltd. (supra) is a complete answer to the contention of the learned standing counsel. In the case before the Supreme Court for a period of almost 20 years the liability remained unpaid and this fact formed the basis of the contention of the Revenue before the Supreme Court to the effect that having regard to the long lapse of time and in the absence of any steps taken by the creditors to recover the amount, it must be held that there was a cessation of the debts bringing the case within the scope of s. 41(1). In the case before us, the identical contention has been taken on behalf of the Revenue, though the period for which the amount remained unpaid to the creditors is much less. It was held by the Supreme Court that a unilateral action cannot bring about a cessation or remission of the liability because a remission can be granted only by the creditor and a cessation of the liability can only occur either by reason of operation of law or the debtor unequivocally declaring his intention not to honour his liability when payment is demanded by the creditor, or by a contract between the parties, or by discharge of the debt.

In several judgments of this Court, this legal position has been accepted. In Daya Chand Uttam Prakash Jain vs. Santosh Devi Sharma (1997) 67 DLT 13, S.N. Kapoor J. applied the principle in a case where the primary question was whether a suit under Order 37 CPC could be filed on the basis of an acknowledgement. In Larsen& Tubro Ltd. vs. Commercial Electric Works & Ors. (1997) 67 DLT 387 a Single Judge of this Court observed that it is well-settled that a balance sheet of a company, where the defendants had shown a particular amount as due to the plaintiff, would constitute an acknowledgement within the meaning of s. 18 of the Limitation Act. In Rishi Pal Gupta vs. S.J. Knitting & Finishing Mills (P) Ltd. (1998) 73 DLT 593 the same view was taken. The last two decisions were cited by Geeta Mittal, J. in S.C. Gupta vs. Allied Beverages Co. (P) Ltd. (decided on 30th April, 2007) and it was held that the acknowledgement made by a company in its balance sheet has the effect of extending the period of limitation for the purposes of s. 18 of the Limitation Act.

18. The judgment of the Supreme Court in CIT vs. Sugauli Sugar Works (P) Ltd. (supra) was followed and applied by a three Judges Bench of the Supreme Court in Chief CIT vs. Kesaria Tea Co. Ltd. (supra).

s.41(1) specifically deals with amounts that were allowed as deduction in the past assessments as trading liabilities, which in a later year cease or are remitted by the creditors. If and when there is evidence in a particular later year to show that the liability has ceased or has been remitted, the same can be brought to tax as provided in s. 41(1). In this manner the statute prescribes that a deduction for a trading liability allowed earlier can be brought to tax on the ground that the liability to pay the same has been remitted or ceased.”

Respectfully following the above effective Ground of appeal is decided against the AO.

In the result, appeal filed by the AO is dismissed.

Order pronounced in the open court on January, 2016.

(Ram Lal Negi)                         (Rajendra)
JUDICIAL MEMBER    ACCOUNTANT MEMBER म

Additions u/s 41(1) for remission/cessation of liability without mentioning deductions/benefits taken earlier. Time does not affect contractual rights | 31-01-2016 |