Ita/658/2015 Of The Commissioner Of Income-Tax v. M/S. Alvares & Thomas

IN THR HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 24 DAY OF MARCH 2016) PRESENT THR HON’BLE MR.JUSTICE JAYANT PATEL AND THR HON’BLE MRS. JUSTICE B.V.NAGARATHNA ITA NO.658/2015 BETWEEN: 1.THR COMMISSIONBR OF INCOME-TAX_oOlH FLOOR, BMTC BUILDING,oOlH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA BANGALORE-5D60 095 a2THER ASSISTANT COMMISSIONER OF INCOME-TAXCIRCLE-1(1)NO.59, HMT BHAVAN,6TH FLOOR, BELLARY ROAD,GANGANAGAR,BANGALORE-560 032CIRCLE-1(1)NO.59, HMT BHAVAN,6TH FLOOR, BELLARY ROAD,GANGANAGAR,BANGALORE-560 032 _APPRLLANTS (BY SRI.K.V.ARAVIND, ADVOCATE) AND: M/S. ALVARES & THOMAS3-9-742,"ALVARES CENTER" VIVEKANANDA ROAD, NANTHOOR,MANGALOREPAN: AAFFA O0107 _.. RESPONDENT THIS ITA [S FILED UNDBR SBCVJ60-A OFINCOME TAX ACT 1961, ARISING OUT OF ORDER)DATEBED14/08/2015PASSEDIN|ITANO.1676/BANG/2013, FOR THE ASSESSMENT YEARA2O10-2011PRAYINGTO.FORMULATE.THESUBSTANTIAL QUESTIONS OF LAW STATED ABOVE)AND ALLOW THR APPKAL AND SBT ASIDBK THEORDER PASSED BY THE ITAT, BENGALURU IN ITA)NO.16076/BANG/2013DATED:14/08/2015CONFIRMINGTH EORDERORTHEAPPBRLLATECOMMISSIONBR AND CONFIRM THR ORDER PASSED|BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1), BENGALURU. THIS APPBAL COMING ON FOR ADMISSION THISDAY,JAYANTPATELJ>DBRBLIVBRETHEFOLLOWING: JUDGMBNT The appellant-Revenue has preferred the presentappeal by raising the following substantial question oflaw: “Whether under the facts and in thecircumstances of the case, the Tribunal was.right1n lawdeletingtheadditionoT|Rs.81,40,232 on account of cessation ofliabilityundersection41(1) beingoutstandinghabilitytowardsM/s.Durga_traders as claimed by the assessee when theassessee failed to prove the existence of the|creditor and that the credit had insisted for|the payment at pay point of time or initiatedany legal action against the assessee,although the entry has been appearing inthe books of the assessee for past 7 to 8|YCarsandassessingauthorityrightly|invoked provisions sections 41(1) as all theconditions are fulfilled in the case otfassessee?”. 2. We may record that the relevant discussion ofthe Tribunal is at paragraphs 11 to 14 which reads as_under: “11. We have given a careful consideration to |the rival submissions. On almost identical|facts, the Hon’ble Delhi High Court in the case.of Shri. Vardhaman Overseas Ltd. (Supra), has clearly laid down that neither section 41(1)|nor section 68 of the Act can be applied. On|the applicability of section 68, we are of the|view that those provisions will not apply as|the balances shown in the creditors account|do not arise out of any transaction during the|previous year relevant to AY 2009-10. The.provisions of sec. 68 are clear inasmuch as.they refer to “sum found credited in the books|of account of an assessee maintained for any|previous year. Since the credit entries inquestion do not relate to previous yearrelevant to AY 2009-10, the same cannot be|brought to tax u/s. 68 of the Act. The proper|course in such cases for the Revenue would|be to find out the year in which the credits in|question were credited in the books ofaccount and thereafter make an enquiry in|that year and make an addition in that year,uf other conditions for applicability of section|68 are satisfied. 12. As far as applicability of section 41(1) ofthe Act is concerned, the question before us 1S limited to the applicability of Section 41(1) of|the Act. The section in so far as it is relevant|for our purpose is as 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| toas|thefirst-mentionedperson)andsubsequently during any previous year, - 12. As far as applicability of section 41(1) ofthe Act is concerned, the question before us 1S limited to the applicability of Section 41(1) of|the Act. The section in so far as it is relevant|for our purpose is as 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| toas|thefirst-mentionedperson)andsubsequently 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 allowanceor deduction has been made is in existence in|that year or not; or XX XX KK XK KXXKXXK KX XK XKKKXK KX /Explanation 1 — For the purposes of this|sub-section, the|expression—lossOrexpenditure or some benefit in respect of any|such trading liability by way of remission orcessation 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. " (underlining ours) 13. Explanation 1 which was inserted w.e-.f.1.4.1997 is not attracted to the present case| since there was no writing off of the liabilityto pay the sundry creditors in the assessee’s|accounts. The question has to be consideredde hors Explanation 1 to Section 41(1). In|order to invoke clause (a) of Sec.41(1) of the|Act, it must be first established that theassessee had obtained some benefit in|respect of the trading liability which was|earlier allowed as a deduction. There is no}dispute in the present case that the amounts.due to the sundry creditors had been allowed|in the earlier assessment years as purchase|price in computing the business income of the.assessee. The second question is whether by not paying them for a period offour years and|above the assessee had obtained some|benefit in respect of the trading lability|allowed in the earlier years. The words|“remission” and “cessation” are legal terms|and have to be interpreted accordingly. In the|present case, there is nothing on record toShow that there was either remission or'cessation of liability of the assessee. In fact,|there is no reference either in the order of the|AO or CIT(A) to the expression “remission orcessation of liability”. In such circumstances,we are of the view that the provisions of|section 41(1) of the Act could not be invoked|by the Revenue. In fact the decision of the|Hon’ble Delht High Court in the case ofVardhaman overseas Ltd. (supra) clearly|supports the plea of the Assessee in thisregard. On identical facts, the Hon’ble Delht|High Court on the applicability of Sec.41(1) ofthe Act, held:- “12. That takes us to the next question as to|what constitutes © remission or cessation of the lability. It|cannot be disputed that the words "remission"|and "cessation" are legal terms and have to|be interpreted accordingly. In State of Madras|vs. Gannon Dunkerley & Co. AIR 1958 SC|960 Venkatarama Atiyyar J. explained thegeneral rule of construction that words usedin Statutes must be taken in their legal sense|and observed: | “12. That takes us to the next question as to|what constitutes © remission or cessation of the lability. It|cannot be disputed that the words "remission"|and "cessation" are legal terms and have to|be interpreted accordingly. In State of Madras|vs. Gannon Dunkerley & Co. AIR 1958 SC|960 Venkatarama Atiyyar J. explained thegeneral rule of construction that words usedin Statutes must be taken in their legal sense|and observed: | "The ratio of the rule of interpretation that|words of legal import occurring in a Statute|Should be construed in their legal sense is.that those words have, in law, acquired a|definiteandpreciseSeCNSEandthat, accordingly, the legislation must be taken to|have|intendedthattheyshouldbeunderstood in that sense. In interpreting an|expression used in a legal sense, therefore,|we have only to ascertain the _ precisconnotation which it possesses in law". © In our opinion, this rule should be applied tothe interpretation and understanding of the|words "remission" and "cessation" used in the|section. 13. In Bombay Dyeing & Mfg. Co. Ltd. vs.|State of Bombay AIR 1958 SC 328 the legal|positionWas Summarizedby|TL.Venkatarama Atyar, J., in the followingmanner . "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 debtsubsists 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, 19[th]Edition, p. 383,are directly in point : "At Common Law lapse of time does notaffect contractual rights. Such a right 1s of a|permanentand.indestructiblecharacter,unless either from the nature of the contract,or from its terms, it be limited in point of|duration.” But though the right possesses thispermanent character, the remedies arisingfrom its violation are withdrawn after acertain lapse of time; interest reipublicaeut s1|finis littuum. The remedies are barred, thoughthe right is not extinguished. ° And tf the law requires that a debtorShould 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." (underlining, italicised in print, ours) This was also the view taken by the Supreme|Court in CIT vs. Sugauli Sugar Works (P) Ltd.(supra). 14. Stnce the Tribunal has relied on the|judgment of the Supreme Court in the case ofCIT vs. Sugault Sugar Works (P) Ltd. (Supra)we may usefully refer to the decision in order|to appreciate the controversy therein and the|ratio laid down. That was a case of a private|limited company. In respect of the asst. UT.|1965-66, it transferred a sum of 3,45,000|from the suspense account running from1946-47 to 1948-49 to the capital reserve|account. The ITO found that a sum of|1,29,000|OUTof|theabove.amount|repaymented deposits and advances which|were paid back by the assessee. He,|therefore, deducted this amount from the|amount of 3,45,000 and the balance of|2,56,529 was brought to assessment under s. 41(1) of the Act. The assessee appealed|unsuccessfully to the AAC and_ thereaftercarried the matter in further appeal to the|Tribunal. Its contention before the Tribunal|was that the unilateral entry of transferring|the amount from the suspense account to the|capital reserve account would not bring the|said amount within s. 41(1). The contentionwas accepted by the Tribunal whose decision| was affirmed by the Calcutta High Court CITvs. Sugault Sugar Works (P) Ltd. (1981) 23]CTR (Cal) 226 : (1983) 140 ITR 286 (Cal). The|Revenue carried the matter in the appeal tothe Supreme Court. The contention of the|Revenue (as noted at p. 520 of 236 ITR) was.that on the facts of the case, the liability came|to an end as a period of more than 20 years|had elapsed and the creditors had not taken|any steps to recover the amount and|consequently there was a cessation of the|debt which would bring the matter within the|scope of s. 41(1). It may be noted that thecontention of the Revenue in the case before|us is precisely the same. To recapitulate, the|learned standing counsel contended before us|that since a period of more than 4 years has|admittedly elapsed from the debt on which|the debts were incurred and Since _ thcreditors had not taken any steps to recover|the amount, there was a cessation of the|debts which brought the matter under s. 41(1). Turning back to the Judgment of the|Supreme Court, we find that the judgment of|the Calcutta High Court under appeal was|affirmed for two reasons. The first reason|was based on a Judgment of the Full Bench ofthe Gujarat High Court in CIT vs. Bharat Iron|& Steel Industries (1992) 105 CTR (Guj)(FB)|331: (1993) 199 ITR 67 (Guj)(FB). It was heldby the Supreme Court that the Gujarat High|Court was right in saying that in order to|attract taxability under s. 41(1) the assessee|Should have obtained, whether in cash or inany other manner whatsoever, any amount in| respect of the loss or expenditure earlier'allowed as a deduction. This part of the|reasoning, in the light of the amended cl. (a)|of sub-s. (1) of s. 41 may not be relevant after|substitution of the said clause by the Finance.Act, 1992 w.e.f. Ist April, 1993, by which thewords "some benefit in respect of such|trading liability by way of remission or|cessation thereof" were inserted. After the|amendment, therefore, it is not necessary that|in respect of a trading liability earlier allowed|as a deduction, the assessee should have.received any amount, in cash or otherwise,|but it is necessary that the assessee should|have received "some benefit" in respect of|such trading liability. However, we have.already seen that this benefit in respect of|trading liability should be "by way oOfremission or cessation of the liability", after|the amendment made to the clause w.e.f. 1st|April, 1993. The second part of the reasoningof the Supreme Court in CIT vs. Sugauli Sugar|Works (P) Ltd. (supra) is based on _ thinterpretation of the words ‘cessation or|remission”of|thetradingliability.TheSupreme Court noticed a Judgment of the|Bombay High Court in J.K. Chemicals Ltd. vs. CIT (1996) 62 ITR 34 (Bom) in which it was)explained as to what could bring out a|cessation or remission of the assessee’s|liability. The observations of the Bombay High|Court in the Judgment cited above are as|under: "The question to be considered iswhether 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 _ iemployees. We fail to see how a debtor, by|his own unilateral act, can bring about the|cessationOrremissionof|hisliability.Remission has to be granted by the creditor. Itis not in dispute, and it indeed cannot be.disputed, that it is not a case of remission ofliability. Similarly, a unilateral act on the part|of the debtor cannot bring about a cessation|of his liability. The cessation of the liability|may occur either by reason of the operation oflaw,1.€.,Orlthe|liability|becomingunenforceable 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 _ contracbetween 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 Co. Ltd. vs. CIT (1963) 49 ITR|278 (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 lability 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 s. 33C(2) of| the Industrial Disputes Act, no bar _ olimitation comes in the way of the employees." 15. The Supreme Court noticed that the|above observations of the Bombay High Court|were quoted by the Calcutta High Court in the|judgment under appeal before them, andobserved as under while upholding the|judgment of the Calcutta High Court : "This Judgment has been quoted by theHigh Court in the present case and followed.We have no hesitation to say that thereasoning 1s correct and we agree with the|Same.To|reinforcethe|conclusion,theOupremeCourt.alsonoticeditsearlierjudgment in Bombay Dyeing & Mfg. Co. Ltd.vs. State of Bombay AIR 1958 SC 328)wherein it was held that the expiry of the|period of limitation prescribed under the.Limitation Act could not extinguish the debtbut it would only prevent the creditor from|enforcing the debt. 16. In our opinion, the Judgment of the|Supreme Court in CIT vs. Sugault Sugar|Works (P) Ltd. (Supra) is a complete answer tothecontentionof|the|learned|Standing|counsel. In the case before the Supreme Court|for a period of almost 20 years the labilityremained 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 unpaidto the creditors is much less. It was held by|the Supreme Court that a unilateral actioncannot bring about a cessation or remission Ofthe liability because a remission can _ bgranted only by the creditor and a cessationof the liability can only occur either by reason|of|operationof|lawOYthe|debtorunequivocally declaring his intention not to|honour|hisliability|whenpayment1S.demanded by the creditor, or by a contract|between the parties, or by discharge of the|debt.”14. From the ratio lqid down in _ theaforesaid decision, we are of the view that|there is nothing on record to show any|cessation or remission of ltability by the|creditor or even an unilateral act by the|Assessee in this regard. In view of the above, we are of the view that the impugned addition|cannot be sustained and the same wasrightly directed to be deleted by the CIT(A).|Theorderof|the|CIT(A)1Sthereforeconfirmed.” 3. The aforesaid shows that, the Tribunal hasconsidered that the issue is already covered by the decision of Delhi High Court that Section 41(1) cannotbe invoked and based on the decision of Delhi HighCourt, the Tribunal held that unless there is no materialon record either for cessation or remission of liability bythe creditor, Section 41 (1) of the Income Tax Act cannotbe invoked and the addition made cannot be sustained.Consequently, the Tribunal has directed the deletionmade by the assessing officer. 4. However, Mr.Arvind, learned counsel appearingfor the revenue relied upon the decisions of Rajasthanand Punjab & Haryana High Courts reported in (2013)35 Taxmann.com 262 (Rajasthan) and (2014) 47.Taxmann.com 268 (P & H) in case of Rama Steel RollingMills & General Engg.Works v. Income Tax Officer andMrs.Adarsh Sood v. Commissioner of Income Tax,Faridabad respectively. He also relied upon theprovisions of Section 41 of the Income Tax Act. oS. The principal contention is that unless theburden is discharged with regard to the existence of theliability by the assessee, it is open for the Revenue toinvoke the provisions of Section 41(1) of the Act and tomake addition on the premise that, the hability hasceased to pay the amount of the creditor. 6. In his submission, the decision of Delhi HighCourt which has been referred to by the Tribunal incase of Sri Vardhman Overseas Ltd., supra cannot beapplied to the facts of the present case since in the saiddecision, it was not a case where the party/creditor wasnot verifiable or that the address was not changed. Hetherefore, submitted that Court may consider thepresent appeal. — /. AS in the above referred order of the Tribunal, the relevant portion of Section 41 is reproduced, we may not reproduce the same. But, the relevant aspect isthat, there are two requirements for invoking theprovision of Section 41. TheSina qua non|is, the)remission or cessation of the trading liability and theadditional requirement is, some benefit in respect ofsuch trade hability is taken by the Assessee. If theaforesaid conditions are satisfied, then only Section41(1) could be invoked by the Assessing Officer. 8. Examining of the facts of the present casereveals that, it is not the case of the Department that,any benefit in respect of such trading liability was takenby the assessee but, the Revenue contends that sincethe burden was not discharged of existence of theliability, it be treated as cessation of the liability andtherefore, Section 41(1) could be invoked. Further,stand of the Revenue is that, when in respect of debt inquestion, confirmation was called for, a letter was produced of the creditor with its address but, when thesame was verified, the report was that, party could notbe traced and therefore, it was not verifiable. 9. In our view, even if we accept the contention ofthe Revenue that the party could not be traced andtherefore debt could not be verified then also, by nostretch of imagination can it be held that it wouldsatisfy the requirement of cessation of liability. In legalparlance, merely because the creditor could not betraced on the date when the verification was made,same is not a ground to conclude that there wascessation of the liability. Cessation of the lability has tobe cessation in law, of the debt to be paid by theassessee to the creditor. The debt is recoverable even ifthe creditor has expired, by the legal heirs of thedeceased creditor. Under the circumstances, in thepresent case, it can hardly be said that the liability hadceased. If the liability had not ceased or the benefit was. not taken by the assessee in respect of such tradeliability, in our view, the conditions precedent were notsatisfied for invoking Section 41(1) of the Act in theinstant case. _ not taken by the assessee in respect of such tradeliability, in our view, the conditions precedent were notsatisfied for invoking Section 41(1) of the Act in theinstant case. _ 10. The Tribunal has rightly relied upon thedecision of Delhi High Court in case of VardhmanOverseas Ltd.,. The discussion of the decision of DelhiHigh Court was relevant, for consideration of the facts ofthe case in order to find out as to under what'circumstances it could be said that there is cessation otfliability. Further, the decision of Delhi High Court isafter considering the view taken by the Apex Court incase of CIT vs. Sugauli Sugar Works P Ltd., (1999) 236.ITR 918 (SC). | 11. In the decision of Rajasthan High Court in thecase of Rama Steel Rolling Mills, the question examinedwas with regard to discharge of the liability, whether by remission or cessation was not concluded but was§rather referred to the assessing authority for freshassessment. In the decision of High Court of Punjab andHaryana in case of Mrs.Adarsh Sood, there were entriesshown in the books of accounts of the assessee as not|in the nature of debts but as credits. Such are not the'fact situations in the present case. 12. Under the circumstances, the aforesaiddecisions of High Court of Rajasthan and High Court ofPunjab and Haryana cannot be applied to the facts ofthe case. _ 13. In view of the aforesaid, we find that when theissue is already covered by the decision of Delhi HighCourtreadwiththe TeaSODNSrecordedby US|hereinabove, it cannot be said that any substantialquestion of law would arise for consideration as sought.to be canvassed. | �04D0"�5/0�2908045�122013�>8�;>8E>880;��� �G(� ����������� �����������