The Commissioner Of Income Tax Delhi-Ii v. >

THE HIGH COURT OF DELHI AT NEW DELHI % +ITA No.235/2013 Judgment delivered on: 24.05.2013 THE COMMISSIONER OF INCOME TAX DELHI-IIversus .....Appellant.…Respondent JAIN EXPORTS PVT. LTD.Advocates who appeared in this case:For the Appellant: Mr Sanjeev Sabharwal, AdvocateFor the Respondent: None. CORAM:-HON’BLE MR JUSTICE BADAR DURREZ AHMEDHON’BLE MR JUSTICE VIBHU BAKHRU JUDGMENT VIBHU BAKHRU, J 1.This appeal is filed, on behalf of the revenue under Section 260A of theIncome Tax Act, 1961 (hereinafter referred to as “the Act”), challenging theorder dated 30.03.2012 passed by Income Tax Appellate Tribunal, setting asidethe addition of sum of ` 1,53,48,850/- made by the Assessing Officer on accountof 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 agriculturalcommodities, however, the assessee did not conduct any business in the year2007-2008 relevant to the assessment year 2008-2009.The assessee filed its return of income, on 25.09.2008, for the assessment year 2008-2009 showing aloss and declaring taxable income as nil. The return was initially accepted underSection 143(1) of the Act, however, subsequently, the return was selected forscrutiny. The Assessing Officer examined the balance sheet of the assesseecompany for the relevant period and noted that the balance sheet disclosed a sumof ` 1,57,54,011/- as sundry creditors. The said amount comprised the followingoutstanding credit balances:- 3.The credit balances against the aforementioned creditors have beenoutstanding since several years. In the case of M/s Elephanta Oil & VanaspatiLtd., the amount of ` 1,53,48,850/- was outstanding in the books since 1984-1985. The Assessing Officer called upon the assessee to provide confirmationsfrom the creditors regarding the balance outstanding to their credit. The assesseefiled a balance confirmation from M/s Ramji Lal Investments (P) Ltd. but couldnot provide confirmations from any of the other aforementioned creditors. TheAssessing Officer also issued notices under section 133(6) of the Act to thecreditors, for the purpose of verifying the credit balance outstanding against theirnames. The notice issued to M/s Elephanta Oil & Vanaspati Ltd., M/s Geo-chemLaboratories (P) Ltd., M/s Jain House, Calcutta and Sh. Sohan Lal Ghai werereturned un-served. 4.The Assessing Officer accepted the amount of ` 38,874/- outstanding tothe credit of M/s Ramji Lal Investments (P) Ltd., but held that the balanceliabilities in respect of other sundry creditors, which were lying unclaimed sinceseveral years, were liable to be added back to the income of the assessee underSection 41(1) of the Act. The Assessing Officer was of the view that there wascessation of these liabilities as there was no possibility of the creditors claimingthe same in the near future. Accordingly, the aggregate of the balancesoutstanding to the credit of the aforementioned four creditors (i.e. M/s ElephantaOil & 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/- wereadded back to the income of the assessee. 4.The Assessing Officer accepted the amount of ` 38,874/- outstanding tothe credit of M/s Ramji Lal Investments (P) Ltd., but held that the balanceliabilities in respect of other sundry creditors, which were lying unclaimed sinceseveral years, were liable to be added back to the income of the assessee underSection 41(1) of the Act. The Assessing Officer was of the view that there wascessation of these liabilities as there was no possibility of the creditors claimingthe same in the near future. Accordingly, the aggregate of the balancesoutstanding to the credit of the aforementioned four creditors (i.e. M/s ElephantaOil & 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/- wereadded back to the income of the assessee. 5.Aggrieved by the assessment order dated 01.11.2010 passed by theAssessing Officer, the assessee preferred an appeal before the CIT (Appeals),inter-alia, on the ground that there was no cessation of liabilities as the assesseecontinued to be liable for the amounts shown as outstanding against variouscreditors. In respect of the amount payable to M/s Elephanta Oil & VanaspatiLtd., the assessee explained that M/s Elephanta Oil & Vanaspati Ltd. also owed asum of ` 1,57,10,690.53/- to the assessee which was reflected as receivable in thebalance 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 amountpayable to M/s Elephanta Oil & Vanaspati Ltd. was liable to be adjusted againstthe amount receivable from M/s Elephanta Oil & Vanaspati Ltd. and thus therecould not be any cessation of liability towards the said creditor. The assesseecompany also provided its final accounts for the years ended on 31.03.2009 and31.03.2010 which indicated the balances outstanding to the various sundrycreditors continued to be reflected in the balance sheets of the assessee companyfor the subsequent years. It was, thus, contended by the assessee that, since the assessee continued to acknowledge the credit balances in the subsequent periodalso, 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 payableto M/s Elephanta Oil & Vanaspati Ltd. were on account of certain bankguarantees which had been furnished by M/s Elephanta Oil & Vanaspati Ltd., onbehalf of the assessee company, to the custom authorities.The assessee alsogave details of the bank guarantees that had been issued by the bank againstcertain 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 areference before the Board of Industrial and Financial Reconstruction (BIFR).The BIFR was of the opinion that M/s Elephanta Oil & Vanaspati Ltd. be woundup and accordingly, winding up proceedings have been initiated in this Court andthe official liquidator has been appointed as the provisional liquidator to takeover possession of the books and accounts and other records of the M/s ElephantaOil & Vanaspati Ltd. 7.The CIT (Appeals) deleted the addition made by the Assessing Officerwith regard to the balance outstanding to the credit of M/s Geo-chemLaboratories (P) Ltd., M/s Jain House, Calcutta and Sh. Sohan Lal Ghai on theground that the assessee had continued to reflect the liabilities against the namesof these creditors in the subsequent period i.e. in the final accounts for the yearsended on 31.03.2009 and 31.03.2010. The CIT (Appeals) held that as theassessee company continued to reflect amounts payable to those creditors therewas no cessation of liability and consequently, the provisions of Section 41(1) ofthe Act were inapplicable.However, in the case of M/s Elephanta Oil &Vanaspati Ltd., the CIT (Appeals) upheld the addition made by the AssessingOfficer, not on the ground that there was cessation of liability, but on the basis that the assessee had failed to establish the genuineness of the liability towardsM/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 orproduce any evidence with regard to the bank guarantees on account of which theliability to pay a sum of ` 1,53,48,850/- had arisen. The contention of theassessee that the transaction related back to the year 1984-1985 and had beenaccepted as genuine by the revenue through a series of scrutiny assessment madein the past, was not accepted. The plea of the assessee that, since the matterrelated to 1984-1985, the assessee could not produce the evidence of the initialtransaction, was also not found to be acceptable by the CIT (Appeals). 8.While, the decision of the CIT (Appeals) was accepted by the revenue, theassessee 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 assesseecompany and thus, the net effect of the same would be that no amount would bepayable 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. TheTribunal was of the view that it was not correct to only accept the figure relatingto the amount that was receivable by the assessee company while rejecting theamount payable by the assessee company to M/s Elephanta Oil & VanaspatiLtd. 9.Aggrieved by the order passed by the Tribunal, the revenue has preferredthe present appeal. It is contended before us on behalf of the revenue that therehas been a cessation of liability of ` 1,53,48,849/- and the Tribunal has erred in setting aside the addition made on that account. It is further urged that theTribunalwasinerrorintakingnoteoftheamountreceivablefromM/s Elephanta Oil & Vanaspati Ltd. while, considering the provisions of Section41(1) of the Act. Whilst, it was conceded before us that the genuineness of theinitial transaction was not in challenge, it was contended that the fact that theamount payable to M/s Elephanta Oil & Vanaspati Ltd. has been outstanding for25 years indicated that the liability has ceased. It has been pleaded on behalf ofthe 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 ofliability?"` 1,53,48,850.00 holding that there was no cession ofliability?" 2."Whether while considering provisions of section 41(1) thenet liability that after providing for receivables is to beconsidered or is relevant?"net liability that after providing for receivables is to beconsidered 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 aspayable 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 creditorshad ceased, the genuineness of the initial transaction on account of which theamounts were payable to various creditors was not made an issue. The only issueraised by the Assessing Officer was that since the outstanding balances hadremained static on the books of the assessee for several years (in the case of M/sElephanta Oil & Vanaspati Ltd. for over 25 years), there was no possibility ofany claim being made by the creditors and the amount of liabilities outstandingwere liable to be added as income of the assessee. 11.The CIT (Appeals) did not accept the reasoning of the Assessing Officerand deleted the addition made by the Assessing Officer with respect to amountsreflected as payable to various sundry creditors on the ground that assesseecompany continued to reflect the amounts payable even in the subsequentperiods. The CIT (Appeals) held that there could be no cessation of liability asthe assessee company continued to acknowledge its debt towards the creditors.However, the CIT (Appeals) concluded that the amount outstanding to the creditof M/s Elephanta Oil & Vanaspati Ltd. was not genuine as the assessee could notproduce any confirmation or evidence of the original transaction which wasundertaken in 1984-1985. It is relevant for us to notice that the revenue did notprefer any appeal against the order of the CIT (Appeals), and thus, accepted hisdecision that there was no cessation of liability in cases where the assesseecompany continued to acknowledge the amount owed by it to its creditors. 12.The question whether there had been any cessation of liability was thusnot before the Tribunal as the Tribunal was only considering the correctness ofthe decision of the CIT (Appeals) wherein the transaction giving rise to theliability payable to M/s Elephanta Oil & Vanaspati Ltd. had been doubted. TheTribunal came to the conclusion, and rightly so, that the books of the assesseehad been examined in the past and it would not be correct to accept a part of theaccount 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 & VanaspatiLtd. which resulted in the amount being receivable from M/s Elephanta Oil &Vanaspati Ltd. was accepted by the CIT (Appeals), the amount payable to thesame entity was rejected. Accordingly, the Tribunal deleted the addition of `1,53,48,850/- confirmed by the CIT (Appeals). 13.The genuineness of the transaction entered into by the assessee in 1984-85with M/s Elephanta Oils & Vanaspati Ltd. is not being assailed before us and theonly controversy sought to be raised before us is whether there has been cessationof liability owed by the assessee to M/s Elephanta Oil & Vanaspati Ltd. In ourview, 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 beenacknowledged by the assessee company has already been accepted by therevenue. However, as the question whether there is any cessation of liability inthe relevant previous year warranting an addition in terms of Section 41(1) of theAct has been urged on behalf of the revenue, we consider it appropriate toexamine the same. 14.Section 41(1) of the Act is relevant and is quoted below:- “41. Profits chargeable to tax- (1) Where an allowance ordeduction has been made in the assessment for any year inrespect of loss, expenditure or trading liability incurred by theassessee (hereinafter referred to as the first-mentioned person)and subsequently during any previous year,- 14.Section 41(1) of the Act is relevant and is quoted below:- “41. Profits chargeable to tax- (1) Where an allowance ordeduction has been made in the assessment for any year inrespect of loss, expenditure or trading liability incurred by theassessee (hereinafter referred to as the first-mentioned person)and subsequently during any previous year,- (a)the first-mentioned person has obtained, whether in cash orin any other manner whatsoever, any amount in respect ofsuch loss or expenditure or some benefit in respect of suchtrading liability by way of remission or cessation thereof,the amount obtained by such person or the value of benefitaccruing to him shall be deemed to be profits and gains ofbusiness or profession and accordingly chargeable toincome-tax as the income of that previous year, whether thebusiness or profession in respect of which the allowance ordeduction has been made is in existence in that year or not ;orin any other manner whatsoever, any amount in respect ofsuch loss or expenditure or some benefit in respect of suchtrading liability by way of remission or cessation thereof,the amount obtained by such person or the value of benefitaccruing to him shall be deemed to be profits and gains ofbusiness or profession and accordingly chargeable toincome-tax as the income of that previous year, whether thebusiness or profession in respect of which the allowance ordeduction has been made is in existence in that year or not ;or (b)the successor in business has obtained, whether in cash orin any other manner whatsoever, any amount in respect ofwhich loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the tradingin any other manner whatsoever, any amount in respect ofwhich 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 orcessation thereof, the amount obtained by the successor inbusiness or the value of benefit accruing to the successor inbusiness shall be deemed to be profits and gains of thebusiness or profession, and accordingly chargeable toincome-tax as the income of that previous year. Explanation 1. – For the purposes of this sub-section, theexpression ‘loss or expenditure or some benefit in respect of anysuch trading liability by way of remission or cessation thereof’shall include the remission or cessation of any liability by aunilateral act by the first mentioned person under clause (a) orthe successor in business under clause (b) of that sub-section byway of writing off such liability in his accounts.” 15.Indisputably, Explanation 1 to section 41(1) of the Act, which wasinserted, w.e.f. 01.04.1997 is not applicable, as the assessee has not written offthe 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 contemplatesobtaining by the assessee an amount either in cash or any other manner or anybenefit by way of cessation or remission of liability. In order to come within thesweep of section 41(1) it is necessary that the benefit derived by an assesseeresults from cessation or remission of a trading liability.The relevant extractfrom the decision of the Supreme Court in the case ofCIT v. Sugauli SugarWorks (P.) Ltd.(supra) is quoted below: “3. It will be seen that the following words in the sectionare important: ‘the assessee has obtained, whether in cash or inany other manner whatsoever any amount in respect of such lossor expenditure or some benefit in respect of such trading liabilityby way of remission or cessation thereof, the amount obtained byhim’. Thus, the section contemplates obtaining by the assessee ofan amount either in cash or in any other manner whatsoever or abenefit by way of remission or cessation and it should be of aparticular amount obtained by him. Thus, the obtaining by the “3. It will be seen that the following words in the sectionare important: ‘the assessee has obtained, whether in cash or inany other manner whatsoever any amount in respect of such lossor expenditure or some benefit in respect of such trading liabilityby way of remission or cessation thereof, the amount obtained byhim’. Thus, the section contemplates obtaining by the assessee ofan amount either in cash or in any other manner whatsoever or abenefit by way of remission or cessation and it should be of aparticular amount obtained by him. Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is sinequa non for application of this section.” 17.The only issue that needs to be considered is whether the liability towardsM/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 incases where the remedy of a creditor is barred by limitation the debt itself is notextinguished but merely becomes unenforceable. The Court observed as under:- “The position then is that, under the law, a debt subsistsnotwithstanding that its recovery is barred by limitation..........” 19.This view has also been taken by the Supreme Court in the case ofCIT v.Sugauli Sugar Works P. Ltd.(supra). In the said case, it was contended onbehalf of the revenue that the liability has come to an end as the creditors in thesaid case had not taken any action to recover the amounts due to them for twentyyears. The Supreme Court affirmed the decision of the Bombay High Court in thecase ofJ. K. Chemicals Ltd. v. CIT: [1966] 62 ITR 34 (Bom) wherein the words“cessation or remission” had been interpreted. The Supreme Court quoted thefollowing passage from the judgment of the Bombay High Court in the said caseof J. K. Chemicals Ltd. v. CIT(supra): - “The question to be considered is whether the transfer ofthese entries brings about a remission or cessation of its liability.The transfer of an entry is a unilateral act of the assessee, who is adebtor to its employees. We fail to see how a debtor, by his ownunilateral act, can bring about the cessation or remission of hisliability. Remission has to be granted by the creditor. It is not indispute, and it indeed cannot be disputed, that it is not a case ofremission of liability. Similarly, a unilateral act on the part of thedebtor cannot bring about a cessation of his liability.The cessation of the liability may occur either by reason of theoperation of law, i.e., on the liability becoming unenforceable atlaw by the creditor and the debtor declaring unequivocally hisintention not to honour his liability when payment is demanded bythe creditor, or a contract between the parties, or by discharge ofthe debt-the debtor making payment thereof to his creditor.Transfer of an entry is neither an agreement between the partiesnor payment of the liability. We have already held in Kohinoormills’ case [1963] 49 ITR 578 (Bom) that the mere fact of theexpiry of the period of limitation to enforce it, does not by itselfconstitute cessation of the liability.In the instant case, theliability being one relating to wages, salaries and bonus due by anemployer to his employees in an industry, the provisions of theIndustrial Disputes Act also are attracted and for the recovery ofthe dues from the employer, under section 33C(2) of the IndustrialDisputes Act, no bar of limitation comes in the way of theemployees.” After quoting the above passage, the Supreme Court held as under:- “This judgment has been quoted by the High Court in thepresent case and followed. We have no hesitation to say that thereasoning is correct and we agree with the same.” After quoting the above passage, the Supreme Court held as under:- “This judgment has been quoted by the High Court in thepresent case and followed. We have no hesitation to say that thereasoning is correct and we agree with the same.” 20.In order to attract the provisions of Section 41(1) of the Act, it isnecessary that there should have been a cessation or remission of liability. Asheld by the Bombay High Court, in the case ofJ. K. Chemicals Ltd.(supra),cessation of liability may occur either by the reason of the liability becomingunenforceable in law by the creditor coupled with debtor declaring his intentionnot to honour his liability, or by a contract between parties or by discharge of thedebt. In the present case, the assessee is acknowledging the debt payable to M/sElephanta Oil & Vanaspati Ltd. and there is no material to indicate that theparties have contracted to extinguish the liability. Thus, in our view it cannot beconcluded that the debt owed by the assessee to M/s Elephanta Oils & VanaspatiLtd. stood extinguished. 21.Although, enforcement of a debt being barred by limitation does not ipsofacto lead to the conclusion that there is cessation or remission of liability, in thefacts of the present case, it is also not possible to conclude that the debt hasbecome unenforceable. It is well settled that reflecting an amount as outstandingin the balance sheet by a company amounts to the company acknowledging thedebt for the purposes of Section 18 of the Limitation Act, 1963 and, thus, theclaim by M/s Elephanta Oil & Vanaspati Ltd. can also not be considered as timebarred as the period of limitation would stand extended.Even, otherwise, itcannot be stated that M/s Elephanta Oil & Vanaspati Ltd. would be unable toclaim a set-off on account of the amount reflected as payable to it by the assessee.Admittedly, winding up proceedings against M/sElephantaOil & VanaspatiLtd. are pending and there is no certainty that any claim that may be made by theassessee with regard to the amounts receivable from M/sElephantaOil &Vanaspati Ltd. would be paid without the liquidator claiming the credit for theamounts receivable from the assessee company. It is well settled that in order toattract the provisions of Section 41(1) of the Act, there should have been anirrevocable cession of liability without any possibility of the same being revived.The assessee company having acknowledged its liability successively over theyears would not be in a position to defend any claim that may be made on behalfof the liquidator for credit of the said amount reflected by the assessee as payableto M/s Elephanta Oil & Vanaspati Ltd. 22.We may also add that, admittedly, no credit entry has been made in thebooks 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 forseveral years. The issue as to the genuineness of a credit entry, thus does notarise in the current year and this issue could only be examined in the year when the liability was recorded as having arisen, that is, in the year 1984-1985. Thedepartment having accepted the balances outstanding over several years, it wasnot 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 sufficientevidence to prove the genuineness of the transactions which were undertaken inthe year 1984-85. 23.The present appeal does not disclose any substantial question of law forour consideration and is, accordingly, dismissed. VIBHU BAKHRU, JBADAR DURREZ AHMED, JMAY 24, 2013MK