Section 41(1) of the Act would apply in a case where there has been remission or cessation of liability during the year under consideration subject
to the conditions contained in the statute being fulfilled.
Additionally, such cessation or remission has to be during the previous
year relevant to the assessment year under consideration.
In
the present case, both elements are missing. There was nothing on
record to suggest there was remission or cessation of liability that too
during the previous year relevant to the assessment year 2007-08 which
was the year under consideration. It is undoubtedly a curious case.
Even the liability itself seems under serious doubt. The Assessing
Officer undertook the exercise to verify the records of the so called
creditors. Many of them were not found at all in the given address. Some
of them stated that they had no dealing with the assessee. In one or
two cases, the response was that they had no dealing with the assessee
nor did they know him. Of course, these inquiries were made ex parte and
in that view of the matter, the assessee would be allowed to contest
such findings. Nevertheless, even if such facts were established through
bi-parte inquiries, the liability as it stands perhaps holds that there
was no cessation or remission of liability and that therefore, the
amount in question cannot be added back as a deemed income under section
4 1(c) f the Act. This is one of the strange cases where even if the
debt itself is found to be non-genuine from the very inception, at least
in terms of section 41(1) of the Act there is no cure for it. Be that
as it may, insofar as the orders of the Revenue authorities are
concerned, the Tribunal not having made any error, this Tax Appeal is
dismissed.
HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 588 of 2013
COMMISSIONER OF INCOME TAX
Versus
BHOGILAL RAMJIBHAI ATARA
Date : 04/02/2014
ORAL ORDER
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal dated 28.2.20 13 raising following questions for our consideration:
“A. Whether in the
facts and circumstances of the case and in law, the Appellate Tribunal
is right in coming to the conclusion that the ingredients of section 4
1(1) of the Act are not satisfied in the instant case?
B. Whether in the
facts and circumstances of the case and in law, the Appellate Tribunal
is justified in deleting the addition of Rs.37,52,752/- made by the A.O.
under section 41(1) of the IT Act?”
Briefly stated, the facts are that for
the assessment year 2007-08, the assessee filed return of income which
showed, besides others, a sum of Rs.37.52 lacs by way of his debt. The
Assessing Officer inquired into such outstanding dues of the assessee.
The assessee supplied details of 27 different creditors. The Assessing
Officer issued summons to all these so called creditors and questioned
them about the alleged credit to the assessee. In detail, the Assessing
Officer in his order of assessment recorded that number of parties were
not found at the given address. Many of them stated that they had no
concern with the assessee. Some of them conveyed that they did not even
know the assessee.
On the basis of such findings and
considering that the debts were outstanding since several years, the
Assessing Officer applied section 41(1) of the Income Tax Act, 1961 and
added the entire sum as income of the assessee. The Assessing Officer
held that liabilities have ceased to exist within the meaning of section 4 1(1) of the Act and therefore, the same should be deemed to be the income of the assessee.
The assessee carried the matter in
appeal. CIT (Appeals) rejected the appeal. The assessee thereupon
approached the Tribunal. The Tribunal by the impugned judgment, allowed
the assessee’s appeal making following brief observations:
“7. We have heard both the parties. There is no finding that the impugned liabilities were trading
liabilities in respect of which the assessee had obtained any benefit
or advantage either by way of their remission or cessation in the year
under appeal. The assessee has not written off the impugned liabilities
shown in the accounts. The A.O. has not brought sufficient material on
records to establish as to how the ingredients of section 41(1) are
satisfied so as to bring the impugned addition within its ambit. ?The
judgment of Hon’ble Jurisdictional High Court in C.I.T. V. Nitin Garg,
cited supra is squarely applicable. In this view of the matter ground
No.1 taken by the assessee is allowed.
8. On the facts of the case, we do not consider it appropriate to restore the matter to the file
of the CIT (A)/AO so as to give them second inning in order to
establish the applicability or non-applicability of section 4 1(1). It
is a settled principle of law that a statutory provision can be invoked
only when the conditions stipulated by it are established. In the
present case, conditions of section 41(1) are not satisfied. It is the
policy of law to ensure that the litigations are brought to an end
expeditiously. In this view of the mater, matters under appeal cannot be
restored at the request of the parties so as to give second inning to
the parties to establish their cases.”
Learned counsel for the Revenue
vehemently contended that the creditors whose details were given by the
assessee were not even found. In many cases, those who were found stated
that they have not given credit to the assessee. He, therefore,
submitted that the Tribunal committed serious error in deleting the addition.
On the other hand, learned counsel Shri
Soparkar for the assessee supported the order of the Tribunal contending
that there had been no cessation of liability. Section 41(1) of the Act
would not apply. In any case, it was not established that such liability ceased during the year under consideration.
The counsel relied on following decisions:
(I) In the case of CIT v. Miraa Processors (P) Ltd. (2012) 208 Taxman 93 (Guj.) in which Division Bench of this Court observed as under:
“14. As pointed out
in the case of Sugauli Sugar Works (P) Ltd. (supra), vide the last five
lines of the paragraph-6 of the judgment, the question whether the
liability is actually barred by limitation is not a matter which can be
decided by considering the assessee’s case alone but has to be decided
only if the creditor is before the concerned authority. In the absence
of the creditor, it is not possible for the authority to come to a
conclusion that the debt is barred and has become unenforceable. There
may be circumstances which may enable the creditor to come with a
proceeding for enforcement of the debt even after expiry of the normal
period of limitation as provided in the Limitation Act.”
(ii) In the case of CIT v. Nitin S. Garg, (2012) 208 Taxman 16 (Guj.), it was observed as under:
15. In the case
before us, it is not been established that the assessee has written off
the outstanding liabilities in the books of account. The Appellate
Tribunal is justified in taking the view that as assessee had continued
to show the admitted amounts as liabilities in its balance sheet the same cannot be treated as assessment of liabilities. Merely because the liabilities are
outstanding for last many years, it cannot be inferred that the said
liabilities have seized to exist. The Appellate Tribunal has rightly
observed that the Assessing Officer shall have to prove that the
assessee has obtained the benefits in respect of such trading
liabilities by way of remission or cessation thereof which is not the
case before us. Merely because the assessee obtained benefit of
reduction in the earlier years and balance is carried forward in the
subsequent year, it would not prove that the trading liabilities of the assessee have become non existent.
16. Moreover, as
pointed out in the case of Sugauli Sugar Works (P) Ltd. (supra), vide
the last five lines of the paragraph-6 of the judgement, the question
whether the liability is actually barred by limitation is not a matter
which can be decided by considering the assessee’s case alone but has to
be decided only if the creditor is before the concerned authority. In
the absence of the creditor, it is not possible for the authority to
come to a conclusion that the debt is barred and has become
unenforceable. There may be circumstances which may enable the creditor
to come with a proceeding for enforcement of the debt even after expiry
of the normal period of limitation as provided in the Limitation Act.”
(iii) In the case of CIT v. G.K. Patel & Co. (2013) 212 Taxman 384 (Guj)., in which a Division Bench of this court held and observed as under:
“To the extent the
said decision holds that a unilateral act on the part of the debtor
cannot bring about a cessation of his liability, the same would not be
applicable to the facts of the present case, in view of the insertion of
Explanation 1. However, at the cost of repetition it may be stated that
in this case there is no unilateral act on the part of the debtor so as
to bring about a cessation of its liability. Therefore, the other part
of the decision would still apply to the facts of the present case,
namely that the cessation of liability has to be either by reason of
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. In the present case, admittedly
there in no declaration by the assessee that it does not intend to
honour its liabilities nor is there any discharge of the debt. In the
aforesaid premises, as no event had taken place in the year under
consideration to indicate remission or cessation of the liabilities in
question, the provisions of section 4 1(1) of the Act could not have
been invoked. The reasoning adopted by the Tribunal while holding that
section 41(1) would not be applicable to the facts of the present case
is in line with the principles enunciated in the above decision. The
Tribunal, therefore, committed no legal error so as to give rise to any
question of law warranting interference by this court.”
We are in agreement with the view of the
Tribunal. Section 41(1) of the Act as discussed in the above three
decisions would apply in a case where there has been remission or
cessation of liability during the year under consideration subject to
the conditions contained in the statute being fulfilled. Additionally,
such cessation or remission has to be during the previous year relevant
to the assessment year under consideration. In the present case, both
elements are missing. There was nothing on record to suggest there was
remission or cessation of liability that too during the previous year
relevant to the assessment year 2007-08 which was the year under
consideration. It is undoubtedly a curious case. Even the liability
itself seems under serious doubt. The Assessing Officer undertook the
exercise to verify the records of the so called creditors. Many of them
were not found at all in the given address. Some of them stated that
they had no dealing with the assessee. In one or two cases, the response
was that they had no dealing with the assessee nor did they know him.
Of course, these inquiries were made ex parte and in that view of the
matter, the assessee would be allowed to contest such findings.
Nevertheless, even if such facts were established through bi-parte
inquiries, the liability as it stands perhaps holds that there was no
cessation or remission of liability and that therefore, the amount in
question cannot be added back as a deemed income under section 4 1(c) f
the Act. This is one of the strange cases where even if the debt itself
is found to be non-genuine from the very inception, at least in terms of
section 41(1) of the Act there is no cure for it. Be that as it may,
insofar as the orders of the Revenue authorities are concerned, the
Tribunal not having made any error, this Tax Appeal is dismissed.
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