ITO 25(3)(2), MUMBAI v. HITECN M. MODI, MUMBAI

1 IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH MUMBAI BEFORE SHRI RAJENDRA SINGH(AM) AND SHRI V.D.RAO (JM) ITA NO.2710/M/2010 ASSESSMENT YEAR 2006-07 THE ITO 25(3)(2) C-11 R.NO.306 SHRI HITEN M. M ODI PRATYAKSHA KAR BHAVAN A/604 VIJAY PARK BANDRA KURLA COMPLEX BANDRA (EAST) MATHURADAS EXT N. ROAD MUMBAI 400 051. KANDIVALI (W) MUMBAI 400 067. PAN : AAMPM 6805 H APPELLANT RESPONDENT REVENUE BY : SHRI SHRAVAN KUMAR ASSESSEE BY : SHRI SANJEEV M. SHAH O R D E R PER RAJENDRA SINGH (AM) THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 7.1.2010 OF CIT(A) FOR THE ASSESSMENT YEAR 2006-07. THE ONL Y DISPUTE RAISED IN THIS APPEAL IS REGARDING ADDITION MADE UNDER SECTION 41( 1) OF THE INCOME-TAX ACT 1961. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E AO DURING THE ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD SHOWN SUNDRY CREDITORS TO THE TUNE OF RS.59 84 281/- OUTSTANDING IN THE BALAN CE SHEET. THE AO OBTAINED DETAILS OF SUNDRY CREDITORS AND WITH A VIEW TO VERI FY THE SAME ISSUED LETTERS UNDER SECTION 133(6) TO THE FOLLOWING CREDITORS : 2 SR NO NAME OF THE PARTY AMOUNT (RS) 1 ARIHANT IMPEX 256180 2 GAUR TRADING CO. 543440 3 GAYATRI TRADING CO. 298000 4 HEZAL MERCANTILE LTD. 687918 5 KETUL CHEM PVT.LTD. 275095 6 MERU CHEM 254907 7 SHREE SAMARTH ADHESIVE 1175030 TOTAL 3490570 2.1 IN RESPONSE TO THE LETTERS ISSUED M/S. MERU CH EM STATED THAT THE CLOSING BALANCE SHOWN IN ITS BOOKS WAS NIL AND THEREFORE NO THING WAS RECEIVABLE FROM THE ASSESSEE. THE REPLY RECEIVED FROM M/S.GAYATRI T RADING CO. REVEALED THAT THERE WERE NO TRANSACTIONS WITH THE ASSESSEE DURING THE F.Y.2005-06. FROM OTHER CREDITORS NO REPLY WAS RECEIVED. WHEN CONFRO NTED THE AR OF THE ASSESSEE SUBMITTED THAT MOST OF THE CREDITS PERTAIN ED TO THE FINANCIAL YEAR 2004-05 AND DURING THE RELEVANT YEAR THE ASSESSEE C OULD NOT MAKE ANY PAYMENT. AO HOWEVER OBSERVED THAT THE AR COULD NOT GIVE ANY SATISFACTORY ANSWER REGARDING REPLY FROM M/S. MERU CHEM AND REGA RDING NO RESPONSE FROM OTHER CREDITORS. AO NOTED THAT OUT OF THE CREDITORS SHOWN IN THE BALANCE SHEET A SUM OF RS.44 69 495/- WAS OUTSTANDING FOR MORE TH AN A YEAR AND THE BALANCE AMOUNT WAS ALSO OUTSTANDING FOR MORE THAN SIX MONTH S. HE REFERRED TO SECTION 41(1) AS PER WHICH WHERE AN ALLOWANCE/ DEDUCTION WA S MADE FOR ANY YEAR IN RESPECT OF LOSS/ EXPENDITURE OR TRADING LIABILITY I NCURRED BY THE ASSESSEE AND SUBSEQUENTLY IF THERE IS REMISSION OR CESSATION OF THE TRADING LIABILITY THE AMOUNT OF LIABILITY WHICH IS EXTINGUISHED IS CHARGE ABLE AS BUSINESS PROFIT OF THAT PREVIOUS YEAR. AO FURTHER OBSERVED THAT THE ASSESSE E HAD FAILED TO SUBSTANTIATE THE EXISTENCE OF THE LIABILITY AND THEREFORE HE CAM E TO THE CONCLUSION THAT THE LIABILITY HAD CEASED TO EXIST. ACCORDINGLY THE AO T REATED THE SUM OF 3 RS.59 84 281/- AS INCOME OF THE ASSESSEE UNDER SECT ION 41(1) OF THE INCOME- TAX ACT. 2.2 THE ASSESSEE DISPUTED THE DECISION OF THE AO AN D SUBMITTED BEFORE CIT(A) THAT THE ASSESSEE DURING THE ASSESSMENT PROC EEDINGS HAD FILED FULL PARTICULARS REGARDING THE TRADE CREDITORS INCLUDING COPY OF LEDGER ACCOUNT ADDRESS PAN COPY OF BANK STATEMENT COPY OF PURCH ASE BILL AND OTHER SUPPORTING EVIDENCES. IT WAS POINTED OUT THAT THE T RADE CREDITORS WERE HAVING VAT NO. DELIVERY CHALLAN BILLS AS WELL AS PAN. IT WAS ALSO SUBMITTED THAT THE AO HAD INFORMED THE ASSESSEE ABOUT INFORMATION COLLECT ED UNDER SECTION 133(6) ONLY ON 28.11.2008 AND THE ASSESSEE DID NOT HAVE SU FFICIENT TIME TO RECONCILE THE ACCOUNTS AS THE ASSESSMENT ORDER WAS PASSED ON 12.12.2008. THE ASSESSEE FILED RECONCILIATION DURING THE APPELLATE PROCEEDIN GS AND POINTED OUT THAT THERE WAS NO DISCREPANCY IN RELATION TO CONFIRMATION RECE IVED FROM M/S. GAYATRI TRADING CO. AND M/S. MERU CHEM. AS REGARDS THE OTHE RS IT WAS SUBMITTED THAT THE ASSESSEE COULD NOT OBTAIN THE CONFIRMATION AS F OUR YEARS HAD LAPSED. CIT(A) FORWARDED THE ADDITIONAL EVIDENCES SUBMITTED BY THE ASSESSEE BEFORE AO FOR ENQUIRY AND REPORT. IN THE REPORT DATED 13.11.2009 THE AO OBSERVED THAT THE ASSESSEE HAD FAILED TO ESTABLISH THE EXISTENCE OF L IABILITY AND THAT NO CONFIRMATIONS WERE FILED. THE ASSESSEE IN THE REMAN D PROCEEDINGS SUBMITTED THAT ALL THE CREDITORS WERE GENUINE ABOUT WHOM FULL PARTICULARS HAD BEEN GIVEN AND THE ASSESSEE COULD NOT FILE CONFIRMATION AFTER A SPAN OF ABOUT FOUR YEARS. IN REPLY TO THE REMAND REPORT THE ASSESSEE SUBMITTED T HAT PROVISIONS OF SECTION 41(1) COULD NOT BE INVOKED MERELY BECAUSE CONFIRMAT IONS HAD NOT BEEN FILED THAT TOO AFTER FOUR YEARS FROM THE TRANSACTION DATE . THE ASSESSEE PLACED RELIANCE ON THE DECISION OF LUCKNOW BENCH OF TRIBUN AL IN CASE OF DCIT VS ALLIED LEATHER FINISHERS (P) LTD. (32 SOT 549) IN WHICH IT WAS HELD THAT IT WAS FOR THE 4 REVENUE TO PROVE THE FACTUM OF CESSATION OR REMISSI ON WHICH COULD NOT BE PRESUMED. THE AO HAD TREATED THE LIABILITY AS CEASE D TO EXIST ONLY ON THE GROUND THAT THESE WERE OLD AND THAT THE LETTERS SEN T TO THEM HAD RETURNED WHICH WAS NOT LEGALLY TENABLE. 2.3 CIT(A) WAS SATISFIED BY THE EXPLANATION GIVEN. IT WAS OBSERVED BY HIM THAT THE ASSESSEE HAD GIVEN COMPLETE DETAILS INCLUD ING ADDRESS PAN VAT BILLS VOUCHERS ETC IN RELATION TO THE CREDITORS. THE ASSE SSEE HAD ALSO MADE PAYMENT BY ACCOUNT PAYEE CHEQUE TO THE CREDITORS DURING THE YEAR EXCEPT IN CASE OF M/S. SHAKTI CHEMICASL CORPORATION TO WHOM SUBSTANTIAL PA YMENTS HAD BEEN MADE EARLIER. CIT(A) ALSO OBSERVED THAT THE LIABILITY CO ULD NOT BE TREATED AS CEASED TO EXIST ONLY ON THE GROUND THAT THESE HAD BECOME OLD AND NO CONFIRMATION HAD BEEN FILED. THE ASSESSEE HAD DULY EXPLAINED THE REA SONS FOR NON FILING OF CONFIRMATION WHICH WAS BECAUSE OF THE FACT THAT IT WAS DIFFICULT TO OBTAIN CONFIRMATION AFTER A SPAN OF FOUR YEARS. THE AO HAD NOT MADE ANY ENQUIRY TO SHOW THAT ANY OF THE LIABILITY HAD CEASED TO EXIST. EVEN IF THE LIABILITY WAS BARRED BY LIMITATION AND MAY NOT BE LEGALLY ENFORCE ABLE YET IT COULD NOT BE SAID THAT LIABILITY HAD CEASED TO EXIST. THE ASSESSEE HA D FILED ADDITIONAL EVIDENCES REGARDING GENUINENESS OF CREDITORS ON WHICH THERE W AS NO ADVERSE FINDING BY THE AO IN THE REMAND REPORT. CIT(A) ACCORDINGLY HEL D THAT NO ADDITION COULD BE MADE UNDER SECTION 41(1) OF THE INCOME-TAX ACT AND THUS DELETED THE ADDITION AGGRIEVED BY WHICH THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 3 BEFORE US THE LEARNED AR FOR THE ASSESSEE REITERA TED THE SUBMISSIONS MADE BEFORE CIT(A) THAT THE LIABILITY COULD NOT BE TREATED AS CEASED TO EXIST ONLY ON THE GROUND THAT NO CONFIRMATIONS HAD BEEN F ILED THOUGH THE ASSESSEE HAD GIVEN COMPLETE DETAILS ABOUT THE LIABILITIES. H E REFERRED TO JUDGMENT OF 5 HONBLE SUPREME COURT IN CASE OF COMMISSIONER OF AG RICULTURAL INCOME-TAX VS KERALA STATE (161 ITR 155) IN WHICH IT WAS HELD THA T SECTION 41(1) WAS A DEEMING PROVISION AND IT MUST BE STRICTLY CONSTRUED . HE ALSO REFERRED TO THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN CASE O F SULZER INDIA VS DCIT (6 ITR (TRIB) 604) IN WHICH IT HAS BEEN HELD THAT FOR ADDI TION UNDER SECTION 41(1) THERE MUST BE ACTUAL REMISSION OR CESSATION OF LIABILITY. REFERENCE WAS ALSO MADE TO THE JUDGMENT OF HONBLE HIGH COURT OF DELHI IN CASE OF CIT VS ORBITAL COMMUNICATION (327 ITR 560) AND SEVERAL OTHER JUDGM ENTS IN SUPPORT OF THE PLEA THAT MERE NON COMPLIANCE OF SUMMONS/ NON PRODU CTION OF PARTY CANNOT DISCREDIT THE CLAIM OF THE ASSESSEE. IT WAS ACCORDI NGLY URGED THAT THE ORDER OF CIT(A) SHOULD BE UPHELD. THE LEARNED DR ON THE OTHE R HAND STRONGLY SUPPORTED THE ORDER OF AO AND EMPHASIZED THAT THE ASSESSEE CO ULD NOT FILE CONFIRMATIONS FROM THE CREDITORS AND THEREFORE AO HAD RIGHTLY TRE ATED THE LIABILITY AS CEASED TO EXIST. HE PLACED A COPY OF THE REMAND REPORT OF THE AO DATED 13.1.2009 ON RECORD. 4 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RI VAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ADDITION UNDER SECTION 41(1). IF IN RESPECT OF ANY TRADING LIABILITIES WHICH HAD BEEN CLAIMED AS D EDUCTION IN THE EARLIER YEAR THE ASSESSEE HAS OBTAINED ANY BENEFIT BY WAY OF REM ISSION OR CESSATION OF THE LIABILITIES IT HAS TO BE TREATED AS INCOME UNDER S ECTION 41(1). IN THE PRESENT CASE THERE IS NO DISPUTE THAT THE OUTSTANDING CREDI TORS TO THE TUNE OF RS.59 84 281/- RELATED TO THE PURCHASES MADE IN THE EARLIER YEAR WHICH HAD BEEN CLAIMED AS DEDUCTION. THEREFORE IN CASE SUCH L IABILITIES HAD CEASED TO EXIST DURING THE YEAR THE ADDITION CAN BE MADE UNDER SEC TION 41(1). HOWEVER BEFORE ANY ADDITION CAN BE MADE IT HAS TO BE ACTUALLY ESTA BLISHED THAT THE LIABILITY HAD CEASED TO EXIST AND FOR THIS ONUS LIES ON THE REVEN UE. THIS VIEW IS SUPPORTED BY 6 THE DECISION OF THE TRIBUNAL IN CASE OF DCIT VS ALL IED LEATHER FINISHERS (P) LTD. (SUPRA). THE ASSESSEE IN THIS CASE HAD GIVEN COMPL ETE DETAILS ABOUT THE SUNDRY CREDITORS INCLUDING NAMES COMPLETE ADDRESSES PAN VAT NO. AND ALSO PRODUCED PURCHASE BILLS ETC. THE AO HAD ISSUED LETT ERS TO THE CREDITORS. THE REPLY RECEIVED FROM TWO CREDITORS I.E M/S. MERU CHE M AND M/S. GAYATRI TRADING CO. SHOWED SOME DISCREPANCY. HOWEVER SUBSEQUENTLY I N THE REMAND PROCEEDINGS THE ASSESSEE HAD FILED RECONCILIATION B EFORE THE CIT(A) WHICH HAD BEEN FORWARDED TO THE AO AND IN THE REMAND REPORT T HE AO GAVE NO ADVERSE FINDINGS ON THE CLAIM OF THE ASSESSEE THAT THE DISC REPANCY HAD BEEN RECONCILED. THE ONLY POINT MADE BY THE AO IN THE REMAND REPORT WAS THAT THE ASSESSEE FAILED TO FILE CONFIRMATIONS. THE ASSESSEE HAD EXPL AINED THAT CONFIRMATIONS COULD NOT BE FILED AS THE MATTER WAS OLD AND MORE T HAN FOUR YEARS HAD PASSED. HOWEVER THE ASSESSEE PRODUCED COMPLETE DOCUMENTARY EVIDENCES TO ESTABLISH THE GENUINENESS OF LIABILITIES ABOUT WHICH AO HAD N OT GIVEN ANY ADVERSE FINDINGS. THE OTHER PARTIES TO WHOM LETTERS UNDER S ECTION 133(6) WERE ISSUED DID NOT REPLY AND THE AO DID NOT PURSUE THE MATTER FURTHER NEITHER DURING ASSESSMENT PROCEEDINGS NOR EVEN DURING REMAND PROCE EDINGS. AO THUS PLACED NO MATERIAL ON RECORD TO SHOW THAT THE LIABILITY HA D CEASED TO EXIST. MERELY BECAUSE THE CREDITORS DID NOT REPLY DOES NOT MEAN T HAT THEY HAD FOREGONE THEIR CLAIM. IT IS NOT THE CASE THAT THE LETTERS ISSUED B Y THE AO HAD BEEN RETURNED UNSERVED AS IN THAT CASE BURDEN WOULD HAVE BEEN ON THE ASSESSEE TO PROVIDE THE CORRECT ADDRESS. THE ADDRESSES GIVEN WERE NOT F OUND WRONG. THE AO COULD HAVE MADE FURTHER ENQUIRIES BY ISSUING SUMMONS WHIC H WAS NOT DONE. FURTHER MERELY BECAUSE LIABILITIES ARE OLD AND ARE BARRED B Y LIMITATION FOR RECOVERY COULD NOT LEAD TO THE CONCLUSION THAT THE LIABILITY HAD CEASED TO EXIST. THIS VIEW IS SUPPORTED BY THE JUDGMENT OF HONBLE SUPREME COU RT IN CASE OF SAGAULI SUGAR WORKS (236 ITR 518). THE LIABILITIES CAN BE T REATED AS CEASED TO EXIST 7 ONLY WHEN THE CREDITORS HAVE FOREGONE THE CLAIM. TH IS HAS TO BE PROVED BY THE REVENUE BY PLACING MATERIAL ON RECORD AFTER MAKING NECESSARY ENQUIRIES. THERE IS NO SUCH MATERIAL PLACED BEFORE US TO SHOW THAT T HE LIABILITY HAD CEASED TO EXIST. THERE IS ALSO NO UNILATERAL WRITE BACK BY TH E ASSESSEE. WE THEREFORE SEE NO INFIRMITY IN THE ORDER OF CIT(A) DELETING THE AD DITION AND THE SAME IS THEREFORE UPHELD. 5. IN THE RESULT THE APPEAL OF THE REVENUE IS DISMI SSED. 6. THE DECISION WAS PRONOUNCED IN THE OPEN COURT ON 23.02.2011. SD/- SD/- ( V.D. RAO ) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE : 23.02.2011 AT :MUMBAI COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) MUMBAI CONCERNED 4. THE CIT MUMBAI CITY CONCERNED 5. THE DR H BENCH ITAT MUMBAI // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI ALK