Pankaj Singh, New Delhi v. ITO, New Delhi

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH : F NEW DELHI) BEFORE SHRI G.E. VEERABHADRAPPA HONBLE VICE PRES IDENT AND SHRI A.D. JAIN JUDICIAL MEMBER ITA NO.5369/DEL./2010 (ASSESSMENT YEAR : 2007-08) PANKAJ SINGH VS. ITO WARD 31(1) 3 SOUTH AVENUE LANE NEW DELHI. NEW DELHI. (PAN/GIR NO.AAYPS1648A) (APPLELLANT) (RESPONDENT) ASSESSEE BY : SHRI NARESH SANKARI CA. REVENUE BY : SHRI H.K. LAL SR.DR ORDER PER A.D. JAIN JM THIS IS ASSESSEES APPEAL FOR AY 2007-08 CONTENDING THAT THE CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF `2 70 000 U/S 41(1) OF THE I.T. ACT 1961. IN THE RETURN OF INCOME FILED BY THE ASSESSEE THE ASSESSEE HAD SHOWN INCOME FROM SALARY LOSS FROM BUSINESS HOU SE PROPERTY INCOME AND CAPITAL GAINS ON SALE OF LAND. T HE AO TREATED A SUM OF `2 70 000 CLAIMED AS LOAN BY THE ASSESSEE AS THE ASSESSEES INCOME FOR THE REASON THAT THE LIABILITY FOR THIS AM OUNT HAD CEASED WITH THE DEMISE OF THE CREDITOR SMT. CHANDRA DAYAL. 2. BY VIRTUE OF THE IMPUGNED ORDER THE CIT(A) CONF IRMED THE ADDITION. 3. AGGRIEVED THE ASSESSEE IS IN APPEAL. 4. CHALLENGING THE IMPUGNED ORDER THE LD.COUNSEL FO R THE ASSESSEE HAS CONTENDED THAT THE CIT(A) HAS ERRED IN CONFIRMING THE ADDITION WRONGLY MADE; THAT THE ASSESSEE HAS NOT WRITTEN OFF THE LIABILITY IT CONTINUES TO BE SHOWN IN THE BOOKS OF ACCOUNT; THAT TH E SUNDRY I.T.A. NO.5369/DEL./10 (AY : 2007-08) 2 CREDITOR SMT. CHANDRA DAYAL PASSED AWAY ON 15.4.05 AND THERE WAS THEREFORE NO CONFIRMATION COULD BE OBTAINED FROM H ER; THAT HOWEVER THE ASSESSEE HAD FILED BEFORE THE AO A COPY OF THE OBI TUARY PUBLISHED IN THE NEWSPAPER TO PROVE THE DEMISE OF THE CREDITOR ; THAT THE AMOUNT WAS IN THE NATURE OF LOAN AND AS SUCH IT COULD NOT BE CONSIDERED UNDER THE PROVISIONS OF SECTION 41(1) OF THE ACT; THAT ACCOR DING TO THE LIMITATION ACT 1963 THE LIABILITY BECOMES BARRED B Y LIMITATION AFTER THE EXPIRY OF 3 YEARS FROM THE CLOSE OF THE YEAR IN W HICH THE RELEVANT ITEM WAS ADMITTED; THAT SINCE THE CREDITOR EXPIRED IN FY 2005-06 THE LIABILITY BECAME BARRED AFTER 31.3.09; THAT THE AMO UNT WAS NOT CREDITED IN THE P&L A/C FOR THE PERIOD ENDED ON 31.3.07; THA T THE CIT(A) HAS ERRED IN OBSERVING THAT SINCE NO PROVISION OF INTEREST ON LOAN WAS PROVIDED IN THE BOOKS OF THE ASSESSEE AFTER FY 2003-04 IT DEMONSTRATED THE BEGINNING OF THE CESSATION OF THE LI ABILITY AND CULMINATED IN THE ACTUAL CESSATION OF THE LIABILITY I N 2006-07 WITH THE DEMISE OF THE CREDITOR; THAT THE CREDITOR WAS A FAMIL Y FRIEND AND IT WAS THEREFORE THAT THERE WAS NON-PROVISION OF INTEREST; T HAT DEATH OF THE CREDITOR DOES NOT ESTABLISH THE CESSATION OF LIABILITY; AND THAT A WRITTEN OFF OF THE LIABILITY IN THE ACCOUNTS OF THE ASSESSEE IS E SSENTIAL TO PROVE THAT THE LIABILITY HAS CEASED AND THE ASSESSEE HAS BENEFIT ED THEREBY; THAT EVEN THE CIT(A) ADMITS THIS. THOUGH THE LD. CO UNSEL FOR THE ASSESSEE HAS REFERRED TO A DECISION OF THE HONBLE P&H HI GH COURT IN CIT VS. G.P. INTERNATIONAL LTD. IN I.T. A. NO. 618 OF 2009 NO COPY THEREOF HAS BEEN PLACED ON RECORD. 5. THE LD.DR ON THE OTHER HAND HAS STRONGLY RELIED ON THE IMPUGNED ORDER. IT HAS BEEN CONTENDED REITERATING THE FINDINGS RECORDED BY THE CIT(A) THAT THE AMOUNT OF `1 40 00 0 WAS RECEIVED BY THE ASSESSEE ON 12.6.93; THAT THEREAFTER TILL 31.3.98 THE ASSESSEE HAD BEEN PAYING INTEREST ON THE AMOUNT AND THE SAME WAS A LSO SHOWN AS PAID TO SMT. CHANDRA DAYAL IN FYS 1998-99 AND 99-00 THE INTEREST I.T.A. NO.5369/DEL./10 (AY : 2007-08) 3 PAYMENT WAS SHOWN IN THE ASSESSEES BOOKS OF ACCOUNT AS HAV ING BEEN RETAINED EVEN THOUGH IT BECOMES DUE TO THE CRE DITOR AND THE LOAN AMOUNT WAS INCREASED BY THE INTEREST SO RETAINED; THAT THEREFORE ON 31.3.2000 THE LOAN INCREASED TO `1 93 731; THAT THEREAFTER IN FY 2000-01 AFTER CREDITING INTEREST AND AFTER MAKING TW O SEPARATE PAYMENTS AMOUNTING TO `45 000 THE BALANCE IN THE LO AN ACCOUNT STOOD AT `181930; THAT FOR THE PERIODS ENDING MARCH 2002 2003 & 2004 THE INTEREST WAS NOT PAID EVEN THOUGH IT HAD BEEN CREDITE D TO THE CREDITORS ACCOUNT; THAT THE AMOUNT AS ON 31.3.04 WAS SHOWN TO HA VE BEEN INCREASED TO `2 70 345; THAT AS SUCH FROM FYS 1993-94 TO 2003-04 ASSESSEE HAD DEBITED TOTAL INTEREST OF `274812 AGAINST TH E LOANS; THAT THEREAFTER NO INTEREST WAS DEBITED ON THE LOAN; THAT ALL THIS SHOWS AS RIGHTLY OBSERVED BY THE CIT(A) THAT THE ASSESSEES APPROA CH WAS IN CONSISTENT; THAT THE ASSESSEES STAND THAT EVEN AFTER MORE THAN 5 YEARS OF THE DEMISE OF THE CREDITOR THE AMOUNT WAS STILL OU TSTANDING IS AGAINST THE NORMAL PRACTICE; THAT ON THE DEMISE OF A PERSON AS LEGAL HEIRS GENERALLY SETTLES THE ASSETS AND LIABILITY AT THE E ARLIEST; THAT THE ASSESSEE IS WRONG IN STATING THAT THE AMOUNT WAS A LOAN; T HAT AS OBSERVED BY THE CIT(A) THE ENTIRE LOAN STOOD RETURNE D IN THE GUISE OF INTEREST PAYMENT; THAT AFTER FY 2003-04 THE ASSESSEE WA S NOT PROVIDED ANY INTEREST FOR THE LOAN THAT THIS BELIES TH E ASSESSEES CONTENTION THAT THE LIABILITY HAD NOT CEASED FROM FY 2003-04; THAT AS CORRECTLY NOTED BY THE CIT(A) THE ASSESSEES ACT OF NON -PROVISION OF INTEREST DEMONSTRATED THE BEGINNING OF THE CESSATION OF THE LIABILITY CULMINATED THE ACTUAL CESSATION THEREOF IN FY 2006-07 WITH THE DEMISE OF THE CREDITOR; THAT THE CIT(A) HAS THEREFORE CORR ECTLY HELD THE LIABILITY TO HAVE CEASED IN AY 2007-08; THAT SINCE THE ASSESSEE WAS NOT LIABLE TO PAY INTEREST ANY LONGER THE CESSATION OF THE LIABILIT Y RESULTED IN BENEFIT TO THE ASSESSEE WHICH WAS CORRECTLY TREATED AS THE ASSESSEE S INCOME U/S 41(1) OF THE ACT; AND THEREFORE THERE BEING NO MERIT IN THE APPEAL THE SAME BE DISMISSED. I.T.A. NO.5369/DEL./10 (AY : 2007-08) 4 6. WE HAVE HEARD THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IS AS TO WHETHER THE CIT(A) HAS CORRECTLY UPHE LD THE ADDITION OF `.2 70 000 U/S 41(1) OF THE ACT. THE AO MADE THE ADDITON SINCE THE UNSECURED LOAN COULD NOT BE SUBSTANTIATED. THE NOTICE ISSUED U/S 133(4) OF THE ACT HAD COME BACK UNSERVED. 7. IT REMAINS UNDISPUTED THAT THE ASSESSEE IS STILL SHOWING THE LIABILITY IN ITS BOOKS OF ACCOUNT AND THE LIABILITY H AS NOT BEEN WRITTEN OFF. SECTION 41(1) OF THE ACT APPLIES WHERE THE ASSESSEE IS BE NEFITED BY THE REMISSION OR CESSATION OF A TRADING LIABILITY. THE REM ISSION AND CESSATION OF THE LIABILITY INCLUDES A UNILATERAL ACT B Y THE ASSESSEE IN WRITING OFF THE LIABILITY IN ITS BOOKS OF ACCOUNT. I N THE ABSENCE THEREOF THE CESSATION IS NOT ESTABLISHED. THE LIABILITY THEREFO RE IS NOT SHOWN TO HAVE CEASED. THE ASSESSEE HAS MAINTAINED THAT NON-PROVISI ON OF INTEREST WAS DUE TO A PERSONAL REQUEST MADE BY THE ASSESSEE TO THE CREDITOR WHO WAS A FAMILY FRIEND. IT WAS DUE TO THE FACT THAT THE CREDITOR SMT. CHANDRA DAYAL PASSED AWAY ON 15.4.05; A ND THAT NO CONFIRMATION COULD BE OBTAINED FROM HER BY THE ASSESSE E. THE FACTUM OF THE DEATH OF THE CREDITOR ON THE SAID DATE HAS HO WEVER NOT BEEN DISPUTED. THE DEMISE OF THE CREDITOR CAME ABOUT IN F Y 2005-06 AND THE LIABILITY BECAME BARRED AFTER 31.3.09 THE AMOU NT WAS NOT CREDITED IN THE ASSESSEES P&L A/C FOR THE PERIOD ENDED ON 31.3.0 7. THE LIABILITY IS STILL EXISTING IN THE BALANCE SHEET. IT HAS NOT BEEN WRITTEN BACK TO THE P&L A/C. AS SUCH THE PROVISIONS OF SECTION 41(1) OF TH E ACT ARE NOT APPLICABLE. IN VIEW OF THE ABOVE THE GRIEVANCE IS FOUND TO BE JUSTIFIED AND IS ACCEPTED AS SUCH. I.T.A. NO.5369/DEL./10 (AY : 2007-08) 5 8. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 25.02.2011. SD/- SD/- (G.E. VEERABHADRAPPA) (A.D.JAIN) VICE PRESIDENT JUDICIAL MEMBER DELHI DATED : 25.02.2011. SKB COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-XXVI NEW DELHI. 5.CIT(ITAT) NEW DELHI. AR/ITAT