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2015 (8) TMI 975 - ITAT BANGALORE

2015 (8) TMI 975 - ITAT BANGALORE - TMI - Cessation of liability under Section 41(1) - Held that:- There is nothing on record to show any cessation or remission of liability by the creditor or even an unilateral act to this effect by the Assessee in this regard. In view of the above, we are of the opinion that the impugned addition u/s. 41(1) in respect of the addition M/s. Tool Masters cannot be sustained and the same is directed to be deleted. See Sugauli Sugar Works (P) Ltd. case [1999 (2) TM .....

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The assessee, proprietor of M/s. Habeeb Exports is engaged in the business of granite processing and polishing. After a search under Section 132 of the Income Tax Act, 1961 (in short 'the Act') was conducted in the case of Sri Hassan Sayeed Abdul Hafeez Sayeed, Prop. Oriental Granites, Hassan on 26.8.2009, the assessee's case was notified to be taken up for scrutiny. In response to notice under Section 142(1) of the Act dt.2.3.2011, the assessee filed his return of income for Assess .....

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Bangalore who dismissed assessee's appeal vide order dt.7.10.2013. 3. Aggrieved by the order of the CIT (Appeals) - VI, Bangalore dt.7.10.2013, the assessee has preferred this appeal raising the following grounds:- 1. The order of the learned authorities below in so far as it is against the appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the appellant s case. 2. The appellant denies himself liable to be assessed on a total income of ₹ 12,08,88 .....

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is not applicable to the facts and circumstances of the case. 5. The ld. authorities below failed to appreciate the fact that the creditor i. E. M/s. Tool Master, Bangalore has confirmed the amount of ₹ 10,29,773 to be receivable from the appellant during the impugned assessment year 2010-11 and thus the liability still persist during the impugned assessment year 2010-11 under the facts and circumstances of the case. 6. The learned authorities below failed to appreciate the facts based on .....

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n 234A & 234B of the Act is also bad in law as the period, rate, quantum and method of calculation adopted on which interest is levied are all not discernable and are wrong on the facts of the case. 8. The appellant craves leave to add, alter, substitute, amend or delete any or all of the grounds of appeal urged above. 9. For the above and other grounds to be urged during the hearing of the appeal the appellant prays that the appeal be allowed in the interest of equity and justice. 4. The Gr .....

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closed its business w. E. F. 1.4.2008 and therefore proposed to treat the outstanding amount of ₹ 10,29,773 as income of the assessee on account of cessation of liability under Section 41(1) of the Act. In response thereto, the assessee objected to the same contending that the said amount was still due and payable by the assessee to M/s. Tool Masters. The explanation put forth by the assessee did not find favour with the Assessing Officer. Observing that the said amount was outstanding fo .....

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Masters, the creditor had closed down its business and also for the reason that the assessee has not been able to show that the said liability has been made good. 5.3.1 In the Grounds raised (supra), the assessee contends that the Assessing Officer / learned CIT (Appeals) were not justified in making/confirming the addition of ₹ 10,29,773 under Section 41(1) of the Act as the provisions of this section were not applicable to the facts and circumstances of the case. It was contended that th .....

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k filed by the assessee), it was also brought to the notice of the learned CIT (Appeals) that M/s. Tool Masters, the creditor had confirmed that a sum of ₹ 10,29,773 is receivable from the assessee (copy of confirmation is placed at page 10 of paper book) and therefore the liability to pay this amount to the creditor M/s. Tool Masters still existed in the impugned Assessment Year 2010-11 even though the creditor may have closed down its business. The learned Authorised Representative conte .....

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Tool Masters is towards purchase of machinery. The learned Authorised Representative thereafter drew our attention and relied on the decision of the Hon'ble Delhi High Court in CIT V Vardhman Overseas Ltd. reported in 343 ITR 408 (Del) wherein on almost identical facts held that neither section 68 nor section 41(1) of the Act would be attracted. The learned Authorised Representative contended that there is no evidence brought on record by the authorities below to show that the liability of t .....

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it and loss account are placed at pages 14 to 16 of the A. R s Paper Book. It is submitted that the impugned addition of ₹ 10,29,773 made under Section 41(1) of the Act is unsustainable both in law and on facts. 5.3.2 Per contra, the learned Departmental Representative placed reliance on the orders of the authorities below. 5.4.1 We have heard the rival contentions and perused and carefully considered the material on record. On almost identical facts, the Hon ble Delhi High Court in the ca .....

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trading liability incurred by the assessee ( hereinafter referred to as the first-mentioned person) and subsequently 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 gain .....

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r 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) 5.4.2 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 liability to pay the sundry creditors in the assessee s accounts. The question has to be considered de hors Explanation 1 to Section .....

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terpreted accordingly. In the present case, there is nothing on record to show that there was either remission or cessation of liability of the assessee. 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 Delhi High Court in the case of Vardhaman overseas Ltd. (supra) clearly supports the plea of the Assessee in this regard. On identical facts, the Hon ble Delhi High Court on the appli .....

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he 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 definite and precise sense and that, accordingly, the legislation must be taken to have intended that they should be understood in that sense. In interpreting an expression used in a legal sense, therefore, we have only to ascertain the precise connotation which it possesses in law". In our opinion, this rule should be .....

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ory transfer of the debts due to the employees, and that is how the board gets title to them. If then a debt subsists 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, 19th Edition, p. 383, are directly in point : "At Common Law lapse of time does not affect contr .....

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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. Since the Tribunal has relied on the judgment of the Supreme Court in the case of CIT vs. Sugauli Sugar Works (P) Ltd. (supra) we may usefully refer to the decision in order to app .....

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to assessment under s. 41(1) of the Act. The assessee appealed unsuccessfully to the AAC and thereafter carried 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 contention was accepted by the Tribunal whose decision was affirmed by the Calcutta High Court CIT vs. Sugauli Sugar Works (P) Ltd. (1981) 2 .....

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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 the creditors 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 af .....

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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. 1st April, 1993, by which the words "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 recei .....

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rpretation of the words "cessation or remission" of the trading liability. The Supreme 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 is whether the transfer of these entries brings about a remission or ce .....

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ation of the liability may occur either by reason of the 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. Transfer of an entry is neither an agreement between the parties nor payment of the liability. We have already held in .....

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limitation 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, and observed as under while upholding the judgment of the Calcutta High Court : "This judgment has been quoted by the High Court in the present case and followed. We have no hesitation to say that the reasoning is correct and we agree with the same. To reinforce the conclusion, .....

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