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The Assistant Commissioner of Income Tax, Circle 1 (1) , Bangalore. Versus M/s. Alvares & Thomas

2015 (11) TMI 179 - ITAT BANGALORE

Addition u/s 68 - cessation of liability u/s. 41(1) - whether addition u/s. 68 of the Act could not be made because, admittedly, the credits in question did not relate to the previous year relevant to AY 2009-10? - Held that:- In almost identical facts, the Hon’ble Delhi High Court in the case of Shri Vardhaman Overseas Ltd. ( 2011 (12) TMI 77 - DELHI HIGH COURT ), has clearly laid down that neither section 41(1) nor section 68 of the Act can be applied. On the applicability of section 68, we ar .....

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e in computing the business income of the assessee. The second question is whether by not paying them for a period of four years and above the assessee had obtained some benefit in respect of the trading liability allowed in the earlier years. The words “remission” and “cessation” are legal terms and have to be interpreted 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 fact, there is no reference .....

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13 - Dated:- 14-8-2015 - SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER For The Appellant : Shri Sunil Kumar Agarwala, Jt. CIT(DR) For The Respondent : Shri S. Venkatesan, CA ORDER Per N.V. Vasudevan, Judicial Member This is an appeal by the Revenue against the order dated 14.8.2013 of the CIT(Appeals), Mysore relating to assessment year 2010-11. 2. In this appeal, the Revenue has challenged the order of CIT(Appeals), whereby he deleted the addition made by th .....

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ish confirmation from M/S.Durga Traders. The assessee gave confirmations from the creditor dated 14.3.2012. The address of M/s.Durga Traders as given in the confirmation was Shop No.1/2, Gurukrupa Housing Complex, Cutinho Road, Karwar-581 301. The AO on 7.8.2012 issued a commission u/s.131(1)(d)of the Act to the ITO, Ward-1, Karwar, to examine the creditor. The ITO, Ward-1, Karwar reported that on enquiry no concern/enterprise by name M/S.Durga Traders existed at the address given and hence no e .....

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AO that in the year 2010, there was a ban on iron ore transaction because of which iron ore industry had come to a standstill. It was therefore possible that M/s. Durga Traders had shifted their office from the given address and moved to some other address. The assessee pleaded its inability to give the correct address. 6. The AO, however, was of the view that there was a cessation of liability and he brought the amount in question to tax u/s. 41(1) of the Act. The following were the relevant o .....

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ng time, there is no interest charged on the amount by M/s Durga Traders. It was also ascertained that M/s Durga Traders was a proprietorship and it is, therefore, inexplicable as to how an individual ran his business despite having such a huge amount payable to him over such a long period of time. 5.5 In view of the above factual position, it is abundantly clear that the liability claim of the assessee towards M/s Durga Traders amounting to ₹ 81,40,232/- does not exist and the liability i .....

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itself not genuine. The CIT(A) on the question of applicability of section 41(1) of the Act, was of the view that just because liability was more than 7 years old, that cannot be the basis to conclude that liability of the assessee ceased to exist. In coming to the aforesaid conclusion, the CIT(A) placed reliance on the decision of the Hon ble Supreme Court in the case of CIT v. Sugauli Sugar Works Pvt. Ltd., 236 ITR 518 (SC). The CIT(A) finally concluded that there was no evidence on record to .....

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this regard, the fact that the creditors did not have any transactions during the relevant previous year is admitted by the AO in para 2 of the assessment order. According to him, therefore the provisions of section 68 will not be attracted. The ld. counsel thereafter drew our attention to the decision of the Hon ble Delhi High Court in CIT v. Sri Vardhaman Overseas Ltd., ITA No.774/2009 dated 23.12.2011 343 ITR 408 (Del), wherein on identical facts, the Hon ble High Court held that neither sect .....

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hat there is no evidence brought on record to show that liability of the assessee vis-à-vis creditors has ceased to exist. It was therefore submitted by the ld. counsel for the assessee that the impugned additions cannot be sustained in law and the same will have to be deleted. 10. The ld. DR, on the order, placed reliance on the orders of the Revenue authorities. 11. We have given a careful consideration to the rival submissions. On almost identical facts, the Hon ble Delhi High Court in .....

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any previous year . Since the credit ITA No.1676/Bang/2013 Page 6 of 14 entries in question do not relate to previous year relevant to AY 2009-10, the same cannot be brought to tax u/s. 68 of the Act. The proper course in such cases for the Revenue would be to find out the year in which the credits in question were credited in the books of account and thereafter make an enquiry in that year and make an addition in that year, if other conditions for applicability of section 68 are satisfied. 12. .....

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ous 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 gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or prof .....

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) of that sub-section by way of writing off such liability in his accounts. (underlining ours) 13. 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 41(1). In order to invoke clause (a) of Sec.41(1) of the Act, it must be first established that the assessee had obtained some benefit in respec .....

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legal terms and have to be interpreted 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 fact, there is no reference either in the order of the AO or CIT(A) to the expression remission or cessation of liability . 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 ca .....

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SC 560 Venkatarama Aiyyar J. explained the general rule of construction that words used in statutes must be taken in their legal sense and observed : "The 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 expre .....

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en a debt becomes time-barred, it does not become extinguished but only unenforceable in a Court of law. Indeed, it is on that footing that there can be statutory 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 .....

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t si finis litium. The remedies are barred, though the right is not extinguished. And if the law requires that a debtor should get a discharge before he can be 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 ha .....

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its and advances which were paid back by the assessee. He, therefore, deducted this amount from the amount of 3,45,000 and the balance of 2,56,529 was brought 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 wi .....

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mount and consequently there was a cessation of the debt which would bring the matter within the scope of s. 41(1). It may be noted that the contention of the 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 .....

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41(1) the assessee should have obtained, whether in cash or in any other manner whatsoever, any amount in respect of the loss or expenditure earlier allowed as 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 insert .....

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e clause w.e.f. 1st April, 1993. The second part of the reasoning of the Supreme Court in CIT vs. Sugauli Sugar Works (P) Ltd. (supra) is based on the interpretation of the ITA No.1676/Bang/2013 Page 11 of 14 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. T .....

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it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation 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 d .....

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in an industry, the provisions of the Industrial Disputes Act also are attracted and for the recovery of the dues from the employer, under s. 33C(2) of the Industrial Disputes Act, no bar of 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 ju .....

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the debt. 16. In our opinion, the judgment of the Supreme Court in CIT vs. Sugauli Sugar Works (P) Ltd. (supra) is a complete answer to the contention of the learned standing counsel. In the case before the Supreme Court for a period of almost 20 years the liability remained unpaid and this fact formed the basis of the contention of the Revenue before the Supreme Court to the effect that having regard to the long lapse of time and in the absence of any steps taken by the creditors to recover the .....

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