TMI Blog1985 (11) TMI 230X X X X Extracts X X X X X X X X Extracts X X X X ..... mon so much so that the contentions and submissions of the parties are also common. 3. First of all, we decide the appeal for the assessment year 1972-73. The first issue in this appeal is regarding the deletion of addition made on account of accrued interest to the assessee on interest free loans to its directors. This issue is determined by the Commissioner (Appeals) in favour of the assessee and against the revenue in his order in paragraph No. 2 on the grounds that the ITO had not established any nexus in the borrowings and the advances made. Moreover, the submissions made by the assessee were having force. Therefore, accordingly, he deleted the addition made by the ITO amounting to ₹ 85,017 observing as under: Against the disallowance made it was submitted that the Tribunal for the assessment years 1969-70 and 1970-71 had approved the non-charging of interest from various debtors as the recovery was doubtful, the inference drawn by the ITO was not correct. Moreover it was submitted that interest of ₹ 1,200 was paid to Shri Ugamlal Parekh from whom loan of ₹ 40,000 was taken during the accounting year relevant to this assessment year for business purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1972-73 there is no basis for inconsistency. Moreover, the loan is old one and, therefore, it cannot be held that the amount of loan is diverted by the assessee for non-business purpose in the previous year, relevant to the assessment. years under consideration. He further contends that the cases relied upon by the department are not relevant to decide the issue as these cases are distinguishable. He relies on the paper book from pages 1 to 4 and 62 to 82 which is the order of the Tribunal in the assessee s own case for assessment year 1973-74. 6. In rebuttal, the learned departmental representative merely stated that the copy of the resolution referred to above was not filed before the ITO. 7. We have heard the rival submissions and have gone through the record before us. From the record it is clear to us that the ITO made the addition which has been deleted by the Commissioner (Appeals) for the amount of interest payable by the directors on the loans advanced to them. The loans were advanced to the directors in the year 1950 and the assessee charged the notional interest thereafter. However, in the year 1961 the shareholders of the assessee-company passed a resolution for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000 and the same is in ground No. 2 which is as under: The Commissioner (Appeals) erred on facts in holding the cash credit of ₹ 40,000 genuine in the name of Ugamlal Parekh, an employee of the company who denied the credit in the statement recorded. 8.1 The ITO asked the assessee to explain the cash credit and the assessee filed the confirmative letter of the creditor Shri Ugamlal Parekh. Further the ITO asked the assessee to produce the creditor before him to verify the genuineness of the cash credit. The assessee requested the ITO to summon him under section 181 of the Act at its cost. In the situation of the matter, the ITO deputed the inspector to investigate and to report. According to the report of the inspector he was an employee of the company. Before the inspector, he denied the fact that he gave any loan to the assessee. The inspector confronted him with his confirmation and his signatures but he stated before the inspector that he had not given any loan to the assessee. The ITO sent the copy of the statement recorded by the inspector to the assessee for giving his comments. The assessee replied to the ITO and requested that Shri Ugamlal Parekh, creditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e creditor to be summoned as he wanted to cross- examine the creditor. The ITO took the view that the onus is upon the assessee to prove the genuineness of the cash credit as well as the credit- worthiness of the creditor. Therefore, he relied upon the report of the inspector and held that the cash credit amounting to ₹ 40,000 is not proved and, therefore, he made additions of ₹ 41,757 which is the total of cash credit amount and the interest thereon. On appeal the Commissioner (Appeals) has held that the confirmatory letter is documentary evidence and, therefore, a statement made before the inspector cannot be relied upon as the same is verbal. He further held that it was for the ITO to summon the cash creditor for cross-examination of the asses- see. Moreover there is an entry of the cash credit in the books of account and, therefore, whatever has been stated by the cash creditor before the inspector cannot be relied upon in view of the documentary evidence in the name of confirmatory letter and the entries in the books of account. These reasons ascertained by the Commissioner (Appeals) for accepting the cash credit are erroneous in law and on facts. The entries in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned departmental representative from the record proved it and when this fact is brought to the knowledge of the learned counsel for the assessee, then he has not answered except to feel sorry. Therefore, the confirmatory letter and the entries in the books of account have been disproved by the creditor himself. When the creditor is denying the advance of loan and making a statement that the signature on the confirmatory letter has been taken by the assessee in deception then there is no duty on the ITO to summon the creditor again and again as the ITO has proved that the claim of the assessee for cash credit amounting to ₹ 40,000 is not genuine. 11. The Commissioner (Appeals) has committed an error in law and on facts in holding that the confirmatory letter is a documentary evidence but this documentary evidence is made by the creditor who has denied the making of the document stating that the signature on the confirmatory letter has been taken by the assessee in deception. The ITO has confronted this statement to the assessee who has not contradicted it even by filing an affidavit or alleging any enemity against the creditor who is still in the service of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and the explanation offered by the assessee for it is unsatisfactory. Therefore, the provisions of section 68 of the Act are applicable to the facts and circumstances of the case. Accordingly, we hold that the amount of ₹ 40,000 is to be added in the income of the assessee for the assessment year under consideration under section 68, and as such the ITO was justified. Regarding the question of interest on this amount as taken by the ITO amounting to ₹ 1,757, we feel the same is to be answered in the negative in view of the fact that to add interest on the cash credit is too much. Further more, if the assessee has failed to explain the cash credit then section 68 says that the same is to be taken as the income of the assessee for the assessment year under consideration in which year the entries in the books of account are made regarding it. Secondly, we hold that there is no basis to make addition for interest on such amount. Accordingly we hold that the amount of ₹ 40,000 has to be added in the hands of the assessee in the assessment year and to this extent we restore the order of the ITO and set aside that of the AAC as he has committed an error in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence, it was submitted that the ITO s conclusion was not correct. He was influenced by the wrong name given to the expenses. I find that the submissions made have force. The addition made by the ITO cannot be sustained. The lease is one with the company which is for working out the mines. It is not a lease for prospecting operations. Hence, the assessee is entitled to work out the mining operations in the leased area and any expenditure incurred in that connection will be necessarily revenue expenditure. It is not the case of the ITO that this expenditure was not incurred. Accordingly, the addition made by the ITO by treating the expenses as of capital nature cannot be sustained and is, therefore, deleted. 16. The departmental representative has not brought any material to rebut the aforesaid findings of the Commissioner (Appeals) though he reiterated the stand of the ITO before us. Further it is an admitted position that the assessee was engaged in the business for the last 40 years and is mining on one lease since then. Therefore, the Commissioner Appeals) is justified in holding that the expenditure in question is revenue expenditure and is extended in carrying out the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion on following the decision of the Tribunal in the assessment year 1973-74 and, therefore, we hold that he is justified in his conclusion and as such we confirm it. 20. The fourth ground in this appeal is regarding the deletion of ₹ 86,169. This ground is in respect of unpaid wages. The ITO in making the addition held that the name and address to whom the wages are to be paid are not given and the details were also not furnished. Therefore, he held that the amount is taxable under section 41(1) of the Act, as the same was not payable. 20.1 On appeal the Commissioner (Appeals) deleted it on the ground that the details of the amount had been filed before him to show that the closing balance at the close of the year was ₹ 1,05,319 and the amount of ₹ 86,169 was an opening balance in the account; that certain payments were not made in this connection during the accounting year, while certain credit entries were passed ; that there was no writing back of this amount in the profit and loss account, hence, it was admitted that the provisions of section 41(1) were not applicable ; that the payments are still being made from the balance outstanding. Therefore, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter be sent back for this purpose. However, he has admitted that the amounts represents payments of labour wages to the labourers and they are there but have so far not come to collect. He has also admitted that these are old amounts to be paid to the labourers for their wages and have not been paid for the last 10 to 15 years. It is also clear from the record that the assessee has filed the affidavit dated 6-2-1980 and contends that the contents have not been rebutted and, therefore, the affidavit should be accepted. The contents of the affidavit need not to be rebutted in view of the fact that the assessee has admitted that the amounts to the labourers have not been paid even up-to-date. Moreover, the assessee was asked by the ITO to give the names and addresses of the labourers but he failed to do so. No doubt, these amounts are to be paid since long and they were there in the assessment years 1974-75 and 1975-76 and the revenue accepted these as payments to the labourers and, therefore, the liability of the assessee to pay has become obsolete. If the liability is not discharged even up-to-date and the amount is lying with the assessee, who is using it in the business and, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 86,169 mentioned above. (The fourth issue as discussed above in this appeal.) For the same reasons, we set aside the order of the Commissioner (Appeals) on this issue also and restore that of the ITO, as we have mentioned for deciding the issue of ₹ 86,169. Hence, we set aside the impugned order on this issue and thereby hold that the contentions of the learned departmental representative mentioned above are well founded and hence tenable. 24. The last issue in this appeal is regarding the deletion of addition of ₹ 38,835. This amount is also representing unpaid wages for various entries in the books of account. The contentions and submissions of the parties are the same as those for the issue of ₹ 86,169 mentioned above (fourth issue). As this amount has not been paid so far and, therefore, for the same reasons, we hold that the liability to pay this amount has ceased and as such these are to be added in the income of the assessee under section 41(1). Accordingly, we set aside the order of the Commissioner (Appeals) on this issue and restore that of the ITO. 25. Now we come to the appeal for the assessment year 1979-80. The first ground in this appeal is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands of addresses as well as the identities of the creditors. According to the ITO no explanation was offered and, therefore, he treated these sums which were outstanding as not liabilities and, hence, treated the same as income under section 41(1). 3. The last item is in respect of certain expenses provided for in the earlier years which remained unpaid. Similar question was asked and the ITO treated the various sums as income under section 41(1). The Commissioner (Appeals) deleted the second and third items for the same reasons as he had deleted the unpaid wages. 4. My learned brother has gone on extraneous consideration such as welfare State and that the country is very poor. It is an admitted fact that all the above items have been charged as an expenditure and allowed as such by the department in the earlier years and provided for. It is also an admitted fact that the department has no evidence in its possession that the parties concerned have remitted the liability in favour of the assessee. It is also an admitted fact that as far as the assessee-company is concerned, there is no cessation of liability. It is also an admitted fact that the details of out standings have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of a liability becoming barred by law of limitation was examined in the case of Kohinoor Mills Co. Ltd. v. CIT [1963] 49 ITR 578 (Bom.) and in the case of Bhagwat Prasad Co. v. CIT [1975] 99 ITR 111 (All). It was held that when a liability becomes barred by the law of limitation, there is neither remission nor cessation of the liability; the liability is not extinguished, only the creditor s remedy becomes barred . Therefore, if the amount of a trade-in-debt was allowed as an expense to the assessee, the amount cannot be taxed under this sub-section as the income of the year in which the debt due by the assessee becomes time barred. 5.2 In the cases of J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34 (Bom.), CIT v. V.T. Kuttappu Sons [1974] 96 ITR 327 (Ker.) and Gannon Dunkerley Co. Ltd. v. CIT [1976] 102 ITR 428 (Bom.), they had gone a step further. In the first two cases the amount that was unpaid was credited to partner s capital account and in the last case of the company the amount was transferred to its general reserve account. Even in that situation it was held that the amount could not be taxed under section 41(1) even if the amount is credited to the profit and lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has credited them in the profit and loss account without submitting them for taxation. These liabilities are old and the assessee is not having any details about these liabilities. It is clear from the discussion, that the assessee has claimed excessive expenses in earlier years and has not paid correct taxes on its real income of these years. He then held that since the assessee failed to give details, there did not exist any liability for these expenses and that the claim for allowance of these amounts was made wrongly in the earlier years. The assessee relied upon certain case law before the ITO but he did not consider it advisable to refer to them on the ground that case law did not help the assessee when no liability existed. Thus, invoking the provisions of section 41(1), the sum of ₹ 86,169 which related to the earlier years was added back as income of the assessee. Then the ITO noticed another item of expenditure under the head Unpaid mandal creditors for ₹ 79,555. Here also the ITO required the assessee to furnish the details of the names of the parties to whom the amounts were owing but the assessee could not furnish the details. Again for the same rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel for the assessee answered that the matter could be sent back to the ITO so that the details of the amounts could be furnished to the ITO and that it was asserted that the labourers were existing and the payments were outstanding and did not cease to be liabilities except that they became old balances. He expressed the opinion that since these amounts were to be paid for long and they were not paid and since the revenue accepted them as payments in the earlier years, the liability of the assessee to pay has ended not having been discharged even till the date of the appeal. The assessee was using this sum in the business and it, therefore, became the amount of the assessee for the purpose of the business. He was of the opinion that the assessee should have deposited these sums in the bank in the names of the labourers instead of utilising the same for business purpose. On the ground that the names of the labourers were not furnished, he expressed a doubt whether the labourers were alive or not. He also held that law of limitation applied to the payment of these wages. He, therefore, held that the Commissioner (Appeals) was not justified in deleting these additions and that the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of such liability by way of remission or cessation thereof was not satisfied and therefore, these amounts were miles away from the application of section 41(1). Then he made a reference to some cases-Punjab Oil Mills (supra), Kohinoor Mills Co. Ltd. (supra) and Bhagawat Prasad Co. (supra) to show that when a liability became barred by the law of limitation, there was neither remission nor cessation of the liability and that the liability was not extinguished except that the creditor s remedy became barred. 4. I have considered the matter very carefully, perused the orders of the authorities below and of my learned brothers, considered the arguments addressed to me and I am of the opinion that these sums could not be treated as income under section 41(1) at all. As rightly pointed out on behalf of the assessee, these sums were not transferred to the profit and loss account at all by the assessee, which is an admitted fact. Even the ITO does not say that these amounts were transferred to profit and loss account. Transfer to profit and loss account becomes significant only to show that there is a cessation of liability at least from the point of view of the assessee if not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entries, i.e., outstanding balance to the profit and loss account was not considered by the Courts as resulting any income within the meaning of section 41(1) because that was a unilateral act, i.e., to say for the section to apply there must be a bilateral act which means that the liability must be given up by the receipient. The Courts have held that there was a distinction between remission and cessation. While remission means a positive conduct on the part of the creditor, cessation may result even from outside agency, e.g., when the assessee is absolved of a liability by a judicial pronouncement or by statute. Since there is neither remission by a positive conduct on the part of the assessee or the creditors nor a cessation and as it was found as a fact that the payments were being made out of these liabilities, though belatedly, I am unable to agree that there was a cessation of the liability or remission thereof so as to bring these sums within the ambit of section 41(1). I, therefore, express my agreement with the view expressed by the learned Accountant Member. Before I close the matter, I would like to add that from the order of the learned Accountant Member which was no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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