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2016 (10) TMI 312 - ITAT MUMBAI

2016 (10) TMI 312 - ITAT MUMBAI - TMI - Addition u/s 41 - unexplained difference in account - cessation of trading liability (in respect of which the assessee had at any time in the past claimed and been allowed deduction - Held that:- prima facie suggestive or indicative of a liability, that by itself could not be conclusive of the matter, particularly considering that we have found the assessee’s books of account as not reflecting the actual state of affairs. Similarly, the non write off of th .....

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irectly by a customer. Why? The supplier (KRL), it needs to be borne in mind, is selling a licensed item (through registered dealers), and recovers, as a matter of policy, payment of goods in advance (refer Ground # 2 before the ld. CIT(A), reproduced at pg. 1 of the impugned order), i.e., does not extend any credit to its’ customers. It is for these reasons that we regard the establishment of intent by the assessee as relevant; the creditor having already, as it appears, exhausted the bank guar .....

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s of answers to all of which only would it be possible to say if there has occurred, or not so, a cessation of liability qua the said balance amount of ₹ 7.63 lacs, i.e., as on 31.3.2008. - The matter is, in view of the foregoing, restored to the file of the AO for proper determination, to be decided after allowing a reasonable opportunity to the assessee to present its’ case before him, issuing definite findings of fact, in accordance with law. We may clarify that we may not be constr .....

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Order by the Commissioner of Income Tax (Appeals)-24, Mumbai ( CIT(A) for short) dated 19.3.2014, allowing the assessee s appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ( the Act hereinafter) for the assessment year (A.Y.) 2008-09 vide order dated 28.12.2010. 2. None appeared for and on behalf of the assessee respondent when the appeal was called out for hearing. There being similarly no representation by the assessee on the earlier dates (of hearing) as well, the Bench .....

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f the material on record and after hearing the party before us. 3. The facts of the case are as follows. The assessee-firm, in the business of trading in chemicals, was found during the assessment proceedings for the relevant year by the Assessing Officer (A.O.) as being liable to trade creditors, M/s. Kochi Refineries Ltd. (KRL) and M/s. Triox Chemicals P. Ltd. (as per the balance-sheet as at the year-end). Notices u/s. 133(6), sent thereto, being uncomplied with by KRL, supplying an organic ch .....

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including the materials furnished in the assessment proceedings, the assessee reiterated its stand. The assessee bought toluene, a licenced item, from KRL, as it was listed therewith. As, however, it did not have a consignee user certificate, the sales (to third parties) were routed through its sister concern, M/s. Jay Pee Trading Company, which held a consignee user certificate, enabling it to issue excise gate passes to the customers, who (or some of whom) paid directly to KRL. This led to th .....

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nce confirmed by it (in January, 2011) was ₹ 11,65,203/-. As per the ld. CIT(A), the recovery through bank guarantee stood evidenced by bank advices, and payment of ₹ 31,42,505/- had been made by M/s. Ash Chemicals, a customer and ultimate user. Though the assessee ought to have recorded entries to this effect in its accounts, its failure to do so would not imply an unexplained cessation of liability, i.e., in the face of abundant evidence as to the encashment of the bank guarantee b .....

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d before us, so that its case is taken as that before the Revenue authorities, remains the same. The primary facts, by now clear, are not disputed. The assessee s liability to KRL as on 31.3.2008, detailed as under, is ₹ 11.65 lacs, since confirmed by the said company, so that there is no unexplained difference in account: (Amt. in Rs.) Credit Balance of Kochi Refineries Ltd. in the books of the assessee as at 31/3/2008 92,35,837/- Add: Delayed payment charges debited by M/s. Kochi Refiner .....

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ts) 31,42,505 [(1) + (2)] 84,72,505 Debit Balance as per Kochi Refineries Ltd. confirmation (96,37,708 - 84,72,505) 11,65,203 The issue, however, is not of any unexplained difference in account, which the ld. CIT(A) has confused it as. Section 41(1) gets attracted on the cumulative satisfaction of two events, i.e.: (a) cessation of trading liability (in respect of which the assessee had at any time in the past claimed and been allowed deduction); and (b) any benefit (in cash or in kind) stands o .....

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ility to the extent of ₹ 84,72,505/- (Rs. 92,35,837 - ₹ 7,63,332). The first limb of section 41(1) is thus satisfied. Where the discharge of liability is recorded in the assessee s books of account, the source thereof, recorded therein, can be ascertained with reference thereto, and explanation qua the same, where and to the extent deemed necessary, sought. In the instant case, however, the discharge having not been recorded in the assessee s accounts, it was incumbent to inquire abo .....

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.36 lacs reflected in the assessee s books of account as on that date. That, rather, confirms of their being a cessation of liability (for ₹ 84.73 lacs), one of the ingredients for the invocation of section 41(1), so that the same ought to have been followed by an enquiry qua the second aspect thereof. This is more so as the non-passing of the entries by the assessee is itself quizzical, with the ld. CIT(A) himself recording (at para 3.4.4 of his order) of it being inexplicable as to why t .....

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e else on his behalf had paid the balance amount (Rs.84.73 lacs). If the assessee has paid the amount, he should state so, along with the sources wherefrom the payment stands made, and as regards someone else, why, we wonder, would someone pay on the assessee s behalf. Then, again, who is this someone else ? The Revenue s case, rather, could not be limited to the application or otherwise of section 41(1), and may well extend to any of the other provision/s, as where it finds, as a result of its .....

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ts? If so, is the amount sufficient to absorb the said reduction, and does the reduced balance agree with that as per the books of the said party? Where so, the source of payment, ascribed to the said party, gets fully explained with reference to the assessee s accounts, so that all that was required is a passing of a journal entry adjusting the account of the debtor and the creditor to that extent (Rs.31,42,505), non-passing of which can by no means be regarded as fatal. As regards the payment .....

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ssessee has placed funds at the disposal of the bank, to be so applied in case of such a contingency (i.e., of non-payment). The source of payment of ₹ 53.33 lacs is completely unexplained, and which would therefore also require being examined, necessitating a remission to the A.O. Finally, we may consider the last component of the impugned sum of ₹ 92.36 lacs, i.e., the balance outstanding as at the year-end, or ₹ 7.63 lacs, reflected, again, as a liability in the assessee s a .....

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n, i.e., assuming so, is: Does the assessee intend of pay the same? Going by the assessee s conduct, it does not. Or else it would not have stopped paying KRL, which appears to be for long, compelling it to charge delayed payment charges and, finally, invoke the bank guarantee in its favour. A good part of the amount outstanding stands paid directly by a customer. Why? The supplier (KRL), it needs to be borne in mind, is selling a licensed item (through registered dealers), and recovers, as a ma .....

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