TMI Blog2021 (4) TMI 461X X X X Extracts X X X X X X X X Extracts X X X X ..... es. But the problem is that they do not pertain to this asst. year. The disallowance, if any, has to be made in the year in which they were claimed. It cannot be taxed as income of this year unless it falls under the provisions of section 41(1) of the Act. No addition can be made to the income of the assessee in this asst. years, as in the view of the AO the outstanding liability in question is bogus and non-existent. The question of cessation of such non-existent as bogus liability does not arise. Hence, Sec. 41(1) cannot be applied. Only when there is a genuine liability and there is cessation of such liability or it is written off in the books of account, then Sec. 41(1) of the Act can be applied. Law permits the Ld. AO to re-open the assessment for the earlier year and consider whether the expenditure incurred are to be allowable or not and in such cases additions can be made of bogus expenditure. Thus, in view of the above discussion, we delete all these additions of outstanding liabilities/expenses as appearing in the balance sheet as made by the Ld.AO and confirmed by the Ld. CIT(A) and allow the grounds of the assessee. Disallowance of expenditure in commission - A/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) ₹ 29,94,747/- as ungenuine, Sundry creditors / outstanding liabilities on various expenses (ii) ₹ 23,94,000/- as ungenuine, liabilities outstanding expenses and iii) ₹ 13,83,100/-, which are long outstanding liability for wages and (iv) ₹ 1,16,13,876/- being outstanding commission expenses of ₹ 40,49,876/- and ₹ 75,64,000/- commission expenses. Aggrieved, the assessee carried the matter in appeal to the First Appellate Authority. The assessee contended that in most of the cases, except current year s commission payments, expenditure incurred for the earlier years and which were allowed in particular AY (2009-10) and when they remained unpaid during the year, no addition can be made during the current assessment year. 3. The First appellate authority dismissed the case of the assessee and confirmed the order of the Ld. AO by observing that the assessee has not furnished any details to conclude that the outstanding liability / sundry creditors could not be treated to be ceased even though they have not been written off from the books of account. He observed that the profit disclosed by the assessee was meager and that the nature of expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve commission receipt as per law. That nature of services rendered by the agents was clear from the bills raised by the agents. He disputed the finding of the Ld. AO that, the supply of goods to various districts in the state of West Bengal was on the basis of lowest tendering and there was direct nexus between the buyer and seller and hence no middleman was required. He submitted that the assessee s supply of goods was throughout the state of W.B. and that either an agent or an employee was required for delivery of goods as well as in liaison follow-up and in realising the bills. He submitted that similar commission expenses was incurred in the earlier assessment year and was allowed by the Ld. AO in the order dt. 29- 11-2011 passed u/s. 143(3) of the Act. He pointed out that the assessee does not have any employees in every part of the state for service and for smooth supply of goods and that it has to rely on these agents for supply, service, billing liaison and receiving of payments. 6. The Ld. DR, on the other hand, opposed the contention of the assessee and submitted that a perusal of any outstanding expenses/liabilities demonstrate that the expenses cannot be kept outs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese expenses. But the problem is that they do not pertain to this asst. year. The disallowance, if any, has to be made in the year in which they were claimed. It cannot be taxed as income of this year unless it falls under the provisions of section 41(1) of the Act. Let us now examine the scope of Sec. 41(1) of the Act. 8. Hyderabad Bench of Tribunal, Hyderabad A Bench, in the case of M/s. Nama Properties Ltd Vs. DCIT, Cir-2(1), Hyderabad, ITA No. 1831/Hyd/2017 for the A.Y 2012-13 on the scope of Sec. 41(1) of the Act considered a number of judgment of the Hon ble Supreme Court and Hon ble High Court s and held as follows:- 8. Having regard to the rival contentions and the material on record, we find that the details of the trade payables/liabilities were produced before the AO and the AO has not doubted that they are the liabilities of the earlier A.Ys i.e. A.Y 2006-07 and 2008-09 respectively. The trading payables are continued as payables since then, and the relevant A.Y before us. 13. if there is cessation of liability, it is for the assessee to write off the payables and offer it to tax u/s 41(1) of the Act. Since the payables are pending for many years, the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of liability without there being any evidence that such liabilities cannot be enforced on the assessee or that the assessee has written it off. Therefore, assessee's appeal is treated as allowed. 9. The assessee has relied upon the following decisions in support of its contention that the genuineness or otherwise of the trade liability should have been considered in the year in which they are claimed as liability and unless and until there is a remission of liability of cessation of liability, it cannot be brought to tax u/s 41(1) of the Act: i) Das D.Y in ITA No.365/Hyd/2013, the SMC Bench of ITAT Hyderabad in this case, has held as under: 8. Having heard the learned DR and having considered the material on record, I find that the only basis for making addition u/s 41(1) of the Act by the AO is the presumption by him that the liability of the assessee under 'sundry creditors' has ceased to be liability due to long duration of time after the credit became a liability and also because the assessee was not having any further transactions with the said parties. It is observed that there can be cessation of liability only when the creditor gives u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any contrary materials placed on record by revenue to show that no such liability existed in books of account or assessee had obtained any benefit by cash or in any manner, merely because said liability was more than 5 years old it could not be said that there was cessation of liability - Held, yes [In favour of assessee] iv) ITAT Delhi in the case of Sri Vardhman Overseas Ltd 24 SOT 393 (Del.) held as under: Section 68 of the Income-tax Act, 1961 - Cash credits - Assessment year 2002- 03 - During relevant assessment year, Assessing Officer asked assesseecompany to prove genuineness of certain sundry creditors - Assessee could not file confirmations from said creditors; therefore, Assessing Officer treated credit balance appearing in assessee's books of account as unexplained credits under section 68 - On appeal, Commissioner (Appeals) confirmed additions under section 41(1) - Whether since no new amount had been credited in accounts of creditors during year under consideration, addition could not be made under section 68 - Held, yes Section 41(1) of the Incometax Act, 1961 -Remission or cessation of trading liability - Assessment year 2002-03 - Whether in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was remission and/or cessation of liability that too during relevant assessment year - Held, yes - Whether since there was no remission and/or cessation of liability during year under consideration, addition made under section 41(1) was liable to be deleted - Held, yes [Para 6.2] [In favour of assessee] vii) ITAT Kolkata in the case of Jashojit Mukherjee 93 Taxmann.com 366 held as under: I. Section 41(1) of the Income-tax Act, 1961 - Remission and cessation of trading liability (Cessation of liability) - Assessment year 2012-13 - Assessee had shown provision for sundry creditors -Assessing Officer held that since present whereabouts of creditors were not known to assessee, sum claimed towards sundry creditors were to be treated as deemed income of assessee under section 41(1) on account of cessation of liability - It was noted that assessee had shown balances outstanding towards sundry creditors even in next assessment year - Assessee had not written back these creditors in his profit and loss account as liabilities no longer payable - Hence, there was no unilateral write back of creditors to his profit and loss account by assessee and from same it could be safely concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d ceased to exist - Penalty under section 271(1)(c) was also levied for furnishing inaccurate particulars of income - Facts revealed that in quantum proceedings Tribunal recorded that one of creditors had denied any amount to be due to it from assessee and some of creditors named by assessee were not found available at addresses given - Further, in penalty proceedings all three authorities had concurrently arrived at a finding of fact that claim made by assessee with regard to its outstanding liabilities for subject assessment year was false - Whether showing a non-existent liability as an existing liability and not offering same to tax amounted to furnishing inaccurate particulars of income and, therefore, penalty was justified - Held, yes [Para 8] [In favour of revenue] c) Hon'ble' Supreme Court in the case of CIT vs. T.V.Sundaram Iyengar Sons Ltd (1996) 88 Taxmann 429 (S.C) held as under: Section 28(i) of the Income-tax Act, 1961 - Business income - Chargeable as - Assessment years 1982-83 and 1983-84 - Assessee received certain deposits from customers in course of its business which were originally treated as capital receipt - Unclaimed credit balances which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion of law arose for consideration regarding effect of section 41(1) resulting into remission or cessation of trade liability standing in books of account - Held, yes [Paras 3 4] [In favour of revenue] e) Hon'ble Gujarat High Court in the case of Gujtron Electronics (P) Ltd vs. ITO, 83 Taxmann.com 389 held as under: Section 41(1) of the Income-tax Act, 1961 - Remission or cessation of trading liability (Customer advances) - Assessment year 2012-2013 - Under a sales promotion scheme launched during financial year 1986- 87, assessee company collected a sum of ₹ 500 from each of its customer by sale of coupons - Assessee collected a huge sum under said scheme - Since then, assessee had been showing such sum as outstanding trade liability under head customer advances - During relevant assessment year, Assessing Officer held that there was cessation of liability and, therefore, added such sum to income of assessee - It was found that scheme was valid only for period of twelve months - There was no activity at hands of assessee in connection with scheme for past several years - Not a single customer had demanded money back nor assessee had made any attempt to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's books showed trading liabilities which worked out to approx. 40 per cent of purchase and were outstanding for a period of almost six years - Entertaining doubts with regard to genuineness of outstanding liabilities, notices were issued to four parties - One party gave its confirmation and other notices were received as unserved -Assessing officer observed that said liabilities ceased to exist and invoked section 41(1) Whether since, confirmation was furnished by one party, application of section 41(1) was unjustified and matter needed re- adjudication - Held, yes - Whether as regards other liability, since no confirmation or any other material furnished and no claims were made same would be said to be clearly unproved and section 41(1) was rightly invoked - Held, yes [Para 4.3] [Partly in favour of revenue] i) The Hon'ble Andhra Pradesh High Court in the case of A.K. Babu Khan vs. CWT 102 ITR 757 held as under: Section 24 of the Wealth-tax Act, 1957, read with rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 - Appellate Tribunal - Orders of - Assessment years 1959-60 to 1963-64 - WTO made ex-parte assessments for relevant assessment years on gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore us, the assessee has not recognized the cessation of liability as in the case of TV Sundaram Iyengar Sons and hence the case is distinguishable on facts. Therefore, the said judgment cannot be applied to the facts of the case before us. 14. In the case of Rama Steel Rolling Mills General Engg. Works, the Hon'ble Rajasthan High Court has held that the liability at the end of the year, if not proved could certainly be added u/s 41(1) of the Act but still it is open for the AO to verify the discharge of liability and if liability had been discharged till the date of assessment, then there would be no remission or cessation of liability, but if assessee failed to produce the creditor or was unable to give exact address of the creditors, then such liability would stand ceased during the year and AO would be free to add back same as per law. 15. In the case of Gujtron Electronics (P) Ltd, the Hon'ble Gujarat High Court held that where there is limitation period in claiming the amount back and if there is absolutely no movement or correspondence between the assessee and its members with respect to the claim or with respect to deposit amount, the same can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of expenditure in commission and held as follows:- (B) Commission of ₹ 63,15,457/- Debited under head Selling, General Administrative exp. Section Schedule 19 of P/L A/c. The A/R during the stage of hearing was asked to produce the details of parties to whom the commission was given and for what purposes. How it helped to promote the sale of assessee firm and whether TDS was made thereon. The Ld. A/R vide his written submission explained that the commission is required in his nature of business and to promote the sale. The AO allowed the claim of the assessee in that year. 11. The assessee specifically submits that he does not have any employee throughout the state of W.B., where supplies of goods have taken place and instead the assessee appointed sales agent to liaison the supply of goods and follow up of the bills and collection in various districts of State of W.B. He also submitted that commission expenses were paid through a/c payee cheques after deducting tax at source against the bills raised by the Commission Agents. The sales agents have filed their I.T returns declaring such commission as there income. We also find that similar commission had been pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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