M/S.Rubfila International Ltd, ... vs Assessee

M/s. Rubfila International Ltd., Vs. The Deputy Commissioner of NIDA, Menonpara Road, Income-tax,Circle-1, Palakkad. Kanjikode P.O., Palakkad-678 621. [PAN:AABCR 4276K] (Assessee-Appellant) (Revenue-Respondent)

Assessee by Shri Mukesh M. Shah, CA Revenue by Shri K.K. John, Sr. DR

Date of hearing 11/12/2014 Date of pronouncement 09/01/2015

ORDER

Per CHANDRA POOJARI, Accountant Member:

This appeal filed by the assessee is directed against the order dated

15-10-2013 passed by the CIT(A)-V, Kochi, for the assessment year 2007-08.

2. The assessee has raised the ground with regard to addition of sundry

credits of Rs.25,39,036/- as non existing liabilities and taxable in the hands of

the assessee as remission of liability u/s. 41(1) of the Income Tax Act.

2. The brief facts of the case are that in the course of assessment, the

Assessing officer asked the assessee to produce account copies/confirmation 2 I.T.A. No.808/Coch/2013

letters from the sundry creditors. Accordingly, the assessee filed confirmation

letters from some of the creditors and they were verified. On verification of the

account copies from parties filed, differences as under were found in the

following accounts by the Assessing officer:

1. Fortichem (India) Rs. 2,84,638

2. Marries Production Rs. 1,54,355

3. National Traders Rs. 2,70,236

4. EID Parry Rs.12,83,724

5. C.Venkatasubramanian Rs. 1,28,750

6. Kohler Lakshmi Power Services Rs. 1,50,430

7. Malinga Sendirian Berhad Rs. 2,66,903 Total Rs.25,39,036

When asked about the above differences, the assessee' Chief Finance Officer had

no satisfactory answer to offer. Hence the above accounts were treated as non

existing and so disallowed as remission of liability u/s. 41(1) of the I.T. Act and

added to the income returned by the assessee.

3. On appeal, the CIT(A) confirmed the order of the Assessing officer by

observing that there was difference in the credit amount and the assessee failed

to furnish any valid reason at the time of assessment which is enough to

conclude that the incidence of cessation of such unconfirmed liabilities has arisen

in the assessment year 2007-08 itself. Against this, the assessee is in appeal

before us.

3 I.T.A. No.808/Coch/2013

4, The Ld. AR submitted that the during the course of assessment

proceedings, the assessee had submitted copies of account of all those creditors

as appearing in its books of account as it could not submit suppliers statement.

The Ld. AR submitted that the assessee had informed the Assessing officer that

all such balances have been written back in subsequent financial years when the

management of the assessee had concluded not to pay any amount to such

parties. However, according to the Ld. AR, the Assessing officer has taken a

stand that the same should be added to the income in respect of A.Y. 2007-08

inspite of the fact that the assessee has actually written back such amounts and

has in turn actually offered the same for taxation also in subsequent financial

years and the Assessing officer has treated the above accounts as non existing

and disallowed as remission of liability u/s. 41(1) of the I.T. Act and added to the

income returned. The Ld. AR submitted that when the Assessing officer

proposed to treat such parties as "non-existing" and consequent addition to the

income returned by the assessee while completing the assessment, the Chief

Finance Officer has signed the order sheet putting words "accepted" before

signature without appreciating the fact that such addition resulted in double

taxation in case of the assessee. The Ld. AR submitted that the assessee has

placed break up of such outstanding dues as on 31st March 2007, invoice-wise,

creditor-wise with copies of relevant available invoices and summarized details of

year-wise transactions with copies of Ledger accounts of respective creditors for

the financial years 2000-01 onwards for consideration before the Bench. The Ld. 4 I.T.A. No.808/Coch/2013

AR submitted that all these details prove that the respective suppliers have in

fact supplied goods/services to the assessee from time to time and payments to

them have also been made.

4.1 According to the Ld. AR, it was because of liquidity crisis, the payments

became irregular and as a result, the respective parties had stopped business

activities with assessee. The Ld. AR submitted that after passing of the order by

BIFR for rehabilitation of the assessee company, the management had

considered such outstanding suppliers and decided to write back the amount that

had remained unpaid for quite long and consequently offered for tax on its own.

These facts were brought before the lower authorities. In view of the above

facts, the Ld. AR submitted that the conclusion of the assessment proceedings

with such addition of unpaid creditors treating them as "non-existent" cannot be

treated as an agreed addition. According to the Ld. AR, the assessee cannot be

denied the right of vindicating its grievance before a higher forum just because

the Chief Finance Officer has written "Accepted" on the order sheet at the

bottom where the concluding remarks were written by the Assessing officer. The

Ld. AR also submitted that the decision relied upon by the Ld. DR in the case of

Jayashree Chit Funds & Services (P) Lt. vs. CIT (1981) 127 ITR 740 (Ker.) is not

applicable to the facts of the present case.

5 I.T.A. No.808/Coch/2013

4.2 The Ld. AR relied on the following precedents in support of his

contentions:

1) Vamadevan Bhanu vs DCIT (2006) 8 SOT 147 (Cochin-Trib.).

2) R.T.Balasubramaniam vs. ITO (1994) 50 ITD 513 (Mad. Trib.).

3) CIT vs. Indian Express (Madurai) (P) Ltd. (1983) 140 ITR 705 (Mad.).

4) CIT vs. Dayaram Vasudeo (1992) 193 ITR 602 (Bom.).

5) Chhat Mull Aggarwal vs. CIT (1979) 116 ITR 694 (P&H).

6) CIT vs. M Pyngrope (1993) 200 ITR 106 (Gau.).

7) The Honorary Secretary, Kaniyra Seva Samaj vs. State of Mysore (1969) 23 STC 155 (Mys.).

8. Rani Anand Kunwar vs. CIT (1940) 8 ITR 126 (Delhi).

9. CIT vs. Vardhman Ovrseas Ltd. (2012) 343 ITR 408 (Delhi).

10.J.K. Chemicals Ltd. vs. CIT (1966) 62 ITR 34 (Mum.).

11.CIT vs. Sugauli Sugar Works P. Ltd. (1999) 236 ITR 518 (SC).

12.CIT vs. Miraa Processors (P) Ltd. (2012) 208 Taxman 93 (Guj.) decided on 11.04.2012.

13. CIT vs. Silver Cotton Mills Co. Ltd. (2001) 170 CTR Guj. 377).

14. CIT vs. Bharat Iron and Steel Industries (1993) (199 ITR 67) (Guj.) (FB).

15. Shri Ahmedabad Flexible Tube Mfg. Yarn Proc. P. Ltd. vs. ITO I.T.A. No. 3133/Ahd./2011 - ITAT Ahd. decided on 13.11.2013.

16. CIT vs. Bhogilal R. Adara (2014) Guj. HC decision delivered on 04.02.2014 in Tax Appeal No. 588 of 2013.

17. CIT vs. Nitin S. Garg (2012) 208 Taxman 16 (Guj.).

18. CIT vs. G.K. Patel & Co. (2013) 212 Taxman 384 (Guj.).

4.3 In view of the above facts, the Ld. AR submitted that the above addition

of Rs.25,39,036/- as "non-existing" liabilities and taxable in the hands of the

assessee as remission of liability u/s. 41(1) of the I.T. Act may be deleted.

5. On the other hand, the Ld. DR submitted that the addition u/s. 41(1) of

the I.T. Act was made on account of remission of liability and the addition was

made after verifying confirmation and account copies filed by the assessee.

According to the Ld. DR, differences found in the accounts totaling to 6 I.T.A. No.808/Coch/2013

Rs.25,39,036/- for which no explanation was offered by the authorized

representative, was treated as non-existing liability and added to the income

returned. The Ld. DR drew our attention to the order sheet entry endorsed by

the authorized representative of the assessee Shri N.N. Parameswaran, Chief

Finance Officer of the Company which is placed on record wherein the Ld. AR

had agreed for the above addition for the assessment year 2007-08. The Ld. DR

relied on the decision of the High Court of Kerala in the case of Jayashree Chit

Funds and Services (P) Ltd. vs. CIT (127 ITR 740) wherein it has been held that

the agreed addition by the Chartered Accountant authorized by the assessee is

binding on the assessee and there cannot be any grievance thereafter. The Ld.

DR also relied on the judgment of the High Court of Kerala in the case of CIT vs.

Smt. Annamkutty Jose in I.T.A. No. 157/2002 vide order dated 27th February,

2008. wherein it was held that burden is on the assessee to prove the sundry

credits appearing in the books of accounts as genuine. If the assessee fails to

prove the transaction, the sundry credits is to be considered as the income of the

assessee.

6. We have heard both the parties and perused the record. We have also

gone through the elaborate written submission filed by the Ld. AR which is kept

on record. In this case, in the course of assessment, the Assessing officer asked

the assessee to produce account copies/confirmation letters from the sundry

creditors. The assessee has filed confirmation letters from some of the creditors. 7 I.T.A. No.808/Coch/2013

On examination of these confirmation letters and comparing the same with the

assessee's books of accounts, the Assessing officer found that there was a

difference of Rs. 25,39,036/-. The same was pointed out by the Assessing

officer to the assessee's authorized representative and required the assessee to

reconcile the same with the books of accounts of the assessee. However, the

assessee failed to explain the difference. On the other hand, the assessee'

authorized representative. Shri N.N. Parameswaran, Chief Finance Officer, duly

authorized by the assessee, agreed to above addition and made endorsement of

acceptance in the order sheet entry dated 25/11/2009. Contrary to this, the

assessee went in appeal before the CIT(A) stating that the above amount was

offered for tax as cessation of liability in the assessment year 2008-09 and in the

assessment year 2012-13 and also argued before the CIT(A) that it cannot be

considered as cessation of liability in the current assessment year 2007-08.

6.1 According to the assessee's Counsel, there was no cessation of liability in

the assessment year under consideration and the debts are existing in the books

of accounts of the assessee in this assessment year and it cannot be considered

as income of the assessee for the present assessment year, 2007-08.

6.2 Admittedly, these credits continue to be carried forward year after year.

On account of this, there was a doubt in the mind of the Assessing officer

regarding these credits. In the normal course, nobody would ordinarily not claim 8 I.T.A. No.808/Coch/2013

his dues and usually they take steps to recover the dues if it is a genuine liability.

In this case, the liability remains to be recovered year after year. For invoking

the provisions of sec. 68 of the I.T. Act, if any sum is found credited in the books

of account of the assessee maintained in the previous year, then only it could be

possible to make addition u/s. 68 of the I.T. Act. In the case of carry forward

credit which is from earlier year, provisions of sec. 68 cannot be applied.

However, in the case of the assessee, the liability is outstanding in the books of

account of the assessee for the assessment year under consideration. As per the

recent judgment of the Delhi High Court in the case of CIT vs. Chipsoft

Technology (P.) Ltd. [2012] 210 Taxman 173 (Del),, the provisions of sec. 41(1)

could be applied in this type of credts.

6.3 The hon'ble Delhi high court as per its recent decision in the case of CIT

vs. Chipsoft Technology (P.) Ltd. [2012] 210 Taxman 173 (Del), examining the

legal aspect of the matter, has clarified that the view that merely because a

liability outstands in books, and that lapse of time bars the remedy but does not

efface the liability, is an abstract and theoretical one which does not ground itself

in reality. The interpretation of law, particularly fiscal and commercial legislation,

is to be based on pragmatic realities. It would be indeed paradoxical, if not

illogical, to allow the assessee-debtor to, while avoiding a liability on the basis

that it is no longer enforceable in law, yet claim his status as a debtor, so that he

was indeed liable for the amount reflected as a liability in accounts. 9 I.T.A. No.808/Coch/2013

6.4 Further, Explanation 1 to the provision to sec. 41(1) inserted by Finance

(No.2) Act, 1996 w.e.f. 01.04.1997 proscribes an assessee to claim an indebted

status while writing back the amount in books, even if unilaterally, in its respect.

The word employed in the said Explanation is 'include' and not 'means', so that it

is not to be read in a restrictive manner. The tribunal explained the scope of the

said Explanation in the case of Kalyani Maan Singh vs. ITO (in ITA No.

6500/Mum(A)/2011 dated 14.11.2013) to mean that the assessee, even as

accounts are not sacrosanct, cannot assume a stand contrary to his own

accounts. Explanation 1, accordingly, could not be interpreted to conclude that

there is or could be no remission or cessation of liability unless the same is

written off in accounts. The argument that there was no period of limitation in

respect of a liability being disputed under the Industrial Disputes Act was also

repelled by the hon'ble court in Chipsoft Technology (P.) Ltd. (supra) on the

basis of the decision by the apex court in The Nedungadi Bank Ltd. vs. K. P.

Madhavankutty Air 2000 SC 839, holding that a stale dispute ousts itself from

being entertained and adjudicated. As would be seen, the hon'ble court has

sought to read the provision consistent with the facts of the case, and not on the

basis of a theoretical construct alone, divorced from the facts of the case. Reference was made both by the hon'ble court as well as the tribunal in the

afore-referred decisions to the decision in the case of Kesoram Industries &

Cotton Mills Ltd. vs. CIT [1992] 196 ITR 845 (Cal.) to the effect that the non- 10 I.T.A. No.808/Coch/2013

discharge of a liability over a long period of time, coupled with absence of any

dispute and/or of legal recourse, would lead to a firm basis to infer remission or

cessation of liability. The said decision by the hon'ble court stands followed and

adopted by the tribunal, as in ITO vs. Shailesh D. Shah (in and Yusuf R. Tanwar

vs. ITO (in I.T. Act No.8408/Mum/2010 dated 28.02.2013). Accordingly, an

omission to pay could give rise to the legal inference of cessation of liability.

True, an amount may continue to outstand in accounts, so that the assessee is

prima facie liable in its respect. However, it is the veracity or the truth of those

very accounts, constituting the assessee's evidence, that the assessee is required

to establish. The matter would, therefore, have to be decided in light of the

conspectus of the facts of each case.

6.5 As per the recent judgment of the Delhi High Court, cited supra, the

provisions of sec. 41(1) could be applied rather than sec. 68 of the I.T. Act.

Section 68 of the Act is not applicable to the cash credits recorded in the books

of account of the assessee in the earlier previous year not relevant to the

assessment year under consideration. When the cash credits pertain to the

earlier previous year, no addition can be made u/s. 68 of the I.T. Act in this

assessment year. In this background, the applicability of sec. 41(1) is to be

considered.

11 I.T.A. No.808/Coch/2013

6.6 As rightly highlighted by the lower authorities, in the present case, the

assessee has drawn balance sheet based on its books of accounts in which the

above amounts were being claimed as liabilities due to the various parties as at

the end of the accounting year under dispute. However, the assessee failed to

establish the genuineness of these liabilities by citing credible evidence. Simply

the liabilities being reflected against certain names in its books of accounts would

not establish the genuineness of such liabilities. On the other hand, the

Assessing officer went to the root of the issue and called for confirmation letters

from the alleged creditors and found discrepancies in the balance as compared

to the assessee's books of accounts and brought on record to show that the

brought forward alleged credit liabilities were not genuine. The assessee chose

not to reconcile the balance in the assessee's books of accounts with the parties'

accounts and agreed to offer the above amount as income under section 41(1)

of the I.T. Act. The assessee's authorized representative being employee of the

assessee company, made endorsement in the order sheet accepting the addition

u/s. 41(1) of the Act. This shows that the assessee has no explanation to prove

that the creditors in its books of account are genuine. To put it differently, the

assessee has failed to discharge its onus cast on it to substantiate its claim

whereas the Assessing officer has brought on record in the form of confirmation

letters from the creditors which shows the difference in the assessee's books of

account in respect of the 7 creditors. Being so, the lower authorities are justified

in holding that such liabilities did not exist at the end of the accounting year 12 I.T.A. No.808/Coch/2013

under dispute and rightly added the said liabilities which had ceased to exist.

Accordingly, the addition sustained by the CIT(A) is confirmed.

7. Further, we make it clear that in this case, the assessee's authorized

representative, Shri N.N. Parameswaran, Chief Finance Officer has accepted the

proposal made by the Assessing officer with regard to addition of

Rs. 25,39,036/-. In our opinion, in view of the judgment of the Jurisdictional

High Court in the case of Jayashree Chit Funds and Services (P) Ltd. vs. CIT (127

ITR 740), the acceptance of the assessee's authorized representative is clearly

binding upon the assessee and the assessee cannot have any grievance even on

this count also.

8. Further, if there is any taxation on the same impugned amount in any

other assessment year, the remedy lies with the assessee elsewhere and not

before us.

9. In the result, the appeal filed by the assessee is dismissed.

Pronounced in the open court on 09-01-2015

sd/- sd/- (N.R.S.GANESAN) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER Place: Kochi Dated: 9th January, 2015 GJ 13 I.T.A. No.808/Coch/2013

Copy to:

1. M/s. Rubfila International Ltd., NIDA, Menonpara Road, Kanjikode P.O., Palakkad-678 621.

2. The Deputy Commissioner of Income-tax, Circle-1, Palakkad.

3. The Commissioner of Income-tax(Appeals)-V, Kochi.

4. The Commissioner of Income-tax, Thrissur.

5. D.R., I.T.A.T., Cochin Bench, Cochin.

6. Guard File.

By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin