R.J. Construction, Mumbai vs Department Of Income Tax

The ACIT, M/s. R.J. Construction, C-11, R.No.308, No.7, Dalvi Hospital, Pratyakshkar Bhavan, Vs. S.V. Road, Bandra-Kurla Complex, Kandivali (W), Bandra (East), Mumbai - 400 067 Mumbai - 400 051 PAN: AAAFR 4765 R (Appellant) (Respondent)

Present for:

Assessee by : Shri Vipul Joshi, A.R. & Shri Abhishek Tilak, A.R. Revenue by : Shri Vipul Joshi, D.R.

Date of Hearing : 12.03.2015 Date of Pronouncement : 27.05.2015

ORDER

Per Sanjay Garg, Judicial Member:

The present appeal has been filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] dated 14.09.2010 relevant to assessment year 2007-08. The Revenue has taken following grounds of appeal:

"1) On the facts and in the circumstances of the case and in law, the LD. CIT(A) erred in deleting the addition made by the AO of ceased liability u/s 41(1) of Rs.54,88,678/- without appreciating the fact that no transactions have been made by the assessee with its creditors and assessee did not furnish confirmation from the creditors.

2) The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the AO be restored."

2 ITA No.8163/M/10 M/s. R.J. Construction

2. Brief facts of the case are that the assessee is a partnership firm engaged in the business of builders and developers. The assessee filed his return of income for the relevant year admitting total income of Rs.28,81,800/- However, the Assessing Officer (herein further referred to as AO) observed that the assessee's balance sheet showed an amount of Rs.54,88,678/- as sundry creditors which were outstanding for more than 3 years. On being called to explain in this respect, the assessee submitted that the construction activity of the assessee firm had stopped in the year 2002 and since then it had not carried out any construction activity. Some of the creditors relating to the period before 2002 were outstanding. It was further submitted that as soon as the assessee firm gets movements of the funds, the outstanding amount of the creditors would be paid. However, the AO did not accept the contention of the assessee and observed that liability of sundry creditors had been outstanding for more than three years and the same was thus to be treated as ceased liability. He therefore added the same into the income of the assessee under section 41(1) of the Income Tax Act.

3. In appeal, the ld. CIT(A) observed that unless the AO would have proved that there was a remission or cessation of liability during the assessment year under consideration, the same could not have been taxed under section 41(1) merely because the liability was outstanding for more than three years. He therefore deleted the addition so made by the AO under this head.

4. We have considered the submissions of the Ld. Representatives of both the parties and have also gone through the records.

3 ITA No.8163/M/10 M/s. R.J. Construction

5. The Ld. D.R., before us, has relied upon a recent authority of the Hon'ble Delhi High Court styled as "CIT vs. Chipsoft Technology (P) Ltd." 210 Taxman 173 (Del), wherein it has been held that in the case of an employer, omission to pay the dues/liability to employee over a period of time and the resultant benefit derived by the employer/assessee would qualify as a cessation of liability, albeit by operation of law and that a debtor or an employer, holding on to unpaid dues, should not be given the benefit of his showing the amount as a liability, even though he would be entitled in law to say that a claim for its recovery is time barred, and continue to enjoy the same. The relevant para of the above said judgment of the Hon'ble Delhi High court is reproduced as under:

"9. Two aspects are to be noticed in this context. The first is that the view that liability does not cease as long as it is reflected in the books, and that mere lapse of time given to the creditor or the workman, to recover the amounts due, does not efface the liability, though it bars the remedy. This view, with respect is an abstract and theoretical one, and does not ground itself in reality. Interpretation of laws, particularly fiscal and commercial legislation is increasingly based on pragmatic realities, which means that even though the law, permits the debtor to take all defences, and successfully avoid liability, for abstract juristic purposes, he would be shown as a debtor. In other words, would be illogical to say that a debtor or an employer, holding on to unpaid dues, should be given the benefit of his showing the amount as a liability, even though he would be entitled in law to say that a claim for its recovery is time barred, and continue to enjoy the amount. The second reason why the assessee's contention is unacceptable is because with effect from 1-4- 1997 by virtue of Finance Act, 1996 (No.2), an Explanation was added to Section 41 which spells out that "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof"

shall include the remission or cessation of any liability by an unilateral act by the first mentioned person under clause". The expression "include" is significant; Parliament did not use the expression "means". Necessarily, even omission to pay, over a period of time, and the resultant benefit derived by the employer/assessee would therefore qualify as a cessation of liability, albeit by operation of law."

6. On the other hand the Ld. A.R. of the assessee has submitted before us that the assessee had not written off the accounts of the sundry creditors into 4 ITA No.8163/M/10 M/s. R.J. Construction

profit and loss account. The liability had regularly been shown in the balance sheet. The assessee's liability to the creditors thus subsisted and had not ceased even. The limitation act bars the remedy to recover through legal course of action but does not extinguish the debt. He has pressed that the amount is not thus assessable u/s. 41(1) of the Income Tax Act. He has strongly relied upon the authority of the Hon'ble Delhi High Court styled as "CIT vs. Shri Vardhaman Overseas Ltd." (2012) 343 ITR 408 (Del). Apart from the said authority, to stress this point, he has also relied upon a catena of decisions of other Hon'ble High Courts.

7. After considering the relevant judicial decisions on this issue, the proposition of law, which, in our view, emerges out on this issues is that the assessee cannot be allowed to show an amount as a liability even though he has no intention to pay it back but to enjoy the same for unlimited period without being added to his income only on the excuse that he has not written off the same in his books of accounts. However, if the facts of the case establish that the liability has been genuinely shown by the assessee and his subsequent conduct shows that he has paid back the said credits and his intention was not to enjoy the amount for unlimited period without any intention to pay back the same, then it cannot be said to be a case of cessation of liability.

8. Before us, the Ld. AR of the assessee has submitted a statement/chart showing that most of the sundry credits have been paid back subsequently and has claimed that the amount which was outstanding at Rs.54,88,674/- has been reduced to Rs.27,86,794/- as on 31.3.2015. He therefore has submitted that in the case of the assessee, the liability has not ceased, rather he has been repaying the amount to his creditors as was submitted before the AO. In view of the above submissions of the ld. AR, in our view, it would be in the interest 5 ITA No.8163/M/10 M/s. R.J. Construction

of justice to remand the issue back to the Assessing Officer for verifying the genuineness of repayment of loans as claimed by the assessee and to verify as to whether the liability was genuinely shown by the assessee in the light of our above observations. We, accordingly, remand this issue back to the file of the Assessing Officer for fresh assessment in accordance with law.

9. In the result, the appeal of the Revenue is allowed for statistical purposes.

Order pronounced in the open court on 27.05.2015.

Sd/- Sd/- (B.R. Baskaran) (Sanjay Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 27.05.2015. * Kishore

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR "C" Bench //True Copy// [

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.