By Jagdish D. Shah
Jagdish T.Punjabi Chartered Accountants
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Section 41(1) and 68 – Old liability of sundry creditors remaining unpaid – Since not arising from current year’s transaction not taxable u/s. 68 – Also nothing on record to show remission or cessation of liability hence, not taxable u/s. 41(1)
Facts:
The assessee who is a dealer in sale of bakery and confectionary products, filed his return of income declaring an income of Rs.29.07 lakh. In the course of assessment proceedings, the AO called for confirmations and names and addresses of sundry creditors totalling to Rs.68.59 lakh. The assessee could furnish the names & addresses of 12 creditors out of total 22 creditors. The letters sent u/s. 133(6) to these creditors returned with the endorsement “no such person”, except in the case of one creditor. The assessee explained that the creditors were old creditors and the addresses given were the address available in the records of the assessee and therefore the assessee was not in a position to confirm whether those creditors were residing in that address. The AO was not satisfied with this reply and made an addition of Rs.65.67 lakh. On appeal by the assessee, the CIT(A) confirmed the order of the AO.
Held:
The Tribunal noted that neither the order of the AO nor that of the CIT(A) was clear as to whether the impugned addition made was u/s. 68 or 41(1) of the Act. According to it, the provisions of section 68 will not apply as the balances shown in the creditors’ account did not arise out of any transaction during the previous year relevant to AY 2009-10. As regards the applicability of section 41(1) is concerned, according to it, in the case of the assessee it has to be examined whether by not paying the creditors for a period of four years, the assessee had obtained some benefit in respect of the trading liability allowed in the earlier years. It further observed that the words “remission” and “cessation” are legal terms and have to be interpreted accordingly. Referring to the observations of the Supreme court referred to by the Delhi High Court in CIT vs. Sri Vardhaman Overseas Ltd.(343 ITR 408) viz. “a unilateral action cannot bring about a cessation or remission of the liability because a remission can be granted only by the creditor and a cessation of the liability can only occur either by reason of operation of law or the debtor unequivocally declaring his intention not to honour his liability when payment is demanded by the creditor, or by a contract between the parties, or by discharge of the debt”, the tribunal noted that there was nothing on record or in the order of the AO or the CIT(A) to show that there was either remission or cessation of liability of the assessee. Accordingly, it held that the provisions of section 41(1) of the Act could not be invoked by the Revenue. Therefore, the appeal filed by the assessee was allowed.
