TaxTMI 
TaxTMI 
2011 (12) TMI 77
X X X X Extracts X X X X
X X X X Extracts X X X X
....wanted to verify the sales made by the assessee on consignment basis to 6 parties of Naya Bazar, Delhi. The total sales shown by the assessee to these parties amounted to Rs. 3,40,12,459/-. While verifying the sales and the sundry debtors shown by the assessee in its books of accounts as on 31.3.2002, which is the last day of the accounting year, the assessing officer also wanted to verify the sundry creditors shown in the books of accounts as on the said date. This was because he took the view that if the consignment sales were not genuine, the purchases shown to have been made by the assessee on credit basis cannot be treated as genuine. He, therefore, called upon the assessee to submit consignment letters from the sundry creditors who were 10 in number (list of sundry creditors given at page 8 of the assessment order). The total amount due to the 10 sundry creditors on account of purchase of paddy was Rs. 1,31,17,230/-. The assessee did not submit the confirmation letters, but wrote to the assessing officer on 18.1.2005 that it was not aware of the present whereabouts of the creditors after a lapse of four years and whatever addresses were available with the assessee had been gi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that such a request was made by the assessee knowing fully well that no summons could be issued to the creditors by the departmental authorities due to lack of details. He further held that the assessee's conduct clearly showed that the liabilities shown in the sundry creditor's account in its books did not exist. In this view of the matter, he held that the liabilities/credits have ceased to exist and, therefore, the addition of Rs. 1,25,46,534/- made by the assessing officer was justified and confirmed the same under Section 41(1) of the Act. 6. It may thus be noted that while the assessing officer made the addition under Section 68 on the ground that the credits were not properly explained, the CIT (A) invoked a different section, namely, Section 41(1) of the Act to uphold the addition. His reasoning in brief was that the liability towards the sundry creditors ceased to exist. 7. The assessee took the matter in further appeal before the Tribunal in ITA No. 440/DEL of 2006. In the course of the appeal proceedings before the Tribunal the assessee submitted a chart as under:- "Name of the party 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 Remarks ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ad become unenforceable. It was further pointed out on behalf of the assessee that the aforesaid view was reiterated by the Supreme Court in the case of Chief Commissioner of Income Tax v. Kesaria Tea Co. Ltd. (2002) 254 ITR 434. It was pointed out that in this judgment the Supreme Court had considered its earlier decision in CIT v. T.V.Sundaram Iyengar & Sons Ltd. (1996) 222 ITR 344 and distinguished the same on the ground that the factual matrix and the provision of law considered therein were entirely different. A few other authorities were also cited before the Tribunal. 8. The Tribunal after taking note of the rival contentions, held that the applicability of Section 68 was ruled out since no fresh amounts were credited in the accounts of the creditors under consideration during the relevant accounting year. As regards the applicability of Section 41(1), the Tribunal held that the assessee was a limited company whose accounts were accessible to general public and that the balances in the accounts of the sundry creditors were only brought forward balances. It was held that the question whether the liabilities were genuine or not cannot be examined in the assessment proceedin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 41(1) because according to him what was to be seen was whether the assessee had obtained a benefit in a practical sense and since the amounts remained unpaid to the parties for more than four years, there could be a reasonable inference that the assessee was no longer liable to pay those parties. In support of this submission the learned standing counsel relied on the words "some benefit in respect of such trading liability" appearing in clause (a) of sub-section (1) of Section 41. The benefit, according to him, arose on account of the fact that the debts had become more than three years old and were, therefore, not recoverable from the assessee in view of the law of limitation. With regard to the finding of the Tribunal that the assessee did not write back the liabilities in its profit and loss account for the year, the learned standing counsel clarified that this fact made no difference to the applicability of Section 41(1) since the Explanation 1 to Section 41(1) which was introduced by the Finance (2) Act, 1996 w.e.f. 1.4.1997 was not being relied upon by him. According to him, the writing back of the accounts of the sundry creditors in the profit and loss account can only be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the assessee's accounts. Therefore, as rightly pointed out by the learned standing counsel for the income tax department, the question has to be considered de hors Explanation 1 to Section 41(1). When we do so, what we find from clause (a) is that in order to invoke the section, it must be first established that the assessee had obtained some benefit in respect of the trading liability which was earlier allowed as a deduction. There is no dispute in the present case that the amounts due to the sundry creditors had been allowed in the earlier assessment years as purchase price in computing the business income of the assessee. The second question is whether by not paying them for a period of four years and above the assessee had obtained some benefit in respect of the trading liability allowed in the earlier years. The argument of the learned standing counsel that the nonpayment or non-discharge of the liability in favour of the sundry creditors resulted in "some benefit in respect of such trading liability" in a practical sense or common sense and, therefore, the section was rightly invoked, with respect, overlooks the words following the above quoted words, namely, "by way of r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... does not affect contractual rights. Such a right is of a permanent and indestructible character, unless either from the nature of the contract, or from its terms, it be limited in point of duration. But though the right possesses this permanent character, the remedies arising from its violation are withdrawn after a certain lapse of time; interest reipublicae ut si finis litium. The remedies are barred, though the right is not extinguished." And if the law requires that a debtor should get a discharge before he can be compelled to pay, that requirement is not satisfied if he is merely told that requirement is the normal course he is not likely to be exposed to action by the creditor." (underlining ours) This was also the view taken by the Supreme Court in CIT v. Sugauli Sugar Works (P) Ltd. (supra). 14. Since the Tribunal has relied on the judgment of the Supreme Court in the case of CIT v. Sugauli Sugar Works (P) Ltd. (supra) we may usefully refer to the decision in order to appreciate the controversy therein and the ratio laid down. That was a case of a private limited company. In respect of the assessment year 1965-66, it transferred a sum of Rs. 3,45....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s part of the reasoning, in the light of the amended clause(a) of sub-section (1) of Section 41 may not be relevant after substitution of the said clause by the Finance Act, 1992 with effect from 1st April, 1993, by which the words "some benefit in respect of such trading liability by way of remission or cessation thereof" were inserted. After the amendment, therefore, it is not necessary that in respect of a trading liability earlier allowed as a deduction, the assessee should have received any amount, in cash or otherwise, but it is necessary that the assessee should have received "some benefit" in respect of such trading liability. However, we have already seen that this benefit in respect of trading liability should be "by way of remission or cessation of the liability", after the amendment made to the clause with effect from 1st April, 1993. The second part of the reasoning of the Supreme Court in CIT v. Sugauli Sugar Works (P) Ltd. (supra) is based on the interpretation of the words "cessation or remission" of the trading liability. The Supreme Court noticed a judgment of the Bombay High Court in J.K. Chemicals Ltd. v. CIT (19966) 62 ITR 34 in which it was explained as to wha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....28 wherein it was held that the expiry of the period of limitaiton prescribed under the Limitaiton Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt. 16. In our opinion, the judgment of the Supreme Court in CIT v. Sugauli Sugar Works (P) Ltd. (supra) is a complete answer to the contention of the learned standing counsel. In the case before the Supreme Court for a period of almost 20 years the liability remained unpaid and this fact formed the basis of the contention of the revenue before the Supreme Court to the effect that having regard to the long lapse of time and in the absence of any steps taken by the creditors to recover the amount, it must be held that there was a cessation of the debts bringing the case within the scope of Section 41(1). In the case before us, the identical contention has been taken on behalf of the revenue, though the period for which the amount remained unpaid to the creditors is much less. It was held by the Supreme Court that 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 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Ltd. 73 (1998) DLT 593, the same view was taken. The last two decisions were cited by Geeta Mittal, J. in S.C. Gupta v. Allied Beverages Company Pvt. Ltd. (decided on 30/4/2007) and it was held that the acknowledgement made by a company in its balance sheet has the effect of extending the period of limitation for the purposes of Section 18 of the Limitation Act. In Ambika Mills Ltd. Ahmedabad v. CIT Gujarat (1964) 54 ITR 167, it was further held that a debt shown in a balance sheet of a company amounts to an acknowledgement for the purpose of Section 19 of the Limitation Act and in order to be so, the balance sheet in which such acknowledgement is made need not be addressed to the creditors. In light of these authorities, it must be held that in the present case, the disclosure by the assessee company in its balance sheet as on 31st March, 2002 of the accounts of the sundry creditors amounts to an acknowledgement of the debts in their favour for the purposes of Section 18 of the Limitation Act. The assessee's liability to the creditors, thus, subsisted and did not cease nor was it remitted by the creditors. The liability was enforceable in a court of law. 18. The judgment of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....payable by the assessee-company to its customers but since they were not claimed by them, they were transferred to the profit and loss account. The ITO rejected the explanation. He held that because the surplus in the accounts of the creditors arose on account of trading transactions, it had the character of income and had to be added to the total income for tax purposes. The CIT(A) and the Tribunal deleted the additions holding that neither section 41(1) nor section 28 applied, as the amounts represented excess trading advances given by the customers to the assessee and that since at the time they were received they were capital receipts they could not change character and become assessable as revenue receipts. At the instance of the revenue, the following question of law was referred to the High Court of Madras: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in deleting the addition made by the Income-tax Officer representing unclaimed sundry credit balances written back to the profit and loss account by the assessee during the previous year relevant for the assessment year under consideration?" The question for dec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing of the appellate authorities to the effect that neither section 41(1) nor section 28 was attracted to that case. That was a case of certain deposits being received by the assessee. At the time of the receipt they were admittedly treated as capital in nature, and the assessee credited them to separate accounts. In due course of time, they were depleted by adjustments made from time to time. The balance in the accounts remained unclaimed for a long time and in the accounts for the accounting periods relevant to the assessment years 198283 and 1983-84, the balance remaining in the accounts was taken to the credit of the profit and loss account. The assessee could not explain why the balance was taken to its profit and loss account even though the money belonged to somebody else. It was in these circumstances that the Supreme Court applied a common sense view of the matter and held that the assessee had become richer by the amount transferred to the profit and loss account. The matter was thus decided on general principles and on the footing that the assessee committed and overt act indicating that it had appropriated the balances in the deposit amounts belonging to its customers a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Works Ltd. v. CIT (supra). A perusal of the judgment shows that though Section 41(1) was invoked to tax amounts that were unilaterally written back to the profit and loss account of the assessee, this Court had applied the judgment of the Supreme Court in CIT Vs. T.V. Sundaram Iyengar (supra) to hold that the unclaimed liabilities written back were taxable under Section 41(1). A perusal of question No. 3 referred to this Court under Section 256(1) of the Act shows that there is a specific reference to Section 41(1) of the Act. However, this judgment cannot be invoked to the present case for the simple reason that in the present case, the assessee did not write back the sundry creditors to its profit and loss account, a finding which is not disputed by the Revenue. The judgment of this Court in Jay Engineering Works Ltd. v. CIT (supra) is therefore distinguishable. 23. In the course of his arguments, the learned standing counsel referred to Section 28(iv) of the Act, according to which "the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession" shall be chargeable to income tax under the head "profits and....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... enjoyed by the assessee by utilizing the amounts payable to the sundry creditors in its own business for a period of four years or more is to be brought to tax under Section 28(iv), notwithstanding that the conditions of Section 41(1), which govern the factual situation, are not satisfied, then it would render the latter section otiose or a dead letter. If we accept the argument of the learned standing counsel for the revenue, it would also introduce an element of uncertainty or subjectiveness in ascertaining as to what would be the lapse of time that would be necessary to render a liability to pay the creditors ineffective, which would result in an alleged benefit to the assessee. Moreover, if after the taxing of the amount u/s 28(iv) on the ground that considerable time has elapsed from the date of the debt during which the assessee had the benefit of the monies in his business, it is found that in another later year the creditor has recovered the money from the assessee, there is no provision in the Act to allow deduction for such payment. The section cannot be made subject to such vagaries or subjectiveness in its applicability. It is also necessary to bear in mind that in the....