(1.) THESE two appeals are cross appeals filed by the assessee as well as revenue. These appeals are emanated from the order of the ld. CIT(Appeals) - XIV, Ahmedabad, order dated 21.06.2012 for A.Y.
2007 -08. Both appealswere heard together and are being disposed of by way of this common order for the sake of convenience.
(2.) THE assessee filed appeal delay by 13 days and explained the reasons. Accordingly, we condone the delay and appeal is allowed to be proceeded.
(3.) FACTS of the case are as under: The A.O. observed that on perusal of balance sheet for the year under consideration the amount of
Rs.1,78,87,324/ - in the name of following persons was shown as outstanding liability under the head
a) Skylark Finance Ltd. Rs. 1,59,25,000/ -
b) Mrubee Exports Rs. 15,00,000/ -
c) Ajanta Chem & Plast P. Ltd. Rs. 1,62,324/ -
d) Kunjan Enterprises P. Ltd. Rs. 3,00,000/ -
Total Rs. 1,78,87,324/ -
Since, the sundry creditor in the name of above said persons were shown asoutstanding in the books of
assessee company for the last several years andthere being no transactions with the parties concerned
during the last severalyears, the assessee was asked to show cause why the said amount shown assundry
creditors should not be treated as its income as the liability forpayment of the same has ceased and the
parties concerned had no legal rightfor asking payment of the same. The assessee submitted before the
A.O. thatnone of the 4 creditors referred to in the show cause letter, were in respect ofany expenditure or
trading liability incurred by the assessee in the past. It isfurther stated that the outstanding amount in this
case appearing as sundry creditors were in fact representing current account liabilities towards finance
received from them. Accordingly, the assessee objected before the A.O. that it cannot be subjected to tax
u/s. 41(1) as no deduction had been claimed in respect of the amounts at any point of time in the past.
The A.O. further analyzed the facts of the case as under:
i) Skylark Finance Ltd. - Rs.1,59,25,000/ -
The assessee Received Rs.1.5 crore from Skylark Finance Pvt. Ltd. in the financial year ending on
31.03.1996 and the balance outstanding was Rs.1.5 crore. No interest was paid on the amount received during the financial year ending on 31.03.1997. The assessee has received further sum of Rs.9,25,000/ -
from the said party and the outstanding balance as on 31.03.1997 was Rs.1,59,25,000/ -. No interest was
charged by the said Skylark nor the assessee had paid any interest on such huge balance of
Rs.1,59,25,000/ - which had been carry forwarded from year to year and is appearing in the balance sheet
of the assessee company for the year ended on31.03.2007 as liability under the head 'sundry creditors'.
Even after 11 years, the said Skylark Finance Ltd. had not charged any interest and neither paid by the
assessee. The lender had not taken any action for recovery of the said amount. In 11 years, there is no
transaction between them. The A.O. opined that the liability in respect of the said sum had come to an
end. Thus, there is a cessation of liability to pay the above said creditor. The A.O. wrote a letter to M/s.
Skylark Finance Ltd. on 20.11.2009 to furnish the copy of ledger account of the assessee company from
the books for the year ended 31.03.2005, 31.03.2006, 31.03.2007 and 31.03.2008. In response to the
said letter, Shri Ketan Shah, Advocate of Skylark Finance Ltd. has filed a letter dated 25.11.2009. The
relevant portion of the said letter is reproduced as under:
"In reference to the above, as per the instruction given to me, I say that the Assessed is not filing any
income -tax return since the company has already been closed and made defunct and the last assessment
year for which the return filed was probably Asstt. Year 1997 -98. Thus, we say that since the company is
defunct under Section 560 of the Companies Act, I say that no details are available on our record."
It is evident from the reply of the creditor that the company has closed its business and become defunct
since A.Y. 97 -98 and that the name of the company has been struck of u/s.560 of the Companies Act.
Thus, it is quite obvious that the Skylark Finance Ltd. is now no more in existence and therefore, the
assessee's liability in so far as the money due to the said party to the extent of Rs.1,59,25,000/ - has
ceased. The ld. A.O. further held that there is no dispute over the fact that the amount in question was
received by the assessee in the course of its trade. By reason of cessation of liability, the assessee is
enriched by an amount of Rs.1,59,25,000/ - since the amount in question was originally received in
connection with and in the course of the assessee's business, the benefit derived by the assessee on
account of cessation of liability is taxable as its income. The same is taxable in view of the provisions of
Section 28(iv) of the IT Act. The argument made by the appellant before the A.O. that amount in question
was not claimed deduction as expenditure in any of the earlier years and therefore, the same cannot
betaxed u/s.41(1) is devoid of any merit. He relied upon the decision of Hon'bleSupreme Court in case of
CIT vs. T.V.Sundaram Iyengar and Sons Ltd., 222ITR 344 (SC). The Hon'ble Supreme Court after referring
various case laws,in the aforesaid case had observed as under:
"The assessee had received deposits in the course of its business which were originally treated as capital
receipts. Some of the deposits were neither claimed by nor returned to the depositors. There is no dispute
that the deposits were received in the course of the carrying on of the business of the assessee. The only
point to be decided is that even though the deposits were of capital nature at the point of time of receipt
by the assessee, could their character change by efflux of time.
In other trading transaction, even though it is not taxable in the year of receipt as being of revenue
character, the amount changes its character when the amount becomes the assessee's own money
because of limitation or by any other statutory or contractual right. When such a thing happens,
commonsense demands that the amount should be treated as income of the assessee."
By considering the Hon'ble Supreme Court decision, the A.O. added this in assessee's income u/s. 28(iv)
of the IT Act and same is also taxable u/s.41 (1).
ii) Mrubee Exports Imports Pvt. Ltd. Rs.15,00,000/ -
The assessee had shown closing balance of Rs.20,00,000/ - in the name of assessee as on 31.03.1996.
During the financial year ended 31.03.1997, there is repayment of Rs.5,00,000/ - and an amount of
Rs.15,00,000/ - is shown as payable to the said party as on 31.03.1997. From 01.04.1997 onwards the
sum of balance of Rs.15 lacs was carry forwarded from year to year and was appearing in the balance
sheet of the assessee company. No interest had been charged by the assessee company nor the assessee
company had paid any interest on the said balance. There has been no transaction between the parties.
The ld. A.O. held that the liability had ceased for the reasons mentioned in the preceding paragraphs in
this case. The amount in question is therefore, liable to tax in the hands of the assessee as income u/s. 28
(iv) by relying upon the decision of Hon'ble Supreme Court in case of CIT vs. T.V.Sundaram Iyengar And
iii) Kunian Enterprises P. Ltd. - 3,00,000/ -
The A.O. observed that the amount was received to him during the F.Y. 199697 and the closing balance as
on 31.03.1997 was Rs.3,00,000/ -. Here also the said balance had been carry forwarded from 01.04.1997
and the same appeared in the balance sheet as on 31.03.2007 also. No interest has been paid or provided
or charged. There had been no transaction between the parties. The liability has come to an end because
as mentioned in the preceding para, the party has not taken any action for recovery of the demand and it
cannot now initiate any action. The amount in question has been received in the course of the business of
the assessee for the reason mentioned in the preceding para dealing with the liability in the case of
Skylark Finance Ltd. this amount was also chargeable to income tax u/s. 28(iv) of the IT Act.
iv) Ananta Chem. & Plastic P. Ltd. Rs.1,62,324/ -
The assessee had filed a copy of the audited profit and loss account and balance sheet of Ananta Chem. &
Plastic P. Ltd. for the year ended31.03.2007. In the balance sheet of the assessee company the name of
the said Ananta Chem & Plast. P. Ltd. appears under the head 'sundry creditors' and an amount of
Rs.1,62,324/ - has been shown as liability to the said company. However, on perusal of the balance sheet
particularly, Schedule VII of Ananta Chem. & PLast. P. Ltd., there is no money recoverable from the
assessee company as on 31.03.2007. As per the said Schedule VII giving list of loans & advances an
amount of Rs.1,58,072/ - was recoverable from the assessee Anugraha Chemicals P. Ltd. However, during
the year ended 31.03.2007, as per the said schedule, no amount is due from the assessee. In other
words, the liability has been discharged either by payment or otherwise. As the liability has come to an
end during the year, the same is taxable as income of the assessee for this year u/s.28(iv) r.w.s. 41(1) of
the I.T. Act. The ld. A.O. again relied upon the Hon'ble Supreme Court decision in case of CIT vs.
T.V.Sundaram Iyengar And Sons (supra). Thus, total addition of Rs.1,78,87,324/ - made in the income of
Being aggrieved by the order of the A.O., the assessee carried the matter before the CIT(A) who had partly allowed the appeal by observing as under:
2.3 I have considered the facts of the case and the submissions of the appellant. I am inclined to accept the contentions of the appellant based on facts and duly supported by evidences and legal proposition.
The A.O. cannot assume the power of the businessman and unilaterally decideabout how to conduct
business, which liability still exist etc, The A.O has power to investigate all the transactions of an assessee
keeping in view various business expediency of such business from businessman's angle. The appellant's
claim that majority of the outstanding amount of Rs. l,78,87,324/ -(except that of Ajanta Chem & Plast
Pvt. Ltd.) is in respect of money borrowed to advance a loan to M/s. Ambica Mills and M/s. Shatmurti Inv.
& Trading Pvt. Ltd. is supported by outstanding balance shown against them in balance sheet. The balance
of M/s. Ambica Mills is Rs. 1,41,75,626/ - while that of M/s. Shatmurti is Rs. 30,10,478/ -. Further, the
appellant was dealing in the business of trading of textiles related to Ambica Mills and such kind of
advancement of loan was a normal business transaction which were used by assessee in such trade to
further/enhance their business. However, because of certain problems and financial constraint, both these
parties had gone under liquidities. The appellant being secured creditor filed a case for recovery of amount
through liquidator. The appellant submitted copy of a letter dt: 01 -10 -09 from Shri Prashant J. Gatha,
C.A. of Gatha & co, A'bad stating therein that claim of appellant in form No. 8 and 13 for the charge
created by Shri Ambica Mills Ltd. (in liq.) for original principal loan amount of Rs. 1,75,00,000/ - + interest
thereon Rs. 82,04,019/ - = Rs. 2,57,04,019 for the charge created on the office premise of M/s. Ambica
Mills Ltd. situated at 122, Maker's Chambers, Nariman Point is filed. The appellant also filed a copy of Civil
Suit No. 5028 of 1997 filed by M/s. Shatmurti Investment and Trading Pvt. Ltd., against M/s. Ambica Mills
Ltd. for an amount of Rs. 1,14,12,473/ - to substantiate that it is also facing same problem as that of
appellant and therefore, not able to pay back to appellant. The appellant submitted copies of confirmation
from Skylark Finance Ltd. (PAN AACCS9634G) showing outstanding balance as on 31 -3 -98 from the books
of Skylark Finance Ltd. (Reference of ledger page No. 24) notarised true copy dt: 30 -11 -09 to substantiate
the claim that appellant still treat it as outstanding and M/s. Skylark has not intimated the appellant about
its closure or write off. Further, appellant objected that the A.O. has done inquiry behind the appellant and
has not afforded any opportunity to cross examine Shri Ketan Shah.
I am further inclined to accept the contention of the appellant that ratio of Hon'ble Supreme Court
judgement, 222 ITR 344 is not applicable in the case of appellant being there were different facts. The
assessee in that case voluntarily credited deposit in its P&L A/c. whereas appellant has not done any such
thing in a bonafide belief that whatever amount will be recovered from M/s. Ambica Mils, the same will be
The other aspect is related to argument contended during appellate proceedings by the appellant that
without prejudice if AO's contention is accepted, this will not give any benefit in real manner to appellant
to enjoy such benefit or advantage. If considered from the angle of real income theory, the A.O. then treat
the corresponding loans and advances to M/s. Ambica Mills and M/s. Shatmurti Inv. & Trading Pvt. Ltd. as
bad debt since the same are also not recoverable since period as that outstanding creditor. This will give
NIL addition. The A,O. cannot unilateraly take only one side of same transaction while not considering
other legal side. Further, if the A.O, is invoking limitation act for such outstanding creditors then why not
such additions were made in any of the earlier year. These transactions are releated to F.Y. 96 -97 and
why A.O. as chosen only this year though facts and circumstances were existing in earlier years also which
were accepted by Deptt. as such. It is, therefore, the A.O. abruptly made such addition without
apprecaiting the facts and legal proposition and does not amount to prooper asst. of income of the
appellant as per settled principle of jurisprudence. The A.O. can invoke such section if appellant recover
some amount or if he receives such information of write off of debt from these three parties after
confronting the appellant. In any case, if appellant is not returning such amount, it has to be reflected as
income by appellant but the time factor is important as the same has to be viewed from the angle of
I am inclined to accept such contentions of the appellant. As per established real income theory, such
additions and asst. of income of theappellant is not tenable in the eyes of law. Therefore, additions u/s. 41
(1) of the Act in respect of following three parties are directed to be deleted: -
M/s. Skylark Finance Ltd. Rs. 1,59,25,000
M/s. Mrubee Export Rs. 15,00,000
M/s. Kunjaii Entp. Pvt. Ltd. Rs. 3,00,000
However, in respect of M/s. Ananta Chem. & Plast Pvt. Ltd., the appellant has shown with evidence as
discussed above that the outstanding balance of Rs. 1,62,324/ - is not more than two years old as per
accounts related to these parties, but the appellant has not submitted any evidence or controverted the
A.O's finding that as per the balance sheet of M/s. Ananta Chem. & Plastic P. Ltd. for the year ending 31 -
3 -07, no such amount is shown due from appellant. The appellant has not filed any confirmation from such party or made any satisfactory explanation. It is, therefore, the A.O. is justified in invoking section
41(1) of the Act, based on factual finding in respect of this party and addition of Rs. 1,62,324/ - is therefore, upheld.
In Conclusion, the ground of appeal appellant is partly allowed where relief of Rs.1,77,25,000/ - is given in
respect of three parties and upholding the addition of Rs. 1,62,324/ -.";