TAXAP/887/2009 1/8 ORDER IN HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL No. 887 of 2009 COMMISSIONER OF INCOME TAX-I - Appellant(s) Versus HARIOM BUILDERS - Opponent(s) Appearance : MR MR BHATT, SR.STANDING COUNSEL WITH MRS MAUNA M BHATT for Appellant None for Opponent CORAM : HONOURABLE MS.JUSTICE H.N.DEVANI and HON'BLE SMT. JUSTICE ABHILASHA KUMARI Date : 07/09/2010 ORAL ORDER (Per: HONOURABLE MS.JUSTICE H.N.DEVANI) 1. In this appeal under section 260 of Income Tax Act, 1961 ( Act ), appellant Revenue has proposed following question: Whether on facts and circumstances of case, and in law, Appellate Tribunal has erred in confirming decision of CIT(A) by deleting additions made by Assessing Officer u/s.41(1) on account of fictitious liability shown in names of M/s. Royal Construction Company, Manubhai Savjibhai Prajapati and M/s. Jyoti Construction? 2. Assessment Year is 2001 02 and relevant accounting period is financial year 01.04.2000 to 31.03.2001. In case of respondent assessee assessment was framed under Downloaded on : Fri Jul 31 09:49:05 IST 2020 TAXAP/887/2009 2/8 ORDER section 143(3) of Act on 29.03.2000 determining total income at Rs.37,75,492/ after making addition of Rs.7,00,000/ on account of unexplained cash credit under section 68 of Act and Rs.16,48,652/ on account of fictitious liabilities under section 41(1) of Act. Aggrieved by additions, assessee preferred appeal before Commissioner (Appeals), who, vide order dated 18.08.2004, allowed appeal. order of Commissioner (Appeals) was carried in appeal before Tribunal who vide order dated 22.11.2002 set aside issuein question with directions to decide same afresh after giving assessee opportunity of hearing. Assessing Officer, thereafter, vide order dated 28.12.2006 framed assessment under section 143(3) read with section 254 of Act making following additions on account of fictitious liabilities under section 41(1) of Act: (i) Rs.4,53,943/ in respect of liabilities of M/s. Royal Builders (ii) Rs.17,994/ in respect of liabilities of Manubhai Savjibhai Prajapati, and (iii) Rs.6,64,558/ in respect of liabilities of M/s. Jyoti Construction 3. Being aggrieved, assessee carried matter in appeal before Commissioner (Appeals), who deleted additions made qua M/s. Royal Builders and M/s. Jyoti Construction. revenue failed in its appeal before Tribunal. 4. Mr. M. R. Bhatt learned senior advocate for appellant assailed impugned order of Tribunal by reiterating Downloaded on : Fri Jul 31 09:49:05 IST 2020 TAXAP/887/2009 3/8 ORDER grounds stated in assessment order. 5. As can be seen from order dated 01.03.2007 made by Commissioner (Appeals), he has observed that for purpose of applicability of section 41(1) of Act, one has to keep in mind that allowance/deduction has been made in respect of trading liability incurred by assessee for earlier assessment year. Subsequently, if benefit is obtained in respect of such trading liability by way of remission or cessation during year in which such event occurred, then value of benefit accruing to assessee is deemed to be profits and gains of business which otherwise would not have been his income. Such value is chargeable to income tax as income of that previous year wherein such benefit has been obtained. Thus, important aspect that is required to be proved is that allowance/deduction had been given in earlier years and during year under consideration, benefit has been obtained. Commissioner (Appeals), upon appreciation of evidence on record, has found that insofar as M/s. Royal Buildings is concerned, assessee had debited liability in name of M/s. Hari Om Construction, sister concern. According to Assessing Officer, liability could not be changed by transferring it to sister concern. However, Commissioner (Appeals) was of opinion that there was no bar against transferring liability. only important aspect that had to be kept in mind was that liability should subsist. Commissioner (Appeals) was of view that since liability in respect of M/s. Royal Buildings was still subsisting in books of account of assessee, there was no question of treating same as `income' under section 41(1) of Act Downloaded on : Fri Jul 31 09:49:05 IST 2020 TAXAP/887/2009 4/8 ORDER for reason that liability had not been extinguished. Insofar as M/s. Jyoti Construction is concerned, it was found that liabilities were written off in financial year 2004 05. According to Commissioner (Appeals), insofar as section 41(1) is concerned, same pertains to liability in respect of which allowance/deduction had been made in earlier assessment year and benefit was obtained in respect of such liability by way of remission/cessation during year in which such event occurred. That in present case, liability was old liability and assessee had written same off in financial year 2004 05. Commissioner (Appeals) was also of view that provisions of section 41 would not be applicable in case where liability is fictitious one and that in case of fictitious liability consequence would be different and addition would be required to be made under other provisions of Act in year in which liability was created in books of accounts and not in between. In aforesaid factual background, Commissioner (Appeals) held that addition in name of M/s. Jyoti Construction was also required to be deleted. 6. Tribunal, in impugned order has, upon appreciation of evidence on record, concurred with findings of fact recorded by Commissioner (Appeals) and has confirmed deletion. 7. Sub section (1) of section 41 of Act insofar as same is relevant for present purpose reads thus: Downloaded on : Fri Jul 31 09:49:05 IST 2020 TAXAP/887/2009 5/8 ORDER 41. Profits chargeable to tax. (1) Where allowance or de- duction has been made in assessment for any year in respect of loss, expenditure or trading liability incurred by assessee (hereinafter referred to as first-mentioned person) and subse- quently during any previous year, (a) first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, amount obtained by such person or value of benefit accruing to him shall be deemed to be profits and gains of business or pro- fession and accordingly chargeable to income tax as income of that previous year, whether business or profession in re- spect of which allowance or deduction has been made is in existence in that year or not; or (b) successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by first-mentioned person or some benefit in respect of trading liability referred to in clause (a) by way of remission or cessation thereof, amount obtained by successor in business or value of ben- efit accruing to successor in business shall be deemed to be profits and gains of business or profession, and accordingly chargeable to income tax as income of that previous year. Explanation 1. For purposes of this sub-section, expres- sion loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof shall include remission or cessation of any liability by unilateral Downloaded on : Fri Jul 31 09:49:05 IST 2020 TAXAP/887/2009 6/8 ORDER act by first mentioned person under clause (a) of succes- sor in business under clause (b) of that sub-section by way of writing off such liability in his accounts. 8. On plain reading of provisions of section 41 of Act, it is apparent that provisions of sub section (1) of section 41(1) would have application only if (i) allowance or deduction had been made, in computation of profits and gains of business or profession, in assessment for any year in respect of loss, expenditure or trading liability incurred by assessee, and (ii) subsequently during any previous year assessee had obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation. Therefore, if there has been any deduction or allowance in respect of loss, expenditure or trading liability, initial test to apply section 41(1) stands satisfied. Thereafter, one has to examine whether assessee had obtained any amount in respect of such loss or expenditure (which amount may be in cash or in any other manner). If earlier allowance or deduction was trading liability, then also, section 41(1) is attracted when assessee obtains subsequently some benefit in respect thereof, by way of remission or cessation of said liability. Examining facts of present case in light of aforesaid statutory provisions, as regards liability in respect of M/s. Royal Builders, assessee had merely transferred same to its sister concern and as such, liability was still subsisting and had not been extinguished. Thus, insofar as first test is concerned, it is apparent that same stands satisfied. Downloaded on : Fri Jul 31 09:49:05 IST 2020 TAXAP/887/2009 7/8 ORDER However, insofar as second test is concerned, it is apparent that in year under consideration assessee has not obtained any benefit in respect of said liability by way of remission or cessation thereof, hence, same is not satisfied. In circumstances, provisions of section 41(1) of Act would not be attracted as regards said liability. Insofar as liability in respect of M/s. Jyoti Construction is concerned, both, Commissioner (Appeals) as well as Tribunal have recorded findings of fact to effect that same had been written off in financial year 2004 05. In circumstances, liability would cease to exist in year in which same have been written off, which would be year in which assessee has obtained some benefit in respect of such liability by way of remission or cessation viz., 2004 05. Therefore, in year under consideration, viz., assessment year 2001 02 second test has not been satisfied, and as such question of invoking provisions of section 41(1) of Act would not arise at all. If at all liability was fictitious one, as is case of revenue, same could not have been allowed as deduction in year in which it had been claimed and as such addition/disallowance was required to be made in year in which it was claimed. However, once such claim had been allowed, sub section (1) of section 41 of Act could have been invoked only in year when some benefit was obtained qua said liability by way of remission or cessation. Since neither of two eventualities has occurred in year under consideration, there was no question of invoking provisions of section 41(1) of Act. 9. In view of above discussion, it is not possible to state that Downloaded on : Fri Jul 31 09:49:05 IST 2020 TAXAP/887/2009 8/8 ORDER impugned order of Tribunal suffers from any legal infirmity so as to warrant any interference. No question of law, as proposed or otherwise, much less substantial question of law, can be said to arise out of impugned order of Tribunal. appeal is, accordingly, dismissed. (Harsha Devani, J.) (Smt.Abhilasha Kumari, J.) (sunil) Commissioner of Income-tax-I v. Hariom Builder