IN INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E, MUMBAI BEFORE SHRI RAJENDRA, HON BLE ACCOUNTANT MEMBER AND SHRI C.N. PRASAD, HON BLE JUDICIAL MEMBER ITA No. 4423/MUM/2012 (Asst. Year : 2009-10) ACIT, Central Circle-34, Vs. Sharad S. Ruia, Mumbai. D-704,Vastu Park, Evershine Nagar, Malad (W), Mumbai - 95 PAN No. AAEPR 0211 Q (Appellant) (Respondent) Assessee by : Shri S.C. Tiwari Adv. Department By : Shri Manjunatha Swamy - DR Date of hearing : 21/07/2016. Date of pronouncement : 19/10/2016. ORDER PER C.N. PRASAD, JUDICIAL MEMBER This appeal is filed by Revenue against order of ld.CIT(A)-41, Mumbai dated 25/04/2012 for Assessment Year 2009-10 arising out of assessment order passed under section 143(3) of Act. 2. only grievance of Revenue in its appeal is that ld.CIT(A) erred in deleting addition of Rs. 1,27,00,000/- made on account of cessation of liability. 3. Brief facts of case are that assessee is individual, who filed his return of income on 27/10/2009 declaring income of Rs. 1,88,840/-. assessment was completed by order dated NIL under section 2 ITA No. 4423/MUM/2012 143(3) determining total income at Rs. 1,29,15,922/-. While completing assessment, Assessing Officer added Rs.1,27,00,000/- as income of assessee by treating it as cessation of liability. Assessing Officer observed that assessee has shown this amount as due to M/s. Nirma Consultancy Pvt. Ltd. under head liabilities . He also observed that assessee s son is Director of M/s. Nirma Plastic Tiles Pvt. Ltd. and M/s. Nirma Plastic Tiles Pvt. Ltd. is defunct company and assessee need not pay back liability to said company. Therefore, he was of view that there is cessation of liability and accordingly, made addition. 4. On appeal, ld. CIT(A) considering fact that assessee has repaid liability during current year and since assessee has not claimed said amount as deduction and since liability is outstanding for last ten years and assessee s son is Director in company, he held that it cannot be reason for invoking provisions of section 41(1) of Act. 5. Departmental Representative supported order of Assessing Officer, whereas Authorized Representative of assessee placed reliance on order of ld. CIT(A). 6. We have heard rival submissions and perused orders of authorities below. This issue has been elaborately considered by ld. CIT(A) with reference to averments of Assessing Officer, submissions of assessee and evidence placed on record. ld. CIT(A) held that there is no cessation of liability and therefore provisions of section 41(1) of Act cannot be invoked by observing as under:- 2.4 I have considered submissions of appellant, order of A.O. and facts of case carefully, it is noticed that A.O. 3 ITA No. 4423/MUM/2012 has observed that assessee has shown liability of Rs. 1.27 crores which is outstanding since A.Y. 2001-02. Secondly, A.O. has observed that M/s. Nirma Plastic Tiles Pvt. Ltd. is defunct company and therefore virtually non-existence. Thirdly, it was noticed that company was owned by son of assessee. In view of these facts, A.O. has given shown cause notice to assessee to explain why outstanding liability may not be treated as ceased to exist and added back to taxable income. In response to this show cause notice, A.R. of appellant has submitted its reply before A.O. and submitted confirmations of M/s. Nirma Plastic Tiles Pvt. Ltd. along with balance sheet of company and argued that liability shown by assessee is reflected in balance sheet of company and both parties are reflecting this entry in their books of accounts and no one has written off, therefore provision of section 41(1) are not applicable. But A.O. has not accepted reply of assessee and held that company was defunct company and owned by son of assessee and liability was outstanding in A.Y. 2001-02, therefore treated it as ceased to exist and added back to taxable income. 2.5 On other hand, A.R. of appellant has submitted that confirmations of company along with balance sheet were duly submitted before A.O. to prove that outstanding liability of assessee is duly reflected in balance sheet of company and it was not written off by any of party, therefore provision of section 41(1) is not applicable. A.R. of appellant has also relied on decision of Hon'ble Supreme Court in case of Suguali Sugar Works Pvt. Ltd. (Supra) and also decision of Hon'ble Delhi High Court in case of CIT Vs. Hotline Electronics Ltd. in which decision of Hon'ble Supreme Court was relied on. Thus it was argued that facts of present case are squarely covered by Hon'ble Supreme Court, therefore no addition is called for. 2.6 From perusal of submissions of appellant and facts of case it is better to read out provision of section 41which is reproduced as under: "41. Profits chargeable to tax. (1) Where allowance or deduction 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 subsequently 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 4 ITA No. 4423/MUM/2012 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 profession and accordingly chargeable to income-tax as income of previous year, whether business or profession in respect of which allowance or deduction has been made is in existence in that year or not; or (b) .............. . Explanation 1 Explanation 2 .. 2.7 gist of decision of Hon'ble Supreme Court in case of Suguali Sugar Works Pvt. Ltd. which is followed by Hon'ble Delhi High Court in case of CIT vs. Hotline Electronics Ltd. (Supra) is reproduced as under: In our opinion, interpretation placed by Tribunal on Section 41 (1) of Act is in conformity with legal position that unless there is evidence to show that creditor has remitted debt or otherwise by operation of law liability to pay him has ceased, there can be no benefit arising to assessee within meaning of clause (a) of Section 41 (1). Tribunal is also right in its view that unless notices were issued to creditors and they had stated that they have given up claims against assessee, no decision can be taken by income tax authorities, merely on ground that debts remained unpaid in assessee's books for number of years, that liability has ceased or has been remitted. In present case Assessing Officer has not issued "any notice to creditors to confirm from them whether they have given up their dues from assessee. It must be remembered that debts were not written back in assessee's accounts as found by Tribunal. Except for fact that amounts were outstanding there was no material or evidence to show that there was remission or cessation of liability. It is Assessing Officer who has invoked Section 41(1). It is he who has stated that there was remission or cessation of assessee's liability. It was, therefore, incumbent upon him to make inquiry and bring on record material. By virtue of powers vested in him under Section 133(6) or any other provision of Income Tax Act to seek clarification or confirmation from creditors, said material/evidence could have been ascertained. assessee herein is limited company and as per legal position acknowledgment of liability in favour of creditors in its balance sheet extends period of limitation for purpose of Section 18 of Limitation 5 ITA No. 4423/MUM/2012 Act. It is assessee's claim that debts are subsisting and it continues to be liable to pay creditors. It is not open to income tax authorities to draw conclusion that creditors have remitted liability or that liability has otherwise ceased without evidence or material when assessee acknowledges liability in balance sheet and Explanation-l is not applicable. In present case, liability to creditors continues to be shown in assessee's books of accounts and accounts of creditors have not been written back. This finding of fact by Tribunal is not under challenge. " "In CIT v. Sugauli Sugar Works (P) Ltd.(1999) 236 ITR 518, Supreme Court disapproved reasoning of Bombay High Court in CIT v. Bennett Coleman & Co. Ltd. (1993) 201 ITR 1021. In this judgment, Bombay High Court had distinguished its earlier judgment in Kohinoor Mills Co. Ltd. v. CIT (1963) 49 ITR 578 by holding that cessation of liability can take place even as result of unilateral act and where debt has become barred by limitation by operation of law, unilateral act of assessee transferring same to his profit and loss account and thereby treating as his income would attract provisions of Section 41(1) of Act. Bombay High Court had also observed that there was cessation of liability due to expiry of period of limitation to enforce same. Disapproving line of reasoning of Bombay High Court in CIT v. Bennett Coleman & Co. Ltd. (supra) Supreme Court held as under:-"We are unable to accept reasoning of Bombay High Court in that case. Just because assessee makes entry in his books of account unilaterally, he cannot get rid of his liability. question whether liability is actually barred by limitation is not matter which can be decided by considering assessee's case alone but it is matter which has to be decided only if creditor is before concerned authority. In absence of creditor, it is not possible for authority to come to conclusion that debt is barred and has become unenforceable. There may be circumstances which may enable creditor to come with proceeding for enforcement of debt even after expiry of normal period of limitation as provided in Limitation Act. " "It may be observed that in present case, as noted earlier, Assessing Officer has not brought on record any evidence or material, including any statement from creditors, that debts had been extinguished and liability of assessee to pay them has ceased, despite extension of period of limitation by acknowledgment made in assessee's balance sheet. 6 ITA No. 4423/MUM/2012 Section 41(1) (a) cannot be invoked on these facts". 2.8 From plain reading of section 41 it is clear that, following conditions should be fulfilled. d) It should have claimed alleged amount as deduction in respect of loss, expenditure or trading liability in assessment for any year; and e) It should have received 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; and f) That liability has ceased to be' 'payable 2.9 facts of present case are that the' creditor has claimed amount in its balance sheet and confirmation was. also filed' along with balance sheet before A.O. liability has also shown as outstanding in balance sheet of assessee and no party has written off of in books of accounts. No doubt liabilities outstanding since A.Y. 2001-02 and assessee's son is director in company but these facts cannot overrule conditions laid down in provisions of section 41. Moreover, appellant has also submitted that liability has been repaid during current year. Therefore, these three conditions that assessee has not claimed this amount as deduction, secondly liability has not ceased to exist and thirdly it is shown as payable & receivable respectively by both parties. Thus none of condition is fulfilled by assessee. facts of present case are squarely covered by decision of Hon'ble Supreme Court and Hon'ble Delhi High Court (Supra), therefore it is concluded that since liability is outstanding in balance sheet of both parties and there is no information with A.O. that any party has written it off in books of accounts. Therefore merely on basis of that liabilities outstanding for last 10 years and assessee's son is director in company cannot be reason for invoking provision of section 41(1) of LT. Act. Since both parties are reflecting entry in balance sheet and moreover has been repaid in current year, therefore addition made by holding it as liability ceased to exist is not sustainable, hence deleted. Ground of appeal is allowed. 7. On careful reading of ld. CIT(A) s order, we find that neither of parties have been reversed entries in their books of account. None of parties have written off amounts in books of account and it is also fact that assessee has not claimed this amount as deduction, liability has not ceased to exist and this 7 ITA No. 4423/MUM/2012 amount has been shown as payable and receivable by both parties. It is finding of ld. CIT(A) that none of conditions for invoking provisions of section 41(1) have been established by Assessing Officer. It is finding of ld. CIT(A) that simply because liabilities are outstanding for more than 10 years and assessee s son is one of Director s of recipient company, this cannot be reason for invoking provisions of section 41(1) of Act. We endorse this view of ld. CIT(A). Further, we find that assessee also submitted that liability has been discharged during accounting year 2008-09. None of above observations have been reverted by Revenue. In these circumstances, we do not find any valid reason to interfere with order of ld. CIT(A), which is hereby confirmed and we dismiss grounds of appeal of Revenue. 8. In result, appeal of Revenue stands dismissed. Order Pronounced in open Court on 19th October, 2016 Sd/- sd/- (RAJENDRA) (C.N. PRASAD) Accountant Member Judicial Member Dated : 19 t h Oct., 2016. vr/- Copy to: 1. Assessee. 2. Revenue. 3. CIT 4. CIT(A) 5. D.R. 6. Guard file. By order //True Copy// Assistant Registrar I.T.A.T., Mumbai. ACIT, Central Circle-34, Mumbai v. Sharad S. Ruia