Limitation of time

Limitation of time is not a determining factor in matters relating to remission or cessation of liabilities

Decided by:. ITAT, `D’ BENCH, MUMBAI

In The case of: DSA Engineers (Bombay) v ITO

Appeal No. : ITA NO. 5354/Mum/2007

Decided on: March 12, 2009

SUMMARY OF CASE LAW

When the assessee continues to reflect or record the liabilities as still payable to the creditors and he decides to not to write them off unilaterally, the AO has higher levels of responsibility and has to establish with evidence that the said book entries are wrong or not bona fide for invoking the provisions of section 41(1) of the Income-tax Act, 1961.

RELEVENT PARAGRAPH

9. From the rival positions of both the parties as well as the provisions of section 41(1) and the legal propositions of various judicial fora, the following issues have emerged. They are: (a) the issue of limitation of period of three years; (b) the issue of discharge of onus, when the assessee has not unilaterally written them off; (c) the issue of unilateral write off for the assessments of the post amendment period i.e. 1.4.1997. We shall proceed to analyse one by one in the succeeding paragraphs.

(a). Regarding the issue of limitation of three years; it is noticed that there is no such limitation provided in section 41(1) or its Explanation 1. Most probably, the revenue has considered the period of 3 three years as reasonable duration for deciding the cessation of liabilities on ad-hoc basis. Other wise the revenue orders do not contain any rationale in support of such period. Delhi Bench decision in the case of M/s Himlaya Refrigeration & Air conditioning Co P Ltd (91 TTJ 296) (Del) is found relevant in this regard and the said order concluded by stating that in the absence of any evidence of cessation of liabilities, mere fact that the liabilities were outstanding for more than three years and were time barred, was not sufficient ground for addition under section 41(1) of the Act. Further, the Ahmadabad Bench of the Tribunal held in the case of New Commercial Mills Co Ltd (73 TTJ 893) that in the absence of cogent reason and material to come to conclusion that the liabilities outstanding for ten to fifteen years have ceased in the year under consideration and the same cannot be charged to tax u/s 41(1). Further, the Mumbai Bench Tribunal held in the case of Thomas cook (India) Ltd (103 ITD 119) that the amounts in the unclaimed balances accounts and suspense accounts, which had become time barred and unilaterally written back by the assessee are not chargeable to tax as there was no cessation of liabilities. Thus, in the light of the above, if the revenue’s proposal is favoured by us, it will effectively amounts to supporting a proposition that all the unclaimed liabilities, which are reflected in the books for the period longer than three years case, shall be the deemed profits of the assessee u/s 41(1) of the Act and this view does not have the support of the Income Tax Act. As such the limitation of time is not a determining factor in the matters relating to remission or cessation of liabilities, the view supported by the apex court’s judgment in the case of M/s Kesaria Tea Co Ltd (supra). This judgment in the case of M/s Kesaria Tea Co Ltd (supra) was delivered after the following the apex court judgment in the case of M/s Sagauli sugar Works Pvt. Ltd (supra) and after distinguishing the judgment in the case of T V S Sundaram Iyangar & Sons Ltd (222 TTR 344).

(b). Regarding the issue of discharging of the onus, it is noticed that the provisions of section 41(1) provides for charging of certain benefits, which are obtained by the assessee in an year as deemed profits. Under the circumstances, where the assessee disputes the obtaining of the benefits, the AO is under statutory obligation to establish the same by gathering evidences in favour of such accrual of benefits. Further, when, the assessee continues to reflect or record the liabilities as still payable to the creditors and assessee decided to not to write them off unilaterally, the AO has higher levels of responsibility and hence, he has to establish with evidence that the said book entries are wrong or not bona fide and thus, the AO is under the obligation to discharge the onus in this regard. This view is supported by the decisions of the Tribunal in the cases of Sri Vardhman Overseas Ltd (24 SOT 393) (Del) and Uttam Air Products P Ltd (99 TTJ 718) relied on by the assessee and said decisions contain are relevant for the proposition that the onus is on the revenue to prove that the liabilities have ceased finally and there is no possibility of their revival.

(c) Regarding the issue of unilateral write off for the assessments of the post amendment period i.e. 1.4.1997, it is noticed that the Explanation 1 was brought into statute by the Finance (No 2) Act 1996 w e f 1.4.1997. The judgments of apex court’s judgment in the case of M/s Kesaria Tea Co Ltd (supra) and Sugauli Sugar Works P Ltd (supra) or Jurisdictional high court’s judgment in the case of M/s Chougule and Co P Ltd (189ITR 473) and other cases cited by the assessee, were delivered involving the AYs prior to pre-amendment period. All the judgments uniformly conclude that the mere unilateral transfer entry in the accounts does not confer any benefit to the assessee and therefore, revenue cannot invoke section 41(1) of the Act. Further, the instant year, being the AY 2003-04, relates to the post amendment period and the said Explanation provides for including the case of obtaining of the benefit by way of remission or cessation of any liability by a unilateral act by way of writing off such liability in the accounts of the assessee, as the case of the deemed profits. In other wards, the assessee’s case, being the one where the alleged liabilities are not unilaterally writing off, the requirements of the Explanation is not met and therefore, it cannot be considered as the case of obtaining of the benefit during the year under consideration. Although the following is inapplicable to assessee’s case, the act of ‘unilateral write off’ of the liabilities assumes great significance for the post amendment assessments for deciding the finality of obtaining of the benefit specified in the section 41(1) of the Act. It is even more significant when the AO has not established that the liabilities have ceased and finally ceased and ceased with no chance of revival of the claim by the creditors in future.

10. On considering that the afore said judgments are delivered favoring the concerned assessees on the facts that they decided to write off unilaterally the liabilities in the books, the facts in the instant case are juxtapose to those cases, we find the said judgments have application to the present appeal in so far as the effect of such unilateral transfer entries in the books. In the absence such unilateral entries in books of the instant assessee, it cannot be held that the AO has correctly applied the provisions of section 14(1) and its Explanation 1. Further, the AO has neither disproved the assessee’s claims relating to the impugned liabilities nor discharged its onus to prove that there is cessation of liabilities and the assessee obtained the benefits finally. Therefore, the arguments of the revenue have to be dismissed. In such circumstances and when the assessee has not unilaterally written off the said liabilities, the question of taking such outstanding liabilities as deemed profits of the year does not arise. Therefore, the impugned order of the CTT (A) has to be set a side in this regard. Accordingly, grounds 1 & 2 of the appeal are allowed.