Income Tax

No Cessation Liability in Presence of Outstanding Creditor’s Details

The Calcutta High Court^[1], in the case titled PCIT Vs Soorajmul Nagarmull, passed a judgement holding that Cessation Liability is not valid in the presence of Outstanding Creditor’s Details. The case was regarding the appeal filed by the  revenue u/s 260A of the Act against the order dated 20.07.2018 passed by the ITAT “B” Bench Kolkata (Tribunal) for the assessment year 2001-2002. The article discusses the facts, issues, contentions of the parties and the judgement passed by the court to provide clarity regarding the said judgement 

Facts of the Case

• The Calcutta High Court’s division bench, in this case, didn’t dismiss Section 260A appeal even after not being satisfied with the grounds for condonation of 627 days as the said case involved an important question of law wherein the ITAT had allowed assessees’ appeal regarding the adding Rs 12.63 crore u/s 41(1) for interest payable appearing under the current head liability.
• The assessee filed the ITR for the AY 2001-02, showing a loss of Rs. 18,740/-. The case was reopened by the issue of a notice u/s Section 148 of the Act wherein the AO observed that the assessee couldn’t include the P & L of Shri Hanuman Jute Mills and Siliguri Godown and of the input division and Vardhal Lubricant while preparing the ITR as the figures in respect of the same wasn’t received by the assessee. Therefore the assessee filed a revised return reporting a loss of Rs. 83,923/- responding to the notice issued by the AO. Subsequently, notices were issued u/s 143(2) & 142(1) of the IT Act, followed by a discussion of the case with the AR of the assessee, after which the assessee was called upon for furnishing the P& L accounts and balance sheets along with the supporting evidences of expenses of each branch for the AYs 2000-01 – 2005-06 together with the business activities details of the done by each unit.

• Upon the completion of the assessment, the AO pointed out the failure on the part of the assessee to submit any of the details of the branches and the head office and has submitted a list of unsecured loan creditors with the amount in respect of the same vide the order dated 31.12.2007.
• The AO further recorded that there wasn’t any confirmation regarding the account of the said loan creditors as of 15.11.2007. The assessee had shown the current liability amounting to Rs. 12 97, 47,322/- in the balance sheet, so the assessee was asked to provide names and addresses to whom such interest was payable along with calling for other connected details.
• Another observation recorded by the AO was regarding the list of loan creditors submitted by the assessee mentioning the interest due and payable to them. The assessee was called upon to explain the reason why the interest payable on the loan shouldn’t be considered as cessation of liability, along with being included in the assessee’s taxable income.
• The response of the assessee regarding the abovementioned question was submitted through a letter dated 31.12.2007, after which the AO had drawn the conclusion that there was an absence of any confirmation or evidence regarding the trading liability and hence as it is a cessation of trading liability per Sec- 41(1)(a) of the Act, and deemed as profit & gain of business or profession for the AY considered in the case. 
• The appellant filed an appeal before the CIT (A ) – XX, Kolkata [CIT(A)] wherein the CIT(A) deleted the addition through the order dated 31.03.2008, which was challenged by the revenue through filing an appeal before the Kolkata tribunal that set aside the orders passed by the CIT(A) along with remanding the matter back to the AO for fresh decision. The AO, by the order dated 30.03.2015, sustained the earlier addition. The assessee preferred to appeal before the CIT (Appeals) – 10, Kolkata (CIT(A), upon being aggrieved by the order. The said appeal was allowed by an order dated 18.07.2016 that the revenue had challenged through the appeal before the tribunal, that was dismissed by the impugned order.

Issues

1. Whether the deletion of the addition of Rs. 12 97 47,322/- made by the AO on account of the cessation of liability by the ITAT correct in law? 
2. Whether the order of the Learned ITAT has failed to appreciate the essential conditions u/s 41(1) of the IT Act 1961?
3. Whether the Tribunal was right in law in holding that there was no cessation of the assessee’s liability to pay the creditors and observing the addition of Rs. 12,97,47,322/ made the Assessing Officer as unjustified
4. Whether Learned Income Tax Appellate Tribunal is perverse as it held that assessee’s liability on account of trading liability existent without taking into consideration the provisions of the Limitation Act, 1963?

Contentions of Parties

• The assessee contended that the AO failed to appreciate the existence of evidence placed on record showcasing the payments made by the assessee firm to its loan creditors in respect of the outstanding liabilities for interest, and the liability continued to reflect as an outstanding liability in the subsequent balance sheets in the subsequent years, and there wasn’t cessation of any potion for the AY under consideration as per the meaning of Section 41(1)(a) of the Act

• Another contention of the appellant was that the burden of proof for satisfying the conditions of Section 41(1)(a) was on the respondent instead of the appellant, and such burden hasn’t been discharged by the revenue, and there was no material on record regarding the conditions referred to in the said provision been satisfied, it can’t be held to be the cessation of trading liability 
• Further, the assessees contended that the liability on interest payable to numerous persons, the name of whom were  furnished, was continuing for a very long time; without any change, at least since 1988-89, corresponding to the assessment year 1989-1990, wherein most of the creditors were associates, relations, and family members of the partners of the assessing firm; the details of all the creditors were available in the old taxation records of the assessee firm; Due to various continuing disputes amongst the partners for more than 30 yrs, the liability on account of loans borrowed from them and/or interest payable thereon, hadn’t been discharged by the assessee;
• The fact that disputes amongst the partners still continue was placed on record of the IT Department, and the assessee was unable even to file its complete tax return over the years, as several partners, including their family members who controlled different business activities of the assessee failed in providing details to its head office; none of the creditors that were named in the list furnished by the assessee has ever granted remission and/or any of the amounts due and bound to be paid to them, and the assessee paid a certain amount of the outstanding liability by cheque, and the evidence supporting the same had already been placed on record by the assessee.
• The assessee also placed a proposition that the debt can’t be extinguished due to the expiry of the period of limitation, supporting the same through relying on the decision of the Apex Court in CIT Vs Sugauli Sugar Works Private Limited and Chief Commissioner of Income Tax Vs Kesaria Tea Company
• The complete details of the outstanding creditors as of 31.03.2001 was duly submitted by the appellant, which was once again filed upon the matter being remanded by the tribunal to the AO for a fresh decision along with the explanation regarding the same being outstanding for twenty years, furnished copies of audited financial statements for the FYs 2003-04 to 2009-10 along with of 22 lists of creditors reflected as outstanding at the year’s end 
• It was further acknowledged by the assessee that the liability in subsequent years till the FY 2010-2011 was written back the same in the books of account and placed the copies of the assessment order u/ s 143(3) for the subsequent years for showing that the AO never drew any adverse inference regarding the outstanding creditors reflected in the balance sheets.
•  The enquiry made by the AO u/s 142 (1) of the Act had been placed on record. Therefore, revenue can’t say that the assessee hasn’t furnished the outstanding creditor’s details. The appellant also furnished details of payments made to creditors after 31st March 2001, which was produced to show that the liabilities still existed at the end of 31st March 2001. It is not disputed that even after being furnished with the full list of creditors, the AO issued notice only to 6 creditors. Directors of the four creditor co. appeared before the AO However; those directors were appointed after 31.03.2001 and did not readily have the necessary information.
• This led the AO to the conclusion that the directors of the four companies were not aware of the transactions, but it is worth noting that none of the persons who had appeared before the AO had contradicted the transactions with the assessee nor said that there weren’t any dues or outstanding payable to them by the assessee
• The assessee also relied on the judgement of Sugauli Sugar; the Apex Court agreed to the view expressed by the High Court of Bombay in J.K. Chemicals Ltd Vs CIT 
• The counsel for the assessee referred to paragraph 12 of the judgment and submitted that the judgement in the case of Bombay Dyeing and Manufacturing Company Limited Vs State of Bombay and Ors, as referred to in the said decision, was pertaining to the statutory liabilities and the decision couldn’t be pressed into service by the tribunal for deciding in favour of the assessee. The question to be decided was if the debtor could cause the cessation or remission of his liability by his own unilateral act.
• The issue was answered by observing that remission must be granted only by the creditors. In Sugauli Sugar, the Hon’ble Supreme Court had agreed to the view expressed by the Bombay High Court in J.K. Chemicals Limited Vs CIT 
• The Revenue contended that the decision in Bombay Dyeing dealt with the statutory liability, and the same couldn’t be taken into consideration for examining the theory of extinguishing the debt.

The Decision of the Calcutta High Court

The court didn’t persuade the submission of the revenue as the entire aspect as regards cessation of liability was analysed by a 5 -judge bench of the Hon’ble Supreme Court, holding that the limitation doesn’t extinguish the debt or precludes its enforcement until and unless the debtor makes a choice avail himself of the defence followed by specifically pleading for it, Therefore, the Bombay Dyeing decision was rightly referred to in Sugauli Sugar Works for the aforesaid legal proposition.

The court appreciated the fact that the AO examined the creditors when they appeared in response to summon and acknowledged the liability and if that principle applies, merely an entry in the books of account made unilaterally in the absence of any by the creditor can’t entitle the debtor for saying that the liability has been extinguished. The court also distinguished between receipt on capital account and other receipts and dismissed the department’s appeal.

The tribunal rightly noted the undisputed factual position, noting that there wasn’t any dispute about the assessee about carrying forward the impugned liability in its books of account for a time span of almost 30yrs without any question being raised by the department in all the intervening assessment years in question.

The ld tribunal also noted that the creditors had given written replies responding to the summons that retaliated their liability and also the fact that the appellant had settled some creditors even after 31.03.2001, thereby fulfilling their duty of providing evidence regarding the existence of the liability at the end of the year.

The assessing officer had miserably failed to establish and prove that there was a cessation of liability Though Explanation 1 -4 Sec- 41(1) has been inserted for treating the cessation or remission of any liability or by a unilateral act on the debtor, the issue shall continue to be litigated.

PCIT-Vs-Soorajmul-Nagarmull-Calcutta-High-Court

Conclusion

The court has analysed the facts and circumstances of the case quite meticulously before holding that the cessation trading liability is invalid if the details of the outstanding creditors are present. The effort of the Court in referring to various precedents to support the decision is commendable. The judgement is expected to provide much-needed clarity on the concept related to the cessation of trading liability u/s 41 (1) of the IT Act.

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