Friday 31 May 2013

Whether enforcement of a debt being barred by limitation, ipso facto leads to conclusion that there is cessation or remission of liability - ruled against Revenue: HC

THE issues before the Court are - Whether enforcement of a debt being barred by limitation, ipso facto leads to the conclusion that there is cessation or remission of liability; Whether in order to attract the provisions of Section 41(1), there should be an irrevocable cession of liability without any possibility of the same being revived; Whether section 41(1) also includes the benefit obtained by an assessee by virtue of remission or cessation of a liability and Whether there can be a cession of liability in case, where the debt has been acknowledged by the assessee company, has already been accepted by the revenue. And the verdict goes against the Revenue.

Facts of the case
Assessee, an Indian company, was engaged in the business of trading in agricultural commodities, however, it had not conducted any business in the year 2007-2008. It had filed its ROI on 25.09.2008, for the AY 2008-2009 showing a loss and declaring taxable income as nil. The return was initially accepted u/s 143(1), however, subsequently, the return was selected for scrutiny. During assessment, AO had examined the balance sheet of the assessee company and noted that the balance sheet disclosed a sum of Rs. 1 ,57,54,011 /- as sundry creditors, which were outstanding for several years. In the case of M/s Elephanta Oil & Vanaspati Ltd., the amount of Rs. 1,53,48,850/- was outstanding in the books since 1984-1985. The AO called upon the assessee to provide confirmations from the creditors regarding the balance outstanding to their credit. The assessee filed a balance confirmation from M/s Ramji Lal Investments (P) Ltd. but could not provide confirmations from any of the other aforementioned creditors. The AO had also issued notices u/s 133(6) to the creditors, for the purpose of verifying the credit balance outstanding against their names. The notice issued to M/s Elephanta Oil & Vanaspati Ltd., M/s Geo- chem Laboratories (P) Ltd., M/s Jain House, Calcutta and Sh. Sohan Lal Ghai were returned un-served. The AO had accepted the amount of Rs. 38,874/- outstanding to the credit of M/s Ramji Lal Investments (P) Ltd., but held that the balance liabilities in respect of other sundry creditors, which were lying unclaimed since several years, were liable to be added back to the income of the assessee u/s 41(1). The AO was of the view that there was cessation of these liabilities as there was no possibility of the creditors claiming the same in the near future. Accordingly, the aggregate of the balances outstanding to the credit of the aforementioned four creditors were added back to the income of the assessee.
On appeal, CIT( A) had pointed out that in respect of the amount payable to M/s Elephanta Oil & Vanaspati Ltd., the assessee explained that M/s Elephanta Oil & Vanaspati Ltd. also owed a sum of Rs. 1,57,10,690.53/- to the assessee which was reflected as receivable in the balance sheet of the assessee company and thus in net terms M/s Elephanta Oil & Vanaspati Ltd. owed the assessee company a sum of Rs. 3,61,840.78. The amount payable to M/s Elephanta Oil & Vanaspati Ltd. was liable to be adjusted against the amount receivable from M/s Elephanta Oil & Vanaspati Ltd. and thus there could not be any cessation of liability towards the said creditor. The assessee company also provided its final accounts for the years ended on 31.03.2009 and 31.03.2010 which indicated the balances outstanding to the various sundry creditors continued to be reflected in the balance sheets of the assessee company for the subsequent years. It was, thus, contended by the assessee that, since the assessee continued to acknowledge the credit balances in the subsequent period also, there could be no cessation of its liability to pay the creditors. The CIT( A) had deleted the addition made by the AO with regard to the balance outstanding to the credit of M/s Geo- chem Laboratories (P) Ltd., M/s Jain House, Calcutta and Sh. Sohan Lal Ghai on the ground that the assessee had continued to reflect the liabilities against the names of these creditors in the subsequent period i.e. in the final accounts for the years ended on 31.03.2009 and 31.03.2010. It was held that as the assessee company continued to reflect amounts payable to those creditors, there was no cessation of liability and consequently, the provisions of Section 41(1) were inapplicable. However, in the case of M/s Elephanta Oil & Vanaspati Ltd., the CIT (A) upheld the addition made by the AO, not on the ground that there was cessation of liability, but on the basis that the assessee had failed to establish the genuineness of the liability towards M/s Elephanta Oil & Vanaspati Ltd. The decision of the CIT (A) was based on the fact that the assessee had not been able to trace or produce any evidence with regard to the bank guarantees on account of which the liability to pay a sum of Rs. 1,53,48,850/- had arisen. The contention of the assessee that the transaction related back to the year 1984-1985 and had been accepted as genuine by the revenue through a series of scrutiny assessment made in the past, was not accepted. The plea of the assessee that, since the matter related to 1984-1985, the assessee could not produce the evidence of the initial transaction, was also not found to be acceptable by the CIT (A). On further appeal, Tribunal had accepted the contention of the assessee that a sum of Rs. 1,57,10,690.53 was owed by M/s Elephanta Oil & Vanaspati Ltd. to the assessee company and thus, the net effect of the same would be that no amount would be payable by the assessee to M/s Elephanta Oil & Vanaspati Ltd. and a sum of Rs. 3,61,840.78 would be receivable after setting off the amount of Rs. 1,53,48,849/- which was standing to the credit of M/s Elephanta Oil & Vanaspati Ltd. The Tribunal was of the view that it was not correct to only accept the figure relating to the amount that was receivable by the assessee company while rejecting the amount payable by the assessee company to M/s Elephanta Oil & Vanaspati Ltd.
Before HC, Revenue's counsel had contended that there has been a cessation of liability of Rs. 1 ,53,48,849 /- and the Tribunal had erred in setting aside the addition made on that account. It was further urged that the Tribunal was in error in taking note of the amount receivable from M/s Elephanta Oil & Vanaspati Ltd. while, considering the provisions of Section 41(1). Whilst, it was conceded that the genuineness of the initial transaction was not in challenge, it was contended that the fact that the amount payable to M/s Elephanta Oil & Vanaspati Ltd. had been outstanding for 25 years indicated that the liability had ceased.
Held that,
++ the genuineness of the transaction entered into by the assessee in 1984-85 with M/s Elephanta Oils & Vanaspati Ltd. is not being assailed before us and the only controversy sought to be raised before us is whether there has been cessation of liability owed by the assessee to M/s Elephanta Oil & Vanaspati Ltd. In our view, that question doesn't arise in the present case since the decision of the CIT (A) that there is no cession of liability in cases where the debt has been acknowledged by the assessee company has already been accepted by the revenue. However, as the question whether there is any cessation of liability in the relevant previous year warranting an addition in terms of Section 41(1) has been urged on behalf of the revenue, we consider it appropriate to examine the same;
++ indisputably, Explanation 1 to section 41(1), which was inserted, w.e.f . 01.04.1997 is not applicable, as the assessee has not written off the liability to pay M/s Elephanta Oil & Vanaspati Ltd. in its books of accounts. The SC in the case of CIT v. Sugauli Sugar Works (P). Ltd.: has held that section 41(1) contemplates obtaining by the assessee an amount either in cash or any other manner or any benefit by way of cessation or remission of liability. In order to come within the sweep of section 41(1) it is necessary that the benefit derived by an assessee results from cessation or remission of a trading liability. It was observed by SC in the decision of CIT v. Sugauli Sugar Works (P.) Ltd. That it will be seen that the following words in the section are important: ‘the assessee 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, the amount obtained by him'. Thus, the section contemplates obtaining by the assessee of an amount either in cash or in any other manner whatsoever or a benefit by way of remission or cessation and it should be of a particular amount obtained by him. Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is sine qua non for application of this section;
++ the only issue that needs to be considered is whether the liability towards M/s Elephanta Oil & Vanaspati Ltd. has ceased on account of efflux of time. The SC in the case of ‘Bombay Dyeing and Manufacturing Co. Ltd.' v. State of Bombay: AIR 1958 SC 328 has clearly held that even in cases where the remedy of a creditor is barred by limitation the debt itself is not extinguished but merely becomes unenforceable. The Court observed that the position then is that, under the law, a debt subsists notwithstanding that its recovery is barred by limitation..........” This view has also been taken by the SC in the case of CIT v. Sugauli Sugar Works P. Ltd. In the said case, it was contended on behalf of the revenue that the liability has come to an end as the creditors in the said case had not taken any action to recover the amounts due to them for twenty years. In order to attract the provisions of Section 41(1), it is necessary that there should have been a cessation or remission of liability. As held by the Bombay High Court, in the case of J. K. Chemicals Ltd., cessation of liability may occur either by the reason of the liability becoming unenforceable in law by the creditor coupled with debtor declaring his intention not to honour his liability, or by a contract between parties or by discharge of the debt. In the present case, the assessee is acknowledging the debt payable to M/s Elephanta Oil & Vanaspati Ltd. and there is no material to indicate that the parties have contracted to extinguish the liability. Thus, in our view it cannot be concluded that the debt owed by the assessee to M/s Elephanta Oils & Vanaspati Ltd. stood extinguished;
++ although, enforcement of a debt being barred by limitation does not ipso facto lead to the conclusion that there is cessation or remission of liability, in the facts of the present case, it is also not possible to conclude that the debt has become unenforceable. It is well settled that reflecting an amount as outstanding in the balance sheet by a company amounts to the company acknowledging the debt for the purposes of Section 18 of the Limitation Act, 1963 and, thus, the claim by M/s Elephanta Oil & Vanaspati Ltd. can also not be considered as time barred as the period of limitation would stand extended. Even, otherwise, it cannot be stated that M/s Elephanta Oil & Vanaspati Ltd. would be unable to claim a set-off on account of the amount reflected as payable to it by the assessee. Admittedly, winding up proceedings against M/s Elephanta Oil & Vanaspati Ltd. are pending and there is no certainty that any claim that may be made by the assessee with regard to the amounts receivable from M/s Elephanta Oil & Vanaspati Ltd. would be paid without the liquidator claiming the credit for the amounts receivable from the assessee company. It is well settled that in order to attract the provisions of Section 41(1), there should have been an irrevocable cession of liability without any possibility of the same being revived. The assessee company having acknowledged its liability successively over the years would not be in a position to defend any claim that may be made on behalf of the liquidator for credit of the said amount reflected by the assessee as payable to M/s Elephanta Oil & Vanaspati Ltd;
++ we may also add that, admittedly, no credit entry has been made in the books of the assessee in the previous year relevant to the AY 2008- 2009. The outstanding balances reflected as payable to M/s Elephanta Oil & Vanaspati Ltd. are the opening balances which are being carried forward for several years. The issue as to the genuineness of a credit entry, thus does not arise in the current year and this issue could only be examined in the year when the liability was recorded as having arisen, that is, in the year 1984-1985. The department having accepted the balances outstanding over several years, it was not open for the CIT (A) to confirm the addition of the amount of Rs. 1,53,48,850/- on the ground that the assessee could not produce sufficient evidence to prove the genuineness of the transactions which were undertaken in the year 1984-85. The present appeal does not disclose any substantial question of law for our consideration and is, accordingly, dismissed

No comments:

HC upholds validity of provisions restricting ITC where supplies are taxed under RCM

  This Tax Alert summarizes a recent judgement of the Delhi High Court (HC) [1] dealing with the issue of denial of input tax credit (ITC) ...