Burden of proof to prove that the liability ceases to exist lies with the AO: Calcutta HC
Facts and Issues of the Case
This appeal was filed 627 days late, and the revenue filed GA 01 of 2020 to condone the delay. The affidavit-in-opposition of the respondent assessees opposing to the prayer for condonation has been filed. Revenue, the appellant, has filed a reply affidavit in response to the claims made in the affidavit-in-opposition. We find that the explanation provided by the appellant revenue for failing to file the appeal within the allotted time is unsatisfactory after carefully listening to the learned Advocates for the parties and going over the averments contained in the affidavits.
The option to reject the appeal as time-barred was certainly available to us. We are of the view that, given the facts and circumstances of the case, it may not be wise to reject the appeal on a technical basis, especially since the statute requires that the requirement be to consider whether any substantial question of law arises. This is because the appeal has been filed under Section 260A of the Income Tax, Act, 1961 (Act), which stipulates that the Court must determine whether any substantial question of law arises for consideration.
Hence for such reasons, we exercise discretion and accordingly condoned the delay in filing the appeal. GA No. 01 of 2020 is allowed. This appeal, filed by the revenue under Section 260A of the Act, appeals the decision given in ITA No. 1907/Kol/2016 for the assessment year 2001-2002 by the Income Tax Appellate Tribunal “B” Bench in Kolkata (Tribunal), on July 20, 2018.
The following important legal issues have been raised by the revenue for consideration :
a) Whether on the facts and in the circumstances of the case and in law, the Learned Income Tax Appellate Tribunal was correct in law in deleting the addition of Rs. 12,97,47,322/- made by the Assessing Officer on account of cessation of liability?
b) Whether on the facts and in the circumstances of the case and in law, the order of the Learned Income Tax Appellate Tribunal has failed to appreciate that necessary conditions u/s 41(1) of the Income Tax Act 1961?
c) Whether on the facts and circumstances of the case and in law and on proper interpretation of Section 41 (1) of the Income Tax Act, 1961, the Tribunal was right in law in holding that the assessees liability to pay the creditors had not cease and therefore, the Assessing Officer was not justified in making an addition of Rs. 12,97,47,322/- ?
d) Whether on the facts and circumstances of the case and in law, the Learned Income Tax Appellate Tribunal is perverse as it holds that liability of the assessee on account of trading liability exists without considering the provisions of the Limitation Act, 1963?
The assessee reported a loss of Rs. 18,740 in their return of income for the assessment year under consideration, A.Y. 2001–2002. The case was reopened by the issuance of the notice under Section 148 of the Act, in which the Assessing Officer noted, among other things, that the assessee was unable to include the profit and loss of Shri Hanuman Jute Mills and Siliguri Godown in their return of income because those figures had not yet been received, as well as of the input division and Vardhal Lubricant because those figures had not yet been received. The assessee filed an amended return in response to the notice under Section 148, reporting a loss of Rs. 83,923/-.
After that, notices were given in accordance with Sections 143(2) and 142(1) of the Act, and the case was discussed with the assessee’s authorised representative. The assessee was asked to provide the profit and loss statements, balance sheets, and supporting documentation of expenses for each branch for the assessment years 2000–2001, 2001–2002, 2002–2003, 2003–2004, 2005–2006. The details of the business operations carried out by each unit were also required. The details of the business operations carried out by each unit were also required. The assessing officer reports that the assessee provided a list of the loan creditors as well as information regarding the interest that is due and payable to each of them. After that, a show-cause notice dated December 27, 2007, was issued, requesting an explanation from the assessee as to why the interest due on a loan for the assessment year 2001-2002 should not be treated as cessation of liability and be included in the taxable income.
The assessee submitted their response in a letter dated December 31, 2007. According to Section 41(1)(a) of the Act, the assessing officer came to the conclusion that there is no evidence or confirmation regarding the trading liability, and hence is deemed to be profit and gain of business or profession for the assessment year under consideration.
As a result of this, the assessee filed an appeal with the Commissioner of Income Tax (Appeals) – XX, Kolkata [CIT(A)], feeling aggrieved. The addition was removed by the CIT(A) in an order dated 31.03.2008. Revenue filed an appeal with the tribunal in ITA No. 1326/Kol/2008 in order to dispute the abovementioned order. The learned tribunal dismissed the CIT(Arulings )’s in an order dated 04.03.2014 and remanded the case to the assessing officer for further consideration.
The addition was upheld by the assessing officer by order dated March 30, 2015. Aggrieved by the same, the assessee filed an appeal with the Commissioner of Income Tax (Appeals) – 10 in Kolkata (CIT) (A). By order dated July 18, 2016, the above mentioned appeal was accepted. The revenue filed an appeal the tribunal which was dismissed by the impugned order.
The issue which falls for consideration is whether the assessing officer was right in applying Section 41(1) after treating the assessee’s liability to the tune of Rs. 12,97,47,322/- to be a case of cessation of liability. The assessee among other things contended that the assessing officer fell in error in not appreciating that there was evidence on record to show that the assessee firm made payments to its loan creditors towards its outstanding liabilities for interest and the liability continues to reflect as outstanding liability in the subsequent balance sheets year after year and no portion thereof can be alleged to have ceased to exist for the assessment year under consideration within the meaning of Section 41(1)(a) of the Act. It was further contended that the burden of proof as to the satisfaction of condition set out in Section 41(1)(a) was on the revenue and not on the assessee and such burden has not been discharged by the revenue and in the absence of any material on record to the effect that conditions referred to in the said provision had been satisfied, it cannot be held that the trading liability had cessated.
The assessees further contended that the obligation to pay interest to the various people whose names were furnished had been continuous for a very long time and that nothing had changed regarding it at least since the assessment year 1989–1990, which corresponded to the years 1988–1989; the majority of the creditors were relatives, friends, and associates of the partners of the assessing firm; the names and addresses of all the creditors are listed in the old tax records of the assesses ; on account of various disputes which had been continuing amongst the partners for more than three decades, the liability on account of loans borrowed from their family members, close relations and their associates and/or interest payable there on, had not been discharged by the assessee; Since its various partners, including their family members who are in charge of the assessee’s various business activities, did not provide information to its head office, the Income Tax Department is aware that disputes between the partners continue to exist, and the assessee was not able to even file its complete tax return year after year. None of the creditors named in the list provided by the assessee have ever granted remission and/or either of the amounts due a refund. Out of the total outstanding liability of Rs. 12,97,47,322/-, Rs. 8,08,554.44ps were paid to Mrs. Indira Jalan through account payee checks along with the principal amount in the financial years 2003-2004 and 2004-2005, and Rs. 2,14,490/- were repaid to Bhuri Devi Charity Trust through account payee checks in the financial year 2008-2009, with evidence supporting the repayments being presented to the assessing officer. The assessee provided complete information on the outstanding creditors as of 31.03.2001 in the very first proceeding before the assessing officer.
Observation by the Court
Mr. Kundalia sought to distinguish the decision in Sugauli Sugar Works Private Limited by referring to paragraph 12 of the judgment and submitting that the decision in the case of Bombay Dyeing and Manufacturing Company Limited Versus State of Bombay and Others 4 which was referred to in the said decision pertain to statutory liabilities and the decision could not have been pressed into service by the tribunal to decide in favour of the assessee. The question that needed to be resolved was whether the debtor may end or reduce his obligation on his own initiative. Remission must only be given by creditors, the court said in response to the above mentioned situation.
As stated previously, revenue contended that because the decision in Bombay Dyeing concerned statutory obligation, it could not have been taken into account while examining the theory of extinguishment of the debt. The Hon. Supreme Court’s five judge panel, which rendered the decision, examined every aspect of cessation of liability and found that the limitation does not extinguish the debt or prevent its enforcement unless the debtor chooses to use the defence and specifically pleads it. As a result, the court are not persuaded by the said submission.
The facts of the case were completely different from those of the case at hand because the assessee there changed his or her line of business to one of an entirely different nature, the creditors of the former business were silent about their liabilities for ten years, and there was no written confirmation from these creditors. The court decided that there was no more a legal obligation in this factual scenario. The above decision can be distinguished based on the facts. The facts of the present case have been noted in the preceding paragraphs, making it difficult to apply the decision in T.V. Sundaram Iyengar. It was decided to depend on Commissioner of Income Tax, Calcutta Versus Karam Chand and Others v. Karam Chand and Others 8 where the Hon’ble Supreme Court stated that common sense requires that such amount should be entered into profit and loss account for the year and to be treated as taxable when no demand for payment was made.
All of the decisions to which the court have previously referred were taken into account in the decision in Commissioner of Income Tax – III Versus Shri Vardhman Overseas Limited 13, which explained the legal position. Lastly the decision of this court in the case of Goodricke Group Limited Versus Commissioner of Income Tax – II, Kolkata 14 has also elaborately discussed all the decisions on the points and it was held that in the absence of the creditors it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable.
In the preceding paragraphs, the court have noted the undisputed factual position which was rightly taken note of by the learned tribunal and in particular, noting that there is no dispute about the assessee to have been carrying forward the impugned liability in its books for a time span of almost three decades and the department did not raise any issue in all the intervening assessment years in question. The tribunal also noted that the assessing officer after the matter was remanded to him had issued summons to six directors of the concerned entities on test check basis, and four out of the six directors had appeared in response to the summons. The statements were recorded. The learned tribunal also notes that the creditors have given written reply in response to the summons reiterating their liability as also the fact that the assessee had settled some of the creditors even after 31.03.2001. Thus the assessee has fulfilled the duty cast upon them to provide evidence that the liability exist at the end of the year. The duty on the assessing officer is to prove that the liability has ceased to exist which in our considered view has been miserably failed to be established.
The Court was satisfied that the assessee has fulfilled the duty cast upon them to provide evidence that the liability exist at the end of the year and the duty on the assessing officer is to prove that the liability has ceased to exist which in our considered view has been miserably failed to be established. The court find that the learned tribunal rightly declined to interfere with the orders passed by the CIT(A) by dismissing the appeal filed by the revenue and ruled in favour of the assessee.PCIT-Vs-Soorajmul-Nagarmull-Calcutta-High-Court