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The Pr. Commissioner Of Income Tax-6 v. New World Synthetics Limited

Delhi High Court

Aug 27, 2018

Judgment

Subsequent
References

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High Court of Delhi — ITA No. 806/2018

Factual and Procedural Background

This appeal arises under Section 260A of the Income-tax Act, 1961. The Revenue (Pr. Commissioner of Income Tax-6) challenged an order dated 5 February 2018 of the Income-tax Appellate Tribunal (Tribunal) in respect of Assessment Year 2005-06 concerning the respondent, New World Synthetics Limited.

For AY 2005-06 the respondent filed its return on 30 October 2005 declaring a loss of Rs.32,27,360/-. The Assessing Officer made an addition of Rs.2,61,72,160/- under Section 41(1) of the Income-tax Act. That addition was deleted by the Commissioner of Income-tax (Appeals) and, on second appeal, the Tribunal dismissed the Revenue's appeal holding that there was no evidence of cessation of liability. The Revenue then filed the present appeal to the High Court.

The underlying substantive fact is that the respondent had an admitted outstanding liability of Rs.2,61,72,160/- payable to M/s P.T. Polysindo, Jakarta, Indonesia, which had been due and payable since 31 March 2003. This liability was shown and acknowledged in the respondent's balance-sheet and accounts for the year ending 31 March 2006 and filed with the Registrar of Companies and the Income-tax department.

The Revenue's case asserted that the debt had remained unpaid from 31 March 2003 to 31 March 2006, had become barred by limitation and thus had ceased or been extinguished (or at least remission or cessation had occurred), which, it argued, attracted Section 41(1).

Legal Issues Presented

Whether the outstanding liability of Rs.2,61,72,160/- payable to M/s P.T. Polysindo had ceased or been remitted for the purposes of Section 41(1) of the Income-tax Act so as to be deemed profits and gains chargeable to tax.
Whether the debt having become time-barred under the law of limitation results in extinction of the debt such that Section 41(1) would apply.

Arguments of the Parties

Revenue's Arguments

The outstanding liability of Rs.2,61,72,160/- had remained unpaid since 31 March 2003 through 31 March 2006 and therefore had become barred by limitation; the debt had, in substance, ceased or been remitted and should be treated under Section 41(1) as deemed income.
The respondent had stopped business operations earlier and suffered heavy losses, making payment unlikely — supporting the contention of cessation/remission of liability.

Respondent's Arguments

The respondent admitted and recorded the debt as outstanding in its balance-sheet and accounts for the year ended 31 March 2006; there was no act of unilateral remission or writing off by the respondent.
No amount or benefit in cash or otherwise was obtained by the respondent in respect of the liability; thus the deeming provision under Section 41(1)(a) did not get attracted.
Non-payment or barring by limitation does not extinguish the liability; the acknowledgment in accounts is significant and inconsistent with said extinction.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Bombay Dyeing & Manufacturing Co. Ltd. v. State of Bombay & Ors., AIR 1958 SC 328	That a debt or liability may subsist notwithstanding that recovery is barred by limitation — limitation bars remedy but does not extinguish the underlying obligation.	The Court relied on this authority to support the legal proposition that a debt barred by limitation does not necessarily cease to exist for the purposes of Section 41(1).
Commissioner of Income Tax v. Sugauli Sugar Works (P) Ltd., (1999) 2 SCC 355	Expiry of limitation period does not extinguish the debt; it only prevents the creditor from enforcing it.	The Court cited this to reinforce that time-barring under the Limitation Act does not equate to cessation or remission of liability under Section 41(1).
Kohinoor Mills Co. Ltd. v. Commissioner of Income-tax, [1963] 49 ITR 578 (Bom.)	Support for the proposition that limitation does not extinguish the debt.	Used as supporting authority for the same principle that limitation does not extinguish the underlying obligation.
Bhagwat Prasad & Co. v. Commissioner of Income-tax, (1975) 99 ITR 111 (All.)	Support for the principle that expiry of limitation does not extinguish liability.	Relied upon as a corroborative precedent for the proposition that limitation affects remedy, not existence of debt.
Ambica Mills Ltd. v. Commissioner of Income-tax, AIR 1964 Guj. 208	Debt acknowledged and admitted in a balance-sheet and accounts can amount to an acknowledgement within Section 18 of the Limitation Act, thereby potentially giving a fresh limitation period.	The Court treated the respondent's recording of the liability in its balance-sheet as a significant acknowledgement under Section 18, undermining the contention that the debt had ceased by limitation.
Uttam Singh Duggal & Co. Ltd. v. United Bank of India & Ors., (2000) (7) SCC 120	Discussion of admission in balance-sheet and accounts in the context of procedural rules (Order XII, Rule 6 CPC).	The Court referenced this to highlight the legal significance of admissions made in account statements and balance-sheets when assessing whether an obligation persists.
Polyflex (India) Pvt. Ltd. v. Commissioner of Income Tax Karnataka, (2002) 7 SCC 188	Distinguishes receipt of cash (or refund) from remission/cessation of liability; where an amount was actually obtained in cash, different analysis applies under Section 41(1).	The Court held this decision to be distinguishable on facts because in Polyflex the assessee had actually received cash (a refund), whereas in the present case no cash or benefit was obtained by the respondent.

Court's Reasoning and Analysis

The Court proceeded through a statutory and factual analysis focused on Section 41(1) of the Income-tax Act and the factual matrix as recorded in the accounts filed by the respondent.

Interpretation of Section 41(1): The Court noted that Section 41(1) deems to be income any amount obtained in respect of loss, expenditure or trading liability where there has been a remission or cessation. The Court explained the ordinary meanings: "cessation" connotes extinction or forfeiture of a debt; "remission" implies cancellation or extinguishment of all or part of a financial obligation.
Explanation provision and unilateral acts: The Court emphasised that the Explanation to Section 41(1) specifically includes remission or cessation by a unilateral act of the assessee such as writing off the liability in its accounts. Thus the assessee's own conduct is relevant when Clause (a) is invoked.
Application to facts — no unilateral act or receipt: The Court found no unilateral act by the respondent effecting remission or cessation; the respondent had not written off the amount. Further, the respondent had not obtained any cash or other benefit in respect of the liability. Consequently, the deeming part of Clause (a) (receipt of amount or value of benefit) did not apply.
Non-payment and limitation: The Court observed that mere non-payment or the debt being barred by limitation does not ipso facto indicate cessation or remission of liability. The law of limitation bars the creditor's remedy but does not extinguish the underlying obligation.
Significance of acknowledgement in accounts: The respondent's admission and acknowledgement of the debt in the balance-sheet and accounts were treated as legally significant. The Court referred to authorities holding that an acknowledgement in accounts can amount to an acknowledgement under Section 18 of the Limitation Act, thereby undermining the Revenue's contention that limitation had extinguished the debt.
Precedential support and distinction: The Court relied on several precedents to conclude that expiry of limitation does not extinguish the debt and that recorded acknowledgements are material. The Court also distinguished Polyflex on the ground that there the assessee had actually received cash (a refund), whereas here no cash or other benefit had been obtained.
Conclusion on facts: On the combined statutory reading and the facts (admitted liability in the respondent's books and absence of any act of remission or receipt of benefit), the Court concluded there was no remission or cessation of the liability within the meaning of Section 41(1).

Holding and Implications

Holding: The appeal by the Revenue was DISMISSED.

Implications:

The addition of Rs.2,61,72,160/- under Section 41(1) made by the Assessing Officer (and subsequently deleted by the CIT(A)) is not sustained by the High Court; the Revenue's challenge to the Tribunal's order was dismissed.
The Court's decision confirms the proposition relied upon in the opinion that (i) expiry of the limitation period does not extinguish the underlying debt, and (ii) an acknowledgement or admission of liability in the assessee's balance-sheet/accounts is legally significant (including for purposes of the Limitation Act), so mere non-payment or time-barring does not automatically amount to "cessation" or "remission" under Section 41(1).
The opinion does not purport to lay down a novel principle; it applies established authority to the facts and thus does not announce a new legal doctrine beyond the authorities it cites.
Direct effect: the respondent's recorded liability remains not treated as deemed income under Section 41(1) on the facts of this case; the Revenue's appeal was dismissed and no notice (or further relief) was granted to the Revenue by the High Court.

Delivered by: SANJIV KHANNA and CHANDER SHEKHAR, JJ. — Pronounced on 27 August 2018.

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$~ * IN THE HIGH COURT OF DELHI AT NEW DELHI

+ ITA No. 806/2018

%^thReserved on: 09 August, 2018 th

Pronounced on:27 August, 2018 THE PR. COMMISSIONER OF INCOME TAX-6 ..... Appellant Through: Mr. Ruchir Bhatia, Advocate. versus

NEW WORLD SYNTHETICS LIMITED, ..... Respondent Through

CORAM:

HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE CHANDER SHEKHAR

SANJIV KHANNA, J.

Present appeal by the Revenue under Section 260 A of the Income Tax Act, 1961 (the Act, for short) assails the order dated 5^thFebruary, 2018 passed by the Income-tax Appellate Tribunal ('Tribunal' for short) in the case of New World Synthetics Limited (the respondent-assessee, for short). The appeal pertains to the Assessment Year 2005-06, for which year the respondent-assessee had filed its return on 30^thOctober, 2005, declaring a loss of Rs.32,27,360/-.

2. The issue raised in the present appeal relates to addition of Rs.2,61,72,160/- made by the Assessing Officer under Section 41(1) of the

Act, which addition was deleted by the Commissioner of Income-tax (Appeals) ['CIT (Appeals)' for short]. The Tribunal vide impugned order has dismissed the second appeal filed by the Revenue holding that there was no evidence of cessation of liability.

3. It is an undisputed and admitted fact that the respondent-assessee had an outstanding liability of Rs.2,61,72,160/- due and payable to M/s. P.T. Polysindo, Jakarta, Indonesia since 31^stMarch, 2003. This liability was shown and acknowledged in the balance-sheet and the accounts prepared by the respondent-assessee for the year ending 31^stMarch, 2006, and filed with the Registrar of Companies and the Income Tax department. M/s. P.T. Polysindo, was shown and recorded as a sundry creditor, to whom the respondent-assessee was liable to pay Rs.2,61,72,160/-.

4. While liability to pay was not disputed and doubted by the respondent- assessee, albeit, the Revenue insists and claims that there was cessation of liability as Rs.2,61,72,160/- had remained outstanding and unpaid since 31^st March, 2003 till 31^stMarch, 2006. The debt due to M/s. P.T. Polysindo, it is stated, had become barred by limitation. Further there was no likelihood of the respondent-assessee making the said payment as the respondent-assessee had incurred huge losses and stopped business operations during the period relevant to the Assessment Year 2000-01.

5. Section 41(1) of the Act, for the sake of convenience is reproduced below:

"Profits chargeable to tax.

41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,—

(a) the 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 remission or cessation thereof, the amount obtained by such person or the 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 the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or

(b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first- mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year.

Explanation 1.—For the purposes of this sub-section, the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof"

shall include the remission or cessation of any liability by a unilateral act by the first-mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts. Explanation 2.—For the purposes of this sub-section, "successor in business" means,—

(i) where there has been an amalgamation of a company with another company, the amalgamated company;

(ii) where the first-mentioned person is succeeded by any other person in that business or profession, the other person;

(iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm;

(iv) where there has been a demerger, the resulting company."

The provision states that when an assessee makes an allowance or deduction in respect of loss, expenditure or trading liability incurred, any amount obtained in cash or in any other manner; or when there is remission or cessation, the amount obtained or the value of benefit accruing by way of remission and cessation shall be deemed to be profit and gain of the business or profession. The word "cessation" in common parlance and in context in which it is used in Section 41(1) of the Act connotes that the debt has become extinct, has come to an end or it has been forfeited. "Remission" implies cancellation or extinguishment of all or part of the financial obligation on part of the creditor.

6. Explanation to the Section states that the loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof, shall include remission and cessation of any liability by unilateral act of the first mentioned person i.e. the assessee. The explanation therefore refers to the conduct of the assessee. We need not refer to Clause

(b) to Section 41(1) for the said clause is not applicable.

7. In the present case there was no unilateral act by way of remission or cessation by the assessee, for the respondent-assessee had not written off the outstanding amount of Rs.2,61,72,160/- payable to M/s.P.T. Polysindo. This is also not a case where benefit in any form or in cash was received by the respondent-assessee. Hence, the first part of Clause (a) to Section 41(1) of the Act, would not apply.

8. Whether the debt had ceased to exist, was forfeited, or was extinct or whether there was remission in whole or part, would normally be a question of fact, unless there was cessation or remission by operation of law. When it comes to facts, the conduct and understanding of the parties is relevant and important. For the conduct would reveal existence or extinction and forfeiture of the liability.

9. Non-payment of outstanding liability which is admitted and acknowledged as due and payable by an assessee does not indicate remission or cession of liability. When an assessee suffers losses, payments and debts due including those due to financial institutions are not paid. Delay or non- payment, even when the Assessing Officer is of the opinion that likelihood of payment was remote as business has stopped, would by itself not denote and mean cessation or remission of liability. In the winding up or bankruptcy proceedings, payments are made, mostly partly, on sale of assets.

10. In Bombay Dyeing & Manufacturing Company Limited Vs. State of Bombay & Ors., AIR 1958 SC 328, it was held and observed that the debt or liability may subsist notwithstanding its recovery was barred by limitation for the law of limitation merely bars the creditor from invoking legal remedy. In

Commissioner of Income Tax Vs. Sugauli Sugar Works (P) Ltd. ,(1999) 2 SCC 355, it was elucidated that expiry of period of limitation as prescribed in the Limitation Act does not extinguish the debt but only prevents the creditor from enforcing the debt. This is the right and correct position in law as held by the Bombay High Court in Kohinoor Mills Co. Ltd. Vs. Commissioner of Income-tax [1963] 49 ITR 578 (Bom.) and Bhagwat Prasad and Co. Vs. Commissioner of Income-tax (1975) 99 ITR 111 (All). In this context the

admission and acknowledgement of the debt and liability by the respondent- assessee is significant and important.

11. The patent flaw in the argument raised by the Revenue is to ignore and overlook admission of liability to pay as the respondent-assessee had acknowledged that Rs.2,61,72,160/- was due and payable to M/s.P.T. Polysindo. This liability was accepted and acknowledged in the books of accounts and the returns filed with the Registrar of Companies and with the Income-tax department. Debt acknowledged and admitted in the balance- sheet and accounts filed with the Registrar of Companies is an acknowledgement within the meaning of Section 18 of the Limitation Act, so as to give a fresh period of the limitation as has been held in Ambica Mills Ltd. Ahmedabad Vs. Commissioner of Income-tax, Gujarat, Ahmedabad

AIR 1964 Guj. 208. The Supreme Court in Uttam Singh Duggal & Co. Ltd. Vs. United Bank of India & Ors. (2000) (7) SCC 120 has reflected and pronounced on admission in the balance sheet and accounts for the purpose of Order XII, Rule 6 of the Code of Civil Procedure.

12. Decision in the case of Polyflex (India) Pvt. Ltd. Bangalore Vs. Commissioner of Income Tax Karnataka (2002) 7 SCC 188, is distinguishable, as in the said case assessee had received and obtained an amount in cash, which amount received was earlier recorded and treated as expenditure in the profit and loss account. In the said case excise duty paid had been refunded, though the Revenue had preferred an appeal and the decision on refund had not attained finality. The Supreme Court therefore drew distinction between receipt of cash or amount; and remission or cessation of liability in respect of loss or expenditure under the second part of clause (a) of Section 41(1) of the Act. In the present case the respondent-

assessee has not obtained any money or benefit under the first part or the deeming part of Clause (a) to Sub-section 1 to Section 41 of the Act.

13. There was no remission or cessation of liability.

14. In view of the aforesaid settled legal position, we are not inclined to issue notice in the present appeal and the same is dismissed.

(SANJIV KHANNA)

JUDGE

(CHANDER SHEKHAR)

JUDGE

AUGUST 27, 2018

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