I.P. Bansal, Judicial Member. - This is an appeal filed by the assessee. It is directed against the order of CIT(A) dated 12-1-2006 for assessment year 2002-03. Grounds of appeal read as under :—
"1. That the learned CIT(A) was wrong to hold that the liability of Rs. 1,25,46,534 payable to the creditors are not in existence is without any material and basis and this finding may be vacated.
2. That the learned CIT(A) was wrong to hold that the liability to pay a sum of Rs. 1,25, 46,534 has ceased to exist and was further wrong to confirm the said addition by applying the provisions of section 41(1) of the Income-tax Act.
3. That the provisions of section 41(1) have been wrongly applied to a sum of Rs. 1,25,46,534 as there is no cessation of the liability and the addition may please be deleted."
2. The Assessing Officer asked the assessee to prove the genuineness of the following sundry creditors :—
| S. No. | Name of the party | Amount |
| 1. | M/s. Ambey Rice and General Mills, Mandi Guru Har Sahai, Khanna | 310,239.75 |
| 2. | M/s. Badinpur Rice and General Mills. Village Bandinpur, PO Mandi. Gobindgarh | 293,300.00 |
| 3. | M/s. Bhagwati Trading Co., Grain Market, Panipat | 40,531.34 |
| 4. | M/s. Bharat Rice Mill, V & PO Bapoli, Distt. Panipat | 100,061.35 |
| 5. | M/s. Giani Ram Anil Kumar, New Grain Market, Panipat | 4,099,716.33 |
| 6. | M/s. Jai Pal Ravinder Kumar, Grain Market, Matlauda, Panipat | 4,665,402.71 |
| S. No. | Name of the party | Amount |
| 7. | M/s. Malwa Agro Industries, Samrat | 351,670.92 |
| 8. | M/s. Shri Vardhman Rice Industries Pvt. Ltd. | 570,696.45 |
| 9. | M/s. Suleman Security and Grain Merchant | 2,518,200.00 |
| 10. | M/s. Hari Chand Roshan Lal Jain, GT Road, Panipat | 167,410.20 |
| | Total | 13,117,229.05 |
| | Or say | Rs. 1,31,17,230 |
3. The assessee did not file confirmations from above sundry creditors except one i.e., of M/s. Shri Vardhman Rice Industries Pvt. Ltd., Panipat. Therefore, the Assessing Officer after giving various opportunities treated the balance amount of Rs. 1,25,46,534 as income of assessee on account of unexplained credits and added the same to the income of assessee under section 68 of the Income-tax Act, 1961. It was pleaded before the CIT(A) that the employee who was looking after the assessment proceedings had left the services on 30-9-2004 and after him there was no person to look after the income-tax matters and both the directors were busy as one director Mr. O.P. Jain was contesting the election of MLA from Panipat for the period of January and mid February. On 18-2-2004 Mr. Ram Bhaj Jain appeared before the Assessing Officer and wanted to file confirmations obtained from M/s. Giani Ram Anil Kumar and M/s. Jai Pal Ravinder Kumar, but Assessing Officer refused to take confirmation since the case was closed on 18-1-2005. It was further submitted that the assessee is having running account with M/s. Bhagwati Trading Co., M/s. Jai Pal Ravinder Kumar, M/s. Giani Ram Anil Kumar, Hari Chand Roshan Lal Jain and M/s. Bharat Rice Mill and they are all income-tax assessees. It was submitted that since the liabilities are subsisting and existing, the Assessing Officer was wrong to treat the amount as unexplained credits in the books of account under the provisions of section 68 of the Income-tax Act [all these facts are found mention in the statement of facts filed before the CIT(A)]. In the proceedings before the CIT(A) it was submitted that all the credits are old and these liabilities are existing liabilities. Proper opportunities was not allowed by the Assessing Officer for filing the evidence. The CIT(A) forwarded the copy of submission to the assessee and Assessing Officer submitted the report dated 18-7-2005. The Assessing Officer replied that assessee had made sale on consignment basis to 7 parties amounting to Rs. 1,25,46,534 and inquiries made during the course of assessment proceedings revealed that none of these parties were in existence. The assessee did not produce any evidence despite several opportunities given to the assessee. A letter was filed by the assessee before the Assessing Officer to contend that the assessee is not aware of the present whereabouts of these parties and their stock of rice was damaged and was sent to the dealers on consignment basis for sale and they have not received sale proceeds even in subsequent years. The Assessing Officer stated that since sales were found to be made to non- existent parties, inquiry made with respect to sundry creditors also reveal that they were not existing and assessee could not file confirmations despite repeated requests, therefore, addition was to be made to the income of the assessee. In the further submissions the assessee submitted before the CIT(A) that the assessee had complied with all the requirements of Assessing Officer, but no proper opportunity was provided. It was submitted that the liabilities of assessee are existing and company is making all efforts to pay them and no addition could be made under section 68 as no amount was received by the assessee. Considering these submissions, the CIT(A) has upheld the addition under section 41(1) with the following observations :—
"I have considered the contentions of the appellant, the reasons given by the Assessing Officer for the said disallowance and the material on record. In the course of appellate proceedings the appellant company was again given an opportunity for giving complete details in respect of the credit balances shown by it in its books of account so that the Assessing Officer could be asked to verify the genuineness of the claim of the appellant. The appellant company vide their letter dated 10-1-2006 filed in the course of appellate proceedings has informed that their creditors are not cooperating for giving the PAN No. as they are demanding their money and that summons should be issued for getting their confirmation and PAN numbers.
It is evident that the appellant company is not in a position to prove the genuineness of these credits. It has not supplied the details and the confirmations before the Assessing Officer despite repeated opportunities. It did not bother to give their PAN numbers and addresses before the Assessing Officer and even in the course of appellate proceedings when an opportunity was allowed to it, it has expressed his inability to furnish these details and/or the confirmations. The request for issue of summons has been made knowing that the details required for issue of such summons are not available with the Assessing Officer. This conduct of the assessee clearly shows that the liabilities shown by the appellant company in its books do not exist and for this reason only the appellant company is not interested in furnishing any details to the Department. In this view of the matter, it is held that the liabilities/credits to the extent of Rs. 1,25,46,534 appearing in the books of the appellant company do not exist or have ceased to exist and therefore the addition of Rs. 1,25,46,534 made by the Assessing Officer is found to be justified and confirmed under section 41(1) of the Income-tax Act, 1961."
4. The assessee is aggrieved, hence, in appeal.
5. The Ld. AR has submitted a chart before us in respect of parties whose credit balance has been added to the income of the assessee. The contents of such chart are as under :—
| Name of the party | 1997-98 | 1998-99 | 1999-00 | 2000-01 | 2001-02 | 2002-03 | Remarks |
| Ambey Rice & | - | 310239 | Same | -do- | -do- | 310239 | |
| General Mills (P. 17-19) | | | | | | | |
| Badinpur Rice & | - | - | - | 293300 | 293300 | 293300 | |
| General Mills (P. 20-22) | | | | | | | |
| Name of the party | 1997-98 | 1998-99 | 1999-00 | 2000-01 | 2001-02 | 2002-03 | Remarks |
| Bhagwati Trading Co. (P. 23-28) | - | 70531 | - | 50531 | 50531 | 40531 | Confirmation enclosed |
| Bharat Rice Mills (P. 15-16) | - | - | - | 97061 | 100061 | 100061 | Confirmation enclosed PAN : AABFB2620G (P. 29) |
| Giani Ram Anil Kumar (P. 29-36) | 4146006 | 4136006 | 4134716 | 4099716 | 4099716 | 4099716 | Confirmation enclosed PAN AABFG4121H |
| Jaipal Ravinder Kumar (P. 37-42) | 5868902 | 5608902 | 5208902 | 4705402 | 4665402 | 4665402 | Confirmation enclosed |
| Malwa Agro Industries (P. 43-45) | - | - | - | 351670 | 351670 | 351670 | |
| Suleman security (P. 46-48) | - | - | 2518200 | 2518200 | 2518200 | 2518200 | |
| Hari Chand Roshan Lal Jain (P. 49-52) | - | 167410 | 167410 | 167410 | 167410 | 167410 | Confirmation enclosed PAN : AAAJH8561P |
| Total | | 12546529 | Difference of Rs. 5 is due to paise. |
6. Referring to above chart it was pleaded that in respect of none of the parties any sum was credited during the year under consideration as the balances of their account represented opening balances. He refer-red to the relevant pages of the paper book to substantiate such contention. He further submitted that Assessing Officer added said amount under the provisions of section 68 of Income-tax Act, 1961. However, the CIT(A) has changed the basis to section 41(1) of the Act. He contended that according to the facts of the case none of these sections were applicable. Hence, addition sustained by CIT(A) is contrary to the provisions of law. In respect of applicability of section 68 it was submitted by Ld. AR that there being no credit entry into the books of account during the year, addition cannot be validly made as provisions of section 68 will not be applicable and they are applicable only in a case where any unexplained credit is found in the books of account in that particular year. So far as it relates to applicability of section 41(1), ld. AR pleaded that addition could not be made unless it is shown that liability had ceased to exist. He referred to the decision of Hon’ble Supreme Court in the case of CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518 1 wherein it has been held that unilateral entry by the assessee in the accounts transferring the amount to the capital reserve would not bring the matter within the scope of section 41(1) of the Act. It was held that the question whether the liability is actually barred by limitation is not a matter which could be decided by considering the assessee’s case alone, but it is a matter which has to be decided only if the creditor is before the concerned authority. In the absence of creditor, it is not possible for the authority to come to the conclusion that the debt is barred and has become unenforceable. It was observed that there may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act. The principle that expiry of period of limitation prescribed under the Limitation Act could not extinguish the debt, but it would only prevent the creditor from enforcing debt. Thus, it was held that unilateral action of the assessee to credit the said amount in its books of account without any act on the part of the creditor will not enable the assessee to say that the liability has come to an end and such credit of the amount itself will not confer any benefit on the debt as contemplated by the section.
7. It was further pointed out that the said view was affirmed again by the Supreme Court in the case of Chief CIT v. Kesaria Tea Co. Ltd. [2002] 254 ITR 4342 wherein their Lordships have also considered the earlier decision of Hon’ble Supreme Court in the case of CIT v. T.V. Sundaram Iyengar & Sons Ltd. [1996] 222 ITR 344 3 and it was observed that the factual metrics and provisions of law considered therein was entirely different. Further reference was made to the decision of Madras High Court in the case of Commissioner Of Income-Tax v. Tamilnadu Warehousing Corporation. [2007] 292 ITR 310 wherein addition was made under section 41(1) in respect of Group Gratuity Scheme shown on the credit side in the balance sheet on the ground that the liability with regard to that had ceased to exist and it was held by the Hon’ble Madras High Court that assessee having continued to show the amount payable under the Group Gratuity Scheme as liability in the balance sheet even after surrendering the scheme, the same is not assessable under section 41(1).
Further reference was made to the decision of Allahabad High Court in the case of CIT v. Willard India Ltd. [2007] 164 Taxman 1 wherein similar proposition was laid down that unilateral act of the assessee debtor in writing bad time barred debt does not amount to cessation of liability, hence the amount not chargeable under section 41(1).
8. Concluding his arguments, ld. AR pleaded that addition has wrongly been sustained by the CIT(A) on the ground of applicability of section 41(1) of the Act.
9. On the other hand relying on the order of the Assessing Officer and CIT(A), it was vehemently pleaded by ld. DR that addition has rightly been sustained by CIT(A). He contended that assessee could not submit any evidence to show the genuineness of the credit and to establish that assessee was really under an obligation to pay such an amount to the creditors. Thus, ld. DR pleaded that order of the CIT(A) should be upheld.
10. We have carefully considered the rival submissions in the light of the material placed before us. From the perusal of copy of account of all the parties with regard to which the addition has been made, it revealed that no new amount has been credited by the assessee in their account during the year under consideration. Therefore, applicability of section 68 is ruled out and addition could not be made under section 68. Now, coming to the applicability of section 41(1), it is observed that assessee company is a limited company and its accounts are accessible to general public. The balances are brought forward balances. If the same are added on account of their non-genuineness, then also these amounts cannot be added to the income of the assessee for the year under consideration as the question of genuineness thereof can be examined only in the year in which they were credited in the account of the assessee. The amount also cannot be considered to be the income of the assessee on the ground of expiry of limitation as, according to well settled law explained by Hon’ble Supreme Court in the case of Sugauli Sugar Works (P.) Ltd. ( supra) in the absence of creditor, it is not possible for the Department to come to the conclusion that the debt is barred and has become unenforceable and there may be some circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act. It will be relevant to reproduce these observations of their Lordships from the said decision :—
"The question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee’s case alone but it is a matter which has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act."
11. In view of the above observations of Hon’ble Supreme Court, in the absence of creditor, it cannot be concluded by the Department that the debt is barred and has become unenforceable more particularly when the assessee is a limited company whose accounts are accessible to general public. In the case of Sugauli Sugar Works (P.) Ltd. (supra) the assessee had credited the amount which was added to its income under section 41(1) of the Act, but in the case of the assessee such amount has not even been credited to the Profit & Loss Account. Thus, the case of the assessee is on sound footing than the case of the assessee in that case. Therefore, on the ground of expiry of limitation, the addition upheld by the CIT(A) under section 41(1) cannot be held justified.
12. Their Lordships of Hon’ble Supreme Court in the case of Kesaria Tea Co. Ltd. (supra) have examined the provisions of section 41(1) and it was observed that for the application of section 41(1) following points are to be kept in view :—
"(1) In the course of assessment for an earlier year, allowance or deduction has been made in respect of trading liability incurred by the assessee; (2) subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the year in which such event occurred; (3) in that situation the value of benefit accruing to the assessee is deemed to be the profit and gains of business which otherwise would not be his income; and (4) such value of benefit is made chargeable to income-tax as the income of the previous year wherein such benefit was obtained."
It was further observed that resort to section 41(1) could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it.
13. According to the above decision the requirements for application of section 41(1) are that the assessee himself should acquire the benefit by way of remission or cessation of that trade liability during the year in which such event occurred and such value of benefit is made chargeable to income-tax as the income of the previous year wherein such benefit was obtained and Section 41(1) will be applicable only if such liability of the assessee can be said to have ceased finally without the possibility of reviving it.
14. If the facts of the present case are considered in the light of the above mentioned observations of their Lordships, it will be inferred that it has not been shown by ld. CIT(A) that the assessee has acquired any benefit from this particular liabilities which are still outstanding in the balance sheet of the assessee and it has also not been shown that these liabilities have ceased finally without the possibility of revival. In our opinion, the onus has wrongly been shifted by the revenue on the assessee. The assessee has shown these liabilities outstanding in its balance sheet. Therefore, there was no occasion to treat the said amount as taxable under section 41(1) of the Act and if Department intends to assess the same by applying the provisions of section 41(1), then the onus will be on the revenue to show that the liability which is appearing in the balance sheet has ceased finally and there is no possibility of the revival of the liability.
15. In view of our above discussion, the addition cannot be sustained either under section 68 or under section 41(1) of the Act and, therefore, deleted. The appeal filed by the assessee is allowed.
16. In the result, the appeal filed by the assessee is allowed.