THE DY CIT RG 8(3), MUMBAI V. M/S. S.M. ENERGY TEKNIK LTD, MUMBAI

ITA 1495/MUM/2008

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9279 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 16-12-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 29-02-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NEIL PHILIP
• Assessee Lawyers: S A KANJI; FEROZE B ANDHYARUJEENA
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI - E BENCH , !' , ! BEFORE S/SH.JOGINDER SINGH, JUDICIAL MEM BER & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO.1859/MUM/2008, # # # # $ $ $ $ / ASSESSMENT YEAR-2003-04 M/S.SM ENERGY TEKNIK & ELECTRONICS LTD., SM BHAVAN, PLOT NO. B07 & B-10, ROAD NO.15, WAGLE INDL. ESTATE,THANE-400604. PAN: AAACS7372L # VS. DCIT-8(3), R.NO. 217, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020. /. ITA NO.1495/MUM/2008, # # # # $ $ $ $ / ASSESSMENT YEAR-2003-04 DCIT-8(3), R.NO. 204, 2ND FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020. # VS. M/S. SM ENERGY TEKNIK & ELECTRONICS LTD., SM CENTRE, ANDHERI KURLA ROAD,MAROL NAKA,ANDHERI (E), MUMBAI-400059. ( %& / APPELLANT) ( '(%& / RESPONDENT) #)* #)* #)* #)* + + + + ! !! ! / ASSESSEE BY :SHRI FEROZE B. ANDHYARUJEENA & S.A. KANJI , + ! / REVENUE BY : SHRI NEIL PHILIP # # # # , ,, , *- *- *- *- / DATE OF HEARING :04 -02-2015 .$ , *- / DATE OF PRONOUNCEMENT :11 -03-2015 # # # # , 1961 , ,, , 254(1) ! !! ! ** ** ** ** !/ !/ !/ !/ ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, A.M. ! !' ! # : CHALLENGING THE ORDER DATED 20.12.2007 OF THE CIT(A )-XXIX,MUMBAI,THE ASSESSEE AND THE ASSESSING OFFICER(AO) HAVE FILED CROSS APPEALS FOR THE ABOVE MENTIONED AS SESSMENT YEAR(AY.).GROUNDS OF APPEAL FILED BY THE ASSESSEE R EADS AS UNDER: GROUND NO.1:ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW: THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF FOREIGN TRA VELLING EXPENSES OF RS.5,87,765/- OUT OF TOTAL AMOUNT OF RS.8,52,235/- MADE BY THE AO THE APPELLA NT PRAYS THAT THE SAME MAY PLEASE BE ALLOWED. GROUND NO.2:THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF DIMINUTION IN VALUE OF INVENTORIES OF WIP AMOUNTING TO RS. 1,95,00,000/-. THE APPELLANT PRAYS THAT THE SAME MAY PLEASE BE ALLOWED. THE APPELLANT COMPANY CRAVES LEAVE TO ADD, ALTER, A MEND OR DELETE ANY OF THE GROUNDS AS AND WHEN ADVISED. ITA NO. 1495 MUM 2008 THE AO HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1.'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT THE INTEREST OF RS.26,44,597/ -RELATING TO BORROWED FUNDS, INVESTED IN ASSETS, GENERATING INCOME NOT INCLUDIBLE IN GROSS TOTAL INCOME, COULD NOT BE DISA LLOWED U/S.14A OF I T ACT ON THE GROUND THAT THE ASSESSEE HAD NOT EARNED SUCH INCOME DURING THE YEAR .'. 2.'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE ADDITION OF RS.54,56,353/-ON ACCOUNT OF CESSATION O F LIABILITY U/S.41 OF I T ACT WITHOUT APPRECIATING THE FINDINGS OF THE A.O THAT THE LIABILITY WAS OUTS TANDING FOR A LONG TIME AND THERE WAS NO MOVEMENT IN TRANSACTION ..' ITA/1859/MUM/2008: 2 ITA NOS. 1859 & 1405/MUM/2008-SMETEL ASSESSEE,ENGAGED IN THE BUSINESS OF MANUFACTURING T EXTILE MACHINERY,FILED ITS RETURN OF INCOME ON 24.11.2003DECLARING LOSS OF RS.3.44.59,980/-.THE AO COMPLETED THE ASSESSMENT U/S.143(3)OF THE ACT ON 31.01.2006 DETERMINING THE INCOME OF THE ASS ESSEE AT RS.58,10,320/-. 2 .FIRST GROUND OF APPEAL FILED BY THE ASSESSEE DEALS WITH DISALLOWANCE MADE UNDER THE HEAD FOREIGN TRAVELLING EXPENSES.DURING THE COURSE OF ASSESSMENT PROCEEDINGS,THE AO OBSERVED THAT ASSESSEE HAD DEBITED TO P&L A/C.RS. 8,52,235/-ON ACCOUNT OF FORE IGN TRAVELING CHARGES,THAT OUT OF THAT AN AMOUNT OF RS.2,64,470/- WAS INCURRED TOWARDS THE COST OF T ICKETS,THAT FOR OTHER EXPENSES,TO THE TUNE OF RS. 5 , 87,765/-,THE ASSESSEE HAD NOT FILED ANY CLARIFICATI ON IN RESPECT.THE AO MADE A DISALLOWANCE OF RS.5.87 LAKHS AND ADDED BACK IT TO THE TOTAL INCOME OF THE ASSESSEE. 2.1. IN THE APPELLATE PROCEEDINGS,THE ASSESSEE SUBMITTED BEFORE THE FIRST APPELLATE AUTHORITY(FAA) THAT THE ASSESSEE HAD EXPORTED GOODS AND EARNED FOR EIGN EXCHANGE OF RS.53.25 LAKHS,THAT FOREIGN TRAVEL UNDERTAKEN BY THE MARKETING CONSULTANT WAS F OR CONVINCING THE PROSPECTIVE BUYERS AND FOR GETTING ORDERS FROM ABROAD,THAT THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF ASSESSEE'S BUSINESS. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE,T HE FAA HELD THAT THE AO HAD DISALLOWED PART OF THE FOREIGN TRAVEL EXPENDITURE AS NO DETAILS HAD BE EN FILED,THAT EXPENDITURE COULD NOT BE ALLOWED AS THE VERACITY OF THE SAME HAD NOT BEEN ESTABLISHED E ITHER BEFORE AO OR HIM.ACCORDINGLY,HE REJECTED THE APPEAL FILED BY THE ASSESSEE. 2.2. BEFORE US,THE AUTHORISED REPRESENTATIVE(AR) STATED THAT THE AO AND THE FAA HAD ALLOWED THE TICKET BOOKING,THAT THEY HAD DISALLOWED FOREIGN EXC HANGE PURCHASED BY THE ASSESSEE,THAT FOREIGN EXCHANGE TAKEN BY THE ASSESSEE WAS REFUNDED OR WAS EN-CASHED, THAT THE AO HAD NOT DOUBTED THE FOREIGN TOURS,THAT DISALLOWANCE WAS 10% OF TOTAL EX PORT.HE REFERRED TO PAGE NOS. 64, 65, 68 AND 69 OF THE PAPER BOOK.HE RELIED UPON THE DECISION OF AH MADABAD TRIBUNAL IN THE CASE OF KRISHNORES LTD.(308 ITR-TRIBUNAL 8,PAGE-NO.8).DEPARTMENTAL REP RESENTATIVE(DR)SUPPORTED THE ORDER OF THE FAA. 2.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD FURNISHED THE DETAILS ABOUT THE ENCASH MENT/SURRENDER OF FOREIGN EXCHANGE BEFORE BOTH THE LOWER AUTHORITIES.PAGE NO. 64 ONWARDS EVIDENCE THE ENCASHMENT/SURRENDER OF FOREIGN EXCHANGE. THE AO OR THE FAA HAD NOT DOUBTED THE FOREIGN TOURS UNDERTAKEN BY THE EMPLOYEES OF THE ASSESSEE- COMPANY.AFTER CONSIDERING THE MATERIAL ON RECORD,SP ECIALLY PAGE NO. 65 TO 96 AND THE JUDGMENT OF KRISHNORES LTD.,WE ARE OF THE OPINION THAT THE ADDI TION UPHELD BY THE FAA WAS NOT BASED ON FACTS AVAILABLE ON THE RECORD.THE ASSESSEE HAD FILED ALL THE DETAILS BEFORE THE AO.THEREFORE, REVERSING THE ORDER OF THE FAA,WE DECIDE GROUND NO.1IN FAVOUR OF THE ASSESSEE. 3. NEXT GROUND OF APPEAL IS ABOUT DISALLOWANCE OF DIMI NUTION IN VALUE OF INVENTORIES OF WIP AMOUNTING TO RS.1,95,00,000/-.DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT IN THE NOTES TO ACCOUNTS IN SCHEDULE 17 THE ASSESSEE HAD MENTION ED THAT WORK-IN-PROGRESS(WIP)INCLUDED THE REVALUATED FIGURES.THE ASSESSEE CONTENDED THAT WIP HAD BEEN REVALUATED AFTER TECHNICAL REVALUATION OF THE MATERIAL WHICH WERE IMPOSITION TO BE SENT FO R DELIVERY BUT WERE NOT ACCEPTED BY THE CUSTOMERS.THE AO REJECTED THE CLAIM MADE BY THE ASS ESSEE AND HELD THAT IT HAD DEVIATED FROM VALUING THE STOCK CORRECTLY,THAT IT PRESENTED DISTO RTED PICTURE BY DIMINISHING THE VALUE OF WIP BY RS.1.95 CRORES.FINALLY,HE MADE THE DISALLOWANCE OF THE ABOVE AMOUNT AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. 3.1. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FAA.AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND THE ASSESSMENT ORDER,THE FAA HELD THAT THE AO HAD NOT ACCEPTED THE CLAIM MADE BY THE ASSESSEE ON THE GROUND THAT IT WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING AND HAD NOT INTIMATED THE CHAN GE OF ACCOUNTING SYSTEM DURING THE YEAR,THAT THE ASSESSEE COULD NOT REDUCE THE VALUE OF CLOSING STOCK,THAT IT HAD REDUCED THE PROFIT FOR THE YEAR UNDER APPEAL,THAT ALL THE GOODS WERE MANUFACTURED O N THE ORDER OF THE CLIENTS,THAT IN CASE OF THE DOMESTIC BUSINESS THE ORDER WAS RECEIVED FROM ONE P ARTY,THAT THE NET REALISABLE VALUE WAS REDUCED 3 ITA NOS. 1859 & 1405/MUM/2008-SMETEL TO RS.5 LAKHS FROM RS. 2.13 CRORES IN THAT CASE,THA T IF THE MANUFACTURING WAS DONE ON A SPECIFIC ORDER IT MUST HAVE RECEIVED AN ADVANCE,THAT IT WAS NOT POSSIBLE TO MANUFACTURE SUCH QUANTITY WITHOUT SPECIFIC ORDER,THAT THE EXPLANATION GIVEN B Y THE ASSESSEE WAS NOT SATISFACTORY,THAT IT HAD NOT INFORMED AS TO WHAT SAFEGUARDS WERE TAKEN BY IT FOR SUCH TRANSACTIONS.FINALLY, HE UPHELD THE ORDER OF THE AO. 3.2. BEFORE US,THE AR STATED THAT THERE WAS NO CHANGE IN METHOD OF ACCOUNTING, THAT ASSESSEE HAD FOLLOWED THE PROVISIONS OF SECTION 145(1), THAT THE FAA HAD TAKEN WRONG FIGURES OF LOCAL SALES.HE RELIED UPON THE CASES OF CHANDU SAMPAT (24 ITR 481) AND ALPHA LAVAL (266 ITR 418).HE FURTHER STATED THAT THE ISSUE HAD ARISEN ONLY DURING THE YE AR UNDER CONSIDERATION ONLY, THAT THE ASSESSEE HAD ENTERED INTO AN AGREEMENT,THAT LC WAS NOT OPENED EV EN AFTER THE AGREEMENT, THAT BECAUSE OF THE GLOBAL RECESSION THE TRANSACTION TAKEN PLACE.DR SUP PORTED THE ORDER OF THE FAA. 3.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD FILED EXPLANATION/RECONCILIATION OF OP ENING AND CLOSING STOCK ALONG WITH THE DETAILS OF WIP WHICH INCLUDED JOBS UNDERTAKEN BY IT FOR CUSTOM ERS( PAGE NO.59 OF PB).WE FIND THAT THE ASSESSEE HAD STATED THAT THE CUSTOMERS HAD NOT FULF ILLED THE COMMITMENTS AND HAD NOT TAKEN DELIVERIES OF THE MACHINERY,THAT IT OBTAINED TECHNI CAL EVALUATION REGARDING THE VALUATION OF THE MATERIAL AND ACCORDINGLY STOCKS HAD BEEN CARRIED AT NET REALISABLE VALUE.VIDE ITS LETTER DATED 30.01. 2006(PG.61 AND 62 OF THE PB),THE ASSESSEE HAD MADE SUBMISSION IN THIS REGARD.WE FIND THAT IN THE CASE OF ALPHA LAVEL(SUPRA)IN THE ALMOST IDENTICAL C IRCUMSTANCES,THE HONBLE BOMBAY HIGH COURT HAD HELD THAT THE ASSESSEE WAS ENTITLED TO VALUE TH E CLOSING STOCK AT MARKET VALUE OR AT COST WHICH - EVER WAS LOWER,THAT THE ASSESSEE HAD PROVED THAT GO ODS WERE SOLD AT THE LESSER PRICE IN THE SUBSEQUENT YEAR AS COMPARED TO THE REVALUED PRICE. IN OUR OPINION,THERE WAS NO CHANGE IN METHOD OF VAL UING THE STOCK AND THEREFORE ASSESSEE WAS NOT REQUIRED TO REPORT THE CHANGE IN THE RETURN ABOUT V ALUING THE STOCK.IT IS A FACT THAT BECAUSE OF THE RECESSION,THE ASSESSEE COULD NOT EXPORT THE GOODS O R SELL THE GOODS IN THE LOCAL MARKET.CONSIDERING THE PECULIAR CIRCUMSTANCES IT REVALUED THE INVENTOR Y.IN OUR OPINION THE AO/FAA SHOULD HAVE MADE FURTHER ENQUIRES IN THIS REGARD.WE FIND THAT IN THE CASE OF ALPHA LAVAL (SUPRA),THE HON'BLE BOMBAY HIGH COURT HAD HELD THAT IN THE SUBSEQUENT ASSESSME NT YEAR THE GOODS IN QUESTION WERE SOLD AT THE LESSER PRICE THEN SHOW IN THE CLOSING STOCK.WE FIND THAT AO HAD NOT CARRIED OUT ANY EXERCISE IN THIS REGARD. IN OUR OPINION, IN THE INTEREST OF JUSTICE, THE MATTER SHOULD BE RESTORED BACK TO THE FILE OF THE AO FOR FRESH ADJUDICATION.HE IS DIRECTED TO VERIFY THE CORRECTNESS OF THE FIGURE OF LOCAL SALES ADOPTED BY THE FAA AND DISPUTED BY THE ASSESSEE.HE SHOULD ALSO VERIFY THE REALISED VALUE OF THE INVENTORY WHEREIN REDUCTION WAS MADE BY THE ASSESSE E DURING THE YEAR UNDER CONSIDERATION.IN CASE IT IS FOUND THAT GOODS WERE SOLD AT THE PRICE OR AT THE LESSER PRICE SHOWN BY THE ASSESSEE AS ON THE LAST DATE OF THE ACCOUNTING YEAR UNDER CONSIDERATIO N,THE CLAIM MADE BY IT HAS TO BE ALLOWED.WE WANT TO MAKE IT CLEAR THAT ISSUE IS BEING RESTORED TO THE FILE OF THE AO FOR LIMITED PURPOSE.GROUND NO.2 IS DECIDED IN FAVOUR OF THE ASSESSEE, IN PART. ITA NO. 1495/MUM/2008: 4 .FIRST GROUND OF APPEAL FILED BY THE AO PERTAINS TO DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT.DURING THE COURSE OF ASSESSMENT PROCEEDINGS,THE AO FOUND THAT ASSESSEE HAD MADE INVESTMENT OF RS.1,00,50,000/- AND RS.3,02,82,000/- RESPECTIVE LY IN ITS SISTER CONCERNS M/S SM INDIA LTD. (SMIL)AND M/S SM DYCHEM LTD.(SMDL).HE FOUND THAT TH ERE WAS NO RETURN ON THESE INVESTMENTS FROM ITS SISTER CONCERNS.HE HELD THAT 38.4% OF INVE STMENT IN SHARES(RS.4,09,32,000 I.E. RS. L, 57, 17,888/-)WAS ATTRIBUTABLE TO SECURED LOAN TAKEN BY ASSESSEE.HE APPLIED SECTION 14A OF THE ACT AND DISALLOWED THE INTEREST ON PROPORTIONATE BASIS WHIC H WORKED OUT TO RS.26,44,597/.HE ADDED IT BACK TO THE TOTAL INCOME OF THE ASSESSEE. 4.1. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FAA.BEFORE HIM,IT WAS ARGUED THAT FROM THE ANALYSIS OF SCHEDUL E 3 OF BALANCE SHEET,THE DETAILS OF WORKING 4 ITA NOS. 1859 & 1405/MUM/2008-SMETEL CAPITAL LOAN AND HIRE PURCHASE LOAN IT WAS CLEAR TH AT THE ASSESSEE HAD UTILISED LOAN AMOUNTS FOR MAKING INVESTMENT IN SHARES,THAT IT HAD USED ITS RE SERVE FUNDS FOR PURCHASING SHARES. AFTER CONSIDERING THE FACTS OF THE CASE AND SUBMISS ION MADE BY THE ASSESSEE,HE HELD THAT THE DISALLOWANCE OF RS.26,44,597/- WAS MADE ON THE GROU ND THAT THE ASSESSEE HAD MADE INVESTMENT OF RS.4.09 CRORES IN TWO SISTER CONCERNS WHILE AN AMOU NT OF RS.L.37 CRORES HAD BEEN PAID AN INTEREST,THAT THE AO HAD CONSIDERED THE INVESTMENT IN SISTER CONCERN AS TO BE COVERED U/S 14A,THAT THE AO ERRED IN INVOKING PROVISION OF 14A,THAT THE ASSESSEE DID NOT HAVE ANY INCOME DURING THE YEAR WHICH WAS NOT FORMING PART OF THE TOTAL INCOME ,THAT A DEDUCTION WAS ALLOWABLE U/S.37 OF THE ACT,IF THE EXPENDITURE WAS NOT CAPITAL OR PERSONAL IN NATURE AND HAS NOT BEEN INCURRED FULLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, THAT SECTI ON 14A MADE AN EXCEPTION IN RESPECT OF INCOME IF IT WAS NOT FORMING PART OF THE TOTAL INCOME,THAT IT WAS NOT THE CASE OF THE AO THAT THE INVESTMENT MADE IN SISTER CONCERN WAS NOT FULLY AND EXCLUSIVEL Y FOR THE PURPOSE OF BUSINESS,THAT DISALLOWANCES WAS MADE BECAUSE IN THE OPINION OF AO THE INVESTMEN T WOULD GENERATE TAX-FREE INCOME,THAT IT WAS MERELY A PRESUMPTION AND NO DISALLOWANCE COULD BE M ADE ON THE BASIS OF SUCH PRESUMPTION.HE FINALLY HELD THAT INTEREST EXPENDITURE ON BORROWED FUND WAS ALLOWABLE ON THE FACTS OF THE CASE AND PROVISION OF SECTION 14A WAS NOT APPLICABLE. 4.2. BEFORE US,THE DEPARTMENTAL REPRESENTATIVE(DR)SUPPOR TED THE ORDER OF THE AO.AUTHORISED REPRESENTATIVE(AR)STATED THAT THERE WAS NO EVIDENCE TO PROVE THAT ASSESSEE HAD EARNED EXEMPT INCOME AND FOR THAT IT HAD CLAIMED SOME EXPENDITURE . 4.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE AO HAD INVOKED THE PROVISIONS OF SECTION 14A OF THE AC T WITHOUT UNDERSTANDING THE REAL NATURE OF THE TRANSACTIONS.THE ASSESSEE HAD NOT SHOWN ANY INCOME UNDER THE HEAD EXEMPT INCOME UNDER CHAPTER III OF THE ACT FOR WHICH IT HAD CLAIMED INCURRING O F EXPENDITURE.UNTIL AND UNLESS BOTH THESE CONDITIONS ARE FULFILLED PROVISIONS OF SECTION 14A CANNOT AND SHOULD NOT BE INVOKED.THE FAA HAD GIVEN A CATEGORICAL FINDING OF FACT IN THIS REGARD. SECONDLY,THE AO HAS NOT FOUND ANY EVIDENCE THAT THE INTEREST EXPENSES INCURRED BY THE ASSESSEE WERE NOT FOR WHOLLY AND EXCLUSIVELY FOR THE BUSINESS OF THE ASSESSEE.IN THESE CIRCUMSTANCES,WE ARE OF TH E OPINION THAT THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL OR FACTUAL INFIRMITY.SO,HIS O RDER ON BOTH THE COUNTS-DELETION OF 14A DISALLOWANCE AND ALLOWING THE INTEREST EXPENDITURE U/S.37-HAS TO BE UPHELD.GROUND NO.1 IS DECIDED AGAINST THE AO. 5. NEXT GROUND IS ABOUT ADDITION MADE UNDER THE HEAD C ESSATION OF LIABILITY,U/S.41 OF THE ACT, AMOUNTING TO RS.54.56 LAKHS.DURING THE ASSESSMENT P ROCEEDINGS,THE FOUND THAT IN CASE OF 22 PARTIES CREDIT BALANCES WERE OUTSTANDING.HE PREPARED A CHAR T OF THOSE PARTIES AND HELD THAT THE OUTSTANDING BALANCE OF SUNDRY CREDITORS AS ON 31.03.2003 WAS AT RS.54,56,353/- WERE NO MORE PAYABLE,THAT THE ASSESSEE ALSO FAILED TO JUSTIFY THE BALANCES SHOWN AS PAYABLE,THAT AS PER THE PROVISION OF SECTION 41 OF ACT,WHEN THE LIABILITY CEASED TO EXIST THE SAME COULD NOT BE ALLOWED,THAT THE LIABILITY SHOWN BY ASSESSEE WAS NO MORE PAYABLE,THAT CREDITORS WERE SH OWN SINCE SO MANY YEARS,THAT THE ASSESSEE ALSO FAILED TO FILE THE CORRESPONDENCE MADE WITH THE CRE DITORS,THAT IT WAS NOT POSSIBLE TO CONSIDER THE LIABILITY AS PAYABLE.FINALLY,HE MADE AN ADDITION OF RS.54.56 LAKHS. 5.1. IN THE APPELLATE PROCEEDINGS,THE ASSESSEE SUBMITTED THAT IT HAD NOT RECEIVED ANY PAYMENTS OR INTIMATION FROM THE CREDITORS THAT THEIR CREDIT BAL ANCES WERE FORFEITED BY THEM,THAT MERELY BECAUSE OF CREDIT BALANCES REMAINED UNPAID FOR THREE YEARS THE SAME COULD NOT BE ADDED AS INCOME OF THE ASSESSEE,THAT THE AO HAD NOT PROVED THAT THE CREDIT BALANCE OUTSTANDING HAD BEEN TAKEN INTO COMPUTING THE TOTAL INCOME IN EARLIER YEAR OR THAT THE ASSESSEE HAD OBTAINED IN CASH OR IN ANY OTHER MANNER WHATSOEVER ANY AMOUNT IN RESPECT OF SUCH LOS S OR EXPENDITURE OR SOME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSION ON CESSA TION THEREOF,THAT THE AO DID NOT GIVE ANY SUCH FINDINGS BUT MERELY STATED THAT THE LIABILITY WAS ' NO MORE PAYABLE' AS THE 'CREDITORS WERE SHOWN SINCE SO MANY YEARS',THAT THE AO 'S CONCLUSION THAT PROVISION OF SECTION 41 OF THE ACT WERE APPLICABLE WAS NOT SUPPORTED BY ANY EVIDENCE. 5 ITA NOS. 1859 & 1405/MUM/2008-SMETEL AFTER CONSIDERING THE FACTS OF THE CASE AND SUBMISS ION MADE BY THE ASSESSEE,THE FAA HELD THAT THE AO HAD DISALLOWED AN AMOUNT OF RS.54,56,353/- U/S. 41(1) OF THE ACT,THAT IN THE AO WAS OF THE OPINION THAT THE SUNDRY CREDITORS APPEARING IN THE BALANCE SHEET WERE CONSTANT FOR LAST THREE YEARS AND THEREFORE THE LIABILITIES HAD CEASED TO EXIST,T HAT THE AMOUNTS UNDER CONSIDERATION WERE APPEARING AS SUNDRY CREDITORS IN THE BALANCE SHEET OF THE ASS ESSEE FOR MORE THAN THREE YEARS IN THE BALANCE SHEET,THAT MERELY BECAUSE THEY HAVE REMAINED OUTSTA NDING FOR SOME YEARS THEY DID NOT COME AUTOMA -TICALLY U/S.41(1) OF THE ACT,THAT THERE SHOULD BE SOME EVIDENCE ON RECORD THAT IN RESPECT OF SUCH LOSS OR EXPENDITURE OR TRADING LIABILITY CLAIMED IN EARLIER YEARS THE ASSESSEE HAS OBTAINED IN SOME MANNER SOME BENEFIT BY WAY OF CESSATION OR REMISSIO N,THAT THERE SHOULD BE SOME EVIDENCE ON RECORD THAT LIABILITY CEASED TO EXISTS IN RESPECT O F THE OUTSTANDING,THAT THERE WAS NO PRESUMPTION IN LAW THAT LIABILITY WHICH REMAINED OUTSTANDING FOR T HREE YEARS THAT CEASED TO EXISTS,THAT THE AO HAD NOT BROUGHT ANYTHING ON RECORD TO PROVE THAT EVEN I F THESE WERE TRADING LIABILITY THEY HAD CEASED TO EXISTS,THAT ONUS IN RESPECT OF THE OUTSTANDING THAT THEY WERE NOT IN THE NATURE OF TRADING LIABILITIES WAS ON THE ASSESSEE,THAT THE ONUS REGARDING THEIR C ESSATION WAS ON AO.FINALLY,HE DELETED THE DISALLOWANCE. 5.2. BEFORE US,THE DR SUPPORTED THE ORDER OF THE AO.THE AR STATED THAT LIABILITIES HAD NOT CEASED, THAT THE AO HAD NOT PROVED THAT THERE WAS CESSATION OF LIABILITY.WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.AS PER THE TAXAT ION JURISPRUDENCE THE VERY FIRST CONDITION FOR INVOKING SECTION 41(1) OF THE ACT IS THAT AN ALLOWA NCE OR DEDUCTION OUGHT TO HAVE BEEN MADE IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF ANY LOSS,EXPE NDITURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE.THE AO HAS NOT DISCUSSED AS TO WHEN THE DE DUCTION WAS ALLOWED.ON THE CONTRARY THE RECORDS REVEAL THAT NO ALLOWANCE OR DEDUCTION HAD BEEN MADE IN THE ASSESSMENT OF THE ASSESSEE IN ANY EARLIER YEAR.CONSEQUENTLY, THERE WAS NO QUESTIO N OF INVOKING SECTION 41(1).SO,IN OUR OPINION THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL INFIRMITY.CONFIRMING HIS ORDER,WE DECIDE GROUND NO.2 AGAINST THE AO. AS A RESULT,APPEAL FILED BY THE ASSESSEE STANDS PAR TLY ALLOWED AND THE APPEAL OF THE AO STANDS DISMISSED. 0*1 #)* 3 4 , /*1 5 , * 6 7 #)* - , #5 , * 6. ORDER PRONOUNCED IN THE OPEN COURT ON 11TH ,MARCH,2 015. !/ , .$ ! 9 :# 11 ,< , ,, , 201 5 , @ SD/- SD/- ( /JOGINDER SINGH) ( !' / RAJENDRA) / JUDICIAL MEMBER ! ! ! ! / ACCOUNTANT MEMBER / MUMBAI, :# /DATE: 11.03.2015 SK !/ !/ !/ !/ , ,, , '*A '*A '*A '*A B!A$* B!A$* B!A$* B!A$* / COPY OF THE ORDER FORWARDED TO : 1. / %& 2. RESPONDENT / '(%& 3. THE CONCERNED CIT(A)/ C D , 4. THE CONCERNED CIT / C D 5. DR E BENCH, ITAT, MUMBAI / AE '*# , . . . 6. GUARD FILE/ 0 (A* '* //TRUE COPY// !/# / BY ORDER, 6 ITA NOS. 1859 & 1405/MUM/2008-SMETEL F / DY./ASST. REGISTRAR , /ITAT, MUMBAI