M/s. V.K. Patel & Co., Ahmedabad V. The ACIT,Range-9, Ahmedabad

ITA 3106/AHD/2010

• Counselvise Citation: 310620514 RSA 2010
• Duration Of Justice: 9 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-09-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 07-09-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 22-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K GUPTA
• Assessee Lawyers: S N SOPARKAR
• Keywords: Business expenditure; Opportunity of being heard; Additional evidence; Bad and doubtful debts; TDS; Set aside
• Section: 271(1)(c); 143(3); 234B; 37

Judgement Text

, , , , , IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD, C BENCH . .. . . .. . , , , , !' !' !' !', , , , #$ #$ #$ #$ %&' ( %&' ( %&' ( %&' (, , , , ) ) ) ) & ' & ' & ' & ' BEFORE S/SHRI G.D. AGARWAL, VICE-PRESIDENT AND BHAVNESH SAINI, JUDICIAL MEMBER) ITA NO.3106/AHD/2010 [ASSTT.YEAR : 2007-08] M/S.V.K. PATEL & CO. V.K.PATEL HOUSE 35-B, MUNICIPAL SERVANTS SOCIETY, NR. FOOTBALL GROUND KANKARIA, AHMEDABAD 380 022. /VS. ACIT, RANGE-9 AHMEDABAD. ( (( (+, +, +, +, / APPELLANT) ( (( (-.+, -.+, -.+, -.+, / RESPONDENT) /0 1 2 &/ ASSESSEE BY : SHRI S.N. SOPARKAR ) 1 2 &/ REVENUE BY : SHRI S.K. GUPTA 45 1 06/ DATE OF HEARING : 7 TH SEPTEMBER, 2011 789 1 06/ DATE OF PRONOUNCEMENT : 16 TH SEPTEMBER, 2011 &' / O R D E R PER G.D. AGARWAL, VICE-PRESIDENT : THIS IS ASSESSEES APPEAL AGAINST ORDER OF THE COMMISSIONER OF INCOME-TAX (AP PEALS)-XV DATED 22-10- 2010 ARISING OUT OF THE ORDER OF THE ASSESSING OFFI CER UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961. 2. THE GROUND NO.1 OF THE ASSESSEES APPEAL READS A S UNDER: 1. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS ON CONFIRMING ACTION OF THE AO IN NOT GRANTING TDS CREDIT OF RS.3,75,571 /- CLAIMED ON INCOME OFFERED FOR TAXATION IN A.Y.2006-2007. BOTH THE LO WER AUTHORITIES FAILED TO APPRECIATE THE FACT THAT THE APPELLANT FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING OFFERED THE INCOME FOR TAXATION IN EARLI ER YEARS WHEREAS THE PAYER ISSUED TDS CERTIFICATE UPON DEDUCTION OF TAXE S IN THE YEAR UNDER CONSIDERATION. THE LD.CIT(A) OUGHT TO HAVE ALLOWED THE CREDIT FOR THE SAME. ITA NO.3106/AHD/2010 -2- 3. AT THE TIME OF HEARING BEFORE US, IT IS STATED B Y THE LEARNED COUNSEL THAT THE AO DID NOT ALLOW CREDIT FOR THE TDS OF RS.3,75, 571/- ON THE GROUND THAT THE INCOME FROM WHICH THE TAX WAS DEDUCTED AT SOURCE WA S OFFERED FOR TAXATION IN ASSESSMENT YEAR 2006-2007. THEREFORE, THE CREDIT F OR THE TDS CANNOT BE ALLOWED IN THE YEAR UNDER CONSIDERATION. IT IS STA TED BY THE LEARNED COUNSEL THAT THE INCOME ACCRUED TO THE ASSESSEE IN THE LAST YEAR THEREFORE THE ASSESSEE OFFERED THE INCOME. THE TAX WAS DEDUCTED FROM SUCH INCOME. HOWEVER, DEDUCTEE DEPOSITED THE TDS WITH THE GOVERNMENT ONLY DURING THE ACCOUNTING YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDER ATION. THEREAFTER, HE ISSUED CERTIFICATE OF TDS. ON THE BASIS OF TDS CERTIFICATE THE ASSESSEE CLAIMED THE CREDIT FOR TDS IN THE YEAR UNDER CONSIDERATION. HE HOWEVER STATED THAT THE ASSESSEE HAS NO OBJECTION IF THE CREDIT FOR THE TDS IS ALLOWED EITHER IN THE YEAR UNDER CONSIDERATION OR IN THE ASSESSMENT YEAR 2006- 2007 AS THE DEPARTMENT DEEMS FIT. THE LEARNED DR, ON THE OTHER HAND, RELI ED UPON THE ORDERS OF THE AUTHORITIES BELOW. 4. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF BO TH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. IT IS NOT I N DISPUTE THAT THE TDS TO THE EXTENT OF RS.3,75,571/- WAS DEDUCTED FROM THE ASSES SEES INCOME. SUCH TDS HAS ALREADY BEEN DEPOSITED BY THE DEDUCTEE WITH THE GOVT. OF INDIA. THE INCOME FROM WHICH THE TAX WAS DEDUCTED IS ALREADY O FFERED TO TAX AND THE ASSESSED AS SUCH. THEREFORE, THERE CANNOT BE ANY D ISPUTE THAT THE ASSESSEE IS ENTITLED TO CREDIT OF SUCH TDS. IF IN THE OPINION OF THE AO, THE CREDIT FOR TDS IS NOT ALLOWABLE IN A.Y.2007-2008, BUT THE SAME IS ALLOWABLE IN A.Y.2006- 2007, HE SHOULD ALLOW IT IN THE YEAR 2006-2007. BU T THE ASSESSEE CANNOT BE DENIED CREDIT FOR THE TDS TOTALLY. IN VIEW OF THE ABOVE, WE SET ASIDE THE ORDER OF THE AUTHORITIES BELOW ON THIS POINT AND RESTORE THE MATTER BACK TO THE FILE OF THE AO. WE DIRECT HIM TO ALLOW CREDIT FOR TDS EITH ER IN A.Y.2007-08 OR IN A.Y.2006-2007 AS HE DEEMS FIT. ITA NO.3106/AHD/2010 -3- 5. GROUND NO.2 READS AS UNDER: 2. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF THE AO IN DISALLOWING PROVISION MADE OF R S.7,11,31,3125/- AGAINST COUNTERCLAIM BY AAI TREATING THE SAME AS ON LY A CONTINGENT LIABILITY. BOTH THE LOWER AUTHORITIES FAILED TO AP PRECIATE THE FACT THAT THE SAME WAS CLAIMED ON MATCHING BASIS AGAINST THE CLAI M OF THE APPELLANT AGAIN AAI OF RS.14,97,45,000/- OFFERED TO TAX AS CO NTRACT INCOME THOUGH THE RIGHT TO RECEIVE HAS NOT ARISEN. LD.CIT(A) OUG HT TO HAVE ALLOWED THE CLAIM OF THE APPELLANT OR ALTERNATIVELY IF THE CLAI M OF CONTINGENT EXPENSE OF RS.7,11,31,315/- WAS TO BE DISALLOWED THEN THE C ONTINGENT INCOME OFFERED OF RS.14,97,45,000/- ALSO REQUIRES TO BE EX CLUDED. 6. DURING THE COURSE OF APPELLATE PROCEEDINGS BEFOR E THE ITAT, THE ASSESSEE MODIFIED THE GROUND NO.2 WITH THE FOLLOWIN G GROUNDS OF APPEAL: (2A) LD. CIT (A) AS WELL AO ERRED IN TAXING OF RS. 14, 97, 50, 000/- BEING THE AMOUNT OF CLAIM MADE AGAINST THE AAI WHIC H IS PENDING BEFORE THE ARBITRATOR TILL THE CLOSE OF THE YEAR. THEY OUG HT TO HAVE APPRECIATED THAT TILL THE ARBITRATION IS CONCLUDED, AWARD IS FI NALLY MADE AND THE AMOUNT IS ACTUALLY DISBURSED TO THE APPELLANT, NO I NCOME COULD BE REGARDED TO HAVE ACCRUED TO THE APPELLANT. (2B) ALTERNATIVELY AND WITHOUT PREJUDICE TO THE ABO VE GROUND, THE LOWER AUTHORITIES ERRED IN NOT APPRECIATING THAT IF AT AL L INCOME REFERRED TO ABOVE IS TAKEN INTO CONSIDERATION, THEN ON MATCHING PRINCIPLE, AMOUNT OF RS.7,11,31,315/- CLAIMED AGAINST THE APPELLANT BY A A1 BEFORE THE ARBITRATOR OUGHT TO HAVE BEEN ALLOWED AS A DEDUCTIO N ON MATCHING PRINCIPLE. (2C) ALTERNATIVELY AND WITHOUT PREJUDICE TO THE ABO VE GROUNDS, THE LOWER AUTHORITIES ERRED IN NOT APPRECIATING THAT IF AT ALL TAXING EVENT HAS OCCURRED IN THE CURRENT YEAR, THEN THE APPELLAN T CAN NOT BE CALLED UPON TO PAY TAX ON AN AMOUNT EXCEEDING RS.44,13,056 .84 WHICH HAS BEEN AWARDED BY THE ARBITRATOR TO THE APPELLANT CON SIDERING THE ABOVE CLAIM AND COUNTER CLAIM OF THE RESPECTIVE PARTIES. 7. APROPOS THIS GROUND, THE ASSESSEE ALSO REQUESTED FOR ADMISSION OF ADDITIONAL EVIDENCE I.E. ARBITRATION AWARD IN THE A RBITRAL PROCEEDINGS BETWEEN THE ASSESSEE AND AIRPORT AUTHORITY OF INDIA (HEREIN AFTER WILL BE REFERRED AS ITA NO.3106/AHD/2010 -4- AAI). AT THE OUTSET, THE LEARNED DR VEHEMENTLY OBJECTED TO THE ADMISSION OF ADDITIONAL EVIDENCE AS WELL AS MODIFICATION OF T HE GROUND NO.2 OF THE ASSESSEES APPEAL. HE ALSO FURNISHED DETAILED WRIT TEN SUBMISSIONS WITH REGARD TO THE OBJECTION TO THE ADMISSION OF THE ADDITIONAL EVIDENCE AND MODIFICATION OF THE GROUND NO.2 OF THE APPEAL AS WELL AS ON THE MER IT OF THE ASSESSEES GROUND. FOR THE SAKE OF CONVENIENCE, THE SAME IS REPRODUCED BELOW: THIS GROUND IS REGARDING CONFIRMING THE ACTION OF A.O. IN DISALLOWING PROVISIONS MADE OF RS.7,11,31,315/- AGAINST COUNTER CLAIM BY AAI TREATING THE SAME AS ONLY A CONTINGENT LIABILITY. T HE GROUND FURTHER STATED THAT BOTH THE LOWER AUTHORITIES FAILED TO AP PRECIATE THE FACT THAT THE SAME WAS CLAIMED ON MATCHING BASIS AGAINST THE CLAIM OF THE APPELLANT AGAINST AAI OF RS.14,97,45,000/- OFFERED TO TAX AS CONTRACT INCOME THOUGH THE RIGHT TO RECEIVED HAD NOT ARISEN. THE APPELLANT STATED IN THE GROUND THAT THE CIT(A) OUGHT TO HAVE ALLOWED THE CLAIM OF THE APPELLANT OR ALTERNATIVELY IF THE CLAIM OF CONT INGENT EXPENSE OF RS.7,11,31,315/- WAS TO BE DISALLOWED THEN THE CONT INGENT INCOME OFFERED OF RS.14,97,45,000/- ALSO REQUIRED TO BE EX CLUDED. 1.2 THIS GROUND HAS NOW BEEN MODIFIED WHEREBY THE A PPELLANT HAS ARGUED THAT THE AO AS WELL AS CIT(A) ERRED IN TAXIN G THE AMOUNT OF RS. 14,97,45,000/- BEING THE AMOUNT OF CLAIM MADE AGAIN ST THE AAI WHICH IS PENDING BEFORE THE ARBITRATOR TILL THE CLOSE OF THE YEAR. IT IS ARGUED THAT TILL THE ARBITRATION IS CONCLUDED, AWARD IS FI NALLY MADE AND THE AMOUNT IS ACTUALLY DISBURSED TO THE APPELLANT, NO I NCOME COULD BE REGARDED TO HAVE ACCRUED TO THE APPELLANT AND ALTER NATIVELY ON MATCHING PRINCIPLE AMOUNT OF RS.7,11,31,315/- CLAIM ED BY THE APPELLANT SHOULD HAVE BEEN ALLOWED. 2.1 IN THIS REGARD IT IS STATED THAT THE ISSUE HAS BEE N DISCUSSED IN PARA 4 FROM PAGES 3 TO 5 OF THE ASSESSMENT ORDER. 1. FROM THERE IT IS CLEAR THAT BEFORE THE AO THE IS SUE OF INCOME OF RS.14,97,45,000/- WAS NOT AT ALL THERE BECAUSE THIS INCOME WAS OFFERED BY THE ASSESSEE IN THE PROFIT & LOSS ACCOUNT ON ACC RUAL BASIS. IF THE ASSESSEE CONSIDERED THAT THIS IS NOT ACCRUED, THE A SSESSEE SHOULD NOT HAVE SHOWN THE SAME IN ITS BOOKS OF ACCOUNTS. THE V ERY FACT THAT THE APPELLANT HAS SHOWN THIS INCOME IN THE BOOKS OF ACC OUNTS IS VERY CLEAR THAT THE INCOME HAD ACCRUED ACCORDING TO THE ASSESS EE. 2. WHAT HAS BEEN OFFERED IN THE RETURN CANNOT BE RE MOVED FROM THE RETURN EXCEPT BY A PROCEDURE OF LAW. THE INCOME-TAX ACT PROVIDES THAT ITA NO.3106/AHD/2010 -5- ANY RETURN CAN BE REVISED WITHIN THE TIME ALLOWED U /S.139(5). IF THE ASSESSEE CONSIDERED THAT THIS INCOME WAS NOT ACCRUE D AND IT WAS WRONGLY SHOWN, THE ASSESSEE SHOULD HAVE FILE A REVI SED RETURN U/S.139(5) WITHIN THE TIME ALLOWED BY THE INCOME-TA X ACT. 3. THE ASSESSEE FIRST OF ALL SHOWED THIS INCOME IN THE P&L ACCOUNT FOR THE YEAR ENDED 31 ST MARCH, 2007 RELEVANT TO A.Y. 2007-08. THE RETURN WAS FILED ON 30 TH OCTOBER, 2007. THE APPLICATION MADE BY THE APPELLANT BEFORE THE HONBLE ARBITRAL TRIBUNAL IS D ATED 14 TH JULY, 2007 ( PAGE 117-196 OF PAPER BOOK FILED BY THE ASSESSEE ON 25 TH AUGUST, 2011). THIS SHOWS THAT BEFORE THE ASSESSEE FILED TH E INCOME-TAX RETURN ON 30 TH OCTOBER, 2007, THE ASSESSEE HAD ALREADY FILED THE APPLICATION BEFORE THE ARBITRAL TRIBUNAL. IF THE ASSESSEE CONSI DERED THAT THE INCOME OF RS. 14,97,45,000/- HAD NOT ACCRUED TO THE ASSESS EE, THE ASSESSEE SHOULD NOT HAVE SHOWN IN THE INCOME-TAX RETURN. FUR THER, THE ASSESSEE COULD HAVE REVISE THE RETURN TAKING OUT THE INCOME WITHIN THE PERIOD ALLOWED U/S.139. THE ASSESSEE HAS NOT DONE SO. THIS CLEARLY PROVES BEYOND DOUBT THAT THE ASSESSEE CONSIDERED THIS INCO ME OF RS.14,97,45,000/- AS INCOME ACCRUED DURING THE CURR ENT YEAR AND HENCE THE ASSESSEES GROUND THAT THIS INCOME SHOULD BE REMOVED IS NOT CORRECT AND TOTALLY AGAINST THE PROVISIONS OF L AW. 2.2 WITH RESPECT TO THE CLAIM OF RS.7,11,31,315/-, THIS CLAIM HAS BEEN DISALLOWED BY THE AO ON THE GROUND THAT IT IS A CONTINGENT LIABILITY AND IS NOT AN ACCRUED LIABILITY. THE ASSESSEE ADMIT TED BEFORE THE AO (PARA 4.3 OF THE ASSESSMENT ORDER) THAT THE SAID AM OUNT IS ONLY A PROVISION AND AS PER ASSESSEES OWN SUBMISSION THE SAME WAS A PROVISION TOWARDS THE COUNTER CLAIM OF AAI, SURAT. AS PER THE SETTLED DECISION OF LAW AND IN VIEW OF THE DECISIONS RELIED UPON BY THE AO ON PAGE 4 OF THE ASSESSMENT ORDER, A CONTINGENT LIABIL ITY IS NOT ALLOWABLE. THE AO HAS RELIED ON THE DECISION OF HONBLE SUPREM E COURT IN THE CASE OF SHREE SAJJAN MILLS LTD. VS. CIT-156 ITR 585 , NAINITAL BANK LTD VS. CIT -62 ITR638(SC), ALLAHABAD HIGH COURT DECISI ON IN THE CASE OF SWADESHI COTTON MILLS CO.LTD. 125 ITR 33 AND THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF PHALTON SUGAR WORK S LTD 162 ITR 622 (BOM). THE AO HAS DISCUSSED THESE CASE LAWS IN PARA 4.3 OF THE ASSESSMENT ORDER. THE SAME IS AS UNDER: I) SHREE SAJJAN MILLS LTD. VS. CIT AT 156 ITR (SC) WHEREIN THE HONBLE SUPREME COURT WHILE DEALING WITH ALLOWABILITY OF A CONTINGENT LIABILITI ES HAS HELD THAT CONTINGENT LIABILITIES DO NOT CONSTITUTE EXPENDITURE AND CANNOT BE THE SUBJECT MATTER OF DEDUCTION EVEN UNDER THE MERCANTILE SYSTEM OF ACCOUNTING. EXPENDITURE WHICH IS DEDUCTIBLE FOR INCOME-TAX PURPOSES IS ITA NO.3106/AHD/2010 -6- TOWARDS A LIABILITY ACTUALLY EXISTING AT THE TIME B UT SETTING APART MONEY WHICH MIGHT BECOME EXPENDITURE ON THE HAPPENING OF AN EVENT IS NOT EXPENDITURE. II) CIT VS. NAINITAL BANK LTD. AT 62 ITR 638 (SC) IN THE SAID CASE THE HONBLE SUPREME COURT HAS HELD THAT A MERE LIABILITY TO SATISFY AN OBLIGATION BY AN ASSESSEE IS UNDOUBTEDLY NOT EXPENDITURE, IT IS ONLY WHEN HE SATISFIES THE OBLIGATION BY DELIVERY OF CASH OR PROPERTY OR BY SETTLEMENT OF ACCOUNTS THAT THERE IS EXPENDITURE. BUT EXPENDITURE DOES NOT NECESSARILY INVOLVE ACTUAL DELIVERY OF OR PARTING WITH MONEY OR PROPERTY. A MERE FORBEARANCE TO REALIZE A CLAIM IS NOT EXPENDITURE. III) SWADESHI COTTON MILLS CO. LTD. VS. CIT AT 125 ITR 33 (ALL), WHEREIN THE HONBLE ALLAHABAD HIGH COURT HAS HELD THAT IN THE CASE OF A STATUTORY LIABILITY THE QUANTIFICATION OR ASCERTAINMENT CANNO T POSTPONE ITS ACCRUAL, BUT IF THE LIABILITY IS BASED UPON SOME CONTRACTUAL OBLIGATION, IT ARISES ONLY WHEN IT IS ASCERTAINED. I) CIT VS. PHALTON SUGAR WORKS LTD. AT 162 ITR 622 (BOM.) IN THE SAID CASE THE BOMBAY HIGH COURT HELD THAT WHERE A LIABILITY ARISING OUT OF A CONTRACTUAL OBLIGATION IS DISPUTED, THE ASSESSEE IS ENTITLED TO CLAIM A DEDUCTION IN THE ASSESSMENT YEAR RELEVANT TO PREVIOUS YEAR IN WHICH THE DISPUTE IS FINALLY ADJUDICATED UPON AND SETTLED. 2.3 AS REGARD THE CLAIM OF THE ASSESSEE THAT AN ADDITI ONAL EVIDENCE IN THE FORM OF ARBITRATION AWARD SHOULD BE ADMITTED , IT IS STATED THAT ARBITRATION AWARD IS DATED 25 TH AUGUST 2009 (PAPER BOOK FILED BY THE ASSESSEE ALONGWITH THE ADDITIONAL EVIDENCE CONSISTI NG OF ARBITRATION AWARD). THIS AWARD HAS BEEN PASSED ON 25 TH AUGUST, 2009. THE ASSESSMENT ORDER WAS PASSED BY THE AO MUCH LATER ON 24 TH DECEMBER, 2009. WHY THIS AWARD WHICH IS NOW AN ADDI TIONAL EVIDENCE WAS NOT GIVEN BEFORE THE AO. FURTHER, EVEN DURING T HE APPELLATE PROCEEDINGS, THIS AWARD WAS NOT GIVEN TO THE CIT(A) . THE ORDER OF THE CIT(A) IS DATED 25 TH OCTOBER, 2009 AND THIS ARBITRATION AWARD WAS NOT PRESENTED AS ADDITIONAL EVIDENCE BEFORE THE CIT(A) ALSO. THE APPELLANT CANNOT FILE THIS ADDITIONAL EVIDENCE AT THIS STAGE BECAUSE THE PROVISIONS OF RULE 46-A ARE NOT SATISFIED. THE APPELLANT HAS F AILED TO SHOW WHAT ITA NO.3106/AHD/2010 -7- PREVENTED IT FROM FILING THE ARBITRATION AWARD COPY BEFORE THE AO OR BEFORE THE CIT(A). FURTHER, EVEN AS PER RULE 29 OF INCOME-TAX APPELLATE TRIBUNAL RULES, 1963, ADDITIONAL EVIDENCE CAN ONLY BE ADMITTED IF THE INCOME-TAX AUTHORITIES HAS DECIDED THE CASE WITHOUT GIVING SUFFICIENT OPPORTUNITY TO THE ASSESSEE TO AD DUCE EVIDENCE EITHER ON POINTS SPECIFIED BY THEM OR NOT SPECIFIED BY THE M, THE TRIBUNAL, FOR REASONS TO BE RECORDED, MAY ALLOW SUCH DOCUMENTS TO BE PRODUCED. IN THE PRESENT CASE NO SUCH CONDITION IS SATISFIED. TH E APPELLANT HAD THE COPY OF THE ARBITRATION AWARD EVEN BEFORE THE ASSES SMENT PROCEEDINGS WERE CONCLUDED, THERE IS NOTHING ON THE RECORD TO S HOW THAT THE APPELLANT HAD SUFFICIENT CAUSE WHICH PREVENTED THE ASSESSEE FROM DOING SO. THEREFORE, THE ADDITIONAL EVIDENCE SHOULD NOT BE ADMITTED. 2.4 FURTHER EVEN THIS ARBITRATION AWARD TREATED AS DECREE, THE SAME IS DISPUTED BY SOME OF THE PARTY AS STATED IN THE C OURT ON 5 TH SEPTEMBER, 2011 BY THE APPELLANT COUNSEL IN WHICH C ASE THIS ARBITRATION AWARD CANNOT BE TAKEN AS DECREE AND HEN CE CANNOT BE ADMITTED. ALTERNATIVELY, IF IT IS TREATED AS DECREE , THE SAME CANNOT BE EFFECT THE INCOME OFFERED BY THE APPELLANT IN THE I NCOME-TAX RETURN ON ACCRUAL BASIS EVEN AFTER THE ASSESSEE FILED THE ARB ITRATION APPLICATION. THEREFORE, EVEN AFTER THE ARBITRATION AWARD, THE IN COME OF RS.14,97,50,000/- CANNOT BE REMOVED AND DELETED WHE N THE ASSESSEE HAS HIMSELF OFFERED THE SAME IN THE P&L ACCOUNT ON ACCRUAL BASIS. IF THE ASSESSEE HAS NOT RECEIVED THE SAID AMOUNT, THE REMEDY LIES BY CLAIMING THE BAD DEBTS BUT BY NOT REMOVING THE SAID INCOME. THE BAD DEBTS CAN BE REMOVED FROM THE BOOKS OF ACCOUNTS. 2.5 IN VIEW OF THE ABOVE, IT IS SUBMITTED THAT THE INC OME OF RS.14,97,50,000 HAS BEEN RIGHTLY TAXED AS THE SAME HAS BEEN OFFERED BY THE ASSESSEE ON ACCRUAL BASIS AND THE EXPENDITUR E OF RS.7,11,31,315/- HAS BEEN RIGHTLY DISALLOWED BECAUS E THE CLAIM WAS MADE ONLY ON THE BASIS OF COUNTER CLAIM MADE BY THE AAI, SURAT AND IT IS NOT ACCRUED LIABILITY BUT IT IS A CONTINGENT LIA BILITY. 8. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, STATED THAT THE MODIFIED GROUND BY THE ASSESSEE IS ONLY THE BIFURCA TION OF EXISTING GROUND NO.2 OF THE ASSESSEES APPEAL. HE HAS MODIFIED THE GROU ND FOR MORE CLARITY AND TO BRING OUT THE CONTROVERSY IN CLEAR TERM. HE THEREF ORE REQUESTED THAT MODIFIED GROUND SHOULD BE ADMITTED. WITH REGARD TO HIS REQU EST FOR ADMISSION OF ADDITIONAL EVIDENCE HE HAS STATED THAT BY WAY OF AD DITIONAL EVIDENCE, THE ASSESSEE HAS REQUESTED ONLY FOR ADMISSION OF AWARD BY THE ARBITRATOR. THAT THE ASSESSEE HAD UNDERTAKEN THE CONTRACT WORK WITH THE AAI. DUE TO DISPUTE ITA NO.3106/AHD/2010 -8- BETWEEN THE ASSESSEE AND THE AAI, THE MATTER WAS RE FERRED TO ARBITRATOR IN WHICH THE ASSESSEE HAS CLAIMED A SUM OF RS.31,71,64 ,710/-. ON FILING OF THE SAID CLAIM, THE AAI HAS CONVEYED TO THE ARBITRATOR THAT THE CLAIMS AMOUNTING TO RS.17,49,69,710/- ARE BEYOND THE SCOPE OF THE REFER ENCE TO THE ARBITRATOR AND THE ARBITRATOR MAY PROCEED ONLY WITH RESPECT TO THE CLAIM AMOUNTING TO RS.14,97,45,000/-. THE AAI HAS ALSO FILED A COUNTE R CLAIM OF RS.7,11,31,315/- AGAINST THE ASSESSEE. IN THE BOOKS OF ACCOUNTS OF THE YEAR UNDER APPEAL, THE ASSESSEE OFFERED A SUM OF RS.14,97,45,000/- AS ITS INCOME AND AT THE SAME TIME MADE A CLAIM OF RS.7,11,31,315/- AS EXPENDITURE. T HAT THE REVENUE DISALLOWED THE CLAIM OF EXPENDITURE OF RS.7,11,31,315/- ON THE GROUND THAT THE LIABILITY HAS NOT ACCRUED. BY WAY OF GROUND NO.2, THE ASSESSEE H AS CLAIMED THAT THE NATURE OF THE INCOME OF RS.14,97,45,000/- IS SIMILAR TO TH E CLAIM OF THE ASSESSEE AT RS.7,11,31,315/- AND THEREFORE THE DEPARTMENT CANNO T TAKE A DIFFERENT STAND IN SUPPORT OF THESE TWO ITEMS. THESE ARE ONLY DIFFERE NT SIDE OF THE SAME COIN. ONE IS CLAIM OF THE ASSESSEE AND ANOTHER IS CLAIM O F THE AAI. BY WAY OF MODIFIED GROUND ONLY GROUND NO.2 OF THE ASSESSEE IS MODIFIED SO AS TO MAKE IT MORE CLEAR. THAT THE ARBITRATOR HAS ALREADY DELIVE RED AWARD ON 25-8-2009. AS PER THE FINDING OF THE ARBITRATOR THE CLAIM OF THE ASSESSEE IS ACCEPTED ONLY TO THE EXTENT OF RS.53,70,568/- WHILE COUNTER CLAIM OF THE AAI IS ACCEPTED AT RS.9,57,511/-. ACCORDINGLY, THE NET AMOUNT PAYABLE TO THE ASSESSEE WAS ONLY RS.44,13,056/-. HE HAS STATED THAT AS PER THE ARBI TRATION ACT, THE AWARD BY THE ARBITRATOR IS THE DECREE OF THE COURT ENFORCEABLE B Y THE PARTIES. THEREFORE IT IS NOT A DOCUMENT AND IN FACT NO APPLICATION IS REQUIR ED FOR THE ADMISSION OF THE AWARD AS ADDITIONAL EVIDENCE. BUT AS AN ABUNDANT P RECAUTION, THE ASSESSEE HAS FILED APPLICATION FOR ADMITTING THE AWARD AS ADDITI ONAL EVIDENCE BECAUSE IT WOULD BE NECESSARY FOR THE ADJUDICATION OF THE ISSU E UNDER APPEAL VIDE GROUND NO.2. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS N OT CHALLENGED THE AWARD BY THE ARBITRATOR. ON THE OTHER HAND, AAI HAS CHALLEN GED THE AWARD BY THE ARBITRATOR. THEREFORE, IN ANY CASE, THE CLAIM IN F AVOUR OF THE ASSESSEE CANNOT ITA NO.3106/AHD/2010 -9- EXCEED THAN WHAT IS AWARDED BY THE ARBITRATOR I.E. RS.44,13,056/-. ON THE OTHER HAND, IF THE COURT ACCEPTS THE CLAIM OF THE AAI, TH E AMOUNT PAYABLE TO THE ASSESSEE CAN BE REDUCED OR THE ASSESSEE WOULD BE DI RECTED TO MAKE THE PAYMENT TO AAI. IN ANY CASE, THE ASSESSEE CANNOT BE ENTITL ED TO RECEIVE MORE THAN WHAT IS AWARDED BY THE ARBITRATOR. HE THEREFORE SUBMITT ED THAT THE MODIFIED GROUND OF THE ASSESSEE SHOULD BE ADMITTED AND THE AWARD BY THE ARBITRATOR SHOULD ALSO BE TAKEN INTO ACCOUNT WHILE ADJUDICATING THE GROUND NO.2 AS MODIFIED BY GROUND NOS.2(A), 2(B) AND 2(C) OF THE ASSESSEES AP PEAL. 9. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF BO TH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. WE FIND TH AT BY WAY OF MODIFIED GROUND, THE ASSESSEE HAS NOT RAISED ANY GROUND WHIC H WAS NOT TAKEN BEFORE. IN FACT, IN GROUND NO.2, AS TAKEN BY THE ASSESSEE HE H AS CLAIMED FOR THE ALLOWABILITY OF DEDUCTION AMOUNTING TO RS.7,11,31,3 15/-. BUT IN THE SAME GROUND, THE ASSESSEE HAS ALSO MADE AN ALTERNATE CLA IM FOR NOT TREATING THE SUM OF RS.14,97,45,000/- AS INCOME. THUS, THE MODIFIED GROUND NO.2 (A) AND 2(B) ARE ONLY BIFURCATION OF GROUND NO.2. THE MODIFIED GROUND NO.2(C) IS ONLY AN ALTERNATIVE GROUND AND THAT HAS ARISEN IN THE LIGHT OF THE ARBITRATION AWARD. HOWEVER, ALL THE THREE GROUNDS ARE INTER-RELATED. IN VIEW OF THE ABOVE, WE ACCEPT THE MODIFIED GROUND OF THE ASSESSEES APPEAL . SO FAR AS ADMISSION OF ARBITRATION AWARD IS CONCERNED WITHOUT GOING INTO T HE CONTROVERSY, WHETHER IT IS A DECREE OR NOT AT THIS STAGE, WE ARE OF THE OPINIO N THAT THE ARBITRATION AWARD IS VERY MUCH RELEVANT FOR ADJUDICATING THE ISSUES RAIS ED BY THE ASSESSEE VIDE GROUND NOS.2(A), 2(B) AND 2(C) OF ITS APPEAL. WE A LSO DO NOT AGREE WITH THE CONTENTION OF THE LEARNED DR THAT THE ASSESSEE INTE NTIONALLY CONCEALED THIS ARBITRATION AWARD FROM THE AO AS WELL AS THE CIT(A) . BECAUSE ADMITTEDLY, THE ARBITRATION AWARD IS IN FAVOUR OF THE ASSESSEE BECA USE THE ASSESSEE HAS OFFERED THE INCOME OF RS.7,86,18,685/- (RS.14,97,45,000/- M INUS RS.7,11,31,315/-) ON THE BASIS OF CLAIM BEFORE THE ARBITRATOR. AFTER TH E ORDER OF THE ARBITRATOR, THE ITA NO.3106/AHD/2010 -10- ASSESSEE HAS BECOME ENTITLED TO RS.44,13,056/-. TH US, THE AWARD BY THE ARBITRATOR IS IN FAVOUR OF THE ASSESSEE AND THERE C ANNOT BE ANY INTENTION IN CONCEALING THE ARBITRATION AWARD FROM THE REVENUE A UTHORITIES. IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THAT ARBITRATION AWARD SHOULD BE ADMITTED AS AN ADDITIONAL EVIDENCE. HOWEVER, THE FACT REMAINS THA T THE ARBITRATOR AWARD WAS NOT PRODUCED BEFORE THE AO AND THAT HE COULD NOT GE T ANY OPPORTUNITY TO EXAMINE THE ASSESSEE CASE IN THE LIGHT OF THE ARBI TRATOR AWARD. MOREOVER, REGARDING GROUND NO.2(A), IT IS STATED BY THE LEARN ED COUNSEL THAT IF IN THE OPINION OF THE AO, THE CLAIM OF AAI HAS NOT ACCRUED , THEN THE CLAIM OF THE ASSESSEE WITH REGARD TO RS.14,97,45,000/- IS ALSO N OT ACCRUED AND THE SAME CANNOT BE TREATED AS ITS INCOME. THE AO HAS NOT EXA MINED THIS ASPECT BECAUSE BEFORE HIM THE ASSESSEE HIMSELF HAS OFFERED THE SUM OF RS.14,97,45,000/- AS INCOME. IN VIEW OF THE TOTALITY OF THE ABOVE FACTS , IN OUR OPINION, THE MATTER NEEDS FRESH EXAMINATION AT THE END OF THE AO. WE T HEREFORE, SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW ON THIS POINT AND R ESTORE THE MATTER BACK TO THE FILE OF THE AO. WE ALSO DIRECT THE ASSESSEE TO PRO DUCE ARBITRATION AWARD BEFORE THE AO AND THEREAFTER THE AO IS DIRECTED TO RE-ADJU DICATE THE MATTER AFRESH IN ACCORDANCE WITH LAW. NEEDLESS TO MENTION THAT THE AO WILL ALLOW ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 10. GROUND NO.3 OF THE ASSESSEES APPEAL READS AS U NDER: 3. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING ACTION OF THE AO IN DISALLOWING RS.1,09,33,435/- OUT OF TO TAL CLAIM OF RS.3,34,31,577/- MADE ON ACCOUNT OF LIQUIDATED DAMA GES BY HOLDING THAT NO DEDUCTION WAS ALLOWABLE SINCE THE APPELLANT HAD NEITHER PAID ANY LIQUIDATED DAMAGES NOR WAS IT RECOVERED BY AAI FROM THE APPELLANT. THE LD.CIT(A) FAILED TO APPRECIATE THAT THERE WAS N O INFRINGEMENT OF LAW BY THE APPELLANT BUT DAMAGES REQUIRED TO BE BORNE B Y THE APPELLANT FOR BRANCH OF CONTRACTUAL OBLIGATIONS AND HENCE THE TOT AL CLAIM MADE BY THE APPELLANT DESERVES TO BE ALLOWED AS THE EXECUTIVE E NGINEER DEDUCTED THE TOTAL AMOUNT FROM THE RA BILL. ITA NO.3106/AHD/2010 -11- 11. THE FACTS OF THE CASE ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS CLAIMED A SUM OF RS.3,34,31,557/- BEIN G LIQUIDATED DAMAGES UNDER THE HEAD SITE OVERHEAD EXPENSES. THE AO WAS OF T HE VIEW THAT THE LIQUIDATED DAMAGES CLAIMED BY THE ASSESSEE HAVE NOT BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND FURTHER THESE ARE IN THE NATURE OF PENALTY. HE THEREFORE DISALLOWED LIQUIDATED DAMAGE S AMOUNTING TO RS.3,34,31,757/-. ON APPEAL, THE CIT(A) PARTLY ALL OWED THE ASSESSEES CLAIM AND SUSTAINED THE DISALLOWANCE AT RS.1,09,33,435/-. THE FINDING OF THE CIT(A) READS AS UNDER: 13. AFTER GOING THROUGH RIVAL SUBMISSIONS, I AM OF THE VIEW THAT RECOVERY OF RS.1,13,18,467/- ON ACCOUNT OF INVOKING BANK GUARANTEE OF THE APPELLANT BY THE EXECUTIVE ENGINEER AND FORFEIT URE OF RENTION MONEY OF RS.65,78,259 IS A BUSINESS EXPENSE AND SHOULD BE ALLOWED AS DEDUCTION BECAUSE THE AMOUNTS WERE RECOVERED NOT FO R ANY INFRACTION OF LAW BUT FOR BREACH OF CONTRACTUAL OBLIGATIONS BY TH E APPELLANT ENTERED WITH AAI. OUT OF ADDITION OF RS.3,34,31,557 THE AO IS DIRECTED TO DELETE THE AFOREMENTIONED AMOUNTS (RS.1,13,18,467 + RS.65, 78,259) HOWEVER THE ADDITION OF THE BALANCE AMOUNT OF RS.1,09,33,43 5 (3,34,31,557 (RS.1,13,18,467 + RS.65,78,259)) IS DIRECTED TO BE UPHELD BECAUSE THE APPELLANT HAS NOT PAID THE LIQUIDATED DAMAGES NEITH ER WAS THIS AMOUNT RECOVERED BY THE AAI THEREFORE NO DEDUCTION IS ALLO WABLE. 12. THE ASSESSEE AGGRIEVED WITH THE ORDER OF THE CI T(A) AGAINST THE DISALLOWANCE SUSTAINED OF RS.1,09,33,435/- IS IN AP PEAL BEFORE US, WHILE THE REVENUE HAS ACCEPTED THE ORDER OF THE CIT(A). AT T HE TIME OF HEARING BEFORE US, IT IS STATED BY THE LEARNED COUNSEL THAT THE AO HAS DISALLOWED ENTIRE CLAIM OF LIQUIDATED DAMAGES AMOUNTING TO RS.3,34,31,557/- ON THE GROUND THAT THE ASSESSEE IS NOT ENTITLED TO DEDUCTION FOR LIQUIDATE D DAMAGES. HOWEVER, THE CIT(A) ACCEPTED THE ASSESSEES CLAIM IN PRINCIPLE A ND ALLOWED THE DEDUCTION TO THE EXTEND WHICH WAS EITHER ACTUALLY PAID OR RECOVE RED BY THE CONTRACTEE. HE SUSTAINED THE DISALLOWANCE AT RS.1.09,33,435 ON THE GROUND THAT THIS AMOUNT WAS NEITHER PAID BY THE ASSESSEE NOR RECOVERED BY T HE CONTRACTOR. IT IS STATED BY ITA NO.3106/AHD/2010 -12- THE LEARNED COUNSEL THAT THIS AMOUNT IS ALREADY PAI D BY THE ASSESSEE IN SUBSEQUENT YEAR AND NO DEDUCTION IS CLAIMED IN THAT YEAR. HE ALSO STATED THAT THE ASSESSEE HAS NOT DISPUTED THE DECISION OF THE C ONTRACTEE I.E. STATE ROAD PROJECT DIVISION FOR THE LIQUIDATED DAMAGES CLAIMED FROM THE ASSESSEE. HE ALSO SUBMITTED THAT THE LIABILITY HAS ARISEN ONLY BECAUS E OF FAILURE OF THE ASSESSEE TO ADHERE TO THE CONTRACTUAL OBLIGATION. THERE IS NO INFRACTION OF LAW BY THE ASSESSEE. IN ANY CASE, SINCE THE REVENUE HAS ACCEP TED THE ORDER OF THE CIT(A), THE QUESTION OF ALLOWABILITY OF LIQUIDATED DAMAGES IS NOT IN DISPUTE. HE THEREFORE SUBMITTED THAT THE REMAINING AMOUNT OF RS .1,09,33,435/- SHOULD ALSO BE ALLOWED. 13. THE LEARNED DR, ON THE OTHER HAND FURNISHED WRI TTEN SUBMISSIONS WHICH READ AS UNDER: THIS GROUND IS REGARDING CONFIRMING THE ACTION OF AO IN DISALLOWING RS.1,09,33,435/- OUT OF TOTAL CLAIM OF RS.3,34,31,7 57/- MADE ON ACCOUNT OF LIQUIDATED DAMAGES BY HOLDING THAT NO DEDUCTION WAS ALLOWABLE SINCE THE APPELLANT HAD NEITHER PAID ANY LIQUIDATED DAMAG ES NOR WAS IT RECOVERED BY AAI FROM THE APPELLANT. IN THIS REGARD IT IS STATED THAT THE ISSUE HAS BEEN DISCUSSED BY THE AO IN PARA 5 (PAGES 5 TO 7) OF THE ASSESSMENT ORDER. IT IS SEEN THAT THE ASSESSEE HAS CLAIMED THIS AMOUNT OF RS.3,34,31,757/- BEING LIQUIDATED DAMAGES IN THE PR OFIT AND LOSS ACCOUNT UNDER THE HEAD SITE OVERHEADS EXPENSES INCLUDED I N SCHEDULE 15 BEING ADMINISTRATIVE AND GENERAL EXPENSES. THE ASSESSEE S TATED THAT THE ASSESSEE WAS AWARDED A WORK OF CONSTRUCTION OF SURE NDRANAGAR- VIRAMGAM ROAD BY THE GOVERNMENT OF GUJARAT. THE WOR K COULD NOT BE COMPLETED IN TIME BECAUSE OF NON AVAILABILITY OF SI TE AND SUBSEQUENT INCLUSION OF CONSTRUCTION OF BRIDGE, WHICH IS NOT P ART OF THE ORIGINAL CONTRACT. THE EXECUTIVE ENGINEER HAS DEDUCTED LIQU IDATED DAMAGES OF ITA NO.3106/AHD/2010 -13- RS.3,34,31,757/- FROM THE RA BILL. THE AO STATED TH AT THE LIQUIDATED DAMAGES HAVE BEEN PAID DUE TO DELAY IN COMPLETING T HE WORK AWARDED RESULTING INTO BREACH OF CONTRACT BY THE ASSESSEE. SECTION 37 OF THE ACT ENABLES THE ASSESSEE TO CLAIM THE EXPENDITURE WHICH IS FOR THE PURPOSE OF BUSINESS. THE AO THEREFORE, STATED THAT THE ASSESSE E DID NOT SATISFY THE PROVISIONS OF SECTION 37 OF THE ACT. THE AO RELIED ON THE DECISION IN THE CASE OF PATEL BRASS WORKS VS. ACIT 50 ITD 322 WHI CH HAS BEEN QUOTED BY THE AO IN PAGE 6 OF THE ASSESSMENT ORDER. THE HONBLE ITAT STATED IT IS NOT THE NORMAL INCIDENT OF THE ASSES SEE TO ENTER INTO CONTRACTS AND THEN CANCEL THE CONTRACT AND SURRENDE R ITS RIGHT AND CLAIM THE CANCELLATION CHARGES OR THE DAMAGES ON THE REVO CATION OF THE CONTRACT AS A BUSINESS EXPENDITURE. CERTAINLY THIS IS NOT THE BUSINESS OF THE ASSESSEE. SUCH A LOSS NO DOUBT HAS OCCASIONED T O THE ASSESSEE BUT IN OUR VIEW THE SAME CANNOT BE CONSIDERED AS A BUSINES S LOSS TO BE ALLOWED OR CLAIMED IN ACCORDANCE WITH THE RESIDUARY PROVISI ONS OF SECTION 37 OF THE I.T. ACT, 1961. THE AO FURTHER STATED THAT THE ASSESSEE HAS NOT ACCEPTED THE LIQUIDATED DAMAGES IMPOSED BY THE EXEC UTIVE ENGINEER AND DISPUTED IT BEFORE THE APPROPRIATE FORUM AND THEREF ORE, THE DISPUTE REGARDING THE LIABILITY FOR LIQUIDATED DAMAGES HAD NOT COME TO CLOSE AS THE DISPUTE IS NOT RESOLVED DURING THE YEAR RELEVAN T TO A.Y. 2007-08 AND FOR THIS REASON ALSO THE SAME IS NOT ALLOWABLE AND IN THIS REGARD, THE AO RELIED ON THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF PHALTON SUGAR WORKS LTD. 162 ITR 622(SUPRA) WHEREIN THE H ONBLE BOMBAY HIGH COURT HELD THAT WHERE A LIABILITY ARISING OUT OF A CONTRACTUAL OBLIGATION IS DISPUTED, THE ASSESSEE IS ENTITLED TO CLAIM A DEDUCTION IN THE ASSESSMENT YEAR RELEVANT TO PREVIOUS YEAR IN WHICH THE DISPUTE IS FINALLY ADJUDICATED UPON AND SETTLED. ITA NO.3106/AHD/2010 -14- 14. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF B OTH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. WE FIND THA T THE AO HELD THE LIQUIDATED DAMAGES TO BE IN THE NATURE OF PENALTY AND THEREFOR E NOT ALLOWABLE. IN THE WRITTEN SUBMISSIONS, THE LEARNED DR HAS ALSO REITER ATED WHAT IS STATED BY THE AO. HOWEVER, THE CIT(A) HAS HELD THE LIQUIDATED DA MAGES TO BE ALLOWABLE DEDUCTION. THE REVENUE HAS NOT CHALLENGED THE ORDE R OF THE CIT(A). THEREFORE, BEFORE US, NOW THE DISPUTE IS NOT WHETHE R THE LIQUIDATED DAMAGES IS ALLOWABLE OR NOT. THE ONLY DISPUTE IS WHETHER THE BALANCE AMOUNT OF RS.1,09,33,435/- OUT OF TOTAL LIQUIDATED DAMAGE OF RS.3,34,31,557/- IS ALLOWABLE IN THIS YEAR OR NOT, BECAUSE THE PAYMENT FOR THE SAME IS NOT MADE. IN OUR OPINION, THE ASSESSEE IS A COMPANY, WHICH IS AD MITTEDLY FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. THEREFORE, THE AC TUAL PAYMENT OF THE LIQUIDATED DAMAGES IS NOT NECESSARY FOR ALLOWABLILI TY OF DEDUCTION ON THE LIQUIDATED DAMAGES. IT HAS BEEN STATED BY THE LEAR NED COUNSEL THAT THE ASSESSEE HAS NOT DISPUTED THE CLAIM OF THE LIQUIDATED DAMAGE S BY THE STATE ROAD PROJECT DIVISION, GOVT. OF GUJARAT AND HAS ALREADY MADE PAY MENT OF BALANCE AMOUNT IN THE SUBSEQUENT YEAR. HE HAS ALSO STATED THAT NO D EDUCTION IS CLAIMED IN THE YEAR OF ACTUAL PAYMENT. IN OUR OPINION, THIS SUBMI SSION OF THE ASSESSEE NEEDS VERIFICATION. WE THEREFORE SET ASIDE THE ISSUE RAI SED BY THE ASSESSEE VIDE GROUND NO.3 TO THE FILE OF THE AO AND DIRECT HIM TO VERIFY WHETHER THE ASSESSEE HAD ACTUALLY MADE THE PAYMENT OF BALANCE SUM OF RS. 1,09,33,435/- IN THE SUBSEQUENT YEAR AND HAS NOT CLAIMED ANY DEDUCTION I N THAT YEAR. IF THE ASSESSEES SUBMISSION IS FOUND TO BE FACTUALLY CORR ECT, THEN THE CLAIM OF LIQUIDATED DAMAGES WOULD BE ALLOWED IN THE YEAR UND ER CONSIDERATION. NEEDLESS TO MENTION, THE AO WILL ALLOW ADEQUATE OPP ORTUNITY OF BEING HEARD TO THE ASSESSEE WHILE ADJUDICATING THE MATTER. 15. GROUND NOS.4 TO 7 READS AS UNDER: THE LEARNED CIT (A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING OF TRAVELING EXPENSE AMOUNTING TO RS.79,289/- IN PLACE OF 50% DISALLOWED ITA NO.3106/AHD/2010 -15- BY AO FAILING TO APPRECIATE THAT ALL THE EXPENSES W ERE INCURRED FOR THE PURPOSE OF BUSINESS ONLY AND THEREFORE NO DISALLOWA NCE IS CALLED FOR. 5 THE LEARNED CIT (A) HAS ERRED IN LAW AND ON FACTS IN NOT ADJUDICATING GROUND OF DISALLOWANCE OF 50% OF MISCE LLANEOUS EXPENSES OF RS.1,72,052/- BY AO ON LUMP SUM BASIS WITHOUT PO INTING OUT ANY DEFICIENCY, THOUGH THE SAME IS VERIFIABLE AND INCUR RED LIAR THE PURPOSE OF BUSINESS OF THE APPELLANT. 6 THE LEARNED CIT (A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF A.O IN DISALLOWING INTEREST OF RS.2,2 61/-ON LATE DEPOSIT OF TDS. BOTH THE LOWER AUTHORITIES HAVE FAILED TO APPR ECIATE THE FACT THAT SUCH INTEREST EXPENSE ON TDS IS NOT COVERED UNDER A NY OF THE DISALLOWANCES SPECIFIED U/S 40 OF THE ACT. 7 THE LEARNED CIT (A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF A.O IN DISALLOWING RS. 2,043/- BEING AMOUNT OF KASAR (TRADE DISCOUNT) WRITTEN OFF AS BAD DEBTS. THE CIT (A) HAS FAILED TO APPRECIATE THAT THE TRADE DISCOUNT IF NOT ALLOWED A S HAD DEBT IS OUGHT TO BE ALLOWED AS BUSINESS LOSS. 16. AT THE TIME OF HEARING BEFORE US, NO SPECIFIC A RGUMENTS WERE ADVANCED RELATING TO THESE GROUNDS. IT SEEMS THAT LOOKING T O THE SMALLNESS OF THE AMOUNT, THE ASSESSEE IS NOT SERIOUS ABOUT THESE GROUNDS OF APPEAL, THEREFORE, WE TREAT THESE GROUNDS AS NOT PRESSED AND REJECT GROUND NOS. 4 TO 7 OF THE ASSESSEES APPEAL. 17. GROUND NO.8 OF THE ASSESSEES APPEAL READS AS U NDER: 8. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING ADDITION MADE BY THE AO OF RS.94,53,513/- MADE ON A CCOUNT OF CESSATION OF LIABILITY OF 35 SUNDRY CREDITORS U/S.4 1(1) OF THE ACT. LD. CIT(A) FAILED TO APPRECIATE THAT THE LIABILITY BEIN G OUTSTANDING IN THE BOOKS OF ACCOUNTS OF THE APPELLANT AND NO BENEFIT H AVING BEEN ACCRUED TO THE APPELLANT, PROVISIONS OF SECTION 41(1) HAS N O APPLICABILITY AND NO ADDITION ON THIS ACCOUNT REQUIRES TO BE MADE. 18. AT THE TIME OF HEARING BEFORE US, IT IS STATED BY THE LEARNED COUNSEL THAT THE AO MADE ADDITION OF RS.94,53,513/- ON THE PRESU MPTION THAT THERE WAS ITA NO.3106/AHD/2010 -16- CESSATION OF LIABILITY MERELY BECAUSE THE AMOUNT WA S OUTSTANDING FOR QUITE SOMETIME. IT IS STATED BY THE LEARNED COUNSEL THAT THE ASSESSEE COULD NOT MAKE THE PAYMENT TO VARIOUS PARTIES IN TIME BECAUSE OF T HE FINANCIAL DIFFICULTIES. HE HAS STATED THAT THERE WAS NO CESSATION OF LIABILITY . THIS ISSUE IS COVERED BY THE DECISION OF THE ITAT IN THE CASE OF DCIT VS. G.K. P ATEL & CO., ITA NO.2938/AHD/2009. THE LEARNED DR, ON THE OTHER HAN D, RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 19. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF B OTH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. WE FIND THA T THE IDENTICAL ISSUE IS CONSIDERED BY THE ITAT IN THE CASE OF M/S.G.K. PATE L & CO., (SUPRA) WHEREIN THE ITAT FOLLOWING ANOTHER DECISION OF THE ITAT IN THE CASE OF M/S.SUPRIYA TEXTILES INDUSTRIES VS. ITO, ITA NO.3228/AHD/2001 H ELD AS UNDER: 14. AFTER HEARING THE RIVAL SUBMISSIONS AND PERUSI NG THE MATERIAL ON RECORD, WE FIND FORCE IN THE SUBMISSION OF LD. COUNSEL. WE FIND THAT THE TRIBUNAL IN THE CASE OF M/S SUPRIY A TEXTILES INDUSTRIES VS. ITO IN ITA NO.3228/AHD/201 ASST. YEA R 2007-08 PRONOUNCED ON 30.6.11 HAS DECIDED THE ISSUE ON IDEN TICAL FACTS AND CIRCUMSTANCES OF THE CASE BY OBSERVING AS UNDER:- 5. WE HAVE HEARD THE PARTIES. THE LD. AR SUBMITTE D THAT PROVISIONS OF SECTION 41(1) CANNOT BE APPLIED AS TH ERE IS NEITHER CESSATION NOR REMISSION OF THE LIABILITIES. SHE FRANKLY ADMITTED THAT THOUGH LIABILITIES ARE TRADING LIABIL ITIES STILL OTHER CONDITIONS LAID DOWN U/S 41(1) ARE NOT SATISF IED INASMUCH AS NO EVENT HAS TAKEN PLACE FOR HOLDING TH AT THERE IS CESSATION OR REMISSION. THE SAME CONDITIONS PREV AIL IN THE CURRENT YEAR AS IT WAS IN THE EARLIER YEAR. SHE REF ERRED TO THREE JUDGMENTS IN SUPPORT OF HER CONTENTIONS. THEY ARE AS UNDER :- (1) CIT VS. BHARAT IRON & STEEL INDUSTRIES (1993) 1 99 ITR 67 (GUJ)(FB).. ITA NO.3106/AHD/2010 -17- (2) CIT VS. SUGAULI SUGAR WORKS (P) LTD. (1999) 236 ITR 518 (SC). (3) NEW COMMERCIAL MILLS CO. LTD. VS. DY. CIT ITA NO.1715/AHD/1995. 6. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT THE CREDITORS DID NOT RESPOND WHEN NOTICES WERE ISSUED TO THEM. THEIR CORRECT ADDRESSES ARE NOT KNOWN. THEY HAVE NO T CONFIRMED THE BALANCES. IF GOODS ARE DEFECTIVE ASSE SSEE IS NOT REQUIRED TO PAY ANYTHING AND, THEREFORE, IT BEC OMES HIS INCOME. HE STRONGLY RELIED ON THE ORDERS OF AUTHORI TIES BELOW. 7. THE UNDISPUTED FACTS ARE THAT THESE LIABILITIES ARE OUTSTANDING IN THE BOOKS OF ASSESSEE FOR LAST THREE YEARS OR MORE. IN THE CURRENT YEAR THE AO THOUGHT TO ENQUIRE AS TO WHY THESE LIABILITIES ARE OUTSTANDING FOR SO LONG A ND FOUND THAT NOTICES ISSUED BY HIM EITHER REMAINED UN-SERVE D OR NO CONFIRMATION WAS FILED IN RESPECT OF OTHERS. BEFORE THE LD. CIT(A) THE ASSESSEE SOUGHT TO PRODUCE EVIDENCE ABOU T DISPUTES WITH THESE PARTIES PENDING IN THE COURTS B UT THE LD. CIT(A) DID NOT ADMIT THEM. IN ANY CASE APPARENTLY N OTHING HAD HAPPENED THIS YEAR IN RESPECT OF THE SUM OUTSTA NDING IN THE BOOKS OF THE ASSESSEE AND IN RESPECT OF WHICH A DDITION WAS ORIGINALLY PROPOSED BY THE AO OR IN RESPECT OF WHICH ADDITION WAS SUSTAINED BY THE LD. CIT (A). NEITHER THE CREDITOR HAS TAKEN ANY ACTION NOR HAS THE DEBTOR DO NE ANYTHING. THUS IN FACT NO EVENT HAS TAKEN PLACE DUR ING THE CURRENT YEAR. THUS APPARENTLY THERE WAS NO OCCASION TO HOLD THAT THE OUTSTANDING BALANCES HAVE BECOME PROFIT CH ARGEABLE TO TAX U/S. 41(1) EXCEPT ENQUIRIES CARRIED OUT BY T HE A.O. FOR THE SAKE OF CONVENIENCE WE REPRODUCE SECTION 41(1) AS UNDER:- SEC.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 (HERE INAFTER REFERRED TO AS THE FIRST MENTIONED PERSON) AND SUBS EQUENTLY DURING ANY PREVIOUS YEAR; ITA NO.3106/AHD/2010 -18- (A) THE FIRST MENTIONED PERSON HAS OBTAINED , WHETHER IN CASH OR IN ANY OTHER MANNER WHATSOEVER, ANY AMOUNT IN RESPECT OF SUCH EXPENDITURE, OR SOME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSI ON OR CESSATION THEREOF THE AMOUNT OBTAINED BY SUCH PERSO N 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 EXISTENC E 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 INCURRE D BY THE FIRST MENTIONED PERSON OR SOME BENEFIT IN RESPECT OF THE TRADING LIABILITY REFERRED TO IN CLA USE (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 C ESSATION THEREOF SHALL INCLUDE THE REMISSION OR CESSATION OF ANY LIABILITY BY A UNILATERAL ACT BY THE FIRST MENTIONE D PERSON UNDER CLAUSE (A) OR THE SUCCESSOR IN THE BUSINESS U NDER CLAUSE (B) OF THAT SUB-SECTION BY WAY OF WRITING OF F 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; ITA NO.3106/AHD/2010 -19- (II) WHERE THE FIRST-MENTIONED PERSON IS SUCCEEDED BY AN Y OTHER PERSON IN THAT BUSINESS OR PROFESSION, THE OT HER PERSON; (III) WHERE A FIRM CARRYING ON A BUSINESS OR PROFESSION I S SUCCEEDED BY ANOTHER FIRM, THE OTHER FIRM; (IV) WHERE THERE HAS BEEN A DEMERGER, THE RESULTING COMPANY. THE FIRST CONDITION REQUIRED TO BE SATISFIED FOR TR EATING A SUM TAXABLE U/S 41(1) IS THAT AN ALLOWANCE OR DEDUCTION HAS BEEN MADE IN RESPECT OF THAT SUM IN THE CURRENT ASST. YE AR OR IN EARLIER ASST. YEAR AS A LOSS, EXPENDITURE OR TRADIN G LIABILITY. IN OTHER WORDS, LIABILITY SHOULD RELATE EITHER TO T RADING ACCOUNT OR TO PROFIT AND LOSS ACCOUNT WHICH MUST HA VE BEEN DEBITED IN THE CURRENT YEAR OR IN AN EARLIER ASST. YEAR WHILE COMPUTING THE INCOME OF THE ASSESSEE. MERELY BECAUS E CERTAIN AMOUNTS WERE OUTSTANDING IN THE BOOKS OF TH E ASSESSEE DOES NOT LEAD TO THE INFERENCE THAT THERE IS A CESSATION OR REMISSION. THE SECOND CONDITION REQUIRED TO BE SATISFIED IS TH AT ASSESSEE MUST HAVE OBTAINED EITHER IN CASH OR IN OTHER MANNE R SOME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY EITHER BY WAY OF REMISSION OR CESSATION THEREOF. THE CONCEPT OF CESSATION IN SECTION 41(1) IMPLIES T HAT LIABILITY OF THE ASSESSEE HAS CEASED TO EXIST IN TH E YEAR UNDER CONSIDERATION, EITHER BY OPERATION OF LAW, OR BY MU TUAL CONTRACT BETWEEN THE PARTIES. OPERATION OF LAW WOUL D INDICATE THAT LIABILITY HAS BECOME UNENFORCEABLE AT LAW I.E. THE LIMITATION PRESCRIBED FOR RECOVERY OF THE DUES BY THE CREDITOR HAS EXPIRED OR THERE IS A COURT DECREE OR ORDER FINALLY AGAINST THE CREDITOR THEREBY HE LOSES HIS R IGHT TO RECOVER THE MONEY FROM THE DEBTOR I.E. THE ASSESSEE . THUS IT IS EITHER EXPIRY OF LIMITATION OR A DECREE OF A COU RT THAT WOULD MAKE THE LIABILITY CEASED TO EXIST. HOWEVER, A FURTHER CONDITION IS IMPOSED WHERE LIMITATION IS EXPIRED. I T IS THAT THE DEBTOR I.E. THE ASSESSEE SHOULD UNEQUIVOCALLY D ECLARE HIS INTENTION NOT TO HONOUR HIS LIABILITY WHEN PAYMENT IS DEMANDED BY THE CREDITOR. FURTHER, IF THERE IS A CO NTRACT ITA NO.3106/AHD/2010 -20- BETWEEN THE PARTIES AND THE CREDITOR DISCHARGES THE DEBTOR OF THE DEBT EITHER FULLY OR PARTLY THEN TO THE EXTENT THE DEBT IS DISCHARGED BY THE CREDITOR WITHOUT PAYMENT BY THE A SSESSEE, LIABILITY WOULD CEASE TO EXIST. THUS THERE HAS TO B E AN EVENT FOR CESSATION OF LIABILITY TO TAKE PLACE. IF NOTHIN G HAPPENS DURING THE ASST. YEAR THEN IT CANNOT BE SAID THAT L IABILITY HAS CEASED TO EXIST. IN CASE OF REMISSION THERE HAS TO BE A WAIVER BY THE CREDITOR IN FAVOUR OF THE ASSESSEE EITHER UN ILATERALLY OR THROUGH CONTRACTUAL AGREEMENT. TO THE EXTENT SUC H REMISSION OR WAIVER OF THE LIABILITY IS GRANTED ASS ESSEE WOULD GET BENEFIT AND ACCORDINGLY TO THAT EXTENT SAME WOU LD BE TAXABLE U/S 41(1) SUBJECT TO THE BASIC CONDITION TH AT SUCH LIABILITY REMITTED HAS BEEN TAKEN INTO ACCOUNT IN T HE TRADING ACCOUNT OR IN THE PROFIT AND LOSS ACCOUNT IN THE CU RRENT YEAR OR IN AN EARLIER YEAR. THUS THERE HAS TO BE A POSIT IVE ACT ON THE PART OF THE CREDITOR IN THE CURRENT YEAR WHICH WOULD PROVIDE THE BENEFIT TO THE ASSESSEE BY WAY OF REMIS SION. IF NO SUCH ACT ON THE PART OF CREDITOR TAKES PLACE THEN T HERE IS NO CASE FOR HOLDING THAT A LIABILITY HAS BEEN REMITTED IN FAVOUR OF THE ASSESSEE. 7. MERELY BECAUSE CERTAIN AMOUNT IS OUTSTANDING FOR NUMBER OF YEARS WILL NOT BE CASE FOR HOLDING THAT T HERE IS A CESSATION OR REMISSION. HON. PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. SITADEVI JUNEJA IN (2010) 32 5 ITR 593 (P & H) HELD THAT IF AO FAILED TO SHOW THAT IN ANY EARLIER YEAR ALLOWANCE OF DEDUCTION HAS BEEN MADE IN RESPEC T OF ANY TRADING LIABILITY INCURRED BY THE ASSESSEE OR IF HE FAILS TO SHOW THAT ANY BENEFIT WAS OBTAINED BY THE ASSESSEE IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSI ON OR CESSATION THEREOF, DURING THE CURRENT YEAR THEN IT CANNOT BE SAID THAT ANY BENEFIT ACCRUED TO THE ASSESSEE. HON BLE PUNJAB & HARYANA HIGH COURT IN CIT VS. GP INTERNATI ONAL LTD. IN (2010) 325 ITR 25 (P & H) HELD THAT PROVISI ONS OF SECTION 41(1) AND EXPLANATION THERETO ARE NOT APPLI CABLE WHERE ASSESSEE IS STILL SHOWING SAME AMOUNT AS LIAB ILITY IN ITS BOOKS AND HAS NOT WRITTEN OFF THE SAME. IN CHIE F CIT VS. KESARIA TEA CO. LTD. 254 ITR 434 (SC) IT WAS HELD T HAT FOR APPLYING PROVISIONS OF SECTION 41(1) FOLLOWING COND ITIONS ARE REQUIRED TO BE SATISFIED:- ITA NO.3106/AHD/2010 -21- (1) IN THE COURSE OF ASSESSMENT FOR AN EARLIER YEAR , ALLOWANCE OR DEDUCTION HAS BEEN MADE IN RESPECT OF TRADING LIABI LITY 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 THE BENEFIT ACC RUING 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 THE BENEFIT IS MADE CHARGEABLE T O INCOME-TAX AS THE INCOME OF THE PREVIOUS YEAR WHEREIN SUCH BENEFIT WA S OBTAINED. HON. SUPREME COURT IN TERUNELVELI MOTOR BUS SERVICE CO. (P) LTD. VS. CIT (1970) 78 ITR 55 (SC) HELD THAT IF IT IS NOT PROVED THAT ANY ALLOWANCE OR DEDUCTION WAS GIVEN IN ANY EARLIER YEAR THEN PROVISION OF SECTION 41(1) CANNOT BE INVOKED. HON. GUJARAT HIGH COURT IN THE CASE OF CIT VS. BHARAT IRON & STEEL INDUSTRIES (1993) 199 ITR 67 (G UJ) (FB) HELD THAT SECTION 41(1) CREATES A FICTION WHICH IS INDIVISIBLE, IT CANNOT BE ENLARGED BY IMPORTING ANOTHER FICTION NAMELY THAT IF THE AMOUNT WAS OBTAINABLE OR RECEIVABLE DUR ING THE PREVIOUS YEAR THEN IT MUST HAVE BEEN OBTAINED OR RE CEIVED DURING THAT YEAR. THE WORDS USED ARE OBTAINED WHETH ER IN CASH OR ANY OTHER MANNER WHICH CLEARLY REFER TO ACT UALLY RECEIVING CASH OR THE BENEFIT DURING THAT YEAR. THE AMOUNT MAY BE ACTUALLY RECEIVED OR IT MAY BE ADJUSTED BY W AY OF AN ADJUSTMENT ENTRY OR A CREDIT NOTE OR IN ANY OTHER F ORM. IN OTHER WORDS, THERE HAS TO BE A POSITIVE EVENT SIGNI FYING OBTAINING A BENEFIT BY WAY OF REMISSION OR CESSATIO N DURING THE CURRENT YEAR. HON. GUJARAT HIGH COURT IN THE CA SE OF CIT VS. BHARAT IRON & STEEL INDUSTRIES (SUPRA) HAD OBSE RVED AS UNDER :- THE KEY WORDS IN SECTION 41(1) OF THE IT ACT, 1961 ARE THE ASSESSEE HAS OBTAINED, WHETHER IN CASH OR IN ANY OT HER MANNER WHATSOEVER, ANY AMOUNT IN RESPECT OF SUCH LO SS OR EXPENDITURE OR SOME BENEFIT IN RESPECT OF SUCH TRAD ING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF. IT IS THE ITA NO.3106/AHD/2010 -22- OBTAINING IN CASH OR IN ANY OTHER MANNER WHATSOEVER ANY AMOUNT..OR SOME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY.. WHICH IS CONTEMPLATED BY THE LEGISLAT URE WHEN IT USED THE WORDS HAS OBTAINED. SECTION 41(1) INTROD UCES A FICTION BY WHICH WHERE AN ALLOWANCE OR DEDUCTION HA S BEEN MADE IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF L OSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE AS SESSEE AND SUBSEQUENTLY DURING ANY PREVIOUS YEAR 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 TRAD ING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF, THE AMOUNT OBTAINED BY HIM OR THE VALUE OF BENEFIT ACCRUING TO HIM SHALL BE DEEMED TO BE PROFITS AND GAINS OF THE BUSINESS O R PROFESSION AND ACCORDINGLY CHARGEABLE TO INCOME-TAX AS INCOME OF THAT PREVIOUS YEAR, WHETHER THE BUSINESS OR PROFESSION IN RESPECT OF WHICH THE ALLOWANCE OR DED UCTION HAS BEEN MADE IS IN EXISTENCE IN THAT YEAR OR NOT. THE FICTION IS AN INDIVISIBLE ONE. IT CANNOT BE ENLARGED BY IMP ORTING ANOTHER FICTION, NAMELY, THAT IF THE AMOUNT WAS OBT AINED OR WAS RECEIVABLE DURING THE PREVIOUS YEAR, IT MUST BE DEEMED TO HAVE BEEN OBTAINED OR RECEIVED DURING THAT YEAR. THE AMOUNT MAY BE ACTUALLY RECEIVED OR IT MAY BE ADJUST ED BY WAY OF AN ADJUSTMENT ENTRY OR A CREDIT NOTE OR IN A NY OTHER FORM WHEN THE CASH OR THE EQUIVALENT OF CASH CAN BE SAID TO HAVE BEEN RECEIVED BY THE ASSESSEE. BUT IT MUST BE THE OBTAINING OF THE ACTUAL AMOUNT WHICH IS CONTEMPLATE D BY THE LEGISLATURE WHEN IT USED THE WORDS HAS OBTAINED, WH ETHER IN CASH OR IN ANY OTHER MANNER WHATSOEVER ANY AMOUNT I N RESPECT OF SUCH LOSS OR EXPENDITURE IN THE PAST. IN THE CONTEXT IN WHICH THESE WORDS OCCUR, NO OTHER MEANING IS POS SIBLE 8. THE FINDING GIVEN BY THE AO IS THAT CERTAIN PART IES ARE NOT TRACEABLE OR THAT SUCH AMOUNT IS NOT OUTSTANDIN G IN THE BOOKS OF THESE PARTIES AGAINST THE ASSESSEE. IT WO ULD MEAN ACCORDING TO LD. DR THAT LIABILITY HAS CEASED TO E XIST. BUT THIS IS NOT THE EVENT WHICH HAS TAKEN PLACE DURING THIS YEAR NOR IS VISUALIZED IN SECTION 41(1). THE SECTION CLE ARLY STIPULATES OBTAINING A BENEFIT BY CASH OR IN ANY OT HER MANNER. THEREFORE, THE AO HAS TO SHOW THAT ASSESSEE HAS ITA NO.3106/AHD/2010 -23- OBTAINED SUCH BENEFIT IN CASH OR OTHERWISE ONLY DUR ING THE CURRENT YEAR. THEREFORE, MERELY BECAUSE CERTAIN CRE DITORS ARE NOT TRACEABLE OR THEY HAVE DENIED ANY LIABILITY AGAINST THE ASSESSEE WOULD NOT SHOW THAT LIABILITY CEASED T O EXIST ONLY IN THE CURRENT YEAR BY VIRTUE OF OPERATION OF LAW, OR IT WAS REMITTED BY THE CREDITOR ONLY DURING THE CURREN T YEAR. THE ENQUIRIES HAD TO BE FURTHER CARRIED OUT TO SHOW WHAT EVENT HAS TAKEN PLACE. THEY SHOULD CLEARLY SHOW A C ESSATION OR REMISSION AND WHEN IT HAPPENED. IF THESE TWO ASP ECTS ARE NOT CLEARLY PROVED BY THE REVENUE PROVISIONS OF SEC TION 41(1) COULD NOT BE INVOKED. IN ADDITION TO THIS, TH E ONUS IS ON THE REVENUE TO SHOW THAT THE AMOUNT IN QUESTION WHI CH IS DEEMED AS PROFIT DURING THE CURRENT YEAR U/S 41(1) WAS IN FACT TAKEN INTO ACCOUNT IN ANY EARLIER YEAR EITHER IN THE TRADING ACCOUNT OR IN THE PROFIT AND LOSS ACCOUNT. SINCE REVENUE HAS FAILED TO DISCHARGE THE ONUS, AS TO - (I) WHAT EVENT HAS TAKEN PLACE DURING THE CURRENT YEAR; (II) WHEN THIS EVENT TOOK PLACE; (III) WHETHER THE SUM IN QUESTION WAS CONSIDERED IN THE TRADING A/C OR PROFIT OR LOSS ACCOUNT IN ANY EARLIER YEAR I.E. WHETHER IT IS A TRADING LIABILITY ; THE OUTSTANDING BALANCES IN THE BOOKS OF THE ASSESS EE CANNOT BE TAXED U/S 41(1). 9. IN THE PRESENT CASE THOUGH THERE IS FINDING THAT THE LIABILITIES IN QUESTION RELATE TO TRADING LIABILITI ES BUT THIS ALONE IS NOT SUFFICIENT TO TAX THEM IN THE CURRENT YEAR. IT HAS TO BE FURTHER SHOWN THAT SUCH LIABILITIES ARE TAXAB LE UNDER CURRENT YEAR U/S 41(1) AS CESSATION OR REMISSION HA S TAKEN PLACE IN THE CURRENT YEAR. THE ACTION OF THE AO IN CARRYING OUT ENQUIRY IS NOT THE EVENT CONTEMPLATED U/S 41(1) . THE EVENT HAS TO TRIGGER EITHER FROM THE CREDITOR OR DE BTOR OR BY LAW. SINCE NOTHING HAS HAPPENED FROM ALL THESE THRE E SIDES IT CANNOT BE SAID THAT SUCH LIABILITIES ARE CHARGEABLE TO TAX U/S 41(1) IN THE CURRENT YEAR. AS A RESULT, THIS GROUND OF APPEAL IS ALLOWED. ITA NO.3106/AHD/2010 -24- 15. RESPECTFULLY FOLLOWING THE ABOVE DECISION OF TH E TRIBUNAL WE ARE OF THE CONSIDERED VIEW THAT THE ENT IRE ADDITION MADE BY THE AO HAS TO BE DELETED AND WE DO SO ACCORDINGLY. THEREFORE THE GROUND RAISED BY THE REV ENUE IN ITS APPEAL IS DISMISSED AND THAT OF THE ASSESSEE IN THE CROSS OBJECTION IS ALLOWED. THE FACTS OF THE ASSESSEES CASE ARE IDENTICAL. IN THE CASE OF THE ASSESSEE ALSO THERE IS NO ACTUAL FINDING OF REMISSION OR CESSATIO N OF LIABILITY. THE AO MADE ADDITION ON THE PRESUMPTION THAT SINCE THE LIABILIT Y IS VERY OLD, IT MUST HAVE CEASED. FOR THE PURPOSE OF APPLICABILITY OF SECTIO N 41(1), THE LIABILITY BEING OLD IS NOT SUFFICIENT TO TAX THE ASSESSEE UNDER SECTION 41(1). THERE HAS TO BE CESSATION OR REMISSION OF THE LIABILITY. IN VIEW O F THE ABOVE, WE HOLD THAT THE AO WAS NOT JUSTIFIED IN MAKING THE ADDITION OF RS.9 4,53,5123/- UNDER SECTION 41(1). 20. GROUND NO.9 IS OF GENERAL NATURE NEEDS NO ADJUD ICATION. THE GROUND NO.10 IS AGAINST CHARGING OF INTEREST UNDER SECTION 234A, 234B AND 234C OF THE ACT. IT IS ADMITTED TO BE CONSEQUENTIAL. WE T HEREFORE DIRECT THE AO TO RE- COMPUTE THE INTEREST, IF ANY, IN ACCORDANCE WITH LA W. 21. THE GROUND NO.11 IS AGAINST INITIATION OF PENAL TY UNDER SECTION 271(1)(C) OF THE ACT. THIS IS PREMATURE AT THIS STA GE, THEREFORE NEEDS NO ADJUDICATION. 22. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THE DATE MENTIONE D HEREINABOVE. SD/- SD/- ( %&' ( %&' ( %&' ( %&' ( /BHAVNESH SAINI ) ) ) ) ) /JUDICIAL MEMBER ( . .. . . .. . G.D. AGARWAL) !' !' !' !' /VICE-PRESIDENT