V.R. Swaminathan V. Income Tax Officer, Ward IX (4)

TC/1772/2008

AI Insights

The case involves V.R. Swaminathan, the appellant, who appealed against the order of the Income Tax Appellate Tribunal, Chennai, which had upheld the additions made to his income for the Assessment Year 2001-2002 under Section 41(1) of the Income Tax Act, 1961. The additions were based on the premise that the liabilities towards certain sundry creditors had ceased, thus converting them into income. The Tribunal's decision was contested on the grounds that the liabilities had not ceased as payments were made in subsequent years. The High Court found that the matter required further investigation and remanded the case back to the Assessing Authority for a detailed examination of the transactions and the status of the creditors.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 677233 (HC-MADRAS)
• Appeal Type: Others
• Pronouncement Date: 05-09-2019
• Assessment Year: misc
• Other Referred Cases: CIT Vs. T.V.Sundaram Iyengar and Sons Ltd., West Asia Exports & Imports (P) Ltd. v. Assistant Commissioner of Income Tax
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: M SWAMINATHAN
• Assessee Lawyers: M P SENTHIL KUMAR
• Keywords: Assessment Year; Cessation of liability; Income Tax; Sundry creditors
• Section: 260A; 41(1)

Judgement Text

" 1/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED :: 05-09-2019 CORAM THE HON'BLE DR.JUSTICE VINEET KOTHARI AND THE HON'BLE MR.JUSTICE C.SARAVANAN T.C.A.No.1772 OF 2008 V.R.Swaminathan ... Appellant -vs- The Income Tax Officer, Ward IX (4), 611, Anna Salai Chennai- 600 006. ... Respondent Appeal under Section 260A of the Income Tax Act,1961, against the order of the Income Tax Appellate Tribunal, Chennai 'C' Bench, dated 30.06.2008, passed in ITA No.2048/Mds/2006. For Appellant : Mr.M.P.Senthilkumar, for Mr.N.Muthukumar. For Respondent : Mr.M.Swaminathan, Senior Standing Counsel, assisted by Mrs.S.Premalatha, Junior Standing Counsel. http://www.judis.nic.in 2/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] JUDGMENT (By Dr.Vineet Kothari,J.) Assessee has filed this appeal aggrieved by the order, dated 30.06.2008, passed by the learned Income Tax Appellate Tribunal, Chennai 'C' Bench, allowing the Revenue's appeal for Assessment Year 2001-2002 and upholding the additions made in the assessment of the assessee under Section 41 (1) of the Income Tax Act,1961, in short, ''the Act''. 2. The relevant findings of the learned Tribunal in Para 7 of its order are quoted below for ready reference : “7. We find that Hon'ble Apex Court in the case of CIT Vs. T.V.Sundaram Iyengar and Sons Ltd. 222 ITR 344 (SC) had propounded that, 'If an amount is received in the course of a trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee.' In the background of aforesaid discussion and precedent, we find that even if the said purchases were http://www.judis.nic.in 3/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] genuine, the amount due to creditors has remained unclaimed is taxable u/s 41 (1) inasmuch as the assessee is not even aware of the address of the creditors. Hence, we are inclined to set aside the order of the learned Commissioner of Income Tax (Appeals) and decide the issue in favour of the Revenue. 8. In the result, this appeal by the Revenue is allowed.” 3. The Assessing Authority, in the present case, in the Assessment Order, dated 30th March,2004, had made the following additions : ''During the course of hearing, letters were issued calling for confirmation to some of the Sundry Creditors. Letter issued to the following Sundry Creditors returned unserved : 1.Yes Em Traders, Villupuram 2.DCW Home Products Ltd., Vijayawada 3.Parameshwara & Co., Tirupur 4.Chandra & Co., Visakapatnam 5.Velmuruga Corpn., Arcot 6.Sivaraj & Co., Ranipet http://www.judis.nic.in 4/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] In this connection, assessee was requested to furnish the correct address of the above persons and furnish account copy of the above persons. Assessee in his letter dated 28.02.2004 and 07.03.2004 furnished the address of five Sundry Creditors except the address of M/s.Velmuruga Corpon., Arcot. He has also not furnished the details of transaction with the above concerns. In the above circumstances, it is held that a sum of Rs.2,41,000/- shown as Trade Creditor is not actually due. The assessee has not furnished the address of the following Sundry Creditors. 1. Shankar Trading : Rs.1,80,000 2. Sunil : Rs.1,62,000 Assessee was asked to furnish the address of the above two Sundry Creditors by this office letters dated 26.12.2003, 23.01.2004 and 23.02.2004. Assessee has not furnished even the address of the above persons for verification. In the above circumstances, it is held that there is no Sundry Creditors by name Shankar Trading and Sunil for the amounts Rs.1,80,000/- and Rs.1,62,000/- respectively. On verification with Sundry Creditors, it was found that no amount was due to M/s.Hari Traders, 18, Managappan Street, Chennai-79 as per their confirmation letter dated 14.01.2004. Whereas, assessee has shown them http://www.judis.nic.in 5/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] as Sundry Creditors for Rs.1,35,332/-. Assessee was requested to clarify this vide this office letter dated 23.02.2004. There was no reply from the assessee in this regard. Hence, a sum of Rs.1,35,332/- show as Sundry Credit is added to the total income.'' 4. The First Appeal, filed by the assessee, however, came to be allowed by the learned Commissioner of Income Tax (Appeals) - CIT(A) – on 25.05.2006, with the following observations : ''3. Briefly the facts. The appellant, proprietor of Sathya Sai Engineering Company filed its return of income for the assessment year 2001-02 which was scrutinized by the A.O. and additions were preferred on account of sundry creditors in the books of the appellant which were not verifiable. The reasons based on which additions were made are as under : (i) M/s.Vel Muruga Corporation Rs.2,11,000 as address of the creditor was not provided. (ii) M/s.Shankar Trading Rs.1,80,000] -do- (iii) M/s.Sunil Trading Rs.1,62,000] (iv) M/s.Hari Trader Rs.1,36,332 as amount not being due Rs.6,88,332 http://www.judis.nic.in 6/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] 4. The appellant vehemently assailing the action of the A.O. has pleaded that the impugned additions be deleted as they are unsustainable on facts and as in law. It has also been pleaded that the balances payable to the sundry creditors was wrongly construed as income in the hands of the appellant against the provisions of the Act. Several lines of argument were advanced by the appellant which inter alia include the following. (i) That all the creditors are genuine. In support invoice copies relating to the creditors for supplies made were enclosed. (ii) the balance on these creditors and not the credit of the year under consideration and were brought forward credits. (iii) the purchases made were for assessment year relating to 1998-99 and 1999-2000 as vouched by purchase register. (iv) The purchases filed for sales tax authorities confirm the transactions. (v) that all purchases and sales were recorded and appellant had paid taxes on the same. (vi) that all relevant details relating to the creditor were produced during the assessment proceedings. The books of account and invoices produced were self- explanatory. (vii) As regards Shankar Trading, the amount outstanding related to purchases made during the assessment year 2002-03 and 2003-04 of Rs.38,000/- and Rs.1,42,000/- respectively. (viii) As regards Sunil Electricals and Electronics, the amount outstanding related to purchases made in the http://www.judis.nic.in 7/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] assessment year 1997-98 and 1998-99 for which the payments were made in the assessment year 2003-04. (ix) as regards M/s.Velmuruga Corporation the amounts outstanding relates to purchases made for the assessment year 1997-98 and 1998-99. The payments for the above transactions made were settled in the assessment year 2002-03 but for a sum of Rs.1,13,000/- which was adjusted against the payment receivable from M/s.Sri Ganesh Electricals in 2003-04. (x) That the returns for the assessment year 2002-03 and 2003-04 were filed on 31.10.2002 and 28.11.2003 take into account all the above details. (xi) That all credits are genuine and do not pertain to the year under consideration and therefore do not warrant to be added back as income. Further, the payments have all been made to those creditors in the subsequent year. (xii) As regards M/s. Hari Traders additions were based on the fact that the confirmation letter received did not reflect the outstanding amount. However, this could not be the basis for the addition as it could be a unilateral action of the party. 5. It was further pleaded that the appellant has not been having dealings with the parties presently and the current addresses are not available. In support of the contentions made the appellant placed on record the books of account and the copies of the creditors appearing in the books along with the vouchers which relate to the transaction. These materials were also placed before the A.O. The perusal of the same shows the http://www.judis.nic.in 8/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] items of purchase relate to items of electrical goods small in number in a moderate price range. The purchase register similarly evidences the transactions in all the cases. As pleaded by the appellant the transactions do not relate to the year under consideration but represent carried forward balances of preceding years relevant to assessment year 1998-99 onwards. The assessment order from the Commercial Taxes Department dated 29.12.98 for the A.Y.97-98, 1998-99 placed on record does not report any finding adverse to the appellant. Apparently the assessment orders were finalised after production in support of the returns of the day book, ledger purchase and sales bill etc. 6. The non furnishing of address appears to be the major reason based on which disallowances were preferred by the A.O. The A.O. also further observed in his report that the appellant is a wholesaler and retailer of electrical goods and filed its return of income for the assessment year 1998-99, 1999-2000 admitting income u/s 44AF. The A.O. further observed that the profit and loss account, balance sheet and other particulars like list of sundry creditors, debtors etc. were not filed along with the return of income. 7. In response thereto the appellant filed necessary clarifications which were considered. In its support the appellant argued that the returns of income filed for the assessment years 1997-98, 1998-99 and 1999-2000 had been accepted. The credits appearing in these aforesaid returns could not be rejected now http://www.judis.nic.in 9/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] without any basis. In support the copies of documents were once again filed for perusal. It is also stated that the books of accounts in respect of its business were produced before the A.O. and were subject to verification and the copies of accounts of such creditors for the earlier and subsequent period were not called for. 8. On careful consideration of the facts in issue, I find that in the instant case the appellant had complied with the notices issued which culminated in the order u/s 143 (3). The A.O. has himself acknowledged in the order that the books of accounts were produced which were examined. It was only conformations to some of the creditors could not be furnished. This matter was not pursued further by the A.O. who summarily concluded that the outstanding credits represented income and proceeded to finalise the assessment. The A.O. ought to have proceeded to establish the infirmities and consequently rejected the books which was not done. Accordingly there appears to be little material facts based on which the disallowances made by the A.O. can be upheld. This is so that the appellant has discharged the onus placed on it in establishing the transactions as being made genuinely and purely in consideration of conduct of business in its case. Accordingly keeping the sum totality of facts before me, the detailed submissions made by the appellant as discussed in the foregoing and having regard to the books of accounts maintained copies of which have also been filed, I hold http://www.judis.nic.in 10/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] the view that the disallowances made by the A.O. cannot be sustained on facts and in law. This ground of appeal is ALLOWED.'' 5. As stated above, the Revenue's appeal, however, came to be allowed by restoring the additions and aggrieved by the same, the assessee has filed the present appeal before this Court under Section 260-A of the Income Tax Act,1961. 6. The following Substantial Question of Law was framed by a co-ordinate Bench of this Court while admitting the appeal on 06.11.2008 : ''Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal is right in allowing the department's appeal and holding that the amount of Rs.6,88,332/- is taxable under the provisions of Sec.41 (1) of the Income Tax Act ?'' 7. Mr.M.P.Senthil Kumar, learned counsel for the appellant- assessee has urged before this Court that payments to the Sundry Trade Creditors, from whom the supplies of goods were taken in the ordinary course of business, were made in the subsequent Assessment Year and, therefore, there was no 'cessation of liability' towards the said creditors and, http://www.judis.nic.in 11/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] as such, additions could not have been made by the Assessing Authority in the impugned order. Hence, according to the learned counsel, the learned CIT(A) has rightly set aside the additions, but the learned Tribunal has erred in allowing the appeal of the Revenue. 8. Per contra, Mr.M.Swaminathan, learned Senior Standing Counsel, appearing for the respondent-Revenue, has vehemently submitted that the Assessing Authority had made due inquiry regarding the Trade Creditors shown in the Balance Sheet, but the assessee failed to supply even the details of the Sundry Creditors shown in the Balance Sheet and, upon verification of two Sundry Creditors, whose addresses were supplied, it was found that those Creditors did not confirm any claim against the assessee, and upon the assessee being confronted with such averment made by the Sundry Trade Creditors, he did not even respond to the same and, therefore, the Assessing Authority was justified in assuming that the liability of the assessee had ceased in terms of Section 41 (1) of the Act and the additions were, therefore, justified. 9. Mr.Swaminathan would submit that the learned CIT(A) has wrongly allowed the appeal of the assessee believing the submissions of the assessee that payments to these Sundry Trade Creditors were made later on http://www.judis.nic.in 12/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] in the year Assessment Year 2002-2003. He also submitted that if such payments were made, then, proof of the same could have been produced by the assessee before the learned Tribunal, but, nothing of this sort was done and, therefore, on account of failure of the assessee to discharge his burden of proof during the course of assessment proceedings as well as before the learned CIT (A), the learned CIT (A) has erred in setting aside those additions made under Section 41(1) of the Act. He relied upon a decision of this Court in the case of West Asia Exports & Imports (P) Ltd. v. Assistant Commissioner of Income Tax, delivered on 11.03.2019, since reported in (2019) 412 ITR 208 (Mad). 10. Having heard the learned counsel for the parties, we are satisfied that this matter requires re-adjudication at the hands of the Assessing Authority. Apparently, we find that the Assessing Authority had made due inquiry from the Sundry Creditors whose addresses and details were supplied by the assessee during the course of assessment proceedings and the communications thereon from the assessee. However, the assessee failed to rebut the adverse material with regard to the Creditors viz., Hari Traders and another M/s.Sunil, who had apparently confirmed that they did not make any claim of the amount of the unpaid amount due to them. It was http://www.judis.nic.in 13/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] thus for the assessee to rebut that material by either producing the relevant documentary evidence or the Sundry Creditors to show that the liability had not ceased in the eye of law so as to attract Section 41 (1) of the Act. Now, on the fact finding exercise undertaken by the learned Appellate Authority also, except making the averments to the effect that these Sundry Creditors were paid, no documentary proof thereof has been produced by the assessee and, therefore, the learned Tribunal, in our opinion, has rightly held that the said averments of the assessee could not be believed on their face value. However, we feel that the matter requires further investigation and inquiry at the hands of the Assessing Authority and, the learned Tribunal, instead of reversing the order of the learned CIT (A), ought to have remanded the matter back to the Assessing Authority in such facts and circumstances of the case to ascertain whether the trade liability towards the Sundry Creditors shown in the Balance Sheet had ceased in the eye of law or whether such trade liability genuinely continued or not. 11. Therefore, we are inclined to dispose of this appeal with the remand of the case to the Assessing Authority without answering the Substantial Question of law, framed above. 12. Accordingly, the present Appeal of the assessee is disposed http://www.judis.nic.in 14/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] of, setting aside the orders passed by all the three authorities below, and the matter stands restored back to the Assessing Authority for Assessment Year 2001-2002 to make fresh assessment, after giving due and reasonable opportunity of hearing to the assessee to adduce reasonable evidence in this regard. No costs. 13. Since considerable time has elapsed, fresh assessment should be made by the Assessing Authority within a period of one year from today. Without any further notice, the assessee may appear before the Assessing Authority and adduce relevant evidence in the course of such fresh assessment proceedings. The first appearance may be made by the assessee on 23rd October,2019. Index : Yes/No (V.K.,J.) (C.S.N.,J.) Internet : Yes/No 05-09-2019 Speaking / Non-Speaking Order dixit To 1.The Income Tax Officer, Ward IX (4), http://www.judis.nic.in 15/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] 611, Anna Salai Chennai- 600 006. 2. Income Tax Appellate Tribunal, Chennai 'C' Bench, Chennai. http://www.judis.nic.in 16/16 Judgment dt.05.09.2019 in TCA No.1772/2008 [V.R.Swaminathan v. Income Tax Officer] DR.VINEET KOTHARI, J. and C.SARAVANAN, J. dixit T.C.A.No.1772 OF 2008 05-09-2019 http://www.judis.nic.in "