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2008 (7) TMI 617 - AT - Income TaxApplicability of section 41(1) - Remission or cessation of trading liability - non-genuineness of credit - HELD THAT - 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. 1999 (2) TMI 5 - SUPREME COURT 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. In the case of the assessee amount has not even been credited to the Profit Loss Account. Therefore, on the ground of expiry of limitation, the addition upheld by the CIT(A) u/s 41(1) cannot be held justified. Hon ble Supreme Court in the case of Kesaria Tea Co. Ltd. 2002 (3) TMI 1 - SUPREME COURT have examined the provisions of section 41(1). Relying on the same, 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 u/s 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. Therefore, the addition cannot be sustained either u/s 68 or u/s 41(1) of the Act and, therefore, deleted. The appeal filed by the assessee is allowed. In the result, the appeal filed by the assessee is allowed.
Issues Involved:
1. Whether the liability of Rs. 1,25,46,534 payable to the creditors is in existence. 2. Whether the liability to pay a sum of Rs. 1,25,46,534 has ceased to exist and if the provisions of section 41(1) of the Income-tax Act are applicable. 3. Whether the provisions of section 68 of the Income-tax Act are applicable to the sum of Rs. 1,25,46,534. Detailed Analysis: 1. Existence of Liability The primary issue is whether the liability of Rs. 1,25,46,534 payable to the creditors exists. The Assessing Officer (AO) asked the assessee to prove the genuineness of sundry creditors, but the assessee failed to provide confirmations except for one creditor. The AO treated the balance amount as unexplained credits and added it to the income under section 68. The assessee argued that the liabilities are existing and subsisting, and the AO did not provide proper opportunities to file evidence. The CIT(A) upheld the addition, stating that the appellant company is not in a position to prove the genuineness of these credits and that the liabilities do not exist. 2. Cessation of Liability and Applicability of Section 41(1) The CIT(A) upheld the addition under section 41(1), concluding that the liabilities shown by the appellant company do not exist or have ceased to exist. The assessee argued that the liabilities are old and existing, and no addition could be made under section 68 as no amount was received during the year. The assessee contended that for section 41(1) to apply, it must be shown that the liability had ceased to exist, referring to the Supreme Court's decision in CIT v. Sugauli Sugar Works (P.) Ltd., which held that unilateral action by the assessee does not bring the matter within the scope of section 41(1). 3. Applicability of Section 68 The assessee argued that section 68 is not applicable as no new credit entries were made during the year under consideration. The AO had added the amount under section 68, but the CIT(A) changed the basis to section 41(1). The assessee contended that neither section 68 nor section 41(1) were applicable in this case. The tribunal observed that no new amount was credited during the year, ruling out the applicability of section 68. Tribunal's Conclusion: The tribunal concluded that the addition could not be sustained under either section 68 or section 41(1) of the Act. It was observed that the liabilities were brought forward balances and no new credits were made during the year. The tribunal referred to the Supreme Court's decision in Sugauli Sugar Works (P.) Ltd., stating that in the absence of the creditor, it is not possible for the Department to conclude that the debt is barred and has become unenforceable. The tribunal emphasized that the onus is on the revenue to show that the liability has ceased finally and there is no possibility of revival. Since this was not demonstrated, the addition was deleted, and the appeal filed by the assessee was allowed. Final Judgment: The appeal filed by the assessee is allowed, and the addition of Rs. 1,25,46,534 made by the AO and upheld by the CIT(A) is deleted.
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