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2009 (3) TMI 646 - AT - Income TaxAddition u/s 41(1) on sundry creditors - Remission or cessation of trading liability - written back liabilities - AO noticed that outstanding balances under the sundry creditor accounts and they are old balances and for period of more than 3 years - On finding there is neither a pending litigation in existence nor any correspondence from the eleven parties demanding for clearing the liabilities AO invoked the provisions of section 41(1) - AO deemed the liabilities of the sundry creditors as the profits and gains of business or profession and charged them to income-tax as the income of the year - As per assessee provisions of section 41(1) do not apply as the alleged liabilities are still payable to the creditors and the same is evident from the fact that they are still reflected in the books of the assessee. HELD THAT - We shall proceed to analyse one by one in the succeeding paragraphs. (a)Regarding the issue of limitation of three years - it is noticed that there is no such limitation provided in section 41(1) or its Explanation 1. Most probably the revenue has considered the period of three years as reasonable duration for deciding the cessation of liabilities on ad hoc basis. Otherwise the revenue orders do not contain any rationale in support of such period. Delhi Bench decision in the case of Dy. CIT v. Himalaya Refrigeration Air Conditioning Co. (P.) Ltd. 2003 (6) TMI 195 - ITAT DELHI-F is found relevant in this regard and the said order concluded by stating that in the absence of any evidence of cessation of liabilities mere fact that the liabilities were outstanding for more than three years and were time barred was not sufficient ground for addition u/s 41(1). Thus the revenue s proposal is favoured by us it will effectively amounts to supporting a proposition that all the unclaimed liabilities which are reflected in the books for the period longer than three years case shall be the deemed profits of the assessee u/s 41(1) and this view does not have the support of the Income-tax Act. As such the limitation of time is not a determining factor in the matters relating to remission or cessation of liabilities the view supported by the Apex Court s judgment in the case of Kesaria Tea Co. Ltd. 2002 (3) TMI 1 - SUPREME COURT . (b)Regarding the issue of discharging of the onus it is noticed that the provisions of section 41(1) provides for charging of certain benefits which are obtained by the assessee in an year as deemed profits. Under the circumstances where the assessee disputes the obtaining of the benefits AO is under statutory obligation to establish the same by gathering evidences in favour of such accrual of benefits. AO is under the obligation to discharge the onus in this regard. This view is supported by the decisions of the Tribunal in the cases of Shri Vardhman Overseas Ltd. v. Asstt. CIT 2008 (7) TMI 617 - ITAT DELHI . (c)Regarding the issue of unilateral write off for the assessments of the post amendment period i.e. 1-4-1997 it is noticed that the Explanation 1 was brought into statute by the Finance (No 2) Act 1996 with effect from 1-4-1997. The judgments of Apex Court s judgment in the case of Kesaria Tea Co. Ltd. (supra) and Sugauli Sugar Works (P.) Ltd. 1999 (2) TMI 5 - SUPREME COURT or Jurisdictional High Court s judgment in the case of CIT v. Chougule Co. (P.) Ltd. 1990 (8) TMI 60 - BOMBAY HIGH COURT and other cases cited by the assessee were delivered involving the assessment years prior to pre-amendment period. All the judgments uniformly conclude that the mere unilateral transfer entry in the accounts does not confer any benefit to the assessee and therefore revenue cannot invoke section 41(1). We find the said judgments have application to the present appeal insofar as the effect of such unilateral transfer entries in the books. In the absence such unilateral entries in books of the instant assessee it cannot be held that AO has correctly applied the provisions of section 14(1) and its Explanation 1. Further AO has neither disproved the assessee s claims relating to the impugned liabilities nor discharged its onus to prove that there is cessation of liabilities and the assessee obtained the benefits finally. Therefore the arguments of the revenue have to be dismissed. In such circumstances and when the assessee has not unilaterally written off the said liabilities the question of taking such outstanding liabilities as deemed profits of the year does not arise. Therefore the order of CIT(A) has to be set aside in this regard. In the result appeal of the assessee is partly allowed.
Issues Involved:
1. Cessation of liabilities under section 41(1) of the Income-tax Act. 2. Limitation period for outstanding liabilities. 3. Onus of proof regarding cessation of liabilities. 4. Unilateral write-off of liabilities post-amendment. Issue-wise Detailed Analysis: 1. Cessation of Liabilities under Section 41(1) of the Income-tax Act: The primary issue revolves around the addition of Rs. 8,95,414 under section 41(1) of the Income-tax Act by the Assessing Officer (AO), treating the outstanding liabilities as having ceased to exist. The AO observed that these balances were old and had been outstanding for more than three years. The assessee contended that the liabilities had not ceased, were still reflected in the accounts, and there was an intention to pay them. The CIT(A) upheld the AO's decision, citing the prolonged period of the outstanding balances and the absence of any litigation or correspondence from creditors demanding payment. The Tribunal, however, noted that mere passage of time does not constitute cessation of liability, referencing the Supreme Court judgment in the case of Kesaria Tea Co. Ltd. and other relevant judgments. 2. Limitation Period for Outstanding Liabilities: The Tribunal emphasized that there is no specific limitation period provided in section 41(1) or its Explanation 1 for determining the cessation of liabilities. The revenue's assumption of a three-year period as reasonable was not supported by any statutory provision. The Tribunal referenced several decisions, including those from the Delhi and Ahmedabad Benches, which concluded that the mere fact that liabilities were outstanding for more than three years and were time-barred was not sufficient grounds for addition under section 41(1). 3. Onus of Proof Regarding Cessation of Liabilities: The Tribunal highlighted that the onus is on the AO to establish that the liabilities have ceased and that the assessee has obtained a benefit. When the assessee continues to reflect the liabilities as payable and has not written them off unilaterally, the AO must provide evidence that these book entries are not bona fide. This view is supported by decisions in the cases of Shri Vardhman Overseas Ltd. and Uttam Air Products (P.) Ltd., which state that the revenue must prove the final cessation of liabilities with no possibility of their revival. 4. Unilateral Write-off of Liabilities Post-Amendment: The Tribunal noted that the Explanation 1 to section 41(1), effective from 1-4-1997, includes the unilateral act of writing off liabilities in the accounts as a case of obtaining a benefit. However, in the present case, the assessee had not unilaterally written off the liabilities. Therefore, the requirements of the Explanation were not met. The Tribunal concluded that in the absence of unilateral write-off and the AO's failure to prove the cessation of liabilities, the provisions of section 41(1) were not correctly applied. Consequently, the addition made by the AO was not justified. Conclusion: The Tribunal allowed the appeal of the assessee, setting aside the order of the CIT(A) and confirming that the outstanding liabilities could not be treated as deemed profits under section 41(1) in the absence of a unilateral write-off and concrete evidence of cessation of liabilities.
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