2015 (5) TMI 991 - AT - Income Tax

Addition of addition u/s 41 - Held that - In this case, when the liability continues, the creditor can recover the amount otherwise than a civil suit. The creditor has every right to recover the money whenever an opportunity comes to it outside the court of law. Moreover, the assessee accepts the liability in the balance sheet as on 31.3.2007. It is well settled principles of law that a liability if accepted in the balance sheet filed in the income tax proceedings is an acceptance of liability under the Limitation Act. Therefore, the period of limitation for recovery of the amount would run from the date on which the liability is accepted in the balance sheet which was filed in the income tax proceedings. Hence, at no stretch of imagination, the liability ceased to exist and the same cannot be treated as income u/s 41(1) of the Act. In those circumstances, this Tribunal is of the considered opinion that addition of is not sustainable. Accordingly the orders of the lower authorities are set aside and the Assessing Officer is directed to delete the addition of 3,19,901/- made u/s 41(1) of the Act. - Decided in favour of assessee.

Summary

Issues:
Assessment of outstanding credit as income under section 41(1) of the Act based on liability cessation.

Analysis:
The appeal pertains to the assessment year 2007-08 where the Assessing Officer treated the outstanding credit of the assessee as income under section 41(1) of the Act due to the alleged cessation of liability. The assessee, engaged in dealership with a company, had shown the liability in the balance sheet as on 31.3.2007. The Assessing Officer demanded a confirmation letter from the creditor, which the assessee failed to provide. The Departmental Representative argued that since there were no transactions with the creditor during the relevant financial year and no effort was made by the creditor to collect dues, the liability ceased to exist, justifying the addition as income.

Upon reviewing the submissions, the Tribunal observed that the liability was indeed shown in the balance sheet, and the assessee had acknowledged it in the profit & loss account. The Tribunal highlighted that under the Limitation Act, the recovery period by the creditor is three years, and even after this period, the creditor can still seek recovery outside a civil suit. The Tribunal emphasized that accepting a liability in the balance sheet for income tax purposes constitutes an acknowledgment under the Limitation Act. Therefore, the liability did not cease to exist, and it could not be treated as income under section 41(1) of the Act.

Consequently, the Tribunal concluded that the addition of the outstanding credit as income was not sustainable. The lower authorities' orders were set aside, and the Assessing Officer was directed to delete the addition from the assessment. As a result, the appeal of the assessee was allowed, and the judgment was pronounced on 22nd May 2015 in Chennai.