2013 (7) TMI 959 - AT - Income Tax

Summary

Issues involved: Appeal against deletion of addition made u/s. 41(1) of the Act in respect of outstanding creditors.

Summary:
The Revenue appealed against the order of the Ld. CIT(A)-12, Mumbai pertaining to A.Y. 2007-08, raising two substantive grounds of appeal. The grievance was that the Ld. CIT(A) erred in deleting the addition made u/s. 41(1) of the Act regarding outstanding creditors. The AO added the entire amount of sundry creditors u/s. 41(1) due to balances carried forward for the last 3 years with no transactions. The assessee explained financial difficulties and disputes with old creditors for non-repayment. The Ld. CIT(A) observed that cessation of liability occurs only when the amount is written back to the profit and loss account and if not offered to tax, the AO cannot tax it under Sec. 41(1). The Ld. CIT(A) emphasized the necessity of establishing the cessation of liability and noted that complete payments were made to 5 parties. Consequently, the Ld. CIT(A) concluded that the AO was unjustified in invoking Sec. 41(1) and deleted the addition.

The Revenue contended against the Ld. CIT(A)'s finding, arguing that additional evidence admitted was against Rule 46A. The Ld. Counsel for the assessee reiterated their submissions. Upon review, it was found that the AO made additions based solely on liabilities outstanding for over 3 years, which cannot be the sole ground for invoking Sec. 41(1) as time-barring trading liabilities do not necessarily indicate remission or cessation. The AO's error in invoking Sec. 41(1) was highlighted, stating that the law of limitation bars the remedy but does not extinguish the liability. The Tribunal upheld the Ld. CIT(A)'s decision, dismissing the Revenue's appeal.

In conclusion, the Tribunal dismissed the appeal filed by the Revenue, emphasizing that time-barring liabilities do not automatically warrant invocation of Sec. 41(1) as the law of limitation does not extinguish the liability.