2013 (8) TMI 945 - AT - Income Tax

Addition on account of cessation of liability u/s 41(1) - Held that - First party is Jagruti Corporation with an opening balance of ₹ 8.52 lakh. Page 35 of the paper book shows the payment of ₹ 1.45 lakh made by the assessee to this party thereby bringing closing balance down to ₹ 7.07 lakh. We fail to appreciate as to how this closing balance can be considered as remission or cessation by the party, even after three years of outstanding balance, so as to qualify as income u/s 41(1) when the assessee is paying the liability and there is nothing to indicate, even remotely, that the creditor has given up his claim. The assessee was supposed to pay ₹ 8.52 lakh to the party, out of which a sum of ₹ 1.45 lakh has paid either by cheque or by cash. When the position is so and the assessee is regularly making payment to such party, there can be no question of treating the closing balance as income u/s 41(1) of the Act. The second party is M/s Samidha Engineering. It had opening balance of ₹ 1.77 lakh. A sum of ₹ 10,000 was paid by cheque during the year under question bringing down the balance payable at ₹ 1.67 lakh at the end of the year. It is further relevant to note that the assessee made payments to this party in the immediately succeeding year for the full amount. Copy of this account for the financial year 2009-2010 is available showing nil balance as at the end of the subsequent year. By no stretch of imagination, this amount can be considered as income u/s 41(1) of the Act for the year relevant to the assessment year under consideration. Similar is the position regarding Universal Enterprises. It had opening balance of ₹ 8.52 lakh. Though no amount was paid during the year but in subsequent year the entire amount has been paid. Copy of account of this party for the financial year 2009-2010 is available on pages 40 and 41 of the paper book showing nil balance. We cannot consider the outstanding amount at the end of the year as income chargeable to tax u/s 41(1). The last is M/s Argass Chemicals. It had opening balance of ₹ 25.67 lakh. Page 32 of the paper book is the copy of account of this party which shows various debits and credits in this account leaving closing balance at ₹ 26.54 lakh. Page 33 of the paper book is copy of account of this party for the subsequent year again having several debits and credits with closing balance of ₹ 14.02 lakh. The assessee is having regular transactions with this party and the amount is payable because of regular purchase transactions. Amount in respect of these four parties cannot be considered as income u/s 41(1) of the Act

Summary

Issues Involved:
Appeal against deletion of addition made under section 41(1) for cessation of liability in the assessment year 2009-2010.

Analysis:
1. Issue of Deletion of Addition under Section 41(1):
The main issue in this case revolved around the deletion made by the CIT(A) of the addition by the AO on account of cessation of liability under section 41(1) concerning various parties. The AO had added amounts totaling &8377; 52.39 lakh under section 41(1) due to notices returned unserved and differences in balances. The CIT(A) partially allowed relief, leading to the Revenue's appeal against the deletion of addition for four parties.

2. Interpretation of Section 41(1):
Section 41(1) states that if an allowance or deduction has been made for a loss or trading liability, and the liability ceases to exist, any amount obtained as a remission or cessation is considered taxable profit. The key requirement is the actual cessation of the liability for it to be treated as income under this section.

3. Analysis of Parties' Balances:
- Jagruti Corporation: The closing balance was reduced by a payment made by the assessee, indicating regular payments and no cessation of liability, thus not qualifying as income under section 41(1).

- Samidha Engineering and Universal Enterprises: Similar to Jagruti Corporation, payments were made in subsequent years, showing ongoing transactions and no cessation of liability during the relevant assessment year.

- Argass Chemicals: Regular transactions were observed with this party, and the closing balance was part of the ongoing purchase transactions, indicating no cessation of liability during the relevant year.

4. Decision and Conclusion:
The Tribunal concluded that the amounts related to the four parties did not qualify as income under section 41(1) as there was no actual cessation of liability during the assessment year. Thus, the impugned order was upheld on this issue. The cross objection filed by the assessee was dismissed, leading to the dismissal of both the Revenue's appeal and the assessee's cross objection.

In conclusion, the judgment focused on the interpretation of section 41(1) concerning the cessation of liability and analyzed specific parties' balances to determine whether they qualified as taxable income. The decision highlighted the importance of actual cessation of liability for amounts to be considered as income under the said section, leading to the dismissal of the appeal and cross objection.