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2011 (3) TMI 574 - AT - Income TaxDeemed income - forfeiture of part payment of earnest money received against proposed sale of flats - cessation of liability - Held that - no financial entries have been passed with regard to the amount of Rs. 1,63,20,000. - it is amply clear that the assessee never wrote off the liability of Rs. 1,63,20,000, in its books of account. - Once this was so, Explanation 1 to section 41(1) of the Act did not at all come into play, since in the absence of the writing off of the liability in the accounts, the liability subsisted and no cessation of liability could be presumed. - Decided in favor of assessee.
Issues Involved:
1. Whether the forfeiture of Rs. 1,63,20,000 by the assessee constitutes a cessation of liability under Section 41(1) of the Income-tax Act. 2. Whether the amount forfeited should be considered as business income of the assessee for the assessment year 2005-06. Issue-Wise Detailed Analysis: 1. Cessation of Liability under Section 41(1): The core issue revolves around whether the forfeiture of Rs. 1,63,20,000 by the assessee amounts to a cessation of liability as per Section 41(1) of the Income-tax Act. The assessee received advances from various parties against the sale of flats but forfeited these amounts when the parties failed to pay the agreed amounts on time. The Assessing Officer (AO) held that this forfeiture represented a clear cessation of trading liability and added the amount to the assessee's business income, invoking Section 41(1). However, the assessee contended that since the liability had not been written off in its books of account and the matter was sub-judice, Section 41(1) could not be invoked. The Commissioner of Income Tax (Appeals) [CIT(A)] agreed with the assessee, noting that the liability was shown under current liabilities in the accounts and no financial entries were passed for the forfeited amount due to ongoing litigation. The CIT(A) concluded that there was no cessation of liability, and thus, Section 41(1) was not applicable. 2. Forfeited Amount as Business Income: The AO considered the forfeited amount as the assessee's business income, relying on precedents like CIT v. Lakshmi Vilas Bank Ltd. and CIT v. State Trading Corpn. of India Ltd. The AO's stance was that the disclosure in the Notes to Accounts indicated a clear forfeiture, thus constituting business income. In contrast, the assessee argued that the disclosure was merely an informative note and not a financial entry, emphasizing that the matter was still under litigation. The CIT(A) supported this view, stating that the disclosure did not equate to writing off the liability in the accounts. Therefore, the forfeited amount could not be treated as business income for the assessment year 2005-06. Tribunal's Decision: Upon appeal, the Tribunal examined whether the disclosure in the Notes to Accounts amounted to a forfeiture and cessation of liability. The Tribunal highlighted that Section 41(1) requires the liability to be written off in the accounts for it to be considered a cessation. Since the assessee explicitly stated that no financial entries were passed due to the ongoing litigation, the Tribunal concluded that there was no cessation of liability. The Tribunal affirmed the CIT(A)'s decision, noting that the forfeiture was not recognized in the accounts, and thus, Section 41(1) was not applicable. Consequently, the forfeited amount could not be treated as business income for the assessment year 2005-06. Conclusion: The Tribunal dismissed the Department's appeal, upholding the CIT(A)'s decision that there was no cessation of liability and the forfeited amount could not be treated as business income for the assessment year 2005-06. The appeal filed by the Department was thereby rejected.
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