2010 (6) TMI 592 - AT - Income Tax

Non-availability of Creditors - The authorities had brought to tax in respect of Non-available 2 creditors of designing and printing, which remained outstanding at the end of this year also. - Held that - the liability has not been written off in the accounts of the assessee. In such circumstances, non-availability of the creditor and lack of any correspondence with them does not obliterate the debt, as the assessee continues to show the same in its books of account. Thus, the provision contained in section 41(1) is not applicable. Decided in the favour of Assesee.

Summary

Issues:
Assessment of outstanding liabilities for two creditors in the appellant's income for the assessment year 2004-05.

Analysis:
The appeal before the Appellate Tribunal ITAT Delhi concerned the assessment of outstanding liabilities amounting to Rs. 33,89,860 for two creditors, Laser Graphics P. Ltd. and Laser Graphics, in the appellant's income for the assessment year 2004-05. The Assessing Officer concluded that since the whereabouts of the creditors were unknown, and no correspondence had occurred since 2001, the liabilities ceased to exist, invoking section 41(1) based on the decision in CIT v. T.V. Sundaram Iyengar & Sons Ltd. The Commissioner of Income-tax (Appeals) concurred with this view and added the amount to the appellant's total income. However, the appellant contended that as the liabilities were not written off in the profit and loss account, they should not be taxed under section 41(1) or section 28(iv), citing the decision in CIT v. Sugauli Sugar Works (P.) Ltd.

The Appellate Tribunal considered the arguments and referred to relevant case laws. In T.V. Sundaram Iyengar & Sons Ltd., the Supreme Court held that when amounts initially treated as capital were written off to the profit and loss account due to non-claim by customers, they should be treated as income. However, in the present case, the liabilities were still shown in the balance sheet, indicating they were not treated as the appellant's own money. The Tribunal distinguished the case from Solid Containers Ltd., where a loan amount credited to the profit and loss account was taxed as income. The Tribunal also discussed the decision in Jay Engineering Works Ltd., emphasizing that writing off a liability unilaterally did not automatically make it income, especially before the amendment in section 41.

Further, the Tribunal referred to Sugauli Sugar Works (P.) Ltd., where the Supreme Court clarified that the expiry of the limitation period did not extinguish the debt, and unilateral entry in the debtor's account did not end the liability. Applying this principle to the current case, the Tribunal held that as the liabilities were not written off, the provisions of section 41(1) and section 28(iv) did not apply. The Tribunal also noted the absence of a time limit in the law for carrying such debts in the books. Consequently, the appeal was partly allowed, indicating that the liabilities should not be taxed in the appellant's income for the assessment year 2004-05.