2010 (12) TMI 915 - AT - Income Tax

Addition invoking Provisions of section 41(1) - CIT(A) set aside the addition - Held that - If there are payments made by the assessee to M/s. GFIL in the subsequent years and if it was accepted by the Assessing Officer in the subsequent years that may be one of the relevant factors to consider as to whether it was a bona fide trading liability which still continue to exist. However, the assessee has to furnish the details in respect of the issues highlighted by the AO i.e., what was the purpose sought to be achieved by the assessee by entering into the agreement with the sister concern with regard to the discounting transaction and if it can be projected then there would have been some benefit to the assessee out of it, it can well be treated as a trading liability as otherwise merely because it was considered as a trading liability in the first year, it cannot continue to remain as a trading liability atleast in the year in which it was noticed that it was a colourable transaction. Since, the assessee had not been carrying on any business in the years under consideration and from the agreement entered into with the associate concern assessee appears to have not obtained any benefit from the time the agreement was entered into - It cannot be said that assessee was not aware of the activities of the sister concern and assessee cannot plead that it is naive to the fact that there are no chances of making fair profit - Therefore, it is for the assessee to highlight as to what prompted it to enter into such transaction and how it had benefited the assessee in any of these earlier years as well as in the years under consideration - The expression cessation or remission of liability was subject matter of consideration by various Courts and various principles were laid down which can act as guiding factors in order to consider as to what can be classified as remission or cessation of trading liability - order of the learned CIT(A) deserves to be set aside & restore the issue to the file of the Assessing Officer for fresh consideration - Thus, the appeal filed by the Revenue is treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Deletion of the addition of Rs. 4.49 crores made under section 41(1) of the Income-tax Act, 1961.
2. Whether the outstanding liability was a trading liability or a colorable transaction.
3. Application of section 41(1) concerning remission or cessation of liability.
4. The role of subsequent payments in determining the liability status.

Detailed Analysis:

1. Deletion of the Addition of Rs. 4.49 Crores:
The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 4.49 crores made by the Assessing Officer (AO) under section 41(1) of the Income-tax Act, 1961. The AO had added this amount, considering it a cessation of liability, as the assessee had not carried on any business for the past three years and the liability was with an associate concern.

2. Nature of the Outstanding Liability:
The assessee had shown an outstanding liability of Rs. 4.49 crores under "current liabilities and provision," payable to M/s. Gold Crest Finance (India) Limited (GFIL), an associate concern. The AO questioned the legitimacy of this liability, suspecting it as a colorable transaction rather than a genuine trading liability. The AO highlighted that the liability was classified as 'non-performing assets (NPA)' by GFIL, raising doubts about its authenticity.

3. Application of Section 41(1) Concerning Remission or Cessation of Liability:
The AO invoked section 41(1), which deals with the remission or cessation of trading liabilities, deeming them as profits chargeable to tax. The AO argued that since GFIL had written off the liability as NPA and the assessee was not carrying on any business, the liability ceased to exist. The CIT(A) disagreed, noting that the liability was acknowledged and partially discharged in subsequent years, thus not fitting the criteria for cessation or remission under section 41(1).

4. Role of Subsequent Payments in Determining the Liability Status:
The CIT(A) observed that the assessee had made partial payments towards the liability in subsequent years, which indicated that the liability was still active. The CIT(A) also noted that the AO had allowed deductions for these payments in subsequent years, contradicting the addition made under section 41(1) for the assessment year 2003-04.

Conclusion and Remand:
The Tribunal, after considering the rival submissions and the record, concluded that the CIT(A) erred in not remitting the matter back to the AO for fresh examination. The Tribunal noted that the CIT(A) considered additional material not available to the AO, such as subsequent payments. The Tribunal highlighted that the CIT(A) should have directed the AO to re-examine the facts, including the purpose of the discounting transaction and whether it provided any benefit to the assessee. The Tribunal emphasized the need for a thorough investigation to determine if the liability was genuine or a colorable transaction.

Final Judgment:
The Tribunal set aside the order of the CIT(A) and remitted the matter back to the AO for fresh consideration, directing the AO to re-examine the issue in light of the additional details and determine if the liability was bona fide and if section 41(1) was applicable. The appeal by the Revenue was allowed for statistical purposes.