2013 (4) TMI 638 - AT - Income Tax

Cessation of trading liability U/s 41(1)(a) - Existence of liability which is of three years - Held that - We observe that ld CIT(A) in the impugned order has stated that the AO has not established that the liability in respect of those creditors had ceased to exist within the meaning of section 41(1) of the Act - It was submitted by the assessee before the authorities below that assessee s business was discontinued due to loss - Therefore, The loan taken from State Bank of India was outstanding for over five years - The sundry creditors were outstanding on account of non-availability of sufficient funds - In view of above, ld CIT(A) has stated Outstanding of creditors even for more than three years cannot be considered as sufficient evidence of cessation of liability - Assessee has not written back the amount payable to these creditors in the books of account We do not find infirmity in the order of ld CIT(A) directing the AO to delete the amount which is outstanding even for more than three years - We accordingly uphold the order of ld CIT(A) and reject grounds of appeal taken by department - Appeal is dismissed in favour of Assessee.

Summary

Issues:
1. Existence of liability for more than three years.
2. Applicability of section 41(1) of the Act on outstanding creditors.

Issue 1: Existence of liability for more than three years
The department filed an appeal against the order of ld CIT(A) for the assessment year 2007-08, challenging the decision on the existence of liability for more than three years. The Assessing Officer noted that the assessee had shown sundry creditors of Rs.36,41,465, with some creditors outstanding for over three years. The AO treated the outstanding liabilities of Rs.27,45,191 as cessation of trading liability under section 41(1)(a) of the Act, deeming them as profits chargeable to tax. The assessee contended that the business was discontinued due to losses, and the creditors were outstanding due to insufficient funds. Ld CIT(A) held that section 41(1) was not attracted to creditors outstanding for more than three years and deleted the amount. The Tribunal upheld the decision, stating that the AO failed to establish the cessation of liability, and the outstanding creditors did not indicate sufficient evidence of liability cessation.

Issue 2: Applicability of section 41(1) of the Act on outstanding creditors
During the appeal, the department argued for the confirmation of the AO's order, relying on the decisions of various tribunals and courts. The AR for the assessee requested the confirmation of ld CIT(A)'s order. The AR highlighted that the assessee had not written off the liability, making section 41(1) inapplicable. The Tribunal considered the submissions and the order of ld CIT(A), noting that the AO did not prove the cessation of liability for the outstanding creditors. The Tribunal agreed with ld CIT(A)'s decision, emphasizing that the mere outstanding of creditors for more than three years did not signify the liability's cessation. As the assessee had not written back the amount payable to the creditors in the books of account, the Tribunal upheld ld CIT(A)'s order to delete the outstanding amount. Consequently, the appeal filed by the department was dismissed.

In conclusion, the Tribunal upheld ld CIT(A)'s decision regarding the liabilities outstanding for more than three years, ruling out the applicability of section 41(1) of the Act on the outstanding creditors. The judgment emphasized the importance of establishing the cessation of liability and the significance of written-off amounts in the books of account to determine the tax implications on outstanding liabilities.