2013 (10) TMI 699 - AT - Income Tax

Applicability of section 41(1) of the Income Tax Act Held that - Section i.e. 41(1) would be applicable where the assessee has obtained some benefit in respect of any trading liability by way of remission or cessation thereof - Merely because a liability has become time barred or is outstanding for a longer period, it cannot be presumed that there is a remission or cessation of the liability - Explanation (1) to Section 41(1) is a deeming provision by which remission or cessation of liability would be presumed in the year in which the debtor has written off the liability in his books of account - Explanation (1) to Section 41(1) would be squarely applicable for the FY 2012-13 - There cannot be cessation of liability twice - Therefore, when as per Explanation (1) there would be cessation of liability in the FY 2012-13 i.e. relevant to the assessment year 2013-14, the addition for the same cannot be made by presuming remission or cessation of liability in the year under consideration i.e. AY 2007-08 Decided in favor of Assessee.

Summary

Issues involved:
- Dispute over addition of outstanding liability in the books
- Interpretation of Section 41(1) regarding remission or cessation of liability
- Application of Explanation (1) to Section 41(1) in the case
- Determination of the year of cessation of liability

Analysis:
The appeal before the Appellate Tribunal ITAT Delhi involved a dispute regarding the addition of an outstanding liability in the books of the assessee for the assessment year 2007-08. The sole ground raised by the assessee was that the learned CIT(A) erred in sustaining the addition of Rs. 7,94,592 outstanding in the name of a specific individual. The Assessing Officer had made the addition based on the liability shown in the balance sheet, which the assessee attributed to goods purchased from the party in previous years. However, the confirmation from the creditor was not produced due to unrest in Afghanistan. The assessee later wrote back the liability to its profit & loss account in 2012. The dispute revolved around the year of cessation of liability, with the Assessing Officer contending it ceased in 2007 and the assessee claiming it ceased in 2013.

The learned DR argued that the liability had already ceased as the whereabouts of the creditor were unknown, and the assessee's action of writing back the liability in 2012 indicated admission of cessation. However, the Tribunal noted that the controversy was narrow, focusing on the year of cessation. The application of Section 41(1) was crucial, which deems any benefit from the remission or cessation of liability as taxable income. The Tribunal emphasized that Explanation (1) to Section 41(1) presumes remission or cessation when a debtor writes off the liability in their accounts. In this case, the Tribunal found that Explanation (1) applied for the financial year 2012-13, indicating cessation of liability for the assessment year 2013-14, not 2007-08. Therefore, the addition made by the Assessing Officer was deleted, and the appeal of the assessee was allowed.

In conclusion, the Tribunal ruled in favor of the assessee, highlighting the significance of correctly applying the provisions of Section 41(1) and Explanation (1) to determine the cessation of liability. The judgment clarified that the mere existence of a long-outstanding liability does not imply remission or cessation, emphasizing the importance of specific actions like writing off in the accounts to trigger the deeming provision.