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2015 (11) TMI 179 - AT - Income TaxAddition u/s 68 - cessation of liability u/s. 41(1) - whether addition u/s. 68 of the Act could not be made because, admittedly, the credits in question did not relate to the previous year relevant to AY 2009-10? - Held that - In almost identical facts, the Hon ble Delhi High Court in the case of Shri Vardhaman Overseas Ltd. ( 2011 (12) TMI 77 - DELHI HIGH COURT ), has clearly laid down that neither section 41(1) nor section 68 of the Act can be applied. On the applicability of section 68, we are of the view that those provisions will not apply as the balances shown in the creditors account do not arise out of any transaction during the previous year relevant to AY 2009-10. The provisions of sec. 68 are clear inasmuch as they refer to sum found credited in the books of account of an assessee maintained for any previous year . There is no dispute in the present case that the amounts due to the sundry creditors had been allowed in the earlier assessment years as purchase price in computing the business income of the assessee. The second question is whether by not paying them for a period of four years and above the assessee had obtained some benefit in respect of the trading liability allowed in the earlier years. The words remission and cessation are legal terms and have to be interpreted accordingly. In the present case, there is nothing on record to show that there was either remission or cessation of liability of the assessee. In fact, there is no reference either in the order of the AO or CIT(A) to the expression remission or cessation of liability . There is nothing on record to show any cessation or remission of liability by the creditor or even an unilateral act by the Assessee in this regard. In view of the above, we are of the view that the impugned addition cannot be sustained and the same was rightly directed to be deleted by the CIT(A). The order of the CIT(A) is therefore confirmed. - Decided in favour of assessee.
Issues Involved:
1. Deletion of Addition by CIT(A) of Rs. 81,40,232. 2. Applicability of Section 41(1) of the Income Tax Act. 3. Applicability of Section 68 of the Income Tax Act. 4. Evidence of Cessation of Liability. Detailed Analysis: 1. Deletion of Addition by CIT(A) of Rs. 81,40,232: The Revenue appealed against the order of CIT(A) dated 14.8.2013, which deleted the addition of Rs. 81,40,232 made by the Assessing Officer (AO). This amount represented the liability of the Assessee to M/S. Durga Traders, shown as sundry creditors in the balance sheet. The AO had presumed that the liability ceased to exist due to the non-availability of M/S. Durga Traders at the given address and added the amount to the Assessee's income under Section 41(1) of the Income Tax Act. However, the CIT(A) held that since there were no transactions during the previous year, no addition could be made in the assessment year 2010-11, and there was no evidence of cessation of liability. 2. Applicability of Section 41(1) of the Income Tax Act: The AO invoked Section 41(1) of the Act, arguing that the liability ceased to exist as M/S. Durga Traders could not be located. The CIT(A) disagreed, citing the Supreme Court's decision in CIT v. Sugauli Sugar Works Pvt. Ltd., 236 ITR 518 (SC), which states that the mere passage of time does not constitute cessation of liability. The Tribunal concurred, noting that there was no evidence of remission or cessation of liability and that the liability had not been written off in the Assessee's accounts. The Tribunal emphasized that cessation or remission of liability requires a legal or contractual discharge, which was not present in this case. 3. Applicability of Section 68 of the Income Tax Act: The Tribunal examined whether Section 68, which deals with unexplained cash credits, was applicable. It was noted that the credits in question did not arise from transactions during the relevant previous year (AY 2009-10). Section 68 applies to sums found credited in the books of account for any previous year, and since the credits were from earlier years, Section 68 could not be invoked. The Tribunal referenced the Delhi High Court's decision in CIT v. Sri Vardhaman Overseas Ltd., which supported this view. 4. Evidence of Cessation of Liability: The Tribunal found no evidence of cessation of liability. The AO's assumption was based on the non-availability of M/S. Durga Traders at the given address and the long-standing nature of the liability. However, the Tribunal highlighted that a unilateral act by the debtor (Assessee) cannot bring about cessation or remission of liability. Legal cessation requires action by the creditor, operation of law, or a mutual agreement, none of which were demonstrated in this case. The Tribunal cited several legal precedents, including the Supreme Court's decision in CIT v. Sugauli Sugar Works (P) Ltd., to reinforce this point. Conclusion: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 81,40,232, finding no basis for the application of Sections 41(1) or 68 of the Income Tax Act. The appeal by the Revenue was dismissed, confirming that there was no cessation or remission of liability and that the addition was not sustainable in law.
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