2017 (6) TMI 1286 - AT - Income Tax

Addition u/s 41(1) - remission/secession of liability - HELD THAT - In absence of any material to establish that the assessee has obtained any benefit in respect of the liability on account of sundry creditors in the impugned assessment year merely on surmises and assumptions it cannot be said that there is remission/cessation of liability in the impugned assessment year. More so, when there is no unilateral act by the assessee in writing off of liability in its books of accounts. As evident from the material on record that in course of assessment proceedings the assessee had furnished the necessary details and submitted that part of the liability has already been written off or paid back in the subsequent years. AO without any valid reasons has failed to recognise such facts. In fact, as pointed out by the AR, such repayment or writing off of the liability in subsequent years was prior to the query raised by the AO on 07.12.2011 for invoking the provisions of section 41(1) of the Act. Thus, the Act of the assessee in repaying a part of the sundry creditors of writing off the liability in its books of account cannot be held to be an afterthought but has to be considered to have been done in good faith. We are of the view that there is no remission or cessation of liability of the sundry creditors appearing in the books of assessee in the impugned assessment year. In view of the aforesaid factual position, we do not consider it necessary to dwell much upon the decisions relied upon by the DR. Thus, in the ultimate analysis, we do not find any infirmity in the order of ld.CIT(A) which is accordingly confirmed. - Decided against revenue.

Issues Involved:
1. Deletion of addition made by the Assessing Officer under section 41(1) of the Income Tax Act, 1961 on account of remission/cessation of liability.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 41(1):

The primary issue in the appeal is the challenge against the deletion of an addition amounting to ?7,29,35,535/- made by the Assessing Officer (AO) under section 41(1) of the Income Tax Act, 1961, concerning the remission/cessation of liability.

Facts of the Case:
The assessee, a company engaged in manufacturing engineering goods, filed its return of income for the assessment year 2009-10. During the assessment proceedings, the AO noticed sundry creditors amounting to ?7,79,12,165/- and demanded details and supporting evidence. The assessee provided a list of creditors and dates of credits, which the AO found insufficient. The AO observed that the credit balances were outstanding for a long period (from 1997-98 to 2002-03) without recent transactions and concluded that the liability no longer existed. Consequently, the AO added the amount as deemed income under section 41(1) of the Act, citing cessation of liability.

CIT(A) Decision:
The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, stating that for a liability to be considered as income under section 41(1), there must be a benefit passed to the assessee or a cessation of liability. The CIT(A) emphasized that the mere fact that liabilities are old does not justify applying section 41(1) without satisfying the conditions therein. The CIT(A) also noted that the assessee had not written back the liability in its books, thus section 41(1) was not applicable.

Department's Argument:
The Department's Representative (DR) argued that the assessee failed to provide sufficient evidence to prove the genuineness of the sundry creditors. The DR relied on case laws to support the contention that the CIT(A) was incorrect in deleting the addition.

Assessee's Argument:
The Assessee's Representative (AR) countered by stating that all details of the sundry creditors and the purpose of the credits were provided to the AO. The AR highlighted that part of the liabilities was either written back or paid in subsequent years, and some liabilities were related to government agencies, which cannot be deemed non-genuine. The AR argued that the burden of proof lies with the department to establish remission or cessation of liability under section 41(1) and that the liabilities continued to be shown in the balance sheet, indicating they were still recoverable.

Tribunal's Analysis:
The Tribunal noted that the AO accepted the origin of the liabilities in the years 1997-98 to 2002-03 but questioned their genuineness in the assessment year under consideration. The Tribunal held that the genuineness of transactions should be examined in the years they originated, not in the current assessment year. The Tribunal emphasized that for section 41(1) to apply, it must be established that the assessee obtained a benefit in respect of the liability in the relevant previous year. The Tribunal found no material evidence that the assessee obtained any benefit in the impugned assessment year. It also noted that part of the liability was due to government agencies, and there was no communication from the government regarding the remission of the debt.

Relevant Case Laws:
The Tribunal referred to several case laws, including:
- Jain Exports (P) Ltd. v. DCIT: Held that reflecting an amount as outstanding in the balance sheet amounts to acknowledging the debt, extending the period of limitation.
- Matruprasad C Pandey v. CIT: Emphasized that addition under section 41(1) cannot be made unless there is remission or cessation of liability in the relevant assessment year.
- Nitin S. Garg v. CIT: Stated that merely because liabilities are outstanding for many years, it cannot be inferred that they have ceased to exist.

Conclusion:
The Tribunal concluded that there was no remission or cessation of liability of the sundry creditors in the impugned assessment year. Therefore, the Tribunal upheld the CIT(A)’s decision to delete the addition made by the AO under section 41(1) and dismissed the department's appeal.

Final Order:
The appeal of the department is dismissed. The order was pronounced in the open court on 21st June 2017.

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