2015 (1) TMI 1433 - AT - Income Tax

Cessation of the liability - shown in parts by the assessee and not bringing the whole amount in to the net of taxation under section 41(1) - HELD THAT - A perusal of the assessment order clearly shows that the assessee has shown the liability of ₹ 27,10,883/- as a liability in its accounts. The amount of ₹ 33,37,011/- clearly is the balance as on 01.04.2006. This is not an amount received by the assessee during the relevant assessment year. A perusal of the modification to the agreement dated 02.04.2001 vide letter dated 18.12.2006 clearly shows that M/s. Rudgormach, Russia has categorically directed the assessee to adjust the necessary expenses required for the marketing, promotional and liasioning work including commission on behalf of M/s. Rudgormach against the outstanding lying with the account. This clearly shows that there is no cessation of liability. In the present case, the amount has any way not been written off. It remains as a liability in the books of the assessee. In these circumstances, we are of the view that the finding of the ld. CIT(Appeals) is on right footing and does not call for any interference. - Decided against revenue

Summary

Issues:
- Whether the deletion of the addition made on account of cessation of liability by the assessee was justified under section 41(1) of the Income Tax Act, 1961.

Analysis:
The appeal before the Appellate Tribunal ITAT Kolkata involved a dispute regarding the deletion of an addition made on account of the cessation of liability by the assessee for the assessment year 2007-08. The Revenue challenged the order of the ld. Commissioner of Income Tax (Appeals)-VIII, Kolkata, questioning the justification of deleting the said addition under section 41(1) of the Income Tax Act, 1961. The key contention was related to the treatment of an amount received by the assessee from M/s. Rudgormach, Russia, and the subsequent adjustment of liabilities. The Revenue argued that the entire amount should have been brought into the net of taxation as advance income. On the other hand, the assessee contended that the liability did not cease and hence the provisions of section 41(1) did not apply.

During the proceedings, it was highlighted that the amount in question was not received during the relevant assessment year but was part of an agreement with M/s. Rudgormach, Russia, dating back to 2001. The assessee had incurred expenses in compliance with the agreement and adjusted a portion of the advance amount towards these expenses. The remaining balance was maintained as an advance in the accounts. The assessee relied on legal precedents, including a decision of the Hon'ble Madras High Court, to support the argument that as long as a liability is reflected in the books of accounts, it cannot be treated as income under section 41(1) of the Income Tax Act, 1961.

Upon careful consideration of the submissions and relevant documents, the Appellate Tribunal observed that the liability of the assessee was duly accounted for in its books, and the amount in question was not received during the assessment year but was an existing balance. Additionally, a modification to the agreement directed the assessee to adjust expenses against the outstanding amount, indicating no cessation of liability. The Tribunal referred to legal decisions, including one by the Hon'ble Supreme Court, emphasizing that even unilateral writing off of a liability in the books does not constitute cessation or remission of liability for taxation under section 41(1). Since the amount in question remained a liability in the books of the assessee, the Tribunal upheld the order of the ld. Commissioner of Income Tax (Appeals)-VIII, Kolkata, and dismissed the appeal of the Revenue.

In conclusion, the Appellate Tribunal ITAT Kolkata, comprising Shri N.K. Saini (Accountant Member) and Shri George Mathan (Judicial Member), upheld the decision of the ld. Commissioner of Income Tax (Appeals)-VIII, Kolkata, regarding the deletion of the addition made on account of the cessation of liability by the assessee. The Tribunal found that the liability was appropriately reflected in the assessee's accounts, and there was no cessation of liability to warrant bringing the amount into the net of taxation under section 41(1) of the Income Tax Act, 1961.