2016 (7) TMI 749 - HC - Income Tax

Addition invoking sec 41(1) - remission or cessation of liability - ITAT deleted the addition - Held that - There is nothing on record to suggest that there was any remission or cessation of liability in the previous year relevant to the assessment year under consideration. Even if the submission advanced by the learned counsel for the revenue that some of the creditors had written off the liability in their books was to be accepted, even then, such liability would have ceased in the year in which such amounts were written off in the books of those creditors. However, it is not the case of the Assessing Officer that the amounts were written off in the year under consideration. In these circumstances, the question of invoking section 41(1) of the Act would not arise. Moreover, this court is in agreement with the view adopted by the Commissioner (Appeals), as confirmed by the Tribunal, that a unilateral act on the part of the parties does not in any way translate into income in the hands of the assessee. As is evident from the material on record, the assessee has shown these liabilities in its books and continues to show the same. Thus, the assessee has not written off the liabilities in its books of account. There is nothing on record to indicate that the creditors have given up their rights to recover such amounts from the assessee. Under the circumstances, it is clear that the addition is based upon an assumption on the part of the Assessing Officer that the liabilities have ceased to exist. The Tribunal, therefore, did not commit any error in upholding the deletion made by the Commissioner (Appeals). - Decided against revenue

Summary

Issues:
Challenge to order under section 260A of the Income Tax Act, 1961 regarding liability amounting to Rs. 81,60,350 ceasing to exist as creditors were non-existing and barred by limitation.

Analysis:
1. The appellant challenged the order made by the Income Tax Appellate Tribunal regarding the liability amounting to Rs. 81,60,350 ceasing to exist as creditors were non-existing and barred by limitation. The Assessing Officer found that the liabilities were no longer payable as the creditors could not be located, and no payments were made for over twelve years. The liabilities were added to the income of the assessee under section 41(1) of the Act.

2. The Commissioner (Appeals) agreed with the assessee that section 41(1) introduces a fiction limited to actual receipt of cash. The Commissioner found that natural justice principles were violated, and the evidence gathered by the Assessing Officer was inconclusive. The deletion of the addition under section 41(1) was upheld as the unilateral act of writing off debts did not automatically translate into income.

3. The Tribunal noted that the assessee had not obtained any cash or benefit in respect of the liabilities under section 41(1). The Tribunal found no evidence of remission or cessation of liability during the relevant previous year. Even if some creditors had written off the liabilities, it did not occur in the relevant assessment year, and the liabilities were still shown in the assessee's books.

4. The Tribunal held that there was no remission or cessation of liability in the relevant previous year, and the addition based on the assumption that liabilities had ceased was unfounded. The Tribunal concurred with the Commissioner (Appeals) that a unilateral act by creditors did not automatically result in income for the assessee. The deletion of the addition was justified based on the lack of evidence supporting the liabilities ceasing to exist.

5. The High Court dismissed the appeal, stating that the Tribunal's order did not raise any substantial question of law. The Court agreed with the Tribunal's decision that there was no evidence to suggest the liabilities had ceased to exist, and the deletion made by the Commissioner (Appeals) was upheld.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing that the liabilities had not ceased to exist as there was no evidence of remission or cessation during the relevant previous year. The Court found no substantial question of law warranting interference and dismissed the appeal.