2017 (12) TMI 678 - HC - Income Tax

Addition u/s 41 - cessation or remission of liability - Held that - The fact that the assessee did not show the amount in its profit and loss account may itself not invite applicability of Section 41 of the Act. Treatment given in accounting entries does not give rise to taxable event. To invoke Section 41 of the Act, the initial burden was on the revenue to establish cessation or remission of liability of Rs. one crore. That burden was not discharged. In as much as it had been found by the CIT (Appeals) and the Tribunal that the amount of Rs. one crore received by the assessee from M/s Widecom Group INC. had been adjusted against the sale price payable to the assessee by that entity, there did not survive any scope to invoke section 41 of the Act in favour of the revenue. Thus Question no. 1 as raised in the memo of appeal is answered in favour of the assessee Cessation of liability in terms of provisions of Section 41(1) - Assessee company is a wholly owned subsidiary of Widecom Group Inc, Canada - Held that - the assessee is a subsidiary of M/s Widecom Group INC is of no consequence in the facts and circumstances of the case. It is admitted that the two companies are separate juristic persons. Also, there is nothing to doubt the genuineness of the transaction of sale of goods made by the assessee to M/s Widecom Group INC. Thus, Question no. 3 is answered in favour of the assessee and against the revenue.

Summary

Issues Involved:
1. Interpretation of Section 41(1) of the Income Tax Act, 1961 regarding the treatment of a liability adjustment.
2. Application of Section 41(1) in a case involving a subsidiary company and its holding company.
3. Assessment of whether the adjustment of funds between related entities constitutes a cessation or remission of liability under Section 41(1).

Analysis:
1. The primary issue in this case revolves around the interpretation of Section 41(1) of the Income Tax Act, 1961 concerning the treatment of a liability adjustment. The case involved an appeal against the order of the Income Tax Appellate Tribunal regarding the addition of Rs. 1 crore under Section 41 of the Act for the Assessment Year 2007-08. The assessing officer contended that the liability disclosed by the assessee towards its holding company had ceased to exist, thus attracting Section 41. However, the CIT (Appeals) and the Tribunal found that the adjustment made by the assessee did not amount to a cessation or remission of liability as contemplated under Section 41. The courts emphasized that the section applies to transactions where a liability is done away without any consideration passing from the assessee to its creditor.

2. Another issue addressed in the judgment was the application of Section 41(1) in a scenario involving a subsidiary company and its holding company. The appellant argued that being a wholly owned subsidiary of the holding company, the transaction should be treated differently. However, the courts held that the two companies are separate juristic persons, and the subsidiary status does not alter the application of Section 41 in this context. The genuineness of the transaction between the entities was not in doubt, further supporting the decision against the revenue.

3. The final issue considered was whether the adjustment of funds between the related entities constituted a cessation or remission of liability under Section 41(1). The courts analyzed the nature of the transaction where the assessee adjusted the share application money against the sale consideration payable by the holding company. It was established that the adjustment represented a discharge of liability rather than a cessation or remission. The courts highlighted that the revenue failed to establish the cessation or remission of the liability, and the burden of proof was not met. Consequently, the appeal lacked merit, and the decision was made in favor of the assessee, dismissing the appeal with no costs awarded.