2022 (11) TMI 1215 - HC - Income Tax

Addition u/s 41(1) - assessee s liability to the tune to be a case of cessation of liability - HELD THAT - Undisputed factual position which was rightly taken note of by the learned tribunal and in particular, noting that there is no dispute about the assessee to have been carrying forward the impugned liability in its books for a time span of almost three decades and the department did not raise any issue in all the intervening assessment years in question. Tribunal also noted that the assessing officer after the matter was remanded to him had issued summons to six directors of the concerned entities on test check basis, and four out of the six directors had appeared in response to the summons. The statements were recorded. Tribunal also notes that the creditors have given written reply in response to the summons reiterating their liability as also the fact that the assessee had settled some of the creditors even after 31.03.2001. Thus the assessee has fulfilled the duty cast upon them to provide evidence that the liability exist at the end of the year. The duty on AO is to prove that the liability has ceased to exist which in our considered view has been miserably failed to be established. We find that the learned tribunal rightly declined to interfere with the orders passed by the CIT(A) by dismissing the appeal filed by the revenue.

Issues Involved:
1. Delay in filing the appeal and condonation of the delay.
2. Applicability of Section 41(1) of the Income Tax Act regarding cessation of liability.
3. Validity of the Assessing Officer's addition of Rs. 12,97,47,322/- as cessation of liability.
4. Interpretation and application of relevant case law.

Detailed Analysis:

1. Delay in Filing the Appeal and Condonation of the Delay:
The appeal was filed with a delay of 627 days. The revenue filed GA 01 of 2020 to condone this delay. The respondent assessees objected to the condonation, and affidavits were exchanged. The court found the explanation for the delay unsatisfactory but chose to condone the delay to address the substantial questions of law under Section 260A of the Income Tax Act, 1961. Thus, GA No. 01 of 2020 was allowed, and the delay was condoned.

2. Applicability of Section 41(1) of the Income Tax Act Regarding Cessation of Liability:
The primary issue was whether the Assessing Officer (AO) was correct in applying Section 41(1) after treating the assessee's liability of Rs. 12,97,47,322/- as a cessation of liability. The assessee contended that the AO failed to appreciate that there was evidence showing payments to loan creditors and that the liability continued to reflect in subsequent balance sheets. The burden of proof to satisfy the conditions of Section 41(1)(a) was on the revenue, which was not discharged.

3. Validity of the Assessing Officer's Addition of Rs. 12,97,47,322/- as Cessation of Liability:
The AO pointed out that the assessee failed to submit details of branches and the head office and only provided a list of unsecured loan creditors without confirmation of accounts. The AO concluded that there was no evidence of trading liability, thus treating it as a cessation of liability under Section 41(1)(a) and adding it to the taxable income. The CIT(A) deleted the addition, and the Tribunal upheld this decision. The Tribunal noted that the AO did not issue notices to all creditors and that the creditors who appeared did not deny the transactions. The Tribunal found that the liability continued to exist, and the AO's conclusion was incorrect.

4. Interpretation and Application of Relevant Case Law:
The court discussed several judgments to interpret the applicability of Section 41(1):

- Sugauli Sugar Works Private Limited: The Supreme Court held that the expiry of the limitation period does not extinguish the debt but only prevents its enforcement unless the debtor pleads it.
- Kesaria Tea Company Limited: A unilateral action by the debtor does not mean the liability has ceased.
- T.V. Sundaram Iyengar and Sons Limited: The court distinguished this case, noting it dealt with unclaimed balances transferred to the profit and loss account, which was not applicable here.
- Indian Rayon and Industries Limited: Affirmed that a unilateral act by the debtor does not extinguish liability.
- Goodricke Group Limited: Reiterated that the expiry of the limitation period does not extinguish the debt and that the AO must prove the liability has ceased.

The court concluded that the AO failed to prove the cessation of liability and that the Tribunal correctly upheld the CIT(A)'s decision to delete the addition.

Conclusion:
The appeal was dismissed, and the substantial questions of law were answered against the revenue. The Tribunal's decision to uphold the deletion of the addition by the CIT(A) was affirmed, emphasizing that the AO failed to establish the cessation of liability under Section 41(1).

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