2023 (6) TMI 431 - AT - Income Tax

Cessation of liability u/s 41(1) - As contented liability existed in the books of account and therefore provisions of Section 41(1) cannot be invoked - AO based on non service of notice under Section 133(6) concluded that the liability has ceased to exist - HELD THAT - The assessee in the instant case, has continued to recognize the liability and one cannot say that the liability is not unenforceable against the assessee without its discharge or reversal. A mere fact of expiry of period of limitation to enforce it does not, by itself, constitute cessation of liability. In the case of Dattatray Poultry 2019 (4) TMI 1171 - GUJARAT HIGH COURT as similarly observed that where the existence of liability was doubted, same could have been disallowed in the year in which it is claimed or could have been treated as unexplained credit in that relevant year - while the assessee has continued to declare the trading liability in its books of account, no benefit can be said to have been obtained in respect of such trading liability by way of remission or cessation thereof and thus the requirement of Section 41(1) are not satisfied. The additions made u/s 41(1) is thus set aside and reversed. Decided in favour of assessee.

Summary

Issues involved:
The appeal against the order of the Commissioner of Income Tax (Appeals) concerning the additions made under Section 41(1) of the Income Tax Act, 1961 for the Assessment Year 2015-16.

Summary:
The appellant challenged the additions made by the Assessing Officer under Section 41(1) of the Act on account of cessation of liability amounting to Rs. 69,59,056. The appellant contended that the liability existed in the books of account and provisions of Section 41(1) cannot be invoked. The CIT(A) declined to give any relief. The Tribunal noted that the applicability of Section 41(1) was in controversy.

The appellant claimed that the liability shown under 'sundry creditors' arose due to non-payment, supported by tax invoices from registered VAT dealers. The Tribunal held that the longevity of the outstanding amount cannot be a ground to treat it as a cessation of liability under Section 41(1). Section 41(1) deems the cessation of liability as income in a subsequent year if the assessee obtains any benefit. The Tribunal found that the liability claimed by the appellant was subsisting, and the Revenue's conclusion that it no longer existed was incorrect.

The Tribunal referred to judgments by the Delhi High Court and the Gujarat High Court, stating that for Section 41(1) to apply, the assessee must have received a benefit through remission or cessation of the liability. As the appellant continued to recognize the liability in its books, the requirement of Section 41(1) was not satisfied. Therefore, the Tribunal set aside and reversed the additions made under Section 41(1).

In conclusion, the appeal of the assessee was allowed, and the additions under Section 41(1) were reversed based on the principles established in the judicial precedents.

Order pronounced in the open Court on 23/05/2023.