2010 (7) TMI 134 - HC - Income Tax

Undercharged Liabilities failure to get confirmation brought forward of sundry creditors deemed income u/s 41(1) applicability of period of limitation Held that - The principle that expiry of period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt, has been well settled. If that principle is applied, it is clear that mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by the section - Section 41(1) of Act, 1961 was not attracted as there was neither remission nor cessation of liability in the present case.

Summary

Issues:
- Condonation of delay in re-filing the appeal
- Interpretation of Section 41(1) of the Income Tax Act, 1961

Condonation of Delay:
The judgment addressed an application for condonation of delay of 107 days in re-filing the appeal. The delay was condoned based on the reasons stated in the application, leading to the disposal of the application.

Interpretation of Section 41(1) of the Income Tax Act, 1961:
The appeal was filed challenging an order passed by the Income Tax Appellate Tribunal (ITAT) for the assessment year 2004-2005. The main contention revolved around the interpretation of Section 41(1) of the Income Tax Act, 1961. The Revenue argued that the ITAT erred in allowing relief to the assessee without confirmation of undischarged liabilities, citing Section 41(1) in support.

The ITAT confirmed the order of the Commissioner of Income Tax (Appeals) and dismissed the Revenue's appeal. The ITAT emphasized that to bring a case under Section 41(1), it must be shown that there has been remission or cessation of the liability. The judgment referred to a previous case emphasizing that the creditor voluntarily giving up the claim constitutes remission, and the liability ceases to exist in the eye of the law for all intents and purposes. The ITAT held that the Revenue failed to show that liabilities had ceased to exist and that the assessee had received any benefit, thus justifying the deletion of the addition made by the Assessing Officer under Section 41(1).

The judgment also cited a Supreme Court case to highlight that the obtaining of a benefit by virtue of remission or cessation is crucial for the application of Section 41(1). It was emphasized that a mere unilateral entry in the debtor's accounts without any act on the part of the creditor does not constitute the liability coming to an end or confer any benefit on the debtor as required by the section.

In conclusion, the appeal was dismissed as it was deemed devoid of merit, with no order as to costs. The judgment was delivered by Justice Manmohan and the Chief Justice on July 15, 2010.