2013 (5) TMI 690 - HC - Income Tax

Addition on account of purported cessation of liability - ITAT deleted the addition - Whether while considering provisions of section 41(1) the net liability that after providing for receivables is to be considered or is relevant? - Held that - In order to attract the provisions of Section 41(1) it is necessary that there should have been a cessation or remission of liability. As held in the case of J. K. Chemicals Ltd. (1966 (2) TMI 73 - BOMBAY HIGH COURT) cessation of liability may occur either by the reason of the liability becoming unenforceable in law by the creditor coupled with debtor declaring his intention not to honour his liability, or by a contract between parties or by discharge of the debt. In the present case, the assessee is acknowledging the debt payable to M/s Elephanta Oil & Vanaspati Ltd. and there is no material to indicate that the parties have contracted to extinguish the liability. Thus, it cannot be concluded that the debt owed by the assessee to M/s Elephanta Oils & Vanaspati Ltd. stood extinguished. Although, enforcement of a debt being barred by limitation does not ipso facto lead to the conclusion that there is cessation or remission of liability, in the facts of the present case, it is also not possible to conclude that the debt has become unenforceable. It is well settled that reflecting an amount as outstanding in the balance sheet by a company amounts to the company acknowledging the debt for the purposes of Section 18 of the Limitation Act, 1963 and, thus, the claim by M/s Elephanta Oil & Vanaspati Ltd. can also not be considered as time barred as the period of limitation would stand extended. Even, otherwise, it cannot be stated that M/s Elephanta Oil & Vanaspati Ltd. would be unable to claim a set-off on account of the amount reflected as payable to it by the assessee. Admittedly, winding up proceedings against M/s Elephanta Oil & Vanaspati Ltd. are pending and there is no certainty that any claim that may be made by the assessee with regard to the amounts receivable from M/s Elephanta Oil & Vanaspati Ltd. would be paid without the liquidator claiming the credit for the amounts receivable from the assessee company. Thus admittedly, no credit entry has been made in the books of the assessee in the previous year relevant to the assessment year 2008- 2009. The outstanding balances reflected as payable to M/s Elephanta Oil & Vanaspati Ltd. are the opening balances which are being carried forward for several years. The issue as to the genuineness of a credit entry, thus does not arise in the current year and this issue could only be examined in the year when the liability was recorded as having arisen, that is, in the year 1984-1985. The department having accepted the balances outstanding over several years, it was not open for the CIT (Appeals) to confirm the addition of the amount on the ground that the assessee could not produce sufficient evidence to prove the genuineness of the transactions which were undertaken in the year 1984-85. No substantial question of law arises.

Summary

Issues Involved:
1. Whether ITAT erred in setting aside an amount of Rs. 1,53,48,850.00 holding that there was no cessation of liability?
2. Whether while considering provisions of section 41(1) the net liability that after providing for receivables is to be considered or is relevant?

Detailed Analysis:

1. Whether ITAT erred in setting aside an amount of Rs. 1,53,48,850.00 holding that there was no cessation of liability?

The revenue filed an appeal under Section 260A of the Income Tax Act, 1961, challenging the order passed by the Income Tax Appellate Tribunal (ITAT), which set aside the addition of Rs. 1,53,48,850/- made by the Assessing Officer (AO) on account of purported cessation of liability. The AO had added the aggregate amounts shown as payable to various sundry creditors, including M/s Elephanta Oil & Vanaspati Ltd., under Section 41(1) of the Act, arguing that the liabilities had ceased due to their long-standing nature.

The CIT (Appeals) deleted the addition for some creditors but upheld it for M/s Elephanta Oil & Vanaspati Ltd., not on the ground of cessation of liability, but due to the assessee's failure to establish the genuineness of the liability. The ITAT, however, accepted the assessee's contention that the net effect of mutual liabilities between the assessee and M/s Elephanta Oil & Vanaspati Ltd. resulted in no net payable amount.

The High Court noted that the revenue did not appeal against the CIT (Appeals) decision regarding the cessation of liability for other creditors, thus accepting that there was no cessation of liability where the debt was acknowledged. The Court concluded that the question of cessation of liability did not arise since the assessee continued to acknowledge the debt, and there was no material to indicate that the liability was extinguished.

2. Whether while considering provisions of section 41(1) the net liability that after providing for receivables is to be considered or is relevant?

Section 41(1) of the Act deals with the remission or cessation of trading liabilities. The Supreme Court in CIT v. Sugauli Sugar Works (P). Ltd. held that for Section 41(1) to apply, the assessee must obtain a benefit by way of remission or cessation of liability. The High Court observed that merely because the liability was outstanding for a long period did not mean it had ceased, especially when the assessee acknowledged it in its balance sheets, thereby extending the limitation period.

The Court emphasized that the debt subsists even if its recovery is barred by limitation, as held in Bombay Dyeing and Manufacturing Co. Ltd. v. State of Bombay. The Court also noted that the assessee's acknowledgment of the debt in subsequent years indicated no cessation of liability. Furthermore, the Court pointed out that no credit entry was made in the books of the assessee in the relevant year, and the genuineness of the credit entry could only be examined in the year when the liability was recorded, which was 1984-1985.

Conclusion:

The High Court dismissed the appeal, concluding that there was no cessation of liability under Section 41(1) of the Act as the assessee continued to acknowledge the debt towards M/s Elephanta Oil & Vanaspati Ltd. The Court also held that the net liability after considering receivables was relevant, and the department could not challenge the genuineness of the transaction recorded in 1984-1985 in the current assessment year. The appeal did not disclose any substantial question of law for consideration.