2015 (7) TMI 16 - HC - Income Tax

Addition made under Section 41(1) - creditors outstanding for more than three years in the books of respondent-assessee - ITAT deleted the addition - Held that - In the present facts, the amount of ₹ 64.27 lacs continues to be shown as the liability in the respodnent-assessee s balance-sheet for the subject assessment year. The occasion to write back the amount of ₹ 64.27 lacs in this particular case, even unilaterally by the the respondent-assessee has not arisen. This is so as the amount of ₹ 64.27 lacs continues to be shown in its balance-sheet as a liability. Consequently, the occasion to invoke the Explanation1 to Section 41 of the Act does not arise. The settled position in law is that showing the amount due to the creditors in the balance-sheet amounts to acknowledgment of liability. Consequently, the decision of the Apex Court in Kesaria Tea Co. Ltd. (supra) continues to apply in the facts of this case. - Decided against revenue.

Summary

Issues:
1. Addition made under Section 41(1) of the Income Tax Act, 1961 for outstanding creditors.
2. Justification of deleting the addition.
3. Reliance on the decision of the Supreme Court in a specific case.

Analysis:
The High Court of Bombay heard an appeal challenging the order of the Income Tax Appellate Tribunal (the Tribunal) dated 30 January 2013, where the revenue's appeal was dismissed. The main issue was the addition made under Section 41(1) of the Income Tax Act, 1961 for outstanding creditors exceeding three years in the respondent-assessee's books. The Assessing Officer added &8377; 64.27 lacs to the respondent's income, claiming cessation of liability. However, the respondent argued that the amount was still shown as a liability in its balance-sheet, thus not meeting the criteria for addition under Section 41(1).

Upon appeal, the Commissioner of Income Tax (Appeals) ruled in favor of the respondent, stating that as the liability was acknowledged in the balance-sheet, there was no cessation of liability triggering Section 41(1). The Tribunal upheld this decision, citing a Supreme Court case. The revenue contended that the Tribunal's reliance on pre-1997 decisions was flawed due to the introduction of Explanation1 to Section 41 in 1997, broadening the scope of cessation of liability.

The High Court noted that the amount in question remained a liability in the respondent's balance-sheet, and no unilateral action had been taken to write it back. As per legal precedent, acknowledging the amount due to creditors in the balance-sheet constitutes acknowledgment of liability. Therefore, the Explanation1 to Section 41 was not applicable in this case, and the Supreme Court's decision continued to be relevant.

Consequently, the High Court found no substantial question of law to consider and dismissed the appeal without costs. The judgment reaffirmed the importance of balance-sheet acknowledgment in determining liability under Section 41(1) of the Income Tax Act, 1961.