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2016 (7) TMI 1006 - AT - Income TaxDisallowance under Section 14A - Addition for cessation of liability under section 41(1) - Held that - Respectfully following the findings of the Hon ble Jurisdictional High Court in the case of Cheminvest Vs. CIT (2009 (8) TMI 126 - ITAT DELHI-B ), we hold that no disallowance under section 14A of the Act is called for in the case of the assessee as no exempt income was received or receivable during the year under consideration. - Decided in favour of assessee Addition for cessation of liability under section 41(1) - Held that - In the facts of the instant case, we find that the assessee has not remitted the liability in its books of accounts. It is the Assessing Officer who has presumed that those parties no longer existed or have written off the amounts in their books of accounts. The Assessing Officer has not verified from those parties whether they have forgone their claim or the liability has become unenforceable at law by the creditor and the debtor declared unequivocally his intention not to honour his liability when payment is demanded by them. As we find that the assessee has not remitted the credit balances in respect of the above parties, the assessee has not obtained any benefit in respect of such trading liability and, therefore, provisions of section 41(1), are not applicable to the facts of the case in hand. Thus we hold that the assessee has not obtained any benefit in respect of the creditors by way of remission or cessation thereof and, therefore, no addition can be made in the assessment year under consideration under section 41(1) of the Act - Decided in favour of assessee
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Cessation of liability under Section 41(1) of the Income Tax Act. Issue 1: Disallowance under Section 14A of the Income Tax Act The first issue pertains to whether the disallowance under Section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules, is justified when no exempt income was earned by the assessee during the relevant assessment years (2009-10 and 2010-11). Analysis: The assessee made investments in its subsidiary and other companies but did not earn any exempt income from these investments. The Assessing Officer (AO) invoked Rule 8D and made disallowances of ?34,01,563/- for AY 2009-10 and ?34,52,252/- for AY 2010-11 under Section 14A. The Commissioner of Income-tax (Appeals) upheld these disallowances, relying on various judicial pronouncements, including the Special Bench decision of the Tribunal in the case of Cheminvest Ltd. Vs. Income Tax Officer (317 ITR 86). The assessee argued that the issue was covered in their favor by the Hon’ble Delhi High Court's judgment in Cheminvest Ltd Vs. CIT (2015) 378 ITR 33 (Del.), which held that Section 14A would not apply if no exempt income is received or receivable during the relevant previous year. The Tribunal found that since no exempt income was earned by the assessee, following the binding precedent of the Hon’ble Delhi High Court, no disallowance under Section 14A was warranted. Therefore, the Tribunal allowed the grounds of appeal for both assessment years. Issue 2: Cessation of liability under Section 41(1) of the Income Tax Act The second issue concerns the addition of ?3,20,055/- for AY 2010-11, which the AO made on the grounds that certain creditors' liabilities had ceased to exist. Analysis: The AO found that certain creditors' balances had been outstanding for more than three years and concluded that these liabilities had ceased to exist, leading to a benefit for the assessee under Section 41(1). The Commissioner of Income-tax (Appeals) upheld this addition, noting the assessee's failure to produce confirmations from these creditors. The assessee contended that obtaining confirmations from third parties was beyond its control and that the AO should have used powers under Section 133(6) to obtain them. The assessee also argued that the mere passage of time does not extinguish a liability and that no benefit was obtained by way of remission, making Section 41(1) inapplicable. They cited Tribunal decisions in Sh. Vardhman Overseas Ltd. Vs. Assistant Commissioner Of Income Tax (2008) 24 SOT 393 (Del) and Income Tax Officer Vs. Janak Steel Tubes (P) Ltd (31 TTJ 384 (Del)) to support their argument. The Tribunal agreed with the assessee, noting that the AO had not verified whether the creditors had written off the amounts or if the liabilities had become unenforceable. The Tribunal found that the assessee had not remitted the liabilities in its books and had not obtained any benefit from them. Thus, the provisions of Section 41(1) were not applicable. The Tribunal allowed the ground of appeal, holding that no addition could be made under Section 41(1) for the assessment year under consideration. Conclusion: Both appeals by the assessee were allowed, with the Tribunal ruling that no disallowance under Section 14A was warranted in the absence of exempt income and that the addition under Section 41(1) was not justified without evidence of cessation or remission of liability. The decision was pronounced in the open court on 14th July 2016.
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