2016 (11) TMI 944 - AT - Income Tax

Addition under section 41(1) - liability of the assessee on account of amount payable to sundry creditors ceased to exist - Held that - The expiry of the period of limitation prescribed under the Limitation Act would not extinguish the debt but it would only prevent the creditors from enforcing the debt. It has further been clearly held that obtaining by the assessee a benefit by virtue of remission or cessation is the sine qua non for the application of section 41(1). Similar view has been taken by the honourable Supreme Court in another judgment in the case of CIT v. S. I. Group India Ltd. 2015 (11) TMI 1004 - SUPREME COURT . Thus, taking into account totality of all the facts and circumstances of the case and the aforesaid judgments we find that the addition made by the Assessing Officer was not sustainable in the eyes of law and, therefore, it is directed to be deleted. - Decided in favour of assessee

Summary

Issues:
- Addition of ?17,71,210 on account of sundry creditors as ceased liability under section 41(1) of the Income-tax Act, 1961.

Analysis:
1. The appeal was filed against the order of the Commissioner of Income-tax (Appeals) regarding the addition of ?17,71,210 under section 41(1) for the assessment year 2008-09.
2. The main issue was whether the liability of the assessee towards sundry creditors ceased to exist, as claimed by the Assessing Officer.
3. The Assessing Officer held that the liability ceased to exist as the creditors did not respond to notices, and the amount was outstanding for more than three years.
4. The assessee contended that the mere age of outstanding does not imply cessation of liability and that there was no basis to presume the liabilities ceased to exist.
5. Despite the assessee's arguments, the Commissioner of Income-tax (Appeals) upheld the addition made by the Assessing Officer.
6. The Tribunal reviewed the case and noted that the liabilities were still shown in the balance-sheet, indicating the assessee's acknowledgment of the debts.
7. The Tribunal highlighted that the liabilities being unenforceable in court does not automatically absolve the assessee from the obligations.
8. It was emphasized that for section 41(1) to apply, the assessee must have obtained some real benefit from the remission or cessation of liabilities during the relevant year.
9. Citing various judgments, including CIT v. Sugauli Sugar Works (P) Ltd., the Tribunal concluded that the Assessing Officer's addition was not justified as the liabilities were still acknowledged, and no benefit accrued to the assessee.
10. Relying on the Supreme Court's observations, the Tribunal ruled in favor of the assessee, directing the deletion of the addition.
11. Consequently, the appeal was allowed, and the addition of ?17,71,210 was set aside as unsustainable in the eyes of the law.