2017 (11) TMI 1068 - AT - Income Tax

Addition u/s 41 - assessee had not written back the said amount and had still shown as advance received in its books, the Ld. AO and CIT (A) still held that it amounts to cessation/ remission of liability within the scope of section 41(1), therefore, the same has to be taxed - Held that - Provisions of section 41(1) has been specifically incorporated in the Act to cover a particular fact or situation where a trading liability was allowed in earlier year in computing the business income of the assessee and assessee has obtained benefit in respect of such trading liability in later year by way of remission or cessation of the liability, then whatever benefit has arisen to the assessee in the later year by way of remission or cessation of the liability will be brought to tax in that year. The apprehension as intended by the Legislature by incorporating the said provision is to ensure that assessee does not get away with a double benefit, once by way of deduction in an earlier assessment year and again by not being taxed on the benefit received by him in later year with a reference to the liability earlier allowed as deduction. The section does not envisage this situation when there is no allowance or deduction and that to be in the nature of loss, expenditure or trading liability. Here in this case we have already held that no such allowance or deduction of trading liability has been allowed in earlier year in the case of the assessee while computing the business income and such a writing off by Air India cannot be reckoned as any benefit to the assessee within the terms and scope of section 41(1), because there is no question of any double deduction or double benefit derived to the assessee. Thus, we hold that no amount can be taxed under section 41(1) and therefore, the amount is directed to be deleted. - Decided in favour of assessee.

Issues Involved:
1. Addition under section 41(1) of the Income Tax Act, 1961.
2. Cessation and remission of liability.
3. Applicability of section 41(1) for the assessment year 2008-09.
4. Requirement of establishing the specific loss, expenditure, or trading liability for invoking section 41(1).
5. Identification of the previous year in which the appellant benefitted.
6. Impact of the holding company writing back the amount in its books.

Issue-wise Detailed Analysis:

1. Addition under section 41(1) of the Income Tax Act, 1961:
The primary issue was whether the addition of ?306,75,17,000 to the total income under section 41(1) was justified. The Tribunal noted that the assessee-company, a 100% subsidiary of Air India Limited, had received a letter from NACIL stating that an amount of ?306.75 crores owing from the assessee as on 31/3/2007 had been written off in NACIL's books for the financial year 2006-07. The Assessing Officer (AO) added this amount to the assessee's income, arguing that the write-off by NACIL constituted a cessation of liability, making the amount taxable under sections 28(iv) and 41(1).

2. Cessation and remission of liability:
The assessee contended that the write-off by NACIL did not constitute a cessation or remission of liability, as NACIL retained the right to recover the amount. The Tribunal found merit in this argument, noting that the mere unilateral write-off by NACIL did not absolve the liability owed by the assessee. The Tribunal emphasized that for section 41(1) to apply, there must be a remission or cessation of a trading liability, which was not the case here.

3. Applicability of section 41(1) for the assessment year 2008-09:
The Tribunal observed that the write-off by NACIL occurred in the financial year 2006-07, relevant to the assessment year 2007-08. Therefore, any potential tax liability under section 41(1) should have been considered in that year, not in the assessment year 2008-09. The Tribunal held that the AO's reliance on the letter dated 21/3/2008 to tax the amount in the assessment year 2008-09 was misplaced.

4. Requirement of establishing the specific loss, expenditure, or trading liability for invoking section 41(1):
The Tribunal highlighted that section 41(1) requires the allowance or deduction of a specific loss, expenditure, or trading liability in an earlier year. In this case, the amount in question was an advance from the holding company, not a trading liability or expenditure that had been allowed as a deduction in any prior year. Therefore, the preconditions for invoking section 41(1) were not met.

5. Identification of the previous year in which the appellant benefitted:
The Tribunal noted that the benefit, if any, from the write-off by NACIL would have accrued in the financial year 2006-07, relevant to the assessment year 2007-08. Since the write-off occurred in that year, it could not be taxed in the assessment year 2008-09. The Tribunal cited the Gujarat High Court's decision in Pr. Commissioner of Income-tax, Ahmedabad vs. Matruprasad C Pandey, which held that the addition under section 41(1) can only be made in the year of remission or cessation of liability.

6. Impact of the holding company writing back the amount in its books:
The Tribunal considered the fact that NACIL had written back the amount in its books in the financial year 2011-12, indicating that the liability still existed. This further supported the assessee's contention that there was no cessation of liability. The Tribunal rejected the AO's and CIT(A)'s arguments that the write-back was an afterthought or a collusive arrangement, emphasizing that the liability continued to exist in NACIL's books.

Conclusion:
The Tribunal held that the addition of ?306,75,17,000 under section 41(1) was not justified, as the conditions for invoking the section were not met. The unilateral write-off by NACIL did not constitute a cessation or remission of liability, and the amount could not be taxed in the assessment year 2008-09. The Tribunal directed the deletion of the addition and allowed the assessee's appeals for both the assessment years 2008-09 and 2010-11.

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