2019 (3) TMI 901 - HC - Income Tax

Addition u/s 41(1) - cessation of liability of Sundry Creditors of timber business which was closed more than 10 years back- non production of written confirmation from such trade creditors - concurrent finding of facts by all authority below - common sense principles application - HELD THAT - The crucial words in the said provisions are the remission or cessation of such trading liability which has been claimed as an allowance or deduction taken by the Assessee in a previous year and if such liability is remitted by the creditor or had ceased to exist, then in the year of remission or cessation, the said trading liability can be brought to tax as profit chargeable to tax under the said provision. Obviously, the word cessation in the said provision means cessation de facto and de jure. The cessation of liability should cease to exist in the eye of law. While the remission of liability can be by way of conscious act on the part of the creditor, the cessation of such liability can be inferred on the basis of facts and circumstances surrounding such trading liability. After Explanation was added on Section 41(1), it can be even by the unilateral act on the part of Assessee viz., by writing back or writing off such liability amounting to cessation of liability in his hands attracting Section 41(1) of the Act and attracting tax thereon. Once the Assessee was called upon to prove the credit entries with regard to the Sundry Creditors of its erstwhile business, the burden shifted upon him to establish the current existence of those creditors and their debts due from Assessee and that there was a live link between the creditors and the outstanding debts and therefore, in the absence of Assessee discharging that burden shifted upon him, the case of cessation of liability made out by the Revenue against him so as to bring back those dead debts of the Assessee to tax under Section 41(1) of the Act, was justified. Assessment Year 2003-04 in question has passed by for last 15-16 years by now. When we took up the cases for hearing, we asked the learned counsel for the Assessee that even in past 15-16 years, if any creditor has raised any claim against the Assessee with regard to these credit entries, he may produce the evidence of the same. But we drew a blank from the learned counsel for the Assessee, despite the grant of an opportunity in this regard. Thus, it is also more fortified now that the liability to pay for these Sundry Creditors had ceased long back and the authorities under the Act, up to the Tribunal, were justified in applying Section 41(1) and bring to tax the liability to pay back their old debts, as having ceased in law and in fact. A reasonable time line of period has to be drawn while considering the words cessation of trading liability as employed in Section 41(1). The lapse of ten years of time, coupled with the fact that there was a change of business altogether by the Assessee, in our opinion, absolutely justified the Assessing Authority to draw an adverse inference against the Assessee about the cessation of liability, especially when the Assessee failed to produce the written confirmation from such trade creditors of its erstwhile timber business, despite grant of opportunity to the Assessee. The debts had not only become time barred long ago, but, in fact also, no creditor made any claim for recovery from the Assessee during any of these years even up to now. We find considerable support in the judgments relied upon by the Revenue, especially the common sense principles propounded by Lord Atkinsons, as applied by the Supreme Court in the case of T.V.Sundaram Iyengar 1996 (9) TMI 1 - SUPREME COURT and also Gujarat High Court in the case of Gujtron Electronics, whereas we are unable to draw any contra support on the basis of ratio of the judgments relied upon by the learned counsel for the Assessee, albeit without any quarrel on the principles laid down therein, especially when it remains a mixed finding of fact and law as to when a trading liability ceases de facto and de jure and therefore, finally it should depend upon the facts and circumstances of each case as to whether such trading liability could be said to have ceased in law or not so as to apply Section 41(1) of the Act. In the present case, we are fully satisfied that the authorities under the Act, all the three authorities, were perfectly justified in drawing such an inference against the Assessee and holding that the trading credits of erstwhile timber business of the Assessee were liable to be taxed as profits of the business under Section 41(1) in the Assessment Year 2003-04 in question. Accordingly, the appeal of the Assessee is dismissed

Issues Involved:
1. Whether the Income Tax Appellate Tribunal was correct in confirming the assessment of ?58,60,105/- as income under Section 41(1) of the Income Tax Act.
2. Whether the Tribunal was right in holding that the absence of confirmation of balances and evidence of claim for repayment during the previous year indicated cessation of liability, warranting the invocation of Section 41(1).

Issue-wise Detailed Analysis:

1. Confirmation of Assessment under Section 41(1):

The Assessee had ceased its timber business around ten years prior to the Assessment Year 2003-04 and switched to recruitment services for Gulf countries. The Assessing Authority added back ?58,60,105/- as income due to cessation of liability of Sundry Creditors from the timber business. The Assessee failed to provide written confirmations from these creditors, leading the Assessing Authority to conclude that the liabilities had ceased to exist. Both the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld this addition. The Tribunal noted that the Assessee's argument that Section 41(1) could not be invoked without writing off the liabilities in the books was erroneous. The Tribunal emphasized that remission and cessation of liability could be inferred from circumstances, even without accounting entries, and upheld the invocation of Section 41(1).

2. Absence of Confirmation and Evidence of Repayment:

The Commissioner of Income Tax (Appeals) observed that the liabilities had been outstanding for over seven years without any claims from creditors, indicating cessation of liability. The Assessee's inability to provide confirmations further supported this conclusion. The Tribunal agreed, noting that the Assessee's change of business and the lack of creditor claims over ten years justified the inference of cessation. The Tribunal distinguished this case from others cited by the Assessee, where liabilities were acknowledged in the balance sheet or where creditors' existence was proven. The Tribunal concluded that the facts indicated cessation of liability, warranting the application of Section 41(1).

Legal Precedents and Counsel Arguments:

The Assessee's counsel cited various High Court decisions arguing that liabilities must be written off in the books or irrevocably ceased to invoke Section 41(1). The Revenue's counsel countered with cases like T.V.Sundaram Iyengar & Sons Ltd., where unclaimed deposits were treated as income due to cessation of liability over time. The court found the Revenue's arguments persuasive, emphasizing that the cessation of liability could be inferred from the Assessee's failure to provide confirmations and the lack of creditor claims.

Conclusion:

The court concluded that the Assessee's liabilities had ceased both de facto and de jure, justifying the invocation of Section 41(1). The appeal was dismissed, and the questions of law were answered in favor of the Revenue, affirming the assessment of ?58,60,105/- as income. The court emphasized that accounting entries alone do not determine the existence of liabilities and that the facts and circumstances of each case must be considered to apply Section 41(1).

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