2019 (4) TMI 1171 - HC - Income Tax

Addition u/s 41(1) - liabilities written off and offered as income in subsequent years - proof of existing liability - remission or cessation of non-existent liability - HELD THAT - In the facts of the present case, while the assessee has shown the trading liability in its books of account, no benefit has been obtained in respect of such trading liability by way of remission or cessation thereof; under the circumstances, the requirements of section 41(1) are not satisfied in the present case. Any such cessation or remission of liability has to be in the previous year relevant to the assessment year under consideration, in the facts of the present case, it is not the case of the Assessing Officer that the liabilities ceased to exist in the previous year relevant to the assessment year under consideration. In fact the Assessing Officer has doubted the very genuineness of such liabilities. Therefore, in the absence of any liability, the question of taxing any income on the ground that there was remission or cessation of such non-existent liability would not arise. The Tribunal, in the impugned order, has held that the Assessing Officer was right to hold the financial year in question as the right year for taxability when the facts concurring the non-existence were unrevealed (sic. revealed/unraveled). Thus, the Tribunal has doubted the very existence of the trading liabilities. Thus, the reasoning adopted by the Tribunal is contrary to the provisions of section 41(1) of the Act, which can be invoked provided there is trading liability in existence and there is remission or cessation of such liability. If no trading liability exists, the question of invoking section 41(1) of the Act would not arise. Another relevant aspect of the matter is that the appellant has written of some of the liabilities in the subsequent assessment years and offered the same as income, therefore, taxing such income in the year under consideration would amount to taxing the same income twice, which is impermissible in law. - Decided in favour of assessee.

Issues Involved:
1. Justification of the addition under section 41(1) of the Income Tax Act, 1961.
2. Addition under section 41(1) in respect of liabilities written off and offered as income in subsequent years.

Issue-wise Detailed Analysis:

1. Justification of the addition under section 41(1) of the Income Tax Act, 1961:

The appellant challenged the addition of ?72,49,188/- under section 41(1) of the Income Tax Act, 1961, which was upheld by the Income Tax Appellate Tribunal (ITAT). The Assessing Officer (AO) observed that the appellant had shown sundry creditors of ?74,40,360/- in its balance sheet. Upon inquiry, many creditors denied transactions with the appellant, and some notices were returned unserved. The AO concluded that the liabilities were not genuine and treated them as cessation of liability under section 41(1), adding the amount to the appellant's income.

The appellant argued that merely because the liability has become time-barred, it does not mean it has ceased to exist. The appellant cited the Supreme Court's decision in Commissioner of Income Tax v. Sugauli Sugar Works (P) Ltd., which states that a unilateral act by the debtor cannot bring about a cessation of liability. The Tribunal, however, relied on the decision in Gujtron Electronics Pvt. Ltd. v. Income Tax Officer, which was deemed inapplicable by the appellant due to different factual contexts.

The respondent contended that the appellant failed to prove the existence and genuineness of the liabilities. The Tribunal upheld the AO's decision, emphasizing that mere book entries do not substantiate the existence of liabilities. The Tribunal found no attempt by the appellant to prove the liabilities' existence, thereby justifying the addition under section 41(1).

2. Addition under section 41(1) in respect of liabilities written off and offered as income in subsequent years:

The appellant argued that the liabilities were acknowledged and not written off in its books of account. It was also highlighted that the appellant had repaid significant amounts of the outstanding debt in subsequent years, and thus, such debts could not be doubly taxed. The Tribunal's reliance on the decision in Gujtron Electronics was challenged, as it was rendered in a different context.

The respondent maintained that the onus was on the appellant to prove the liabilities' existence, which was not discharged. The Tribunal observed that the liabilities had been outstanding for many years without repayment and were not genuine. The Tribunal's decision was based on the finding that the liabilities were symbolic and non-existent, justifying their addition under section 41(1).

Court's Findings:

The court noted that the addition under section 41(1) was based on the cessation of trading liabilities. Section 41(1) requires that an allowance or deduction has been made in respect of any loss, expenditure, or trading liability incurred by the assessee, and subsequently, any amount is obtained in respect of such loss or expenditure, or any benefit is obtained in respect of such trading liability by way of remission or cessation thereof.

The court referred to the Supreme Court's interpretation in Commissioner of Income Tax v. Sugauli Sugar Works (P) Ltd., which states that the expiry of the limitation period does not extinguish the debt but only prevents the creditor from enforcing it. The court found no material on record to show cessation or remission of liability during the relevant assessment year.

The court observed that the AO doubted the genuineness of the liabilities, which could have been disallowed in the year they were claimed or treated as unexplained cash credit under section 68 of the Act. However, taxing them under section 41(1) was not appropriate as the liabilities' existence was in question. The court emphasized that section 41(1) applies only if there is an existing liability and its remission or cessation in the year under consideration.

The court concluded that the Tribunal's decision was contrary to the provisions of section 41(1). The appellant had shown the liabilities in its books without obtaining any benefit by way of remission or cessation. The court found that taxing the liabilities in the year under consideration would result in double taxation, as some liabilities were written off and offered as income in subsequent years.

Judgment:

The appeal was allowed, and the Tribunal's order was quashed and set aside. The court held that the Tribunal was not justified in upholding the addition under section 41(1) of the Income Tax Act, 1961, and in respect of liabilities written off and offered as income in subsequent years. The questions were answered in the negative, in favor of the appellant and against the revenue.

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