2021 (9) TMI 1213 - AT - Income Tax

Addition u/s 41(1) - benefit by way of remission or cessation of liability - HELD THAT - There is no dispute that there was a liability in existence in the books of the assessee. The AO has to go according to the books of accounts of the assessee, while computing the income of the assessee but not as per the books of accounts of the creditor. As per section 41(1) of the Act any allowance or deduction made in the assessment year in respect of loss or expenditure or trading liability incurred by the assessee and subsequently obtained the benefit by way of remission or cessation, the same required to be taxed under the profits and gains of the business of income of that person of the previous year The expression loss or expenditure or some benefit in respect of any such trading liability by any unilateral act by the first mentioned person under clause(a) or the successor in business under clause (b) of section 41(1) of the Act. In the instant case, the first mentioned person is the assessee, but not the creditor. In the instant case, the assessee has not written off the liability, though the creditor has written off the debt. Though the debtor has no legal right to enforce the debt, still the assessee is having liability to make the payment, till the assessee writes off the debt. In these facts and circumstances there is no case for making addition u/s 41(1) of the Act. ITAT Kolkata in the case of M/s Sonodyne Television Co. Ltd 2018 (1) TMI 1454 - ITAT KOLKATA dismissed the appeal of the revenue on similar fact - There is no case for invoking the provision u/s 41(1) in the case of the assessee. Accordingly, appeal of the assessee is allowed.

Summary

Issues involved:
1. Addition made under section 41(1) of the Income Tax Act, 1961 regarding outstanding loan of a company.

Detailed Analysis:
1. The appeal was filed against the order of the Commissioner of Income Tax (Appeals) related to the addition made by the Assessing Officer under section 41(1) of the Income Tax Act. The Assessing Officer found an outstanding amount against a company and invoked the provisions of section 41(1) as the creditor had written off the debt, leading to the addition. The CIT(A) confirmed the addition, stating that the company had forgone the right to receive the debt.

2. During the appeal before the Tribunal, the appellant argued that despite the creditor writing off the debt, the appellant still had an obligation to pay as it was not written off in their books. The appellant relied on a decision by ITAT Kolkata to support their argument. On the contrary, the Departmental Representative argued that since the creditor had written off the debt, there was no liability for the appellant, and the addition was justified under section 41(1).

3. The Tribunal analyzed the provisions of section 41(1) which state that if an allowance or deduction has been made in respect of a liability and subsequently there is remission or cessation of such liability, it should be taxed as income. The Tribunal highlighted that the expression in the explanation to section 41(1) refers to the debtor writing off the liability, not the creditor. As the appellant had not written off the debt and still had a liability to pay, the Tribunal held that there was no case for making the addition under section 41(1). The Tribunal referred to a similar decision by ITAT Kolkata to support their conclusion.

4. Ultimately, the Tribunal allowed the appeal of the assessee, emphasizing that there was no basis for invoking section 41(1) as the appellant had not written off the debt, and the liability still existed. The decision was based on the interpretation of the provisions of the Income Tax Act and relevant case law, leading to the allowance of the appeal.