ITO Vs Seth Carbon & Alloys Private Limited (ITAT Mumbai)
The Mumbai ITAT upheld deletion of addition of ₹9.59 crore made u/s 41(1) on account of alleged cessation of trading liability. The AO had treated outstanding payable to M/s Pipavav Defence and Offshore Engineering Co. Ltd. as ceased liability mainly because the creditor denied receipt of subsequent payments allegedly claimed by the assessee.
Before the CIT(A) and Tribunal, the assessee contended that the liability was continuously reflected in the books, had never been written back, and most importantly, the creditor itself had categorically confirmed in response to notice u/s 133(6) that the amount remained receivable from the assessee. It was argued that mere delay in payment or long outstanding balance could never trigger section 41(1) unless there was clear remission or cessation of liability by operation of law or mutual agreement.
The Tribunal agreed with the CIT(A) and held that the very evidence relied upon by the AO demolished the Revenue’s case because the creditor had expressly acknowledged the debt as subsisting and recoverable. The ITAT observed that section 41(1) can be invoked only where the assessee derives a benefit through remission, waiver or extinguishment of liability, which was completely absent in the present case.
Relying on the Supreme Court decision in CIT v. Sugauli Sugar Works Pvt. Ltd., the Tribunal reiterated that mere outstanding liability for long periods or assumptions drawn by the Revenue cannot automatically amount to cessation of liability. Since the liability continued to be acknowledged by both parties and remained reflected in the books, the addition of ₹9.59 crore was rightly deleted and the Revenue’s appeal was dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The aforesaid appeal has been filed by the Revenue against the order dated 10.07.2025 passed by the learned CIT(Appeals)-48, Mumbai, for the quantum assessment framed under section 143(3) of the Income Tax Act, 1961 for the assessment year 2016-17. In the grounds of appeal, the Revenue has challenged the action of the learned CIT(A) in deleting the addition of Rs.9,59,78,916/- made by the Assessing Officer under section 41(1) of the Act on account of alleged cessation of trading liability.
