Case Law Details
Time-barred unpaid dues – Unpaid dues of employees, whose recovery is time barred, cease to be employer’s liability and have to be added under section 41(1)
There are many judgments to the effect that there is neither remission nor cessation of the assessee’s trading liability, within the meaning of Section 41(1) of the Income tax Act 1961 where there is neither any unilateral act of the creditor amounting to remission nor any bilateral act of the parties resulting in the liability ceasing to exist in law, even if the recovery of the same has become time-barred.(J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34 (Bom), CIT v. Sadabhakti Prakashan Printing Press (P.) Ltd. [1980] 125 ITR 326 (Bom), CIT v. V.T. Kuttappu & Sons [1974] 96 ITR 327 (Ker), Liquidator, Mysore Agencies Pvt. Ltd. v. CIT [1978] 114 ITR 853 (Kar), and Bhagwat Prasad & Co. v. CIT [1975] 99 ITR 111 (All). Even though it was held in those judgments that the mere fact that even if the assessee did not show the amount as his trading liability in his account books it did not affect the consequence since such unilateral act of the assessee was neither remission nor cessation of his trading liability. However the latter situation has been amended in favour of the Revenue with the insertion of the Explanation-1 to Section 41(1) with effect from 1-4-1997 by the Finance Act, 1996 (No.2).
Recently the Delhi HC has, in a landmark judgment, gone a step further in favour of the Revenue, and rejected the view that a liability does not cease as long as it is reflected in the books, that mere lapse of the time given to the creditor or the workman to recover the amounts due, does not efface the liability though it bars the remedy, and that therefore the liability of the assessee is not assessable u/s 41(1). The High Court has held (in COMMISSIONER OF INCOME TAX Vs CHIPSOFT TECHNOLOGY PVT LTD – ITA No.598/2011 decided on 20-07-2012) that this view is an abstract and theoretical one, and does not ground itself in reality. In the process the High court held, “Interpretation of laws, particularly fiscal and commercial legislation is increasingly based on pragmatic realities, which means that even though the law permits the debtor to take all defences, and successfully avoid liability, for abstract juristic purposes, he would be shown as a debtor. In other words, it would be illogical to say that a debtor or an employer, holding on to unpaid dues, should be given the benefit of his showing the amount as a liability, even though he would be entitled in law to say that a claim for its recovery is time barred, and continue to enjoy the amount”.
The Delhi High Court has further held that “Loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof” as ensviaged in the Explanation to Section 41(1), includes even omission to pay, over a period of time, and the resultant benefit derived by the employer/assessee would therefore qualify as a cessation of liability, albeit by operation of law. Thus debts which have become unenforceable by operation of law, also are assessable under section 41(1), Delhi High Court has held.
Please become a Premium member. If you are already a Premium member, login here to access the full content.
