Case Law Details
Issue – The only ground taken by revenue in this appeal relates to deleting the addition of Rs. 17,91,334/- on account of cessation of liability u/s. 41(1) of the Act.
Contention of the Assessing Officer – The AO while making this addition has observed as under:-
“4.1 For the year under consideration in the balance sheet an amount of Rs. 17,91,334/- is appearing as sundry creditors for Export commission under the head “Current Liability and Provisions”. The assessee was requested to clarify the said entry. In response to the assessee vide letter dated 3-11-2008 submitted as under :-
“The commission of Rs. 17,91,334/- is unpaid to Mr Ashwin Pare/, as the said party has not performed the work as decided earlier. Later on, the payment could not be made because of liquidity crunch. We intend to make this payment in current year as soon as possible.”
Further from the details produced by the assessee it is seen that the liability is outstanding from F.Y. 2002-03 i.e. Rs. 1,71,267/- and F.Y. 2003-04 i.e. Rs. 16,20,067/-. This fact is also apparent from the records, wherein the outstanding liability is appearing in the balance sheet of the assessee from A. Y. 2004-05, though the assessee has debited these expenses in the P&L A/c. for the relevant years.
4.2. Here it is pertinent to go through the provision of the section 41(1) of the Act, relevant portion is which reproduced as under:-
“Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year- “
(a) the first mentioned person has obtained, whether in cash or any in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to Income-tax as the income of that previous year, whether the business or profession in respect of which allowance or deduction has been made is in existence in that year or not;
From the above provisions it is clear that the amount of outstanding liability of Rs. 17,91,3341- as appearing in the balance sheet of the assessee for the year under consideration and incurred/debited during A. Y. 2003-04 and 2004-05 is required to be treated as deemed profit for the year under consideration. Further, the above point of view is also consolidated by the admission of the assessee that it is not in a position to pay the said amount. Therefore, it is clear that the liability as appearing in the balance sheet of the assessee has ceased to exist.
4.3. In view of above facts, the amount of Rs. 17,91,334/- is treated as deemed profit of the assessee for the year under consideration and added back to the total income of the assessee.”
Held by CIT (A) – Ld. CIT(A) has deleted this addition by observing as under:-
“3.3. I have considered the submissions made by the A. R. of the appellant and the observations of the assessing officer in the assessment order. The addition was made by the A. O. simply on the ground that the liability continues to be outstanding for quite some time. The provisions of Sec. 41(1) come into play when the assessee obtains in cash or in kind any amount out of the expenditure allowed earlier. Alternatively the assessee must have obtained benefit by way of remission or cessation of trading liability. The third scenario in which the provisions cana be invoked is when the assessee unilaterally writes-off the liability. In the instant case none of the above-mentioned events took place. As contended by the appellant, the liability continues to be outstanding even as on 31-03-2010. In the circumstances, the addition of Rs. 1 7,91,334/- u/s. 41(1) is not in accordance with law. It is deleted. This ground of appeal is allowed.”
Held by ITAT – Since Ld. CIT(A)’s above finding is in conformity with the order of jurisdiction High Court in the case of CIT vs. Nitin S. Garg Tax Appeal Nos. 2428 & 2431 of 2010 dated 11th April, 2012 [2012] 22 taxman.com 59 (Guj) wherein following was held.
“It had not been established that the assessee had written off the outstanding liabilities in the books of account. The Tribunal was justified in taking the view that the assessee had continued to show the admitted liabilities in its balance sheet, the same could not be treated as cessation of liabilities. Merely because the liabilities were outstanding for last many years, it could not be inferred that the said liabilities has ceased to exist. The Tribunal had rightly observed that the Assessing Officer would have to prove that the assessee had obtained the benefits in respect of such trading liabilities by way of remission or cessation thereof. Merely because the assessee obtained benefit of reduction in the earlier years and balance was carried forward in the subsequent year, it would not prove that the trading liabilities of the assessee had become non-existent. [Para 15]
In view of aforesaid, impugned order passed by the Tribunal was to be upheld.”
We feel no need to interfere with the order passed by Ld CIT(A) and the same is hereby upheld. Revenue’s appeal is dismissed.
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