Mere cessation of liability not results into fit case of sec. 41(1) of Income-tax Act

Issue before tribunal:

• Whether AO had rightly invoked provision of section 41 (1) of the Income-tax Act when there is no recovery of any loss/expenditure/trading liability.

Brief facts:

• The assessee company is engaged in the business of Finance and Export. However, during the year, there was no business activity except receipt of interest and some hire charges etc. As against gross receipts of Rs. 6,54,900/- the assessee company has claimed expenditure of Rs. 10,83,949/- working out on loss of Rs. 4,29,049/-.
• During the assessment proceedings the AO observed that the amount of secured and unsecured loans appearing at Rs.5,64,85,956/- as on 31.03.2008 was reduced to NIL as on 31.03.2009.
• The AO invoked the provisions of section 41(1) of the I.T. Act and made addition of Rs.5,64,85,956/- to the income of the assessee and completed the assessment u/s. 143(3) of the Act vide order dated 28.12.2011.
• On appeal CIT (A) granted relief to the assessee and held that there was a family settlement and provision of section 41 (1) are not applicable to the assessee.

Contention of the revenue:

• Revenue relied upon the order of assessment before ITAT.

Contention of the assessee:

• The assessee submitted that there was a family settlement between the group members and the assets and liabilities were reallocated. Copy of the Memorandum of Family settlement was filed.
• The assessee explained that the assessee company transferred its investment in Tinna Overseas Ltd. costing Rs.82.65 Iakh and investment in Pratham Road Technologies Ltd. costing Rs.25.40 lakh in favour of BKS Group and in turn, liability of secured and unsecured loan ofRs.5.64 crores was discharged by Tinna Overseas Ltd.
• The assessee submitted that the difference of these figures i.e. 5.64 crores – 82.65 lakh – 25.40 lakh = Rs.4.56 crores was credited to the reserve account of the assessee.
• The assessee further submitted that there was no trading transaction involved in these transactions and therefore the provisions of section 41(1) of the I.T. Act were not attracted.

Held by the court: