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:

AO has made the addition of Rs. 5.64 crore by invoking provision of sec. 41(1) of the income tax without stating how the provision are applicable to the assessee’s case.

Mere cessation of liability does not result into fit case of sec. 41 (1) of the I.T. Act.

Assesse is squarely covered by the following judgments wherein it has been held that whenever, an amount is borrowed towards capital account and the loan is waived off, the same cannot be brought to tax net either in terms of sec-41 (1) or 28(iv) of the Act:

(1) CIT vs. Tosha lnternational Ltd. (176 Taxaman 187) (Del.)

(2) Govind Bhai C Patel Vs DCIT (ITA No. 1675/Ahd/2009) dated  30.10.2009 (ITAT Ahmedabad)

(3) CIT vs. Phool Chand Jiwan Ram (131 ITR 17) (Del.)

(4)CIT vs. Compaq Electric Ltd. (ITA No. 172 of 2011 dated 18.10.2011)   (Karnatka HC)

(5) CIT vs. Chetan Chemicals Pvt. Ltd. (267 ITR 770) (Guj.)

(6)Mahindra & Mahindra Ltd. vs. CIT (261 ITR 501) (Bom.)

(7) CIT-3 vs. M/s Cipla Investments Ltd. (ITA No. 6988 of 2012, dated           07.02.2012) (HC of Bombay)

No deduction/allowance has been made in respect of loss/ expenditure/liability in the assessment year or in any earlier years, cessation of such liability cannot be taxed under section 41(1) of the Income Tax Act.

Reliance placed upon following judgments:

• CIT-III Vs. Shivali Constructions Pvt. Ltd 355 ITR 218 (Delhi High Court)
• CIT-II Vs National Dairy Development Board -Gujarat HC 49 Taxman.com 316 (ITA Appeal No. 195 of 2014) dated. 6.5.2014.

Conclusion:

Section 41 (1) of the act provides treating of trading liability on cessation as deemed profit in business or profession. But section has to apply when there is benefit upon such cessation in form of any remission. Mere cessation of any liability does not create a way for assessing officer to invoke provision of section 41 (1).