S. 41(1) Merely because liabilities were outstanding for last many years, it cannot be said that said liabilities ceased to exist

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- “