No Addition for Cessation of Liability if no Evidence of Remission: ITAT Mumbai

Action Gold Vs DCIT (ITAT Mumbai)

In this case before the Income Tax Appellate Tribunal Mumbai, the assessee challenged the addition made under Section 41(1) of the Income Tax Act, 1961 on account of alleged cessation of liability relating to two sundry creditors. The assessee had declared income for Assessment Year 2022–23 and during scrutiny proceedings, the Assessing Officer identified outstanding balances of ₹28,69,575 in respect of two creditors. The assessee explained that these liabilities arose from disputes relating to jewellery manufacturing contracts, where finished goods were not accepted due to issues such as variation in purity, and therefore the amounts remained outstanding pending resolution.

The Assessing Officer observed that the assessee failed to provide confirmations or adequate supporting evidence to establish the continued existence of these liabilities. Considering that the amounts remained unpaid for a prolonged period, the Assessing Officer invoked Section 41(1) and treated the outstanding liabilities as ceased, adding the amount to the assessee’s income.

On appeal, the Commissioner (Appeals) upheld the addition, noting that the assessee failed to furnish corroborative evidence such as confirmations from creditors, GST records, or independent verification of settlement. Although the assessee claimed that the liabilities were later settled through adjustment against sale of ornaments, the appellate authority found the evidence to be self-serving and insufficient. It also observed that the liabilities had remained outstanding for several years, and in the absence of clear evidence, the provisions of Section 41(1) were rightly applied.

Before the Tribunal, the assessee submitted additional evidence to demonstrate that the liabilities were genuine, subsisting during the relevant year, and subsequently discharged. It argued that there was no remission or cessation of liability during the relevant previous year and that mere non-payment or passage of time does not constitute cessation.

The Tribunal examined the legal requirement under Section 41(1) and held that the essential condition for invoking the provision is the existence of remission or cessation of liability during the relevant previous year. It observed that such cessation cannot be presumed merely due to prolonged non-payment or absence of confirmations, unless supported by material evidence showing that the liability no longer exists in law or in substance. It further noted that a liability subsequently discharged cannot be treated as having ceased during an earlier year.

The Tribunal also considered that the additional evidence submitted by the assessee was not available before the lower authorities and required proper verification. Given these circumstances, it held that the matter required fresh examination. Accordingly, the Tribunal set aside the order of the Commissioner (Appeals) and restored the issue to the Assessing Officer for de novo adjudication.

The Assessing Officer was directed to examine the additional evidence, verify whether the liabilities subsisted during the relevant year and were subsequently discharged, and then decide the issue afresh in accordance with law after providing the assessee an opportunity of being heard. The appeal was allowed for statistical purposes.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the assessee is directed against order dated 14.10.2025 passed by the learned Commissioner of Income Tax (Appeal), National Faceless Appeal Centre (NFAC), Delhi [in short ‘the ld. CIT(A)’], for assessment year 2022-23, raising following grounds:

“1. On the facts and circumstances of case and in law, the Ld. CIT has erred in confirming the Assessment Order passed by the Ld. AO under section 143(3) of Income Tax Act which is passed against the principal of natural justice.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT has erred in confirming the addition made by the Ld. AO of outstanding balance of Rs.28,69,675 (Rs.10,40,408 from Sun Gold and Rs.18,29,167 from D B Gold) as cessation of liability whose payments were pending due to dispute between the assessee and the creditors.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT has erred in confirming the addition made by the Ld. AO even after acknowledging the fact that the liability has been settled during the appellate proceedings.”

2. Briefly stated facts of the case are that the assessee filed its return of income for the year under consideration on 28.09.2022, declaring total income at Rs. 2,21,94,830/-. The return of income filed by the assessee was selected for scrutiny and statutory notices under the Income Tax Act, 1961 (in short ‘the Act’) were issued and duly served upon the assessee.

3. During the course of assessment proceedings, the Assessing Officer noticed outstanding balances in respect of two sundry creditors, namely, M/s. DB Gold (₹18,29,167/-) and M/s. Sun Gold (₹10,40,408/-). The assessee explained that gold bars had been issued to these two manufacturing contractor parties for manufacture of jewellery; however, disputes arose on account of alleged variation in purity, resulting in non-acceptance of the finished goods. It was submitted that, by mutual understanding, the amounts were retained for a specified period pending resolution of disputes, and accordingly continued to be reflected as liabilities in the books.

4. The Assessing Officer, however, observed that the assessee failed to furnish confirmations or supporting evidence regarding the subsistence of the liabilities. Noting that the amounts remained unpaid for a considerable period, the Assessing Officer invoked section 41(1) of the Act and treated the sum of ₹28,69,575/- as cessation of liability, adding the same to the income of the assessee.

5. Before the learned CIT(A), the assessee contended that there was neither remission nor cessation of liability during the relevant previous year and that the liabilities continued to subsist. It was further submitted that the dues had subsequently been settled by way of adjustment against sale of ornaments. The learned CIT(A), however, was not persuaded. He held that the assessee had failed to furnish cogent and corroborative evidence in support of its claim, including confirmations from creditors, GST records, or independent verification of settlement. The additional evidences filed were found to be inadequate and self-serving in nature. Accordingly, the addition made under section 41(1) was sustained observing as under:

“8.4 During the course of appellate proceedings, the appellant has submitted that for invoking the provisions of Section 41(1), the two conditions that has to be satisfied are namely 1. there has to be remission or cessation of liability and 2. remission or cessation has to be during the previous year under consideration. In the appellant company’s case, both the above elements are missing as there was no evidence to prove that there was a remission or cessation of liability and that too during the previous year relevant to the assessment year. The provision of Section 41(1) was brought into statute to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability. To support the above contentions, he has relied upon certain case laws.

8.5 The appellant has further submitted that it has obtained the confirmation from the said creditors and also settled the amount outstanding and as on date of filing appeal, there is no outstanding payable to both the creditors. The details of settlement are as under:-

Both the parties had not given the confirmation in the assessment proceedings but has tried to take advantage of the situation, from the above it is clear that the amount was payable and therefore the liability was not ceased or has not been the case of remission or cessation of liability, any addition made on the above grounds will result in injustice to the appellant and no purpose shall be served as the appellant has to pay the creditors and also has to pay the taxes levied on the addition made without considering the commercial expediency. The assessee in the instant case has continued to recognize the liability and one cannot say that the liability is not unenforceable against the assessee without its discharge or reversal. A mere fact of expiry of period of limitation to enforce it does not, by itself, constitute cessation of liability.

8.5 As per the submissions, the appellant has pleaded that in order to invoke the provisions of Section 41(1) of the Act; there should be cessation of the liabilities in the relevant previous year. However, it is noted from the assessment year that the liabilities were almost the same for the last three years. As per the assessee’s statement during the course of assessment proceedings that the amounts were outstanding for more than 3 years and the payment was held for 4 years only and further 2 more years were passed and still the assessee failed to discharge its liability even after 5 years (3 years+2 years after F.Y. 2021-22). Since, no period has been mentioned in the provisions by which the liabilities may be treated to have been ceased and therefore, the AO was right in applying the provisions of Section 41(1) in treating the cessation of these trading liabilities. In view of the same, the action of the AO is upheld.

8.6 Another contention raised by the appellant is that it has settled the dispute with the creditors on 12.04.2024 by way of sale of ornaments to both the creditors. In this regard, the appellant has filed a copy of account of M/s. Sun Gold and M/s. DB Gold in its books of account alongwith Sale Invoices issued to these parties equivalent to the amounts of outstanding liabilities. However, it is noted that the appellant has failed to file a copy of account of the appellant concerning these liabilities in the books of these parties for the period before and after settlement of dispute, copies of GST Returns relating to the sale invoices issued to these parties, confirmation from the said creditors in the shape of affidavits with regard to receipt of the sums in the shape of ornaments to authenticate the claim of the appellant. In the absence of these corroborative and conclusive evidences, the sale invoices issued by the appellant being just self-serving documents cannot be relied upon and the claim of the appellant regarding discharge of the liabilities is rejected. As regards request of the appellant regarding admission of additional evidences filed in the shape of copies of sale invoices and copies of account of the parties in its books, since these are not found convincing as mentioned above, the same are not confronted to the AO. Accordingly, the grounds of appeal Nos. 2, 3 & 4 are dismissed.”

6. Before us, the assessee has filed an application seeking admission of additional evidence, comprising documentary material to substantiate that the liabilities in question were genuine, subsisting during the relevant year, and subsequently discharged. It was contended that in the absence of any remission or cessation during the year under consideration, invocation of section 41(1) is legally unsustainable.

7. We have carefully considered the rival submissions and perused the material available on record. The sine qua non for invoking section 41(1) of the Act is the existence of a remission or cessation of a trading liability during the relevant previous year. Such cessation cannot be presumed merely on account of passage of time or non-payment over a period, unless there is material to demonstrate that the liability has, in fact, ceased to exist in law or in substance. In the present case, the addition has been made primarily on the ground that the liabilities remained outstanding for a prolonged period and that the assessee failed to furnish confirmations. However, it is well-settled that mere absence of confirmation or the fact that the liability is time-barred does not ipso facto lead to the conclusion that there is cessation of liability. Further, the assessee has now placed on record additional evidences to demonstrate that the liabilities were, in fact, settled in subsequent periods. If such claim is found to be correct upon verification, it would prima facie negate the very basis of the addition under section 41(1), as a liability which is subsequently discharged cannot be treated as having ceased during the year under consideration. At the same time, the assessee has also filed an application of admission of the additional evidences. Those evidences were not available before the lower authorities and require proper verification. The ld. CIT(A) also observed that the assessee had not filed copy of the account of the assessee in the books of these parties, copies of the GST returns, confirmation from the said creditors in the shape of affidavits, etc.

8. In these circumstances, and in the interest of justice, we feel appropriate to provide one more opportunity to the assessee to support its contentions that those liabilities have been later on discharge in the subsequent assessment years. Accordingly, we set aside the order of the ld. CIT(A) and restore the matter to the file of the Assessing Officer for fresh adjudication. The Assessing Officer shall examine the additional evidences, verify the claim of the assessee regarding subsistence and subsequent discharge of liabilities, and thereafter decide the issue afresh in accordance with law, after affording adequate opportunity of being heard to the assessee.

9. The grounds of the appeal raised by the assessee are allowed for statistical purposes.

10. In the result, the appeal filed by the assessee is allowed for statistical purpose.

Order pronounced in the open Court on 07/04/2026.