Case Law Details
ITO Vs Seth Carbon & Alloys Private Limited (ITAT Mumbai)
The Mumbai ITAT upheld deletion of addition of ₹9.59 crore made u/s 41(1) on account of alleged cessation of trading liability. The AO had treated outstanding payable to M/s Pipavav Defence and Offshore Engineering Co. Ltd. as ceased liability mainly because the creditor denied receipt of subsequent payments allegedly claimed by the assessee.
Before the CIT(A) and Tribunal, the assessee contended that the liability was continuously reflected in the books, had never been written back, and most importantly, the creditor itself had categorically confirmed in response to notice u/s 133(6) that the amount remained receivable from the assessee. It was argued that mere delay in payment or long outstanding balance could never trigger section 41(1) unless there was clear remission or cessation of liability by operation of law or mutual agreement.
The Tribunal agreed with the CIT(A) and held that the very evidence relied upon by the AO demolished the Revenue’s case because the creditor had expressly acknowledged the debt as subsisting and recoverable. The ITAT observed that section 41(1) can be invoked only where the assessee derives a benefit through remission, waiver or extinguishment of liability, which was completely absent in the present case.
Relying on the Supreme Court decision in CIT v. Sugauli Sugar Works Pvt. Ltd., the Tribunal reiterated that mere outstanding liability for long periods or assumptions drawn by the Revenue cannot automatically amount to cessation of liability. Since the liability continued to be acknowledged by both parties and remained reflected in the books, the addition of ₹9.59 crore was rightly deleted and the Revenue’s appeal was dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The aforesaid appeal has been filed by the Revenue against the order dated 10.07.2025 passed by the learned CIT(Appeals)-48, Mumbai, for the quantum assessment framed under section 143(3) of the Income Tax Act, 1961 for the assessment year 2016-17. In the grounds of appeal, the Revenue has challenged the action of the learned CIT(A) in deleting the addition of Rs.9,59,78,916/- made by the Assessing Officer under section 41(1) of the Act on account of alleged cessation of trading liability.
2. Briefly stated, the facts borne out from the assessment records are that the assessee company is engaged in the business of trading in ferrous and non-ferrous metals and had filed its return of income declaring total income of Rs.18,51,959/-. During the course of scrutiny assessment proceedings, the Assessing Officer observed that there was substantial outstanding liability appearing in the name of M/s Pipavav Defence and Offshore Engineering Co. Ltd. amounting to Rs.9,59,78,916/-. In order to verify the genuineness and status of the said liability, notice under section 133(6) was issued to the said creditor. In response thereto, the creditor vide letter dated 26.11.2018 confirmed that an amount of Rs.9,54,77,917/- was receivable from the assessee and further stated that no payment had been received from the assessee during the relevant year and subsequent period referred therein. Based on such reply, the Assessing Officer inferred that since the assessee had stated during the course of proceedings that payments had been made in subsequent years, whereas the creditor denied receipt of such payment, therefore, according to the Assessing Officer, the liability had ceased to exist and the assessee had derived benefit in respect of trading liability. On this premise, the Assessing Officer invoked provisions of section 41(1) and treated the entire outstanding amount as cessation of liability and made addition of Rs.9,59,78,916/-.
3. Before the learned CIT(A), it was contended by the assessee that the very foundation on which section 41(1) had been invoked was wholly misconceived and contrary to the material available on record. It was submitted that the liability was continuously reflected in the books of account and had never been written back by the assessee. It was further submitted that the creditor itself, in response to notice issued under section 133(6), had categorically acknowledged that the amount was receivable from the assessee and, therefore, there was a clear acknowledgment of subsisting debt by the creditor itself. It was argued that once the creditor had confirmed the outstanding balance, there could not be any occasion to infer remission or cessation of liability within the meaning of section 41(1). The assessee further explained that due to financial difficulties and stress in business operations, payments to the creditor had been delayed and the bank account of the assessee had also become NPA, however, mere non-payment or long pendency of liability could never lead to automatic invocation of section 41(1). The assessee also submitted details of payments made in subsequent years and placed reliance upon various judicial precedents including the judgment of the Hon’ble Supreme Court in the case of CIT vs. Sugauli Sugar Works (P.) Ltd., 236 ITR 518 (SC), to contend that unless there is a clear remission or cessation of liability either by operation of law or by bilateral act between the parties, provisions of section 41(1) cannot be invoked merely on assumptions and presumptions.
4. The learned CIT(A), after considering the assessment order, submissions of the assessee and material placed on record, deleted the addition. The learned CIT(A) observed that the Assessing Officer himself had relied upon the confirmation received from the creditor under section 133(6), wherein the creditor had unequivocally confirmed that the amount was receivable from the assessee. Thus, according to the learned CIT(A), the very evidence relied upon by the Assessing Officer itself demonstrated that the liability was subsisting and acknowledged by the creditor. The learned CIT(A) further held that the assessee had continuously shown the liability in its books of account and had not written back the same. It was further observed that there was no material brought on record by the Assessing Officer to establish that the creditor had remitted or waived the liability or that the liability had become unenforceable in law. Relying upon the ratio laid down by the Hon’ble Supreme Court in Sugauli Sugar Works (P.) Ltd. (supra) and other judicial precedents, the learned CIT(A) held that mere long outstanding liability or discrepancy regarding timing of payment cannot by itself result in cessation of liability under section 41(1). Accordingly, the addition was deleted.
5. Before us, the learned Departmental Representative strongly relied upon the reasoning given in the assessment order and submitted that the assessee had failed to reconcile the discrepancy between its statement regarding payment and the confirmation received from the creditor. It was thus contended that the Assessing Officer had rightly inferred that the liability was no longer payable and had ceased to exist.
6. On the other hand, the learned counsel for the assessee reiterated the submissions made before the lower authorities and submitted that there was absolutely no material brought on record by the Revenue to establish either remission or cessation of liability. He submitted that the creditor itself had acknowledged the outstanding amount and, therefore, the entire edifice of the Assessing Officer’s conclusion collapses on the face of the very evidence gathered during assessment proceedings. He further submitted that the liability had never been written back in the books and even subsequent payments had been explained before the authorities below.
7. After carefully considering the rival submissions, perusing the orders of the authorities below and examining the entire material placed on record, we find ourselves in complete agreement with the well-reasoned findings and conclusion drawn by the learned CIT(A). The entire basis on which the Assessing Officer proceeded to invoke section 41(1) is fundamentally flawed both on facts as well as in law. The Assessing Officer has proceeded merely on the premise that since there was some discrepancy between the assessee’s explanation regarding payments made in subsequent years and the reply furnished by the creditor, therefore, the outstanding liability should be presumed to have ceased. However, such inference, in our considered opinion, is wholly unsupported by any cogent material or legally sustainable evidence demonstrating either remission or cessation of liability as contemplated under section 41(1) of the Act. The provisions of section 41(1) can be invoked only when an assessee derives some benefit in respect of a trading liability by way of remission, waiver, extinguishment or cessation thereof, either by operation of law or by some conscious bilateral act between the parties. Such cessation cannot be inferred merely on conjectures, surmises or on account of delayed payments, especially when the liability continues to remain acknowledged and reflected in the books of account.
8. In the present case, the most striking feature which completely demolishes the case of the Revenue is that the very creditor, namely M/s Pipavav Defence and Offshore Engineering Co. Ltd., in response to notice issued under section 133(6), had categorically and unequivocally confirmed that the amount in question was receivable from the assessee. Thus, the evidence collected by the Assessing Officer himself does not support the conclusion drawn by him; rather, it completely negates the allegation of cessation of liability. Once the creditor acknowledges the debt as recoverable and subsisting, it is incomprehensible as to how the same liability could simultaneously be treated as ceased or extinguished in the hands of the assessee. The Assessing Officer has neither brought any material on record to show that the creditor had waived the amount nor has he demonstrated that the liability had become legally unenforceable or had been written off by mutual understanding between the parties. On the contrary, the undisputed factual position emerging from record is that the assessee had continuously reflected the liability in its books of account and had never written back the same. Therefore, the primary and foundational condition precedent for invoking section 41(1), namely obtaining of benefit by way of remission or cessation of liability, remains completely absent in the present case.
9. We further find that the learned CIT(A) has correctly appreciated the settled legal position while deleting the addition. The ratio laid down by the Hon’ble Supreme Court in the case of CIT vs. Sugauli Sugar Works (P.) Ltd. (supra) clearly lays down that mere existence of outstanding liability for a long period or unilateral assumptions drawn by the Revenue cannot automatically result in applicability of section 41(1) unless there is clear evidence of remission or cessation of liability. Here, the case of the assessee stands on an even stronger footing because there is not even any unilateral act on the part of the assessee in writing back the liability. Rather, the liability has throughout been acknowledged by both parties. Even assuming there was some discrepancy regarding timing or mode of payment, the same by itself could never justify the drastic conclusion that the liability had ceased to exist, particularly when the creditor itself confirms the amount as receivable. The Assessing Officer has thus proceeded purely on assumptions and presumptions without bringing any legally sustainable material to discharge the burden cast upon him under section 41(1).
10. Thus, having regard to the entirety of facts and circumstances of the case, and considering the material available on record in the light of settled judicial principles governing the scope and applicability of section 41(1), we are of the considered opinion that the learned CIT(A) has rightly deleted the addition of Rs.9,59,78,916/- made by the Assessing Officer. We, therefore, find no reason to interfere with the impugned order passed by the learned CIT(A), and accordingly, the grounds raised by the Revenue stand dismissed.
11. In the result, appeal of the Revenue is dismissed
Order pronounced on 18th May, 2026.
Author Bio
