Advocate Akhilesh Kumar Sah

Akhilesh Kumar SahRecently, the Ahmedabad ITAT has held that no section 41(1) addition was possible in the case as assessee had acknowledged trading liability and settled it in subsequent years[2014] 50 taxmann.com112 (Ahmedabad – Trib.)/[2013] 28 ITR(T) 561 (Ahmedabad – Trib.). Also, the ITAT Mumbai, has held thatremission of sale-tax loan on prepayment of loan amount will not be deemed as remission of liability under section 41(1)[2014] 48 taxmann.com293 (Mumbai – Trib.)/[2014] 151 ITD 566 (Mumbai – Trib.)/[2014] 159 TTJ 21 (Mumbai – Trib.).

Section 41(1) of the Income Tax Act, 1961, subject to its Explanations makes chargeable an amount/value of benefit as profits and gains of business and, therefore, chargeable to income-tax as the income of the concerned previous year if the following conditions (in short) are fulfilled :

(i) Where an allowance or deduction has been made in the previous assessments in respect of loss, expenditure or trading liability incurred by the assessee, and

(ii) Subsequently the assessee/ the successor in business has obtained, whether in cash or in any other manner what so ever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof.

Once conditions mentioned here-in-above are established, then during the relevant assessment year, the question whether business of the assessee is actually in existence or not would pale into insignificance and the amount in question would be treated to be profit or gain of business and accordingly chargeable to income-tax as the income of that previous year, evende horsthe fact that business during that relevant previous year would be non-existent [SeeCIT v. Pranlal P. Doshi (1992) 106 CTR (Guj) 130 : (1993) 201 ITR 756 (Guj)]. Where assessee has never claimed any deduction in respect of sums credited to Profit & Loss Account provisions of section 41(1) cannot be applied [SeeCIT v. A. Tosh & Sons (P) Ltd. (1992) 107 CTR (Cal) 233]. [See also CIT v. Minerals & Metal Trading Corporation of India Ltd. (1986) 157 ITR 371 (Del)].But where an assessee has obtained refund of amount in respect of expenditure incurred by it and also it had got a deduction in respect of the amount in the earlier year, the refunded amount shall be deemed to be profits and gains of business or profession and the same shall be chargeable to income-tax under section 41(1) an income of the previous year [SeeCIT v. Taj Gas Service (1980)122 ITR 1034 (All)].

The scope of section 41(1) has been enhanced by substituting it to present one by the Finance Act, 1992, w. e. f. 1-4-1993. The Supreme Court inSaraswati Industrial Syndicate Ltd. v. CIT (1990) 186 ITR 278 (SC)had observed that there can be no doubt that when two companies amalgamate and merge into one, the transferor company loses its entity as it ceases to have its business. Their respective rights or liabilities are determined under the scheme of amalgamation but the corporate entity of the transferor company ceases to exist with effect from the date the amalgamation is made effective. But now, where there has been an amalgamation of a company with another company, the amalgamated company with also be taken as “successor in business” as per the Explanation (which was inserted in section 41(1). the words “obtained, whether in case or in any other manner whatsoever, any amount in respect of such loss or expenditure” (incurred in any previous year) in section 41 clearly refer to the actual receiving of that amount. The cash may be actually received or it may be adjusted by way of an adjustment entry or a credit note or in any other form when the cash or equivalent of the cash can be said to have been received by the assessee. But it must be the obtaining of the actual cash which is contemplated by the legislature when it used the words “has obtained, whether in case or in any other manner whatsoever, any amount in respect of such loss or expenditure” [CIT v. Rashmi Trading (1976) 103 ITR 312 (Guj)].Section 41(1) introduces a statutory fiction which is an indivisible one. The operation of this fiction should be limited to the language of the section. It (fiction) cannot be enlarged by importing another fiction, namely, that if the amount was obtainable or receivable during the previous year, it must be deemed to have been obtained or received during that year [CIT v. Phoolchand Jiwan Ram (1981) 131 ITR 37 (Del) and CIT v. Bharat Iron & Steel Industries (1993) 199 ITR 67 (Guj) (DB)].Unless the Income Tax Department is able to identify any particular item as having been already allowed as a deduction in an earlier assessment conclusively, section 10(2A), (which corresponds to section 41(1) of Income Tax Act, 1961), is not available for recoupment. [Tirunelveli Motor Bus Service Co. P. Ltd. v. CIT. (1970) 78 ITR 55 (SC)].

Section 41 enables the revenue to take back what it has already allowed if certain conditions are satisfied and the assessee recouped something for which an allowance had already been made and deducted from his business income [CIT v. Agarpara Co. Ltd. (1986) 158 ITR 78 (Cal)].In order that an amount may be deemed to be income under section 10 (2A) of the 1922 Act (corresponding to section 41(1) of the 1961 Act) there must be a remission or cessation of the liability in respect of that amount. The remission of the liability arises when the creditor voluntarily gives up the claim. The cessation of such liability arises only when it ceases to exist in the eye of law for all intents and purposes. When a debt becomes barred by time the creditor would not be able to recover the amount by enforcing his right in a court. But the right will not come to an end nor does the liability cease. A mere entry of credit in the accounts in respect of the amount would also not bring about a remission or cessation of the liability [J. K. Chemicals Ltd. v. CIT (1966) 62 ITR 34(Bom): (1978)114 ITR 853 (Karn)].Unless the liability is finally extinguished and there is no possibility of its revival in future, there will neither be a remission nor a cessation of the liability [Rameshwar Prasad Kishan Gopal v. V. K. Arora, ITO (1983) 141 ITR 763 (All)].The principle that statute of limitation only bars the remedy but does not extinguish the debt may not strictly apply in the income-tax proceedings in deciding whether there has been cessation or remission of a statutory liability. When the assessee claims statutory liability as a deduction on ‘due basis’ such deduction is allowed in computing its total income even though such liability was not actually paid. This benefit is given to the assessee only because of the provisions of the Income Tax Act [CIT v. Agarpara Co. Ltd. (1987) 167 ITR 866 (Cal)].Also whether there is cessation of liability, it will depend on the facts of each case [CIT v. Bennett Coleman & Co. Ltd. (1993) 201 ITR 1021 (Bom)].

Onus on Income Tax Department:

The burden of proving that an allowance or deduction has been given in the earlier assessment year lies upon the department [Steel And General Mills Co. Ltd. v. CIT (1974) 96 ITR 438 (Del)].

Resume :

If an allowance or deduction is in respect of an expenditure and it is a case of reimbursement subsequently received, then it will be deemed to be in come under the head “Business or Profession” in the year or receipt. If it is an allowanceor deduction in respect of a trading liability and, subsequently, the assessee has been benefited by the remission or cessation of the trading liability then the amount of the liability which is extinguished will be deemed to be the income chargeable as business profits of that previous year. [Rameshwar Prasad Kishan Gopal v. V. K. Arora, ITO (1983) 141 ITR 763 (All)].Sub section (2A) of the section 10 of Income Tax Act, 1922 (corresponding to section 41(1) of the Income Tax Act, 1961) was inserted in the Act on 1-4-1955 and it does not introduce any new principle of law but is only a declaratory provision so far as refunds are concerned [CIT v. Lakshmamma (1964)52 ITR 789 (Mys)].Also the corresponding section 10 (2A) of the Income Tax Act, 1922, does not cover a mistaken payment or mistake in calculation. It deals with a case where the assessee is able to reimburse himself any allowance which had been granted to him in any earlier year and has nothing to do with a case where the assessee had paid or expended any money which is not for the purpose of the business [CIT v. India Cements Ltd. (1975) 98 ITR 69 (Mad)].Only itemised losses which are incurred by an assessee and which are allowed or deducted by the income Tax Department in any given assessment year, would properly enter into a consideration for the purpose of the application of section 41(1) of the Income Tax Act, 1961, in any subsequent year if the assessee derives same benefit or remission with respect to that very item of lossCIT v. N. Rudrappan (1984) 147 ITR 355 (Mad)].If the liability for which an amount was set apart still exists and no reverse entries have been made by the assessee in his account books relating to the said amount then in such circumstances section 41(1) has absolutely no application [SeeElgin Mills Co. Ltd. v. IAC (1991) 198 ITR 81 (All)].Also there can be a “cessation” of liability only when the liability has finally ceased without there being a chance of its revival [CIT v. Combined Transport Co. Pvt. Ltd. (1988) 174 ITR 528 (MP)].Also liability of an assessee does not cease merely because the liability has become barred by limitation [CIT v. Chase Bright Steel Ltd. (1989) 177 ITR 128 (Bom)].

Further, many Court rulings have provided that taxpayers would not be liable to tax on the amount of trading liability written off unilaterally credited to the profit and loss account. The recovery of debt in such cases may have been barred by limitation and also where there is no likelihood of the liability being enforced. The courts decisions revolve on the view that a debtor by his unilateral action cannot bring about remission or cessation of his liability. By inserting an Explanation to section 41(1) with effect from the assessment year 1997-98 it has been provided by the Finance Act, 1996 to tax the remission or cessation of liability in the hands of the taxpayer and for this purpose the expression “all or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof” shall defined to include the remission or cessation of any liability by any unilateral act of the assessee by way of writing off such liability in his accounts.

Once the assessee gets back the amount which was claimed and allowed as business expenditure during the earlier year, the deeming provision of section 41(1) comes into play and it is not necessary that the Revenue should await the verdict of higher court or Tribunal (Polyflex (India) (P) Ltd. vs. CIT (2002) 21 SITC 441 (SC).

The Supreme Court in CCIT vs. Kesaria Tea Co. Ltd. (2002) 20 SITC 172 (SC) has laid down that the resort to section 41(1) can be taken only if the liability of the assessee can be said to have ceased finally and there is no possibility or reviving it. Also, it has held that an unilateral action on the part of the assessee by way of writing-off the liability in its accounts does not necessarily mean that the liability ceased in the eye of law.

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0 responses to “Making Chargeable to Tax U/s. 41(1) of Allowance/Deduction Already Made”

  1. Nem Singh says:

    In this regard reliance is placed on the following decisions wherein it has been held that to attract the provisions of Section 41(1) of the Act, it is necessary that there should have been a cessation or remission of liability.

    1. CIT vs Shri Vardhaman Overseas Ltd. 343 ITR 408 (Del): In this case the Ld AO discovered certain credits and held that the creditors were not genuine and therewas no genuine outstanding in their accounts and added Rs.1,25,46,534/- which represented the credit balances in the accounts of nine parties u/s 68 of the Act. On appeal, the CIT(A) held that the liabilities had ceased to exist and therefore, the addition of Rs.1,25,46,534/- made by Ld AO was justified and confirmed it under section 41(1) of the Act.
    On further appeal the Tribunal held that the applicability of section 68 was ruled out since no fresh amounts were credited in the accounts of the creditors under consideration during the relevant accounting year. It also held that the assessee was a limited company whose accounts were accessible to general public and that the balances in the accounts of the sundry creditors were only brought forward balance therefore the plea of the assessee that there was no cessation of any liability to the sundry creditors in the relevant accounting year and, hence, the provisions of section 41(1) of the Act were not attracted is accepted in the light of the judgment of Supreme Court in the case of Sugauli Sugar Works (P) Ltd . The tribunal also applied the judgment of the Supreme Court in the case of Keraria Tea Co. Ltd and held that resort to section 41(1)can be had only if liability of the assessee ceased finaly in the relevant accounting year without the possibility of being revived. It was also noted by the tribunal in paragraph 11 of its order that the decision of Supreme Court in Sagauli Sugar Works (P) Ltd would apply with greater force to the assessee’s case because in the said decision the assessee had credited the profit and loss account with the amounts standing to the credit of the sundry creditors, whereas in the present assessee’s case the amounts payable to the sundry creditswere not credited to its profit and loss account for the year and were still shown as outstanding as on 31.03.2002.
    On appeal to the High Court after due consideration of advanced argument of department and several judgments of both sides the hon’ble court has held that section 41(1) does not apply if the amount is not written back in the books of accounts.
    “Held, dismissing the appeal, that the assessee had not unilaterally written back the account of the sundry creditors in its profit and loss account. The liability was shown in the balance-sheet as on March 31, 2002. The assessee being a limited company, this amounted to acknowledging the debt in favour of the creditors for purposes of section 18 of the Limitation Act, 1963. The assessee’s liability to the creditors, thus, subsisted and did not cease not was it remitted by the creditors. The liability was I

    2. CIT Vs SUGAULI SUGAR WORKS PVT. LTD. (1991) 236 ITR, 518(S.C) Held that the question whether the liability cease to exist or not was not a matter to be decided by considering the assessee conduct alone but was a matter to be decided only if the creditor was also before the concerned authority and that in the absence of creditor it is not possible for the concerned authority to come to the conclusion that the debt was barred by limitation and had become un-enforceable. The aforesaid view was reiterated by the supreme court in the case of CIT Vs Kesaria Tea Co, Ltd. (2002) 254 ITR 434 (S.C) after considering its earlier decision in CIT Vs T.V Sundaram Iyenger & Sons Ltd. (1996) 222 ITR 344 (S.C) and distinguished the same on the ground that factual matrix and the provisions of law considered therein were entirely different.

    3. CIT Vs. Jain Esports Pvt. Ltd., ITA No. 235/2013, order date 24.05.2013, Delhi High Court: In this case during assessment proceedings u/s 143(3) for the AY 2008-09 the Ld AO has examined the balance sheet of the assessee for the relevant period and noted that the balance sheet disclosed a sum of Rs.1,57,54,011/- as sundry creditors and found that an amount of Rs.1,53,48,850/- is outstanding in the books since 1984-1985 in the name of M/s Elephanta Oil & Vanaspati Ltd. and after due verification a sum of Rs.1,57,15,137/- added to the income of the assessee. The CIT(A) deleted the part addition on the ground that the assessee has continued to reflect the liabilities against the name of criditors in subcequent period ie ended on 31.03.2009 and 31.03.2010 held that as the assessee company continued to reflect amounts payable to those creditors there was no cessation or liability and consequently, the provisions of section 41(10 of the Act were inapplicable. However, upheld the addition of Rs.1,53,48,850/- on the ground that there was cessation of liabilities, but on the basis that the assessee had failed to established the genuineness of the liability towards Elephanta Oil & Vanaspati Ltd.

    On further appeal by the assessee, the Tribunal accepted the contention of the assessee that a sum of Rs.1,57,10,690.53 was owed by M/s Elephanta Oil & Vanaspati Ltd. to the assessee company and thus, the net effect of the same would be that no amount would be payable by the assessee to M/s Elephanta Oil & Vanaspati Ltd. and a sum of Rs.3,61,840.78 would be receivable after setting off the amount of Rs. 1,53,48,849/- which was standing to the credit of M/s Elephanta Oil & Vanaspati Ltd. The Tribunal was of the view that it was not correct to only accept the figure relating to the amount that was receivable by the assessee company while rejecting the amount payable by the assessee company to M/s Elephanta Oil & Vanaspati Ltd.

    The department has preferred an appeal before the High Court, dismissed the appeal of the revenue department. The relevant paras of the order is as under:

    “20. In order to attract the provisions of Section 41(1) of the Act, it is necessary that there should have been a cessation or remission of liability. As held by the Bombay High Court, in the case of J. K. Chemicals Ltd. (supra), cessation of liability may occur either by the reason of the liability becoming unenforceable in law by the creditor coupled with debtor declaring his intention not to honour his liability, or by a contract between parties or by discharge of the debt. In the present case, the assessee is acknowledging the debt payable to M/s Elephanta Oil & Vanaspati Ltd. and there is no material to indicate that the parties have contracted to extinguish the liability. Thus, in our view it cannot be concluded that the debt owed by the assessee to M/s Elephanta Oils & Vanaspati Ltd. stood extinguished.
    21. Although, enforcement of a debt being barred by limitation does not ipso facto lead to the conclusion that there is cessation or remission of liability, in the facts of the present case, it is also not possible to conclude that the debt has become unenforceable. It is well settled that reflecting an amount as outstanding in the balance sheet by a company amounts to the company acknowledging the debt for the purposes of Section 18 of the Limitation Act, 1963 and, thus, the claim by M/s Elephanta Oil & Vanaspati Ltd. can also not be considered as time barred as the period of limitation would stand extended. Even, otherwise, it cannot be stated that M/s Elephanta Oil & Vanaspati Ltd. would be unable to claim a set-off on account of the amount reflected as payable to it by the assessee. Admittedly, winding up proceedings against M/s Elephanta Oil & Vanaspati Ltd. are pending and there is no certainty that any claim that may be made by the assessee with regard to the amounts receivable from M/s Elephanta Oil & Vanaspati Ltd. would be paid without the liquidator claiming the credit for the amounts receivable from the assessee company. It is well settled that in order to attract the provisions of Section 4 1(1) of the Act, there should have been an irrevocable cession of liability without any possibility of the same being revived. The assessee company having acknowledged its liability successively over the years would not be in a position to defend any claim that may be made on behalf of the liquidator for credit of the said amount reflected by the assessee as payable to M/s Elephanta Oil & Vanaspati Ltd.
    22. We may also add that, admittedly, no credit entry has been made in the books of the assessee in the previous year relevant to the assessment year 2008- 2009. The outstanding balances reflected as payable to M/s Elephanta Oil & Vanaspati Ltd. are the opening balances which are being carried forward for several years. The issue as to the genuineness of a credit entry, thus does not arise in the current year and this issue could only be examined in the year when the liability was recorded as having arisen, that is, in the year 1984-1985. The department having accepted the balances outstanding over several years, it was not open for the CIT (Appeals) to confirm the addition of the amount of ` 1,53,48,850/- on the ground that the assessee could not produce sufficient evidence to prove the genuineness of the transactions which were undertaken in the year 1984-85.”
    4. CIT vs Bhogilal Ramjibhai Atara, ITA No. 588/2013 order dated 04.02.2014 (Guj-HC), held that even if there is unclaimed liability of earlier years where even creditors are untraceable and liabilities are non-genuine, then also the addition cannot be made u/s 41(1) since assessee has not written it back in books of account.
    In AY 2007-08 the assessee showed an amount of Rs. 37.52 lakhs as being due to various creditors. The AO issued summons to the creditors. Some of the creditors were not found at the given address and some stated that they had no concern with the assessee. The AO took the view that there was a “cessation” of the liabilities and assessed the said liabilities to tax u/s 41(1). The CIT(A) confirmed the addition though the Tribunal deleted it on the basis that as the liabilities had not been written back in the accounts, s. 41(1) did not apply. On appeal by the department to the High Court HELD dismissing the appeal:
    “Section 41(1) would apply in a case where there has been remission or cessation of liability during the year under consideration. In the present case, there was nothing on record to suggest there was remission or cessation of liability in the AY 2007-08. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. The AO undertook the exercise to verify the records of the so-called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi-parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income u/s 41(1) of the Act. This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of s. 41(1) of the Act there is no cure for it.”
    5. CIT vs Tamilnadu Warehousing Corporation 292 ITR 310 (Mad): In this case assessment was completed under section 143(3) of the Act. Further the CIT passed an order under section 263 of the Act and set aside the assessment with a direction to the AO to assesss the said amount under section 41(1) of the Act for the assessment year 1989-90. In this case the assessee has admitted the amount of Rs.8,22,925 as liability in the balance sheet. The hon’ble tribunal while deciding the appeal against the order u/s 263, canceled the order passed u/s 263 and restore the assessment order passed by the Assessing Officer and held that:

    “it is clear that the assessee has continued to show the admitted amount of Rs.8,22,925/- as liability in the balance sheet. The undisputed fact is that it is a liability reflected in the balance-sheet. Once it is shown as liability by the assessee, the Commissioner of Income Tax is wrong in holding that the same is assessable under section 41(1) of the Act. Unless and until there is a cessation of liability, section 41 will not be pressed in to service.”

    On appeal to High Court:

    “Held, in view of the foregoing reasons, we find the reasoning by the Tribunal was based on valid materials and evidence and hence there is no error or legal infirmity in the order of the tribunal so as to warrant interference.”

    6. The Hon’ble Jurisdictional ITAT in the case of Navneet Singh Sahni vs Asstt. CIT, ITA No.444/Del/2012 order dated 13.04.2012 considering the facts of the case and decisions relied upon by the assessee the Hon’ble tribunal held that the facts of the assessee case are similar to the facts in the case of CIT vs Shri Vardhaman Overseas Ltd wherein the assessee has been granted the relief by the hon’ble jurisdiction High Court the relevant part of the order is as under:

    “5. We have heard both the sides in detail. In the assessee’s case the liability was outstanding since 2002 and same as reflected in the balancesheet of the assessee for subsequent years. The assessee has not credited the amount in the Profit & Loss A/c as it has been done in the case of T.V. Sundaram Iyengar & Sons Ltd. cited supra. Therefore, in our considered view the ratio laid down by the Hon’ble Supreme Court in that case is not applicable to the facts of the assessee’s case. Further we have also found that the facts of the assessee’s case are similar to the facts in the case of CIT Vs. Shri Vardhman Overseas Ltd. cited supra wherein the assessee has been granted the relief by the Hon’ble jurisdictional High Court, where Hon’ble High Court has held as under:-

    “Section 41(1), read with section 68, of the Income-tax Act, 1961 – Remission or cessation of trading liability – Assessment year 2002-03 – Assessee was a company engaged in manufacture of rice from paddy – It was also selling rice after purchasing same from local market – In course of assessment, Assessing Officer wanted to verify sundry creditors shown in books of account – He, therefore, called upon assessee to submit confirmation letters from sundry creditors – On failure of assessee to submit confirmation letters, Assessing Officer added amount in question to assessee’s income under section 68 – On appeal, Commissioner (Appeals) held that liabilities/credits had ceased to exist and, therefore, addition made by the Assessing Officer was justified but he confirmed same under section 41(1) – Tribunal held that applicability of section 68 was ruled out since no fresh amounts were credited in accounts of creditors during relevant accounting year – Tribunal further found that amounts payable to sundry creditors were not credited to assessee’s profit and loss account for year and those amounts were still shown as outstanding at end of relevant year – Tribunal therefore held that provisions of section 41(1) were not attracted to case – Whether in view of fact that assessee had not unilaterally written back accounts of sundry creditors in its profit and loss account, Tribunal was justified in deleting impugned addition made under section 41(1) – Held, yes [In favour of assessee]”

    6. The ITAT, Delhi Bench `D’ in the case of Kaps Advertising vs. ITO cited supra, has held as under:-

    “In the case of CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518/102 Taxman 713, the Supreme Court came to the conclusion that after expiry of limitation period, a debt does not stand extinguished, but it only bars the creditors from taking recourse to a legal remedy for enforcement of the debt. Therefore, even where an entry is made in the accounts of the debtors unilaterally without any act on the part of the creditor, it will not lead to a conclusion that the liability has ceased to exist. Such an act will also not confer any benefits on the debtor as contemplated in section 41(1). [Para 12]

    The decision in the case of Suguali Sugar Works (P.) Ltd. (supra) is applicable to the facts of the case more so when the liability has not been written off in the accounts of the assessee. In such circumstances, non-availability of the creditor and lack of any correspondence with them does not obliterate the debt, as the assessee continues to show the same in its books of account. Thus, the provisions contained in section 41(1) is not applicable. It is an undisputed fact that the assessee has not written off the amount to the credit of the profit and loss account. Thus, it has not treated the money as its own money. Accordingly, it has not become richer by the impugned amount as it continues to hold out that it is indebted to the aforesaid creditors. [Para 13]”

    7. Considering all these facts and circumstances of the case, we set aside the order of the CIT(A) and allow the appeal filed by the assessee.”

    If any update please write back!
    Nem Singh
    Advocate

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