pri Section 41(1) cannot be invoked by revenue without showing that such liability had, in fact, ceased to exist Section 41(1) cannot be invoked by revenue without showing that such liability had, in fact, ceased to exist

Case Law Details

Case Name : Pr. CIT Vs. Dharmendra Jagdishbhai Dubal (Gujarat High Court)
Appeal Number : Tax Appeal No. 910 of 2017
Date of Judgement/Order : 21/11/2017
Related Assessment Year :

Pr. CIT Vs. Dharmendra Jagdishbhai Dubal (Gujarat High Court)

Therefore, to attract the provisions of sub-section (1) of section 41 of the Act, the revenue has to either show that such liability has in fact ceased to exist or that the assessee has written off such liability in his accounts. In the facts of the present case the assessee continues to acknowledge the liability in his accounts and there is nothing to show that on account of lapse of time the liability has ceased to exist. Under the circumstances, the Tribunal was wholly justified in holding that it cannot be said that the liability has ceased and deleting the addition.

FULL TEXT OF THE HIGH COURT JUDGMENT / ORDER IS AS FOLLOWS

Leave to amend question (B).

2. Heard Mrs. Mauna M. Bhatt, learned senior standing counsel for the appellant.

3. ADMIT. The following substantial questions of law arise for consideration.

(1) Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in deleting the addition of Rs. 23,04,369 by considering the same to be service tax?

(2) Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in deleting the addition of Rs. 53,600 made under section 40(a)(ia) of the Income Tax Act, 1961?

(3) Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in deleting the addition of Rs. 1,95,250 on account of addition made under section 40A(3) of the Income Tax Act, 1961?

4. The appellant has also challenged the impugned order dated 30-5-2017 passed by the Tribunal by proposing the following question stated to be a substantial question of law:

Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal has erred on facts and in law in deleting the addition of ₹ 33,85,907 made by the Assessing Officer under section 41(1) of the Income Tax Act?

5. The Assessing Officer on verification of ledger accounts of the respondent- assessee noticed certain persons appearing as sundry creditors and found that the balances were pending for long. The total amount of such balances came to ₹ 33,85,907. The Assessing Officer was of the opinion that no party would wait indefinitely, especially when a substantial amount was due and accordingly added the amount to the income of the assessee for the year under consideration under section 41(1) of the Income Tax Act. The assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals), who confirmed the order passed by the Assessing Officer. The assessee carried the matter in further appeal before the Tribunal, which held that section 41(1) of the Income Tax Act applies where a trading liability is allowed as deduction in an earlier year in computing the business income of the assessee and the assessee obtained benefit in respect of such trading liability in the later year by way of remission or cessation of such liability. The Tribunal observed that the assessee has not written off the liability in the accounts and that the amount could have been added to the total income of the assessee, if the same is written off by the assessee; and that till the assessee recognizes such liability, it cannot be held that such liability has ceased.

6. Section 41(1)(a) of the Income Tax Act, 1961 provides that 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, the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, 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, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not;

Explanation 1 thereto provides that for the purposes of the sub-section, the expression “loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof” shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.

Therefore, to attract the provisions of sub-section (1) of section 41 of the Act, the revenue has to either show that such liability has in fact ceased to exist or that the assessee has written off such liability in his accounts. In the facts of the present case the assessee continues to acknowledge the liability in his accounts and there is nothing to show that on account of lapse of time the liability has ceased to exist. Under the circumstances, the Tribunal was wholly justified in holding that it cannot be said that the liability has ceased and deleting the addition. No question of law can be said to arise insofar as this issue is concerned. Question [C] is therefore, disallowed.

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