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Section 41(1) includes remission or cessation of any liability by a unilateral act

Loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation shall be includible by a unilateral act by the first person who is assessee, i.e., debtor. There is no stipulation of such unilateral act by the creditor.

Advocate Akhilesh Kumar Sah

Section 41(1) of the Income Tax Act, 1961 (for short ‘the Act’) deals with the profits chargeable to tax in certain cases.

Recently in, DCIT. vs Sonodyne Television Co. Ltd. [I.T.A No. 330/Kol/2016 (Date of Decision: 31.01.2018)], one of the ground raised before ITAT Kolkata was that the CIT(A) had erred in law as well as on fact by deleting the liability written off for Rs. 59,75,631/-, when the assessee had failed to bring any evidence on record to prove the genuineness of the creditors.

Briefly, in the case the assessee was a limited company and was engaged in the business of renting of immovable properties which are used for the commercial purposes. The income from the rental of commercial properties was offered to tax under the head profit and gains of business or profession. The assessee in the earlier years was also engaged in the manufacturing of television business which was closed down in the year 1997.

The assessee in the year under consideration had shown sundry creditors of Rs.69,74,254.20 only at the end of the financial year. Out of these creditors a sum of Rs.59,75,631/- was representing the sundry creditors pertaining to the television business of the assessee and the remaining sundry creditors of Rs.9,98,614/- was relating to business (Haldia Projects). The assessee during the assessment proceeding furnished a list of 135 parties representing the creditors of Rs.59,75,631/- pertaining to the television business. However, there was no address in the list provided by assessee to the AO. Accordingly, the AO was of the view that the trading liability of sundry creditors had ceased to exist in the books of the assessee and therefore liable to be taxed under section 41(1) of the Act. Thus the amount of sundry creditors for Rs.59,75,631.00 was disallowed under section 41(1) of the Act and added to the total income of the assessee.

Against the order of the AO, assessee preferred an appeal to the CIT(A). The assessee before the CIT(A) submitted that the liability on account of sundry creditors was very much appearing in the books of accounts of the assessee. Such liability of sundry creditors was carried over from the earlier years. As such the liability on account of sundry creditors was not written off in the books of accounts.

The CIT(A) after considering the submission of the assessee deleted the addition made by the AO. Being aggrieved by the order of the CIT(A) the Revenue filed appeal before Kolkata ITAT.

The Learned members of the Kolkata ITAT observed that under section 41(1) of the Act, it is imperative that any allowance or deduction which has been made in the assessment for any year either in respect of loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, and in case such benefit is arrived, then value of benefit accrued to him is deemed to be the profits and gains of the business or profession, which is chargeable to income-tax as the income of that previous year, that is, in the year in which benefit such derived by the assessee. Explanation 1 to above mentioned section provides that loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation shall be includible by a unilateral act by the first person who is assessee, i.e., debtor. There is no stipulation of such unilateral act by the creditor. Here in the instant case, Explanation 1 cannot be held to be attracted at all, since there was no writing-off of the liability by the assessee to pay to the creditors in the assessee’s account.

In the case of CIT vs. Nitin. S. Garg reported in 208 taxman 16 (Guj), it was held that addition under section 41(1) of the Act, can be made only when it is found that there was a remission and/or cessation of the liability.

The ITAT Kolkata held that, there was no ambiguity in the case dealt in that the assessee has not written off the sundry creditors pertaining to the television division though the same was shut down long time ago. But the balance of sundry creditors was very much reflecting in the books of the assessee. These sundry creditors were brought forward from the earlier years which imply that these were accepted in the earlier years. Thus non-furnishing of address of such sundry creditors cannot be the reason for invoking the provision of section 41(1) of the Act. The ground of appeal filed by the Revenue was dismissed.

Categories: Income Tax
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