L&T MHI Power Boilers Private Limited Vs ACIT (ITAT Mumbai)
Summary: The Mumbai Bench of the Income Tax Appellate Tribunal allowed L&T MHI Power Boilers Private Limited’s appeal for AY 2017-18 against an addition of ₹2,98,29,000 under Section 41(1) arising from three outstanding trade creditors. The Assessing Officer had treated liabilities of ₹60.19 lakh to Koyo Singapore Bearing (Pte.) Ltd., ₹93.08 lakh to Vallourec & Mannesmann Tubes and ₹145.02 lakh to Era Buildsys Ltd. as ceased because their balances remained unchanged for more than two years. The CIT(A) upheld the addition despite the company continuing to acknowledge the liabilities in its books and furnishing evidence of a subsequent payment to one creditor.
The Tribunal held that prolonged non-payment, lack of creditor confirmations or expiry of the limitation period could not, without more, establish remission or cessation of a liability under Section 41(1). The Revenue had identified no waiver, settlement, write-back or other event during the relevant year giving the assessee a benefit. Following PCIT v. Pukhraj S. Jain, PCIT v. Batliboi Environmental Engineering Ltd. and CIT v. Sugauli Sugar Works (P.) Ltd., the Bench held that the later payment to Koyo Singapore Bearing was relevant evidence of the liability’s subsistence at year-end. It deleted the entire ₹2,98,29,000 addition, noting also that the rejection of additional evidence under rule 46A did not cure the underlying absence of proof of cessation.
On the separate issue of interest under section 234C, the assessee submitted that ₹30,91,256 was payable on returned income, whereas the Assessing Officer had charged ₹77,25,599 by reference to assessed income. The Tribunal directed recomputation of interest on tax due on returned income, after applicable credit for TDS and advance tax, subject to verification of the assessee’s calculation. The appeal was allowed in the terms indicated in the order, with the interest ground allowed for statistical purposes.
Cases Discussed
- PCIT v. Pukhraj S. Jain (Bombay High Court) — Income Tax Appeal No. 1288 of 2016; 4 October 2019. Non-payment for over three years and the expiry of limitation do not automatically establish cessation of liability.
- PCIT v. Batliboi Environmental Engineering Ltd. (Bombay High Court) — [2022] 144 taxmann.com 245. A debt does not cease merely because it is old or its recovery may be time-barred.
- CIT v. Sugauli Sugar Works (P.) Ltd. (Supreme Court) — [1999] 236 ITR 518 (SC). Expiry of limitation alone does not extinguish a debt or establish cessation for Section 41(1).
- CIT v. Indian Rayon and Industries Ltd. (Bombay High Court) — Mentioned within the passage quoted from Batliboi Environmental Engineering Ltd. concerning time-barred liabilities; not separately analysed by the Tribunal.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This appeal by the assessee is directed against the order dated 19.01.2026 passed by the National Faceless Appeal Centre, Delhi [hereinafter referred to as the “Ld. CIT(A)”] under section 250 of the Income-tax Act, 1961 (“the Act”), arising from the assessment order dated 20.12.2019 passed by the Assistant Commissioner of Income Tax, Circle 2(2)(1), Mumbai under section 143(3) of the Act for Assessment Year 2017-18.
2. The assessee has raised the following grounds of appeal:
“1. On the facts and in the circumstances of the case and in law, the learned Assessing Officer (AO)/Commissioner of Income Tax (Appeals) [CIT(A)] have erred in trea1ng the outstanding balances of three creditors as cessa1on of liability under sec1on 41(1) of the Act and consequently making an addi1on of Rs. 2,98,29,000. While doing so, the authori1es failed to appreciate that the liabili1es con1nued to subsist and had neither ceased nor been remi;ed. Accordingly, the addi1on is unjus1fied, unwarranted and liable to be deleted.
2. On the facts and in the circumstances of the case and in law, the AO/CIT(A) have erred in not taking cognizance of the subsequent payment made to one such creditor, which itself proves that there was a con1nuing liability.
3. On the facts and in the circumstances of the case and in law, the AO/CIT(A) have erred in levying interest under sec1on 234C on the assessed income, ignoring the express provision of sec1on 234C which calls for levy of interest for deferment of advance tax on the returned income.
4. The appellant company craves leave to add to, amend, alter or modify the aforesaid grounds of appeal.”
3. Briefly stated, the assessee filed its original return of income on 27.11.2017 declaring total income of Rs. 361,52,57,100 and filed a revised return on the same date declaring total income of Rs. 362,65,67,880. The case was selected for scrutiny and the statutory notices were issued. During assessment proceedings, the Assessing Officer noticed that balances payable to Koyo Singapore Bearing (Pte.) Ltd. of Rs. 60.19 lakh, Vallourec & Mannesmann Tubes of Rs. 93.08 lakh and Era Buildsys Ltd. of Rs. 145.02 lakh had remained unchanged as on 31.03.2015, 31.03.2016 and 31.03.2017. The assessee explained that the creditors continued in its books and that there had been no remission or cessation of the liabilities. The Assessing Officer was not satisfied with the explanation and, solely because the balances had remained IT T https outstanding for more than two years and supporting evidence had not been furnished, treated the aggregate amount of Rs. 2,98,29,000 as ceased liability under section 41(1). The total income was assessed at Rs. 365,63,96,880.
4. In appeal, the assessee reiterated that the liabilities continued to be shown as payable and that no benefit had arisen to it by way of remission or cessation. It also produced payment advices, SAP records and bank documents to demonstrate that the amount payable to Koyo Singapore Bearing (Pte.) Ltd. was subsequently discharged. The Assessing Officer, in the remand report, objected to admission of the additional evidence under rule 46A and also contended that a subsequent payment could not alter the position as at 31.03.2017. The Ld. CIT(A) accepted the objections of the Assessing Officer. He held that cessation could be inferred from prolonged non-payment and the absence of confirmations or demands from the creditors and further held that a payment made after the close of the year could not retrospectively establish subsistence of the liability on the balance-sheet date. He accordingly confirmed the addition. The levy of interest under section 234C was also upheld, subject to verification of arithmetical accuracy.
5. Before us, the Ld. Authorised Representative submitted that the addition was made merely because the balances were old. He submitted that all three liabilities continued to be acknowledged in the assessee’s audited books and that neither the assessee nor the creditors had waived, written back or otherwise extinguished them. He drew our attention to the evidence of payment to Koyo Singapore Bearing (Pte.) Ltd. immediately after the close of the relevant previous year and submitted that the payment conclusively disproved cessation. Reliance was placed on the judgments of the Hon’ble jurisdictional High Court in PCIT v. Pukhraj S. Jain, Income Tax Appeal No. 1288 of 2016, dated 04.10.2019, and PCIT v. Batliboi Environmental Engineering Ltd. [2022] 144 taxmann.com 245 (Bom). He also relied upon the appellate order dated 02.12.2024 in the case of the assessee’s group concern, L&T MHI Power Turbine Generators Private Limited, for the same assessment year, in which an addition made on an identical basis was deleted. On section 234C, he submitted that the assessee had computed interest of Rs. 30,91,256 on the tax due on the returned income, whereas the Assessing Officer had charged Rs. 77,25,599 by taking the assessed income.
6. The Ld. Departmental Representative supported the orders of the lower authorities. He submitted that the balances had remained static for more than two years; the assessee had failed to furnish confirmations, reconciliations or contemporaneous demands during assessment proceedings; and the additional evidence was rightly rejected under rule 46A. According to him, the long period of non- payment and the absence of evidence from the creditors justified the inference that the liabilities had ceased. In respect of section 234C, he submitted that the Assessing Officer may be directed to compute the interest in accordance with law.
7. We have heard the rival submissions and perused the material available on record. Grounds Nos. 1 and 2 concern the same addition under section 41(1) and are therefore considered together. Section 41(1), to the extent relevant, applies where an allowance or deduction has been made in an earlier assessment in respect of a loss, expenditure or trading liability and the assessee subsequently obtains, whether in cash or in any other manner, a benefit in respect of such loss or expenditure, or a benefit by way of remission or cessation of such trading liability. The benefit is chargeable in the previous year in which it is obtained. Thus, apart from the foundational requirement that the relevant liability had resulted in an allowance or deduction in an earlier year, the Revenue must establish an event of remission or cessation, or the obtaining of a benefit, during the previous year sought to be taxed.
8. In the present case, the Assessing Officer has not identified any act, agreement, waiver, settlement, unilateral write-back or other event during the previous year ended 31.03.2017 by which any of the three liabilities was remitted or had ceased. The balances continued to stand as liabilities in the assessee’s books. The entire basis of the addition is that the amounts had remained unchanged for more than two years and the assessee did not furnish the evidence called for within the short time available at the end of the assessment proceedings. The age of a trade liability, by itself, does not satisfy the statutory condition of remission or cessation. Equally, the absence of a recovery action or confirmation from the creditor does not create income in the hands of the debtor when the debtor continues to acknowledge the liability.
9. The issue is directly governed by the judgment of the Hon’ble jurisdictional High Court in PCIT v. Pukhraj S. Jain (supra). The material part of paragraph 4 reads as under:
“4. It is well se;led through series of judgments that merely because a debt has not been repaid for over three years, would not automa1cally imply cessa1on of liability. Exhaus1on of period of limita1on may prevent filing of recovery proceedings in a Court of law, nevertheless it cannot be stated by itself that the liability to repay the amount had ceased. Going by this logic itself, the Assessing Officer, in our opinion, commi;ed an error invoking Sec1on 41(1) of the Act.”
10. The same principle was reiterated by the Hon’ble jurisdictional High Court in PCIT v. Batliboi Environmental Engineering Ltd. (supra). While rejecting the Revenue’s contention that liabilities outstanding for several years and allegedly barred by limitation had ceased, the Hon’ble High Court observed as under:
“The Delhi High Court, aDer following these decisions concluded that merely because the liability is barred by limita1on, it does not cease to be a debt. This view is also taken by this Court in the case of CIT v. Indian Rayon and Industries Ltd. Therefore, the submission made by the Appellant that because the liability is barred by the period of limita1on the same would be treated as income and added under sec1on 41(1) of the Act cannot be accepted as no other decision contrary to the above is shown to us.”
11. The aforesaid view is consistent with the decision of the Hon’ble Supreme Court in CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518 (SC), wherein it was held that expiry of the period of limitation does not, by itself, extinguish the debt and that cessation cannot be inferred merely from the creditor’s inability to enforce recovery through a court. The decisive consideration is whether the liability has in fact been remitted or has ceased in the relevant previous year.
12. The finding of the Ld. CIT(A) that a payment made after 31.03.2017 cannot have any bearing on the subsistence of the liability as at the year-end also cannot be accepted. A subsequent event is not being used to create or extinguish a liability retrospectively; it is relevant evidence of the factual position that existed on the balance-sheet date. The payment to Koyo Singapore Bearing (Pte.) Ltd. shortly after the year-end is incompatible with the conclusion that the corresponding liability had already ceased on 31.03.2017. Even apart from the subsequent payment, the assessee had continued to acknowledge each of the three amounts in its books, and the Revenue has brought no material to show that any creditor waived its claim or that the assessee obtained any benefit during the year.
13. The Ld. CIT(A) rejected the additional evidence on the ground that the assessee had not shown sufficient cause under rule 46A. However, once a remand report had been obtained and the evidence went to the root of the very inference drawn under section 41(1), the appellate authority was required to determine the correct tax liability on the basis of the material available before it. In any event, the addition fails on the admitted facts recorded in the assessment order itself: the liabilities continued in the books and the only circumstance relied upon was their age. The evidence of subsequent payment merely reinforces that conclusion. We also note that in the case of L&T MHI Power Turbine Generators Private Limited, the appellate authority deleted an addition made on materially identical facts by following Pukhraj S. Jain and Batliboi Environmental Engineering Ltd. Though that order does not govern the present appeal as a precedent, the same application of the jurisdictional law supports consistency in the treatment of identical facts.
14. In view of the binding judgments discussed above, we hold that the conditions of section 41(1) were not satisfied. The addition of Rs. 2,98,29,000 is therefore deleted. Grounds Nos. 1 and 2 are allowed.
15. Ground No. 3 concerns the computation of interest under section 234C. The levy is mandatory but must be computed strictly in accordance with the section. For a company, the shortfall in advance tax instalments is determined with reference to the tax due on the returned income, subject to the adjustments expressly provided in the section. The Assessing Officer was therefore not justified in increasing the interest merely with reference to the income assessed under section 143(3). We direct the Assessing Officer to recompute interest under section 234C on the tax due on the returned income, after granting due credit for tax deducted at source and advance tax in accordance with law. The assessee’s computation shall be verified. Ground No. 3 is allowed for statistical purposes.
16. Ground No. 4 is general and requires no separate adjudication.
17. In the result, the appeal filed by the assessee is allowed in the terms indicated above.
Order pronounced in the open court on 17/09/2026.
