Cessation of Liability u/s 41 – Calcutta High Court demystifies the Income TaxLaw
ABCAUS Neutral Case Law Citation:
ABCAUS 3678 (2023) (02) HC
Important Case Laws relied upon by parties:
Commissioner of Income Tax vs. Sugauli Sugar Works Private Limited 1999) 236 ITR 519
Chief Commissioner of Income Tax vs. Kesaria Tea Company Limited (2002) 254 ITR 434 (SC)
Commissioner of Income Tax vs. Chipsoft Technology Private Limited (2012) 210 Taxman 173 (Del)
Bombay Dyeing and Manufacturing Company Limited vs. State of Bombay and Others AIR 1958 SC 328
J.K. Chemicals Limited Versus Commissioner of Income Tax (1966) 62 ITR 34 (Bom)
West Asia Exports and Imports Private Limited vs. Assistant Commissioner of Income Tax (2019) 412 ITR 208 (Mad)
Commissioner of Income Tax vs. T.V. Sundaram Iyengar and Sons Limited 1996 (1996) 6 SCC 294
Commissioner of Income Tax, Calcutta vs. Karam Chand and Others (1996) 10 SCC 575
Chief Commissioner of Income Tax, Cochin vs. Kesaria Tea Company Limited (2002) 3 SCC 684
Gujtron Electronics Private Limited vs. Income Tax Officer (2017) 397 ITR 462 (Guj)
Jay Engineering Works Limited vs. Commissioner of Income Tax (2009) 311 ITR 299 (del)
Commissioner of Income Tax vs. Indian Rayon and Industries Limited (2011) 336 ITR 479 (Bom)
Commissioner of Income Tax vs. Shri Vardhman Overseas Limited (2011) 16 Taxmann.com 350 (Del)
Goodricke Group Limited vs Commissioner of Income Tax (2011) 11 Taxmann.com 210 (Cal)
In a recent judgment, Hon’ble Calcutta High Court has given a comprehensive judgment on the issue of cessation of liability under section 41(1) of the Income Tax Act, 1961 (the Act).
In the instant case, the Income Tax Department had challenged the order passed by the ITAT upholding the decision of CIT(A) in deleting the addition made by the Assessing Officer (AO) on account of cessation of liability.
The Assessing Officer (AO) during the course of the proceedings of the Act noted that in the balance sheet, the assessee had shown large amount of current liabilities. The assessee was directed to provide names and addresses of all persons to whom this interest is payable. Other connected details were also called for.
Thereafter a show cause notice was issued calling upon the assessee to explain as to why the interest payable on loan not be treated as cessation of liability.
After considering the submission of the assessee, the AO concluded that there was no evidence or confirmation regarding the trading liability and hence as per Section 41(1)(a) of the Act, it was a cessation of trading liability and hence was deemed to be profit and gain of business or profession for the relevant assessment year.
The CIT(A) deleted the addition and the Tribunal also dismissed the appeal of the Revenue.
The Hon’ble High Court observed that the assessee had furnished complete details of the outstanding creditors. The details included the names, address and the amount due to each of the creditors. The assessee offered explanation as to why these sums were outstanding for 20 years, furnished copies of all audited financial statements.
The Hon’ble High Court also observed that the assessee had placed the copies of the assessment order under Section 143(3) for the subsequent years to show that the assessing officers never drew any adverse inference with regard to the outstanding creditors reflected in the balance sheets.
Also, the assessee had also furnished the details of payments made to creditors subsequently to show that the liabilities continue to exist at the end the financial year.
The Hon’ble High Court further noted that the AO though was furnished the full list of creditors chose to issue notice only to 6 of them. Directors of the four creditor companies appeared before the assessing officer, however, those directors were appointed subsequent to the end of the financial year and did not readily have the necessary information. However, none of the persons who appeared before the assessing officer had denied the transactions with the assessee nor stated that there were no dues or outstanding payable by assessee to them.
The assessee had placed reliance on the decisions of the Hon’ble Supreme Court for the proposition that even the expiry of period of limitation would not extinguish the debt. The AO had relied upon the judgment of the Hon’ble High Court while the tribunal had followed the decision of the Hon’ble Supreme Court while granting relief to the assessee.
The Revenue sought to distinguish the decision of the Hon’ble Supreme Court relied upon by the ITAT. It was submitted that the decision pertained to statutory liabilities and the decision could not have been pressed into service to decide in favour of the assessee. The question which was decided was whether the debtor by his own unilateral act can bring about the cessation or remission of his liability. The said issue was answered by holding that remission has to be granted only by the creditors.
However, the Hon’ble High Court opined that the five judge bench of the Hon’ble Supreme Court which delivered the verdict had analysed the entire aspect as regards, cessation of liability and held that the limitation does not extinguish the debt or precludes its enforcement unless the debtor chooses to avail himself of the defence and specifically pleads it.
The Hon’ble High Court held that the decision of the Hon’ble Madras High Court relied upon by the Revenue was also distinguishable as the facts were wholly different. In that case, there was change of business of the assessee to entirely different nature and the creditors of the old business did not speak anything about the liability or ten years and there was no written confirmation from such creditors. In such factual situation, the court held that there was cessation of liability
Further the Revenue had relied upon the decision of the Hon’ble Supreme Court for the proposition that the claims of the creditors had become time barred and unenforceable and therefore there was cessation of liability.
However, the Hon’ble High Court noted the facts of the said case was that the assessee had transferred unclaimed credit balances of the customers to the profit and loss account but those amounts were not included in the total income of the assessee. In such factual situation, the Hon’ble Supreme Court had held that the amount changes its character when the amount becomes assessee’s own money because of limitation or by any other statutory or contractual right.
The Revenue had placed reliance on yet another decision wherein the Hon’ble Supreme Court had pointed out that when no demand for payment was made, common sense requires that such amount should be entered into profit and loss account for the year and to be treated as taxable.
The Hon’ble High Court observed that in the said case, it was held that the conduct of the assessee went to show that the assessee himself did not treat the amount as trust money and the amount was not shown as a liability nor was it kept in a suspense account. Hence the decision was not applicable to the case in hand.
With respect to the another decision of the Hon’ble Supreme Court which was relied upon by the Revenue, the Hon’ble High Court observed that in the said decision also on facts the court found that in all the accounts the assessee had treated such amount as its own and the scheme which the assessee has floated had been terminated many years back and the limitation for claiming the amount back had also ceased and there was absolutely no movement or the correspondence between the assessee and its members with regard to the claim or with response to the deposited amount.
The Hon’ble High Court opined that the decision of the Bombay High Court was squarely applicable to the facts and circumstances of the case and enure in favour of the assessee.
In the said case, the substantial questions of law which was decided was whether the tribunal was right in deleting the disallowance of deduction and adding back the sum being unclaimed credit balances unilaterally written back (credited to the profit and loss account). It was held that debtor, by his own unilateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor.
The Hon’ble High Court further observed that the Delhi High Court has considered all the above decisions and explained the legal position and held that Section 41(1) specifically deals with amounts that were allowed as deduction in the past assessments as trading liabilities, which in a later year cease or are remitted by the creditors. If and when there is evidence in a particular later year to show that the liability has ceased or has been remitted, the same can be brought to tax as provided in Section 41(1). In this manner the statute prescribes that a deduction for a trading liability allowed earlier can be brought to tax on the ground that the liability to pay the same has been remitted or ceased. It was held that unclaimed liabilities written back are taxable under Section 41(1). However, it can not be applied where the assessee did not write back the sundry creditors to its profit and loss account.
The Hon’ble High Court observed that previously it had elaborately discussed all the decisions on the points and held that in the absence of the creditors it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable.
In the instant case, the Hon’ble High Court observed that there was no dispute about the assessee to have been carrying forward the impugned liability in its books for a time span of almost three decades and the department did not raise any issue in all the intervening assessment years in question. The assessee had fulfilled the duty cast upon them to provide evidence that the liability exist at the end of the year. The onus was on the assessing officer is to prove that the liability has ceased to exist which he miserably failed to be established.
As a result, appeal was dismissed and the substantial questions of law were answered against the revenue.
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