Creditors not barred by limitation if liability acknowledged in accounts, they can rely on such acknowledgment-High Court

Creditors not barred by limitation if liability acknowledged in accounts, creditors can rely on the said acknowledgment-High Court  

ABCAUS Case Law Citation:
ABCAUS 2185 (2018) (01) HC

Brief Facts of the Case:
The assessee, during the course of the assessment proceedings had furnished details of the creditors. The Assessing Officer (AO) noted that there were several outstanding balances of old creditors i.e., where there was no transaction during the last three years or more. Treating the non transactions as remission or cessation of liability within the meaning of Section 41(1) of the Income Tax Act, 1961 (the Act) the AO made addition in respect of such outstanding balances of creditors.

The AO was of the view that there has to be some time limit for the credit recorded in the books to be carried forward. 

The Commissioner of Income Tax (Appeal) [CIT-A] tallied the list of old creditors with payments made by the assessee to these creditors in the subsequent years and partly confirmed the additions.

Income Tax Appellate Tribunal (ITAT) held that the assessee had carried forward the balances from earlier years. Some credit balances were written off in the year in question and some in the succeeding years. Further, when a liability was acknowledged by the debtor, it cannot be said that the claim of the creditor was barred by limitation. In case of 16 creditors, it was noted that the credit balance was returned or adjusted for the next financial year. In view of the above, the ITAT held that the Provisions of Section 41(1) of the Act were not attracted to the assessee.

Aggrieved, the Revenue approached the Hon’ble High Court in the present Income Tax Appeal.

The question of Law framed/urged:
The relevant question framed was whether the ITAT was correct in law and in facts and circumstances of the case in deleting the addition made by the A.O. by invoking the provisions of Section 41(1) of the Act?”

Observations made by the High Court:
It was observed that the respondent assessee was a company and accounts were audited as per the mandate of the Companies Act. In the accounts, the respondent assessee had accepted and acknowledged its liability.

The Hon’ble High Court opined that the creditors can rely on the said acknowledgment. Even otherwise many of the creditors were paid, adjusted or eased in the subsequent years as accepted by the CIT(A) and the Tribunal. AO had not given any special facts or reasons to hold and observe that the liabilities had ceased and amounts should be added under Section 41(1) of the Act.

The Hon’ble High Court upheld the order of the Tribunal and opined that no error could be found in the findings and reasons given by the Tribunal.

Decision/ Conclusion/Held:
The relevant question raised was accordingly decided against the revenue and in favour of the assessee.

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