No remission/cessation of liability if trading liability is declared in books of account

No remission or cessation of liability u/s 41(1) if trading liability is continued to be declared in books of account

ABCAUS Case Law Citation:
ABCAUS 3758 (2023) (05) ITAT

Important Case Laws relied upon:
Vardhman Overseas Ltd. 343 ITR 408 (Del)
Dattatray Poultry Breeding Farm P. Ltd. vs. ACIT (2019) 104 taxmann.com 366

In the instant case, the assessee had challenged the order passed by the CIT(A) confirming the addition towards cessation / remission of trading liability u/s 41(1) of the Income Tax Act, 1961 (the Act) made by the Assessing Officer (AO).

The appellant assessee e-filed his return of income declaring total income at ‘Nil’ and claimed loss for the Assessment Year in question.    

The Assessing Officer noticed that four sundry creditors were outstanding for last three years.  A notice was issued to them under Section 133(6) to confirm whether liability still existed or not but could not be served.

The assessee responding to the show cause notice issued by the AO   submitted that purchases were made from these parties against bills and VATs were charged and also partly paid against these bills. All these bills were from registered VAT dealers and proper entries have been made in the books of account in this regard. Copies of bills of all parties were also presented before the AO for verification.

The assessee further contended that due to ongoing financial problem and lack of fund, the assessee could not make full payment resulting in outstanding balances in the books of account.  

The assessee thus contended that the liability existed in the books of account and therefore provisions of Section 41(1) cannot be invoked.  The Assessing Officer however based on non service of notice under Section 133(6) concluded that the liability has ceased to exist and invoking the provision of Section 41(1) made additions.

The Tribunal observed that Section 41(1) of the Act states that when   allowances in respect of an expenditure or trading liability etc. is made in a year and the assessee obtains any benefit, whether in cash or otherwise in a subsequent year, such benefit shall be deemed to be profits and gains of the business in that subsequent year, whether such business is in existence or not in the subsequent year. The Section has the effect of deeming such cessation or remission of liability.

The Tribunal found that the issue was squarely covered in favour of the assessee by the judgment of the Hon’ble High Courts. The Hon’ble High Court had inter alia observed that for invocation of Section 41(1), it is necessary that the assessee should have received ‘some benefit’ with respect to all such trading liability. However, the benefit in respect of trading liability should be ‘by way of remission or cessation of the liability’. 

The Tribunal noted that the assessee in the instant case, had continued to recognize the liability and one cannot say that the liability was not unenforceable against the assessee without its discharge or reversal. A mere fact of expiry of period of limitation to enforce it does not, by itself, constitute cessation of liability.  

Similarly in another case the Hon’ble High Court observed that where the existence of liability was doubted, same could have been disallowed in the year in which it was claimed or could have been treated as unexplained credit in that relevant year.   

The Hon’ble High Court observed that while the assessee had continued to declare the trading liability in its books of account, no benefit can be said to have been obtained in respect of such trading   liability by way of remission or cessation thereof and thus the requirement of Section 41(1) are not satisfied. 

Following the judicial precedents,  the Tribunal set aside the order the appeal of the assessee was allowed.

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