Provisions of Section 41(1) not apply to liabilities in respect of capital assets – ITAT

Provisions of Section 41(1) not applicable to liabilities written back which were incurred in respect of capital assets and were capitalized

In a recent judgment, ITAT Guwahati has held that when expenses liabilities written off were incurred in respect of capital assets and were capitalized, the provisions of Section 41(1) of the Act are not applicable.

ABCAUS Case Law Citation:
4721 (2025) (08) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming of the addition made by the Assessing Officer (AO) under section 41(1) of the Income Tax Act, 1961 (the Act).

The return of income of the assessee was processed u/s 143(1) of the Act. Thereafter, the case of the assessee was selected for scrutiny and statutory notices along with questionnaire were duly served upon the assessee.

The AO during the course of assessment proceedings observed that assessee had written back current liabilities to the tune of ₹1.00 crores. Similarly, it was also seen that Industrial Development Corporation had waived interest on which the AO sought clarification.

According to the AO, prima facie the liability written back was chargeable to income tax as deemed profit and accordingly, the same was added to the income of the assessee when assessee was failed to respond to the two opportunities granted and added to the income of the assessee.  

Before the CIT(A) the assessee submitted that provisions of Section 41(1) of the Act related to remission of liability were not applicable in the instant case as the same is applicable along only when the liabilities/ expenses which were written back  were rooted to the profit and loss account and are of revenue nature alone.

But the submission of the assessee did not find favour with the ld. CIT (A) and he dismissed the appeal by holding that the assessee had not furnished any documentary evidences in this regard.

Before the Tribunal the assessee submitted that during the relevant financial year it undertook a comprehensive review of old liabilities to ensure that our financial statements reflect a true and fair view of our obligations. As a part of this exercise, various payables which had been outstanding for a prolonged period and were no longer payable were written off.

The assessee also filed evidences qua the each liabilities/ expenses provided in the books of accounts that almost all the liabilities / expenses were incurred on the capital account which were incurred in connection with the building, plant and machinery or provisions of rent which were capitalized to capital work-in-progress.

The Tribunal examined the detailed written submission along with evidences with regard to each liability and after considering the nature of the above liabilities and expenses and found that these were not charged to the Profit and Loss account. All these liabilities which were written back were incurred in respect of capital assets and were capitalized.

The Tribunal held that provisions of Section 41(1) of the Act are not applicable at all while writing back the liabilities.

Accordingly, the impugned order was set aside and AO was directed to delete the addition.   

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