2016 (5) TMI 1150 - HC - Income Tax

Court affirms deletion of addition under Income Tax Act; creditor traceability not enough for liability cessation

Commissioner of Income-tax, Bangalore Versus Alvares & Thomas

The High Court affirmed the Tribunal's decision to delete the addition under Section 41(1) of the Income Tax Act, as there was no evidence of 'remission' ... Addition on account of cessation of liability under Section 41(1) - Held that:- Examining of the facts of the present case reveals that, it is not the case of the Department that, any benefit in respect of such trading liability was taken by the assessee but, the Revenue contends that since the burden was not discharged of existence of the liability, it be treated as cessation of the liability and therefore, Section 41(1) could be invoked. Further, stand of the Revenue is that, when in respect of debt in question, confirmation was called for, a letter was produced of the creditor with its address but, when the same was verified, the report was that, party could not be traced and therefore, it was not verifiable. In our view, even if we accept the contention of the Revenue that the party could not be traced and therefore debt could not be verified then also, by no stretch of imagination can it be held that it would satisfy the requirement of cessation of liability. In legal parlance, merely because the creditor could not be traced on the date when the verification was made, same is not a ground to conclude that there was cessation of the liability. Cessation of the liability has to be cessation in law, of the debt to be paid by the assessee to the creditor. The debt is recoverable even if the creditor has expired, by the legal heirs of the deceased creditor. Under the circumstances, in the present case, it can hardly be said that the liability had ceased. If the liability had not ceased or the benefit was not taken by the assessee in respect of such trade liability, in our view, the conditions precedent were not satisfied for invoking Section 41(1) of the Act in the instant case. - Decided in favour of assessee. Issues Involved:1. Applicability of Section 41(1) of the Income Tax Act.2. Burden of proof regarding the existence of liability.3. Interpretation of 'remission' and 'cessation' of liability.Issue-wise Detailed Analysis:1. Applicability of Section 41(1) of the Income Tax Act:The primary issue is whether the Tribunal was correct in deleting the addition of Rs. 81,40,232 on account of cessation of liability under Section 41(1). The Tribunal's discussion, referencing paragraphs 11 to 14, highlighted that neither Section 41(1) nor Section 68 could be applied. The Tribunal cited the Delhi High Court's decision in Shri Vardhaman Overseas Ltd., emphasizing that Section 68 applies only to transactions within the relevant assessment year, which was not the case here. For Section 41(1), the Tribunal noted that there was no evidence of 'remission' or 'cessation' of liability, as required by the statute. The Tribunal also referenced the Supreme Court's decision in CIT vs. Sugauli Sugar Works (P) Ltd., which clarified that a unilateral act by the debtor does not constitute cessation or remission of liability.2. Burden of Proof Regarding the Existence of Liability:The Revenue argued that the assessee failed to prove the existence of the creditor, which should allow for the invocation of Section 41(1). However, the Tribunal and the High Court found that the mere inability to trace the creditor does not equate to the cessation of liability. The High Court emphasized that cessation must be a legal cessation, not merely the inability to verify the creditor's current existence. The debt remains recoverable even if the creditor is deceased, as the legal heirs can claim it.3. Interpretation of 'Remission' and 'Cessation' of Liability:The High Court reiterated that 'remission' and 'cessation' are legal terms and must be interpreted as such. The Tribunal's reliance on the Delhi High Court's decision and the Supreme Court's ruling in Sugauli Sugar Works was deemed appropriate. The Supreme Court had clarified that the cessation of liability occurs either by operation of law or by the debtor unequivocally declaring the intention not to honor the liability, neither of which was demonstrated in this case. The High Court dismissed the Revenue's reliance on the Rajasthan and Punjab & Haryana High Court decisions, distinguishing them based on the facts and context of the present case.Conclusion:The High Court concluded that the Tribunal correctly applied the law, finding no substantial question of law warranting further consideration. Consequently, the appeal was dismissed, affirming the Tribunal's decision to delete the addition made by the assessing officer.