2019 (3) TMI 901 - HC - Income Tax

Court Upholds Income Tax Assessment Decision under Section 41(1)

M/s. West Asia Exports & Imports (P) Ltd. Versus Assistant Commissioner of Income Tax Company Circle III (3), Chennai

M/s. West Asia Exports & Imports (P) Ltd. Versus Assistant Commissioner of Income Tax Company Circle III (3), Chennai - [2019] 412 ITR 208 (Mad) Issues Involved:1. Whether the Income Tax Appellate Tribunal was correct in confirming the assessment of Rs. 58,60,105/- as income under Section 41(1) of the Income Tax Act.2. Whether the Tribunal was right in holding that the absence of confirmation of balances and evidence of claim for repayment during the previous year indicated cessation of liability, warranting the invocation of Section 41(1).Issue-wise Detailed Analysis:1. Confirmation of Assessment under Section 41(1):The Assessee had ceased its timber business around ten years prior to the Assessment Year 2003-04 and switched to recruitment services for Gulf countries. The Assessing Authority added back Rs. 58,60,105/- as income due to cessation of liability of Sundry Creditors from the timber business. The Assessee failed to provide written confirmations from these creditors, leading the Assessing Authority to conclude that the liabilities had ceased to exist. Both the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal upheld this addition. The Tribunal noted that the Assessee's argument that Section 41(1) could not be invoked without writing off the liabilities in the books was erroneous. The Tribunal emphasized that remission and cessation of liability could be inferred from circumstances, even without accounting entries, and upheld the invocation of Section 41(1).2. Absence of Confirmation and Evidence of Repayment:The Commissioner of Income Tax (Appeals) observed that the liabilities had been outstanding for over seven years without any claims from creditors, indicating cessation of liability. The Assessee's inability to provide confirmations further supported this conclusion. The Tribunal agreed, noting that the Assessee's change of business and the lack of creditor claims over ten years justified the inference of cessation. The Tribunal distinguished this case from others cited by the Assessee, where liabilities were acknowledged in the balance sheet or where creditors' existence was proven. The Tribunal concluded that the facts indicated cessation of liability, warranting the application of Section 41(1).Legal Precedents and Counsel Arguments:The Assessee's counsel cited various High Court decisions arguing that liabilities must be written off in the books or irrevocably ceased to invoke Section 41(1). The Revenue's counsel countered with cases like T.V.Sundaram Iyengar & Sons Ltd., where unclaimed deposits were treated as income due to cessation of liability over time. The court found the Revenue's arguments persuasive, emphasizing that the cessation of liability could be inferred from the Assessee's failure to provide confirmations and the lack of creditor claims.Conclusion:The court concluded that the Assessee's liabilities had ceased both de facto and de jure, justifying the invocation of Section 41(1). The appeal was dismissed, and the questions of law were answered in favor of the Revenue, affirming the assessment of Rs. 58,60,105/- as income. The court emphasized that accounting entries alone do not determine the existence of liabilities and that the facts and circumstances of each case must be considered to apply Section 41(1).