2019 (9) TMI 400 - AT - Income Tax

Income Tax Appeal: No Cessation of Liability Without Write-Back

The case involved the deletion of an addition under section 41(1) of the Income Tax Act, 1961. The Ld. CIT(A) deleted the addition as the liability had ... Addition u/s 41 - proof of liability ceased - recommended for winding up of the company by BIFR - HELD THAT:- Assessee is a sick industrial unit and BIFR has recommended for winding up of the company. It is also noted that at present, the matter is subjudice before the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) which has stayed the order of Hon’ble Delhi High Court till further orders. Therefore, it cannot be said that liability has ceased to exist in Assessee’s case as neither the liability has been written back by the Assessee in its Profit and Loss Account nor the winding up process has been completed. Hon’ble Delhi High Court in the case of CIT vs. Vardhman Overseas Ltd. [2011 (12) TMI 77 - DELHI HIGH COURT] has held that there is no cessation of liability when Assessee has not unilaterally the written back the amounts on account of sundry creditors in its P&L account. It is also noted that the facts of the judgment of Hon’ble Supreme Court in the case of T.V. Sundaram Iyengar [1996 (9) TMI 1 - SUPREME COURT] are different as in that case, because the Assessee had written back the amounts as income in its Profit & Loss Account. Therefore, CIT-A rightly deleted the additions made by the assessing officer - Decided against revenue Issues involved:1. Deletion of addition under section 41(1) of the Income Tax Act, 1961.2. Validity of the decision by the Ld. CIT(A) in allowing the appeal of the assessee.3. Interpretation of legal precedents in relation to the remission or cessation of trading liability.Issue 1: The primary issue in this case revolved around the deletion of an addition of Rs. 2,78,25,006 made under section 41(1) of the Income Tax Act, 1961. The Assessing Officer had added this amount as the assessee company had outstanding amounts for more than five to six years, indicating a benefit obtained in the course of business. The Ld. CIT(A) deleted this addition based on the argument that the liability had not ceased to exist as it was not written back in the Profit and Loss Account, and the winding-up process was still ongoing.Issue 2: The Ld. CIT(A) allowed the appeal of the assessee based on the interpretation of legal precedents. The counsel for the assessee argued that the issue was covered by a decision of the Hon’ble Delhi High Court in the case of CIT vs. Vardhman Overseas Ltd., where it was held that there is no cessation of liability when the amounts are not unilaterally written back in the Profit and Loss Account. The Ld. CIT(A) relied on this decision and concluded that the addition made by the Assessing Officer was not justified.Issue 3: The Tribunal upheld the decision of the Ld. CIT(A) after analyzing the facts and legal precedents. It noted that the assessee was a sick industrial unit recommended for winding up, with the matter sub judice before the Appellate Authority for Industrial and Financial Reconstruction. The Tribunal emphasized that the liability had not been written back in the Profit and Loss Account, aligning with the judgment of the Hon’ble Delhi High Court. The Tribunal found no illegality or infirmity in the Ld. CIT(A)'s decision and rejected the grounds raised by the Revenue, ultimately dismissing the appeal.In conclusion, the judgment focused on the application of legal principles regarding the cessation of trading liability, emphasizing the importance of written-off amounts in the Profit and Loss Account and the ongoing legal proceedings related to the company's status as a sick industrial unit.