2025 (1) TMI 1768 - AT - Income Tax

Remission or cessation of liability must exist in-year to trigger tax addition; verify write-offs and return filing before denying relief.

Section 41(1) addition cannot be applied for the year unless there is remission or cessation of liability in that year; continuation of the creditor ... Addition u/s 41(1) - amount payable by the assessee to Efkon AG - consequential disallowance of foreign exchange loss on account of restatement of the foreign exchange liability - HELD THAT:- Courts have held time and again that the rigours of section 41(1) have to be necessarily satisfied in order to invoke the said provisions. The fact that the assessee has placed certain funds with another relates entity and has not repaid the aforesaid creditor doesn’t by any stretch of imagination leads to a situation where it can be held that the corresponding liability ceases to exist and authorizes the AO to go ahead and hold that to the extent of amount advanced to related entity, the corresponding liability is written off by the assessee. The act of write-off of any liability has to be tested based on positive act by way of actual entries in the books of accounts and so long as liability continues to exist in books of accounts, there cannot be any presumption of write off as so held by the AO in the instant case. The restatement of foreign exchange liability in the books of accounts and corresponding recording of foreign exchange loss in the books of accounts is an accepted accounting methodology duly recognized under mercantile system of accounting following the accounting standards so prescribed. The reasoning adopted by the AO which has been summarily upheld by the Ld.CIT(A) therefore cannot be accepted. It is noted that the assessee has explained the reasons for non-payment of dues on account of dispute with ICICI. It has been submitted by the assessee that since the services availed from M/s. Efkon AG were related to the ICICI contract, it kept payment to M/s. Efkon AG in abeyance pending resolution of the dispute with ICICI Bank. It was further submitted that subsequent to said dispute attaining finality with the decision of the Hon’ble Supreme Court, the assessee has taken steps and has actually written off an amount of Rs 27.86 Crores in subsequent financial years in its books of accounts. Therefore, the question of application of section 41(1) arises in subsequent assessment years and not in the year under consideration. The assessee has further submitted that the amount so written off in its books of accounts have been suo-moto offered to tax in its return of income for assessment year 2022-23 and 2024-25. The same again supports the case of the assessee as the amount already offered to tax cannot be brought to tax in the impugned assessment year 2014-15 and the decisions of the Co-ordinate Bench also supports the case of the assessee. Given that these submissions have been made by the assessee before the ld CIT(A) in terms of final settlement of dispute with ICICI, actual write off in books of accounts and amount offered to tax in the subsequent assessment years and there is no specific finding recorded by the CIT(A), the same being factual in nature need appropriate verification. Levy of interest u/s. 234A - as submitted that the AO has wrongly levied the interest without appreciating that the return of income has been filed within due date - AO is directed to verify the date of filing of the return of income and where the same has been filed with due date so prescribed for the impugned assessment year, is hereby directed to allow necessary relief to the assessee. Issues: (i) Whether addition under Section 41(1) of the Income-tax Act, 1961 in respect of outstanding sundry creditors to Efkon AG and consequent disallowance of proportionate foreign exchange loss is sustainable for AY 2014-15; (ii) Whether interest under Section 234A of the Income-tax Act, 1961 was incorrectly levied where the return of income was filed within the due date.Issue (i): Whether Section 41(1) can be invoked in the concerned year for amounts payable to Efkon AG and whether the proportionate foreign exchange loss claimed under AS-11 can be disallowed as consequential to such invocation.Analysis: The assessee continued to record the liability to Efkon AG in its books and obtained confirmation of the outstanding debt. Foreign exchange restatement and corresponding loss were recorded in accordance with accepted accounting practices. Subsequent to final adjudication of the commercial dispute, the assessee effected write-offs in later financial years and offered those amounts to tax in subsequent assessment years. The invocation of Section 41(1) requires proof of remission or cessation of liability in the year under consideration; mere placement of funds with a related entity and continuation of the liability in books do not establish write-off in the impugned year. The factual claims concerning subsequent write-offs and offers to tax in later years require verification by the assessing authority before a conclusive tax consequence for AY 2014-15 can be determined.Conclusion: The matter is set aside for limited verification. If verification confirms that the amounts were written off and offered to tax in subsequent assessment years as claimed, the assessing officer is directed to allow appropriate relief for AY 2014-15. This disposes Grounds No. 2 to 6 in favour of the assessee subject to verification.Issue (ii): Whether interest under Section 234A was leviable when the return of income was filed within the due date.Analysis: The correctness of interest under Section 234A depends on the date of filing of the return. The filing date is a verifiable fact in the assessment record and should be checked against the statutory due date for the relevant assessment year.Conclusion: The assessing officer is directed to verify the return filing date and, if the return was filed within the due date, to grant relief to the assessee. Ground No. 7 is disposed of in favour of the assessee subject to verification.Final Conclusion: The appeal is partly allowed by setting aside specified issues for limited factual verification and directing the assessing officer to grant relief if the verification supports the assessee's claims; the decision reduces the assessing authority's contention under Section 41(1) and related disallowances and also requires verification on interest under Section 234A.Ratio Decidendi: Section 41(1) can be invoked only where there is a remission or cessation of liability in the relevant year; continuation of liability in the books and accounting for foreign exchange restatement under accepted accounting principles do not, by themselves, establish remission or cessation for the purpose of Section 41(1).