2024 (7) TMI 441 - HC - Income Tax

Section 41(1) addition deleted as cessation of liability requires actual reversal in books, not mere time-barred recovery

The Principal Commissioner of Income Tax - 3 Ahmedabad Versus M/s Vishal Exports Overseas Ltd.

Gujarat HC upheld ITAT's deletion of addition under Section 41(1) for cessation of liability. Court held that Section 41(1) cannot be invoked merely ... Addition u/s 41(1) - addition for cessation of the liability of the assessee - right to recovery of the said amount has become time barred - ITAT deleted addition - HELD THAT:- The provisions of Section 41 (1) of the Act provides for the liability and there can be cessation of liability only when the assessee has returned of such liability in its books of account and the provisions of Section 41 (1) of the Act cannot be invoked under the circumstances on the ground that the payment of liability has become barred by limitation and there is no legal right or remedy to enforce such liability against the assessee. Tribunal has, therefore, rightly deleted additions made by the Assessing Officer invoking the provisions of Section 41 (1) of the Act inasmuch as the assessee has never claimed any allowance or deduction in respect of loan, expenditure or trading liability which the assessee has subsequently recovered and any benefit of remission or cessation thereof is availed by the assessee. Considering the decision of Bhogilal Ramjibhai Atara [2014 (2) TMI 794 - GUJARAT HIGH COURT] and Dattatray Poultry Breeding Farm (P) Ltd [2019 (4) TMI 1171 - GUJARAT HIGH COURT] Tribunal has held that the provisions of Section 41 (1) of the Act cannot be invoked where the existence of liability was doubted as such the addition could have been made in the year in which it was claimed or it could have been treated as unexplained cash credit in hands of the assessee under Section 68 of the Act as there is nothing on record to suggest that there is remission or cessation for the year under consideration. Tribunal has not committed any error in deleting the addition by arriving at a finding of fact that the said amount pertaining to five parties, there was nothing on record to suggest that there was remission or cessation of such liability of the respondent – assessee so as to invoke the provisions under Section 41 (1) - Assessee appeal allowed. Issues Involved:1. Validity of the addition of Rs. 2,05,06,635/- under Section 41(1) of the Income Tax Act, 1961.2. Examination of the cessation or remission of liability and its tax implications.Detailed Analysis:Issue 1: Validity of the Addition under Section 41(1) of the Income Tax Act, 1961The appellant - Revenue filed a Tax Appeal under Section 260A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal (ITAT) which deleted the addition of Rs. 2,05,06,635/- made under Section 41(1) of the Act. The Assessing Officer (AO) had observed that certain amounts payable to six parties were outstanding for the last three years and invoked Section 41(1) on the grounds that these liabilities had become time-barred under the Limitation Act. The AO made an addition of Rs. 75,38,74,413/- in respect of these six parties, asserting that the right to recovery had become time-barred and thus, the liabilities had ceased to exist.The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the AO's addition, stating that the appellant failed to provide necessary evidence to prove the existence of these liabilities. The CIT(A) noted that the total liability of Rs. 75,38,74,413/- did not reflect as a liability and was either a discharged liability or a receipt claimed towards export but not reconciled.Issue 2: Examination of the Cessation or Remission of LiabilityThe Tribunal, upon appeal by the assessee, deleted the addition pertaining to five parties, while remanding the case of Presidential Trading – FZC back to the CIT(A) for fresh examination. The Tribunal held that the provisions of Section 41(1) could not be invoked merely because the claim was barred by limitation. The Tribunal emphasized that there was no evidence of remission or cessation of liability during the assessment year in question.The Tribunal's detailed findings for each party were as follows:- Purchase Difference (Rs. 1,69,978/-): The liability was outstanding towards marine exports and the original party was not doubted by the AO.- Sonoma Exports Pvt Ltd. Tirupur (Rs. 8,74,500/-): No conclusive evidence was presented to show that the liability had ceased to exist.- Allure Jewel (Rs. 1,19,94,266/-): The assessee provided a complete ledger account supporting the existence of the liability.- FIRC (Rs. 74,60,839/-): The Tribunal noted that no expenditure was incurred by the assessee as it pertained to export sales.- Pest Mortem (India) Pvt. Ltd (Rs. 7,052/-): The liability was a carry-forward balance from earlier years.The Tribunal relied on precedents such as Bhogilal Ramjibhai Atara and Dattatray Poultry Breeding Farm (P.) Ltd., where it was held that without evidence of remission or cessation of liability during the assessment year, Section 41(1) could not be invoked. The Tribunal concluded that the AO and CIT(A) erred in their approach, as the liabilities were not conclusively shown to have ceased.Conclusion:The High Court upheld the Tribunal's decision, stating that the Tribunal did not commit any error in deleting the addition of Rs. 2,05,06,635/-. The Court found that there was no evidence of remission or cessation of liability for the year under consideration, and thus, the provisions of Section 41(1) could not be invoked. The appeal was dismissed as no substantial question of law arose from the Tribunal's order.