TaxTMI 
TaxTMI 
2018 (6) TMI 1100
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.... as outstanding in the books for several years were unsupported by complete addresses and were non-traceable and the assessee on few instances did not dispute about closure of its account in rival party's books. 2. On the facts of the case and in the circumstances and in law, the CIT(A)-IV, Baroda has erred in deleting the addition of Rs. 72,49,188 made by the AO running over the eyes on Explanation 1 below section 41(1) conspicuously spells out that loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof shall include the remission or cessation of any liability and this rudimentary principle gets support from the decision in the case of CIT v/s Chipsoft Technology (P.) Ltd. reported in 26 taxmann.com 109 [Delhi]. 3. On the facts of the case and in the circumstances and in law, the CIT(A)-IV, Baroda has erred in deleting addition of Rs. 72,49,188 made by the AO ignoring the factum that section 41(1) is a deeming provision and legal disability is applicable even in the absence of unilateral act of remission or cessation of any liability by the assessee as per principles of Law of limitation." 3. B....
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....e the CIT(A). 4. The CIT(A) revisited the submissions made on behalf of the assessee in this regard and also referred to certain judicial pronouncements and found merit in the appeal of the assessee. It will be apt to reproduce the relevant operative para of the order of the CIT(A) dealing with the issue: "4.2 I have considered the appellant's submissions and the Assessing Officer's observations. In this case, the appellant had not been able to give the addresses of many sundry creditors. Besides, in some cases in which addresses were available the notice u/s. 133(6) could not be served at those addresses. In 5 cases, other parties did not confirm that they had to receive some amount from the appellant. But it is also a fact that there was no transaction with these sundry creditors during the F.Y. 2009-10. Besides, the appellant has not written off these amounts in its books of accounts. On similar facts, the Hon'ble Gujarat High Court in its decision in the case of Bogilal Ramajbhai Atara (Supra) has held after discussing the discussions in the case of Miraa Processors Pvt. Ltd 208 taxmann.com 93 (Guj), Nitin S. Garg, 208 taxmann.com 16 (Guj) and G.K. Patel....
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....iabilities cannot be regarded as income under s. 41(1) of the Act. The CIT(A) also relied upon the decision of the hon'ble Gujarat High Court in the case of Bhogilal Ramjibhai Atara 227 Taxman 313(Guj) and concluded that Section 41(1) of the Act has no application in the facts of the case. He accordingly exonerated the assessee from the clutches of Section 41(1) of the Act and reversed the action of the AO in this regard. 6. Aggrieved by the aforesaid action of the CIT(A), the Revenue is in appeal before the Tribunal. 7. Learned DR for the Revenue submitted at the outset that existence of liability shown in the balance sheet is under serious doubt. The AO has undertaken detailed verification of the factual aspects and found that the facts of the case are gross and peculiar. It is a matter of record that creditors were either not traceable or have actually denied the existence of these long outstanding liability. In such a factual matrix, the CIT(A) has misdirected himself in law and on facts in summarily adjudicating the issue in favour of the assessee. As regards the reliance placed by the CIT(A) on the decision of the hon'ble Gujarat High Court in the case of CIT vs. Bhogil....
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....as referred to in the decision of the Hon'ble Supreme Court of India in CIT vs. Sugauli Sugar Works (P.) Ltd. 236 ITR 518 (SC). The learned AR insisted that merely because the liabilities have remained outstanding in the books of accounts for last many years is an irrelevant consideration to ascertain taxability with reference to Section 41(1) of the Act. It was also contended that the expiry of period of limitation prescribed under the Limitation Act cannot extinguish the debts as it would only prevent the creditor from enforcing these debts. The learned AR submitted that in the absence of removal of the liability from the balance sheet by way of write back, no benefit can be said to be conferred on the assessee by way of cessation which can be deemed to be profit and gains of business of the assessee. The learned AR next referred to the decision of hon'ble Gujarat High Court in the case of CIT vs. Bhogilal Ramjibhai Atara (supra) and submitted that in that case also, the AO undertook exercise to verify the records of the so called creditors and found that creditors had no dealing with the assessee. It was further found by the AO therein that debts were outstanding since last seve....
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....ase. The learned AR thus submitted that the CIT(A) has decided the issue in right perspective and no interference thereof is called for. 9. We have carefully considered the rival submissions and perused the orders of the authorities below and the case laws cited at bar. The applicability of Section 41(1) of the Act on outstanding trading liabilities as reflected in the balance sheet has been called into question. Section 41(1) of the Act states that where an allowance in respect of an expenditure or trading liability etc. is made in a year and the assessee obtains any benefit, whether in cash or otherwise in a subsequent year, such benefit shall be deemed to be profits & gains of the business of that subsequent year, whether such business is in existence or not in that subsequent year. The Section has an effect of deeming such cessation or remission of liability as income in departure with the general law where such remission or cessation is not regarded as an income. Coming to the facts, as noted above, it is the case of the Revenue that the trading liabilities of Rs. 74.40 Lakhs claimed to be payable to several parties was not found to be subsisting liability as per the outcom....
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.... ceased to exist. Therefore, it logically flows that the hon'ble Gujarat High Court has clearly opined that liability may cease to exist in terms of Section 41(1) where it is outstanding for a long period without any payment despite it being reflected in the books of accounts. The hon'ble Gujarat High Court also did not question the action of Revenue towards taxability u/s.41(1) of the Act with reference to financial year in question. The distinction sought to drawn on behalf of Assessee for its non application is un-merited. The Hon'ble Gujarat High Court has approved the findings of ITAT that Section 41(1) of the Act would apply where liabilities outstanding are found to be not payable for one or more reasons. We notice that similar views have been echoed by the hon'ble Delhi High Court in the case of CIT vs. Chipsoft Technology (supra) cited on behalf of Revenue. The hon'ble Delhi High Court in that case observed that the assessee could not claim benefit of showing unpaid dues of employees outstanding for 6-7 years and it was found that there was cessation of such liability on facts which was liable to be added to the income of the assessee. The hon'ble Delhi High Court also neg....