CIT v. Jain Exports (P.) Ltd.

INCOME TAX ACT, 1961

--Business income--Profits chargeable to tax under section 41(1)Cessation or remission of liability --Assessee-company was engaged in the business of trading in agricultural commodities, however, it did not conduct any business in the relevant assessment year. Its return of income showing loss was initially accepted under section 143(1) but subsequently, the return was selected for scrutiny. AO noted that balance sheet of assessee disclosed certain sum as sundry creditors, which were lying unclaimed since several years. On requiring, assessee filed confirmation from one of the creditors but could not provide confirmations from any of the other creditors. Notices issued under section 133(6) to these creditors were returned unserved. AO accepted the amount outstanding to the credit of one of the creditors but made addition under section 41(1) in respect of other sundry creditors with a view that there was cessation of these liabilities as there was no possibility of the creditors claiming the same in the near future. Assessee submitted that since it continued to acknowledge the credit balances in the subsequent period also, there could be no cessation of its liability to pay the creditors. Held: In order to attract the provisions of section 41(1), there should have been an irrecovable cessation of liability without any possibility of the same being revived. Since assessee was acknowledging the debt payable to one of the creditors and there was no material to indicate that the parties had contracted to extinguish the liability, it could not be concluded that the debt owed by assessee to its one of the creditors stood extinguished.