INCOME TAX ACT, 1961

Section 41(1)

Business income - Profit chargeable to tax under section 41(1) - Remission/cessation of liability - Outstanding expenses

As per AO, assessee could not satisfy with regard to genuineness of trading liabilities and thus additions under section 41(1) was made. CIT(A) upheld order of AO. Assessee contended that assessee had claimed outstanding expenses and in this respect, assessee had shown outstanding expenses payable in its balance sheet. It was further submitted that the AO had wrongly treated the same as income under section 41 in absence of party details and confirmations. However, the same were treated by the AO as income under section 41 by holding that since the assessee had failed to prove the genuineness of liability.Held: Before treating the amount outstanding as deemed income of the assessee under section 41(1) on account of remission/cessation of liability, the AO is duty bound to examine whether the condition laid down under section 41(1) were fulfilled or not. As per the reading of section 41(1) along with Explanation (1) to section 41(1), the liability ceases to exist in the books of account of the assessee in a particular previous year, if the person showing such liability had obtained benefit either in cash or in any other manner in respect of such liability. It further provides that such remission or cessation of liability was also acceptable by unilateral act of writing off such liability in its account by the person showing such liability. Therefore, before applying the provisions of section 41(1), it is necessary to establish on record that the assessee had obtained a benefit either in cash or in any form in respect of such liability in the relevant previous year. Thus, when in AO's own admission liability continued from past so many years, then what prompted the AO to conclude that the assessee has obtained benefit in respect of such liability in the impugned assessment year must be clearly brought on record so merely on the basis of surmises and assumptions it cannot be said that there was remission/cessation of liability in the impugned assessment year. AO was therefore, directed to delete the disallowance made under section 41.

Relied:Asstt. CIT v. Trans Freight Containers [ITA No. 5979/Mum/12], CIT v. Jain Exports (P) Ltd. [ITA No. 235/2013, dt. 24-5-2013]: 2014 TaxPub(DT) 3631 (Del-HC) and Pr. CIT v. Matruprasad C Pandey (2015) 377 ITR 363 (Guj) : 2015 TaxPub(DT) 3634 (Guj-HC).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2007-08

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