By TIOL News Service

BANGALORE, MAY 06, 2016: THE issue is - Whether it can be concluded that there is cessation of assessee's liability, merely on the ground that the creditor is unable to be traced. NO is the answer.

Facts of the case

The assessee had claimed outstanding liability towards ‘X’. The AO had made addition of specified amount on account of cessation of liability u/s 41(1) on grounds that assessee had failed to prove the existence of the creditor and that the credit had insisted for the payment at pay point of time. The AO had that the party could not be traced and therefore debt could not be verified and there is cessation of liability. On appeal Tribunal had deleted the addition of Rs.81,40,232/-.

Having heard the parties, the High Court held that,

++ it was held by the Tribunal that on the applicability of section 68, it was viewed that those provisions would not apply as the balances shown in the creditors account does not arise out of any transaction during the previous year relevant to AY 2009-10. Since the credit entries in question do not relate to previous year relevant to AY 2009-10, the same cannot be brought to tax u/s. 68. The proper course in such cases for the Revenue would be to find out the year in which the credits in question were credited in the books of account and thereafter make an enquiry in that year and make an addition in that year, if other conditions for applicability of section 68 are satisfied. In order to invoke clause (a) of Sec.41(1), it must be first established that the assessee had obtained some benefit in respect of the trading liability which was earlier allowed as a deduction. There is no dispute in the present case that the amounts due to the sundry creditors had been allowed in the earlier assessment years as purchase price in computing the business income of the assessee. In the present case, there was nothing on record to show that there was either remission or cessation of liability of the assessee. In fact, there was no reference either in the order of the AO or CIT(A) to the expression “remission or cessation of liability". In such circumstances, it was viewed that the provisions of section 41(1) could not be invoked by the Revenue. The Tribunal had held that a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the operation of law, i.e., on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor, or a contract between the parties, or by discharge of the debt the debtor making payment thereof to his creditor. Transfer of an entry is neither an agreement between the parties nor payment of the liability. The mere fact of the expiry of the period of limitation to enforce it, does not by itself constitute cessation of the liability. Tribunal had refereed  the judgment of the Supreme Court in CIT vs. Sugauli Sugar Works (P) Ltd wherein it was held that unilateral action cannot bring about a cessation or remission of the liability. Tribunal had held that there is nothing on record to show any cessation or remission of liability by the creditor or even an unilateral act by the Assessee in this regard. the impugned addition cannot be sustained and the same was rightly directed to be deleted by the CIT(A);

++ the Tribunal had considered that the issue is already covered by the decision of Delhi High Court that Section 41(1) cannot be invoked and based on the decision of Delhi High Court, the Tribunal held that unless there is no material on record either for cessation or remission of liability by the creditor, Section 41 (1) cannot be invoked and the addition made cannot be sustained. Consequently, the Tribunal has directed the deletion made by the AO. It was held by Tribunal that, there are two requirements for invoking the provision of Section 41. The Sina qua non is, the remission or cessation of the trading liability and the additional requirement is, some benefit in respect of such trade liability is taken by the Assessee. If the aforesaid conditions are satisfied, then only Section 41(1) could be invoked by the AO. It was held by High court that merely because a party could not be traced and therefore debt could not be verified then also, by no stretch of imagination can it be held that it would satisfy the requirement of cessation of liability. Cessation of the liability has to be cessation in law, of the debt to be paid by the assessee to the creditor. The debt is recoverable even if the creditor has expired, by the legal heirs of the deceased creditor. In the present case, it can hardly be said that the liability had ceased. If the liability had not ceased or the benefit was not taken by the assessee in respect of such trade liability, in our view, the conditions precedent were not satisfied for invoking Section 41(1). The Tribunal has rightly relied upon the decision of Delhi High Court in case of Vardhman Overseas Ltd. The discussion of the decision of Delhi High Court was relevant, for consideration of the facts of the case in order to find out as to under what circumstances it could be said that there is cessation of liability. Further, the decision of Delhi High Court is after considering the view taken by the Apex Court in case of CIT vs. Sugauli Sugar Works P Ltd. It was found that when the issue is already covered by the decision of Delhi High Court read with the reasons recorded by us hereinabove, it cannot be said that any substantial question of law would arise for consideration as sought to be canvassed.

(See 2016-TIOL-890-HC-KAR-IT)