Section 41(1) – Amounts shown in Balance Sheet cannot be deemed to be cases of “cessation of liability” only because they are outstanding for several years. The AO has to establish with evidence that there has been a cessation of liability with regard to the outstanding creditors.

FACTS

In the course of assessment proceedings the Assessing Officer (AO) observed that the assessee’s balance sheet reflected creditors of Rs. 33,44,827.  Upon enquiry, the assessee submitted that these are old creditors pertaining to the period when he carried out business in Indore and that these have been carried forward for past 7 to 8 years and are unpaid due to disputes with the creditors.

The AO considered the entire creditors balance outstanding aggregating to Rs. 33,44,827 as income of the assessee by invoking section 41(1) as cessation of liability for the reason that these are old amounts and pertain to assessee’s old place of business and still remain unpaid.

Aggrieved, the assessee preferred an appeal to the CIT(A) who after considering the material on record and also referring to the judicial pronouncements of the Apex Court in the case of CIT vs. Sugauli Sugar Works (P.) Ltd. 236 ITR 518 (SC) and UOI vs. J. K. Synthetics Ltd. (199 ITR 14)(SC) held that in the case on hand there was no write back of liability payable to creditors which is disclosed in the assessee’s balance sheet.  He also observed that no independent inquiries were carried out by the AO to establish that these creditors have written off the debts appearing in their respective account.  He held that the AO was not justified in unilaterally deciding that the amounts reflected as liabilities in the balance sheet of the assessee have ceased to exist within the meaning of section 41(1) of the Act.  He allowed the appeal.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the AO has failed to cause enquiries to be made with or notices issued to creditors to ascertain from them whether they have remitted the dues from the assessees in their books of account.  The fact that the creditors outstanding balances were not written back in the assessee’s books of account, but rather stood reflected in the asseessee’s balance sheet clearly establishes that there is no cessation of liability.  On the contrary, it is an acknowledgement by the assessee of existing debts it owes to its creditors.  It further observed that no material has been brought on record by the AO to show that there was remission or cessation of liability.  When the AO was of the view that there was cessation of liability in the case on hand, it was incumbent upon him to cause necessary enquiries to be made in order to bring on record material evidence to establish the requirement for invoking the provisions of section 41(1) of the Act.  The very fact that the assessee reflects these amounts as creditors in his Balance Sheet is an acknowledgement of his liability to these creditors and this also extends the period of limitation u/s.18 of the Limitation Act.  Once the assessee acknowledges that the debts to creditors are outstanding in his Balance Sheet, that he is liable to pay his creditors, Revenue cannot suo moto conclude that the creditors have remitted their liability or that the liability has otherwise ceased to exist, without bringing on record any material evidence to the contrary.  Since the AO had not brought on record any material evidence to establish that there was cessation of liability in respect of the outstanding creditors reflected in the Balance Sheet, the Tribunal concurred with the finding of the CIT(A) that the addition of Rs. 33,44,827 u/s. 41(1) of the Act is unsustainable.

The Tribunal dismissed the appeal filed by the Revenue.