CIT vs. Bhogilal Ramjibhai Atara (guj); tax appeal no. 588 Of 2013 dated 04-02-2014:
For the A. Y. 2007-08, in the return of income, the assessee had shown an amount of Rs. 37,52,752/- as outstanding debt and the same was shown in the accounts as payable. The Assessing Officer summoned all the creditors and questioned them about the alleged credit to the assesee. In the assessment order he gave a finding that a number of parties were not found at the given address, many of them stated that they had no concern with the assessee and some of them conveyed that they did not even know the assessee. On the basis of such findings and considering that the debts were outstanding since several years, the Assessing Officer applied section 41(1) of the Income-tax Act, 1961 and added the entire sum as income of the assessee. The Assessing Officer held that liabilities have ceased to exist within the meaning of section 41(1) and therefore, the same should be deemed to be the income of the assessee. The Tribunal allowed the assessee’s appeal and deleted the addition.
On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:
“i) We are in agreement with the view of the Tribunal. Section 41(1) of the Act would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year.
ii) In the present case, both elements are missing. There was nothing on record to suggest that there was remission or cessation of liability that too during the previous year relevant to the A. Y. 2007-08 which was the year under consideration.
iii) It is undoubtedly a curious case. Even the liability, itself, seems under doubt. The Assessing Officer undertook the exercise to verify the records of the so-called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealings with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income u/s. 41(1) of the Act.
vi) This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of section 41(1) of the Act there is no cure for it. Be that as it may, insofar as the orders of the Revenue authorities are concerned, the Tribunal not having made any error, this Tax Appeal is dismissed.”
