S. 41(1) — Limitation of time is not a determining factor in matters relating to remission or cessation of liabilities.

DSA Engineers (Bombay) v. ITO

ITA No. 5354 (Mum.) of 2007

A.Y. : 2003-04. Dated : 12-3-2009

S. 41(1) — Limitation of time is not a determining factor
in matters relating to remission or cessation of liabilities.

For the relevant assessment year, in respect of certain
creditors appearing in the Balance Sheet of the assessee, the AO found that
there was neither a pending litigation in existence nor any correspondence
from the parties demanding for clearing the liabilities and held that the
assessee had not proved that it was yet to make the payment of the said
outstanding balances to the creditors, that it had the intention to make the
said payment, and that the liability had not ceased. He, accordingly, invoked
the provisions of S. 41(1) and deemed the liabilities of the creditors as the
profits and gains of business or profession and treated them as the income of
the year. The CIT(A) upheld the order of the AO.

The Tribunal set aside the orders of the lower authorities.
The Tribunal noted as under :

2. From the rival positions of both parties as well as
the provisions of S. 41(1) and the legal propositions of various judicial
fora, the following issues have emerged :

•  the
  issue of limitation of period of three years

•  the
  issue of discharge of onus when the assessee had not unilaterally written
  them off

•  the
  issue of unilateral write-off for the assessments of the post-amendment
  period, i.e., after 1-4-1997.

3. Regarding the issue of limitation of three years, it
was noticed that there is no such limitation provided in S. 41(1) or in its
Explanation 1. In the case of Dy. CIT v. Himalaya Refrigeration & Air
Conditioning Co. (P.) Ltd., (2003) 91 TTJ (Delhi) 296, the Tribunal held
that in the absence of any evidence of cessation of liabilities, mere fact
that the liabilities were outstanding for more than three years and were
time barred, was not sufficient ground for addition u/s.41(1). The
limitation of time is not a determining factor in the matters relating to
remission or cessation of liabilities.

4. Regarding the issue of discharging of onus, it was
held that when the assessee continues to reflect or record the liabilities
as still payable to the creditors and decides not to write them off
unilaterally, the Assessing Officer has higher levels of responsibility and,
hence, he has to establish with evidence that the said book entries are
wrong or not bona fide and, thus, the Assessing Officer is under the
obligation to discharge the onus in this regard. The onus is on the revenue
to prove that the liabilities have ceased finally and there is no
possibility of their revival.

5. Regarding the issue of unilateral write off for the
assessments of the post amendment period, i.e. 1-4-1997, it was
noticed that Explanation 1 was brought into statute by the Finance (No. 2)
Act, 1996 with effect from 1-4-1997. Mere unilateral transfer entry in the
accounts does not confer any benefit to the assessee and, therefore, the
revenue cannot invoke S. 41(1). The assessee’s case, being one where the
alleged liabilities were not unilaterally written off, the requirements of
the Explanation were not met and, therefore, it could not be considered as
the case of obtaining of the benefit during the year under consideration.