No additions for cessation of liability unless deduction thereof was allowed in earlier years

Where no deduction or allowance had been made in respect of any loss, expenditure or liability in assessment for an earlier year, addition under section 41(1) cannot be made on basis of cessation of such liability

[2013] 35 taxmann.com 451 (Delhi)

HIGH COURT OF DELHI

Commissioner of Income-tax-III

v.

Shivali Construction (P.) Ltd.*

BADAR DURREZ AHMED AND VIBHU BAKHRU, JJ.

IT APPEAL NO. 52 OF 2013†

MAY  1, 2013 

Section 41(1) of the Income-tax Act, 1961 - Remission or cessation of trading liability [Conditions precedent] - Assessment year 2007-08 - Whether where no deduction or allowance had been made in respect of any loss, expenditure or liability in assessment for an earlier year, addition under section 41(1) cannot be made on basis of cessation of such liability - Held, yes [Para 3] [In favour of assessee]

FACTS

■		The assessee had not been carrying out any business activity for last many years. Still it was showing unsecured loan of Rs. 48.03 lakhs.
■		The Assessing Officer found that loans are outstanding from long times and there does not appear any obligation on assessee to repay these loans, thus, there was a cessation of liability to pay those loans. On the basis of above findings, he added the unclaimed unsecured loan of Rs. 48.03 lakhs as income of the assessee.
■		On appeal, the Commissioner (Appeals) deleted the addition.
■		On revenue's appeal, the Tribunal confirmed the order of the Commissioner (Appeals) and concluded that the said liability was of a capital nature and could not be treated as income of the assessee unless and until it had been written off to the credit of the Profit and loss account.
■		On appeal to High Court:

HELD

■

The Tribunal also placed reliance on its decision in the case of the assessee's sister concern (Renu Construction) in ITA No. 220/Del/2011 dated 25-3-2011. It is informed by the appellant/revenue that no appeal was preferred by the department against the said decision of the Tribunal dated 25-3-2011 in ITA No. 220/Del/2011. On this ground alone, the instant appeal is liable to be dismissed. However, it is also find that the Tribunal and the Commissioner (Appeals) had adopted the correct approach and had interpreted the provisions of section 41(1) in the correct manner. The very first condition for invoking section 41(1) is that an allowance or deduction ought to have been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee. In the instant case it is an admitted position that no allowance or deduction had been made in the assessment of the respondent/assessee in any earlier year. Consequently, there is no question of invoking section 41(1) and the Tribunal as well as Commissioner (Appeals) were correct in deleting the addition made by the Assessing Officer. There is no merit in this appeal as no substantial question of law arises for our consideration. [Para 3]

Sanjeev Rajpal for the Appellant. Piyush Kaushik for the Respondent.

JUDGMENT

1. This appeal by the revenue is against the order dated 20.04.2012 passed by the Income Tax Appellate Tribunal, New Delhi, in ITA No. 217/Del/2011 relating to the assessment year 2007-08. The only issue which is raised by the revenue is with regard to the deletion of the sum of Rs. 48,03,481/- which had been added by the assessing officer under section 41(1) of the Income Tax Act, 1961. The assessing officer had made the said additions by observing as under:-

"It is seen that assessee has not been carrying out any business activity for last many years. Still it is showing unsecured loans to the tune of Rs. 48,03,481/- as payable. Since loans are long outstanding and there does not appear to be any obligation on assessee to repay these loans, it clearly implies that there is cessation of liability to pay those loans. The treatment of such liabilities has been discussed by our esteemed courts as under. It is established principle that when an amount is received even as a capital receipts, the amount character when the amount becomes assessee's own money being unclaimed because of limitation or otherwise and in such cases common sense demands that the amount should be treated as income of the assessee [7 ITR 316 (CA)].The same principle has also been approved by Hon'ble Supreme Court by holding that though the deposits received during the course of business were of the capital nature but when deposits are not claimed or claim of depositor is barred by limitation, such money is to be treated as income of assessee [CIT v. Sundaram Iyenger and Sons Ltd (222 ITR 344)].

By applying the ratio of the above cases, I treat the unclaimed unsecured loans of Rs. 48,03,481/- as income of the assessee."

2. The Commissioner of Income Tax (Appeals) deleted the said addition by virtue of an order dated 27.10.2010. This was confirmed by the Tribunal by virtue of the impugned order dated 20.04.2012. The Tribunal noted that section 41 of the said Act would operate only if the following conditions were satisfied:-

"i.		The assessee has incurred a trading liability; ii. this trading liability has been allowed deduction in an earlier year, and
iii.		later on, such liability has either been remitted or has ceased to exist."

3. The Tribunal also observed that in the present case the liability was of a capital nature and it had not yet been written off to the profit and loss account. Consequently, the Tribunal concluded that the findings of the assessing officer were misplaced inasmuch as the said amount could not be treated as income of the assessee unless and until it had been written off to the credit of the profit and loss account, wholly or partly, and, therefore, it could not have been treated as a cessation of a liability as contemplated under section 41(1) of the said Act. The Tribunal also placed reliance on its decision in the case of the assessee's sister concern (Renu Construction) in ITA No. 220/Del/2011 dated 25.03.2011. We had inquired from the learned counsel for the parties as to what happened to that case. We are informed by the learned counsel for the appellant/revenue that no appeal was preferred by the department against the said decision of the Tribunal dated 25.03.2011 in ITA No. 220/Del/2011. On this ground alone, the present appeal is liable to be dismissed. However, we also find that the Tribunal and the Commissioner of Income Tax (Appeals) had adopted the correct approach and had interpreted the provisions of section 41(1) in the correct manner. The very first condition for invoking section 41(1) is that an allowance or deduction ought to have been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee. In the present case it is an admitted position that no allowance or deduction had been made in the assessment of the respondent/assessee in any earlier year. Consequently, there is no question of invoking section 41(1) of the said act and the Tribunal as well as Commissioner of Income Tax (Appeals) were correct in deleting the addition made by the assessing officer. There is no merit in this appeal as no substantial question of law arises for our consideration.

The appeal is dismissed.

RITESH