2023 (8) TMI 1067 - AT - Income Tax

Cessation of liabilities u/s 41(1) - CIT(A) applying the provision of section 28(iv) thereby, modifying the assessment order - HELD THAT - As far the question of cessation of liability in respect of Green Press Pvt. Ltd. is concerned, the assessee has placed reliance on various case laws by the more particularly judgement of Jain Exports (P.) Ltd. 2013 (5) TMI 690 - DELHI HIGH COURT and Batliboi Environmental Engineering Ltd. 2022 (6) TMI 903 - BOMBAY HIGH COURT as concluded that merely because the liability is barred by limitation, it does not cease to be a debt. This view is also taken by this court in the case of CIT v. Indian Rayon and Industries Ltd. 2010 (3) TMI 299 - BOMBAY HIGH COURT Therefore, the submission made by the appellant that because the liability is barred by the period of limitation the same would be treated as income and added under section 41(1) of the Act cannot be accepted as no other decision contrary to the above is shown to us. Thus, the second question of law does not survive for consideration. Thus AO erred in making addition treating the cessation of liability and CIT(A) erred in applying the provision of section 28(iv) of the Act, thereby, modifying the assessment order. The grounds so raised by the assessee deserve to be allowed.

Summary

Issues Involved:
1. Addition under Section 41(1) of the Income Tax Act, 1961.
2. Addition under Section 28(iv) of the Income Tax Act, 1961.

Summary:

Issue 1: Addition under Section 41(1) of the Income Tax Act, 1961

The assessee argued that the outstanding liability reflected in its books of account had not ceased during the year, making the addition of Rs. 7,02,059/- by the AO under Section 41(1) unsustainable. The Tribunal referred to judicial precedents, including the Delhi High Court's decision in CIT v. Jain Exports (P.) Ltd. [2013] and the Bombay High Court's decision in PCIT v. Batliboi Environmental Engineering Ltd. [2022], which established that merely because a liability is barred by limitation, it does not cease to be a debt. Consequently, the Tribunal found that the AO erred in making the addition under Section 41(1).

Issue 2: Addition under Section 28(iv) of the Income Tax Act, 1961

The assessee contended that the advance received from M/s Deserts Sands General Trading and M/s Gajpati Oversea, shown as liabilities in the books of account, were not in the nature of benefit or perquisite within the meaning of Section 28(iv). The Tribunal cited the Supreme Court's decision in Mahindra & Mahindra Ltd. and the Panaji Tribunal's decision in Infrastructure Logistics (P.) Ltd. v. JCIT, which clarified that Section 28(iv) applies only when the benefit is received in a form other than money. Since the advances were in the form of money, the provisions of Section 28(iv) were not applicable. The Tribunal concluded that the Ld. CIT(A) erred in applying Section 28(iv) and modifying the assessment order.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that the additions under Sections 41(1) and 28(iv) were unsustainable based on the cited judicial precedents. The grounds raised by the assessee were allowed, and the order of the Ld. CIT(A) was set aside.