2025 (5) TMI 2121 - AT - Income Tax

Cessation of liability u/s 41(1) - assessee contended that the solitary reason for treating the liabilities as having ceased to exist was that the PAN number of the creditors were not furnished - HELD THAT - The only basis with the Revenue for treating these liabilities to have ceased to exist was the fact that their PAN number was not furnished. Revenues case rests on the premise that the onus is on the assessee to prove that liabilities exist and by not furnishing PAN of the impugned parties the assessee has failed to prove whether these parties still exist. As per the Revenues reasoning itself we find that the assessee had discharged its onus of proving that the balances existed for payment since admittedly confirmations of the impugned creditors were filed by the assessee and the same have neither been found to be false nor any infirmity pointed out in them. The onus in fact now shifted to the Revenue for proving otherwise that the liabilities ceased to exist. Even otherwise mere non-furnishing of PAN cannot lead to the conclusion that the liabilities have ceased to exist. The non- furnishing of PAN by the assessee firstly does not establish that the said parties have no PAN. PAN may be existing but may not have been furnished for any reason by the assessee. Moreover PAN is an identity which is given by the department to assessee registered in their data base. Even if we consider no PAN of the creditors as is the allegation of the Revenue it can at the most show that these parties do not exist as assessee s (emphasis supplied by us) with the department. But it definitely is not conclusive proof /evidence of the fact that the entity does not exist at all. We have no hesitation in holding that the Revenue has no basis at all for making addition to the income of the assessee on account of liabilities ceasing to exist as per section 41(1) - Appeal filed by the assessee is allowed.

Summary

The core legal questions considered in this judgment are:

1. Whether the delay of 293 days in filing the appeal before the Appellate Tribunal is liable to be condoned under the principles governing 'sufficient cause' and limitation laws.

2. Whether the addition of Rs. 5,45,347/- to the income of the assessee on account of cessation of liability under Section 41(1) of the Income Tax Act, 1961, is justified on the facts and law.

Regarding the first issue of condonation of delay, the relevant legal framework includes Section 5 of the Limitation Act, which permits condonation of delay upon sufficient cause being shown. The Court referred to binding precedent from the Supreme Court which held that the expression 'sufficient cause' must receive a liberal construction to advance substantial justice. It was emphasized that mere negligence or inadvertence on part of the litigant or his agents is not sufficient to deny relief unless there is mala fide or deliberate delay intended as a dilatory tactic. The Court relied on the precedent that no presumption of deliberate delay arises and that ordinarily a litigant does not benefit from delay in filing appeals. The Apex Court's decision in Collector Land Acquisition Vs. Mst. Katiji was cited to reinforce the principle that substantial justice must prevail over technicalities.

The Court examined the facts and found that the delay was attributable to the accountant of the assessee who failed to forward the CIT(A) order to the Chartered Accountant due to workload. This explanation was supported by an affidavit sworn by the accountant. The assessee acted promptly upon discovering the lapse and filed the appeal within two months thereafter. The Revenue failed to disprove or challenge the bona fides of this explanation. Accordingly, the Court held that the assessee had demonstrated sufficient cause for the delay and condoned the same, admitting the appeal for adjudication.

The second issue concerned the addition made under Section 41(1) of the Act on account of cessation of liability amounting to Rs. 5,45,347/-. Section 41(1) provides that if any liability or part thereof, which was previously allowed as a deduction, ceases to exist in the previous year, the amount of such liability shall be deemed to be income of the assessee in that year.

The facts revealed that the addition related to four sundry creditors whose balances were outstanding since the Financial Year 2015-16. The assessee had furnished confirmations of these balances from the creditors, which were acknowledged by the Assessing Officer (AO). However, the AO and the CIT(A) held that since the PAN numbers of these creditors were not furnished, it could be concluded that the liabilities had ceased to exist and thus added the amount to income under Section 41(1). The AO further noted that no transactions had taken place with these creditors for more than three years and the assessee had not provided PAN or other details to verify their existence. The AO also observed that the assessee had not written back these liabilities in its books nor received any payments against them, leading to the conclusion that the liabilities had ceased.

The assessee contended that the mere non-furnishing of PAN could not be a ground to treat the liabilities as ceased. It was argued that the creditors had confirmed the balances, and the absence of PAN did not prove that these parties did not exist or that the liabilities had ceased. The assessee asserted that the onus to prove cessation of liability lay on the Revenue once confirmations were furnished.

The Court analyzed the legal position and facts, holding that the assessee had discharged its onus by producing confirmations of the creditors' balances. The absence of PAN could not conclusively establish that the liabilities ceased to exist, as PAN is merely an identification number and its non-furnishing does not negate the existence of the creditor or liability. The Court emphasized that the Revenue failed to produce any evidence disproving the confirmations or establishing that the liabilities had actually ceased. The Court observed that the Revenue's case rested solely on the non-furnishing of PAN, which was insufficient to apply Section 41(1).

Therefore, the Court concluded that the addition under Section 41(1) was not justified and directed its deletion. The ground raised by the assessee was allowed.

Significant holdings from the judgment include the following verbatim excerpts and principles:

"Courts have been unanimous in holding that the word 'sufficient cause' as per section 5 of the Limitation Act should receive a liberal construction so as to advance substantial justice and that merely because there is some lapse of the litigant concerned, that alone is not enough to shut the door of justice to him."

"There is no presumption that delay is occasioned deliberately, or on account of culpable negligence. A litigant doesn't stand to benefit by resorting to delay."

"Even otherwise mere non-furnishing of PAN cannot lead to the conclusion that the liabilities have ceased to exist. The non-furnishing of PAN by the assessee firstly does not establish that the said parties have no PAN... it definitely is not conclusive proof/evidence of the fact that the entity does not exist at all."

"The assessee had discharged its onus of proving that the balances existed for payment, since admittedly confirmations of the impugned creditors were filed by the assessee and the same have neither been found to be false nor any infirmity pointed out in them. The onus, in fact, now shifted to the Revenue for proving otherwise, that the liabilities ceased to exist."

"We have no hesitation in holding that the Revenue has no basis at all for making addition of Rs. 5,45,347/- to the income of the assessee on account of liabilities ceasing to exist, as per section 41(1) of the Act."

In conclusion, the Court determined that the delay in filing the appeal was condoned as sufficient cause was shown without mala fide intent, and the appeal was admitted. On merits, the addition under Section 41(1) was deleted as the liabilities had not ceased to exist and the Revenue's reliance on non-furnishing of PAN was held to be an insufficient basis for invoking cessation of liability provisions.