Cessation of Liabilities: Liabilities reflected in balance sheet cannot be treated as cessation of liabilities

[CA Students Forum]

Cessation of Liabilities: Liabilities reflected in balance sheet
cannot be treated as cessation of liabilities

* Merely because the liabilities are outstanding for last many
years, it cannot be inferred that the said liabilities have ceased to
exist



[2010] 5 taxmann.com 115 (Ahd. - ITAT)

ITAT, ‘B’ BENCH – AHMEDABAD

Nitin S. Garg

v.

ACIT

ITA Nos. 169,170,171 and 172/Ahd/2009

June 4, 2010

FACTS

In all the appeals the assessee challenged the orders of the learned
CIT(A) in confirming the additions u/s 41(1)(a) of the IT Act on old
and outstanding liabilities of Rs.38,17,601/-, Rs.1,60,090/-, Rs.
40,032/- and Rs.1,32,118/- respectively observing that the said
liability had ceased to exist irrespective of the fact that the
assessee had not written it off in its books of account. It is further
stated in the grounds of appeal that the learned CIT(A) erred in not
considering that in the regular assessment for the assessment year
2002-03 and 2005-06, no addition was made in respect of these
liabilities.



Briefly, the facts of the case are that the AO made the above
additions in all the assessment years respectively u/s 41(A) of the IT
Act as cessation of liabilities. The AO made the additions on the
basis that the assessee had shown the liabilities in respect of the
expenditure incurred during the years but he has not given the details
and addresses of the parties and thus are not verifiable, hence, the
liabilities claimed in respect of the expenditure incurred, has ceased
and income is liable to tax u/s 41 (1) of the IT Act. The assessee
submitted before the learned CIT(A) that these are very old creditors
and hence does not have Permanent Account Numbers and confirmations of
these parties. Further, there was no remission or cessation of
liabilities and in the books of account the assessee has not written
off these amounts. Hence, these are not covered u/s 41(1) of the IT
Act. It was also submitted that the amount of Rs.1,60,590/- and Rs.
1,10,520/- out of the amounts pertaining to assessment year 2001-02
has been paid to Royal Engineering Works in financial year 2008-09.
Therefore, these amounts are not to be disallowed. The learned CIT(A)
considering the submissions of the assessee and material on record
confirmed all the above additions.


HELD



Considering the facts of the case in the light of the above provisions
and the decision referred to above, it is clear that the expenditure
claimed as deduction in the earlier year have not been disallowed in
the earlier year in which they were claimed. Even the AO in the
earlier year has not doubted the existence of the parties. The learned
Counsel for the assessee filed copies of balance sheet of the all
years under appeal, as well as proceedings earlier assessment years
which prove that the outstanding liabilities from earlier years were
carried forwarded to the assessment years under appeal starting from
assessment year 2001-02. The liabilities in assessment year 2000-01
were in a sum of Rs.1,29,83,564/-. The particulars of those parties
against whom the liabilities were shown is mentioned at PB-3, 4 and 5.
The same parties continued in the assessment year 2001-02 under appeal
but the balances of some of the parties have reduced which would show
that part payments have been made to them. The above facts would show
that the liabilities shown in the balance sheet in the assessment year
under appeal i.e. 2001-02 which are opening balances which are carried
forward fro the preceding assessment year. The liabilities have been
shown in the balance sheet of the assessee which would show that the
assessee acknowledged the liabilities of the outstanding amounts. The
balances were thus carried forward from earlier years. In assessment
year 2002-03, the AO made addition of Rs.1,60,590/- in respect of
Royal Engineering Work whose balance was also outstanding in the
assessment year 2000-01 and 2001-02. It would, therefore, show that
similar addition is made in the assessment year 2002-03 which would
amount to double addition in respect of the same party. In assessment
year 2003-04 the AO made addition of Rs.40,032/- in respect of Sanjay
Spal , Rs.32/-, Ankit Engineering Rs.20,000/- and Motilalji Rs.
20,000/-. These amounts were not carried forward from earlier years as
per the details filed in the paper book. It would show that these are
the current liabilities of the assessee in the assessment year
2003-04. Similarly, in assessment year 2006-07 the AO made addition of
Rs.1,32,118/- in respect of amount of Rs.45,409/- and Rs.86,709/- in
respect of Mahalaxmi Roadways and Nihal Roadways. These were the
credit balances in the assessment year under appeal which were carried
forward in the preceding assessment year 2005-06 and in that year
there were debit balances against these parties as per the details
submitted by the learned Counsel for the assessee. These facts would
show that the authorities below have not applied their mind to the
facts of the case that these are not the fit cases for invoking the
provisions of section 41(1) of the IT Act in the matter as done by the
AO.



Considering the facts of the case as noted above it is clear that the
assessee had continued to show the admitted amounts as liabilities in
its balance sheet. The liabilities reflected in the balance sheet
cannot be treated as cessation of liabilities. Merely because the
liabilities are outstanding for last many years, it cannot be inferred
that the said liabilities have ceased to exist. It is also a fact that
the assessee has not written off the outstanding liabilities in the
books of account and the outstanding liabilities are still in
existence would prove that the assessee acknowledged his liabilities
as per the books of account. Section 41(1) of the IT Act is attracted
when there is cessation or remission of a trading liability. The AO
shall have to prove that the assessee has obtained the benefits in
respect of such trading liabilities by way of remission or cessation
thereof. Merely because the assessee obtained benefit of deduction in
the earlier years and balances are carried forward in the subsequent
year, would not prove that the trading liabilities of the assessee
have become non-existent. It may also be noted here that the assessee
has not claimed any deduction of the expenditure in all the assessment
years under appeal. Therefore, we are of the view that provisions of
section 41 (1) (a) of the IT Act have been wrongly applied in the
matter. We may also note here that the learned Counsel for the
assessee has filed details of particulars of payments of liabilities
in subsequent years which are in the nature of adjustment through
journal entry, cash payment and some payments by banking channel. The
learned DR objected to the filing of such details at this stage and
further submitted that the payment by cash and journal entry would not
prove genuineness of the payments. We do not agree with the submission
of the learned DR because those details were called for by the Bench
during the course of hearing and even payment by cheques and/or
journal entry would not absolve the AO for making out a case u/s 41
(1) (a) of the IT Act. The last contention of the learned Counsel for
the assessee was that since income of the assessee is computed u/s
44AE of the IT Act, therefore, provisions of section 41(1) of the IT
Act would not apply. However, considering the finding given above that
provisions of section 41 (1) would not apply to the facts and
circumstances of the case; there is no need to give further findings
on this issue.





On consideration of the above discussion, we find that the authorities
below were not justified in making the additions against the assessee
in all the assessment years under appeal of the above amounts with the
aid of section 41(1)(a) of the IT Act. As a result, we set aside the
orders of the authorities below and delete the entire additions.



O R D E R





PER BHAVNESH SAINI, JM:



All the appeals by the assessee are directed against different orders
of the learned CIT (A)-II, Ahmedabad dated 01-10-2009 for the above
assessment years.



2. In ITA No.172/Ahd/2009 for assessment year 2006-07, the learned
Counsel for the assessee did not press Ground Nos. 4, 5 and 6, these
grounds are accordingly dismissed being not pressed.



3. In all the appeals the assessee challenged the orders of the
learned CIT(A) in confirming the additions u/s 41(1)(a) of the IT Act
on old and outstanding liabilities of Rs.38,17,601/-, Rs.1,60,090/-,
Rs.40,032/- and Rs.1,32,118/- respectively observing that the said
liability had ceased to exist irrespective of the fact that the
assessee had not written it off in its books of account. It is further
stated in the grounds of appeal that the learned CIT(A) erred in not
considering that in the regular assessment for the assessment year
2002-03 and 2005-06, no addition was made in respect of these
liabilities.



4. We have heard the learned representatives of both the parties,
perused the findings of the authorities below and the materials
available on record.



5. Briefly, the facts of the case are that the AO made the above
additions in all the assessment years respectively u/s 41(A) of the IT
Act as cessation of liabilities. The AO made the additions on the
basis that the assessee had shown the liabilities in respect of the
expenditure incurred during the years but he has not given the details
and addresses of the parties and thus are not verifiable, hence, the
liabilities claimed in respect of the expenditure incurred, has ceased
and income is liable to tax u/s 41 (1) of the IT Act. The assessee
submitted before the learned CIT(A) that these are very old creditors
and hence does not have Permanent Account Numbers and confirmations of
these parties. Further, there was no remission or cessation of
liabilities and in the books of account the assessee has not written
off these amounts. Hence, these are not covered u/s 41(1) of the IT
Act. The assessee relied upon the decisions in the cases of Parmeshwar
Bohra 301 ITR 404 (Raj.), CIT Vs Tamilnadu Warehousing Corporation 292
ITR 310 (Mad.) and Natversingh Chauhan Vs ITO (Ahmedabad Bench). It
was also submitted that the amount of Rs.1,60,590/- and Rs.1,10,520/-
out of the amounts pertaining to assessment year 2001-02 has been paid
to Royal Engineering Works in financial year 2008-09. Therefore, these
amounts are not to be disallowed. The learned CIT(A) considering the
submissions of the assessee and material on record confirmed all the
above additions. The findings of the learned CIT(A) are similar in all
the assessment years. The same is reproduced as under as is taken from
Para 5.2 from ITA No.169/Ahd/2007:

“5.2 I have considered the facts and the submissions. I do not agree
with the appellant’s view. When the parties are not traceable and the
expenditure is not verifiable, the addition has to be made. When the
liability itself is not to be paid as the party is not traceable, and
the appellant has claimed the expenses in the earlier years, the same
has to be taxed u/s. 41(1) of the I. T. Act irrespective of the fact
that the appellant has written it off or not. The ratios of the case
laws relied upon are not applicable as facts are different. In the
case of Natversingh Chauhan vs ITO, the parties were existing but
here, the parties are not traceable. In the case of CIT vs Parmeshwar
Bohra, it was held that carry forward amount of previous year, did not
become an investment or cash credit generated during the year and
cannot be assessed as income. Here the issue is application of section
41(1) for cessation of liabilities which is different. Further, for
the amount to be paid to Royal Engg. Works, the party has not
confirmed that this was the receipt of amount relating to A. Y.
2001-02. Hence, the additions are confirmed and this ground is
rejected”.



6. The learned Counsel for the assessee reiterated the submissions
made before the authorities below. He has filed copies of the balance
sheets of assessment years 2000-01 to 2007-08 in the paper book and
demonstrated that on the same issue there was outstanding liability of
Rs. 1,29,83,564/- in assessment year 2000-01 (PB -2), which was
reduced in the subsequent assessment years by making the payments to
the parties. The list of the parties is filed at page 1 of the paper
book and separate chart is also filed. The learned Counsel for the
assessee, therefore, demonstrated that since it was old liability in
earlier years and outstanding balances/liabilities have been carried
forward in assessment years under appeal, therefore, no addition u/s
41(1) of the IT Act can be made. He has submitted that it is admitted
fact that all the above amounts in question under appeal pertain to
the earlier years in which the AO did not disputed genuineness of the
expenditure and even outstanding balances against names of several
parties have also not been doubted by the AO in the preceding
assessment year in which outstanding balances were reflected in the
balance sheet. Therefore, opening balances of the existing liabilities
in the assessment years in question cannot be added u/s 41(1) of the
IT Act. He has relied upon the following judgments in support of his
contentions:

1) CIT Vs Tamilnadu Warehousing Corporation (292 ITR 310)

2) CIT Vs Smt. Sita Devi Juneja (187 Taxman 96)

3) N. R. Chauhan Vs ITO (ITAT Ahmedabad– dated 23-01-2009)

4) DCIT VI, Kanpur Vs Alied Leather Industries (P) Ltd.(32 SOT 549)

5) General Industries Corporation Vs ITO (33 ITD 524)

6) CIT Vs Parmeshwar Bohra (301 ITR 404)

7) ACIT Central Circle 32, Mumbai Vs VIP Industries Ltd. (30 SOT

254)

8) DSA Engineers (Bombay) Vs ITO (30 SOT 31)

The learned Counsel for the assessee further submitted that the same
details are also incorporated by the AO at page 12 of the assessment
order in respect of which the assessee has filed details at PB-1 and
the chart submitted during the course of arguments. The learned
Counsel for the assessee further submitted that the amount of Rs.
1,60,590/- is added in the assessment year 2002-03 is the same amount
which is reflected in the preceding assessment year 2001-02 in respect
of the same party namely Royal Engineering Works which is also added
in the assessment year 2001-02, therefore, it would amount to double
addition in the assessment year 2002-03. The learned Counsel for the
assessee further submitted that in assessment year 2003-04 the
addition is made of Rs.40,032/- in respect of 3 parties namely Sanjaya
Spal, Ankit Engineering and Motilalji which are new liabilities in
this assessment year under appeal. Further in assessment year 2006-07
the liabilities of Rs.1,32,118/- pertain to Mahalaxmi Roadways and
Nihal Roadways which were debit balance in the assessment year 2005-06
which is also explained in the chart filed for consideration. The
learned Counsel for the assessee, therefore, submitted that the AO was
not justified in applying provisions of section 41(1) of the IT Act in
those assessment years particularly when the genuineness of the
expenditure has not been doubted by the AO in respect of these parties
whose amounts were shown as liabilities in the balance sheet. Copies
of the accounts of the parties are filed in the paper book. The
learned Counsel for the assessee further submitted that ultimately the
income of the assessee is computed by the learned CIT(A) by applying
the provisions of section 44AE of the IT Act. Therefore, no addition u/
s 14(1) of the IT Act could be

made. He has relied upon the decision in the case of Tirunelveli Motor
Bus Service Co. P. Ltd. Vs CIT 78 ITR 55. He has further submitted
that once the income is computed u/s 44 AE of the IT Act, provisions
of section 41(1) of the IT Act would not apply.



7. On the other hand, the learned DR relied upon the orders of the
authorities below. The learned DR submitted that the expenses were
claimed by the assessee in respect of outstanding liabilities in the
earlier years and deductions have been allowed. The learned DR
submitted that liabilities have however, still existing in the books
of the assessee being sundry creditors. The learned DR submitted that
the assessee has failed to furnish addresses of the parties, their
Permanent Account Numbers and confirmations of outstanding balances.
The learned DR submitted that the AO because of the above facts found
that the said trading liabilities have ceased as no evidence and
confirmation of existence of the parties have been filed. The learned
DR submitted that since the assessee failed to produce relevant
material on record, therefore, adverse inference shall have to be
drawn against the assessee. Therefore, the AO would be justified in
applying provisions of section 41(1) of the IT Act because the issue
would arise as to on what date the liability is ceased. Since no proof
is filed by the assessee, therefore, the authorities below were
justified in rejecting the claim of the assessee. The learned DR
submitted that the AO has given a categorical finding that the
assessee has claimed certain deduction against the income earned
during earlier year. Therefore, non-existing liabilities in the
subsequent year would amount to cessation of liabilities. The learned
DR submitted that since the assessee has not paid any amount towards
outstanding liabilities for several years and carried forward the
balances to the assessment years under appeal, it would prove
intention of the assessee that the assessee has no longer wanted to
pay off the debts. The learned DR relied upon the decision of the
Hon’ble Calcutta High Court in the case of Kesoram Industries and
Cotton Mill Vs CIT 196 ITR 845 in which it was held that “unclaimed
wages written back in the profit & loss account is assessable under
Income Tax Act”. The learned DR submitted that burden is upon the
assessee to prove that the details filed in the return of income is
true and correct. The learned DR relied upon the decision of the
Hon’ble Supreme Court in the case of L. H. Sugar Factory and Oil Mills
(P) Ltd. Vs CIT 125 ITR 293 in which it was held that “when expenses
were not wholly and exclusively laid out for the purpose of assessee’s
business same is not allowable deduction”. The learned DR also relied
upon the decision of the Hon’ble Gauhati High Court in the case of
Assam Pesticides and Agro Chemicals Vs CIT 227 ITR 846 in which it was
held that “payment of commission not made out of commercial
consideration not allowable deduction”. The learned DR submitted that
the figures given in the chart filed by the assessee’s counsel shows
that the figures are static in assessment year 2001-02 as compared
with earlier year and no amount is paid. The learned DR submitted that
there is no movement in any of the years, therefore, by applying the
principle of preponderance of probabilities which is applicable to the
IT Act, it could be reasonably inferred that the assessee has no
intention to make the payment against the outstanding liabilities. The
learned DR submitted that the assessee has not made any offer to pay
the parties. Similarly, no effort is made by the parties whose
outstanding balances are reflected in the balance sheet of the
assessee to make recovery against the assessee. Therefore, these are
squared up liabilities and should be treated as liabilities against
unknown parties for which no evidence has been filed. Therefore,
provisions of section 41(1) of the IT Act have been rightly applied in
the matter. The learned DR submitted that since the assessee claimed
deduction, therefore, onus is upon the assessee to prove that
deduction is admissible for the purpose of the business. The learned
DR in his concluding submissions submitted that the assessee has no
liabilities to make the payment as on date. The assessee has no
evidence whatsoever to back up its claim and he failed to produce the
creditors before the AO for verification. Therefore, it is clear that
liability to make the payment to the outstanding creditors has ceased.
Therefore, addition was rightly made u/s 41(1) (a) of the IT Act.



8. We have considered the rival submissions and material available on
record. Section 41 (1) (a) of the IT Act reads as under: “41. (1)
Where an allowance or deduction has been made in the assessment for
any year in respect of loss, expenditure or trading liability incurred
by the assessee (hereinafter referred to as the first-mentioned
person) and subsequently during any previous year,—

(a) the first-mentioned person has obtained, whether in cash or in any
other manner whatsoever, any amount in respect of such loss or
expenditure or some benefit in respect of such trading liability by
way of remission or cessation thereof, the amount obtained by such
person or the value of benefit accruing to him shall be deemed to be
profits and gains of business or profession and accordingly chargeable
to income-tax as the income of that previous year, whether the
business or profession in respect of which the allowance or deduction
has been made is in existence in that year or not; or”

8.1 Hon’ble Madras High Court in the case of Tamilnadu Warehousing
Corporation (supra) held as under:

“The assessee filed its return for the assessment year 1989-90 and
assessment eras completed under section 143(3) of the Income-tax Act,
1961. The assessee had surrendered the Group Gratuity Scheme with LIC
and received a sum of Rs.8,22,925/- during the year relevant to the
assessment year 1989-90. As there was no proper enquiry made by the
Assessing Officer in the assessment completed on January 21,1992, the
Commissioner passed order under section 263 of the Act and set aside
the assessment with a direction to the Assessing Officer to assess the
said amount under section 41(1) of the Act for the assessment year
1989-90. The Tribunal set aide the order of the Commissioner. On
appeal to the High Court: Held, that the assessee had continued to
show the

admitted amount of Rs.8,22,925 as liability in the balance-sheet. The
undisputed fact was that it was a liability reflected in the balance-
sheet. Once it was shown as liability by the assessee, the
Commissioner was wrong in holding that it was assessable under section
41(1) of the Act. Unless and until there is a cessation of liability,
section 41 is not applicable”.



8.2 Hon’ble Punjab and Haryana High Court in the case of Smt. Sita
Devi Juneja (supra) held as under:

“It is the conceded position that in the assessee’s balance sheet the
aforesaid liabilities have been shown, which are payable to the sundry
creditors. Such

liabilities, shown in the balance sheet, indicate the acknowledgement
of the debts payable by the assessee. Merely because, such liability
is outstanding for the

last six years, it cannot be presumed that the said liabilities have
ceased to exist. It is also conceded positin that there is no
bilateral act of the assessee and the creditors, which indicates that
the said liabilities have ceased to exist. In absence of any bilateral
act, the said liabilities could not have been treated to have

ceased”.



8.3 ITAT Ahmedabad Bench in the case of N. R. Chauhan (supra) held as
under:

“The ld. Counsel for the assessee specifically drawn our attention to
the account copies and stated that these are outstanding as on date
and this amount are not

written off in the books of account. Accordingly, the same cannot be
added u/s. 41(1) of the Act as the liability of outstanding and the
parties are in existence.

We are in full agreement with the argument of the Ld. Counsel for the
assessee, as is seen from the documents and papers filed before us
that the parties do exist and these amounts are outstanding in the
books of the assessee as payable. In view of these facts and
circumstances, we feel that these amounts cannot be added either u/s.
68 or 41(1) of the Act. We delete the addition and this issue of the
assessee’s appeal is allowed”.

8.4 ITAT Lucknow Bench in the case of DCIT Vs Allied Leather Finishers
(P) Ltd. (supra) held as under:

“21.7 A liability could not be treated as a cessation if it was being
merely carried forward for years. A non-genuine non-trading liability
standing in the balance sheet can be taxed but under section 68 if it
came in the books in the current year. If such nongenuine non-trading
liability came in the books in an earlier year than same cannot be
taxed in the current year even under section 68. A non-genuine trading
liability can be considered in the current year if it is related to
current year’s trading/manufacturing or Profit & loss account but not
under section 41(1) or under section 68. It can be considered only
under section 28, i.e. it can be considered for disallowance while
examining the claim of expenses or outgoings against revenue receipts.
Current year’s genuine trading liabilities, waved/remitted or ceased
to exist in the current year itself will not form part of trading/
manufacturing or P/L account except a note appended to them as
disclosure of information.



21.10 Even in a case where a liability ceased to exist due to
limitation i.e. the claim of the creditor is barred by limitation
under Limitation Act of 1963 but

if the liability subsist or has not been written off by the assessee,
or the assessee does not absolve himself from the liability, though
not legally enforceable, it cannot be taxed under section 41(1)”.

8.5 The Hon’ble Rajasthan High Court in the case of CIT VS Prameshwar
Bohra (supra) has held as under:

“The assessee on the first day of the previous year relevant to the
assessment year 1993-94 i.e. on April 1, 1992, credited an amount of
investment/cash credit of Rs.1,55,316 in his books of account. The
Assessing Officer added this amount in the income of the assessee as
unexplained investment in the assessment year

1993-94. The Tribunal held that this was not a case of cash credit
entered in the books of account of the assessee during the year but it
was a case in which the

assessee had invested the capital in the business and this amount was
shown as a closing capital as on March 31, 1992 and on April 1, 1992,
it was an opening

balance. Therefore the Tribunal held that what was already credited in
the books of account ending on March 31, 1992, for financial year
1991-92 relevant to assessment year 1992-93 could not be unexplained
cash credit or investment in the books of account maintained for the
financial year 1992-93, the accounting period for which ended on March
31, 1993. On appeal: Held, dismissing the appeal, that the carried
forward amount of the previous year did not become an investment or
cash credit generated during the relevant year 1993-94. This alone was
sufficient to sustain the order of the Tribunal in deleting the amount
of R.1,55,316 from the assessment for the assessment year 1993-94”.



8.6 ITAT Mumbai Bench in the case of ACIT Vs VIP Industries (supra)
held as under:

“Section 41(1) is attracted when there is cessation for remission of a
trading liability. Simply because a period of three years has expired
and the creditor cannot lawfully enforce his claim, it does not mean
that there is a cessation or remission of liability. There may be
several situations when the money is not claimed or paid by one party
to another within three years and thereafter the claim is made and
honoured by the other. So, simply because a particular amount is
outstanding for a period of more than three years, that does not
constitute income under section 41(1)”.



9. Considering the facts of the case in the light of the above
provisions and the decision referred to above, it is clear that the
expenditure claimed as deduction in the earlier year have not been
disallowed in the earlier year in which they were claimed. Even the AO
in the earlier year has not doubted the existence of the parties. The
learned Counsel for the assessee filed copies of balance sheet of the
all years under appeal, as well as proceedings earlier assessment
years which prove that the outstanding liabilities from earlier years
were carried forwarded to the assessment years under appeal starting
from assessment year 2001-02. The liabilities in assessment year
2000-01 were in a sum of Rs.1,29,83,564/-. The particulars of those
parties against whom the liabilities were shown is mentioned at PB-3,
4 and 5. The same parties continued in the assessment year 2001-02
under appeal but the balances of some of the parties have reduced
which would show that part payments have been made to them. The above
facts would show that the liabilities shown in the balance sheet in
the assessment year under appeal i.e. 2001-02 which are opening
balances which are carried forward fro the preceding assessment year.
The liabilities have been shown in the balance sheet of the assessee
which would show that the assessee acknowledged the liabilities of the
outstanding amounts. The balances were thus carried forward from
earlier years. In assessment year 2002-03, the AO made addition of Rs.
1,60,590/- in respect of Royal Engineering Work whose balance was also
outstanding in the assessment year 2000-01 and 2001-02. It would,
therefore, show that similar addition is made in the assessment year
2002-03 which would amount to double addition in respect of the same
party. In assessment year 2003-04 the AO made addition of Rs.40,032/-
in respect of Sanjay Spal , Rs.32/-, Ankit Engineering Rs.20,000/- and
Motilalji Rs.20,000/-. These amounts were not carried forward from
earlier years as per the details filed in the paper book. It would
show that these are the current liabilities of the assessee in the
assessment year 2003-04. Similarly, in assessment year 2006-07 the AO
made addition of Rs.1,32,118/- in respect of amount of Rs.45,409/- and
Rs.86,709/- in respect of Mahalaxmi Roadways and Nihal Roadways. These
were the credit balances in the assessment year under appeal which
were carried forward in the preceding assessment year 2005-06 and in
that year there were debit balances against these parties as per the
details submitted by the learned Counsel for the assessee. These facts
would show that the authorities below have not applied their mind to
the facts of the case that these are not the fit cases for invoking
the provisions of section 41(1) of the IT Act in the matter as done by
the AO.



9.1 Considering the facts of the case as noted above it is clear that
the assessee had continued to show the admitted amounts as liabilities
in its balance sheet. The liabilities reflected in the balance sheet
cannot be treated as cessation of liabilities. Merely because the
liabilities are outstanding for last many years, it cannot be inferred
that the said liabilities have ceased to exist. It is also a fact that
the assessee has not written off the outstanding liabilities in the
books of account and the outstanding liabilities are still in
existence would prove that the assessee acknowledged his liabilities
as per the books of account. Section 41(1) of the IT Act is attracted
when there is cessation or remission of a trading liability. The AO
shall have to prove that the assessee has obtained the benefits in
respect of such trading liabilities by way of remission or cessation
thereof. Merely because the assessee obtained benefit of deduction in
the earlier years and balances are carried forward in the subsequent
year, would not prove that the trading liabilities of the assessee
have become non-existent. It may also be noted here that the assessee
has not claimed any deduction of the expenditure in all the assessment
years under appeal. The decisions cited by the learned Counsel for the
assessee squarely apply to the facts of the case. Therefore, we are of
the view that provisions of section 41 (1) (a) of the IT Act have been
wrongly applied in the matter. We may also note here that the learned
Counsel for the assessee has filed details of particulars of payments
of liabilities in subsequent years which are in the nature of
adjustment through journal entry, cash payment and some payments by
banking channel. The learned DR objected to the filing of such details
at this stage and further submitted that the payment by cash and
journal entry would not prove genuineness of the payments. We do not
agree with the submission of the learned DR because those details were
called for by the Bench during the course of hearing and even payment
by cheques and/or journal entry would not absolve the AO for making
out a case u/s 41 (1) (a) of the IT Act. The last contention of the
learned Counsel for the assessee was that since income of the assessee
is computed u/s 44AE of the IT Act, therefore, provisions of section
41(1) of the IT Act would not apply. However, considering the finding
given above that provisions of section 41 (1) would not apply to the
facts and circumstances of the case; there is no need to give further
findings on this issue.



10. On consideration of the above discussion, we find that the
authorities below were not justified in making the additions against
the assessee in all the assessment years under appeal of the above
amounts with the aid of section 41(1)(a) of the IT Act. As a result,
we set aside the orders of the authorities below and delete the entire
additions.



11. In view of the above findings, the decisions cited by the learned
DR would not support the case of the Revenue.



12. As a result, these grounds of appeal of the assessee in all the
appeals are allowed.



13. In the result, the appeals of the assessee in ITA No.169, 170 and
171/Ahd/2009 are allowed whereas the appeal of the assessee in ITA No.
172/Ahd/2009 is partly allowed.