By TIOL News Service

MUMBAI, JULY 10, 2018: THE ISSUE IS - Whether liability acknowledged by the assessee as payable in Balance Sheet cannot be considered as cessation, merely because liability is outstanding for long time, where the creditor has not waived off the amount. YES IS THE VERDICT.

Facts of the case

The assessee company engaged in the business of designing, manufacturing, reselling and installing engineering Equipments used for noise and pollution control. One job order received from Flo-Dyne Limited, U.K. was given to M/s. Camy Plant for Rs. 1,01,06,500/- out of which an amount of Rs. 75,82,302/ was payable on 31-03-2011. Neither M/s. Camy Plant had waived the amount nor had the assessee unilaterally written back the liability. The amount payable to M/s. Camy Plant Rs.75,82,302/- was acknowledged as payable in the audited balance sheet. The assessee had filed return for relevant AY. During assessment AO noticed that assessee had shown certain amount as liability in balance sheet payable to M/s. Camy Plant. The assessee was asked to furnish the confirmations from the creditors and also required to explain as to why the same should not be treated as cessation of liability u/s. 41(1) of the Act. The assessee submitted that in its case the conditions u/s 41(1) were not satisfied as there was no remission or cessation of liability during the relevant year. However, the AO treated this sundry credit in the balance sheet as cessation of liability u/s. 41(1) of the Act and taxed in the hands of the assessee observing that assessee had not submitted the confirmation from the creditor and genuineness of the transactions was not proved. On appeal, CIT(A) upheld the order of AO.

Tribunal held that,

++ the assessee is having dispute with the other party the creditor who executed the work beyond the stipulated time and the dispute is going on. It is an admitted fact that neither the assessee nor the creditor have written off the liability from their Books of Accounts. In such circumstances simply because the liability is outstanding for quite some years the liability does not seize to exist. In the case of CIT v. Smt Sita Devi Juneja the Gujarat High Court considering the judgment of the Supreme Court in the case of CIT v. Sugauli Sugar Works (P.) Ltd held as under " 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 position 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. In view of these facts, the CIT (A) as well as the ITAT have rightly come to the conclusion that the Assessing Officer has wrongly invoked the Explanation-I of Section 41 (1) of the Act and made the aforesaid addition on the basis of presumption, conjectures and surmises.";

++ the Supreme Court in the case of CIT v. Sugauli Sugar Works (P.) Ltd. while dismissing appeal of the Revenue held that " the principle that expiry of period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt, has been well settled. It is enough to refer to the decision of Court in Bombay Dyeing & Manufacturing Co. Ltd. v. The State of Bombay and Others, [1958] SCR 1122, If that principle is applied, it is clear that mere entry in the books of accounts of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by the Section" Respectfully following the decision, it was held that there is no cessation of liability in the case of the assessee. Hence this ground of appeal is allowed.

(See 2018-TIOL-1053-ITAT-MUM)