The Bangalore bench of the Income Tax Appellate Tribunal ( ITAT ) observed that debt does not cease to exist when there was no writing in books of account, no Cessation of Liability under Section 41(1) of the Income Tax Act, 1961
The counsel for the aseessee Tanmayee Rajkumar argued that simply recording a liability in the assessee’s books without any corresponding action from the creditor does not imply that the liability has been discharged. Furthermore, this action does not inherently provide any advantage to the debtor as outlined in Section 41(1) of the Income Tax Act, 1961
The counsel there was no forgiveness or termination of the trading liability, and the assessee did not gain any benefit from the overdue or termination, which is essential for the application of Section 41(1) of the Income Tax Act, 1961
The counsel for the revenue Neera Malhotra argued that the outstanding amount has remained unpaid for an extended period, ranging from 730 to 1460 days, without any transactions with the creditors. Therefore, it should be inferred that there were no demands from the creditors for payment. Consequently, she endorsed the decisions of the lower authorities.
The bench reviewed the arguments presented by both sides and examined the available records. It was undisputed in the current case that an outstanding amount of Rs.39,65,829/- was reflected in the assessee’s books and financial statements. This amount had not been officially written off by the assessee, nor was there confirmation that the other party had done so in their records.
The Supreme Court, in CIT Vs. Sugauli Sugar Works Pvt. Ltd., emphasized that for a debt to be considered ceased, it must be written off in the books of accounts of both parties. The termination of liability could occur through legal means, such as the debt becoming unenforceable by law, or through explicit communication between the parties, or by the debt being discharged through payment by the debtor to the creditor.
The two member bench of the tribunal comprising Madhumitha Roy ( Judicial member ) and Chandra poojari ( Accountant member ) observed that in the assessment year under consideration, this amount cannot be considered as cessation liability under Section 41(1) ) of the Income Tax Act, 1961. This ground of appeal of the assessee was allowed.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
