ITAT Dismisses Revenue’s Appeal, Upholds Deletion of ₹5.2 Crore Addition Under Section 41(1) Due to Lack of Cessation of Liability Evidence [Read Order]

The appeal pertained to the Assessment Year 2020–21, where the Assessing Officer had treated ₹3 crore received as lease deposits from Poonam Resorts Ltd. and ₹2.2 crore shown as booking advances as ceased liabilities. The AO concluded that these liabilities were long-standing and unsupported by current documentation, and thus constituted income under Section 41(1). The assessee had shown these as “other current liabilities” in its balance sheet.

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The case was selected for limited scrutiny to examine high creditors and investment in immovable property. During assessment, the assessee explained that ₹13 crore was received from Poonam Resorts Ltd. in earlier years as interest-free lease deposits under a lease agreement executed in 2011 for a period of 21 years. It submitted that ₹10 crore was paid initially in 2011, followed by ₹3 crore later, and that these liabilities had been accepted in earlier assessments, including scrutiny under Section 143(3) for AY 2017–18.

In addition to the lease deposits, the assessee also explained the ₹2.2 crore in booking advances as old advances received from customers for property bookings. It was argued that these were customary in the real estate business and had been carried forward from prior years. The assessee emphasized that no sales had been made during the relevant year and that these advances were still reflected as liabilities in the audited balance sheet. Supporting evidence including ledger accounts, confirmation letters, and bank statements were filed.

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The CIT(A), after detailed examination, held that the provisions of Section 41(1) were not applicable as there was no remission or cessation of the liabilities in question. It noted that no deduction or allowance had been claimed in prior years in respect of these amounts, and that the liabilities had not been written off or waived unilaterally or contractually.

On further appeal by the Revenue, the ITAT agreed with the CIT(A)’s reasoning and found that the Assessing Officer had neither demonstrated any cessation of liability nor any benefit accruing to the assessee. The Tribunal observed that merely branding liabilities as “old” was not sufficient for invoking Section 41(1) and also clarified that these transactions could not be taxed under Section 68 as they were not new credits for the relevant year. The Tribunal also considered the lease deposit agreement and the 21-year lease tenure, holding that the liability still legally existed and was backed by confirmations from the creditor.

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While delivering the order, the Bench comprising Shri V. Durga Rao, Judicial Member, and Shri K.M. Roy, Accountant Member, took note of multiple case law references cited by the assessee, including CIT v. Shivali Construction Pvt. Ltd. (2013), CIT v. Jain Exports Pvt. Ltd. (2013), and CIT v. Speedways Tyre Ltd. (2014), which supported the view that mere passage of time or absence of transactions in a particular year does not automatically trigger cessation under Section 41(1).

Concluding that the Revenue had failed to establish a valid basis for the addition, the ITAT upheld the deletion of ₹5.2 crore and dismissed the appeal.

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