Shri Saket Agarwal vs Deputy Commissioner Of Income Tax

Per Mahavir Singh, Vice President:

This appeal by the assessee is directed against the order of learned CIT(Appeals), Delhi dated 21^st August, 2025 in appeal No.NFAC/2019-20/10178067. Assessment in this case was made by the DCIT, Circle-59(1), Delhi vide order dated 22^nd September, 2022 passed under Section 143(3) read with Section 144B of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') for the assessment year 2020-21.

The only issue in this appeal of the assessee is as regards to the order of learned CIT(A) in confirming the addition made by the Assessing Officer on account of liabilities written off under Section 41(1) of the Act amounting to ₹55,60,599/- in respect of Jadia Pipes India Ltd.

The brief facts are that the assessee is an individual and trading in steel tubes, sanitary and also investment in shares. The assessee's case was selected for limited scrutiny through CASS for the reason that capital gains/loss and taxability of business liability written off under Section 41(1) of the Act or any other Section or refund claimed by the assessee. According to the Assessing Officer, information was available with the Department that Jadia Pipes India Ltd. has written off bad debts reported in its profit & loss account amounting to ₹55,60,599/-. In response to show cause notice, the assessee replied that this amount of ₹55,60,599/- is outstanding towards Jadia Pipes India Ltd. for consignment sales made by the assessee during the financial year 2015-16 and assessee has not claimed any expenditure in its books of account towards this outstanding amount. The Assessing Officer noted the facts in paragraph 3.2 of his order, as under:-

Accordingly, the Assessing Officer added this amount of ₹55,60,599/- on account of cessation of liability in view of provisions of Section 41(1) of the Act as the other party Jadia Pipes India Ltd. has written off the claim as bad debts. Aggrieved, assessee preferred appeal before learned CIT(A).

Learned CIT(A), after considering the facts and documentary evidences, noted that liability under consideration arose from trading transactions in its books of account as purchases and, assessee's claim now that outstanding liability was withheld to secure investment of ₹26 lakhs made in the financial year 2007-08 being share application money, is without merit. Learned CIT(A) finally noted that debtor cannot, by unilateral action, convert a trade liability into a security or set-off against another claim without the express consent of the creditor. Learned CIT(A) noted that the creditor has already written off the amount in its books, thereby extinguishing its claim. He further noted that once the creditor has abandoned its right, cessation of liability is deemed under Section 41(1) of the Act being cessation of liability comes into play and the Assessing Officer has rightly disallowed the same. He confirmed the same. Aggrieved, the assessee is in appeal before us.

We have heard the rival contentions and perused the material placed before us. We noted from the accounts of the assessee which are placed in assessee's paper book at page 53 for the financial year 2019-20 relevant to assessment year 2020-21 that this particular amount if shown as credit balance in the accounts of Jadia Pipes India Ltd. and this is outstanding liability. The assessee also contended before the Assessing Officer as well as learned CIT(A) and now before us that the assessee has not written off the said liability in its books of account and such liability has been appearing not only in the assessee's audited balance sheet as on 31^st March, 2020 but also in assessee's audited balance sheet as on 31^st March, 2021, 31^st March, 2022, 31^st March, 2023 and 31^st March, 2024. The assessee is consistently shown this as outstanding liability. As regards the allegation of mere unilateral entry in the other parties' accounts by the other parties, it does not in any way give benefit to the assessee by way of remission or cessation of the liability under Section 41(1) of the Act. This view is supported by the decision of Hon'ble Supreme Court in the case of Commissioner of Income Tax Vs. Sugauli Sugar Works (P.) Ltd. – [1999] 236 ITR 518, wherein Hon'ble Supreme Court affirmed the decision of Hon'ble Calcutta High Court in CIT Vs. Sugauli Sugar Works P.Ltd. – [1983] 140 ITR 286, and observed that the following words in Section 41(1) of the Act are important "the assessee had 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 him". The Section contemplates the obtaining by the assessee of an amount either in cash or in any other manner whatsoever or a benefit by way of remission or cessation and it should be of a particular amount obtained by him. Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is the sine qua non for the application of this section. The mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not enable the Department to say that Section 41(1) of the Act would apply and the amount should be included in the total income of the assessee. It was further held that the principle that expiry of the 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. If that principle is applied, it is clear that mere entry in the books of account 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.

In view of the above, we are of the view that in the given facts and circumstances, there is no cessation of liability in terms of Section 41(1) of the Act in regard to the amount of ₹55,60,599/-. We delete the addition and allow the appeal of the assessee.

In the result, the appeal of the assessee is allowed.