ACIT-19(3), MUMBAI, MUMBAI vs. YOGI STAR LLP, MUMBAI

This appeal is filed by the Revenue against the order dated 11.08.2025 passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), [hereinafter referred to as "Ld. CIT(A)"] for A.Y. 2023-24 arising out of the assessment proceedings framed u/s 143(3) of the Income Tax Act, 1961.

The brief facts of the case are that the assessee is a Limited Liability Partnership engaged in the business of import, export and trading of diamonds. The assessee filed its return of income declaring total income of Rs.1,71,59,350/-. The case was selected for complete scrutiny under CASS for verification of information relating to lower disallowance under section 40(a)(ia) as compared to the tax audit report. During the course of assessment proceedings, the Assessing Officer called upon the assessee to furnish complete details regarding domestic as well as foreign creditors reflected in its books of account.

On verification of the details furnished, the Assessing Officer noticed that the assessee had shown four foreign entities as outstanding trade creditors. The aggregate opening balance of these creditors was Rs.9,85,64,690/-. During the year, an amount of Rs.87,15,803/- was added on account of foreign exchange fluctuation resulting in the closing balance of Rs.10,72,80,493/-. According to the Assessing Officer, except for the yearly foreign exchange adjustment, there was practically no movement in these liabilities and the outstanding balances had continued for several years. The Assessing Officer further observed that the assessee had not produced RBI permission, banking approvals or other

The Assessing Officer further issued a detailed show cause notice requiring the assessee to explain, inter alia, the nature of the transactions, details of the foreign creditors, copies of RBI approvals, bank permissions, Form 15CC, correspondence exchanged with the foreign suppliers and reasons for non-payment of the outstanding dues over a prolonged period. The assessee was also required to explain why the outstanding liabilities should not be treated as ceased liabilities chargeable to tax under section 41(1) of the Act.

According to the Assessing Officer, the replies furnished by the assessee did not satisfactorily explain the prolonged non-payment of the outstanding foreign liabilities. The Assessing Officer observed that despite the liabilities having originated in Financial Years 2015-16 and 2016-17, no effective steps had been taken by the assessee to liquidate the outstanding dues. He was of the view that the assessee had failed to establish that the liabilities continued to subsist in law. Accordingly, treating the outstanding foreign creditors amounting to Rs.10,72,80,493/- as liabilities which had ceased within the meaning of section 41(1) of the Act, he added the said amount to the total income of the assessee.

Aggrieved, the assessee preferred an appeal before the Ld. CIT(A). Before the first appellate authority, it was contended that there was neither remission nor cessation of liability. The assessee furnished copies of ledger accounts, confirmations from certain foreign creditors, correspondence acknowledging the outstanding dues and certain banking

The Ld. CIT(A), after considering the submissions of the assessee, accepted the contention that the liabilities continued to subsist and that no material had been brought on record by the Assessing Officer to establish any waiver, remission or extinguishment of the liabilities. Relying principally upon the judgments of the Hon'ble Supreme Court in CIT vs. Sugauli Sugar Works (P.) Ltd. (236 ITR 518) and Chief CIT vs. Kesaria Tea Co. Ltd. (254 ITR 434), the Ld. CIT(A) held that mere long outstanding liabilities could not be brought to tax under section 41(1) in the absence of any benefit obtained by the assessee. The addition of Rs.10,72,80,493/- was accordingly deleted.

Being aggrieved, the Revenue is in appeal before us.

The Ld. Departmental Representative relied upon the assessment order and the written submissions filed before us. He submitted that the Ld. CIT(A) deleted the addition without examining the surrounding facts and circumstances. Inviting our attention to page 51 of the assessee's paper book, he submitted that the email dated 07.10.2019 issued by Mr. A. Moens in respect of N.V. Sushang Exports records that the company had been declared bankrupt and called upon the assessee to settle the outstanding dues. However, no material has been produced to show what transpired thereafter or whether the liability continued to remain enforceable after the bankruptcy proceedings. He further submitted that the assessee has not explained the reasons for non-payment of the outstanding dues for several years. The Ld. DR also pointed out that the assessee has relied upon emails dated 26.03.2025 addressed to the

Per contra, the Ld. Authorised Representative supported the order of the Ld. CIT(A). He submitted that the very email dated 07.10.2019 demonstrates that the liability had not ceased as the bankruptcy administrator had demanded payment of the outstanding dues. He further submitted that the emails dated 26.03.2025 and 27.05.2025 clearly establish that the foreign creditors continued to acknowledge the outstanding liability and the assessee had initiated steps for obtaining RBI permission to remit the dues. According to him, in the absence of any remission or cessation of liability, the provisions of section 41(1) could not be invoked and the Ld. CIT(A) was justified in deleting the addition.

We have heard the rival submissions and perused the material available on record. The sole issue before us is whether the outstanding foreign creditors aggregating to Rs.10,72,80,493/- could be brought to tax under section 41(1) of the Act. The Assessing Officer held that the liabilities had ceased mainly because they remained unpaid for several years and the assessee failed to furnish RBI permissions and other supporting evidence. The Ld. CIT(A), however, deleted the addition holding that there was no remission or cessation of liability.

During the course of hearing, the Ld. DR drew our attention to page 51 of the assessee's paper book containing an email dated 07.10.2019 issued by Mr. A. Moens in respect of N.V. Sushang Exports. The said communication records that the company had been declared

We also notice that the assessee has relied upon emails dated 26.03.2025 addressed to the foreign creditors stating that RBI permission had been sought for remittance of the outstanding dues and subsequent emails dated 27.05.2025 received from the creditors requesting payment. Admittedly, these documents were not available before the Assessing Officer and, therefore, could not be examined by him. Their authenticity and evidentiary value require verification.

In our considered view, the controversy cannot be decided merely on the basis of the age of the liabilities nor solely on the basis of the additional documents now produced by the assessee. The email relating to the bankruptcy proceedings of N.V. Sushang Exports, the subsequent correspondence, the legal status of the liabilities, the reasons for prolonged non-payment and the additional evidence relied upon by the assessee require proper factual enquiry. Since these aspects go to the root of the applicability of section 41(1), we deem it appropriate to restore the matter to the file of the Assessing Officer.

We accordingly set aside the impugned order of the Ld. CIT(A) and restore the issue relating to the addition under section 41(1) to the file of the Assessing Officer. The Assessing Officer shall examine the email dated 07.10.2019, the subsequent correspondence relating to the

In the result, the appeal of the Revenue is allowed for statistical purposes.