MAX MEDIA TECHNOLOGIES PRIVATE LIMITED ,MUMBAI vs. ITO WARD 12(3)(1), MUMBAI

4. No cessation or remission of liability in fact or in law: On the facts and in the circumstances of the case and in law, the CIT(A) erred in confirming the addition under section 41(1) despite no evidence of actual cessation or remission of liability by the foreign creditors, nor any write-back in the appellant's books of account.

5. Ignoring binding judicial precedents: On the facts and in the circumstances of the case and in law, the CIT(A) erred in disregarding judicial precedents cited by the appellant which held that mere long pendency of liability, without extinguishment or unilateral write-back, does not constitute cessation under section 41(1).

6. Incorrect assumption of cessation based on time lapse: On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that mere non-payment for a long-time result in automatic cessation of liability under section 41(1), which is contrary to law and settled judicial position. The appellant craves leave to add to, amend or alter the above grounds before or at the time of hearing of the appeal.”

The assessee is a company engaged in the business of import and resale of mobile phones and their accessories. For the year under consideration, it filed its return of income on 13/08/2014 declaring a loss of ₹1,42,598/-. The case was selected for scrutiny and notice u/s 143(2) of the Act was issued on 31/08/2015. Subsequently, notice u/s 142(1) along with a questionnaire was issued. In response to the statutory notices, the representative of the assessee appeared before the Ld. AO and furnished the details as called for.

2.1. During the course of assessment proceedings, the Ld. AO observed that certain sundry creditors were outstanding from the preceding years. Accordingly, the Ld. AO called for party-wise details of the sundry creditors and required the assessee to explain as to why the unpaid creditors should not be treated as income on account of cessation of liability.

2.1.1. In response, the assessee submitted that mobile phones and accessories were purchased in the earlier years from Zytel Industries Ltd., and Hainan Peng Hua National Industries, both being Hong Kong-based entities, and that the outstanding balances were continuing to be reflected as trade creditors since FY 2008–09 & 2009-10 respectively. The assessee submitted before the Ld. AO that, the amounts represented outstanding liabilities and did not amount to cessation of income. It was further submitted that, the assessee had not derived any benefit from the outstanding creditors during the year under consideration since the same was not waived by the creditors. In support of its contention, the assessee 2.2. However, the Ld. AO was of the opinion that the assessee failed to establish the genuineness of the creditors and, thus held that the liability ceased to exist. In support of this conclusion, the Ld. AO placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT v. Sundaram Iyengar (T.V.) & Sons Ltd.. Accordingly, the Ld. AO treated the outstanding credit liability as income u/s 41(1) of the Act.

Aggrieved by the order of the Ld. AO, the assessee preferred an appeal before the Ld.CIT(A).

“Ground no 1: Assessee has challenged addition of Rs 43,79,941/-. From time to time, assessee has made various submission to justify its claim. Assessee made submission when an opportunity was provided by undersigned also. Gist of the submission made by assessee is as below: • When liability is still outstanding as on 31-03-2013 in books of accounts, addition u/s 41(1) of the Act is liable to be deleted. • Unless the liability becomes unenforceable or is given up by the other party or something is brought on records that there is cessation of liability, the same cannot be brought to tax u/s 41(1) of the Act. Assessee has also relied on various case laws. After considering material available on record and submission made by assessee, find that assesse fails to justify its claim. As noted by AO, the amounts were long pending to be paid on 31-03-2013. Assessee has failed to substantiate why payments were not being made to a foreign party (not a domestic party). Further, assessee failed to bring any evidence of dispute with foreign parties on record. Such a situation is squarely covered by provisions of section 41 of the Act which is reproduced as under:

Profits chargeable to tax. 41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,- (a) the first-mentioned person has 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 such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (Explanation 1.-For the purposes of this sub-section, the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof shall include the remission or cessation of any liability by a unilateral act by the first-mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.] It is amply clear that inclusion of word "shall include" in the Explanation means that it is not necessary that assessee should admit cessation of liability before AO can invoke provisions of section 41 of the Act. Further, case laws cited by assessee are distinguishable on facts of the case under consideration. Rather I find support in Supreme Court judgment in case of Sundaram lyengar (TV) & Sons Ltd (as cited in assessment order) that assessee because of its business operation has become richer by the amount of Rs 43,79,941/-, that the amount has arisen out of ordinary business transactions, that the amount remained with assessee for a long period unpaid to foreign parties, that the claim of foreign parties attains a totally different quality after such a long time period, that the amount becomes a definite surplus in hands of assessee. In spite of availing various opportunities, assessee has not confirmed whether the amounts have been paid as on date. All these factual details confirm the decision taken by AO. Hence the ground of appeal raised by assessee is dismissed.” Aggrieved, by the order of Ld.CIT(A), assessee is in appeal before this Tribunal.

The Ld.AR submitted that, the liability arose due to its agreement with the quality/care issues of the consignment received from suppliers. He submitted that the payment, therefore, did not take place for a long time and there was also no waiver of liability during that period. The Ld.AR at the outset, submitted that, assessee had continuously recognised the outstanding balance as payable in its balance sheet. It is submitted that, the liabilities were never written back nor treated as income during the preceding assessment year.

4.1. The Ld. AR submitted that the dispute was resolved with both foreign suppliers during FY 2023–24 and they agreed to grant relief by way of waiver of the outstanding liabilities and the said amounts were written back during FY 2023–24. He submitted that the said amount of ₹43,79,941/- was thus credited to the profit and loss account in the financial statements for AY 2024–25 relevant to FY 2023–24.

4.2. The Ld. AR submitted that during the course of assessment proceedings the assessee had furnished the following details to establish the genuineness of the transactions:

4.2.1. The Ld. AR submitted that the AO could not identify any error in these documents nor doubted the genuineness of the purchases of goods from the suppliers in the earlier years. He further submitted that in the earlier years the AO had not made any addition on account of cessation of liability in respect of the outstanding credits relating to the two suppliers under consideration.

4.3. The Ld. AR submitted that confirmations regarding waiver of liabilities have also been placed on record in support of the submissions. The Ld. AR further submitted that, the assessee closed its business in the year 2019 and that the assessee discharged its primary onus to establish the genuineness of the transactions recorded in its books of account which were within its knowledge. He submitted that the amount remained outstanding till the closure of the business and it was only thereafter that waiver of liabilities was intimated by the creditors.

4.4. The Ld. AR submitted that the Ld.AO doubted the transactions merely on the ground that, assessee did not make payment to the creditors within six months from the date of shipment as per RBI policy and FEMA regulations. He submitted that the Ld. AO proceeded on the footing that the assessee did not seek extension of 4.5. It was further submitted that, the decision relied upon by the Ld. AO of the Hon’ble Supreme Court in the case of CIT v. T.V. Sundaram Iyengar & Sons Ltd. (supra) is distinguishable and operates on a different footing. He submitted that the issue considered by the Hon’ble Supreme Court in that case was whether advances received would assume the character of income where such amounts remained unclaimed by the trade parties. The Hon’ble Supreme Court thus observed that, by the lapse of time, the deposits become time barred and the amount attained a totally different quality. The Ld.AR submitted that, in the present facts of the case, it was a liability in the books of assessee which remained so and based on the dispute that continued between assessee and the suppliers (creditors), and it never crystallized to be paid by assessee. The Ld.AR thus submitted that, liability that arose, does not get converted into income u/s 41(1) of the Act.

4.5. On the contrary, the Ld.DR submitted that, there is no evidence that the supplier took necessary steps to recover money from assessee. He also submitted that, assessee did not recognise the outstanding credits in its books as liability and has retained the trade liability till it was decided to be waived off by the suppliers. It was the contention of the Ld. DR that since no payment was made till FY 2023–24, the trade liability continued to remain outstanding in the books of the assessee and was liable to be treated as income Perused the submissions advanced by both sides in light of the material placed on record.

5.1. It is further noted that, Ld. AO has not demonstrated that assessee obtained any benefit in respect of the outstanding liability in cash or in kind or in any other manner so as to result in cessation. Admittedly, the waiver of liability was offered to tax by the assessee in AY 2024–25, which clearly shows that the liability had not ceased during the year under consideration. In any event, the assessee has subsequently offered to tax the amount waived by the creditors in the relevant assessment year based on information received regarding such waiver. In the present facts and circumstances, we find that the Ld. AO has not made out a case to Accordingly, grounds raised by the assessee stand allowed.

In the result, the appeal filed by the assessee stands allowed. Order pronounced in the open court on 10/02/2026 Sd/- (BEENA PILLAI) Judicial Member Mumbai Dated: 10/02/2026 SC Sr. P.S. Copy of the order forwarded to:

(1)The Appellant (2) The Respondent (3) The CIT (4) The CIT (Appeals) (5) The DR, I.T.A.T.