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Facts
The assessee company's assessment year was 2017-18. The Assessing Officer (AO) treated outstanding sundry creditors as income under Section 41(1) of the Income Tax Act, 1961, considering them as a cessation of liability. The assessee argued that these liabilities were still outstanding and not written back, hence Section 41(1) was not applicable.
Held
The Tribunal held that for Section 41(1) to apply, there must be a remission or cessation of liability, and the assessee must have derived some benefit from it. In this case, the liabilities were still shown as outstanding in the assessee's books, and there was no evidence of cessation in law or benefit derived by the assessee. Therefore, Section 41(1) could not be invoked.
Key Issues
Whether outstanding sundry creditors, not written back or ceased, can be considered as income under Section 41(1) of the Income Tax Act, 1961.
Sections Cited
41(1), 143(3), 132(4), 132
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘SMC’ BENCH : BANGALORE
Before: SHRI PRASHANT MAHARISHI, VICE – & SHRI KESHAV DUBEY
ORDER PER PRASHANT MAHARISHI, VICE – PRESIDENT 1.
M/s. Hassan Power Supply Company Ltd., (the Assessee/Appellant) for Assessment Year 2017- 18 against the Appellate Order passed by the Commissioner of Income Tax, Appeals-15, Bangalore (the Ld. CIT(A)) wherein the Appeal filed by the Assessee against the Assessment Order passed u/s. 143(3) of the Income Tax Act, 1961 (the Act) dated 26.12.2019 was dismissed.
Main Grievance of the assessee is that there are current liabilities of group companies , which are outstanding in the books of the accounts of the assessee, which are not written back by assessee or Page 2 of 6 those creditors, have been considered by the ld. AO as cessation of liability , liable to tax u/s 41(1) of the Act merely because those liabilities are outstanding for long time and in statement u/s 132 (4) of the Act one of the directors of the assessee, agreed to offer the same as income.
Briefly stated the facts of the case shows that for the impugned Assessment Year 2017-18, the Assessee Company filed return of income on 07.02.2018 declaring income at Rs. Nil/-. The case was selected for complete scrutiny and notice u/s. 143(2) of the Act was issued. The facts also shows that during search u/s. 132 of the Act on 23.09.2016 in case of M/s. Srinivasa Trust, statement of one Shri D.A. Srinivas was taken wherein he was confronted with the fact that there were long outstanding sundry creditors which were non-moving in nature. He voluntarily agreed to offer them as additional income. However, in the return of income, it was not offered and therefore the Ld. Assessing Officer questioned the Assessee.
The Assessee submitted that the statement given by Shri D.A. Srinivas is not binding, submitted confirmation of sundry creditors and it was stated that same are outstanding, hence, there is no cessation of liability u/s 41 (1) of the Act.
The Ld. Assessing Officer rejected the contention of the Assessee stating that the creditors appearing in the books are long outstanding as well as stagnant balances and does not have further transactions since last 10 years and therefore these are income of the Assessee. The Assessee could not produce any evidence that those parties have made efforts to recover said credits from the Assessee. Therefore, the Ld. Assessing Officer noted that Rs. 5,62,187/- related to these different parties are chargeable to tax u/s. 41(1) of the Act being
The Assessee challenged the Assessment Order before the Ld. CIT(A) wherein the Ld. CIT(A) confirmed the action of the Ld. Assessing Officer. Therefore, the Assessee is in Appeal.
The Ld. Authorized Representative submitted that there is no application of section 41(1) of the Act as the outstanding creditors are neither written back nor ceased to exist. He further referred to the decision of several High Courts wherein the issue is decided in favor of the Assessee. He submits that in all the decisions relied upon by the Ld. Assessing Officer, the credit balances are written back in the books of accounts of the Assessee and recognized as income but same was not offered for tax. The case of the Assessee is that all the sum are still outstanding in the books of accounts of the Assessee as it is and therefore there is no question of cessation of liability so that the same being offered as an income.
The Ld. Standing Counsel for Revenue Shri Ganesh R Ghale, Advocate vehemently supported the orders of the Ld. lower authorities and submitted that when during the course of search Mr. D.A. Srinivas agreed to offer the income of these parties which are related parties , outstanding in the books of accounts of the Assessee for a decade, there is no evidence that there is any demand from those parties and therefore liability pay them have ceased and naturally it is the income of the Assessee. The Ld. lower authorities have correctly confirmed the income taxability u/s. 41(1) of the Act.
We have carefully considered the rival contention and perused the orders of the Ld. lower authorities. The fact shows that there are certain outstanding sums of sundry creditors lying in the books of the Page 4 of 6 Assessee as sundry creditors. Such amount are tabulated in Paragraph no. 5.3 of the Ld. Assessing Officer as under:-
Date Confirmation Sundry Outstanding Outstanding since S.No. received Creditors Amount since last (Yes/No) payment Chakra Infrastructure Not 1. 282750 >5 years No Consultants known Pvt. Ltd J M Morgan Not 2. 1000 >5 years No Stanlet Ltd. known Deepam Silk Not 3. 1187 >1 year No International known Audit Fee Not 4. 60000 >2 years No Payable known TDS on Not 5. 17250 >5 years No contract known Rent Deposit Not 6. 200000 >2 years No Received known 10. These sums when questioned during search to one Mr. D.A. Srinivas, he agreed to offer same as income. But, in the return of income, same were not offered. Therefore, the issue is when the sundry creditors are outstanding in the books of accounts, they can be considered as cessation of the liability because of the fact that same remain unpaid, there is no evidence of recovery being asked by those parties from the Assessee, pertaining to related parties. According to provisions of section 41(1) of the Act, we find that the income is chargeable to tax only when there is a remission or cessation of liability. Here the liability is disclosed in the books of accounts, and it is subsisting. Therefore, we do not find that the provisions of section 41(1) apply in this case.
In Commissioner of Income-tax, Bangalore vs. Alvares & Thomas [2016] 69 taxmann.com 257 (Karnataka)/ [2016] 239 Taxman 456 (Karnataka)/[2017] 394 ITR 647 (Karnataka)[24-03-2016] it is heldthat there are two requirements for invoking the provision of Section 41. The Sine qua non is, the remission or cessation of the Page 5 of 6 trading liability and the additional requirement is, some benefit in respect of such trade liability is taken by the Assessee. If the aforesaid conditions are satisfied, then only Section 41(1) could be invoked by the Assessing Officer. Cessation of the liability has to be cessation in law, of the debt to be paid by the assessee to the creditor. All the judicial precedents cited shows that there is write back of such liability by the assessee itself, which is not the case here as assessee continued to show these creditors as its liability in its annual accounts.
In the present case it is not shown that liability has ceased to exist. Mere admission u/s 132(4) by the director of the company or non- availability of confirmation cannot go contrary to the law that when there is no cessation of liability, it cannot be the income of the assessee.
In view ofthis, ground no. 4 is allowed.
All other grounds of appeal are not pressed and hence dismissed.
In the result, Appeal filed by the Assessee is partly allowed.
Order pronounced in the open court on 06th February, 2026.
Sd/- Sd/- (KESHAV DUBEY) (PRASHANT MAHARISHI) JUDICIAL MEMBER VICE-PRESIDENT Bangalore, Dated, the 06th February, 2026. *TNTS*