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Facts
The Revenue appealed against the deletion of an addition of Rs. 8,22,08,000/- made by the Assessing Officer under Section 41(1) of the Income Tax Act. The addition was based on the cessation of a liability, which was a loan received by the assessee for repaying a bank loan.
Held
The Tribunal held that the loan was not a trading liability, and there was no remission or cessation of liability as required for invoking Section 41(1). The liability was a capital liability and was duly acknowledged as outstanding. Therefore, Section 41(1) and its Explanation 1 were not applicable.
Key Issues
Whether the loan received by the assessee for repayment of a bank loan constitutes a trading liability the cessation of which attracts Section 41(1)? Whether Explanation 1 to Section 41(1) is applicable in this case?
Sections Cited
41(1), 143(3), 248, 252(3), 46A
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Income Tax Appellate Tribunal, DELHI ‘C’ BENCH,
Before: SHRI ANUBHAV SHARMA, & SHRI NAVEEN CHANDRA
This appeal by the Revenue is directed against the order of the ld.
CIT(A), Delhi dated 26.09.2024 pertaining to A.Y 2016-17.
The solitary grievance raised by the Revenue pertains to the deletion of addition of Rs. 8,22,08,000/- made u/s 41(1) of the Income- without following the process of admitting additional evidence u/r 46A.
Brief facts of the case are that the assessee received an amount of Rs. 8,22,08,000/- from M/s Sethi Housing Private Limited and the amount has been utilized by the assessee for the purpose of repayment of loan of Bank of India. The same is returnable to M/s Sethi Housing Private Limited. The assessee has not claimed this amount as trading expenses in the books of accounts in any of the preceding years.
The ld AO however considered the same as cessation of liability u/s 41(1) and added the same to the income of the assessee u/s 143(3) of the Act.
Aggrieved, the assessee went in appeal before the ld. CIT(A) who deleted the addition made by the Assessing Officer.
Now the aggrieved Revenue is in appeal before us.
The ld. counsel for the Revenue vehemently submitted that the ld. CIT(A) was not justified in ignoring the applicability of Explanation 1 of Section 41(1)(a) of the Act as mentioned in the case of T V Sundram Aiyangar & Sons 222 ITR 344. The ld. DR relied upon the findings of the Assessing Officer.
The ld DR further stated that during the course of appellate proceedings, the Assessing Officer in his remand report has mentioned
Page 2 of 10 ROC(H)/248(5)STK-7/2017 dated 21.7.2017, issued by the Registrar of Companies, AP & Telangana u/s 248(5) of the Companies Act, 2013, hence the liability of return back the loan ceased to exist and hence the AO has correctly added the same to the income of the assessee.
Per contra, the ld AR of the assessee, on the issue of striking off of a company u/s 248 of the Companies Act, 2013, submitted that being struck off for Register due to non-compliance, does not amount to a winding-up under the Act. It merely results in temporary removal from the register of companies, but the company's legal obligations, including its liabilities, are not extinguished. A key distinction must be drawn between striking off under Section 248 and winding up. Striking off ends the legal existence of the company for operational purposes, but does not result in the distribution or extinguishment of its assets or liabilities.
Winding up, on the other hand, is a judicial or administrative process by which the assets are realized and liabilities discharged under the oversight of the Tribunal or Liquidator. The legislature being mindful of this distinction specifically inserted provision 248(8) that recognizes the power of the Tribunal to wind up a company that has been struck off.
It was also contended that u/s 252(3) of the Companies Act, 2013, the name of a company struck off under Section 248 can be restored by Page 3 of 10 twenty years of the publication of the striking-off notice in the Official Gazette. Accordingly, the right to recover or enforce liabilities against the struck-off company remains intact.
Additionally, the ld AR submitted that the effective date of striking off, as acknowledged by the Assessing Officer, is 21.07.2017, which is subsequent to the relevant Assessment Year 2016-17. Therefore, it has no bearing on the assessee liability or position during the year under consideration.
The ld. counsel for the assessee vehemently stated that detailed documentary evidence, including Profit & Loss accounts, Balance Sheets, and ITR acknowledgments for the F.Ys 2010-11 to 2018-19 were submitted before the authorities which confirm that no deduction or expense was ever claimed in respect of this liability in any earlier year, nor has any amount been written back to the P&L account in the current year. The liability continues to be reflected under sundry creditors as on 31.03.2018. The ld AR added that these facts are not disputed by the Assessing Officer.
Regarding the applicability of Rule 46A, the ld. counsel for the assessee submitted that the ld CIT(A) has categorically clarified that there is no question of applicability of rule 46A in this as the appellant
Page 4 of 10 the AO. Thus, the objection regarding additional evidence and violation of Rule 46A is unfounded both in law and on facts.
The ld. counsel for the assessee relied upon the following case laws: [2024]164 taxmann.com 353 (SC) SUPREME COURT OF INDIA in the case of Principal Commissioner of Income-tax v. Soorajmull Nagarmull [2023] 156 taxmann.com 266 (Delhi) HIGH COURT OF DELHI in the case of Principal Commissioner of Income-tax v. Arvind Kumar Arora [2024] 165 taxmann.com 368 (Gujarat) HIGH COURT OF GUJARAT in the case of Principal Commissioner of Income-tax v. Vishal Exports Overseas Ltd. [2023] 153 taxmann.com 465 (Mumbai - Trib.) IN THE ITAT MUMBAI BENCH 'D' in the case of Deputy Commissioner of Income-tax v. Ramani Exports [2022] 143 taxmann.com 60 (Chandigarh - Trib.) IN THE ITAT CHANDIGARH BENCH 'B' in the case of Income-tax Officer v. Mohinder Pal Singla [2018] 97 taxmann.com 399 (Delhi) HIGH COURT OF DELHI in the case of Principal Commissioner of Income Tax-6 v. New World Synthetics Ltd. [2015] 59 taxmann.com 428 (Gujarat) HIGH COURT OF GUJARAT in the case of Pr. Commissioner of Income-tax, Ahmedabad v. Matruprasad C Pandey [2013] 35 taxmann.com 451 (Delhi) HIGH COURT OF DELHI in the case of Commissioner of Income-tax-III v. Shivali Construction (P.) Ltd.
We have heard the rival submissions and have perused the relevant material on record. We have also gone through the cited decisions. To adjudicate the matter at hand, a recitation of the law involved u/s 41(1) is necessary to be cited as follows:
“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 Page 5 of 10 [A.Y 2016-17] JLG Developers 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 b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year. 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 in his accounts”
In order to apply the provisions of section 41(1) in the instant case, we have to examine the relevant facts vis a vis the law. Firstly, there should be a recovery of any loss or expenditure, remission or cessation of trading liability. The liability must be a trading liability and not on capital account and that person is allowed deduction or allowance for the same in any previous year.
In the instant case, we find that the fact that the assessee has not written back any amount relating to this liability as a remission or Page 6 of 10 liability was still outstanding in the books, has not been controverted.
Admittedly, it is not the revenue case that there is recovery of any loss or expenditure. The fact that the said liability of the assessee was in the nature of a loan taken to repay the loan from Bank of India, also remains uncontroverted. Furthermore, there is no amount is debited in profit and loss account relating to this liability.
In the above factual matrix of the instant case, we are of the considered view that the said loan is in not in the nature of trading liability. Further, there is no remission or cessation of liability as the assessee has neither written back nor credited the said liability to its profit and loss account, which is a mandatory precondition for invoking Section 41(1). The said liability continued to appear as outstanding in the assessee's books not only for the year under consideration but also in subsequent financial years. In our considered view therefore, the provisions of section 41(1) is not applicable in the instant case. Ground 1 is dismissed.
In the facts of the case, we further find that there is no violation of 46A as the assessee never filed any additional evidence before the CIT(A) which would have brought Rule 46A into play.
Page 7 of 10 we find that Explanation 1 to Section 41(1) clarifies that the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation" shall include remission or cessation of liability by a unilateral act, such as writing off such liability in the accounts of the assessee. This provision is applicable only where a trading liability ceases either through mutual understanding or by unilateral action of the assessee. In the present case, the said liability is not a trading liability but rather a capital liability in the form of an advance/loan received, which was used for the repayment of a bank loan. There has been no unilateral act of write-off, and the liability is duly acknowledged as outstanding both in the books of the appellant and in the confirmation furnished by the creditor. Thus, we hold that Explanation 1 of section 41(1) is also not applicable in the case of the assessee. Ground 2 is dismissed.
We also find that the CIT(A) has correctly distinguished the facts of the assessee’s case with that of the case of T V Sundram Aiyangar & Sons 222 ITR 344(SC). In the case of T V Sundram Aiyangar & Sons, the assessee had a trading liability which was written back in the P & L account. In contrast, in the instant case, the liability is that of a Loan
Page 8 of 10 refundable.
The decision of the hon’ble Supreme Court in the case of Principal Commissioner of Income-tax v. Soorajmull Nagarmull (supra) and that of hon’ble Delhi High Court in the case of Principal Commissioner of Income-tax v. Arvind Kumar Arora,(supra) relied upon by the assessee are squarely applicable. dismissed.
Order pronounced in open court on 12.12.2025.