No cessation of liability if proceedings for recovery of amount from assessee were pending before court: ITAT

Case details: DCIT v. Surbhit Impex (P.) Ltd. - [2021] 130 taxmann.com 315 (Mumbai - Trib.)

Judiciary and Counsel Details

• • Pramod Kumar, Vice President and Saktijit Dey, Judicial Member
  • Vijaykumar G. Subramanyam for the Appellant.
  • K. Shivaram, Sr. Adv. for the Respondent.

Facts of the Case

Assessee was a company engaged in the business of trading. During the assessment, Assessing Officer (AO) noted that the assessee had two creditors. The assessee had purchased and sold the consignment, and since the consignment was not of good quality, the payments to these parties were not made.

Accordingly, AO held that amount to be paid to these creditors was trading liability & was not paid till date, thus the same to be treated as deemed income of business by cessation of trading liability under section 41(1)(a) of the Income-tax Act, 1961. Assessee opposed treatment because the liability had not ceased as the same was disputed before judicial forums. However, AO rejected the assessee’s contentions.

The CIT(A) reversed the order of AO. Aggrieved-AO filed the instant appeal before the Tribunal.

ITAT Held

The Mumbai Tribunal held that it was undisputed position that as on the relevant point of time, the proceedings against the assessee for recovery of amounts payable to creditors were pending before the Hon’ble judicial forum.

To bring an amount to tax under section 41(1)(a), three fundamental conditions are to be satisfied. Out of these three, one of the very foundational conditions is that there has to be benefit in respect of such trading liability through ‘remission and cessation’.
In the instant case, that condition was not satisfied due to the pendency of recovery proceedings initiated by creditors against the assessee. Thus, the order of CIT(A) deleting additions was to be upheld.