AdminIn a recent decision, Mumbai Income Tax Tribunal has held that where a liability was outstanding on books for a disproportionately long period of time and the assessee is unable to prove the identity & genuineness of creditors, such long outstanding liability will be assessed as income under section 41(1) of the Income Tax Act, 1961.
In the case before the Mumbai Tribunal, the assessee, engaged in the business of civil construction and labour contractor, had an amount of Rs. 86.25 lakhs shown as outstanding labour charges in his balance sheet that had remained unpaid for more than three years. The Assessing Officer (AO) held that the fact that the amount was outstanding for so many years was abnormal. As the assessee was unable to give the addresses and labour bills of the labourers, he held that the assessee had failed to prove the genuineness of the liability and that it had ceased to exist. He therefore assessed the said sum as income u/s 41(1). On appeal, the CIT(A) reversed the AO on the ground that the fact that the amount was outstanding for a long period and that the assessee was unable to furnish confirmations did not mean that there was a remission or cessation of liability during the assessment year so as to attract s. 41(1).
On appeal by the department to the Tribunal while allowing the appeal observed that it is very improbable that payments to labour can remain outstanding for more than three years. The assessee has not been able to produce the records relating to the name, addresses and bills of the labour etc to prove that the liability continues to exist. It is accordingly a case of cessation of liability. The assessee has just continued the entry of the same in his books of account without any intention to pay back the same.
The view was taken that it would be illogical to say that a debtor or an employer, holding on to unpaid dues, should be given the benefit of his showing the amount as a liability, even though he would be entitled in law to say that a claim for its recovery is time barred, and continue to enjoy the amount. It was observed that the assessee cannot be allowed to show an amount as a liability even though he has no intention to pay it back but to enjoy the same for an unlimited period without being added to his income only on the excuse that he has not written off the same in his books of accounts. However, if the facts of the case establish that the liability has been genuinely shown by the assessee and his subsequent conduct shows that he has paid back the said credits and his intention was not to enjoy the amount for unlimited period without any intention to pay back the same, then it cannot be said to be a case of cessation of liability.
On the above premise, the Tribunal opined that on facts, not only is the existence of outstanding liability of labour charges for so many years improbable in the normal course of business but the assessee has also failed to give any evidence regarding the identity & genuineness of the creditors. Accordingly it is a case of cessation of liability and s. 41(1) applies.
The above decision of the Mumbai Tribunal is contrary to the law laid down by the Mumbai High Court in J.K.Chemicals and by the Delhi High Court in Vardhaman Overseas Ltd where the law was laid down that section 41(1) does not apply if the amount of liability is not written back in the accounts.
[By Shaleen Shah (Partner), VNCA]
