Merely because a debt has not been repaid for over 3 years would not automatically imply cessation of liability. Limitation period may not be relevant for taxation under the IncomeTax Act.

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Merely because a debt has not been repaid for over 3 years would not automatically imply cessation of liability. Limitation period may not be relevant for taxation under the IncomeTax Act.

Short conclusion of the judgement by Bombay HC is as under:

 

  1. 41(1) (old & unpaid liability for sundry creditors): It is well settled through series of judgments that merely because a debt has not been repaid for over three years, would not automatically imply cessation of liability. Exhaustion of period of limitation may prevent filing of recovery proceedings in a Court of law, nevertheless it cannot be stated by itself that the liability to repay the amount had ceased. Such liability cannot be termed as bogus

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 1288 OF 2016
Pr. Commissioner of Income Tax19
..Appellant
Vs.
Pukhraj S. Jain ..Respondent
…………
Mr. Ashok Kotangle a/w. Ms. Padma Divakar for appellant.
Mr. Tanzil Padvekar for respondent.
…………
CORAM : AKIL KURESHI &
M.S. KARNIK, JJ.
DATE : 4th JANUARY, 2019
P.C.

The Revenue is in Appeal against the judgment of Income Tax Appellate Tribunal dated 10/11/2015. Following questions have been presented for our consideration :

  1. Whether on the facts and circumstances of the case and in Law, the Hon. ITAT was justified in upholding the decision of the Ld. CIT(A) by completely ignoring the contention of the revenue in respect of violation of Rule 46A of the I T Rules, 1962 ?
  2. Whether on the facts and circumstances of the case and in Law, the Hon. ITAT was justified in upholding the decision of the Ld. CIT(A) wherein the addition by the A.O., by invoking section 41 of the I T
    Act, 1961 was deleted ?

2. Briefly stated the facts are that, The respondent – assessee is an individual and engaged in the business of imports. The Assessing Officer while assessing return of the respondent – assessee for the assessment year 2010- 11 noticed that there were several sundry creditors towards whom the assessee had not repaid a sum of Rs.1.79
crores (rounded off) for over three years. The Assessing Officer
therefore after putting the assessee to notice invoked Section
41(1) of the Income Tax Act, 1961 (‘the Act’ for short).

  1. The assessee carried the matter in Appeal and in
    addition to raising legal contentions, the appellant contended
    that in subsequent years most of the creditors were paid off. The
    evidence in this respect was produced before the Commissioner
    (Appeals). The Commissioner (Appeals) allowed the Appeal
    upon which the Revenue approached the Tribunal. The Tribunal
    by the impugned judgment dismissed the Revenue’s Appeal. The
    Tribunal noted that the assessee was unable to repay the
    creditors because of weak financial position and further that the assessee had never completely stopped making repayments. The
    Tribunal also noted that in next couple of years the assessee had
    in fact repaid a sum of Rs. 1.54 crores out of Rs.1.79 crores. The
    Tribunal, therefore, concluded that the assessee never treated
    the liability to have ceased.
  2. It is well settled through series of judgments that
    merely because a debt has not been repaid for over three years,
    would not automatically imply cessation of liability. Exhaustion
    of period of limitation may prevent filing of recovery
    proceedings in a Court of law, nevertheless it cannot be stated
    by itself that the liability to repay the amount had ceased. Going
    by this logic itself, the Assessing Officer, in our opinion,
    committed an error invoking Section 41(1) of the Act. Further
    the assessee had produced additional evidence on record before
    the Appellate Authority after following the procedure and
    pointed out that substantial portion of the debt was cleared in
    later assessment years.
  3. We do not find any error in the decision of the
    Tribunal. Income Tax Appeal is dismissed.
    (M.S. KARNIK, J.) (AKIL KURESHI, J.)

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