S. 41(1): Unclaimed Liabilities Not Taxable As Income Even If Creditors Not Traceable And Liabilities Are Non-Genuine

CIT vs. Bhogilal Ramjibhai Atara (Gujarat High Court)

S. 41(1): Unclaimed liabilities (of earlier years), which are shown as payable in the accounts, are not taxable as income even if creditors untraceable & liabilities are non-genuine


In AY 2007-08 the assessee showed an amount of Rs. 37.52 lakhs as being due to various creditors. The AO issued summons to the creditors. Some of the creditors were not found at the given address and some stated that they had no concern with the assessee. The AO took the view that there was a “cessation” of the liabilities and assessed the said liabilities to tax u/s 41(1). The CIT(A) confirmed the addition though the Tribunal deleted it on the basis that as the liabilities had not been written back in the accounts, s. 41(1) did not apply. On appeal by the department to the High Court HELD dismissing the appeal:

S. 41(1) would apply in a case where there has been remission or cessation of liability during the year under consideration. In the present case, there was nothing on record to suggest there was remission or cessation of liability in the AY 2007-08. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. The AO undertook the exercise to verify the records of the so-called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi-parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income u/s 41(1) of the Act. This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of s. 41(1) of the Act there is no cure for it.

Contrast with Shailesh Shah/ Yusuf Tanwar (ITAT Mum) where it was held, following Chipsoft Technology 210 Taxman 173 (Del) (which appears to be contrary to Vardhaman Overseas 343 ITR 408 (Del)), that if the alleged creditors are unidentifiable, the liabilities must be deemed to have ceased and the amount is assessable u/s 41(1)

Anupam Tele Services vs. ITO (Gujarat High Court)

No s. 40A(3) disallowance for cash payments even if Rule 6DD(j) exception does not apply if there is no dispute as to genuineness of payment and business compulsion


S. 40A(3) and Rule 6DD are not intended to restrict business activities. The terms of s. 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the AO the circumstances under which the payment in the manner prescribed in s. 40A (3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. On facts, though the case of the assessee did not fall within the exclusion clause in Rule 6DD (j), s. 40A(3) will not apply because (a) there is no doubt as to the genuineness of the payment nor the identity of the payee, (b) the assessee was compelled to pay cash owing to the insistence of its principal and if it had not abided by the direction, the business would have suffered & (c) the exceptions in Rule 6DD are not exhaustive and the rule must be interpreted liberally (Attar Singh Gurmukh Singh 191 ITR 667 (SC), Hynoup Food & Oil Industries 290 ITR 702 (Guj) & Harshila Chordia 298 ITR 349 (Raj) referred)