INCOME TAX ACT, 1961

Section 41(1)

Business income - Profits chargeable to tax under section 41(1) - Remission or cessation of trading liability - Trading credits of erstwhile business--Assessee's failure to produce written confirmations coupled with no claim made by creditors for long

Assessee was earlier engaged in business of timber, but about 10 years back it closed that timber business and switched over to the business of recruitment of employees for sending to Gulf countries on behalf of certain foreign companies. Sundry creditors, about 16 in number, totaling to Rs. 58 lakhs represented suppliers in timber business of assessee and shown as sundry creditors in balance-sheet of assessee. AO required assessee to produce confirmations from those sundry creditors about existence of its liability but assessee submitted that these were old balances outstanding for last several years and therefore, it was unable to produce such written confirmations. AO, therefore, held that liability of the assessee towards such sundry creditors had ceased to exist and therefore, the same was liable to be added back as income of assessee as per section 41(1). Held: A reasonable time line of period has to be drawn while considering the words 'cessation of trading liability' as employed in section 41(1). A lapse of ten years of time, coupled with the fact that there was a change of business altogether by assessee, absolutely justified AO to draw adverse inference against assessee about the cessation of liability, especially when assessee failed to produce written confirmation from trade creditors of its erstwhile timber business, despite grant of opportunity to the assessee. The debts had not only become time barred long ago, but, in fact also, no creditor made any claim for recovery from assessee accordingly, trading credits of erstwhile timber business of assessee were liable to be taxed as profits of business under section 41(1).

REFERRED : CIT v. Chipsoft Technology (P). Ltd. (2013) 1 ITR-OL 106 (Del) : 2013 TaxPub(DT) 0338 (Del-HC).

FAVOUR : Against the assessee.

A.Y. :

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