The
caption heading of section 41(1) is ‘Profits Chargeable to tax’. The section
falls under Chapter IV –Computation of Income from Business or Profession. At the outset, reference is invited towards the
provision of section 41(1) of the Income Tax Act, 1961. The relevant extracts of the same are reproduced
here under:
“Profits chargeable to tax.
(1)
Where an allowance or
deduction has been made in the assessment for any year in respect
of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as
the first-mentioned person) and subsequently during any previous year,—
the first-mentioned
person has
obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in
respect of such trading liability by way of remission
or cessation thereof, the amount obtained
by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business
or profession
and
accordingly chargeable to income-tax as the income of that previous year,
whether the business or profession in respect of which the allowance or
deduction has been made is in existence in that year or not;
Explanation 1.- For
the purposes of this sub-section, the expression “loss or expenditure or some benefit in respect of any such
trading liability by way of
remission or cessation thereof” shall include the remission or cessation of any liability by a unilateral act
by the first mentioned person under clause (a) or the successor in business
under clause (b) of that sub-section by
way of writing off such liability
in his accounts.”
On perusal of the aforesaid section, it could be
said that the above provision enacts adjustment provisions whereby the revenue
takes back what it has already allowed if the following two conditions come to
pass and as such, the under noted conditions needs to be fulfilled in order to
treat the cessation of a liability as income under section 41(1) of the Act:
1.
The assessee has to avail an allowance or deduction in
any earlier year in respect of
loss, expenditure or
trading liability and
2.
In subsequent year, the assessee has to
obtain benefits in cash or any other kind in respect of such loss,
expenditure and trading liability by way of remission or cessation of liability.
3.
As the assessee had not debited the aforesaid liability
to its P&L in any of the earlier years and hence,
the question of receiving any benefit, allowance or
deduction by the assessee in
earlier years, as specified in (1) above, has not been fulfilled in the
instant case and thereby there lies no application of section 41(1) in the
instant case.
4.
Further, the
assessee had also not received any benefit either in cash or otherwise during
the relevant year. In fact the said sum will decrease the cash inflows of the
assessee in the subsequent years. The
assessee has not written back the liability during the relevant year and the
said liability continued to appear as the closing liability and has been
carried forward to next year. Hence,
condition (2) above has also not been fulfilled.
5.
To tabulate the same
one needs to consider the following mandatory
points,
(a)
There has to be a
remission or cessation of a liability or
(b)
There has to be
recovery of any loss or
(c)
There has to be
recovery of any expenditure
(d)
The liability must
be a trading liability and not on capital account
(e) The person is allowed deduction or allowance for the same in any previous year
6.
Thus,
it can be said that both conditions needed for the application of section 41(1)
of the Act has not been fulfilled in the instant case and therefore the
addition made under section 41(1) of the Act would have no legs to stand and
would be thereby liable to be struck.
7.
It is humbly
submitted that in order to apply section 41(1) of the Act, an assessee should
have obtained a deduction in respect of loss, expenditure or trading liability.
The core intent of section 41(1) of the Act was to take back the benefit in the
cases, where the benefit was granted earlier but the subsequent event shows
that the benefit should not have been
granted.
8.
However, in the
instant case, the benefit is neither granted in the earlier years nor during
the relevant year and thereby no addition may be made under section 41(1) of
the Act. Had the assessee availed any benefit in earlier years or during the
relevant year then section 41(1) of the Act would have application. In the
instant case, it is not disputed that the assessee never debited any sum in the
Profit & Loss account and as such, the assessee has not obtained such
allowance or deduction in respect of expenditure or trading liability and
therefore, the question of section 41(1) of the Act is not applicable.
9.
Reliance in this
regard is placed on the decision in the case
of CIT -vs.- Sugauli Sugar Works
(P). Ltd. (1999) 236 ITR 518 (SC) wherein the ITO held that the liability
had come to an end as a period of more
than 20 years had elapsed and the creditor had not taken any step to recover
the amount and therefore, there was a cessation of the debt under section 41 of
the Act. The Hon’ble Supreme Court while
affirming the decision of the Hon’ble Calcutta High Court held that obtaining
benefit by virtue of remission or cessation is sine qua nonfor section 41(1).
The Hon’ble Apex Court inter alia held,
“3. It will be seen that the following words in the section are
important : ‘the assessee had obtained, whether in cash or in any other manner
whatsoever any amount in respect of such loss or expenditure or some benefit in
respect of such trading liability by way of remission or cessation thereof, the
amount obtained by him’. Thus, the section contemplates the obtaining by the
assessee of an amount either in cash or in any other manner, whatsoever, or a
benefit by way of remission or cessation and it should be of a particular
amount obtained by him. Thus, the
obtaining by the assessee of a benefit by virtue of remission or cessation is sine qua non for the application of this section.”
10.
On
the kind perusal of the said decision, it may be highly appreciate the fact
that the Hon’ble Apex Court has clearly laid down the law that when an amount
has been continuously shown by assessee in its balance sheet, it could not be
construed as ceased so as to bring it within mischief of section 41(1) of the
Act. It cannot be said that the liabilities have ceased to exist on the basis
of the fact that the sum is outstanding for a period of 20 years. In the
instant case, the assessee has shown its liabilities in the books of accounts.
It is indeed that the liabilities are outstanding for nearly ten years but
there has been no remission/cessation of liability and as such, applying the
above ratio, it can be said that the addition under section 41(1) of the Act
has no legs to stand and is liable to be struck.
11.
The aforesaid
provision of the Act came up for further consideration before the Constitutional Bench of three learned Judges of
the Hon’ble Apex Court in the
case of Chief CIT -vs.- Kesaria Tea Co. Ltd. (2002) 254 ITR 434 (SC) wherein
in the context of the similar facts, it was held that section 41(1) of the Act
could arise only if the liability of the assessee has ceased without the
possibility of reviving it and if there has been no cessation during the year
then section 41(1) of the Act has no application. The Hon’ble Apex Court
reiterated the views taken in the case of Sugauli
Sugar(supra.) and had laid the following points for the application of section 41(1):
1.
In the course of the
assessment for an earlier year,
allowance or deduction has been made in respect of any loss, expenditure, or
trading liability incurred by the assessee;
2.
Subsequently, a benefit is obtained in respect of
such trading liability by the way of remission or cessation thereof during the
year in which such event occurred;
3.
The value of benefit
accruing to the assessee is deemed to be the profit and gains of business which
otherwise would not be his income;
4.
The value of benefit
is made chargeable to tax as the income of the year wherein such benefit was obtained.
12.
In the instant case,
the assessee has neither claimed any allowance and/or deduction in the earlier
years nor had received any benefit by way of
remission or cessation of liabilities during the relevant year and therefore it
may be safely concluded that the assessee has fulfilled none of the above
prescribed conditions and thereby applying the ratio laid down by the Hon’ble
Supreme Court, it may be stated that section 41(1) would have no legs to stand.
13.
Further, in the case
of CIT -vs.- Mahindra & Mahindra
Ltd. (2018) 93 taxmann.com 32 (SC) the Hon’ble Supreme Court elucidated
that it is a sine qua non that there
should be an allowance or deduction claimed by the assessee in any assessment
for any year in respect of loss, expenditure or trading liability incurred by
the assessee and subsequent waiver/remission of the liability. It was further
stated that if an amount has not been debited to P&L in the earlier years
then the same would not be covered under the mischief of section 41(1) of the
Act. The Hon’ble Apex Court explained
the provisions of the said section in the following words,
“15. On a perusal of
the said provision, it is evident that it
is a sine qua non that there should
be an allowance or deduction claimed
by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by
the assessee. Then, subsequently,
during any previous year, if the creditor
remits or waives any such liability, then the assessee is liable to pay tax
under Section 41 of the IT Act. The objective behind this Section is simple. It
is made to ensure that the assessee
does not get away with a double benefit once
by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to
deduction allowed earlier in case of
remission of such liability…
It is important to
note that the said purchase amount had
not been debited to the trading
account or to the profit or loss account
in any of the assessment years…Hence,
we find no force in the argument of
the Revenue that the case of the Respondent
would fall under Section 41 (1) of the IT Act.”
14.
Furthermore, in the
case of Tirunelveli Motor Bus Service
Co. (P.) Ltd. -vs.- CIT (1970) 78 ITR 55(SC) wherein the Hon’ble Apex Court
had categorically held that unless it is proved that an allowance or deduction has been made in any preceding assessment
year in respect of loss, expenditure or trading liability, it is not open to
the revenue to refer to section 10(2A) of Indian Income-tax Act, 1922
(corresponding to section 41(1) of the Act). It was held,
“On that finding of
the Tribunal it could hardly be regarded as established that either any
allowance or deduction had been granted in respect of a trading liability of
the assessment year 1950-51, or it had been proved that the assessee had
obtained any benefit relating to such trading liability in the assessment year
1957-58, which would attract the provisions of section 10(2A) of the Act. That provision only applies when an allowance for deduction has been made in
the assessment of any year in
respect of any loss, expenditure or trading liability incurred by the assessee and, subsequently, during any previous year the assessee receives any
amount in respect of such loss or
expenditure or has obtained some benefit in respect
of such trading liability by way of remission or cessation thereof in which event the amount received by him
has to be deemed to be profits and gains. On the finding of the Tribunal the
condition of section 10(2A) could not be said to have been satisfied and the addition
of Rs. 54,479 made by the Income-tax Officer in the assessment for the year
1957-58 was not justified.”
Relaince placed upon
Solid Containers
Ltd. 308 ITR 407 (BOM)
In such cases though
the person has gained an advantage by not paying the liability, the second test
which is regarding claim or any allowance or deduction is not satisfied. The
acquisition of fixed asset is never allowed as a deduction. Hence the amount
written back cannot be brought to tax. Secondly it also cannot be brought to
tax u/s 28(iv) because 28(iv) refers to benefit in kind and not in cash.
Regarding: -Liability outstanding for a very
long period of time and not
written back in account.
15.
The creditors
balance standing as on last day of the relevant year has been carried forward
as the opening balance of the creditor in the immediately next year, there was
opening balance in the ledger account in the books it could not be said that
there was cessation of liability and hence dis-allowance under section 41(1)
was not justified.
16.
CIT v/s Bhogilal Ramjibhai Atara (Guj) held that even if there is unclaimed liability of
earlier years where even creditors are untraceable and liabilities are non-genuine,
then also the addition cannot be made u/s 41(1) since assessee has not written
it back in books of account.
Bombay Gas Co. Ltd. v/s ACIT (MUM) ITA no. 646 and 1188 of
2009, the Hon’ble High Court has observed that it
is settled law that if the loan was taken for acquiring the capital asset,
waiver thereof would not amount to any income eligible to tax. On the other
hand, if this loan was for trading purpose and was treated as such from the
very beginning in the books of account, as per T.V. Sundaram Iyengar & Sons
Ltd.’s case, the waiver thereof may result in the income more so when it was
transferred to Profit and Loss account.
17.
Hon’ble Supreme
Court decision in the case of CIT vs.
T.V.
Sundaram Iyengar & Sons Ltd. reported in 222 ITR
344 SC:- In this case trade security deposit received by
the assessee and not payable later on was routed through Profit & Loss a/c.
This case has gone against the assessee due to 3 reasons:
1. It was a trade security deposit from debtors.
2. It was reversed by crediting Profit & Loss a/c.
3.
It was a trade liability.
If any of these 3 components are present then it is
not covered u/s 41(1).
18.
The creditors
balance standing as on last day of the relevant year has been carried forward
as the opening balance of the creditor in the immediately next year, there was
opening balance in the ledger account in the books it could not be said that
there was cessation of liability and hence dis-allowance under section 41(1)
was not justified. Applying the ratio laid down in the above judgement, it is apparent that before the section
41(1) of the Act can be invoked, it
is necessary that allowance or deduction has been granted for any year in respect of loss, expenditure or
trading liability and
subsequently the assessee obtains, whether in cash or in any
other manner, any amount in respect of such trading liability by way of
remission or cessation of such liability.
19.
However, in the
instant case, neither any benefit had accrued to the assessee nor had the
assessee claimed any deduction for the said sum and hence the same cannot be
deemed to be the profits and gains of a business and as such, there lies no
question of applying the provision the provision of section 41(1) of the Act.
20.
The disclosure of debt in the books makes the
liability enforceable and thus when the assessee’s liability has subsisted and
did not cease, section 41(1) has no application. In order to attract the
provisions of section 41(1) of the Act, it is necessary that there should have
been a cessation or remission of liability.
21.
In this regard, It is humbly submitted that
disclosure of creditors by the assessee in its balance sheet amounts to an
acknowledgement of the debts in its favor. An acknowledgement of
debt in the audited financials makes the liability enforceable in a court of
law. Thereby assessee’s liability to the creditors subsisted during the
relevant year and had not ceased till the relevant year and as such, the
application of section 41(1) is void-ab-initio.
22.
The duly signed
balance sheet of the assessee by the directors constitutes an acknowledgement
of a legally enforceable debt by the assessee. The assessee has presented the said financials before all the stakeholders including the creditors of the company and
thereby it can be said that that a debt shown in a balance sheet of a company
is enough to acknowledge debt and such acknowledgement need not be addressed by
the creditors. The assessee acknowledges a liability in its financials and
claims that the debts are subsisting and it continues to be liable to pay the
creditors by disclosing the sum as liability payable in its balance sheet.
23.
Reliance in this
regard, is placed upon the decision in the case of Mahabir Cold Storage -vs.- CIT (1991) 188 ITR 91 (SC), wherein the
Hon’ble Supreme Court held that the
entries in the books of accounts of the assessee would amount to an
acknowledgement of the liability as debt. To the same effect, in the case of Ambica Mills Ltd. -vs.- CIT (1964) 54 ITR
167 (Guj.), wherein it was further held that a debt shown in a balance
sheet of a company amounts to an acknowledgement of debt and further the
balance sheet in which such acknowledgement is made need not be addressed to
the creditors.
24.
Similarly, after a
detailed analysis of the legal matter and after consideration of various
judicial pronouncements, the
Hon’ble Delhi High Court in the case
of CIT -vs.- Shri Vardhman Overseas Ltd.
(2011) 343 ITR 408 (Delhi) held that the acknowledgement made by a company
in its balance sheet amounts to acknowledgement of debt. The assessee’s
liability to the creditors thus, subsisted and did not cease nor was it
remitted by the creditors and thereby section 41(1) was not applicable. The
Hon’ble High Court held,
“17…In an
early case, in England, in Jones v. Bellgrove
Properties [1949] 2KB 700, it was held that a statement in a balance sheet
of a company presented to a creditor-share holder of the company and
duly signed by the directors constitutes an acknowledgement of the debt. In Mahabir Cold Storage v. CIT [1991] 188 ITR
91, the Supreme Court held:
“The entries in the books of accounts of the asessee
would amount to an acknowledgement of the liability to creditors within the
meaning of Section 18 of the Limitation Act, 1963, and extend the period of
limitation for the discharge of the liability as debt.”
25.
In several
judgments of this Court, this legal position has been accepted. In Daya Chand Uttam Prakash Jain v. Santosh
Devi Sharma [1997] 67 DLT 13, S.N. Kapoor J. applied the principle in a
case where the primary question was whether a suit under Order 37 CPC could be
filed on the basis of an acknowledgement. In Larsen & Tubro Ltd. v. Commercial Electric Works [1997] 67 DLT 387 a
Single Judge of this Court observed that it is well settled that a balance sheet of a company, where the
defendants had shown a particular amount as due to
the plaintiff, would
constitute an acknowledgement within the meaning of
Section 18 of the Limitation Act. In Rishi
Pal Gupta v. S.J. Knitting & Finishing Mills (P.) Ltd. [1998] 73 DLT 593,
the same view was taken. The last two decisions were cited by Geeta Mittal, J.
in S.C. Gupta v. Allied Beverages Co.
(P.) Ltd. (I.A. No. 7987/2004, decided on 30/4/2007) and it was held that the acknowledgement made by a company in
its balance sheet has the effect of extending the period of limitation for
the purposes of Section 18 of the Limitation Act. In Ambica Mills Ltd. v. CIT [1964] 54 ITR 167 (Guj.), it was further
held that a debt shown in a balance
sheet of a company amounts to an acknowledgement for the purpose of Section 19 of the Limitation Act and in order to be so, the
balance sheet in which such acknowledgement is made need not be addressed to
the creditors. In light of these authorities, it must be held that in the
present case, the disclosure by the
assessee company in its balance
sheet as on 31st March, 2002 of the accounts of the sundry creditors amounts to an
acknowledgement of the debts
in their favour for the purposes of Section 18 of the Limitation Act. The assessee’s liability to the creditors,
thus, subsisted and did not cease
nor was it remitted by the creditors. The
liability was enforceable in a court of law.”
[Emphasis Added]
26. In the said case of Shri Vardhman Overseas Ltd. (supra.), the AO had asked the assessee to submit confirmation letter
from the sundry creditors but the assessee did not submit the confirmation
letters. The AO rejected the assessee’s explanation and added the sum as
income. On appeal before the the Hon’ble Delhi High Court, it was held that the
amounts payable to the sundry credits were not credited to its profit and loss
account for the year and were still shown as outstanding and therefore the
provisions of section 41(1) were not
attracted. The Court
categorically held that though the liability to creditors were
outstanding for more than four years, since there was no cessation of
liability, section 41(1) has no application and after analyzing various
decisions, it was held that the disclosure of liability by the assessee company in its balance sheet
amounts to an acknowledgement of the debts and the liability was enforceable in
a court of law. The assessee’s liability to the creditors, thus, subsisted
and did not cease. The Hon’ble High Court inter
alia held that,
“16. In our
opinion, the judgment of the Supreme
Court in
Sugauli Sugar Works (P.) Ltd. (supra) is a complete answer to the contention of the learned standing counsel. In the case before the Supreme Court for a
period of almost 20 years the
liability remained unpaid and this fact formed
the basis of the contention of the revenue before the Supreme Court to the effect that having regard to the long lapse of time and in the absence of
any steps taken by the creditors to
recover the amount, it must be held that
there was a cessation of the debts bringing the case within the scope of Section 41(1). In the case before us, the identical contention has been taken on
behalf of the revenue, though the
period for which the amount remained
unpaid to the creditors is much less…”
[Emphasis Added]
27.
The said case is
squarely applicable in the instant case. In the instant case, the appellant had
disclosure the liability in its balance sheet and therefore the same amounts to
an acknowledgement of the debt and thus in case where the debt exists there lies
no question of remission/cessation and thereby there arises no question of
application of section 41(1) of the Act.
28. Merely because the liabilities were outstanding for
long periods it could not be inferred that such liabilities had seized to
exist. In this regard, it is submitted that the judgment of the Hon’ble Supreme Court in the case of Sugauli Sugar Works (P.) Ltd. (supra.) is
a complete rebuttal answer to the contention of the A.O. In the said case
before the Hon’ble Apex Court, the liability had been long outstanding for
almost 20 years and the creditor
had not taken
any step to recover
the amount and this fact formed the basis of the contention of the revenue to
the effect that having regard to the long lapse of time and in the absence of
any steps taken by the creditors to recover the amount, it must be held that
there was a cessation of the debts bringing the case within the scope of
Section 41(1). The Hon’ble Apex Court held that the amount has been
continuously shown by assessee in its balance sheet, it could not be construed
as ceased so as to bring it within mischief of section 41(1) of the Act. It
cannot be said that the liabilities have ceased to exist on the basis of the
fact that the sum is outstanding for a period of 20 years.
29.
In the instant case,
the amount remained unpaid to the creditors is nearly ten years i.e. almost
half of the time as before the Hon’ble Supreme Court. The liabilities are
outstanding for nearly ten years but there has been no remission/cessation of
liability and as such, applying the above ratio laid down in the case of Sugauli Sugar Works (P.) Ltd. (supra.) ,
it can be said that the section 41(1) is not applicable in the instant case.
30.
Similarly, in the
case of CIT vs. Sita Devi Juneja (2010)
325 ITR 593 (P&H) assessee’s balance sheet showed the amount as the
liability of Rs. 1.47 crore payable to the creditors. The Hon’ble Punjab & Haryana High Court held
that such liability shown in the
balance sheet indicated the acknowledgement of the debt payable by the assessee.
Merely because such liability was
outstanding for the last six years, it could not be presumed that the said
liability had ceased to exist in following words,
“4…It is the conceded position that in the assessee’s balance sheet, the aforesaid liabilities have been
shown, which are payable to the
sundry creditors. Such liabilities,
shown in the balance sheet,
indicate the acknowledgement of the debts payable
by the assessee. Merely because, such
liability is outstanding for the
last six years, it cannot be presumed that the
said liabilities have ceased to exist…In view of these facts, the CIT(A) as
well as the ITAT have rightly come to the conclusion that the Assessing Officer
has wrongly invoked the Explanation I of section 41(1) of the Act and made the
aforesaid addition on the basis of presumption,
conjectures and surmises. It
has been further found that the Assessing
Officer failed to show that in any
earlier year, allowance of deduction
had been in respect of any trading liability incurred by the assessee. It was also not proved that any benefit was
obtained by the assessee concerning
such trading liability by way of remission or cessation thereof during the
concerned year. Thus, there did not accrue any benefit to the assessee which
could be deemed to be the profit or gain of the assessee’s business, which
would otherwise not be the assessee’s income”
[Emphasis Added]
31.
In light of the
same, it can be said that when the liability continues to appear in the balance
sheet and the same has been carried forward to the subsequent year, the
liability was legally enforceable and thereby there arises no question of
remission or cessation of liability and accordingly, section 41(1) is not applicable
Regarding : Striking off of Company
Name in MCA records
32.
Meaning of Winding
Up:
“Winding up is a
means by which the dissolution of a company is brought about and its assets are
realised and applied in the payment of its debts. After satisfaction of the
debts, the remaining balance, if any, is paid back to the members in proportion
to the contribution made by them to the capital of the company.”
1. “The liquidation or winding up of a company is the
process whereby its life is ended and its property is administered for the
benefit of its creditors and members. An Administrator, called a liquidator, is
appointed and he takes control of the company, collects its assets, pays its
debts and finally distributes any surplus among the members in accordance with
their rights.”
2. As per Section 2(94A) of the Companies Act, 2013,
“winding up” means winding up under this Act or liquidation under the
Insolvency and Bankruptcy Code, 2016.
Thus, winding up
ultimately leads to the dissolution of the company. In between winding up and dissolution,
the legal entity of the company remains and it can be sued in a Tribunal of
law.
Meaning of Dissolution of a Company:
A company is said to be dissolved when it ceases to
exist as a corporate entity. On dissolution, the company’s name shall be struck
off by the Registrar from the Register of Companies and he shall also get this
fact published in the Official Gazette. The dissolution, thus puts an end to
the existence of the company.
Strike Off is a method prescribed under sections
248-252 of the Companies Act, 2013 (the “Act”). These provisions have been
notified by the Ministry of Corporate
Affairs by way of a notification
dated 26 December 2016. They provide an opportunity for defunct companies to
get their names removed from the records of the Registrar of Companies (“ROC’)
With respect to the first method of strike off, the
ROC may suo moto remove the name of the company from the register of companies
under section 248(1) of the Act, provided that the ROC has reasonable cause to
believe that
(a) a company has failed to commence its business within
one year of its incorporation; or
(b)
a company is not
carrying on any business or operation for a period of two immediately preceding
financial years and has not made any application within such period for
obtaining the status of a dormant
company under section 455.
34. Thus the
difference between winding up o company is is the process where the
business operation of a company is terminated and its assets are realised and
the proceeds are paid to the creditors according to priorities whereas in the
strike off of company the effect would be that It shall on and from
the date mentioned in the notice under sub-section (5) of section 248 cease to
operate as a company and the Certificate
of Incorporation issued to it shall be deemed to have been cancelled from such
date except
for the purpose of realising the amount due to the
company and for the payment or discharge of the liabilities or obligations of
the company
35. It is necessary to point out that despite being
dissolved under section 248, the company is not wound up. In other words,
striking off under section 248 only ends the life of the company and it can no
longer operate or do business but does not result in appropriation of
undisposed property towards the liabilities of the company. However, winding up
is a process by which the assets of the company are realised and its
liabilities are paid in accordance with the provisions of the Companies Act.
The legislature being mindful of this distinction specifically inserted
provision 248(8) that recognises the power of the Tribunal to wind up a company
that has been struck off.
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