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Deputy Commissioner Of Income Tax vs. Karnataka Agro Industries - (Income Tax Appellate Tribunal) (02 Sep 2021)

Liability appearing in the Balance Sheet tantamount to acknowledgement of debt


Direct Taxation

In facts of present case, an amount of Rs. 6,03,90,079 was disallowed under Section 41(1) of the Income Tax Act, 1961 (IT Act) and added to the total income by the Assessing Officer vide assessment order. Aggrieved, the assessee preferred an appeal to the first appellate authority.

Before the first appellate authority, it was contended that, the assessee had received this advance prior to 2003 against sales / services rendered by the assessee. It was submitted that, major portions have been received from the Government Departments. It was stated that, these advances were outstanding due to non-adjustment of receivables on account of closure of assessee-company and the same has been adjusted to receivables after reconciliation during the subsequent assessment years. The advances received against sales amount is ‘Nil' as per Balance Sheet as on 31st March, 2016. The assessee also filed details with regard to how the advances were adjusted against the receivables. The CIT(A) allowed the issue of the assessee and deleted the additions made under Section 41(1) of the IT Act. Aggrieved, the Revenue has raised this issue before the ITAT.

Admittedly, the amounts were received prior to 2003 and were outstanding due to closure of assessee- Company. The advances so received were adjusted to the receivables and reconciliation was filed. As on 31st March, 2016, the advances received against sales amount is ‘Nil' as per the Balance Sheet. Therefore, the liability cannot be construed to have been extinguished and assumed the character of income as envisaged in section 41(1) of the IT Act.

In this context, present Tribunal rely on the judgment of the Delhi High Court in the case of CIT v. Shri Vardhman Overseas Ltd., wherein it was held that, the liability appearing in the Balance Sheet tantamount to acknowledgement of debt. Therefore, it was held by the High Court that, the liability has neither ceased to exist nor there is a remission of liability in terms of Section 41(1) of the IT Act. In view of the judgment of the High Court of Delhi and reasoning, present Tribunal upheld the order of the CIT(A). The appeal filed by the Revenue is dismissed.


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