Mere Acknowledgment of Unpaid Trade Liabilities in Books

Mere Acknowledgment of Unpaid Trade Liabilities in Books Does Not Constitute Remission or Cessation under Section 41(1)

Issue

Whether trade payables remaining unchanged for over two years can be treated as income due to remission or cessation of liability under Section 41(1) of the Income-tax Act, 1961, when the assessee continues to show them as outstanding in its books.
Whether interest under Section 234C for deferment of advance tax should be calculated based on the returned income or on the assessed income under Section 143(3).

Facts

Filing of Return: The assessee-company filed its return of income declaring a certain amount for Assessment Year 2017-18.
Scrutiny Assessment: During scrutiny proceedings, the Assessing Officer (AO) noted that trade payables towards certain parties remained unchanged for more than two years.
Addition under Section 41(1): Citing non-furnishing of evidence called for, the AO treated the aggregate amount of trade payables as income due to cessation of liability under Section 41(1).
Assessee’s Submission: The assessee contended that the liabilities were continuously acknowledged and shown as payable in its books. It provided payment advices, SAP records, and bank documents showing subsequent discharge of liability for one party.
CIT(A) Decision: The CIT(A) upheld the addition made by the AO under Section 41(1).
Levy of Interest under Section 234C: The AO assessed total income at ~Rs. 365.64 crores under Section 143(3) and levied deferment interest under Section 234C based on the final assessed income rather than the returned income.

Decision

On Section 41(1) (Cessation of Liability)

The mere age of a trade liability does not automatically satisfy the statutory condition of remission or cessation.
The absence of recovery action or confirmation from a creditor does not generate taxable income in the debtor’s hands as long as the debtor acknowledges the debt.
Since the assessee continued to acknowledge all three trade liabilities in its books and the revenue failed to prove waiver by creditors or any benefit obtained during the year, Section 41(1) conditions were not met. (In favour of assessee)

On Section 234C (Advance Tax Interest)

Shortfall in advance tax instalments under Section 234C must be determined strictly with reference to tax due on the returned income, not the assessed income.
The AO was not justified in enhancing interest merely on the basis of income determined under Section 143(3).
The AO was directed to recompute Section 234C interest on tax due on the returned income after allowing due credit for TDS and advance tax. (Matter remanded)

Key Takeaways

Unilateral Treatment Barred: Revenue cannot unilaterally treat long-outstanding liabilities as income under Section 41(1) unless there is evidence of creditor waiver or actual cessation of liability.
Book Entry Significance: Continued acknowledgment of debt in financial statements protects an assessee against addition under Section 41(1).
Section 234C Computation Basis: Interest under Section 234C for advance tax deferment is strictly tied to returned income calculations, distinguishing it from post-assessment interest additions.

IN THE ITAT MUMBAI BENCH ‘A’

L&T MHI Power Boilers (P.) Ltd.

Assistant Commissioner of Income-tax

Smt. Beena Pillai, Judicial Member
and Jagadish, Accountant Member

IT Appeal No. 3273 (Mum) of 2026
[Assessment year 2017-18]

SEPTEMBER 17, 2026

Fenil Bhat, Adv for the Appellant. Surendra Mohan, (SR. DR) for the Respondent.

ORDER

Jagadish, Accountant Member.- This appeal by the assessee is directed against the order dated 19.01.2026 passed by the National Faceless Appeal Centre, Delhi [hereinafter referred to as the “Ld. CIT(A)”] under section 250 of the Income-tax Act, 1961 (“the Act”), arising from the assessment order dated 20.12.2019 passed by the Assistant Commissioner of Income Tax, Circle 2(2)(1), Mumbai under section 143(3) of the Act for Assessment Year 2017-18.

2. The assessee has raised the following grounds of appeal:

“1. On the facts and in the circumstances of the case and in law, the learned Assessing Officer (AO)/Commissioner of Income Tax (Appeals) [CIT(A)] have erred in treating the outstanding balances of three creditors as cessation of liability under section 41(1) of the Act and consequently making an addition of Rs. 2,98,29,000. While doing so, the authorities failed to appreciate that the liabilities continued to subsist and had neither ceased nor been remitted. Accordingly, the addition is unjustified, unwarranted and liable to be deleted.

2. On the facts and in the circumstances of the case and in law, the AO/CIT(A) have erred in not taking cognizance of the subsequent payment made to one such creditor, which itself proves that there was a continuing liability.

3. On the facts and in the circumstances of the case and in law, the AO/CIT(A) have erred in levying interest under section 234C on the assessed income, ignoring the express provision of section 234C which calls for levy of interest for deferment of advance tax on the returned income.

4. The appellant company craves leave to add to, amend, alter or modify the aforesaid grounds of appeal.”

3. Briefly stated, the assessee filed its original return of income on 27.11.2017 declaring total income of Rs. 361,52,57,100 and filed a revised return on the same date declaring total income of Rs. 362,65,67,880. The case was selected for scrutiny and the statutory notices were issued. During assessment proceedings, the Assessing Officer noticed that balances payable to Koyo Singapore Bearing (Pte.) Ltd. of Rs. 60.19 lakh, Vallourec & Mannesmann Tubes of Rs. 93.08 lakh and Era Buildsys Ltd. of Rs. 145.02 lakh had remained unchanged as on 31.03.2015, 31.03.2016 and 31.03.2017. The assessee explained that the creditors continued in its books and that there had been no remission or cessation of the liabilities. The Assessing Officer was not satisfied with the explanation and, solely because the balances had remained outstanding for more than two years and supporting evidence had not been furnished, treated the aggregate amount of Rs. 2,98,29,000 as ceased liability under section 41(1). The total income was assessed at Rs. 365,63,96,880.

4. In appeal, the assessee reiterated that the liabilities continued to be shown as payable and that no benefit had arisen to it by way of remission or cessation. It also produced payment advices, SAP records and bank documents to demonstrate that the amount payable to Koyo Singapore Bearing (Pte.) Ltd. was subsequently discharged. The Assessing Officer, in the remand report, objected to admission of the additional evidence under rule 46A and also contended that a subsequent payment could not alter the position as at 31.03.2017. The Ld. CIT(A) accepted the objections of the Assessing Officer. He held that cessation could be inferred from prolonged non-payment and the absence of confirmations or demands from the creditors and further held that a payment made after the close of the year could not retrospectively establish subsistence of the liability on the balance-sheet date. He accordingly confirmed the addition. The levy of interest under section 234C was also upheld, subject to verification of arithmetical accuracy.

5. Before us, the Ld. Authorised Representative submitted that the addition was made merely because the balances were old. He submitted that all three liabilities continued to be acknowledged in the assessee’s audited books and that neither the assessee nor the creditors had waived, written back or otherwise extinguished them. He drew our attention to the evidence of payment to Koyo Singapore Bearing (Pte.) Ltd. immediately after the close of the relevant previous year and submitted that the payment conclusively disproved cessation. Reliance was placed on the judgments of the Hon’ble jurisdictional High Court in PCIT v. Pukhraj S. Jain [Income Tax Appeal No. 1288 of 2016, dated 04.10.2019], and . PCIT v. Batliboi Environmental Engineering Ltd. (Bom). He also relied upon the appellate order dated 02.12.2024 in the case of the assessee’s group concern, L&T MHI Power Turbine Generators Private Limited, for the same assessment year, in which an addition made on an identical basis was deleted. On section 234C, he submitted that the assessee had computed interest of Rs. 30,91,256 on the tax due on the returned income, whereas the Assessing Officer had charged Rs. 77,25,599 by taking the assessed income.

6. The Ld. Departmental Representative supported the orders of the lower authorities. He submitted that the balances had remained static for more than two years; the assessee had failed to furnish confirmations, reconciliations or contemporaneous demands during assessment proceedings; and the additional evidence was rightly rejected under rule 46A. According to him, the long period of nonpayment and the absence of evidence from the creditors justified the inference that the liabilities had ceased. In respect of section 234C, he submitted that the Assessing Officer may be directed to compute the interest in accordance with law.

7. We have heard the rival submissions and perused the material available on record. Grounds Nos. 1 and 2 concern the same addition under section 41(1) and are therefore considered together. Section 41(1), to the extent relevant, applies where an allowance or deduction has been made in an earlier assessment in respect of a loss, expenditure or trading liability and the assessee subsequently obtains, whether in cash or in any other manner, a benefit in respect of such loss or expenditure, or a benefit by way of remission or cessation of such trading liability. The benefit is chargeable in the previous year in which it is obtained. Thus, apart from the foundational requirement that the relevant liability had resulted in an allowance or deduction in an earlier year, the Revenue must establish an event of remission or cessation, or the obtaining of a benefit, during the previous year sought to be taxed.

8. In the present case, the Assessing Officer has not identified any act, agreement, waiver, settlement, unilateral write-back or other event during the previous year ended 31.03.2017 by which any of the three liabilities was remitted or had ceased. The balances continued to stand as liabilities in the assessee’s books. The entire basis of the addition is that the amounts had remained unchanged for more than two years and the assessee did not furnish the evidence called for within the short time available at the end of the assessment proceedings. The age of a trade liability, by itself, does not satisfy the statutory condition of remission or cessation. Equally, the absence of a recovery action or confirmation from the creditor does not create income in the hands of the debtor when the debtor continues to acknowledge the liability.

9. The issue is directly governed by the judgment of the Hon’ble jurisdictional High Court in Pukhraj S. Jain (supra). The material part of paragraph 4 reads as under:

“4. 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.”

10. The same principle was reiterated by the Hon’ble jurisdictional High Court in Batliboi Environmental Engineering Ltd. (supra). While rejecting the Revenue’s contention that liabilities outstanding for several years and allegedly barred by limitation had ceased, the Hon’ble High Court observed as under:

“The Delhi High Court, after following these decisions concluded that merely because the liability is barred by limitation, it does not cease to be a debt. This view is also taken by this Court in the case of CIT v. Indian Rayon and Industries Ltd. Therefore, the submission made by the Appellant that because the liability is barred by the period of limitation the same would be treated as income and added under section 41(1) of the Act cannot be accepted as no other decision contrary to the above is shown to us.”

11. The aforesaid view is consistent with the decision of the Hon’ble Supreme Court in CIT v. Sugauli Sugar Works (P.) Ltd. 236 ITR 518 (SC), wherein it was held that expiry of the period of limitation does not, by itself, extinguish the debt and that cessation cannot be inferred merely from the creditor’s inability to enforce recovery through a court. The decisive consideration is whether the liability has in fact been remitted or has ceased in the relevant previous year.

12. The finding of the Ld. CIT(A) that a payment made after 31.03.2017 cannot have any bearing on the subsistence of the liability as at the year-end also cannot be accepted. A subsequent event is not being used to create or extinguish a liability retrospectively; it is relevant evidence of the factual position that existed on the balance-sheet date. The payment to Koyo Singapore Bearing (Pte.) Ltd. shortly after the year-end is incompatible with the conclusion that the corresponding liability had already ceased on 31.03.2017. Even apart from the subsequent payment, the assessee had continued to acknowledge each of the three amounts in its books, and the Revenue has brought no material to show that any creditor waived its claim or that the assessee obtained any benefit during the year.

13. The Ld. CIT(A) rejected the additional evidence on the ground that the assessee had not shown sufficient cause under rule 46A. However, once a remand report had been obtained and the evidence went to the root of the very inference drawn under section 41(1), the appellate authority was required to determine the correct tax liability on the basis of the material available before it. In any event, the addition fails on the admitted facts recorded in the assessment order itself: the liabilities continued in the books and the only circumstance relied upon was their age. The evidence of subsequent payment merely reinforces that conclusion. We also note that in the case of L&T MHI Power Turbine Generators Private Limited, the appellate authority deleted an addition made on materially identical facts by following Pukhraj S. Jain and Batliboi Environmental Engineering Ltd. Though that order does not govern the present appeal as a precedent, the same application of the jurisdictional law supports consistency in the treatment of identical facts.

14. In view of the binding judgments discussed above, we hold that the conditions of section 41(1) were not satisfied. The addition of Rs. 2,98,29,000 is therefore deleted. Grounds Nos. 1 and 2 are allowed.

15. Ground No. 3 concerns the computation of interest under section 234C. The levy is mandatory but must be computed strictly in accordance with the section. For a company, the shortfall in advance tax instalments is determined with reference to the tax due on the returned income, subject to the adjustments expressly provided in the section. The Assessing Officer was therefore not justified in increasing the interest merely with reference to the income assessed under section 143(3). We direct the Assessing Officer to recompute interest under section 234C on the tax due on the returned income, after granting due credit for tax deducted at source and advance tax in accordance with law. The assessee’s computation shall be verified. Ground No. 3 is allowed for statistical purposes.

16. Ground No. 4 is general and requires no separate adjudication.

17. In the result, the appeal filed by the assessee is allowed in the terms indicated above.