Section 41 Disallowance Can Only Be Made With Cogent Evidence Of Cessation Of Liability: ITAT Remands The Matter Back To AO
The Delhi Bench of theIncome Tax Appellate Tribunal (ITAT)has held that the issue of the genuineness of the purchases will be applicable only if the purchases belong to the current year.The two-member bench of Anubhav Sharma (Judicial Member) and Shamim Yahya (Accountant Member) has observed that if the department is of the opinion that purchases were made in earlier years but now...
The Delhi Bench of theIncome Tax Appellate Tribunal (ITAT)has held that the issue of the genuineness of the purchases will be applicable only if the purchases belong to the current year.
The two-member bench of Anubhav Sharma (Judicial Member) and Shamim Yahya (Accountant Member) has observed that if the department is of the opinion that purchases were made in earlier years but now the liability has ceased to exist, disallowance can only be made if cogent evidence is brought on record for cessation of liability.
The assessee is in the business of trading in computers and computer peripherals and also providing maintenance services for its clients. During assessment proceedings, the AO called for details of sundry creditors above Rs. 5 lakh, their complete address, and confirmation of the last two years' balance. Independent enquiries were made for the creditors by issuing notices under section 133(6) of the Income Tax Act. The confirmation from M/s AVS Computer Pvt. Ltd. was not received. The confirmation from M/s P3P Productions, M/s JVIT Pvt. Ltd., M/s M Square and M/s M.M. Software Pvt. Ltd. was received.
The AO held that there was no liability for the assessee towards the creditors and had shown a self-created liability in its books, which no longer exists. Therefore, the credit balance is treated as a cessation of liability under section 41 of the Income Tax Act and added back.
Section 41 postulates the disallowance of the cessation of liability for expenditure incurred in trading accounts earlier.
The assessee appealed against the order of the AO before the CIT (A). The CIT (A) sustained the addition. The CIT(A) noted that the appellant provided no evidence at either the assessment or the appellant stages.However, the allegation of the AO is specific and on the basis of documents brought on record, no interference is made with the findings of the AO and the addition is sustained.
The ITAT noted that the disallowance had been made by the AO and confirmed by the CIT (A) on the plank that the purchases were not genuine.
The ITAT held that since the authorities below are for all practical purposes trying to disallow the purchases made in earlier years on the plank of their not being genuine, the disallowance under section 41 is not legally maintainable.
"However, since it is also noted that the AO has brought some material by establishing the doubtfulness of liabilities, we deem it appropriate to remit the issue back to the file to the AO. The AO shall consider the issue afresh and make proper enquiry after giving proper notice of being heard to the assessee," the court said.
Case Title: Jain Peripherals Pvt. Ltd. Versus DCIT
Citation: ITA No.5099/Del./2019
Dated: 23.06.2022
Counsel For Appellant: None
Counsel For Respondent: Senior DR Anupama Singla