No Addition Is Permitted U/S 41(1) In Absence Of Evidence Showing Cessation Of Liability: Delhi ITAT
The New Delhi ITAT held that unless and until there is evidence to show that the liability has ceased to exist, there cannot be any addition u/s 41(1) of the Income Tax Act, and hence, deleted the addition made by AO. As per Section 41(1) of the Income tax Act, where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or...
The New Delhi ITAT held that unless and until there is evidence to show that the liability has ceased to exist, there cannot be any addition u/s 41(1) of the Income Tax Act, and hence, deleted the addition made by AO.
As per Section 41(1) of the Income tax Act, 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, and subsequently during any previous year the assessee 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 him 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.
The Bench of the ITAT comprising of Yogesh Kumar U.S. (Judicial Member) and Dr. B.R.R. Kumar (Accountant Member) observed that “When the inspector has visited the premises, it was reported that the firm was not operative from that address in the year 2015. However, the transaction took place prior to 01.04.2009 and the non-existence of this firm in 2015 cannot be reason to sustain addition and the report of the inspector cannot be relied in its entirety since there was no basis for such information so recorded by him by following the due procedure as stipulated in Code of Civil Procedure. Hence, unless and until there is evidence to show that these credits are ceased to exist, there cannot be any addition u/s 41(1) of the Act.” (Para 8)
Facts of the case
The assessee filed return declaring Nil income and his case was selected for scrutiny. The assessment proceedings initiated against the assessee and an order u/s 143(3) came to be passed by making addition of Rs.1,68,38,416/- treating the same as undisclosed income. On appeal, the CIT(A) sustained the addition of Rs.1,68,38,416/- u/s 41(1).
Observation of Tribunal:
The Bench noted that the AO has invoked the provisions of section 68 by observing that the assessee has not given satisfactory explanation with regard to identity of parties, genuineness of transaction and capacity of creditors.
The Bench further noted that the CIT(A) sustained the addition by invoking the provisions of section 41(1) holding that these credits have been outstanding since long time.
The Bench observed that once the purchase is accepted, other part of the entry being creditor cannot be overlooked, otherwise, it gives distort picture of the assessee's income for the assessment year under consideration.
The Bench further observed that the authorities have not brought anything on record to prove that the liability is ceased to exist and neither of the parties has written off the same in their books of accounts.
The Bench found that balance sheet of the assessment year has been duly signed by the assessee itself thereby acknowledged the debt and in such circumstances, the lower authority is precluded in applying the provisions of section 41(1).
The Bench also noted that lower authority was not sure whether section 68 to be applied or section 41(1), in such dichotomy neither provisions of section 68 nor 41(1) could be applied by the Revenue Authorities.
The Bench found that the assessee signed the balance sheet, which was the acknowledgement of debt and the AO has not brought anything to show that it was ceased to exist in the assessment year under consideration, in such circumstances, it is not possible to hold that debt ceased to exist.
The Bench reiterated while referring the decision of the Supreme Court in the case of CIT Vs. Balkrishna Industries Ltd reported in 300 CTR 29 that “if there is no remission or cessation of liability, amount in question cannot be treated as income u/s 41(1) of the Act”.
Hence, referring to the judgment of the Supreme Court in the case of CIT Vs. SI Group India Ltd., the ITAT dismissed the applicability of section 41(1) and addition under said provision and partly allowed assessee's appeal.
Counsel for Appellant/Taxpayer: Raj Kumar Gupta
Counsel for Respondent/Department: Subhra Jyoti Chakraborty
Case Title: Late Sh. Mahender Kumar Mittal verses ITO
Case Number: ITA No.7497/Del/2019