2015 (7) TMI 1162 - AT - Income Tax

Addition on account of cessation of liabilities under section 41(1) - Held that - Provisions of Section 41 (1) would not apply in the case of the assessee as it is clear that assessee had continued to show the admitted amounts as liability in its balance sheet. The liabilities reflected in the balance sheet could not be treated as cessation of liability. Therefore, addition was wholly unjustified. - Decided in favour of assessee Disallowance of commodities loss - held that - the enquiries from Ludhiana Stock Exchange revealed that claim of loss on account of commodity transaction was not a genuine claim. The assessee merely produced copy of notes from M/s Anand Commodity Services, would not prove that assessee suffered genuine loss. The evidences collected from Ludhiana Stock Exchange and confronted to the assessee clearly proved that the commodity transaction was not actually carried out but was merely accommodation entries. Earlier the Tribunal, while restoring the matter to the file of Assessing Officer directed the assessee to produce the requisite material and evidence to prove the genuineness of the loss in question. The assessee, however, failed to produce any requisite material and evidence before Assessing Officer in set aside proceedings to prove the genuineness of the loss in question. Therefore, authorities below were justified in maintaining the addition - Decided against assessee.

Summary

Issues Involved:
1. Addition of Rs. 3,95,614/- on account of cessation of liabilities under Section 41(1) of the Income Tax Act.
2. Disallowance of commodities loss of Rs. 4,20,824/-.

Issue-wise Detailed Analysis:

1. Addition of Rs. 3,95,614/- on account of cessation of liabilities under Section 41(1):
The assessee contended that the liabilities represented advances received from clients as margin money for transactions on their behalf, and no allowance or deduction was ever claimed for these sums. These liabilities had not ceased to exist during the year under consideration and were settled in subsequent years. The Assessing Officer (AO) initially made the addition, which was subsequently set aside by the Tribunal for fresh adjudication. Upon re-examination, the AO maintained the addition, stating that the liabilities were shown under 'sundry creditors' and there was no reason to conclude otherwise.

The CIT(Appeals) upheld the AO's decision, noting that the assessee failed to provide evidence that the liabilities were not trading liabilities and that no deduction was claimed in earlier years. However, the Tribunal found that the liabilities reflected in the balance sheet could not be treated as cessation of liability merely because they were outstanding for many years. The Tribunal cited the case of Nitin S. Garg V ACIT 40 SOT 253, which held that liabilities shown in the balance sheet could not be treated as ceased, and Section 41(1) applies only when there is a cessation or remission of a trading liability. The Tribunal concluded that the provisions of Section 41(1) were not applicable and deleted the addition of Rs. 3,95,614/-.

2. Disallowance of commodities loss of Rs. 4,20,824/-:
The assessee claimed a loss on the sale of commodities, submitting copies of contract notes as evidence. The AO disallowed the loss, stating that the evidence was similar to that provided in the original assessment proceedings and did not substantiate the claim. The CIT(Appeals) upheld the AO's decision, supported by enquiries from Ludhiana Stock Exchange, which revealed that the loss claimed was not genuine.

The Tribunal noted that the assessee failed to produce requisite material and evidence to prove the genuineness of the loss, as directed in earlier proceedings. The evidence collected from Ludhiana Stock Exchange indicated that the commodity transactions were merely accommodation entries and not genuine. Therefore, the Tribunal upheld the disallowance of Rs. 4,20,824/-.

Conclusion:
The appeal of the assessee was partly allowed. The addition under Section 41(1) of Rs. 3,95,614/- was deleted, while the disallowance of commodities loss of Rs. 4,20,824/- was upheld. The Tribunal emphasized the necessity of concrete evidence to substantiate claims and the proper application of legal provisions in determining the cessation of liabilities.