2010 (10) TMI 170 - HC - Income Tax

Applicability of section 41 (1) of the Income Tax Act, 1961 - The Assessing Officer was of the opinion that the creditors shown appeared to be bogus - Learned Counsel for the assessee argues that the conditions for applicability of Section 41 (1) of the Act for obtaining the benefit of remission or cession of the liability were not satisfied in the instant case The liabilities that exist in the balance sheet have to be proved by the assessee. Although in the earlier years, these liabilities were shown to be existing, it is seen from the record, what sort of evidence he produced in support of the claim of these liabilities is not clear. There was not even a confirmation letter coming in support of the liabilities. Apart from this, the conduct of the assessee has to be seen. He writes off in a subsequent year where the department says, it was the year of loss and the assessing officer has made a specific comment that the writ off has been made only in the year of loss so that if does not have any tax implication. The appeal is accordingly dismissed

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal for assessment year 2000-01 regarding additions made by Assessing Officer on sundry creditors; Applicability of Section 41(1) of the Act for remission or cession of liability; Existence of bogus creditors and subsequent write-off by assessee.

Analysis:
1. The appellant sought to challenge the order of the Income Tax Appellate Tribunal regarding additions made by the Assessing Officer on sundry creditors. The Assessing Officer considered the creditors as bogus as they were shown in the balance sheet for several years without any recovery attempts by the creditors. Ultimately, the assessee wrote off these creditors in the assessment year 2003-04. Both the Commissioner of Income Tax (A) and ITAT upheld the additions. The ITAT observed that the liabilities needed to be proven by the assessee, and the lack of evidence and confirmation letters raised doubts on the genuineness of these liabilities. The ITAT concluded that the liabilities were non-existing before the assessment year 2003-04, justifying the assessing officer's stance and sustaining the addition.

2. The appellant argued against the applicability of Section 41(1) of the Act for remission or cession of liability. The conditions required for this section to apply were discussed, emphasizing that the onus is on the department to prove the satisfaction of these conditions. The first condition, regarding allowance or deduction in a preceding assessment year, was accepted, but the second condition, involving obtaining any amount or benefit by remission or cession of liability, was not satisfied. The liabilities were still shown in the books of account, and no remission or cession had occurred. The appellant cited various judgments to support this argument.

3. The judgments referred to by the appellant highlighted the importance of proving the existence and genuineness of liabilities for the applicability of Section 41(1) of the Act. However, the authorities found that the creditors in question were bogus, as they took no steps for recovery and were eventually written off by the assessee. The concurrent finding of fact by all authorities was that these creditors appeared to be non-genuine. The ITAT emphasized the lack of evidence supporting the liabilities and the assessee's conduct of writing off the liabilities in a year of loss to avoid tax implications. Considering these circumstances, the ITAT upheld the addition made by the assessing officer.

4. In conclusion, the court found no substantial question of law arising from the case and dismissed the appeal accordingly. The judgment focused on the lack of evidence supporting the existence of the liabilities, the conduct of the assessee in writing off the liabilities, and the overall circumstances leading to the conclusion that the creditors were bogus.