2013 (2) TMI 523 - HC - Income Tax

Addition u/s 41(1) In A/Y 2002-03, assessee has shown creditors of Rs.52.53 lakhs which included number of creditors brought forward from earlier years and were shown as outstanding even in later returns furnished by the assessee including the year 2004-2005 - Assessee furnished to the AO only list of creditors without their addresses and PAN numbers As per AO these creditors were not genuine and invoked Section 41(1) Held that - As decided in Sugauli Sugar Works(P) Ltd. 1999 (2) TMI 5 - SUPREME COURT unless there is a cessation of liability or there is a remission of liability by the creditor, the liability subsists and, therefore, even if the entries are made to write back the expenditure, the amount so written back cannot be added in the income of the assessee as per the provision of section 41(1) of the Act - Assessee has not obtained any benefit either by way of remission or cessation of any liability while the aforesaid liabilities are continually admitted by the assessee in their balance sheet. Further section 41(1) of the Act would naturally not apply. Section 41(1) applies in a case 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 he has obtained whether in cash or in any other manner any amount in respect of such loss or expenditure or trading liability by way of remission or cessation thereof, the amount obtained. In the present case, Revenue s case is that there was no genuine trading liability incurred by the assessee. Question of remission or cessation thereof would not arise Against the revenue.

Summary

Issues:
Appeal against Tribunal's judgment on disallowance of claim of non-genuine creditors under Section 41(1) of the Income Tax Act, 1961.

Analysis:
1. The Revenue appealed against the Tribunal's decision regarding the disallowance of a claim of non-genuine creditors under Section 41(1) of the Income Tax Act, 1961. The Assessing Officer found discrepancies in the creditors' details provided by the assessee for the assessment year 2002-2003. Despite opportunities given, confirmations from creditors were not received, leading to the conclusion that the creditors were not genuine. Consequently, an amount was added to the assessee's income under Section 41(1) of the Act.

2. The CIT(Appeals) partially allowed the appeal, reducing the addition made by the Assessing Officer. Both the assessee and the Revenue filed cross-appeals before the Tribunal. The Tribunal, after considering relevant case laws, held that the provisions of Section 41(1) would not apply in this case. The Tribunal relied on various decisions, including the Apex Court's ruling in CIT v. Sugauli Sugar Works (P) Ltd., to support its decision.

3. The High Court, after examining the Tribunal's order and relevant legal provisions, concurred with the Tribunal's decision. The Court emphasized that for Section 41(1) to apply, there must be a cessation of liability or remission by the creditor. Since there was no evidence of the assessee benefiting from such remission or cessation, the provisions of Section 41(1) were not attracted. The Court also highlighted that the liability in question was continually admitted by the assessee in their balance sheet, further supporting the decision to vacate the addition made by the CIT(A).

4. Additionally, the Court clarified that if the Revenue's contention was that there was no genuine credit, Section 41(1) would not be applicable. The provision applies when there is a genuine trading liability incurred by the assessee, and subsequently, there is a remission or cessation of that liability. In this case, since the Revenue argued that there was no genuine trading liability, the question of remission or cessation did not arise.

5. The Court also addressed the Assessing Officer's alternative reference to unexplained investment in assets, noting that it did not pertain to the relevant assessment year. The liability in question had been carried forward over multiple years and was not a new claim for the year under consideration. Therefore, the question of unexplained investment for the present assessment did not arise.

6. Ultimately, the Court dismissed the Tax Appeal, upholding the Tribunal's decision regarding the disallowance of the claim of non-genuine creditors under Section 41(1) of the Income Tax Act, 1961.