2014 (3) TMI 69 - AT - Income Tax

Unpaid creditors written off Application of section 41(1) of the Act Held that - On given addresses of the creditors, the letters were returned back unserved and in one case, namely, M/s. Ashok Trading Company had denied having been any business transaction with the assessee - The creditors had been shown as liability in the balance sheet during the year under consideration as per assessee s submission, it was pertained to A.Y. 03-04, whereas the CIT(A) confirmed the addition on account of nonexistence of liability - The facts show that outstanding remained to pay for more than 4 years which is not possible assessee contended that the amount has been paid in A.Y. 09-10 thus, the AO is directed to verify whether the creditors have been paid or not Decided in favour of Assessee.

Summary

Issues involved:
1. Writing off unpaid creditors of A.Y. 2003-04 in A.Y. 2009-10.
2. Application of Indian Limitation Act by Assessing Officer.
3. Existence of liabilities towards unpaid creditors for purchases.

Analysis:

Issue 1: Writing off unpaid creditors of A.Y. 2003-04 in A.Y. 2009-10
The appellant filed an appeal against the CIT(A)'s order regarding the writing off of unpaid creditors from A.Y. 2003-04 in A.Y. 2009-10. The appellant argued that the liabilities were paid in A.Y. 09-10 and were not written off in the books of accounts, thus not covered under section 41(1) of the IT Act. The Tribunal directed the Assessing Officer to verify in the records of A.Y. 09-10 whether the creditors were paid, allowing the appellant to contest any findings. The appeal was allowed for statistical purposes.

Issue 2: Application of Indian Limitation Act by Assessing Officer
The Assessing Officer did not apply the Indian Limitation Act to the unpaid creditors' case, leading to the appellant's argument that the creditors could file suits at any time. However, the Tribunal focused on the non-existence of liabilities towards these creditors, as evidenced by returned letters, lack of business transactions, and absence of replies or legal actions from the creditors. The Tribunal emphasized the burden on the appellant to prove the existence of liabilities, which was not fulfilled.

Issue 3: Existence of liabilities towards unpaid creditors for purchases
The CIT(A) dismissed the appellant's appeal by highlighting the lack of evidence proving the existence of liabilities towards unpaid creditors for purchases. The appellant failed to establish the liabilities despite opportunities provided, and the CIT(A) confirmed the addition made by the Assessing Officer. The Tribunal intervened, directing the Assessing Officer to verify the payment status of the creditors in A.Y. 09-10, considering the appellant's argument that the liabilities were paid in that assessment year.

In conclusion, the Tribunal's judgment addressed the issues of writing off unpaid creditors, the application of the Indian Limitation Act, and the existence of liabilities towards unpaid creditors for purchases. The decision provided directions for further verification and upheld the appeal for statistical purposes.