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2014 (3) TMI 332 - AT - Income TaxAddition made as cessation of liability u/s 41(1) of the Act Held that - The appellant has tried to demonstrate that in subsequent year the requisite entry in the books of account have been made but that was being a capital receipt - the amount was transferred to capital reserve account Relying upon Shri Vishnu Anant Mahajan Versus ACIT Baroda 2012 (6) TMI 297 - ITAT, Ahmedabad and CIT Vs. Sugauli Sugar Works Pvt. Ltd. 1999 (2) TMI 5 - SUPREME Court - a unilateral action in writing off the liability do not amount to remission or cessation of liability - the AO has unilaterally acted and considered that the liability in question had ceased to exist - On both the counts that the liability being capital in nature cannot be taxed in the hands of the assessee the order of the CIT(A) set aside Decided in favour of Assessee. Addition made u/s 68 of the Act Unexplained cash credits Held that - In a situation when the directors are subject to tax and filing the returns of income in their independent capacity - the requisite inquiry should have been made in their respective hands the decision in Commissioner Of Income Tax Versus Steller Investment Ltd. 2000 (7) TMI 76 - SUPREME Court followed - part relief given by the learned CIT(A) was not in line with the several judgments passed in this regard that the proper action is required to be taken in the hands of the persons in whose accounts the credit is appearing instead of invoking the provisions of Section 68 in the case of the company-assessee thus, the addition made is directed to be set aside Decided in favour of Assessee.
Issues Involved:
1. Addition of Rs. 35,74,216/- as cessation of liability under Section 41(1) of the IT Act, 1961. 2. Addition of Rs. 2,25,000/- out of total Rs. 19,00,000/- on account of unexplained cash credits under Section 68 of the IT Act. Issue-wise Detailed Analysis: 1. Addition of Rs. 35,74,216/- as cessation of liability under Section 41(1) of the IT Act, 1961: The assessee company had ceased business activities and had shown three categories of sundry creditors in its books: for goods (Rs. 72,690), for others (Rs. 90,350), and for capital goods (Rs. 35,83,568). The AO noted that there was no movement in these accounts for several years, and concluded that the liabilities had ceased to exist, thus invoking Section 41(1) to add Rs. 35,74,216 to the assessee's income. The AO relied on the legal precedent that cessation of liability can be inferred from the conduct and surrounding circumstances. The CIT(A) upheld the AO's decision, noting the lack of movement in these accounts and the assessee's admission that these liabilities would be offered suo moto in the return for A.Y. 2009-10. The assessee argued that the decision of the Bombay High Court in the case of Nector Beverages, which the AO relied on, was overruled by the Supreme Court. The Supreme Court held that depreciation is neither a loss nor an expenditure, nor a trading liability under Section 41(1). The assessee also demonstrated that the liabilities were transferred to the capital reserve account in subsequent years. The Tribunal noted that the AO's reliance on the overruled decision was misplaced and that unilateral action by the AO did not constitute cessation of liability. The Tribunal reversed the findings of the CIT(A) and allowed the assessee's ground, concluding that the liability being capital in nature should not be taxed. 2. Addition of Rs. 2,25,000/- out of total Rs. 19,00,000/- on account of unexplained cash credits under Section 68 of the IT Act: The AO observed an increase in unsecured loans in the balance sheet and added Rs. 19,00,000 as unexplained cash credits under Section 68 due to the assessee's failure to furnish confirmations from the directors who allegedly provided these loans. The CIT(A) partly accepted the assessee's explanation that the directors had paid the company's income tax liability, which was later refunded and adjusted in the books. However, the CIT(A) only found receipts for Rs. 16,75,000 and upheld the addition of the remaining Rs. 2,25,000. The Tribunal reviewed the assessee's explanation and noted that the directors were subject to tax and filing returns independently. It held that the proper inquiry should be made in the directors' accounts, not in the company's. The Tribunal directed to delete the addition of Rs. 2,25,000, aligning with the principle that credits should be investigated in the accounts where they appear. Revenue's Appeal: The Revenue's appeal contested the deletion of Rs. 16,75,000 out of the total addition of Rs. 19,00,000. The Tribunal dismissed this appeal, consistent with its decision on the assessee's appeal regarding unexplained cash credits. Conclusion: The Tribunal allowed the assessee's appeal, reversing the additions made under Section 41(1) and Section 68, and dismissed the Revenue's appeal, thereby providing relief to the assessee on both counts.
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