2015 (6) TMI 885 - AT - Income Tax

Cessation of liability in respect to trade creditors - CIT(A) deleted part addition - Held that - Section 41 (1) would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year relevant to the assessment year under consideration. In the present case, both elements are missing. There was nothing on record to suggest there was remission or cessation of liability that too during the previous year 2007-08 relevant to the assessment year 2008-09 which was the year under consideration. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. The AO undertook the exercise to verify the records of the so called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi-parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that, therefore, the amount in question cannot be added back as a deemed income under section 41(1) of the Act. This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of section 41(1) of the Act there is no cure for it. Hence, we have no alternative except to confirm the findings of CIT(A) in respect of deletion but reverse qua the confirmation of addition. - Decided in favour of assessee.

Summary

Issues Involved:
Appeal against common order of CIT(A) regarding addition of trade creditors under section 41(1) of the Income Tax Act, 1961 for Assessment Year 2008-09.

Analysis:
1. Issue of Limitation on Revenue's Appeal:
The revenue's appeal was initially barred by a 17-day delay. However, the revenue filed a Condonation petition explaining the reasons for the delay, which was supported by an affidavit. The appellant did not oppose the Condonation and agreed to condone the delay. Consequently, the delay was condoned, and the appeal was admitted.

2. Common Issue of Addition of Trade Creditors:
Both the assessee and revenue raised appeals against the order of CIT(A) regarding the addition of trade creditors under section 41(1) of the Act. The CIT(A) had restricted the addition to a specific amount out of the total addition made by the Assessing Officer. The main contention revolved around whether the addition was justified under the provisions of section 41(1) of the Act.

3. Factual Background and AO's Findings:
The Assessing Officer noted discrepancies in the list of sundry creditors provided by the assessee. The AO conducted inquiries through an Inspector and found that many of the creditors were non-existent or denied having any dealings with the assessee. The AO treated the trade creditors as bogus and added the total amount to the assessee's income. The CIT(A) later restricted the addition to a specific sum pertaining to eight creditors out of the total.

4. Legal Analysis and Tribunal's Decision:
The Tribunal analyzed the provisions of section 41(1) of the Act, which deal with the remission or cessation of liability during the relevant assessment year. In this case, there was no evidence of remission or cessation of liability in the relevant year. The Tribunal noted that even if the debts were found to be non-genuine, the provisions of section 41(1) did not apply as there was no cessation or remission of liability. Therefore, the Tribunal confirmed the deletion of the addition made by the CIT(A) but reversed the decision regarding the confirmation of the addition.

5. Conclusion:
Ultimately, the Tribunal dismissed the revenue's appeal and allowed the assessee's appeal. The decision was pronounced in open court on a specific date.

This comprehensive analysis covers the issues involved in the legal judgment, providing detailed insights into the background, findings, legal analysis, and final decision of the Appellate Tribunal ITAT KOLKATA regarding the addition of trade creditors under section 41(1) of the Income Tax Act, 1961 for the Assessment Year 2008-09.