2016 (1) TMI 220 - AT - Income Tax

Addition under sec.41(1) on account of cessation of liability - Held that - As rightly highlighted by the lower authorities, in the present case, the assessee has drawn balance sheet based on its books of accounts in which the above amounts were being claimed as liabilities due to the various parties as at the end of the accounting year under dispute. However, the assessee failed to establish the genuineness of these liabilities by citing credible evidence. Simply the liabilities being reflected against certain names in its books of accounts would not establish the genuineness of such liabilities. The assessee chose not to reconcile the balance in the assessee s books of accounts with the parties accounts and agreed to offer the above amount as income under section 41(1) of the I.T. Act. The assessee s authorized representative accepted before the AO, the addition u/s. 41(1) of the Act. This shows that the assessee has no explanation to prove that the creditors in its books of account are genuine. To put it differently, the assessee has failed to discharge its onus cast on it to substantiate its claim. Being so, the lower authorities are justified in holding that such liabilities did not exist at the end of the accounting year under dispute and rightly added the said liabilities which had ceased to exist. Accordingly, the addition sustained by the CIT(A) is confirmed. - Decided against assessee

Summary

Issues:
Addition under sec.41(1) of the I.T. Act, 1961 on account of cessation of liability.

Analysis:
The appeal concerned the addition of a certain amount under sec.41(1) of the I.T. Act, 1961 on account of cessation of liability. The assessee had a balance of &8377; 6,86,825/- in the name of a specific entity, which was carried forward from year to year. The Assessing Officer added this amount as 'unproved credit' as the assessee failed to reconcile the same. The assessee contended that it did not agree to this addition and argued that it was not a cessation of liability under sec.41(1) of the Act. The Commissioner of Income-tax(Appeals) dismissed the appeal, leading the assessee to appeal further. The assessee submitted various documents to support its case, including a letter and financial statements. The assessee also relied on a Tribunal order in a similar case to strengthen its argument against the addition.

The Tribunal analyzed the case thoroughly, considering the arguments presented by both parties. The Assessing Officer had asked the assessee to provide account copies/confirmation letters from the creditors, which the assessee failed to do. The authorized representative of the assessee had initially agreed to the addition but later contested it before the CIT(A). The Tribunal noted that the liability in question continued to be carried forward year after year, raising doubts. The Tribunal highlighted that the provisions of sec. 68 of the I.T. Act could not be applied to carry forward credits from earlier years. However, sec. 41(1) could be applicable in such cases, as per relevant judgments, including one from the Delhi High Court.

The Tribunal delved into legal interpretations and precedents to establish the validity of the addition under sec.41(1). It emphasized that the assessee failed to substantiate the genuineness of the liabilities claimed, as it did not reconcile the balance in its books of accounts with the parties' accounts. The Tribunal concluded that the liabilities had ceased to exist, as the assessee could not prove their genuineness, and upheld the addition made by the lower authorities. Additionally, the Tribunal cited a High Court judgment to assert the binding nature of the assessee's authorized representative's acceptance.

In conclusion, the Tribunal dismissed the appeal, relying on High Court judgments and declining to comment on the decision of the co-ordinate Bench of the Tribunal. The order was pronounced on a specific date in Chennai, marking the resolution of the case regarding the addition under sec.41(1) of the I.T. Act, 1961 on account of cessation of liability.