2017 (12) TMI 1613 - AT - Income Tax

Addition u/s 41(1) on account of bogus liability and liability cease to exist - Held that - The liabilities which are bogus would not be within the purview of section 41(1) of the Act; however, the trading liabilities which ceased to exist would fall within the purview of section 41(1). Therefore, both liabilities which are bogus cannot be treated as liability which ceased to exist in fact cessation of liability would be where if trading liability was existed. In the case of bogus liability, which was not in existence from the time of inception, cannot be treated to be ceased to exist. Hence, the authorities below have failed to appreciate this aspect of the matter. Admittedly, the Ld. CIT(A) has not accepted the explanation that such liability was discharged in subsequent years by making payment through banking channels. We are unable to sustain this finding of the Ld. CIT(A) for the simple reasons that the banking accounts cannot be opened in vacuum. We therefore, direct the AO to delete this disallowance. Thus, this ground of the assessee s appeal is allowed.

Summary

Issues:
1. Validity of order passed under section 250
2. Addition under section 41(1) for alleged bogus liability
3. Interpretation of section 41(1) regarding ceased liabilities

Analysis:

Issue 1: Validity of order passed under section 250
The Assessee raised concerns regarding the order passed under section 250, claiming it to be against the principles of natural justice. However, the Assessee did not press this ground during the hearing, and it was dismissed as not pressed.

Issue 2: Addition under section 41(1) for alleged bogus liability
The Assessing Officer made an addition of &8377; 65,50,706 under section 41(1) of the Income Tax Act, 1961, alleging that certain liabilities of the Assessee were bogus and had ceased to exist. The CIT(A) partly allowed the appeal, deleting the addition related to liabilities of two PSUs and one private party but sustaining the rest. The Assessee contested the addition of &8377; 37,56,733 out of the total amount. The Tribunal observed that the Assessing Officer's view that the liabilities were bogus and ceased to exist was not justified. The Tribunal held that liabilities that are bogus do not fall under the purview of section 41(1), which applies to trading liabilities that have ceased to exist. The Tribunal noted that the authorities failed to appreciate this distinction and directed the Assessing Officer to delete the disallowance based on subsequent payments made through banking channels, indicating the existence of the liabilities.

Issue 3: Interpretation of section 41(1) regarding ceased liabilities
The Tribunal clarified the interpretation of section 41(1) concerning ceased liabilities, emphasizing that trading liabilities that have ceased to exist are covered under the provision. The Tribunal highlighted that liabilities that are bogus and never existed cannot be treated as ceased liabilities under section 41(1). The Tribunal disagreed with the CIT(A)'s finding that certain payments made by the Assessee do not absolve them from proving the existence of the parties. The Tribunal emphasized that banking accounts cannot be opened in a vacuum, indicating that the payments made through banking channels substantiated the existence of the liabilities. Consequently, the Tribunal allowed the Assessee's appeal on this ground, directing the deletion of the disallowance.

In conclusion, the Tribunal partly allowed the Assessee's appeal, emphasizing the distinction between bogus liabilities and ceased trading liabilities under section 41(1) and directing the deletion of the disallowance based on the Assessee's subsequent payments through banking channels.