2015 (8) TMI 1487 - AT - Income Tax

Addition of bogus sundry creditors u/s 41 - setting off of the same amount in AY 2001-02 - HELD THAT - The provision of Sec. 41(1) comes into operation where the assessee has incurred a trading liability and trading liability has been allowed as a deduction in any earlier year, and something has, later on, being recovered in respect of such liability or such liability has either been remitted or has seized to exist. Hon'ble jurisdictional High Court in the case of CIT v S.K. Reference Ltd 1994 (1) TMI 278 - CALCUTTA HIGH COURT has held that where the liability to pay commission on sugarcane was later allowed as deduction pursuant to State Government s Ordinance which was later enacted into Act, provision for such liability cannot be taxed by invoking the provision of Sec. 41(1) of the Act on the mere ground that amount allowed was returned back to profit and loss account, unless such liability was remitted or seized to exists. In the present case, the liability very much in existence in on account of sundry credit and this is trading liability and once it is not seize to exist, or remitted, the mere non-existence of the parties cannot be added as an income of the assessee. Accordingly, this appeal of assessee is allowed on merits. Set off of sundry creditors and carried forward from earlier year, as the appeal for AY 2000-01 has already been allowed in favour of assessee, this will not be treated as income for AY 2001-02. Hence, these two appeals of assessee are allowed.

Summary

Issues:
Appeal against addition of bogus sundry creditors in AY 2000-01 and set off in AY 2001-02.

Analysis:

Issue 1: Addition of bogus sundry creditors in AY 2000-01 and set off in AY 2001-02

The appeals by the assessee arose from the order of CIT(A) confirming the addition made by the Assessing Officer regarding bogus sundry creditors in AY 2000-01 and the subsequent set off in AY 2001-02. The total amount of sundry credits was &8377; 11,36,355, which the AO considered unverifiable and added under Sec. 41(1) of the Income-tax Act. The CIT(A) upheld this action. However, the ITAT Kolkata found that the liabilities were existing in the books of accounts and not written off by the assessee. The ITAT referred to Sec. 41(1) of the Act, emphasizing that the provision applies when a trading liability has been allowed as a deduction in an earlier year and later recovered or remitted. Citing a High Court case, the ITAT concluded that unless the liability ceased to exist or was remitted, the mere non-existence of the creditors cannot be treated as income. Therefore, the appeals of the assessee were allowed on merits.

Issue 2: Jurisdictional issue for initiation of proceedings u/s. 148 r.w.s. 147

The grounds related to the initiation of proceedings under Sec. 148 r.w.s. 147 were not pressed by the counsel for the assessee. Consequently, these grounds were dismissed as not pressed. The ITAT, in its judgment, did not delve further into this jurisdictional issue.

Conclusion:

The ITAT Kolkata, in its judgment, partly allowed both appeals of the assessee concerning the addition of bogus sundry creditors in AY 2000-01 and the set off in AY 2001-02. The ITAT emphasized the importance of liabilities being existing and not written off, as well as the specific conditions under Sec. 41(1) of the Act for invoking tax provisions related to recovered liabilities. The jurisdictional issue regarding the initiation of proceedings was not pursued by the assessee's counsel, leading to its dismissal without further discussion.

This detailed analysis of the legal judgment provides a comprehensive understanding of the issues involved and the ITAT Kolkata's decision on each matter.