2015 (9) TMI 1661 - AT - Income Tax

Addition u/s. 41(1) - remission or cessation of liability - 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 2006-07 relevant to the assessment year 2007-08 which was the year under consideration. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. 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 except in the case of Narayan Chandra Gorai and M/s. Stesalit Limited. 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) - no alternative except to delete the addition as made by AO and confirmed by CIT(A). Appeal of assessee is allowed.

Summary

Issues:
Addition of Rs. 5,11,700 under section 41(1) of the Income Tax Act, 1961 based on unverifiable sundry creditors.

Analysis:

Issue 1: Addition of Rs. 5,11,700 under section 41(1) of the Act
The appellant challenged the CIT(A)'s order confirming the addition of Rs. 5,11,700 made by the Assessing Officer (AO) under section 41(1) of the Income Tax Act, 1961. The AO added this amount to the appellant's income as unverifiable sundry creditors were considered as a bogus liability. The appellant failed to substantiate the claim as genuine, leading to the addition. However, the ITAT found that the liability was trade creditors from earlier years, constituting opening balances. It was noted that the liability had not been written off, ceased, or remitted. Section 41(1) applies when there is a remission or cessation of liability during the relevant assessment year, which was not the case here. The AO's verification revealed discrepancies in the creditors' records, but without evidence of cessation or remission of liability, the addition under section 41(1) was deemed inappropriate. The ITAT concluded that the liability's existence was doubtful, and since there was no cessation or remission during the relevant year, the addition was unwarranted. Thus, the ITAT allowed the appeal and ordered the deletion of the addition.

This judgment highlights the importance of substantiating liabilities and the necessity for evidence of cessation or remission to justify additions under section 41(1) of the Act. The ITAT's decision underscores the need for thorough verification and compliance with legal provisions to support income tax assessments accurately.