2022 (5) TMI 1551 - AT - Income Tax

Cessation of liability as mentioned u/s 41(1) - AO treating the impugned amount to the seized/non-existence, because of the fact that the liability was being shown outstanding for many preceding years and the assessee could not provide confirmations from the respective creditors and also failed to provide necessary details like PAN, address etc. of the creditors - CIT- A deleted the addition - HELD THAT - Undisputedly the liabilities were outstanding since many previous year in the balance sheet of the assessee and the assessee has not written off the outstanding liabilities/creditors in its audited books of accounts and thus, it has to be presumed that the impugned outstanding liabilities/creditors were existing at the end of the Financial Year 2012-13 pertaining to Assessment Year 2013-14. As per mandatory requirement of section 41(1) of the Act, the AO entitled to make additions in the hands of the assessee where the liabilities/creditors seized to exist but in the present case, neither the assessee company has written off the impugned amount as bad debts in its books of accounts nor there was any other positive material on the record and in the hands of the AO showing that the impugned amount of the liabilities/creditors seized to exist during the relevant Financial Year. Therefore, we are unable to see any ambiguity, perversity or any valid reason to interfere with the findings recorded by CIT(A). Thus, we uphold the same. Grounds raised by the Revenue are dismissed.

Summary

Issues:
Interpretation of cessation of liability under section 41(1) of IT Act, 1961
Deletion of addition made by AO on account of unproven genuineness of Sundry Creditors

Interpretation of Cessation of Liability under Section 41(1) of IT Act, 1961:
The Revenue appealed against the order of Ld. CIT(A)-34, New Delhi concerning the assessment year 2013-14. The Revenue contended that the AO was justified in treating the outstanding liability as seized/non-existent due to the assessee's failure to provide confirmations from creditors and necessary details like PAN and address. The Ld. Sr. DR argued that the AO correctly invoked section 41(1) of the Income Tax Act, 1961, making additions in the hands of the assessee. The Ld. CIT(A) granted relief to the assessee without proper justification, according to the Revenue. However, the Ld. CIT(A) found that the impugned liabilities were still existing as the assessee had not written them off in the books of accounts.

Deletion of Addition Made by AO on Account of Unproven Genuineness of Sundry Creditors:
The Ld. CIT(A) analyzed the issue in detail, considering the submissions of the assessee. The appellant failed to furnish confirmed copies of accounts for sundry creditors, leading to an addition by the AO under section 41(1). The Ld. CIT(A) noted that the appellant provided PAN numbers for most parties and did not write off the creditors in the books of accounts, indicating no cessation of liability. The Ld. CIT(A) cited case law to support the position that non-payment of outstanding liability does not imply remission or cessation of liability. Additionally, the Ld. CIT(A) referenced cases where outstanding creditors in balance sheets did not result in cessation of liability under section 41(1). The Ld. CIT(A) concluded that the addition made by the AO was not sustainable and deleted it.

In summary, the ITAT Delhi upheld the Ld. CIT(A)'s decision, stating that the liabilities were outstanding in previous years, not written off in audited books of accounts, and presumed to exist at the end of the relevant financial year. As the impugned liabilities were not treated as bad debts or shown to have ceased to exist, the ITAT found no reason to interfere with the Ld. CIT(A)'s findings. Consequently, the appeal of the Revenue was dismissed.