2016 (3) TMI 863 - AT - Income Tax

Addition u/s 41(1) - amount payable by the assessee company to 5 creditors - Held that - Hon ble Supreme Court in the case of CIT Vs Sugauli Sugar Works (P) Ltd. (1999 (2) TMI 5 - SUPREME Court) held that mere unilateral entry made by the assessee in accounts, there is no cessation of liability. In the case on hand, the assessee has not even written back the creditors in its accounts. The Hon ble Bombay High Court in the case of Indian Rayon & Industries (2010 (3) TMI 299 - BOMBAY HIGH COURT) held that there is no remission or cessation of liability within the meaning of Sec. 41(1) of the Act on unilateral entry of write back of the unclaimed credit balances by the assessee. In view of the above, we hold that the addition made by the AO u/s. 41(1) of the Act is to be deleted. - Decided in favour of assessee Addition towards decrease in stock - Held that - The appellant has claimed reduction in stock on account of damage of stock in the heavy rains and selling of goods on minimal prices. The fact of loss to appellant on account of heavy rains occurred in Mumbai, in July 2005, and consequently damage of appellant s stock was also subject matter of appeals of earlier years. In A.Y. 2006-07, the appellant s claim of gross loss of ₹ 8.25 crore was disallowed by the AO. In appeal order, the disallowance made by AO was deleted. The Sales Tax Authorities have also considered the effect of heavy rains of 2005, on appellant s business and loss to the appellant in their sales tax assessment order. It has been mentioned in such sales tax assessment order that the Insurance Company also rejected the appellant s claim and the dealer (appellant closed down its business. In the facts and circumstances, the appellant s claim of selling the stock at throwaway price appears to be convincing. Moreover, the AO has not brought on record any evidence that the appellant sold the stock outside the books of accounts. In the facts and circumstances, there was no case for rejecting the appellant s claim. The disallowance made by AO is therefore, deleted. - Decided in favour of assessee

Summary

Issues:
1. Applicability of Sec. 41(1) of the Act on amount payable by the assessee company to creditors.
2. Deletion of addition made by AO u/s. 41(1) for assessment years 2006-07 & 2008-09.
3. Deletion of addition made towards decrease in stock for assessment year 2008-09.

Analysis:

Issue 1: Applicability of Sec. 41(1) on amount payable by the assessee company to creditors
The Assessing Officer (AO) made additions u/s. 41(1) of the Act due to the cessation of liability, based on the view that the creditors had either ceased to exist or the corresponding payments were no longer payable. However, the Ld. CIT(A) deleted the addition, emphasizing that the assessee had provided complete details of the creditors, refuting the AO's claims. The Tribunal concurred with the Ld. CIT(A) and cited legal precedents to support the decision. The Tribunal held that unilateral entries in accounts do not signify a cessation of liability, and since the assessee did not even write back the creditors in its accounts, the addition made by the AO was deemed unjustified. The Tribunal upheld the Ld. CIT(A)'s order on this issue.

Issue 2: Deletion of addition made by AO u/s. 41(1) for assessment years 2006-07 & 2008-09
The AO had made additions under Sec. 41(1) for the assessment years 2006-07 & 2008-09, which were subsequently deleted by the Ld. CIT(A). The Tribunal, after considering the contentions of both parties and the case laws cited, agreed with the Ld. CIT(A) and upheld the deletion of the additions. The Tribunal found that the AO failed to provide sufficient evidence to prove that the liability in respect of the trade creditors had ceased to exist. The decision was supported by legal precedents emphasizing that mere unilateral entries in accounts do not constitute a cessation of liability under Sec. 41(1) of the Act.

Issue 3: Deletion of addition made towards decrease in stock for assessment year 2008-09
The AO had made an addition towards decrease in stock for the assessment year 2008-09, which was later deleted by the Ld. CIT(A). The Tribunal reviewed the submissions made by the assessee regarding the decrease in stock due to damage caused by heavy rains, leading to the stock being sold at a nominal price. The Ld. CIT(A) considered the explanations provided by the assessee and the supporting documents, including the order under the Maharashtra Value Added Tax Act, and deleted the disallowance made by the AO. The Tribunal found no reason to interfere with the Ld. CIT(A)'s findings, as the Revenue failed to present evidence to counter the explanations provided by the assessee. Therefore, the Tribunal upheld the Ld. CIT(A)'s decision on this issue.

In conclusion, the appeals filed by the Revenue were dismissed, and the orders of the Ld. CIT(A) were upheld by the Tribunal after thorough analysis and consideration of the legal provisions and precedents cited during the proceedings.