2016 (10) TMI 312 - AT - Income Tax

Addition u/s 41 - unexplained difference in account - cessation of trading liability (in respect of which the assessee had at any time in the past claimed and been allowed deduction - Held that - prima facie suggestive or indicative of a liability, that by itself could not be conclusive of the matter, particularly considering that we have found the assessee s books of account as not reflecting the actual state of affairs. Similarly, the non write off of the debt by KRL, which may be hopeful of recovery, would also not conclude or be determinative of the matter. The principal question, despite legal obligation, i.e., assuming so, is Does the assessee intend of pay the same? Going by the assessee s conduct, it does not. Or else it would not have stopped paying KRL, which appears to be for long, compelling it to charge delayed payment charges and, finally, invoke the bank guarantee in its favour. A good part of the amount outstanding stands paid directly by a customer. Why? The supplier (KRL), it needs to be borne in mind, is selling a licensed item (through registered dealers), and recovers, as a matter of policy, payment of goods in advance (refer Ground # 2 before the ld. CIT(A), reproduced at pg. 1 of the impugned order), i.e., does not extend any credit to its customers. It is for these reasons that we regard the establishment of intent by the assessee as relevant; the creditor having already, as it appears, exhausted the bank guarantee issued in its favour. How would the assessee establish its intent to pay the said amount, as implied by its holding out the same as a subsisting liability, we cannot predicate, being in fact a matter of evidence. Does the company have any means to recover except, of course, by initiating a legal process? Has it done so at any time? When does the same get barred by time? Has any part of liability been discharged subsequent to 31.3.2008? These and other related questions arise, on the basis of answers to all of which only would it be possible to say if there has occurred, or not so, a cessation of liability qua the said balance amount of ₹ 7.63 lacs, i.e., as on 31.3.2008. The matter is, in view of the foregoing, restored to the file of the AO for proper determination, to be decided after allowing a reasonable opportunity to the assessee to present its case before him, issuing definite findings of fact, in accordance with law. We may clarify that we may not be construed as having issued any finding in the matter, but as having only analyzed the facts and circumstances with reference to the assessment of the (whole or any part of the) said credit balance appearing in the assessee s books of account as income under the Act.

Summary

Issues:
1. Appeal against the Order by the Commissioner of Income Tax (Appeals) allowing the assessee's appeal contesting its assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2008-09.
2. Dispute regarding the liability of the assessee-firm to trade creditors, M/s. Kochi Refineries Ltd. and M/s. Triox Chemicals P. Ltd.
3. Application of section 41(1) of the Income Tax Act, 1961 concerning cessation of trading liability and benefits obtained by the assessee.
4. Examination of various components of the disputed sum of Rs. 92.36 lacs reflected in the assessee's books of account.
5. Lack of explanation regarding the non-recording of discharge of liabilities in the assessee's accounts and the need for further inquiry into the sources of payment.

Analysis:
1. The appeal was filed by the Revenue against the Order of the Commissioner of Income Tax (Appeals) allowing the assessee's appeal concerning the assessment for the assessment year 2008-09. The Tribunal noted the absence of representation by the assessee during the hearing and proceeded ex parte based on the material on record.
2. The dispute arose from the liability of the assessee-firm to trade creditors, M/s. Kochi Refineries Ltd. and M/s. Triox Chemicals P. Ltd. The Assessing Officer added an amount to the assessment as deemed income under section 41(1) of the Act, which was later deleted by the Commissioner of Income Tax (Appeals).
3. The Tribunal analyzed the application of section 41(1) concerning the cessation of trading liability and benefits obtained by the assessee. It emphasized the need for a thorough inquiry into the sources of payment and the recording of discharge of liabilities in the assessee's accounts.
4. Various components of the disputed sum of Rs. 92.36 lacs were examined, including payments made by trade debtors and the outstanding balance reflected in the assessee's accounts. The Tribunal highlighted the importance of establishing the intent of the assessee to pay the outstanding amount.
5. The Tribunal found discrepancies in the recording of discharge of liabilities in the assessee's accounts and emphasized the necessity of further inquiry into the sources of payment. The matter was remanded to the Assessing Officer for proper determination after allowing the assessee a reasonable opportunity to present its case. The Tribunal clarified that it had not issued any final findings but had analyzed the facts and circumstances for proper assessment under the Act.