2016 (11) TMI 1047 - AT - Income Tax

Addition u/s 41 - cessation of liability - Held that - When the Assessing Officer was of the view that there was cessation of liability in the case on hand, it was incumbent upon him to cause necessary enquiries to be made in order to bring on record material evidence to establish the requirement for invoking the provisions of section 41(1) of the Act. The very fact that the assessee reflects these amounts as creditors in his Balance Sheet as on 31/3/2007, is an acknowledgement of his liability to these creditors and this also automatically extends the period of limitation under section 18 of the Limitation Act. Once the assessee acknowledges that the debts to creditors are outstanding in his Balance Sheet, that he is liable to pay his creditors, Revenue cannot suo-moto conclude that the creditors have remitted their liability or that the liability has otherwise ceased to exist, without bringing on record any material evidence to the contrary. In the case on hand, the creditors aggregating to ₹ 33,44,827/- continue to be reflected in the assessee s Balance Sheet as on 31/3/2007. We are of the opinion that the Assessing Officer has not brought on record any material evidence to establish that there was cessation of liability in respect of the outstanding creditors balances represented in the assessee s Balance Sheet as on 31/3/2007, and concur with the finding of the Ld. CIT(A) that the addition under section 41(1) of the Act as cessation of liability being unsustainable, is to be deleted. - Decided in favour of assessee.

Summary

Issues:
Appeal against CIT(A) order for assessment year 2008-09 - Deletion of addition under section 41(1) - Burden of proof on existence of liability - Cessation of liability - Failure to submit confirmations from creditors - Liability from old business location - Recovery by legal means barred by limitation - Failure to attend hearings - Disposal of appeal without assessee's presence.

Analysis:
The appeal pertains to the deletion of an addition of ?33,44,827 made under section 41(1) for assessment year 2008-09. The assessee, engaged in the sale of educational products and film production, filed a return declaring income of ?5,53,180. The assessment under section 143(3) determined income at ?81,96,760, including additions for sales difference, cessation liability, and cash expenses. The CIT(A) partially allowed the appeal against these additions. The Revenue appealed against the deletion of the ?33,44,827 addition, arguing that the assessee failed to prove the liability's existence or submit confirmations from creditors, and recovery was barred by limitation due to old creditors from a previous business location.

The ITAT noted the repeated adjournments due to the assessee's absence in hearings. The only issue for consideration was the deletion of the ?33,44,827 addition under section 41(1). The Revenue contended that the CIT(A) erred in deleting the addition without proper evidence of liability existence. The ITAT considered the material and facts, where the Assessing Officer treated outstanding creditors as income due to cessation of liability. However, the CIT(A) found that the liabilities were acknowledged in the balance sheet and no evidence of remission existed. The ITAT agreed that the creditors' balances were liabilities acknowledged by the assessee, and no cessation of liability was proven. The Assessing Officer failed to provide evidence for invoking section 41(1), leading to the deletion of the addition.

The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition. The failure to provide evidence of cessation of liability and the acknowledgment of debts in the balance sheet led to the conclusion that the addition under section 41(1) was unsustainable. The ITAT relied on judicial precedents and the lack of material evidence to support the Revenue's grounds. The appeal was disposed of in favor of the assessee due to the absence of proof of cessation of liability and the acknowledgment of outstanding debts in the balance sheet.

In conclusion, the ITAT dismissed the Revenue's appeal against the deletion of the addition under section 41(1) for assessment year 2008-09, highlighting the importance of providing evidence of cessation of liability and the acknowledgment of debts in the balance sheet. The decision was based on the lack of material evidence supporting the Revenue's contentions and the failure to establish the cessation of liability as per the provisions of the Income Tax Act.