2017 (2) TMI 560 - AT - Income Tax

Additions u/s 41(1) on account of seizure of current liability - whether the liability of assessee has ceased to exist in the books of account - Held that - The liability has been shown in the balance-sheet for ₹ 26,27,186/-. Merely the notices issued under section 133(6) of the Act to the parties returned as un-served cannot be ground for the addition under section 41(1) of the Act as the liability has not ceased to exist. Therefore, it cannot be concluded that the liability has ceased to exist. It has not actually been written off in the books of account of assessee and the ld. DR has not brought anything on record suggesting that the trading liability has actually been written off in the books of account. In the instant case, the Authorities Below has presumed that the trading liability ceased to exist as the notice u/s 133(6) of the Act issued were not served. As such on examination of orders of Authorities Below, we find that the liability has not been written off in the books of account of assessee. In our considered view, liability cannot cease to exist until and unless it is written off in the books of account of assessee. In this view of the matter, we hold that the liability which has actually been written off can only be treated as income of assessee u/s 41(1) of the Act

Issues Involved:
1. Disallowance under Section 41(1) of the Income Tax Act.
2. Levy of interest under Sections 234B and 220(2).
3. Validity of assessment proceedings under Section 153A.

Detailed Analysis:

1. Disallowance under Section 41(1) of the Income Tax Act:
The primary issue revolves around the disallowance of ?36,11,230/- under Section 41(1) of the Income Tax Act on account of the cessation of trading liability. The assessee, engaged in the timber business, had initially shown a trading liability of ?45,66,426.21, which the Assessing Officer (AO) treated as ceased to exist, thus adding it to the income. Upon appeal, the matter was remanded back to the AO for fresh adjudication. The assessee provided a breakup of the trading liability and payments made in subsequent years. The AO, however, maintained the disallowance, citing reasons such as the non-existence of creditors at the given addresses and the encashment of bearer cheques in Kolkata, which seemed improbable for parties based in the North-Eastern region.

The Commissioner of Income Tax (Appeals) [CIT(A)] partially upheld the AO's decision, granting relief for payments made through account payee drafts totaling ?9,55,195/-. The CIT(A) observed that the assessee failed to provide current addresses or confirmations from creditors and questioned the use of bearer cheques. However, the CIT(A) accepted that payments made via account payee drafts were genuine.

Upon further appeal, the Tribunal noted that the trading liability was old and had been accepted in earlier years. The Tribunal emphasized that merely because notices under Section 133(6) were unserved, it could not be concluded that the liability ceased to exist. The Tribunal held that a liability could only be deemed to have ceased if written off in the books of account, which was not the case here. Consequently, the Tribunal directed the AO to restrict the addition under Section 41(1) to the extent of ?36,11,230/- and allowed the assessee's appeal partly.

2. Levy of Interest under Sections 234B and 220(2):
The assessee challenged the levy of interest under Sections 234B and 220(2). The Tribunal found that the levy of interest under these sections is consequential in nature. Therefore, the grounds raised by the assessee regarding the interest were dismissed.

3. Validity of Assessment Proceedings under Section 153A:
The assessee also challenged the assessment proceedings under Section 153A. The Tribunal observed that the AO had made additions in the assessment order under Section 153A/143(3) based on information available in the original assessment order. Since the same issue was already adjudicated in the original assessment proceedings, the Tribunal held that the addition for the same issue could not be made twice under Sections 153A and 143(3). Therefore, the addition under Section 153A was not sustainable, and the assessee's appeal on this ground was allowed.

Conclusion:
The Tribunal partly allowed the assessee's appeals, directing the AO to restrict the addition under Section 41(1) to ?36,11,230/- and dismissing the grounds related to the levy of interest as consequential. The Tribunal also invalidated the addition under Section 153A, as it was based on the same issue already adjudicated in the original assessment proceedings.

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