2017 (3) TMI 192 - AT - Income Tax

Addition u/s.41(1) -liability towards ex-employees - bogus and unproved liabilities - Held that - When the assessee had reversed the aforesaid provisions of ₹ 2,18,34,299/- in the succeeding years, and had resultantly reduced the same to Rs. Nil as on 31.03.2013 which factual position had thereafter been scrutinized and accepted by the department in the course of regular assessments framed u/s 143(3) in the hands of the assessee company for A.Y 2012-13 and A.Y 2013-14, which respective years had witnessed a reversal of provision of ₹ 60 lac and ₹ 1,09,17,273/-, therefore we are of the considered view that in the backdrop of the aforesaid facts no adverse inferences as regards the genuineness of the aforesaid provision for salary and statutory dues payable of ₹ 2,18,34,299/- is liable to drawn in the hands of the assessee company. No addition of the said amount would be called for in the hands of the assessee during year under consideration, for the reason that even if the said liabilities were found to be bogus, the same could only be assessed as an unexplained credit in the hands of the assessee in the year of its genesis, viz. the year in which the same were found to be generated as a credit in the books of accounts of the assessee, and thus could not be whimsically related to and added as the income of the assessee for the year under consideration in which the same had only figured as a B/forward balance. Thus in light of our aforesaid observations, now when we are of the considered view that the aforesaid liabilities can neither be characterized as bogus liabilities, nor any adverse inferences as regards the same are liable to be drawn in the hands of the assessee company during the year under consideration - Decided in favour of assessee

Summary

Issues involved:
1. Addition of a sum under section 41(1) of the Income Tax Act 1961.
2. Verification of provision for salary and statutory dues payable.

Issue 1: Addition of a sum under section 41(1) of the Income Tax Act 1961
The appeal filed by the assessee company challenged the order passed by the CIT(A) confirming the addition of a sum under section 41(1) of the Income Tax Act 1961. The assessee argued that the liability towards ex-employees was not remitted or ceased during the year and should not be taxed under section 41(1) of the Act. The appellant contended that the addition made by the Assessing Officer was unjustifiable and should be disallowed. The CIT(A) deleted the addition made by the AO on account of cessation of liability under section 41(1) but called for documentary evidence to verify the genuineness of the outstanding liability. The CIT(A) concluded that the liabilities were not payable as the assessee failed to provide necessary confirmations and documents, characterizing the liabilities as bogus and unproved.

Issue 2: Verification of provision for salary and statutory dues payable
The main issue before the ITAT was whether the provision for salary and statutory dues payable, reflected in the balance sheet of the assessee company, could be considered as bogus and unproved liabilities. The ITAT observed that the assessee had reversed the provisions in the succeeding years, reducing them to nil, which had been accepted by the department in the assessments for subsequent years. The ITAT agreed with the appellant's argument that sustaining the addition of the amount would lead to double taxation. Even if the liabilities were considered bogus, they could only be assessed as unexplained credits in the year of their genesis and not added to the income of the assessee for the year under consideration. Therefore, the ITAT deleted the addition confirmed by the CIT(A) and allowed the appeal of the assessee, setting aside the order of the CIT(A).

In conclusion, the ITAT ruled in favor of the assessee, holding that the provision for salary and statutory dues payable should not be considered as bogus liabilities and no adverse inferences should be drawn. The ITAT emphasized that sustaining the addition would lead to double taxation and that even if the liabilities were found to be bogus, they could only be assessed as unexplained credits in the year of their origin.