2017 (9) TMI 41 - AT - Income Tax

Sundry creditors outstanding liability to be added to the income of assessee u/s 41(1) - issued notices u/s. 133(6) to sundry creditors - failed to give evidence regarding genuineness of creditors - Held that - There is no question of remission or cessation of sundry creditors liability and the same is shown in the balance sheet of the assessee, then, facts and circumstances of the case would prove that the case of the assessee is not covered by the provisions of section 41 (i) of the IT Act. We, therefore, do not find any justification to interfere with the order of the learned CIT(A). We confirm his findings and dismiss this ground of appeal of the revenue - Decided against revenue Disallowance of business promotion and telephone expenses - Held that - Authorities have made this disallowance without pointing out as to how much of such expenses were incurred by the assessee for personal benefit of assessee. Hence, the adhoc disallowance out of these expenses deserves to be deleted. Regarding car running expenses and electricity expenses, the AO has rightly made the disallowance, as the assessee could not be able to produce the log books of the vehicles run by him and that composite electricity expenses were found incurred on office cum residence of assessee. We accordingly confirm the disallowance made out of electricity and car running expenses as made by the authorities below.

Issues Involved:
1. Addition of ?90,36,451/- on account of sundry creditors under section 41(1).
2. Disallowance of ?12,320/- on account of bogus purchases.
3. Disallowance of expenses treated as personal in nature (business promotion, telephone, car running & maintenance, and electricity expenses).
4. Charging of interest under sections 234B, 234C, and 234D of the Income Tax Act, 1961.

Detailed Analysis:

1. Addition of ?90,36,451/- on account of sundry creditors under section 41(1):
The assessee, engaged in civil construction, showed sundry creditors of ?2,59,71,557/- in the balance sheet. The Assessing Officer (AO) issued notices under section 133(6) to various parties, some of which were returned unserved or not replied to. The AO received confirmations from certain parties but found issues such as invalid PANs and non-existent addresses. Consequently, the AO added ?90,36,451/- to the income under section 41(1), treating it as cessation of liability.

The Tribunal observed that section 41(1) applies where there is remission or cessation of liability during the year under consideration. The assessee continued to show the liabilities in the balance sheet, and the Revenue failed to prove any benefit by way of remission or cessation. Citing precedents like CIT vs. Sugauli Sugar Works (P) Ltd. and CIT vs. Bhogilal Ramjibhai Atara, the Tribunal opined that mere entries in books do not constitute cessation of liability. Therefore, the addition under section 41(1) was deleted.

2. Disallowance of ?12,320/- on account of bogus purchases:
The assessee did not press this ground, and it was dismissed as not pressed.

3. Disallowance of expenses treated as personal in nature:
The AO disallowed expenses on business promotion (?7,670/-), telephone (?3,174/-), car running & maintenance (?19,808/-), and electricity (?27,471/-), citing personal elements. The Tribunal found the disallowance of business promotion and telephone expenses to be arbitrary, as the AO did not specify the personal benefit derived. Hence, these disallowances were deleted. However, the disallowance of car running and electricity expenses was upheld due to the lack of log books and the composite nature of the electricity expenses incurred on the office-cum-residence.

4. Charging of interest under sections 234B, 234C, and 234D:
The issue of interest under sections 234B, 234C, and 234D was deemed consequential. The AO was directed to charge interest as per law.

Conclusion:
The appeal was partly allowed, with the deletion of the addition under section 41(1) and certain disallowances. The stay petition filed by the assessee was dismissed as the appeal was disposed of. The order was pronounced in the open court on 29.08.17.

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