2009 (12) TMI 34 - HC - Income Tax

Addition on account of cessation of liability liability was six years old - and on inquiry conducted by the Assessing Officer creditors were untraceable and also the assessee failed to produce the creditors, their Income Tax particulars and even present address of the creditors despite opportunity being afforded to the assessee AO made the addition u/s 41(1) CIT(A) and ITAT deleted the additions - Assessing Officer in his assessment order has observed that though copies of accounts of sundry creditors appearing in the books of the assessee signed by the concerned creditors were filed by the assessee, the assessee herself admitted during the assessment proceedings that she had lost contact with the creditors and their latest addresses are being located and further, the addresses of creditors and their PANs were also not given during the assessment proceedings held that - It is the conceded position that in the assessee s balance sheet, the aforesaid liabilities have been shown, which are payable to the sundry creditors. Such liabilities, shown in the balance sheet, indicate the acknowledgment of the debts payable by the assessee. Merely because such liability is outstanding for the last six years, it cannot be presumed that the said liabilities have ceased to exist. It is also conceded position that there is no bilateral act of the assessee and the creditors, which indicates that the said liabilities have ceased to exist Order of ITAT sustained not addition to be made

Summary

Issues:
1. Whether the ITAT was justified in confirming the deletion of an addition made on account of cessation of liability by the CIT (A)?
2. Whether the ITAT was correct in holding that no trading liability existed to attract Section 41(1) of the Income Tax Act?
3. Whether the Assessing Officer wrongly invoked the provision of Section 41(1), Explanation-I of the Act?

Analysis:
1. The appeal was filed by the revenue against the ITAT order concerning the addition of Rs. 1,47,71,696 on account of outstanding sundry credit balances. The CIT (A) partially allowed the appeal and deleted the addition, stating that the provision of Section 41(1) was wrongly invoked by the Assessing Officer. The CIT (A) observed that there was no unilateral cessation or remission of liabilities, and the burden to prove the income under Section 41(1) lay with the revenue, which was not fulfilled by the Assessing Officer. The ITAT dismissed the revenue's appeal, emphasizing that the liabilities were payable to the assessee and were shown in the balance sheet, indicating acknowledgment of debts. The ITAT held that the Assessing Officer failed to demonstrate that the liabilities had ceased to exist, and no trading liability was proven to attract Section 41(1).

2. The ITAT's decision was based on the premise that the liabilities existed and were acknowledged in the balance sheet, and there was no bilateral act indicating cessation of liabilities. The ITAT referenced previous judgments to support its decision, highlighting that the burden of proving the deeming fiction under Section 41(1) rested with the department. The ITAT concluded that the addition made by the Assessing Officer was purely speculative and lacked factual basis, as no benefit accrued to the assessee from any trading liability remission or cessation.

3. The High Court, after reviewing the impugned order and arguments, upheld the ITAT's decision. It concurred that the liabilities shown in the balance sheet were valid and not ceased, as there was no bilateral act to indicate otherwise. The High Court noted that the Assessing Officer failed to provide evidence of any trading liability deduction in previous years or any benefit obtained from the cessation of liabilities. The confirmation from the creditors provided by the assessee further supported the conclusion that no substantial questions of law arose from the ITAT's order. Consequently, the High Court dismissed the appeal, affirming the ITAT's decision.