2018 (3) TMI 1357 - HC - Income Tax

Additions u/s 41(1) - credit balance of creditors - unclaimed credit liability - it contended that, once the addition on account of unexplained credit added in A.Y. 2007-08 the same amount could not be added in A.Y. 2008-09 - Held that - there is nothing on record to show that there have been cessation of trading liability or that some benefits have been taken in respect of the trading liability by the assessee. The necessary ingredients for invoking the provisions of Section 141 are two folds; firstly, there should have been a cessation of the trading liability and secondly that some benefit in respect of the trade liability had been taken by the assessee. Out of total amount of ₹ 1 crore and odd, approximately 86 lacs had still remained unrecoverable as the creditors were untraceable. This is the finding recorded. In any event, it could not be said that the liability had ceased or that any advantage had been taken by the assessee on account of this. No addition could be made - Decided against the revenue.

Summary

Issues:
1. Appeal under Section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal for the assessment year 2007-08.
2. Deletion of addition made on account of Sundry Creditors.
3. Deletion of addition made on account of unclaimed liability.
4. Deletion of addition made on account of Bad Debts.

Analysis:

Issue 1:
The appeal was filed against the ITAT's order for the assessment year 2007-08. The questions of law raised included the deletion of additions made on various grounds. The Tribunal's observations were crucial in deciding the issues raised in the appeal.

Issue 2: Deletion of addition on account of Sundry Creditors:
The Assessing Officer had made an addition on account of sundry creditors, alleging lack of evidence regarding the existence of these liabilities. The invocation of Section 41(1) of the Income Tax Act was questioned. The Tribunal found that there was no evidence of cessation of trading liability or any benefit taken by the assessee. The court referred to a Karnataka High Court decision to support the conclusion that mere untraceability of a creditor does not imply cessation of liability. Therefore, the provisions of Section 41(1) could not be invoked, and the issue was decided in favor of the assessee.

Issue 3: Deletion of addition on account of Unclaimed Liability:
The Tribunal also deleted the addition made on account of unclaimed liability. The court emphasized the necessity of actual write-off in the accounts of the assessee to establish bad debts. The Assessing Officer's failure to examine the actual write-off led to the decision in favor of the assessee, citing the Apex Court's position on bad debts.

Issue 4: Deletion of addition on account of Bad Debts:
The law regarding bad debts was well-settled, as per the Apex Court's decision. The court emphasized that after a certain date, it was not necessary to prove irrecoverability; it was enough if the debt was written off in the accounts. The Assessing Officer's failure to examine the actual write-off led to the decision in favor of the assessee, and the matter was remitted for further consideration.

In conclusion, the appeal was dismissed, with all issues being decided in favor of the assessee based on the Tribunal's findings and legal precedents.