2018 (3) TMI 1515 - AT - Income Tax

Addition u/s 41 - remission or cessation of liability proof - Held that - Addition under section 41(1) cannot be made simply by doubting the creditor or his creditworthiness or his identity. Further, no addition can be made simply because the creditors are very old. In view of the above facts as well as the various binding precedents, we are of the considered opinion that no addition can be made under section 41(1) of the Act merely on the basis of doubting the genuineness of the creditor without establishing the actual cessation of liability. Hence when the assessee is showing the liability in the books of account and has repaid in the subsequent years then the addition under section 41(1) of the Act is not sustainable. - Decided in favour of assessee.

Issues Involved:
1. Addition of ?3,34,38,259/- by treating sundry creditors as non-genuine.
2. Non-allowance of sales made to creditors in subsequent years to settle accounts.
3. Consideration of trading additions made by disallowing purchases in earlier years.

Issue-wise Detailed Analysis:

1. Addition of ?3,34,38,259/- by treating sundry creditors as non-genuine:
The assessee, an HUF engaged in the business of precious and semi-precious stones, filed its return for the assessment year 2012-13. During assessment, the AO noted substantial sundry credits amounting to ?9,78,82,902/-. While ?4,27,14,114/- related to foreign creditors was accepted, the AO questioned the genuineness of local trade creditors amounting to ?3,34,38,259/- due to their long-standing nature and unserved notices. The AO added this amount to the income of the assessee under section 41(1) of the IT Act, which was upheld by the CIT (A). The assessee argued that the AO's action was arbitrary and based on assumptions, emphasizing that the books were audited under section 44AB, and no defects were found. The assessee provided detailed information about the creditors, including PAN and TIN numbers, and highlighted that in the business of precious stones, confidentiality often prevents public display of business names. The Tribunal, considering various precedents, concluded that merely because liabilities are outstanding for a long period does not imply cessation of liability. The Tribunal noted that the AO failed to provide evidence that the liabilities ceased to exist and that the creditors denied any claims. Therefore, the addition under section 41(1) was not sustainable.

2. Non-allowance of sales made to creditors in subsequent years to settle accounts:
The assessee contended that in subsequent assessment years (2014-15 and 2015-16), it had settled part of the liabilities by making sales to the trade creditors amounting to ?80,72,538/-. The assessee provided sale vouchers as evidence. The Tribunal noted that the AO did not consider these subsequent payments and sales while doubting the genuineness of the creditors. The Tribunal emphasized that the liability shown in the books and subsequent payments indicate that the liability had not ceased to exist. Hence, the Tribunal found merit in the assessee's argument and concluded that the addition under section 41(1) was not justified.

3. Consideration of trading additions made by disallowing purchases in earlier years:
The assessee argued that in earlier years, trading additions were made by disallowing purchases, which should be considered while assessing the current year's liabilities. The Tribunal observed that the AO did not introduce fresh trade creditors during the year under consideration and accepted the trading results declared by the assessee. The Tribunal reiterated that once trade creditors were accepted in the year they were introduced, their genuineness cannot be doubted in subsequent years without evidence of cessation of liability. The Tribunal concluded that the AO's action of treating the trade credits as non-genuine was not supported by tangible evidence.

Conclusion:
The Tribunal allowed the appeal of the assessee, deleting the addition made by the AO under section 41(1) of the IT Act. The Tribunal emphasized that the mere long-standing nature of liabilities does not imply cessation, and the AO failed to provide evidence of cessation or remission of liabilities. The Tribunal's decision was based on several precedents that support the view that liabilities shown in the books and not written off cannot be treated as income under section 41(1).

Order:
The appeal of the assessee was allowed, and the addition made by the AO and sustained by the CIT (A) under section 41(1) of the IT Act was deleted. The order was pronounced in the open court on 20/03/2018.

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