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2018 (4) TMI 741 - AT - Income TaxAddition u/s 41(1) - accounts not reconciled - remission or cessation of a trading liability - Held that - In the case on hand, the reason why M/s. C.D.Steel chose to debit the account of M/s. Alisha Steel P. Ltd., is not known. The AO should have examined this issue. Just because the accounts have not been reconciled, the AO cannot make an addition u/s 41(1) of the Act. Thus following the propositon of law laid down by the Hon ble Delhi High Court in the case of CIT vs Shri Vardman Overseas Ltd (2011 (12) TMI 77 - DELHI HIGH COURT) and the Bangalore Bench of the ITAT in the case of M/s Glen Williams (2015 (8) TMI 974 - ITAT BANGALORE) delete this addition and allow this ground of the assessee.
Issues Involved:
1. Addition under Section 41(1) of the Income Tax Act, 1961. 2. Discrepancy in the balance of sundry creditors. 3. Applicability of legal precedents on remission or cessation of liability. Issue-wise Detailed Analysis: 1. Addition under Section 41(1) of the Income Tax Act, 1961: The primary issue in this case is the addition made under Section 41(1) of the Income Tax Act, 1961. The Assessing Officer (AO) noticed a discrepancy in the balance of sundry creditors, specifically an amount due from M/s. C.D. Steel Pvt. Ltd. The assessee disclosed ?29,75,823/- as due from M/s. C.D. Steel Pvt. Ltd., whereas M/s. C.D. Steel Pvt. Ltd. reported a balance of only ?9,23,416/-. The AO directed the assessee to explain the discrepancy of ?20,52,407/-. The assessee claimed that M/s. C.D. Steel Pvt. Ltd. had mistakenly debited M/s. Alishan Steel Pvt. Ltd. instead of the assessee company. Despite this explanation, the AO made an addition under Section 41(1) of the Act, which was upheld by the First Appellate Authority. 2. Discrepancy in the Balance of Sundry Creditors: The discrepancy in the balance of sundry creditors was central to the AO's decision. The assessee argued that the discrepancy arose due to an error by M/s. C.D. Steel Pvt. Ltd., which had debited another company instead of the assessee. The AO, however, did not accept this explanation and proceeded with the addition. The Tribunal found that the AO should have further examined the reason behind M/s. C.D. Steel Pvt. Ltd.'s decision to debit another company's account. 3. Applicability of Legal Precedents on Remission or Cessation of Liability: The Tribunal relied on several legal precedents to determine the applicability of Section 41(1). The assessee cited the case of CIT vs. Shri Vardman Overseas Ltd. (2012) 343 ITR 408, where the Delhi High Court held that no addition could be made for any sundry creditor or loan brought forward from an earlier year merely because the assessee could not furnish the required details. The Tribunal also referred to the Bangalore ITAT's decision in the case of Glen Williams vs. ACIT, which analyzed Section 41(1) and concluded that for the section to apply, there must be a benefit obtained by the assessee in respect of the trading liability, which was not evident in this case. The Tribunal emphasized that the terms "remission" and "cessation" are legal terms that must be interpreted accordingly. In the present case, there was no evidence of remission or cessation of liability by the creditor or any unilateral act by the assessee to write off the liability. The Tribunal cited the Supreme Court's decision in CIT vs. Sugauli Sugar Works (P) Ltd., which held that a unilateral act by the debtor cannot bring about the cessation of liability. The Tribunal concluded that the AO could not invoke Section 41(1) merely because the accounts were not reconciled. Conclusion: The Tribunal, following the legal principles laid down by the Delhi High Court and the Bangalore ITAT, held that the addition under Section 41(1) was not justified. The Tribunal deleted the addition and allowed the assessee's appeal. The decision underscores the importance of substantial evidence and proper examination before invoking Section 41(1) for discrepancies in sundry creditors' balances. Order: In the result, the appeal of the assessee is allowed. The order was pronounced in the Court on 13.04.2018.
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