2018 (6) TMI 1506 - AT - Income Tax

Addition u/s 41(1) - Held that - No other alternative but to delete the addition for the reason that there is neither remission or cessation of liabilities in this case. Merely because evidence of repayment of sundry creditors is not produced, an addition u/s 41(1) cannot be made. CIT(A) has not followed the basic proposition of law laid down by the Court on application of Section 41(1) - delete the disallowance and allow the ground of the assessee.

Issues Involved:
1. Addition made under Section 41(1) of the Income Tax Act, 1961 for sundry creditors.
2. Addition made under Section 41(1) of the Income Tax Act, 1961 for a sum payable to an individual.

Issue-wise Detailed Analysis:

1. Addition made under Section 41(1) of the Income Tax Act, 1961 for sundry creditors:
The primary issue in this appeal concerns the addition of ?7,36,174/- under Section 41(1) of the Income Tax Act, 1961, which pertains to the cessation or remission of trading liabilities. The Assessing Officer (AO) concluded that certain sundry creditors' liabilities had ceased because no payments were made to these creditors during the previous year, and no purchases were made from them during the same period. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed this addition, noting that the appellant provided a list of payments made in subsequent years, primarily in FY 2010-11, without specifying the mode of payment or furnishing confirmations from the creditors. The CIT(A) held that without supporting evidence, the AO's finding of cessation of liabilities was justified.

2. Addition made under Section 41(1) of the Income Tax Act, 1961 for a sum payable to an individual:
The second issue pertains to an addition of ?1,40,732/- under Section 41(1) for a sum payable to an individual, which the AO also considered a ceased liability due to similar reasons as the first issue. The AO added this amount because no payments were made to the individual during the previous year, and a verification letter sent to him remained unserved. The CIT(A) upheld this addition, rejecting the appellant's submission of ledger payments without any supporting confirmation from the creditor, thus confirming the AO's finding of cessation of liability.

Tribunal's Analysis and Judgment:
The Tribunal referenced the Bangalore Tribunal'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 evidence of remission or cessation of liability. The Tribunal emphasized that the terms "remission" and "cessation" are legal terms and must be interpreted accordingly. It cited the Supreme Court's judgment in CIT vs. Sugauli Sugar Works (P) Ltd., which held that the mere lapse of time does not constitute cessation of liability, and a unilateral act by the debtor cannot bring about cessation or remission of liability.

The Tribunal found that there was no evidence of remission or cessation of liabilities in the present case. It held that merely because the appellant did not produce evidence of repayment of sundry creditors, an addition under Section 41(1) could not be justified. The CIT(A) did not follow the basic legal proposition regarding the application of Section 41(1).

Conclusion:
The Tribunal concluded that the impugned additions could not be sustained and directed their deletion. Consequently, the appeal of the assessee was allowed. The order was pronounced in the court on 27.06.2018.

← Previous Next →