2018 (11) TMI 543 - AT - Income Tax

Addition as cessation of liability u/s 41(1) - proof of cessation of liability - Held that - There is no dispute that in furtherance of its business, the assessee had made purchases from various persons. There is no denying that one of the parties, namely, M/s Hoshiar Singh Suresh Chandra Sarees Pvt Ltd. could not be produced before the AO. At the same time, it is an undisputed fact that notice u/s 133(6) of the Act was served upon the said party. Nothing prevented the AO to issue summons u/s 131 of the Act to the said party. Be that as it may, fail to understand how the provisions of section 41(1) of the Act apply on the facts of the case in hand. There is no question of cessation of liability and, therefore, the CIT(A) grossly erred in confirming the addition under the said section. There is no finding by the Assessing Officer that the purchases were bogus and corresponding sales are also bogus - no corroborative evidence brought on record to make addition - decided in favour of assessee. Addition under various heads - Held that - AO has made addition taking the g.p. rate as basis, the CIT(A) confirmed part disallowance on a different reasoning. The basis given by the first appellate authority is by comparing the turnover of immediately preceding assessment year with that of the year under consideration. The ratio so determined by the CIT(A) does not have any strong footing. Each assessment year is a separate unit and, therefore, the basis adopted by the CIT(A) is erroneous. However, even before me, the assessee fairly admitted that certain expenses are not properly supported by bills and vouchers. Therefore addition of ₹ 50,000/- should meet the ends of justice. Accordingly direct the Assessing Officer to restrict the disallowance to ₹ 50,000/-. Ground No. 2 is partly allowed.

Summary

Issues:
1. Addition of &8377; 2,28,240/- as cessation of liability u/s 41(1) of the Income-tax Act, 1961.
2. Addition of &8377; 96,758/- under various heads.

Analysis:

Issue 1: Addition of &8377; 2,28,240/- as cessation of liability u/s 41(1) of the Income-tax Act, 1961:
- The Assessing Officer added &8377; 2,28,240/- as cessation of liability u/s 41(1) due to non-production of a party, M/s Hoshiar Singh Suresh Chandra Sarees Pvt Ltd., despite notices served.
- The assessee contended before the ld. CIT(A) that purchases were genuine, supported by bills, and non-production of the party should not lead to the addition.
- The ITAT held that section 41(1) did not apply as there was no cessation of liability, no evidence of bogus purchases or sales, and no error in bills. The ld. CIT(A) erred in confirming the addition.
- The ITAT directed the Assessing Officer to delete the addition of &8377; 2,28,240/-, allowing Ground No. 1.

Issue 2: Addition of &8377; 96,758/- under various heads:
- The Assessing Officer disallowed various expenses totaling &8377; 96,758/- due to lack of substantiation, leading to a higher GP rate computation.
- The ld. CIT(A) compared expenses with the turnover of the previous year to test reasonableness and restricted the disallowance to &8377; 96,758/-.
- The ITAT found the ld. CIT(A)'s basis flawed, as each assessment year is separate, but acknowledged unsupported expenses.
- The ITAT directed a disallowance of &8377; 50,000/- to meet justice, partially allowing Ground No. 2.

In conclusion, the ITAT partially allowed the appeal, directing the Assessing Officer to delete the first addition and restrict the disallowance under various heads to &8377; 50,000/-.