2019 (1) TMI 633 - AT - Income Tax

Addition u/s 41(1)(a) - cessation of trading liability - relevancy of accounting entry - Held that - Whether a trading liability, which the impugned amount/s represents, could be added u/s. 41(1)(a), subject of course to the conditions in its respect being satisfied, where the purchase (of goods), to which the said liability/s relates, is not doubted for its genuineness or its genuineness otherwise not in dispute. There is nothing in the clear mandate of the provision to so suggest, as sought to be canvassed by Sh. Sarna with reference to the decision in Jain Exports Pvt. Ltd. 2013 (5) TMI 690 - DELHI HIGH COURT . Why, the very fact that the liability under reference stands allowed as a deduction, a condition precedent for the applicability of section 41(1), in an earlier year, itself implies that the genuineness of the transaction/s of purchase, giving rise to the liability, is not under question. Rather, where so, the same would disqualify the relevant amount/s for being allowed as a deduction for the year in which it arose, i.e., under the relevant provision, as under section 37(1) qua a purchase transaction, even as explained in Jain Exports (P.)Ltd. (supra). As such, nothing turns on the assertion that the relevant purchase/s stands not doubted by the Revenue; the very basis of sec. 41(1)(a) being the allowance of deduction qua the liability under reference earlier. As explained in Motilal Ambaidas v. CIT 1976 (2) TMI 17 - GUJARAT HIGH COURT in the context of a sec. 41(1) addition, wherein no entries in respect of sale-tax collected (from customers) and paid to the Government were made by the assessee in his books of account, contending that therefore no deduction qua sales-tax paid had been claimed by him for section 41(1) to apply on the refund of the sales-tax from the Government. The contention was not accepted by the Hon ble Court, further explaining that the provision is a machinery provision. In fact, as explained in CIT v. Balabux Birla & Co. 1985 (5) TMI 39 - PUNJAB AND HARYANA HIGH COURT the method of accounting, cash or mercantile, adopted by the assessee is also irrelevant as far as section 41(1) is concerned, so that as soon as the assessee is found to have benefited from the remission or cessation of a trading liability, allowed in an earlier year, the provision would get attracted in the facts and circumstances of the case. The said condition, in view of the foregoing, stands satisfied, so that in my view section 41(1)(a) stands rightly invoked by the Revenue in the instant case qua the impugned liabilities. No case for telescoping, also considered, also obtains. Assessee s appeal dismissed.

Summary

Issues Involved:
1. Timeliness of the appeal.
2. Maintainability of the addition under Section 41(1)(a) of the Income Tax Act, 1961.
3. Rejection of accounts and its implications.
4. The burden of proof regarding the existence of liability.

Detailed Analysis:

1. Timeliness of the Appeal:
The appeal was initially considered time-barred by 109 days. However, it was clarified that the appeal was filed on time on 08/12/2017, with an appeal fee of ?8600, which was short by ?1400. The additional fee was paid on 29/3/2018 after communication from the Tribunal's Registry. The appeal was admitted, and the hearing proceeded.

2. Maintainability of the Addition Under Section 41(1)(a):
The primary issue was the addition of ?4.61 lacs outstanding in favor of two trade creditors under Section 41(1)(a). The assessee argued that no further addition under Section 41(1) could be made since the accounts were rejected and income was estimated. The assessee relied on previous judgments, including ITO v. S. L. Road Construction Co. and CIT v. Jain Exports Pvt. Ltd., to support the argument that the liability continued to be reflected in the accounts and was discharged in the following year.

The Tribunal examined whether the conditions for the applicability of Section 41(1)(a) were satisfied. It was determined that the genuineness of the purchase was not in dispute, and the liability had been allowed as a deduction in an earlier year. The Tribunal found that the assessee failed to prove the existence of the liability at the relevant year-end, despite the liability being reflected in the accounts. The Tribunal noted that the liability remained unpaid for an extended period without a valid explanation, and the notice to the creditor was returned undelivered.

3. Rejection of Accounts and Its Implications:
The Tribunal addressed whether the rejection of accounts precluded the addition under Section 41(1)(a). It was clarified that the rejection of accounts does not imply that all entries are doubted. The Tribunal referred to the Supreme Court's decision in Devi Prasad Vishwanath Prasad, which held that an addition under Section 68 could be made even if the accounts were rejected. The Tribunal found that the rejection of accounts did not support the assessee's case regarding the existence of the liability.

4. Burden of Proof Regarding the Existence of Liability:
The Tribunal emphasized that the burden of proof lies on the assessee to establish the existence of the liability. The assessee failed to provide confirmations from the creditors or any other evidence to substantiate the claim of outstanding liability. The Tribunal concluded that the assessee's claim was unproved, and the liability did not exist at the relevant year-end. The Tribunal also considered whether the addition under Section 41(1)(a) could be telescoped against the profit assessed over and above that disclosed in the accounts but found no basis for such restoration.

Conclusion:
The Tribunal concluded that the benefit arising from the remission or cessation of a trading liability need not be reflected in the accounts. The assessee's accounts were found to be unreliable, and the claim of liability was unproved. The addition under Section 41(1)(a) was upheld, and the assessee's appeal was dismissed. The order was pronounced in the open court on October 31, 2018.