2019 (2) TMI 1461 - AT - Income Tax

Outstanding creditors - cessation/ remission of liability u/s 41(1) - addition u/s 69A - power of CIT(A) to issue direction u/s 150(1) - HELD THAT - If the assessee paid the creditors, s. 69A would come into play. If, on the other hand, someone paid them on assessee s behalf u/s 41(1) would get attracted on account of cessation of a trade liability; the assessee admittedly not incurring any other liability in lieu of such payment. Thirdly, if, as claimed, no amount stands paid to the creditors with they introducing their own money, s. 41(1) would again get attracted on account of remission of the trade liability. No hesitation in upholding the assessment as the assessee s income, being the amount by which the assessee s liability to SSS has undergone reduction during the current year. Though one could argue that the assessee s accounts reflecting a total liability to the trade creditors at ₹ 14.43 lacs, which does not exist as at the year-end, so that the entire amount ought to be, as by the AO, assessed as income, it needs to appreciated, that the evidence with the Revenue, in the form of denial of the assessee s debt in their favour by the trade creditors, itself states of reduction in the said liability over a period of time. Agree with the CIT(A) that the reduction obtaining during a particular year is to be assessed as income for that year. His directions, accordingly, to that effect to the AO u/s. 150(1), subject to the fulfillment of the conditions u/s. 150(2), cannot be faulted. However, of the payment of ₹ 4 lacs to JRJC during f.y. 2004-05, ₹ 3 lacs stands already paid during f.y. 2003-04 as per the assessee s accounts. Accordingly, it is only the difference, i.e., ₹ 1.0 lac, that can be assessed as income u/s. 41(1) for AY 2005-06 on that account. This aspect shall be duly considered by the AO while giving effect to the said directions by the ld. CIT(A).

Summary

Issues Involved:
1. Maintainability of an addition for ?4.39 lacs sustained by the first appellate authority.
2. Application of Section 69A and Section 41(1) of the Income Tax Act, 1961.
3. Credibility of the creditors' statements and the assessee's denial of payments.

Issue-Wise Detailed Analysis:

1. Maintainability of an Addition for ?4.39 lacs:
The principal issue in the appeal was the maintainability of an addition for ?4.39 lacs sustained by the first appellate authority. The assessee, a partnership firm in the rice milling business, filed a return declaring 'Nil' income. The Assessing Officer (AO) verified trade debtors and creditors, particularly focusing on two creditors: JRJC and SSS. The AO noted discrepancies in the accounts, which led to the addition. The Tribunal, in an earlier order, had remanded the matter to the first appellate authority, which confirmed the additions for the current year to the extent of the payment recorded as received by the creditor-firm, i.e., ?4,38,872/- in the case of SSS.

2. Application of Section 69A and Section 41(1) of the Income Tax Act, 1961:
The assessee contended that no payments not recorded in its books were made, and the entries of cash received from the assessee in the creditors' accounts were false. The Tribunal questioned how Section 41(1) would not apply given the creditors' denial of any debt due by the assessee. The Tribunal observed that the creditors' statements on oath, which have evidentiary value, confirmed the payments. Thus, even if the assessee did not pay the creditors, the denial of liability by the creditors would amount to a remission of a trade liability, attracting Section 41(1). The Tribunal also considered the application of Section 69A if the assessee had paid the creditors.

3. Credibility of the Creditors' Statements and the Assessee's Denial of Payments:
The Tribunal noted that the creditors' statements under oath, corroborated by their books of account, were not rebutted by the assessee. The Tribunal found no merit in the assessee's claim of not having made any payments. The Tribunal emphasized that the denial of liability by the creditors, backed by their statements, would result in the cessation of liability, attracting Section 41(1). The Tribunal also discussed the possibility of the creditors introducing their own money as cash received from the assessee to protect their capital, but found no firm basis for such a claim.

Conclusion:
The Tribunal upheld the assessment of ?4,38,872/- as the assessee's income, being the amount by which the assessee's liability to SSS had reduced during the year. The Tribunal agreed with the CIT(A) that the reduction in liability during a particular year should be assessed as income for that year. The Tribunal also directed the AO to consider only the difference of ?1 lac for AY 2005-06 in the case of JRJC. The assessee's appeal was disposed of accordingly, with no interference in the CIT(A)'s findings.

Order Pronouncement:
The order was pronounced in the open Court on December 06, 2018.