2019 (3) TMI 467 - AT - Income Tax

Addition u/s 41 - outstanding expenses - remission/cessation of liability - assessee had failed to prove the genuineness of liability - assessee had obtained a benefit either in cash or in any form in respect of such liability - HELD THAT - It is an undisputed fact that the said liability is continuing in the books of account of the assessee for a long period without being paid by the assessee. Expenses have been claimed by the assessee in earlier years and are continuing unchanged till the impugned assessment year. But the disallowance was made by holding that assessee had failed to file confirmations and no payments have been made for years together. AO accepts that the liabilities were created in the earlier years, then the genuineness of such transactions have to be examined in those assessment years and not in assessment year under consideration. Reading of the provisions of section 41(1) we are of the view that before treating the amount outstanding as deemed income of the assessee u/s 41(1) on account of remission/cessation of liability, the AO is duty bound to examine whether the condition laid down u/s 41(1) are fulfilled or not. Remission or cessation of liability is also acceptable by unilateral act of writing off such liability in its account by the person showing such liability. Therefore, before applying the provisions of section 41(1), it is necessary to establish on record that the assessee had obtained a benefit either in cash or in any form in respect of such liability in the relevant previous year. Thus, when in AO s own admission liability continued from past so many years, then what prompted the AO to conclude that the assessee has obtained benefit in respect of such liability in the impugned assessment year must be clearly brought on record. In the absence of any material to establish that the assessee had obtained any benefit in respect of the liability in the impugned assessment year, so merely on the basis of surmises and assumptions it cannot be said that there is remission/cessation of liability in the impugned assessment year. Addition u/s 41 to be deleted - Decided in favour of assessee.

Summary

Issues Involved:
1. Confirming additions made by the AO on account of outstanding expenses as income under Section 41 of the Income Tax Act, 1961.
2. Genuineness of trading liabilities and unexplained credit under Section 68 of the Income Tax Act, 1961.

Detailed Analysis:

1. Confirming Additions as Income under Section 41 of the Income Tax Act, 1961:
The primary issue in this appeal was whether the outstanding expenses amounting to ?4,26,66,276/- should be treated as income under Section 41 of the Income Tax Act, 1961. The assessee had shown these expenses as payable in its balance sheet, but the Assessing Officer (AO) treated them as income due to the absence of party details and confirmations. The assessee argued that the liability continued in the books for a long period and there was no benefit derived from such liability in the year under consideration. The AO ignored the assessee's explanation that the payments were not made due to insufficient revenue and ongoing losses.

Upon review, the tribunal found that the liability was indeed continuing in the books for a long period without being paid. Referring to the decision in ACIT vs. M/s Trans Freight Containers, it was held that the genuineness of such transactions should be examined in the year the liability was created, not in the current assessment year. The tribunal emphasized that for Section 41(1) to apply, it must be established that the assessee obtained a benefit in respect of the liability in the relevant previous year, which was not proven in this case. The tribunal also cited decisions from the Hon’ble Delhi High Court and the Hon’ble Gujarat High Court, reinforcing that mere continuation of liability without payment does not constitute cessation or remission of liability under Section 41(1).

2. Genuineness of Trading Liabilities and Unexplained Credit under Section 68 of the Income Tax Act, 1961:
The AO had made additions on account of new loans received during the year, treating them as unexplained credits under Section 68 of the Income Tax Act, 1961, due to the absence of confirmations from the parties advancing the loans. The tribunal did not specifically address this issue in detail in the provided judgment text, focusing instead on the primary issue of outstanding expenses under Section 41.

Conclusion:
The tribunal concluded that the AO's decision to treat the outstanding expenses as income under Section 41 was incorrect. The tribunal directed the AO to delete the disallowance made under Section 41, allowing the assessee's appeal. The judgment emphasized the necessity of examining the genuineness of liabilities in the year they were created and not in the assessment year under consideration, and highlighted the requirement for concrete evidence of benefit derived by the assessee in the relevant year for Section 41(1) to apply. The appeal was allowed with no order as to cost.