2020 (1) TMI 52 - AT - Income Tax

Addition u/s 41(1) treating the outstanding as cessation of liability - HELD THAT - It is not in dispute that the creditors were outstanding for more than three years. In our considered opinion, merely because the period of limitation prescribed under the Limitation Act has expired, would not extinguish the debt. As the liability still exists in the balance of the assessee, additions made u/s 41(1) are unwarranted and deserve to be deleted to be deleted in the light of ratio laid down SUGAULI SUGAR WORKS PVT. LIMITED 1999 (2) TMI 5 - SUPREME COURT . Assessing Officer is directed to delete the addition. Addition of total advertisement and marketing expenses - HELD THAT - It is true that there is no violation of provisions of section 40A(3) of the Act. Merely because some payments were made in cash would not justify the impugned addition. It is equally true that some of the expenses were supported by internal vouchers. In our considered opinion, an addition of ₹ 1 lakh would meet the ends of justice. We, accordingly, direct the AO to restrict the disallowance to ₹ 1 lakhs. The assessee will get relief of ₹ 2 lakhs.

Summary

Issues:
1. Addition under section 41(1) of the Income-tax Act, 1961 for outstanding liabilities.
2. Disallowance of advertisement and marketing expenses.

Issue 1: Addition under section 41(1) of the Income-tax Act, 1961 for outstanding liabilities:

The assessee contested the addition of ?4,17,252 made by the Assessing Officer under section 41(1) of the Act, treating the outstanding liabilities as ceased. The Assessing Officer noted that the creditors had been static for an extended period and sought justification from the assessee. The assessee argued that discussions were ongoing to resolve disputes regarding short supply and defective goods, indicating that the liability had not ceased. Despite the assessee's submissions, the Assessing Officer upheld the addition. The Tribunal, after considering the arguments, referred to the Supreme Court's decision in CIT Vs. Sugauli Sugar Works P. Ltd 236 ITR 518, emphasizing that the expiry of the limitation period does not extinguish the debt but only prevents enforcement. Therefore, as the liability still existed, the additions under section 41(1) were deemed unwarranted, directing the Assessing Officer to delete the addition of ?4,17,252.

Issue 2: Disallowance of advertisement and marketing expenses:

The Assessing Officer disallowed ?3 lakhs out of total advertisement and marketing expenses of ?1,19,49,371 due to cash payments and lack of proper documentation. The assessee argued that cash payments did not violate section 40A(3) of the Act and that some expenses without bills were supported by internal vouchers. The Tribunal acknowledged that there was no violation of section 40A(3) and that internal vouchers supported some expenses. Consequently, the Tribunal directed the Assessing Officer to restrict the disallowance to ?1 lakh, providing relief of ?2 lakhs to the assessee.

In conclusion, the appeal of the assessee in ITA No. 2354/DEL/2017 was partly allowed, with the Tribunal ruling in favor of the assessee on both issues.