2020 (6) TMI 366 - AT - Income Tax

Cessation of liability u/s 41(1) - liability is being carried forward for years and the assessee is not able to completely prove the genuineness of the trading liability - HELD THAT - Genuineness of the trade payables or creditors has to be examined in the year in which they originate and that unless the liability becomes unenforceable or is written off by the assessee or is given up by the other party or something is brought on record that there is cessation of liability the same cannot be brought to tax u/s 41(1) of the Act. Therefore they are very much applicable to the facts of the case before us and respectfully following the same since there is no evidence that there is a cessation of liability during the relevant A.Y we hold that it cannot be brought to tax u/s 41(1) of the Act during the relevant A.Y. The addition is accordingly deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Cessation of liability under Section 41(1) of the Income Tax Act.
2. Admission of additional evidence.
3. Genuineness of trade payables.

Detailed Analysis:

1. Cessation of Liability Under Section 41(1) of the Income Tax Act:
The core issue revolves around whether the outstanding trade payables amounting to ?19,62,86,726/- should be considered as cessation of liability under Section 41(1) of the Income Tax Act. The Assessing Officer (AO) observed that these liabilities had been outstanding for several years and deemed them as ceased liabilities, thereby bringing them to tax under Section 41(1). The assessee argued that the liabilities still existed in their books and had not been written off, hence there was no cessation of liability. The Tribunal found that the AO had not provided evidence that the liabilities had ceased to exist or that the creditors had given up their claims. The Tribunal ruled that the AO cannot unilaterally treat the liabilities as ceased without corroborative evidence, and thus, the addition under Section 41(1) was deleted.

2. Admission of Additional Evidence:
The assessee submitted additional evidence, including confirmation letters and financial statements, to substantiate the existence of the liabilities. The CIT (DR) objected to the admission of this additional evidence, arguing that the assessee had ample opportunity to present these details during the assessment and first appellate proceedings. The AO's remand report also questioned the authenticity of the additional evidence, stating that it did not clarify the nature of the balance receivable by the assessee company. However, the Tribunal admitted the additional evidence, noting that the Annual Report of Madhucon Projects Ltd listed the assessee under "Enterprises where significant Influence Exists," supporting the claim that the liabilities were still enforceable.

3. Genuineness of Trade Payables:
The AO questioned the genuineness of the trade payables due to the lack of detailed information provided by the assessee. The assessee contended that the liabilities were genuine and had been carried forward from previous years. The Tribunal observed that the AO should have examined the genuineness of the liabilities in the years they were claimed and not during the assessment year in question. The Tribunal cited several judicial precedents, including cases from the ITAT Hyderabad, Gujarat High Court, and Delhi High Court, which supported the view that the genuineness of liabilities should be assessed in the year they originated. The Tribunal concluded that there was no evidence of cessation of liability during the relevant assessment year and thus, the addition under Section 41(1) was not justified.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the AO had not provided sufficient evidence to prove the cessation of liability under Section 41(1) of the Income Tax Act. The additional evidence submitted by the assessee was admitted, and the genuineness of the trade payables was deemed to be a matter for the years in which they originated, not the assessment year under consideration. The addition of ?19,62,86,726/- as ceased liability was deleted, and the appeal was allowed in favor of the assessee.