2020 (9) TMI 627 - AT - Income Tax

Addition u/s 41(1) - liability outstanding in the books of the assessee towards sundry creditors - CIT(A) deleted the addition partly - HELD THAT - The assessee is not in appeal against the confirmation of additions by the ld. CIT(A) in respect of both the parties to the extent noted above. Except for these two parties, the AO, in the remand proceedings, did not point out any inconsistency calling for the applicability of section 41(1). This section, in turn, states that where an allowance or deduction has been made in the assessment for any year in respect of loss or expenditure or trading liability incurred by the assessee and subsequently the assessee obtains some benefit in respect of such trading liability etc. by way of remission or cessation thereof, the amount of benefit obtained by the assessee becomes income u/s. 41(1). It is evident that obtaining of any benefit by the assessee in the form remission or cessation is sine qua non for invoking section 41(1). If the liability continues to exist, the factum of delay in payment does not ipso facto requires addition u/s. 41(1). We are confronted with a situation in which the assessee categorically stated before the AO that all the creditors were genuinely payable and there were some transactions in their accounts as well. CIT(A) was justified in coming to the conclusion that addition was not called for u/s.41(1) of the Act pro tanto. - Decided against revenue.

Summary

Issues:
Deletion of addition made by Assessing Officer under section 41(1) of the Income-tax Act, 1961.

Analysis:
The appeal was against the deletion of an addition of ?2,95,60,819/- made by the Assessing Officer under section 41(1) of the Income-tax Act, 1961. The assessee, a contractor, had a liability towards sundry creditors. The AO added the entire outstanding amount as income under section 41(1) as the assessee failed to provide confirmations from most creditors. The assessee contended that all creditors were genuinely payable, and there were transactions in their accounts. The CIT(A) admitted additional evidence and deleted the addition after considering the submissions. The Tribunal observed that the AO did not grant adequate hearing to the assessee initially but noted that the assessee provided relevant evidence during the remand proceedings. The AO pointed out inconsistencies in two accounts, and the CIT(A) confirmed the additions for those creditors. However, for other creditors, the Tribunal found no benefit obtained by the assessee in the form of remission or cessation, which is essential for invoking section 41(1). As the liability continued to exist, delay in payment did not warrant addition under section 41(1). The Tribunal upheld the CIT(A)'s decision, stating that the addition was not justified under section 41(1) for most creditors.

In conclusion, the Tribunal dismissed the appeal, affirming the CIT(A)'s decision to delete the addition made by the Assessing Officer under section 41(1) of the Income-tax Act, 1961. The Tribunal held that the assessee's liability towards most creditors was genuine, and no benefit was obtained by the assessee in the form of remission or cessation, thus not warranting the addition under section 41(1).