2021 (4) TMI 461 - AT - Income Tax

Addition of outstanding expenses and liabilities belonging to earlier assessment years - as contended that no particular section has been invoked by the Ld. AO or the Ld. CIT(A) for making this addition and that the only section under which the addition can be made is only u/s. 41(1) - HELD THAT - AO made the addition of all outstanding liabilities except in the case of commission expenses, where both outstanding as well as current year expenses were added as income. Such additions of outstanding liabilities can be made only u/s. 41(1) of the Act. This section can be invoked only when there is either cessation or remission of the liabilities. It is not the case of the ld. AO or the Ld. CIT(A) that there is cessation of liability in question. It is true that on a perusal of the nature of the expenses, our conclusion is that there cannot be outstanding for these many number of years. This indicates that these expenditure is not genuine. Such expenses should not have been allowed in the year in which they were claimed. The AO is correct in doubting the genuine of these expenses. But the problem is that they do not pertain to this asst. year. The disallowance, if any, has to be made in the year in which they were claimed. It cannot be taxed as income of this year unless it falls under the provisions of section 41(1) of the Act. No addition can be made to the income of the assessee in this asst. years, as in the view of the AO the outstanding liability in question is bogus and non-existent. The question of cessation of such non-existent as bogus liability does not arise. Hence, Sec. 41(1) cannot be applied. Only when there is a genuine liability and there is cessation of such liability or it is written off in the books of account, then Sec. 41(1) of the Act can be applied. Law permits the Ld. AO to re-open the assessment for the earlier year and consider whether the expenditure incurred are to be allowable or not and in such cases additions can be made of bogus expenditure. Thus, in view of the above discussion, we delete all these additions of outstanding liabilities/expenses as appearing in the balance sheet as made by the Ld.AO and confirmed by the Ld. CIT(A) and allow the grounds of the assessee. Disallowance of expenditure in commission - A/R during the stage of hearing was asked to produce the details of parties to whom the commission was given and for what purposes - HELD THAT - As assessee specifically submits that he does not have any employee throughout the state of W.B., where supplies of goods have taken place and instead the assessee appointed sales agent to liaison the supply of goods and follow up of the bills and collection in various districts of State of W.B. and commission expenses were paid through a/c payee cheques after deducting tax at source against the bills raised by the Commission Agents. The sales agents have filed their I.T returns declaring such commission as there income. We also find that similar commission had been paid by the assessee in the earlier years also. The Ld. DR could not controvert these facts as stated by the assessee. The only basis for such disallowance is that supply of goods was to State Govt. by way of open tender and that no commission need to be paid for sales. Commission expenditure in this case was paid for liaison work at various locations in the state where goods were supplied. Thus, expenditure incurred was in lieu of salary which was required to be paid to employees; agents were not employed. In view of the above discussion, we find no justification in the disallowance of commission expenditure - Decided in favour of assessee.

Issues Involved:
1. Addition of outstanding liabilities/sundry creditors as income.
2. Addition of outstanding commission expenses as income.

Detailed Analysis:

1. Addition of Outstanding Liabilities/Sundry Creditors as Income:

The primary issue in this case revolves around the addition of outstanding liabilities and sundry creditors as income by the Assessing Officer (AO). The assessee, a partnership firm in the business of manufacturing electrical goods, filed its return of income for the assessment year 2011-12, declaring an income of ?29,99,051/-. However, the AO, during scrutiny assessment, determined the total income at ?2,13,84,774/-, making additions for various outstanding liabilities.

The AO made additions on the grounds that these liabilities, which included sundry creditors and outstanding expenses, were not genuine. The First Appellate Authority upheld this view, stating that the assessee failed to provide details proving that these liabilities were still enforceable.

The assessee argued that these liabilities were incurred in earlier assessment years and had been allowed as expenses in those years. The only section under which such additions could be made is Section 41(1) of the Income-tax Act, 1961, which deals with the cessation or remission of liabilities. The assessee contended that there was no cessation or remission of these liabilities, and they were still outstanding and had not been written off in the books of account.

The Tribunal agreed with the assessee, stating that the AO and CIT(A) did not invoke Section 41(1) explicitly. The Tribunal emphasized that for additions under Section 41(1), there must be a cessation or remission of liability. The AO's conclusion that these expenses were not genuine was not sufficient to make additions in the current assessment year. The Tribunal cited several judgments supporting the view that the genuineness of liabilities should be examined in the year they were claimed and not in subsequent years unless there is evidence of cessation of liability.

2. Addition of Outstanding Commission Expenses as Income:

The second issue pertains to the addition of outstanding commission expenses as income. The AO added ?1,16,13,876/- as outstanding commission expenses, including both current year and previous years' expenses. The assessee argued that these expenses were genuine, incurred for services received, and paid through account payee cheques with tax deducted at source. The agents who received the commission had filed their income tax returns, declaring these amounts.

The AO disallowed these expenses, arguing that since the goods were supplied to government departments through tenders, no middleman was required. However, the assessee contended that agents were necessary for liaison work, follow-up, and bill realization across the state.

The Tribunal found merit in the assessee's arguments, noting that similar commission expenses had been allowed in earlier years. The Tribunal concluded that the commission expenses were genuine and necessary for the business operations, especially given the extensive geographical spread of the business. Therefore, the disallowance of commission expenses was unjustified.

Conclusion:

The Tribunal allowed the appeal of the assessee, deleting the additions of outstanding liabilities and commission expenses made by the AO and confirmed by the CIT(A). The Tribunal emphasized the importance of examining the genuineness of liabilities in the year they were claimed and not in subsequent years unless there is clear evidence of cessation or remission of liability. The Tribunal also recognized the necessity of commission expenses for the assessee's business operations.

← Previous Next →