2022 (4) TMI 17 - AT - Income Tax

Cessation of liability relating to sundry creditors as per the provisions of section 41(1) - claim of expenditure relating to the impugned creditors CIT-A deleted - HELD THAT - The expenditure relating to the impugned creditors resulting only in work in progress and no sales having been made by the assessee, surely the same has not resulted in any claim by way of expenditure made by the assessee in its assessment for the years to which it relates, being accumulated in work in progress account only. The aforesaid facts were not disputed by the Ld. DR before us who also fairly admitted that no expenditure had been claimed by the assessee relating to the impugned creditors in view of the said facts. Having said so, there arises no question of invoking the provision of section 41(1) of the Act in the present case at all since it fails to fulfill the basic criteria enunciated in the said section. Therefore, for this reason alone, the addition made u/s. 41(1) by the Assessing Officer deserves to be set aside and order of the Ld.CIT(A) be upheld - we uphold the order of the Ld. CIT(A) deleting the addition made to the income of the assessee u/s 41(1) - Decided in favour of assessee.

Summary

Issues:
Addition made to the income of the assessee on account of cessation of liability relating to sundry creditors under section 41(1) of the Income Tax Act, 1961.

Analysis:
The appeal was filed by the Revenue against the order passed by the CIT(A) pertaining to the Assessment Year 2014-15. The sole issue in the appeal was the addition made to the income of the assessee by the Assessing Officer on account of cessation of liability relating to sundry creditors amounting to ?1,92,46,069 under section 41(1) of the Act, which was later deleted by the CIT(A). The Assessing Officer had treated the liability as income of the assessee due to old balances and lack of details provided by the assessee. However, the CIT(A) deleted the addition, stating that the liability was not written back in the books and the assessee had not received any benefit from the cessation of liability. The Revenue appealed this decision.

The Tribunal analyzed the provisions of section 41(1) of the Act, which deem certain amounts as income of the assessee if a deduction or allowance was claimed earlier and the liability ceases to exist. In this case, the assessee did not fulfill the criteria of having claimed any expenditure or allowance regarding the sundry creditors added back to its income. The assessee explained that the expenditure related to construction material resulted in work in progress and no sales were made during the relevant assessment year. The Tribunal noted that no expenditure had been claimed by the assessee for the impugned creditors, as confirmed by the Revenue.

The Tribunal concluded that since the basic condition of an expense or allowance being claimed by the assessee was not met, the provision of section 41(1) could not be invoked. The addition made by the Assessing Officer was set aside, and the order of the CIT(A) was upheld. The Tribunal dismissed the Revenue's appeal, stating that the case laws relied upon by the Revenue were not applicable to the current situation. The order was pronounced on 02-12-2021.