2022 (9) TMI 106 - AT - Income Tax

Addition u/s. 41(1) - liability towards sundry creditors - assessee has not been able to prove that the liability - Assessee submitted liability was existing and company has to pay the same, but due to financial crisis and acute liquidity problems faced by the company, these creditors have not been paid - HELD THAT - The actual liability of the creditors was Rs. 8,97,893/- and not Rs. 10,21,420/-. Further we note that the fact that assessee had paid back a sum of Rs. 6,21,182/- back to the creditors in the subsequent years and an amount of Rs. 2,76,726/- was written off in the subsequent period and offered to income in the subsequent year demonstrates that there was an existing liability of Rs. 8,97,893/- against the assessee as that the end of the financial year under consideration. Therefore, in our considered view, in the instant facts, CIT(Appeals) erred in facts and law in confirming the addition on the ground that the assessee has not been able to prove that the liability was actually subsisting at the end of the financial year. Appeal of the assessee is allowed.

Summary

Issues:
Appeal against CIT(A) order upholding addition under section 41(1) of the Income Tax Act.

Analysis:
The appeal was filed against the CIT(A)'s order upholding the addition of Rs. 10,21,420 made by the Assessing Officer under section 41(1) of the Income Tax Act, 1961. The assessee contended that the liability towards sundry creditors existed but remained unpaid due to financial crisis and liquidity problems faced by the company. The CIT(A) dismissed the appeal stating that the onus to prove the liability was subsisting was not discharged by the appellant. However, the ITAT bench observed that the actual liability of the creditors was Rs. 8,97,893 and not Rs. 10,21,420. The ITAT noted that the assessee had repaid a significant amount to the creditors in subsequent years and had written off another amount, demonstrating the existence of the liability at the end of the financial year. Thus, the ITAT held that the CIT(A) erred in confirming the addition under section 41(1) as the liability was proven to be subsisting.

The ITAT's decision was based on the fact that the assessee had provided evidence to support the existence of the liability towards creditors, despite facing financial difficulties. The ITAT considered the details presented by the assessee, including the repayment made to creditors in subsequent years and the amount written off, to determine the actual liability amount. The ITAT concluded that the CIT(A) had erred in dismissing the appeal without considering the evidence provided by the assessee. By analyzing the financial transactions and liabilities, the ITAT found that the addition under section 41(1) was not justified as the liability was proven to be subsisting at the end of the financial year.

The ITAT's decision highlighted the importance of providing sufficient evidence to establish the existence of liabilities, especially in cases where financial challenges impact the repayment of debts. The ITAT emphasized the need for a thorough examination of the facts and financial records to determine the actual liability amount. By considering the repayment history and write-offs, the ITAT was able to ascertain the true liability of the assessee and overturn the CIT(A)'s decision to uphold the addition under section 41(1) of the Income Tax Act.