2023 (5) TMI 1011 - HC - Income Tax

Addition u/s 41(1) - addition towards waiver of liability / expenditure claimed earlier - assessee has neither filed its return of income nor made an assessment and thus interest was not claimed as deduction - HELD THAT - Undisputed fact of the case is, assessee stopped its operation in the year 2004 and it is under the control of Liquidator. Assessee has not filed its return from A.Y. 2003-04 onwards. As per mercantile system of accounting, assessee had been accounting for interest expenses every year in its books of accounts showing it as payable. One of the essential requirements of Section 41(1) of the Act is that there should be an allowance or deduction made in the assessment for any year in respect of loss or expenditure or trading liability. The AO has recorded a finding in para 3 of its order that the assessee has not filed the returns for the claim for the earlier years and thus no claim has been made by filing returns of income. As is right in his submission that Section 41(1) shall be applicable only when allowance is made in any assessment or reassessment for any year. In the present case, no assessment or reassessment has been made for any A.Ys. Therefore, no allowance or deductions are claimed for any A.Ys. It is not in dispute that assessee has not filed return of income in the earlier A.Ys. claiming deduction of interest and no assessment or reassessment has been made for any A.Ys. Hence, Section 41(1) of the Act is not applicable and we find no error in the CIT(A) s order. Decided in favour of the assessee.

Summary

Issues involved:
The issue in this case revolves around the applicability of Section 41(1) of the Income Tax Act concerning the waiver of interest payable by an assessee to cooperative banks, where the assessee had not filed its return of income and no assessment was done for the relevant years.

Summary:
The case involves an appeal by the Assessee against an order passed by the Income Tax Appellate Tribunal (ITAT) regarding the waiver of interest payable to cooperative banks. The Assessee, a cooperative sugar factory under liquidation, had not filed returns for several years and claimed interest waiver as a deduction. The Assessing Officer rejected the claim, stating that expenses should be claimed in the year they accrue. The Commissioner of Income Tax (Appeals) allowed the Assessee's appeal, but the ITAT overturned this decision. The Assessee argued that Section 41(1) of the Act does not apply as no returns were filed earlier, and the expenses were not claimed. The Court analyzed the provisions of Section 41(1) and relevant case law, concluding that since no assessment or allowance was made in earlier years, the section did not apply. The appeal was allowed, with the Court ruling in favor of the Assessee and setting aside the ITAT's order.

Judgment Details:
The Court emphasized that for Section 41(1) to apply, there must be an allowance or deduction made in the assessment for any year, which was not the case here due to the Assessee's failure to file returns. Citing relevant case law, the Court highlighted that without an actual allowance in earlier assessments, Section 41(1) does not come into play. The Court concurred with the Commissioner of Income Tax (Appeals) that since no deductions were claimed or allowed in previous assessments, the section was not applicable. As a result, the Court allowed the appeal, ruling in favor of the Assessee and setting aside the ITAT's decision.