2023 (7) TMI 651 - AT - Income Tax

Modification of assessment order by CIT(A) - Addition of remission of liabilities u/s 41(1) rather than sec 68 - CIT(A) sustained the impugned addition by invoking the provision of section 41(1) without giving any notice to the assessee - HELD THAT - As per section 251(1)(a), Ld.CIT(A) is empowered in an appeal against the order of assessment to confirm, reduce, enhance, annul the assessment but it does not speak of modification of the order. In the present case, Ld.CIT(A) in essence has modified the assessment order by sustaining the addition u/s 41(1) of the Act instead of section 68 of the Act. Therefore, in our considered view, Ld.CIT(A) travelled beyond the jurisdiction conferred by the Act. Moreover, both the Authorities have failed to take note of the binding judgement of Shri Vardhman Overseas Ltd 2011 (12) TMI 77 - DELHI HIGH COURT as concentrated on applicability of Clause (a) of sub-section (1) of Section 41 and as to what constitute remission or cessation of a trading liability. It may be noted that in the present case, the assessee has not unilaterally written back the accounts of the sundry creditors in its profit and loss account. In the present case, the AO as well as Ld.CIT(A) have recorded the fact that the creditors are outstanding for more than 02 years. However, in the case of CIT vs Sugauli Sugar Works Pvt.Ltd. 1999 (2) TMI 5 - SUPREME COURT as recorded that the liabilities were existing for more than 20 years. Therefore,we are of the considered view that the authorities below were not justified in making the impugned addition. We therefore, direct the AO to delete the addition. Grounds raised by the assessee are thus, allowed.

Summary

Issues Involved:
The judgment involves the assessment of outstanding creditors more than two years old, treatment of liabilities as unexplained cash credit under section 68 of the Income Tax Act, 1961, and the invocation of section 41(1) of the Act for remission of liabilities.

Assessment of Outstanding Creditors:
The appellant company had outstanding creditors totaling INR 2,07,29,190, which were more than two years old. The Assessing Officer raised doubts over the genuineness of these creditors and treated them as unexplained cash credit under section 68 of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) sustained the addition under section 41(1) of the Act, considering it as remission of trading liability. The appellant contended that the AO's action was unjustified and illegal, and the CIT(A) erred in invoking section 41(1) without notice to the assessee.

Legal Analysis and Decision:
The Tribunal found that the impugned addition was made by the AO under section 68 of the Act, but the CIT(A) sustained it under section 41(1) without proper notice to the assessee. The Tribunal held that the CIT(A) exceeded jurisdiction by modifying the assessment order and not following binding precedents. Referring to the judgment in CIT vs Sugauli Sugar Works Pvt. Ltd., it was established that liabilities existing for more than 20 years were not taxable. Consequently, the Tribunal directed the AO to delete the addition, as the authorities below were not justified in making it. The appeal of the assessee was allowed.

Conclusion:
The Tribunal's decision focused on the incorrect application of sections 68 and 41(1) of the Income Tax Act, 1961 in assessing outstanding creditors. By following binding precedents, the Tribunal ruled in favor of the appellant, directing the deletion of the addition. The judgment highlighted the importance of adhering to legal provisions and precedents in tax assessments to ensure fair and accurate decisions.