2023 (9) TMI 1505 - AT - Income Tax

Addition u/s 41(1) towards cessation of trading liability - assessing Loan payable to company as the name of the said company was struck off on MCA - HELD THAT - From persual of Provisions of Section 41(1), we notice that the same refers to a trading liability. When the assessee purchases goods and the sundry creditor is appearing in the balance sheet and the same has remained unpaid for a long time and the assessee fails to prove that such liability is existing/live then in such cases Section 41(1) of the Act can be invoked, but in the present case the alleged sum is the balance of outstanding loan. The assessee took loan but the same has remained outstanding in the balance sheet only and it has never been claimed as a trading liability. Only the interest paid on such sum has been claimed as an expenditure. Even the assessee has also claimed that the loan liability was live as on the closing date of the year under appeal and this company was struck off at a later stage. Thus, we are of the considered view that only the interest expenditure claimed by the assessee during FY 2001-02 needs to be added back to the income of the assessee but so far as the remaining amount is concerned it being not in the nature of trading liability, cannot be added in the hands of the assessee u/s 41(1) - Appeal filed by the assessee is partly allowed.

Summary

Issues:
Assessment order validity; Treatment of loan under Section 41(1) of the Income Tax Act, 1961.

Assessment Order Validity:
The appeal challenged an order passed under Section 250 of the Income Tax Act, 1961 by the Commissioner of Income Tax (Appeals) for the Assessment Year 2011-12. The appellant contended that the assessment order was legally flawed and factually incorrect. The facts revealed that the assessee, a private limited company, declared income of Rs. 31,11,681/- for the relevant year. The assessment was completed under Section 143(3) of the Act, resulting in an income assessment of Rs. 57,25,440/-. Following an appeal, the issue was remanded to the Assessing Officer for fresh adjudication. Subsequently, the AO made an addition towards cessation of trading liability under Section 41(1) of the Act amounting to Rs. 26,13,757/-, which was contested by the assessee before the CIT(A) without success.

Treatment of Loan under Section 41(1) of the Act:
The crux of the issue revolved around the treatment of an unsecured loan of Rs. 24.50 Lakh taken by the assessee from a company, with a net credit balance of Rs. 26,13,757/- carried forward over the years. The AO invoked Section 41(1) of the Act, deeming the outstanding loan amount as income of the assessee due to cessation of trading liability. The Tribunal analyzed the provisions of Section 41(1) which pertain to trading liabilities, emphasizing that the section applies when an allowance or deduction has been made for a trading liability that subsequently ceases to exist. In this case, the outstanding loan was not treated as a trading liability by the assessee but as an unsecured loan, with only the interest expenditure claimed as an expense. The Tribunal concluded that only the interest expenditure of Rs. 2,05,725/- needed to be added back to the assessee's income, while the remaining loan amount was not a trading liability and hence not subject to addition under Section 41(1) of the Act.

In summary, the Tribunal partially allowed the appeal, holding that the interest expenditure claimed by the assessee should be added back to income, but the outstanding loan amount was not a trading liability and therefore not subject to addition under Section 41(1) of the Income Tax Act, 1961.