2024 (11) TMI 1019 - AT - Income Tax

Addition u/s. 41(1) - addition on account of unproved Sundry Creditors holding that existence of liabilities is not proved - evidence that the liability has ceased to exist and that too in the year under appeal or not? - Revenue s endeavour to invoke section 68 - HELD THAT - AO had held the assessee not to have proved identity, creditworthiness and genuineness despite availing various opportunities. He therefore concluded in para 5 of the impugned credits lacked genuineness which inturn, represented the assessee s sundry credits only, in the regular course of business. Learned departmental representative could hardly dispute the clinching fact emerging from the assessee s paper book that it had duly filed all the relevant details of the said sundry credits which also had been having opening balances as well as settlement(s) finalized in the relevant previous year and afterwards. Sofaras the Revenue s endeavour to invoke section 68 herein is concerned, we do not find any discussion in the assessment order as to how the assessee s relevant details had failed to discharge its onus even if it is presumed that this not an instance of cessation of liability u/s. 41(1) of the Act. We conclude in these peculiar facts and circumstances that be it section 41(1) cessation of liability addition or that section 68 unexplained cash credits, the learned Assessing Officer could not have made the impugned addition in assessee s hands on both counts. Rejected accordingly.

Summary

Issues Involved:

1. Whether the addition of unproved sundry creditors by the Assessing Officer (AO) under Section 41(1) of the Income Tax Act, 1961, was justified.
2. Whether the CIT(A) erred in law by not providing an opportunity to the AO to investigate additional evidence submitted by the assessee.
3. Whether the AO's action of adding unexplained cash credits under Section 68 of the Act was justified.

Detailed Analysis:

Issue 1: Addition of Unproved Sundry Creditors under Section 41(1)

The primary contention revolves around the addition of Rs. 3,92,87,487/- as unproved sundry creditors by the AO. The CIT(A) reversed this addition, noting that the AO did not specify Section 41(1) while making the addition. The CIT(A) emphasized that for Section 41(1) to apply, there must be evidence of remission or cessation of liability, which was absent in this case. The assessee provided substantial documentation, including the list of creditors, PAN details, and ledger accounts, arguing that these were genuine trade payables settled in subsequent years. The CIT(A) relied on various judicial precedents, including the Supreme Court's decision in CIT v. Sugauli Sugar Works (P) Ltd., which clarified that cessation of liability cannot occur unilaterally and requires either a legal operation or an agreement between parties. The tribunal upheld the CIT(A)'s decision, finding no cessation or remission of liability.

Issue 2: Opportunity to AO for Investigating Additional Evidence

The Revenue contended that the CIT(A) failed to comply with Rule 46A of the Income-tax Rules, 1962, by admitting additional evidence without seeking a remand report from the AO. The tribunal, however, found that the assessee had provided all necessary details during the assessment proceedings, and the AO had sufficient time to verify these details. The tribunal noted that the AO's failure to specify the relevant section under which the addition was made and the lack of evidence to suggest that the liabilities had ceased further weakened the Revenue's case.

Issue 3: Addition under Section 68 as Unexplained Cash Credits

The Revenue argued that the addition should be considered under Section 68 for unexplained cash credits. However, the tribunal observed that the AO did not provide a clear rationale or evidence for invoking Section 68. The assessee had demonstrated the identity, creditworthiness, and genuineness of the transactions, which were regular business transactions. The tribunal concluded that neither Section 41(1) nor Section 68 was applicable, as the AO failed to discharge the burden of proof required to substantiate the addition.

Conclusion:

The tribunal found no merit in the Revenue's appeal, affirming the CIT(A)'s decision to delete the addition of Rs. 3,92,87,487/-. The tribunal held that the AO's actions were not justified under either Section 41(1) or Section 68, as the necessary conditions for invoking these sections were not met. Consequently, the Revenue's appeal was dismissed.