2012 (7) TMI 392 - AT - Income Tax

Addition u/s 41(1) on account of unexplained sundry creditors - CIT(A) after admitting additional evidence found that the assessee was dealing with most of the parties in the subsequent year and liability had been paid up - CIT(A) while deleting the addition Held that - unless there is a cessation of liability or there is a remission of liability by the creditor, the liability subsists and the assessee having not unilaterally written back accounts of the aforesaid creditors in its profit and loss account, the provisions of section 41(1) of the Act and explanation 1 thereto, are not attracted - there is nothing to suggest that the assessee obtained any benefit either by way of remission or cessation of any liability while the aforesaid liabilities are continually admitted by the assessee in their balance sheet - AO or the ld. CIT(A) have nowhere doubted the genuineness of purchases - appeal of the Revenue is dismissed Addition on account of unexplained expenses AO added an amount on account of expenses payable, the assessee having not furnished details of expenses and evidence of payment - assessee contended that the ld. CIT(A) was not justified in upholding the addition out of expenses payable at the end of the year nor any benefit accrued to the assessee Held that - No basis to upheld addition while invoking provisions of sec. 41(1) of the Act - CO filed by assessee is allowed

Issues Involved:
1. Deletion of addition on account of unexplained sundry creditors.
2. Allowing relief on account of unexplained expenses.
3. Treatment of sum as remission of trading liability.
4. Treatment of sum as cessation of trading liability under Section 41(1) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Unexplained Sundry Creditors:
The Revenue contended that the CIT(A) erred in deleting the addition of Rs.17,34,147/- related to unexplained sundry creditors. The assessee had initially failed to provide confirmations or establish the genuineness of the creditors. However, on appeal, the CIT(A) admitted additional evidence and directed the AO to verify it. The AO's remand report indicated that notices to creditors were returned undelivered. Despite this, the CIT(A) found that the assessee had regular business transactions with most of these creditors, and the liabilities were settled in the subsequent year, except for Rs.81,653/- related to M/s Cottage Craft. The CIT(A) concluded that the transactions were genuine and thus deleted the addition of Rs.17,34,147/-, but treated Rs.81,653/- as remission of trading liability.

2. Allowing Relief on Account of Unexplained Expenses:
The Revenue also contested the CIT(A)'s decision to allow relief of Rs.1,09,800/- on account of unexplained expenses. The AO had added Rs.1,68,300/- due to the absence of details and evidence of payment. On appeal, the CIT(A), after considering the remand report, deleted Rs.59,800/- related to salary, rent, and professional charges paid in the subsequent year. However, the CIT(A) upheld Rs.58,500/- as cessation of liability under Section 41(1) of the Act, due to lack of evidence for rent payable and partial payment of sampling charges.

3. Treatment of Sum as Remission of Trading Liability:
The assessee disputed the CIT(A)'s decision to treat Rs.81,653/- as remission of trading liability. The CIT(A) had concluded that the liability to M/s Cottage Craft, carried forward from the preceding year, remained outstanding and was not settled subsequently. The Tribunal, referencing various judicial precedents, held that unless there is a cessation or remission of liability by the creditor, the liability subsists. Since the liability was still shown as outstanding and not written back in the profit and loss account, the provisions of Section 41(1) were not applicable. Consequently, the addition of Rs.81,653/- was also deleted.

4. Treatment of Sum as Cessation of Trading Liability under Section 41(1):
The CIT(A) had treated Rs.58,500/- as cessation of trading liability under Section 41(1) due to the lack of evidence for rent payable and partial payment of sampling charges. The Tribunal, however, found that the liability still existed and was not written back in the profit and loss account. Citing judicial precedents, it was held that merely because the liability became unenforceable due to the law of limitation, it does not cease to exist. Therefore, the addition of Rs.58,500/- was also deleted.

Conclusion:
The Tribunal upheld the CIT(A)'s deletion of Rs.17,34,147/- on account of unexplained sundry creditors and Rs.1,09,800/- on account of unexplained expenses. Additionally, the Tribunal deleted the additions of Rs.81,653/- and Rs.58,500/- treated as remission and cessation of trading liabilities, respectively, under Section 41(1) of the Income-tax Act. The appeal of the Revenue was dismissed, and the cross-objection of the assessee was allowed.

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