2016 (5) TMI 637 - AT - Income Tax

Addition u/s 41 - conversion of unsecured loan from the sister as gift by book entry - in the earlier years, interest paid to sister was claimed as deduction - whether remission / cessation of liability u/s 41(1) - Held that - There was no remission of liability u/s 41(1) of the Act, because the gift was genuinely made by Smt. Kiranben Gandhi and accepted by the assessee out of natural love and affection and there was no business consideration in this transaction. Therefore, the provisions of Section 41(1) of the Act cannot be invoked for the interest payment made in earlier years. Also see 2012 (8) TMI 620 - ITAT COCHIN 2012 (8) TMI 620 - ITAT COCHIN - Decided in favour of assessee

Summary

Issues:
Disallowance u/s 41(1) of the I.T. Act, 1961 - Appeal against the order of the Commissioner of Income-tax (Appeals) confirming the action of the Assessing Officer in disallowing ?11,12,947/-.

Analysis:
1. The assessee, engaged in the sale of processed yarn, stamping foils, and cloth, filed a return showing total income of ?7,740/- for Assessment Year 2012-13. The Assessing Officer disallowed ?11,12,947/- under section 41(1) of the Act, treating interest paid to the sister as a cessation of liability. Additionally, a further disallowance of ?1,00,430/- was made for personal expenses. The CIT(A) confirmed the disallowance u/s 41(1) at ?11,12,947/- and partly allowed the disallowance of expenses.

2. The assessee contended that the interest paid was on a loan from the sister, which was converted into a gift. The Assessing Officer invoked section 41(1) based on the interest payment. The assessee argued that the transaction was a genuine gift and not a cessation of liability, citing relevant case laws. The Departmental Representative supported the lower authorities' orders.

3. The Tribunal found that the gift from the sister was genuine and accepted by both parties, with the interest transactions duly reflected in their respective tax returns. Drawing parallels with a similar case, the Tribunal held that there was no remission of liability u/s 41(1) as the gift was out of natural love and affection, devoid of any business consideration. Therefore, the provisions of section 41(1) could not be applied to the interest payment made in earlier years.

4. Grounds 2 & 3 were of a general nature and not specific to the disallowance issue. The Tribunal allowed the appeal, pronouncing the order on 1st April 2016 at Ahmedabad.