2017 (3) TMI 253 - AT - Income Tax

Addition u/s 41 - creditor was in dispute - Held that - Up on careful consideration we find that the assessing officer has disallowed the outstanding liability under section 41(1) only after issuing a notice under section 133(6). In this regard assessee had submitted that the matter with the creditor was in dispute and sub judice. In these circumstances in our considered opinion the assessing officer has not brought on record any cogent material to prove that the liability has ceased to exist When the matter is in dispute and sub judice assessee cannot be expected to get a confirmation from the creditor. In these circumstances in our considered opinion assessing officer was wrong in adding the credit under section 41(1). Accordingly, we hold that the addition is not sustainable. - Decided in favour of assessee

Summary

Issues:

1. Whether the liability of ?33,02,000 standing in the name of a creditor should be added back to the assessee's total income under section 41(1) of the Income Tax Act.
2. Whether the assessing officer's decision to disallow the outstanding liability under section 41(1) was justified.
3. Whether the direction given by the CIT-A to consider the liability in the year of its origin was correct.

Issue 1:

The assessing officer noted a liability of ?33,02,000 against a creditor, Mr. Anand P Shetey, and issued notices to confirm the same. The appellant failed to provide confirmations, leading the AO to treat the liability as ceased under section 41(1) and add it back to the total income. However, the CIT-A found that the genuineness of the liability was not proven, and the AO failed to establish the creation of the liability in the relevant year. The CIT-A directed the AO to take necessary action in the year of the liability's creation, emphasizing that without proof of creation in the relevant year, the addition could not be confirmed for the assessment year 2010-11.

Issue 2:

Upon appeal, the ITAT observed that the assessing officer disallowed the liability under section 41(1) after issuing a notice under section 133(6). The appellant had explained that the matter with the creditor was sub judice, and no confirmation could be obtained. The ITAT held that the assessing officer lacked sufficient evidence to prove the liability had ceased to exist. In cases where a matter is in dispute and sub judice, expecting confirmation from the creditor is unreasonable. Therefore, the ITAT concluded that the assessing officer was wrong in adding the liability under section 41(1) and deemed the addition unsustainable.

Issue 3:

While the ITAT disagreed with the CIT-A's reasoning for deleting the addition and the direction to consider the liability in the year of its origin, it ultimately held that the assessing officer's addition was not sustainable. The ITAT emphasized that in the absence of concrete evidence proving the liability's cessation, the addition could not be upheld. Therefore, the ITAT dismissed the appeal filed by the revenue, maintaining that the assessing officer's decision to disallow the liability under section 41(1) was not justified.

This detailed analysis of the judgment highlights the key legal issues addressed by the ITAT Mumbai in this case involving the treatment of a disputed liability under the Income Tax Act.