2018 (6) TMI 1100 - AT - Income Tax

Addition u/s.41(1) - cessation of liability - whether the purported creditors shown as outstanding in the books for several years were unsupported by complete addresses and were non-traceable and the assessee on few instances did not dispute about closure of its account in rival party s books - we are not impressed by the plea the AO did not bring anything on record to allege that cessation took place during the financial year in question for the purposes of taxability under s.41(1) of the Act. We find that AO has assertive justification to bring the outstanding liability within the net of s.41(1) of the Act in the Financial Year under inquiry. The onus is on the Assessee to show that year of cessation is different. In the instant case, the Assessee does not admit cessation at first place. AO is within its right to hold the Financial Year in question as the right year for taxability when the facts concurring the non existence were unrevealed. The Assessee was failed to discharge onus. Besides, the defect of year of taxation if any can be cured under s.153(6) in such cases. However, we do not consider it expedient to dwell further - addition made in respect of trading liabilities which had ceased to exist represents taxable business income in terms of Section 41(1) of the Act - Appeal of the Revenue is allowed.

Issues Involved:
1. Deletion of addition under Section 41(1) of the Income Tax Act, 1961, concerning cessation of liability.
2. Whether the liability shown in the balance sheet was genuine.
3. Applicability of Section 41(1) when liabilities are not written back in the books of accounts.
4. The year of taxability for cessation of liability.

Detailed Analysis:

1. Deletion of Addition under Section 41(1):
The Revenue challenged the CIT(A)'s decision to delete the ?72,49,188 addition made by the AO under Section 41(1) of the Income Tax Act, 1961. The AO had added this amount as income, considering it as cessation of liability. The CIT(A) found merit in the assessee's appeal, noting that the liabilities were not written off in the books of accounts and relied on the Gujarat High Court's decision in Bhogilal Ramjibhai Atara, which held that Section 41(1) applies only if there is a remission or cessation of liability during the relevant year.

2. Genuineness of Liability:
The AO observed that the assessee had shown sundry creditors outstanding for payment but failed to provide correct addresses, PAN numbers, and confirmations for these creditors. Some creditors denied any transactions with the assessee, and others were untraceable. The AO concluded that ?72,49,188 of the ?74,40,360 shown as creditors' liability was not genuine and treated it as cessation of liability under Section 41(1). The CIT(A), however, noted that the assessee had not written off these amounts and relied on judicial precedents to rule in favor of the assessee.

3. Applicability of Section 41(1):
The CIT(A) ruled that since the assessee had not written back the liabilities as income in its books, the outstanding liabilities could not be regarded as income under Section 41(1). The CIT(A) relied on the Gujarat High Court's decision in Bhogilal Ramjibhai Atara, which held that Section 41(1) applies only if there is a remission or cessation of liability during the relevant year. The Revenue, however, argued that the law has evolved and cited the Gujarat High Court's decision in Gujtron Electronics and the Delhi High Court's decision in Chipsoft Technology, which supported the AO's stance that non-existent liabilities can be taxed under Section 41(1).

4. Year of Taxability:
The Tribunal agreed with the AO's view that the addition made in respect of trading liabilities that had ceased to exist represents taxable business income under Section 41(1). The Tribunal noted that the AO had a justification for bringing the outstanding liability within the net of Section 41(1) in the financial year under inquiry. The onus was on the assessee to show that the year of cessation was different. Since the assessee did not admit cessation, the AO was within its rights to hold the financial year in question as the correct year for taxability.

Conclusion:
The Tribunal concluded that the CIT(A) had erred in disregarding the facts unearthed by the AO and set aside the CIT(A)'s order, restoring the AO's decision to add ?72,49,188 as income under Section 41(1). The Tribunal found that the liabilities shown in the balance sheet were not genuine and that the addition made by the AO was justified. The appeal of the Revenue was allowed.

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