2019 (12) TMI 1188 - AT - Income Tax

Disallowance u/s 41(1) - whether merely because assessee has shown the outstanding liability for years and non-furnishing of complete details, cannot be the reason for considering the liability has ceased to exist? - HELD THAT - Liability has not ceased. The facts remain undisputed by both authorities are that these amounts were debited by the assessee and allowed by the Revenue. We find that the impugned addition was made by the Revenue authorities by doubting existence of these liabilities and that the assessee has not written back and continue to show these liabilities as outstanding in the balance sheet. AO has not brought any evidence on the record to show that liability has ceased. The assessee has not written off the liability in the accounts. Therefore, there would not be any addition under section 41(1) of the Act. Hon'ble High Court in the case of Bhogilal Ramjibbhai Atara 2014 (2) TMI 794 - GUJARAT HIGH COURT considered this aspect and observed that even if debt itself is found to be non-genuine from the very inception that also in terms of section 41(1) of the Act, there is no solution for that. In other words, addition cannot be made unless liability in the accounts has been written off. - delete the disallowance - Decided in favour of assessee. Non-granting of set off of unabsorbed depreciation and carry forward of short term capital loss - HELD THAT - CIT(A) has recorded a finding that no discussion on these issues has been made by the AO, and also the assessee has not made any submission on this ground. CIT(A) has set aside this issue to the file of the AO with direction to verify the records and allow the claim if allowable as per law. We are of the view that no prejudice will be caused to the assessee with this direction of the ld.CIT(A) to the AO, and therefore, no interference is called for on this issue.

Summary

Issues:
1. Disallowance under section 41(1) of the Income Tax Act, 1961.
2. Set off of unabsorbed depreciation and carry forward of short term capital loss.

Analysis:

Issue 1: Disallowance under section 41(1) of the Income Tax Act, 1961:
The case involved an appeal by the assessee against the disallowance of &8377; 11,32,791 made by the Assessing Officer under section 41(1) of the Income Tax Act for the assessment year 2013-14. The Assessing Officer observed that certain outstanding liabilities reflected in the balance sheet had no corresponding transactions. The assessee was asked to prove the genuineness of the liabilities, but the explanation was not accepted, leading to the addition to the total income under section 41(1). The assessee appealed to the CIT(A) but did not receive relief, hence the appeal before the Tribunal. The Tribunal noted that section 41(1) applies when a trading liability allowed as a deduction in an earlier year ceases to exist in a later year, ensuring no double benefit for the assessee. Citing a judgment by the Hon'ble Gujarat High Court, it was emphasized that the liability must have ceased during the relevant previous year, which was not the case here. As the liabilities were not written off in the accounts and no evidence of cessation was presented, the Tribunal allowed the appeal and deleted the disallowance.

Issue 2: Set off of unabsorbed depreciation and carry forward of short term capital loss:
Regarding the second ground of appeal related to the non-granting of set off of unabsorbed depreciation and carry forward of short term capital loss, the CIT(A) directed the Assessing Officer to verify the records and allow the claim if permissible by law. The Tribunal found no prejudice to the assessee with this direction and decided not to interfere with the issue. Consequently, the appeal of the assessee was partly allowed.

In conclusion, the Tribunal ruled in favor of the assessee on the disallowance under section 41(1) due to the absence of evidence of liability cessation, while maintaining the direction of the CIT(A) on the issue of set off of unabsorbed depreciation and carry forward of short term capital loss.