2020 (12) TMI 1023 - AT - Income Tax

Addition u/s 41(1) - treating of the outstanding liability of the assessee towards M/s. Aakshi Electrical Sys Pvt. Ltd., as a ceased liability within the meaning of Sec. 41(1) - whether liability has ceased to exist and the appellant has claimed the amount as an expenditure when the liability was created? - HELD THAT - A.O. had failed to discharge the 'onus' that was cast upon him as regards proving the satisfaction of the aforesaid requisite conditions prior to invoking of the provisions of Sec. 41(1) - Not only that, we find that even otherwise there is nothing discernible from the record which could persuade us to conclude that the benefit, if any, obtained by the assessee by way of remission of cessation of the aforesaid liability could be related to the year under consideration. Lower authorities had shirked from making necessary verifications, which could have safely be done by calling for the requisite details from the aforementioned party i.e. M/s. Aakshi Electrical Sys Pvt. Ltd. But then, we also cannot remain oblivious of the fact that the assessee had also failed to do the bare minimum in order to establish that the liability towards the aforementioned party, though disputed, was however outstanding. Apart from that, except for harping on the fact that the payment to the aforementioned party was towards an advance in lieu of a contract for installations to be carried out in a hospital i.e. a capital expenditure, nothing had been placed on record by the assessee which could irrefutably substantiate the said factual position to the hilt. In the backdrop of the aforesaid facts, we are of the considered view that in all fairness the matter requires to be restored to the file of the A.O. for fresh adjudication - Decided in favour of assessee for statistical purposes..

Summary

Issues Involved:
1. Addition of ?50,000 under Section 41(1) of the Income Tax Act, 1961.
2. Addition of ?6,98,007 under Section 41(1) of the Income Tax Act, 1961.
3. Procedural issue regarding the delay in pronouncement of the order.

Issue-wise Detailed Analysis:

1. Addition of ?50,000 under Section 41(1) of the Income Tax Act, 1961:
The assessee challenged the addition of ?50,000 under Section 41(1) made by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO observed that the liability towards M/s. Hitachi Home & Life Solutions (India) Ltd. had ceased to exist as the corresponding debit entry was missing in the assessee's books. The assessee argued that the amount was an advance given by the director from his own sources, which was later returned, but the entry was omitted in the books. The Tribunal noted that for invoking Section 41(1), it must be shown that a deduction was claimed for the liability and that the assessee obtained a benefit by way of remission or cessation of the liability. The AO failed to establish these conditions. The Tribunal found that the AO did not verify the factual position with the concerned party and thus, the addition of ?50,000 could not be sustained. Consequently, Grounds of Appeal Nos. 1 & 2 were allowed.

2. Addition of ?6,98,007 under Section 41(1) of the Income Tax Act, 1961:
The assessee contested the addition of ?6,98,007 under Section 41(1) for an outstanding liability towards M/s. Aakshi Electrical Sys Pvt. Ltd. The assessee claimed that the amount was a disputed liability for electrical installations, which was capitalized and no expenditure except depreciation was claimed. The lower authorities dismissed the assessee's claim without proper verification. The Tribunal emphasized that the AO must prove that the liability was claimed as a deduction and that the assessee obtained a benefit by way of remission or cessation. The Tribunal found that the AO did not discharge this onus and failed to verify the factual situation with the concerned party. However, the assessee also did not substantiate the disputed liability adequately. Therefore, the Tribunal remanded the matter back to the AO for fresh adjudication, allowing Ground of Appeal No. 3 for statistical purposes.

3. Procedural Issue Regarding Delay in Pronouncement of Order:
The Tribunal addressed the procedural delay in pronouncing the order beyond the 90-day period due to the COVID-19 pandemic and nationwide lockdown. Citing Rule 34(5) of the Income-tax Appellate Tribunal Rules, 1963, and relevant judicial precedents, the Tribunal justified the delay as an extraordinary circumstance. It referred to the Supreme Court and Bombay High Court's directions extending the limitation period due to the pandemic. The Tribunal concluded that the lockdown period should be excluded while computing the 90-day limit for pronouncement of orders, thus validating the delayed pronouncement in this case.

Conclusion:
The appeal filed by the assessee was allowed in part. The addition of ?50,000 was vacated, and the matter regarding the addition of ?6,98,007 was remanded for fresh adjudication. The procedural delay in pronouncement of the order was justified due to the extraordinary circumstances of the COVID-19 pandemic. The Ground of Appeal No. 4 was dismissed as general.