2021 (8) TMI 153 - AT - Income Tax

Addition of sundry creditors payable including expenses outstanding by AO u/s 41(1) on cessation of liability - notice u/sec 133(6) of the Act issued by the AO was returned unserved and the parties have not filed confirmation of outstanding balances and also few parties have denied having made any transaction with the assessee - CIT-A deleted the addition - HELD THAT - On perusal of the assessment order find that the assessee in the A.Y.2016-17 has written back the sundry creditors in the profit and loss account. When the question was raised to the Ld.DR on written back of sundry creditors balance the Ld.DR relied on the findings of the Assessing officer. The Ld.AR of the assessee submitted that the sundry creditors are not disputed nor fictitious and the Ld.CIT(A) has considered the overall facts and relied on the judicial decisions and granted relief to the assessee. We find that the CIT(A) has passed an elaborate order covering various facts, system of accounting, provisions of law and the judicial decisions and passed a reasoned order. Accordingly, we do not find any infirmity in the order of the CIT(A) and uphold the same and dismiss the grounds of appeal of the revenue

Issues:
1. Deletion of addition made under section 41(1) of the Income-tax Act, 1961.
2. Justification of deletion without appreciating creditors' confirmation.
3. Impact of denial of liabilities on addition made by Assessing Officer.
4. Direction to delete addition without considering written back and written off amounts.
5. Reliance on affidavit filed by Director of assessee company.
6. Application of section 41(1) under mercantile system of accounting.

Issue 1 - Deletion of Addition under Section 41(1):
The appeal concerned the deletion of an addition made by the Assessing Officer under section 41(1) of the Income-tax Act, 1961. The Commissioner of Income Tax (Appeals) justified the deletion based on various submissions and affidavits filed by the assessee company. The CIT(A) considered the facts, provisions of law, and judicial decisions, ultimately ruling in favor of the assessee and deleting the addition. The Revenue appealed this decision before the Hon'ble Tribunal.

Issue 2 - Creditor Confirmation and Deletion Justification:
The Assessing Officer had raised concerns regarding the deletion of the addition without appreciating the confirmation provided by creditors. The CIT(A) relied on submissions and affidavits filed by the assessee along with statements of sundry creditors to justify the deletion. The Revenue contended that the CIT(A) erred in granting relief to the assessee, emphasizing the non-compliance of notice u/s 133(6) by certain parties. However, the CIT(A) analyzed the proceedings and legal opinions, concluding that the addition could not be solely based on non-compliance of notices u/s 133(6).

Issue 3 - Denial of Liabilities Impact:
The Assessing Officer had invoked the provisions of Sec. 41(1) of the Act due to denial of liabilities by some parties in response to notices issued u/s 133(6). The CIT(A) considered this aspect along with the overall facts, judicial decisions, and the system of accounting. The CIT(A) highlighted the need for concrete evidence beyond non-compliance to sustain such a significant addition, ultimately directing the deletion of the disallowance made under section 41(1).

Issue 4 - Direction to Delete Addition and Written Back Amounts:
The CIT(A) directed the Assessing Officer to delete the addition made under section 41(1) without considering the written back and written off amounts by the assessee in different assessment years. The Assessing Officer had made additions based on the cessation of liability, but the CIT(A) found the reasoning insufficient and ordered the deletion of the disallowance.

Issue 5 - Reliance on Affidavit and Written Back Amounts:
The CIT(A) relied on the affidavit filed by the Director of the assessee company and the written back amounts in subsequent assessment years to support the deletion of the addition made under section 41(1). The Revenue challenged this decision, but the CIT(A) analyzed the facts, legal opinions, and judicial pronouncements to uphold the deletion.

Issue 6 - Application of Section 41(1) under Mercantile System:
The CIT(A) justified the deletion of the addition made under section 41(1) by considering the mercantile system of accounting and the timing of liabilities ceasing to exist in the books. The CIT(A) emphasized the need for additional evidence beyond non-compliance notices to sustain such a substantial addition under the Act.

In conclusion, the Hon'ble Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition made under section 41(1) after a thorough analysis of the facts, legal provisions, and judicial decisions.

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