2021 (9) TMI 960 - AT - Income Tax

Addition of sundry creditors u/s 41(1) - cessation of liability - disputed sundry creditors were being outstanding for more than 3 years and in compliance to notice under section 133(6) it was replied by them that they had no outstanding balance with the assessee - HELD THAT - It is an admitted fact as evident from the impugned order that the ld. CIT(A) has endorsed the finding of the ld. AO in the matter of cessation of liability relying on the unilateral decision without rebuttal to the assessee and ascertain the fact that whether in the year under consideration i.e. the asstt. year 2013-14 any gains has accrued or arisen to the assessee in the given facts and circumstances of the case by way of remission or cessation as the said amounts were squared up / written off in earlier assessment years by the creditors. Any addition under section 41(1) of the Act, if at all can be made only in the year in which the remission or cessation of liability has taken place. The Assessing Officer has not rebutted the evidence that relied upon regarding cessation of liability of creditors collected u/s 133(6) of the act. Reply filed by the assessee has not been considered and disposed of by speaking order before jumping on the decision to confirm the finding of the AO regarding addition on account of on account of sundry creditors u/s 41(1) and u/s 40A(3) of the Act . We, therefore, held that it is a fit case to be restored back to the Ld. CIT(A) to decide afresh on both the issues by way of speaking order - Appeal of the assessee is allowed for statistical purposes.

Issues Involved:
1. Validity of the assessment order under section 143(3) of the Income-tax Act, 1961.
2. Addition under section 41(1) of the Income-tax Act, 1961.
3. Disallowance under section 40A(3) of the Income-tax Act, 1961.

Detailed Analysis:

1. Validity of the Assessment Order:
The appellant contended that the assessment order framed by the Assistant Commissioner of Income Tax was vitiated and perverse, having been passed in violation of principles of natural justice, making it arbitrary, bad in law, and void ab-initio. However, the judgment does not provide a detailed analysis or resolution of this specific ground, focusing instead on the substantive issues of additions under sections 41(1) and 40A(3).

2. Addition under Section 41(1) of the Income-tax Act, 1961:
The primary issue challenged was the addition of ?32,41,130/- on account of sundry creditors, treated as cessation of liability by the AO. The AO noted that the liabilities were outstanding for more than three years, and necessary inquiries revealed that some creditors had no outstanding balance with the assessee, while others could not be traced. The AO thus invoked section 41(1) and made the addition.

The CIT(A) upheld the AO's decision, noting that the assessee failed to establish the existence and genuineness of these liabilities. The CIT(A) observed that the liabilities had ceased to exist, justifying the addition under section 41(1).

The appellant argued that the addition was erroneous, as a liability cannot be presumed to have ceased unless there is a conscious act by the creditor to waive it. The appellant also contended that part of the amount had already been offered for tax in subsequent years, leading to double taxation.

The tribunal noted that the disputed sundry creditors had been outstanding for more than three years, and some creditors confirmed having no outstanding balance with the assessee. The tribunal emphasized the necessity to ascertain the financial year of cessation of liability with corroborative evidence before applying judicial precedents. It was highlighted that any addition under section 41(1) could only be made in the year in which the cessation of liability occurred.

The tribunal found that the CIT(A) endorsed the AO's findings without adequately considering the appellant's rebuttals and evidence. Therefore, the tribunal held that the case should be restored to the CIT(A) to decide afresh, considering the documentary evidence and granting sufficient opportunity for hearing.

3. Disallowance under Section 40A(3) of the Income-tax Act, 1961:
The AO disallowed ?2,62,370/- under section 40A(3) for cash payments exceeding ?20,000/-, which were not justified with documentary evidence. The CIT(A) upheld this disallowance, noting that the appellant failed to prove that the payments were covered by exceptions under Rule 6DD.

The appellant argued that the payments were made to actual producers of hide and skin, covered by exceptions in Rule 6DD. The appellant contended that the CIT(A)'s finding was factually incorrect and that the disallowance was unjustified as the genuineness of the transactions and the identity of the parties were not in doubt.

The tribunal noted that the CIT(A) had not properly considered the appellant's submissions and evidence. Therefore, the tribunal directed the CIT(A) to re-examine the issue afresh, considering the documentary evidence and granting sufficient opportunity for hearing.

Conclusion:
The tribunal allowed the appeal for statistical purposes, directing the CIT(A) to re-examine both the issues of addition under section 41(1) and disallowance under section 40A(3) afresh, considering the documentary evidence and providing a speaking order after granting sufficient opportunity for hearing. The assessee was also directed to cooperate in the fresh proceedings.

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