2021 (12) TMI 303 - AT - Income Tax

Addition u/s.41(1) - cessation of liability - outstanding sundry creditors - AO invoking provisions u/s.41(1) in respect of outstanding sundry creditors is that the notice u/s.133(6) sent by the AO to the sundry creditors remain unresponded and those parties were not produced by the assessee for examination by the ld. AO - HELD THAT - We find that the assessee had duly furnished the complete ledger account of the sundry creditors for the year under consideration as well as for the subsequent years. Except for M/s. Sangham Diamonds, the assessee had even furnished the ledger account of the creditors duly confirmed by them before the ld. AO. It is not in dispute that all these sundry creditors have a valid PAN. All these sundry creditors have been duly discharged by the assessee in subsequent assessment years. We also find as on 31/03/2015, the assessee had not written back the sundry creditors to its income as no longer payable, hence, the liability had not ceased to exist and assessee had duly acknowledged his debt payable to these sundry creditors. Hence, in these circumstances, in any case, irrespective of the payments made in subsequent years, the provisions of Section 41(1) could not come into operation at all. These points have been duly appreciated by the ld. CIT(A) and hence, we do not find any infirmity in the order of the ld. CIT(A) granting relief to the assessee. Accordingly, the ground raised by the revenue is dismissed.

Summary

Issues:
Whether the deletion of the addition made under section 41(1) of the Income Tax Act on account of cessation of liability was justified.

Analysis:
The appeal in ITA No.1134/Mum/2020 for A.Y.2015-16 was against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961. The main issue was whether the deletion of the addition of ?207,90,576 u/s.41(1) of the Act on account of cessation of liability was justified. The assessee, engaged in the business of dealing and manufacturing of diamonds, had shown sundry creditors in its balance sheet. The Assessing Officer (AO) treated these creditors as "liability no longer required" under section 41(1) due to non-response to notices u/s.133(6) of the Act. The assessee provided ledger accounts, bank statements, and confirmations from creditors, arguing that the liability had not ceased to exist. The ld. CIT(A) agreed with the assessee, noting that the liability was related to new purchases and had been discharged in subsequent years. The Revenue appealed this decision.

The Tribunal found that the AO's basis for invoking section 41(1) was the lack of response from creditors to notices u/s.133(6). However, the assessee had provided complete ledger accounts, confirmations, and evidence of payments made to creditors. Except for one creditor, all others were duly discharged in subsequent years. The Tribunal noted that the liability had not been written back as income by the assessee and had not ceased to exist as of 31/03/2015. Therefore, the provisions of section 41(1) could not be applied. The Tribunal upheld the ld. CIT(A)'s decision, stating that the assessee had acknowledged the debt payable to creditors, and the provisions of section 41(1) did not apply. The appeal of the Revenue was dismissed, affirming the relief granted to the assessee.

In conclusion, the Tribunal held that the deletion of the addition made under section 41(1) of the Income Tax Act on account of cessation of liability was justified. The assessee had provided sufficient evidence to show that the liability to sundry creditors had not ceased to exist, and the provisions of section 41(1) were not applicable in this case. The decision of the ld. CIT(A) was upheld, and the appeal of the Revenue was dismissed.