2023 (1) TMI 766 - AT - Income Tax

Addition u/s. 41(1) - cessations of creditors - HELD THAT - Liability ceases when it has become barred by limitation and assessee has unequivocally expressed its intention not to honor the liability even when demanded. The liability has been shown to be paid for the last 15 years and the assessee has not made any payment and no demand from the lender could be proved by the assessee with regard to the outstanding payment. No business transactions have been made with these parties in the last 10 years and no confirmations have been filed before the revenue authorities. All these facts goes to prove that the amounts which have been debited to P L account once and taken as outstanding payable have ceased to exist. The argument of the ld. Counsel that if at all the amounts ceased to exist it could have been taxed in the last previous year or in the subsequent year, there is no reason to tax in the instant year cannot be held to be valid argument that such proposition would be devoid of any logic and revenue cannot be expected to wait for indefinite period to receive their dues as taxes with folded hands. There was no iota of proof to demonstrate that the amounts have liable to be paid in the instant year or in the near future. The conduct of both the parties clearly demonstrates the remission of the amounts. The amounts which were hitherto remained unpaid for more than a decade cannot be treated as an existing liability. Hence, the action of the revenue authorities subjecting that amount u/s. 41(1) cannot be faulted with. The appeal of the assessee on this ground is dismissed. Advances Received - As on 31.03.2016, there was credit balances appearing in the account of M/s. Gaurav International and Elite Sales (India) which was advanced from customers - HELD THAT - With regard to addition it is submitted that advances received by the assessee in earlier assessment years could not be brought to tax as undisclosed income during the year under consideration. In the present case advances were continuing from earlier years and during the year under consideration no fresh advance was received. Hence, we hold that the Ld. CIT(A) has erred in sustaining the addition on account of advance from M/s. Gaurav International and M/s. Elite Sales(India) u/s. 41(1). Addition on account of outstanding credit balance - HELD THAT - The statement of account of M/s. Swastika Enterprises for F.Y. 2013-14, 2014-15 and 2015-16 duly confirmed along with PAN was filed. And just because during the F.Y. 2014-15 and 2015-16 there is no purchase from this firm, although payments have been made in the F.Y. 2013-14 and 2015-16 against the purchases made in F.Y. 2013-14, there is no justification for making addition as undisclosed income. Hence, the action of the revenue authorities cannot be sustained.

Summary

Issues Involved:
1. Validity of assessment order under Section 143(3) of the Income Tax Act.
2. Violation of principles of natural justice in assessment order.
3. Consideration of explanations, evidences, and materials in assessment.
4. Addition under Section 41(1) on account of alleged cessations of creditors.
5. Addition on account of advance from specific entities.
6. Addition on account of outstanding credit balance.

Detailed Analysis:
1. The appeal challenged the assessment order under Section 143(3) of the Income Tax Act, contending it was illegal and against the principles of natural justice. However, the tribunal upheld the assessment, noting the lapse of several years with static outstanding balances, indicating a cessation of liability, and thus, the addition under Section 41(1) was justified.

2. The addition under Section 41(1) was made regarding outstanding creditors for 15-16 years. The tribunal found that the liability had ceased based on evidence presented, including the absence of transactions with creditors for many years. The tribunal emphasized that the onus was on the Revenue to prove the liability had ceased, which was established in this case.

3. Another issue involved an addition on account of advances from specific entities, which were mistakenly categorized as Sundry Creditors. The tribunal held that as these advances were continuing from earlier years with no fresh advances during the year under consideration, the addition under Section 41(1) was not justified.

4. Regarding the addition on account of an outstanding credit balance, the tribunal found discrepancies in the AO's assessment, noting payments made against the outstanding balance in subsequent years. The tribunal ruled that the addition was not warranted as there was no justification for treating the outstanding balance as undisclosed income.

5. The tribunal referenced legal precedents and provisions of Section 41(1) to support its decisions on each issue, emphasizing the need for evidence of cessation of liability and the proper categorization of transactions. Ultimately, the appeal was partly allowed based on the specific merits of each issue raised by the assessee.