2023 (1) TMI 1068 - AT - Income Tax

Addition u/s 41(1) - assessee has shown liabilities of sundry creditors - assessee stated that the outstanding liability is against the purchase of machinery from Sabko Emerystone Engineering Industries - As assessee has not claimed depreciation on this machinery in any of the assessment order. In absence of any claim of expenditure/loss, depreciation in any assessment year, the provision of Section 41(1) cannot be applied - AO held that assessee has not established his claim of sundry creditor is capital in nature - HELD THAT - Lower authority has not disputed about the purchase of machinery. No adverse evidence is brought on record that the liability is other than purchase of machinery. Thus, the credit in the books is not on account of trading liability. The expenditure incurred and purchases of machinery are certainly a capital expenditure. Further, the assessee has never claimed depreciation on such machinery. In the case of CIT vs Mahindra Mahindra 2018 (5) TMI 358 - SUPREME COURT held on a perusal of section 41(1), it is evident that it is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax u/s 41. The objective behind this section is simple. It is made to ensure that the assessee does not get away with a double benefit once by way of deduction and another by not being taxed on the benefit received by him in the later year with reference to deduction allowed earlier in case of remission of such liability. In absence of any evidence that liability shown by assessee was other than purchase of machinery (capital asset), which was never put to use and the assessee never claimed depreciation thereof. That the consideration under section 41(1) of the Act is not sustainable. Appeal filed by the assessee is allowed.

Summary

Issues involved:
- Addition of Rs.15,95,250 under section 41(1) of the Income Tax Act, 1961 for Assessment Year 2016-17 based on liabilities shown by the assessee.

Detailed Analysis:

1. Assessing Officer's Observation:
- The assessee, a private limited company, declared total income of Rs. Nil for AY 2016-17.
- The liabilities of sundry creditors at Rs.15,95,250 were noted during scrutiny.
- The liability was against the purchase of defective machinery never put to use from a supplier.
- The Assessing Officer applied Section 41(1) due to lack of depreciation claims or expenditure in any assessment year.

2. Assessee's Contentions and CIT(A) Decision:
- Assessee argued that the liability was for capital expenditure on machinery, not a trade liability.
- The ld. CIT(A) found the claim contradictory as no depreciation was claimed, and the machinery was not added to fixed assets.

3. Tribunal's Analysis and Decision:
- The Tribunal considered the absence of evidence showing the liability was other than for the purchase of machinery.
- The liability was not on account of trading liability, and the machinery was never used or depreciated.
- Citing the decision in CIT vs Mahindra & Mahindra, the Tribunal found the addition under section 41(1) unsustainable.
- The appeal was allowed, overturning the addition of Rs.15,95,250.

This detailed analysis covers the issues raised, the arguments presented by the parties, and the final decision of the Tribunal, providing a comprehensive overview of the legal judgment.