2023 (3) TMI 143 - AT - Income Tax

Addition u/s 41(1) - cessation of liability in view of continuing operations with the party - HELD THAT - The provision of Section 41(1) provides that where assessee has obtained any benefit in respect of trading liability by way of remission or cessation same is taxable in the hands of the assessee in the year of cessation. The above liabilities are outstanding in the balance sheet of the assessee. They have not been written back by the assessee nor there is any evidence that these liabilities have been waived by the creditors. These liabilities are existing in the books of the assessee as payable. CIT (A) has categorically held that there is no evidence of cessation of this liability and therefore, addition u/s 41(1) is not sustainable. We also find that there is no evidence that the liability for payment of the above sum has ceased. This is also so because the assessee being assessed u/s 143(3) of the Act in earlier years, no such addition on account of current balances of Sundry Creditors was made. It is also not shown that any of the liability is non existing. In Principal Commissioner of Income Tax-6 V New World Synthetics Ltd 2018 (9) TMI 230 - DELHI HIGH COURT it is held that Non-payment of outstanding liability which is admitted and acknowledged as due and payable by an assessee does not indicate remission or cessation of liability - We do not find any infirmity in the order of the CIT (A) in deleting the addition u/s 41(1). Ground no 1 of appeal is dismissed. Disallowance of the expenses claimed on ad hoc basis - CIT (A) has categorically held that there is no reason to uphold the addition because it was merely an estimate and that too without any basis - HELD THAT - We find that in the earlier years this was the only dispute and same was not challenged before any appellate authority. In the present year, CIT (A) held that all the details of expenses were provided to the AO. If the AO was of the view that some of the vouchers are missing, the amount of addition should have been made of the same amount. Merely due to smallness of amount cannot result into any disallowance. We do not find any infirmity in the order of the CIT (A) in deleting the disallowance out of the expenses. The order of the learned CIT (A) is confirmed. Appeal of AO dismissed.

Summary

Issues:
1. Deletion of addition under Section 41(1) of the Income Tax Act.
2. Deletion of ad hoc disallowance of expenses.

Analysis:

Deletion of addition under Section 41(1) of the Income Tax Act:
The appeal was filed by the Income Tax Officer against the appellate order passed by the National Faceless Appeal Centre, where the deletion of the addition of Rs. 8,46,87,207 under Section 41(1) of the Act was allowed. The Assessing Officer had added this amount as trading liability of the assessee on account of cessation. However, the CIT (A) held that the liability payable to laborers was continuously paid, and there was no cessation of liability. The CIT (A) found that the addition made by the Assessing Officer was based on misappreciation of facts. The Tribunal agreed with the CIT (A) and held that there was no evidence of cessation of liability, making the addition under Section 41(1) unsustainable. The Tribunal also noted that in earlier assessments, no such addition was made regarding current balances of Sundry Creditors, and there was no evidence that any liability was non-existing. Citing legal precedents, the Tribunal confirmed the CIT (A)'s decision to delete the addition under Section 41(1) of the Act.

Deletion of ad hoc disallowance of expenses:
The Assessing Officer had made an ad hoc disallowance of Rs. 1,50,000 out of the expenses claimed by the assessee. However, the CIT (A) held that such ad hoc disallowance in the case of a company was not valid, proper, or legal. The CIT (A) stated that the disallowance was merely an estimate without any basis and hence deleted the same. The Tribunal agreed with the CIT (A) and noted that all details of expenses were provided to the Assessing Officer. The Tribunal found that the Assessing Officer should have made an addition for missing vouchers if necessary and that the smallness of the amount could not justify any disallowance. Therefore, the Tribunal confirmed the CIT (A)'s decision to delete the ad hoc disallowance of expenses.

In conclusion, the Tribunal upheld the order of the CIT (A) on both counts, thereby dismissing the appeal of the Assessing Officer. The judgment emphasized the importance of providing evidence and proper justification for additions or disallowances in tax assessments, ensuring fairness and compliance with legal provisions.