2023 (11) TMI 648 - HC - Income Tax

Addition u/s 41(1) - cessation of liability - as per AO assessee failed to prove genuineness of the outstanding credit balance - HELD THAT - When the transaction between the assessee and the M/s.Paper Star Marketing was found to be genuine in the preceding AY 2012-13 as per the assessment order after the same being examined by the AO, then the outstanding balance pertaining to the same transaction could not have been stated to be non-genuine since the AO in preceding year after conducting inquiry had found that the adverse material on record in form of denial by the said party did not lead to the conclusion that the transaction of the assessee with the said party was non-genuine. Tribunal therefore has rightly come to the conclusion that for such reason only the CIT (Appeals) has rightly deleted the addition made by the AO by invoking Section 41(1). Considering the provision of Section 41(1) no addition can be made under the said provision unless the liability ceased to exist during the previous year and the assessee write off the same in its books of accounts. It is also found as a matter of fact that the assessee has made payment to the said party in the next year i.e. AY 2014-15 so the liability cannot be said to have ceased to exist during the year under consideration and the appellant has also not written out the same in its books of accounts. No substantial question of law arises.

Summary

Issues involved:
The issue involved in this case is whether the Appellate Tribunal erred in deleting the addition of Rs. 8,21,50,309/- made by the Assessing Officer by invoking the provisions of Section 41(1) of the Income Tax Act.

Details of the judgment:

1. Background of the case:
The appellant-Revenue raised a substantial question of law regarding the addition of Rs. 8,21,50,309/- made by the Assessing Officer under Section 41(1) of the Income Tax Act. The Assessing Officer found discrepancies in the outstanding credit balance of the assessee related to a party named Paper Star Marketing.

2. Assessing Officer's findings:
The Assessing Officer noted that the party denied any transaction with the assessee and that there was no evidence of such transactions in the bank statement. Consequently, a show-cause notice was issued to add the outstanding balance to the assessee's income under Section 41(1) of the Act.

3. Assessee's defense:
The assessee contended that the outstanding balance was from transactions in the previous year and was not proven to be sham. They provided evidence of payments made to the party and argued that Section 41(1) did not apply as there was no cessation of liability.

4. CIT (Appeals) decision:
The CIT (Appeals) deleted the addition, stating that the liability did not cease to exist during the relevant year and was not written off in the books of accounts. The Tribunal upheld this decision based on the findings of the Assessing Officer in the preceding year.

5. Tribunal's decision:
The Tribunal confirmed the order of the CIT (Appeals), emphasizing that the transactions were found to be genuine in the preceding year. Therefore, the outstanding balance could not be deemed non-genuine based on the same transactions.

6. Legal analysis:
The Tribunal considered Section 41(1) of the Act, which requires the cessation of liability during the previous year for an addition to be made. Since the liability was not written off and payments were made in the subsequent year, the Tribunal found no grounds for adding the amount to the assessee's income.

7. Conclusion:
The Tribunal dismissed the appeal, stating that no substantial question of law arose from the judgment. The decision was made based on the provisions of Section 41(1) and the factual findings of the case.

Final verdict:
The appeal was dismissed with no orders as to costs.