2012 (4) TMI 451 - HC - Income Tax

High Court affirms ITAT decision on debt deletion under Income Tax Act Section 41(1)(a).

The High Court upheld the ITAT's decision regarding the deletion of the addition under Section 41(1)(a) of the Income Tax Act. The Court found that the ... Deemed income – addition made on account of sundry creditors under Section-41(1)(a) - Appellate Tribunal deleted addition – Held that:- Decision in CIT, Calcutta vs. Sugauli Sugar Works (P) Ltd (1999 (2) TMI 5 - SUPREME Court) taken that only if the assessee has made an entry of transfer in his accounts unilaterally will not enable the Department to say that S. 41 would apply and the amount should be included in the total income of the assessee - expiry of period of limitation did not extinguish the debt but only prevented the creditor from enforcing the debt – in favour of assessee. Issues Involved:1. Deletion of addition under Section 41(1)(a) of the Income Tax Act.2. Onus of burden of proof on the assessee.3. Perverse order contrary to evidence and material on record.Issue-wise Detailed Analysis:1. Deletion of Addition under Section 41(1)(a) of the Income Tax Act:The core issue revolves around whether the Income Tax Appellate Tribunal (ITAT) was right in law in deleting the addition of Rs. 18,72,697/- made by the Assessing Officer (AO) under Section 41(1)(a) of the Income Tax Act. The AO had added this amount on account of sundry creditors, asserting that the assessee failed to provide addresses for three out of five creditors and notices to the remaining two were returned unserved. The CIT (Appeals) deleted this addition, which was confirmed by the ITAT, citing that the liability was continuously shown in the balance sheet and had not ceased. The Tribunal's decision was aligned with precedents set by the Supreme Court and High Courts, emphasizing that unilateral entries by the assessee do not constitute cessation of liability under Section 41(1).2. Onus of Burden of Proof on the Assessee:The Revenue argued that the assessee failed to discharge its burden of proof to substantiate the existence of the creditors. The Tribunal, however, found that the assessee had been consistently showing the liability in its balance sheet over the years, indicating no cessation of liability. The Tribunal referenced the Supreme Court's ruling in Commissioner of Income-tax, Calcutta vs. Sugauli Sugar Works (P) Ltd., which held that mere entries in the assessee's books do not prove cessation of liability, and the burden of proof lies with the Revenue to show that the liability had ceased.3. Perverse Order Contrary to Evidence and Material on Record:The Revenue contended that the ITAT's order was perverse and contrary to the evidence on record. However, the Tribunal, supported by the CIT (Appeals), found no material evidence suggesting cessation of liability. The Tribunal's decision was consistent with judicial precedents, including CIT vs. Silver Cotton Mills Company Ltd. and CIT vs. Bharat Iron and Steel Industries, which emphasized that the liability must be proven to have ceased for Section 41(1) to apply. The Tribunal concluded that the mere passage of time or non-recovery by creditors does not extinguish the debt.Conclusion:The High Court upheld the ITAT's decision, finding no substantial question of law. It reiterated that the Tribunal's view was consistent with Supreme Court judgments, particularly Sugauli Sugar Works (P) Ltd., which clarified that cessation of liability under Section 41(1) requires concrete evidence of the liability being extinguished. The appeal was dismissed in limine, affirming that the Tribunal correctly interpreted and applied the law, with no costs ordered.