2019 (12) TMI 1253 - AT - Income Tax

Tribunal upholds CIT(A)'s order, rejects Revenue's appeal on Section 41(1) addition.

Income Tax Officer, Ward-2 (1) (1), Ahmedabad Versus M/s Gayatri Intermediates Ltd.

Income Tax Officer, Ward-2 (1) (1), Ahmedabad Versus M/s Gayatri Intermediates Ltd. - TMI Issues Involved:1. Deletion of addition made by the AO on account of ceased liabilities under Section 41(1) of the Income Tax Act.2. Whether the CIT(A) was correct in deleting the addition made by the AO.3. Applicability of Section 41(1) of the Income Tax Act to the case.Issue-Wise Detailed Analysis:1. Deletion of Addition Made by the AO on Account of Ceased Liabilities under Section 41(1) of the Income Tax Act:The AO observed that the assessee had ceased operations in March 2005 and had shown trade payables amounting to Rs. 20,773,910/- in the balance sheet without any changes over the years. The AO asked the assessee to provide proof of the existing liabilities. The assessee provided a list of trade payables and contended that the liabilities were still outstanding and payable as per legal and contractual terms. However, the AO found the reply unsatisfactory as the assessee could not provide confirmations or supporting evidence for the majority of the creditors amounting to Rs. 1,79,75,009/-. Consequently, the AO considered the liabilities ceased under Section 41(1) and added the amount to the assessee's income.2. Whether the CIT(A) was Correct in Deleting the Addition Made by the AO:The CIT(A) examined the facts and submissions of the assessee, noting that the company had not carried out any business operations since March 2005. The CIT(A) found that there was no cessation or remission of any trade liability during the year under appeal. The liability towards the creditors still subsisted, and the assessee had not obtained any benefit in cash or otherwise. The CIT(A) relied on various judgments, including those of the Hon'ble Gujarat High Court, which held that no addition under Section 41(1) could be made unless the creditors had foregone their debts. The CIT(A) concluded that the AO had not established any cessation or remission of liability and directed the deletion of the addition.3. Applicability of Section 41(1) of the Income Tax Act to the Case:The CIT(A) and the Tribunal both referred to several judgments that clarified the applicability of Section 41(1). The judgments emphasized that for Section 41(1) to apply, there must be a remission or cessation of liability during the year under consideration. In this case, there was no evidence of such remission or cessation. The Tribunal upheld the CIT(A)'s decision, noting that the AO had not brought anything on record to show that the sundry creditors had foregone their debts in favor of the assessee. The Tribunal also referred to the Hon'ble Gujarat High Court's decisions in similar cases, which supported the assessee's contention that the liabilities were still outstanding and payable.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order. The Tribunal found no substantive error in the CIT(A)'s detailed and reasoned order, which was supported by the Hon'ble Gujarat High Court's judgments. The addition made by the AO under Section 41(1) was deleted as the conditions for its applicability were not met. The Tribunal concluded that the liabilities towards the creditors still subsisted, and there was no remission or cessation of liability during the year under consideration.