2023 (1) TMI 823 - AT - Income Tax

Tribunal allows appeal, overturns CIT(A) order on Section 41(1) additions.

The Tribunal allowed the appeal, setting aside the CIT(Appeals) order and vacating the additions made by the A.O. under Section 41(1) of the Income-tax ... Addition u/s. 41(1) - outstanding balance in the account of a party - HELD THAT:- We are of the considered view that in the present case before us, in the absence of any evidence to conclude that there was a final remission or cessation of the trading liabilities or any part of it the provisions of Sec. 41(1) could not have been invoked by the A.O. Also, support is drawn from the order in the case of Satpal & Sons [2017 (9) TMI 41 - ITAT DELHI] wherein it was, inter alia, observed by the Tribunal that the obtaining by the assessee of a benefit by virtue of remission or cessation is the sine-qua-non for the application of Section 41(1) of the Act. We not being able to persuade ourselves to subscribe to the view taken by the lower authorities, who without satisfying the pre-conditions set out in Section 41(1) had dubbed the outstanding liabilities of the assessee company as ceased liabilities, thus, set-aside the order of the CIT(Appeals) and vacate the addition made by the A.O. u/s. 41(1) of the Act. Decided in favour of assessee. Issues Involved:1. Condonation of delay in filing the appeal.2. Addition of Rs. 2,96,878/- under Section 41(1) of the Income-tax Act, 1961.3. Addition of Rs. 22,63,951/- under Section 41(1) of the Income-tax Act, 1961.4. Overall addition of Rs. 25,60,829/- under Section 41(1) of the Income-tax Act, 1961.Detailed Analysis:1. Condonation of Delay:The appeal was filed with a delay of 141 days. The delay was attributed to the inadvertent failure of an employee of the assessee company to bring the CIT(Appeals) order to the notice of the directors. The Tribunal found the reasons for the delay to be bona fide and not due to any deliberate conduct or lackadaisical approach. Therefore, the delay was condoned.2. Addition of Rs. 2,96,878/- under Section 41(1) of the Income-tax Act, 1961:The A.O. observed that the liability towards M/s. Ashoka Buildcon Ltd. was an unmoved outstanding balance from the preceding year and treated it as a ceased liability under Section 41(1). The Tribunal noted that the A.O. did not conclusively prove that the liability had ceased or that the assessee had obtained any benefit from it. The Tribunal emphasized that mere outstanding liabilities do not justify their classification as ceased liabilities.3. Addition of Rs. 22,63,951/- under Section 41(1) of the Income-tax Act, 1961:Similarly, the liability towards Jetha Ram Concreeto was also treated as ceased by the A.O. The Tribunal found that the A.O. failed to provide concrete evidence that the liability had ceased or that any benefit was obtained by the assessee. The Tribunal reiterated that the conditions for invoking Section 41(1) were not met.4. Overall Addition of Rs. 25,60,829/- under Section 41(1) of the Income-tax Act, 1961:The Tribunal analyzed the statutory provisions of Section 41(1) and concluded that for the section to be applicable, there must be a cessation or remission of liability, and the assessee must have obtained a benefit from it. In this case, the A.O. could not establish that the liabilities had ceased or that any benefit was derived by the assessee during the assessment year. The Tribunal relied on judicial precedents, including the Delhi High Court's judgment in CIT vs. Jain Exports (P) Ltd., which emphasized the necessity of cessation or remission of liability for Section 41(1) to apply. Consequently, the Tribunal vacated the addition of Rs. 25,60,829/- made by the A.O.Conclusion:The Tribunal allowed the appeal of the assessee, setting aside the order of the CIT(Appeals) and vacating the additions made by the A.O. under Section 41(1) of the Income-tax Act, 1961. The judgment underscores the importance of meeting the statutory requirements for invoking Section 41(1) and the necessity of concrete evidence to prove the cessation or remission of liabilities.