2024 (7) TMI 1233 - AT - Income Tax

ITAT remands Section 41(1) liability reduction case for proper verification of creditor existence and debt write-offs

Income Tax Officer, Ward-13 (1), New Delhi Versus Jagdamba Foods Ltd.

The ITAT Delhi remanded the matter back to the AO for verification regarding additions under Section 41(1) for reduction of long term liabilities, short ... Addition on account of reduction of long term liabilities, short term borrowing, trade payables and other current liabilities u/s 41(1) - CIT(A) deleted the addition as no cessation of liabilities during the year as assumed by the ld. CIT(A) but it was discharged the liabilities against the trade receivables - HELD THAT:- Assessee could not file any confirmation before the AO with regard to the sundry creditor whether they are still outstanding or not. There were no details about the intention of the assessee to pay the outstanding liabilities nor any reminders from the creditors seeking payment of the amounts due. The details of the litigation or any Court case have not been brought before us. As per CIT(A) that the liabilities brought forward from earlier years, hence, the provisions of Section 68 are not applicable is not emanating from the record. To that extent, the ld. CIT(A) erred in adjudicating on the Section which is not a subject matter of AO - Hence, matter should go back to the AO for due verification as to the existence of the parties, writing of these liabilities as bad debts in their books or not and to afford an opportunity to the assessee to file the confirmations and the relevant details before the Assessing Officer. The appeal of the Revenue on this ground is allowed for statistical purpose Issues:1. Cessation/remission of liabilities under section 41(1)(a)2. Reduction in trade receivable3. Unexplained creditors, long term liabilities, and other current liabilitiesCessation/Remission of Liabilities under Section 41(1)(a):The Assessing Officer made an addition due to the reduction of long term liabilities, short term borrowing, trade payables, and other current liabilities, alleging remission in trading liabilities taxable under section 41(1). However, the ld. CIT(A) deleted the addition, stating that the liabilities were discharged against trade receivables. The ld. DR cited precedents, but the ld. AR supported the ld. CIT(A) and referred to various judgments. The outstanding balance of Rs. 4,95,12,689/- included an adjustment of Rs. 1,05,69,416/- by debtors. The ld. CIT(A) thoroughly examined the debtors and creditors' details, leading to the affirmation of the deletion of the addition.Reduction in Trade Receivable:The AO added Rs. 1,05,57,313/- for the reduction in trade receivable, alleging no corresponding transaction in the bank account. The ld. CIT(A) reasoned that the reduction was due to decreased trade payables and other liabilities, not reflecting income. The trade receivable reduction, even without payment received, qualifies as a deduction for bad debt write-off. The ld. CIT(A) directed the deletion of this addition, emphasizing that it cannot be considered income. The appeal was declined, upholding the ld. CIT(A)'s well-reasoned decision.Unexplained Creditors, Long Term Liabilities, and Other Current Liabilities:The AO added Rs. 3,84,82,400/- due to unexplained creditors and liabilities, alleging failure to prove the genuineness of trade creditors. The ld. CIT(A) deleted the addition, stating no cessation of liabilities to invoke section 41(1). However, the absence of creditor confirmations and details led to the appeal's allowance for statistical purposes. The matter was directed back to the AO for verification and opportunity provision to the assessee. The appeal of the Revenue was allowed for statistical purposes, emphasizing the need for due diligence in verifying outstanding liabilities.In conclusion, the judgment addressed the issues of cessation/remission of liabilities, reduction in trade receivable, and unexplained creditors and liabilities under section 41(1)(a). The ld. CIT(A) meticulously analyzed the facts and legal provisions, leading to the deletion of additions based on well-founded reasoning and examination of relevant details. The decision highlighted the importance of substantiating claims and providing necessary documentation to support assertions regarding liabilities and income adjustments.