2024 (10) TMI 423 - AT - Income Tax

Trading liability addition under section 41(1) deleted where AO failed to prove cessation of liability definitively

Saket Agarwal Versus The ITO, Ward-2 (3), Jaipur.

The ITAT Jaipur held that addition under section 41(1) for cessation of trading liabilities was unjustified where the AO made the addition merely because ... Addition u/s 41(1) - cessation of trading liabilities on the part of the assessee appellant - AO made the addition merely the notice / summons issued u/s. 133(6)/131 were not responded - AO was not satisfied about the genuineness of sundry creditors HELD THAT:- As is evident from the provision of the Act the assessee has not made any remission or cessation thereof, the amount shown as liability in the books of account the assessee has not received any benefit accruing to him and therefore, the said liability cannot be considered as income of the assessee. The decision our High Court relied upon by the AO in the order of assessment in the case of CIT Vs. M/s. Bright Future Gems [2016 (11) TMI 539 - RAJASTHAN HIGH COURT] deals with the addition u/s. 69C of the Act, whereas in the case on hand the addition is in relation to section 41(1) of the Act and therefore, the same is pari material on the different facts. As decided in case having the similar set of facts in the case of CIT vs. Narendra Mohan Mathur [2013 (11) TMI 1707 - RAJASTHAN HIGH COURT] Section 41(1) requires that the onus is on the assessing officer to come to the conclusion that the liabilities ceased to exist or the assessee has obtained whether in cash or in any other manner whatsoever any amount in respect of such loss or expenditure, or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person. On the one hand the assessee claims that the amount was payable and the assessee may be justified in saying so because one never knows when a creditor will come and raise the demand. May be, the creditor was justified that interest was being paid, so he did not turn up to take the principal amount. Therefore, it was for the assessing officer to come to a definite finding that the liability ceased to exist during the previous year relevant to the year under appeal which, in our view, has not been proved by the assessing officer. As the facts of the case on hand with that facts of the above case decided by our High Court we respectfully following the binding precedent direct the ld. AO to delete the addition made in the year under consideration. Based on these observations ground no. 1 raised by the assessee stands allowed. Issues Involved:1. Addition of Rs. 3,17,55,786 on account of unproved sundry creditors under Section 41(1) of the Income Tax Act, 1961.2. Issuance of penalty notice under Section 271(1)(c) of the Income Tax Act.Issue-wise Detailed Analysis:1. Addition of Rs. 3,17,55,786 on account of unproved sundry creditors under Section 41(1) of the Income Tax Act, 1961:The primary issue in this case revolves around the addition of Rs. 3,17,55,786 made by the Assessing Officer (AO) concerning sundry creditors, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee challenged the addition on the grounds that the AO and CIT(A) failed to appreciate the evidence provided, including confirmations, original invoices, and payments made through account payee cheques. The AO noted that the sundry creditors exceeded the turnover, which was deemed abnormal. Letters issued to creditors were returned undelivered, and the assessee failed to provide current addresses or confirmations during the appellate proceedings.The AO relied on Section 41(1) of the Income Tax Act, which pertains to the cessation of liability. The assessee argued that the transactions were genuine, supported by purchase bills, confirmations, and bank statements, and that the liabilities were settled in subsequent years. The assessee also highlighted that the AO did not dispute the sales transactions, which were linked to the purchases from these creditors.The assessee cited various judicial precedents, including the Supreme Court's ruling in CIT v. Sugauli Sugar Works (P.) Ltd., which emphasized that mere non-response from creditors does not prove cessation of liability. The Rajasthan High Court in CIT v. Narendra Mohan Mathur held that the onus is on the AO to prove cessation of liability, which was not established in this case.The Tribunal found merit in the assessee's arguments, noting that the liabilities were recognized in the balance sheet and payments were made through banking channels. The Tribunal concluded that the addition under Section 41(1) was not justified, as there was no evidence of cessation or remission of liability. The Tribunal directed the AO to delete the addition, citing the lack of evidence for cessation and the existence of genuine liabilities.2. Issuance of penalty notice under Section 271(1)(c) of the Income Tax Act:The second issue pertains to the issuance of a penalty notice under Section 271(1)(c) for alleged concealment of income or furnishing inaccurate particulars. The assessee argued that the penalty notice was issued mechanically without any basis, as there was no concealment or furnishing of inaccurate particulars of income.The CIT(A) dismissed this ground of appeal as premature, indicating that the penalty proceedings were separate and would be adjudicated independently. The Tribunal did not adjudicate this issue, considering it premature at this stage, and focused on the primary issue of addition under Section 41(1).Conclusion:The Tribunal allowed the appeal filed by the assessee, directing the deletion of the addition of Rs. 3,17,55,786 under Section 41(1) due to the lack of evidence for cessation of liability and the existence of genuine transactions. The issue of penalty under Section 271(1)(c) was deemed premature and not adjudicated at this stage. The Tribunal's decision was pronounced in open court on 01/10/2024.