2024 (11) TMI 1019 - AT - Income Tax

Revenue's addition under section 41(1) dismissed for unproved sundry creditors lacking proper assessment discussion

DCIT, Circle-1 (1), Pune Versus Indus Biotech Pvt. Ltd.

DCIT, Circle-1 (1), Pune Versus Indus Biotech Pvt. Ltd. - TMI Issues Involved:1. Whether the addition of unproved sundry creditors by the Assessing Officer (AO) under Section 41(1) of the Income Tax Act, 1961, was justified.2. Whether the CIT(A) erred in law by not providing an opportunity to the AO to investigate additional evidence submitted by the assessee.3. Whether the AO's action of adding unexplained cash credits under Section 68 of the Act was justified.Detailed Analysis:Issue 1: Addition of Unproved Sundry Creditors under Section 41(1)The primary contention revolves around the addition of Rs. 3,92,87,487/- as unproved sundry creditors by the AO. The CIT(A) reversed this addition, noting that the AO did not specify Section 41(1) while making the addition. The CIT(A) emphasized that for Section 41(1) to apply, there must be evidence of remission or cessation of liability, which was absent in this case. The assessee provided substantial documentation, including the list of creditors, PAN details, and ledger accounts, arguing that these were genuine trade payables settled in subsequent years. The CIT(A) relied on various judicial precedents, including the Supreme Court's decision in CIT v. Sugauli Sugar Works (P) Ltd., which clarified that cessation of liability cannot occur unilaterally and requires either a legal operation or an agreement between parties. The tribunal upheld the CIT(A)'s decision, finding no cessation or remission of liability.Issue 2: Opportunity to AO for Investigating Additional EvidenceThe Revenue contended that the CIT(A) failed to comply with Rule 46A of the Income-tax Rules, 1962, by admitting additional evidence without seeking a remand report from the AO. The tribunal, however, found that the assessee had provided all necessary details during the assessment proceedings, and the AO had sufficient time to verify these details. The tribunal noted that the AO's failure to specify the relevant section under which the addition was made and the lack of evidence to suggest that the liabilities had ceased further weakened the Revenue's case.Issue 3: Addition under Section 68 as Unexplained Cash CreditsThe Revenue argued that the addition should be considered under Section 68 for unexplained cash credits. However, the tribunal observed that the AO did not provide a clear rationale or evidence for invoking Section 68. The assessee had demonstrated the identity, creditworthiness, and genuineness of the transactions, which were regular business transactions. The tribunal concluded that neither Section 41(1) nor Section 68 was applicable, as the AO failed to discharge the burden of proof required to substantiate the addition.Conclusion:The tribunal found no merit in the Revenue's appeal, affirming the CIT(A)'s decision to delete the addition of Rs. 3,92,87,487/-. The tribunal held that the AO's actions were not justified under either Section 41(1) or Section 68, as the necessary conditions for invoking these sections were not met. Consequently, the Revenue's appeal was dismissed.