No creditor’s liability cessation u/s 41(1) for an entry outstanding in books over the years and not been challenged in the initial year of such entry

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ITAT Amritsar, in a recent judgment, has held that no conclusion of cessation of creditor’s liability u/s 41(1) can be drawn for an entry outstanding in books over the years and not been challenged in the initial year of such entry. 

Case Law Details:
M/s. Modern Distributors vs. Income Tax Officer

ITA No.341(Asr)/2015 Assessment year:2010-11
Date of Order/Judgment: 12/04/2016

Brief Facts of the Case:

The assessee was a partnership firm engaged in the business of trading in medical equipment For the year, the assessee filed its return declaring income of Rs.36,750/-. During the course of assessment proceedings, the Assessing Officer, in order to know the correctness of the balances shown in the case of various sundry creditors, called for information from the creditors u/s 133(6). In response, one party creditor namely; Anup Kumar with an outstanding balance of of Rs.37,440/- denied to have any outstanding balance and having no transaction with the assessee during the F.Y.2009-10 and the other two creditors did not respond to the notice.

The AO being not satisfied with assessee’s replies, made an addition of Rs.93,327/- to the returned income of the assessee on account of remission or cessation of liability in the above referred cases by invoking the provisions of section 41(1).

CIT(A) confirmed the addition by observing that the assessee could not establish that the liability shown in its books of account in the case of the three creditors still existed.  CIT(A) observed that since the creditor himself stated that he was not to receive anything from the assessee, it would automatically tantamount to remission or cessation of liability under the provisions of section 41(1).

Excerpt from ITAT Judgment:

In this regard, in ‘CIT vs. Jain Exports Pvt. Ltd.’, 89 DTR (Del) 265, it has been observed that where outstanding balance is payable to creditor and such opening balances are being carried forward for several years, the issue as to the genuineness of a credit entry could only be examined in the year in which the liability was recorded as arisen and such issue does not arise in any other year; and that the AO having accepted balances outstanding for years, it was not open for the ld. CIT(A) to confirm the addition. In the present case, as noted, once the credit entry qua Sh. Anup Kumar is continuing in the assessee’s books over several years and it has been accepted as such, the ld. CIT(A) has clearly erred while accepting Sh. Anup Kumar’s version that he did not owe anything to the assessee and rejecting the assessee’s entry of credit outstanding. Thereby, the Authorities below have raised the issue of genuineness of the credit entry during the year under consideration, which action is not sustainable in view of the ‘Jain Exports Pvt. Ltd.’

Apropos party no.2, the assessee’s stand that the amount of Rs.10,000/- had been received as advance towards supply of goods, but the goods had not been supplied to the party, i.e., M/s. Ganesh Pharmaceutical & Surgical, Dharamsala. The assessee’s claim was rejected on the basis that since the creditor party did not respond in the enquiry proceedings before the AO, the assessee could not substantiate his submission and that no documentary evidence had been filed. Here again, the entry has been standing in the assessee’s books over the years and it has not been challenged in the initial year of such entry. Therefore, the facts not having undergone any change in the year under consideration, no conclusion of cessation of liability can be arrived at. As such, this addition is deleted. 

So far as regards party no. 3, i.e., Civil Surgeon, Hoshiarpur, the assessee maintained that it was a wrong entry and that this credit balance was on account of bad accounting, since the debtor had inadvertently been credited to some other account, which had been corrected in the next year.

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