Addition for liability existing in balance sheet u/s 41(1). CIT(A) had no locus standi to enhance the assessment for the reason of cessation of liability – ITAT
ABCAUS Case Law Citation:
ABCAUS 1272 (2017) (06) ITAT
The appeal of the assessee was directed against the order passed by CIT(A) inter alia, against the enhancement of the income u/s 41(1) of the Income Tax Act, 1961 (‘the Act’) on account of cessation of liability.
Assessment Year : 2010-11
Date/Month of Pronouncement: May, 2017
Important Case Laws Cited relied upon:
CIT V/s Enam Securities Ltd.
Brief Facts of the Case:
During the course of appellate proceedings, CIT(A) observed that the turnover of the assessee was more than 2.25 times than purchases. The CIT(A) also observed that the assessee was carrying substantial amount of liabilities in as form of sundry creditors and advance from debtors amounting to approx Rs. 60 lakhs. The assessee was called upon to explain as to why these liabilities were not discharged. In response, the assessee filed copies of ledger accounts and also payment made in some cases.
CIT(A) issued a show cause notice to the assessee as to why the assessment should not be enhanced by the amount of sundry creditors and advanced from the debtors, which was replied by the assessee submitting that the he had already declared a sum of Rs. 7,04,240/- as other income in the assessment year 2011-12 on account of writing back of certain sundry creditors which are no more payable.
However, CIT(A) did not find the submissions and contentions of the assessee convincing and satisfying and he disallowed the amount aggregating to Rs. 11,38,798/- for the reasons that the assessee could not produce any confirmation or documentary proof that the liability to its sundry creditors existed as on 31.3.2010 as under:
|Amount outstanding (in Rs.)||Remarks|
|540910/-||The assessee has not been able to prove that this liability exists through any correspondence or confirmation. The assessee has also not declared any transaction with this party till date and no payment has also been made so far.|
|383341/-||The assessee has not been able to prove that this liability existed as on 31.03.2010 through any correspondence or confirmation. The assessee has also not declared any transaction with this party and has claimed to have written back the amount on 02.04.2010. The assessee has given no explanation as to how the liability ceased on 02.04.2010. The assessee has given no explanation as to how the liability ceased on 2.4.2010. However this has no impact on the finding of cessation of liability on 31.03.2010 as per the case law discussed below:|
|26000/-||Same as above.|
|788/-||Same as above.|
|121259/-||Same as above.|
|7082/-||Same as above.|
|7944/-||Same as above.|
|35757/-||Same as above.|
|43001/-||The assessee has not been able to prove that this liability exists through any correspondence or confirmation. The assessee has not been able to file the relevant ledger account of the party though it is claimed to have been filed with the letter dated 12.05.2016. Thus the assessee apparently not declared any transaction with this party till date and no payment has been made so far.|
|317716/-||The assessee has not been able to prove that this is a genuine advance received from the party and not some unbilled amount. The assessee has not proved that the liability exists on 31.03.2010 through any correspondence or confirmation. The assessee has not declared any transaction with this party thereafter and no payment has been returned also. The assessee has claimed to have written back the amount in his books on 02.04.2010 but the assessee has given no explanation as to how the liabilities ceased on 02.04.2010 only. Further this has no impact on the finding of cessation of liability on 31.3.2010 as per the case law discussed below|
Observations made by the Tribunal:
The ITAT found that the assessee had shown sundry creditors and advances from sundry debtors in the balance sheet on liability side. The assessee had suomotu written back an amount of Rs. Rs.7,04,240/- in the assessment year 2011-12 which ceased to exist for which the trading liability had extinguished.
The Tribunal opined that the action of the CIT(A) in making enhancement u/s 41(1) of the Act was contrary to the provisions of law in view of the fact when the assessee himself was showing the liability as existing on the balance sheet date and the FAA had no locus standi to assess the income of the assessee under section 41(1) of the Act.
It was observed that the case of the assessee was covered under the decision of the Jurisdictional High Court wherein an identical issue had been decided by the Hon’ble High Court in favour of the assessee.
We, therefore, respectfully following the ratio laid down in the said judgment set aside the order of the ld.CIT(A) and direct the AO to delete the addition.
The order of the CIT(A) was set aside and AO was directed to delete the addition made u/s 41(1).