Addition u/s 41(1) made on the ground of untraceable creditors-There was not cessation of liability-High Court

Addition u/s 41(1) made on the ground of untraceable creditors-the liability had not ceased or any advantage was taken. High Court upheld deletion made by ITAT

ABCAUS Case Law Citation:
ABCAUS 2240 (2018) (03) HC

The Revenue was aggrieved by the order of the Income Tax Appellate Tribunal  (ITAT) in deletion the addition made by the Assessing Officer (AO) u/s 41 of the Income Tax Act, 1961 (‘Act’) for untraceable creditors.

The grievance of the Assessing Officer was that the assessee had not filed any evidence before the Assessing Officer with regard to the actual existence of these liabilities or to show that the liabilities existed.

The Hon’ble High Court observed that the necessary ingredients for invoking the provisions of Section 141 are two folds; firstly, there should have been a cessation of the trading liability and secondly that some benefit in respect of the trade liability had been taken by the assessee. Whereas, there was nothing on record to show that there have been cessation of trading liability or that some benefits had been taken in respect of the trading liability by the assessee.

The Hon’ble Supreme Court observed that out of total amount approximately 86% had still remained unrecoverable as the creditors were untraceable and in any event, it could not be said that the liability had ceased or that any advantage had been taken by the assessee on account of this.

The Hon’ble High Court also noted that the Hon’ble Karnataka High Court had came to the conclusion that merely because creditor could not be traced on date when verification was made, is not a ground to conclude that there cessation of liability because cessation of liability has to be cessation in law, of debt to be paid by assessee to the creditor and, therefore, Section 41(1) of the Act could not have been invoked.

The appeal was dismissed.