No addition u/s 41(1) can be made unless liability is written off in the accounts

No addition u/s 41(1) can be made unless liability is written off in accounts. AO has to brought evidence on record to show that liability has ceased

ABCAUS Case Law Citation:
ABCAUS 2940 (2019) (05) ITAT

Important Case Laws Cited/relied upon by the parties
CIT v. Bhogilal Ramjibhai Atara [2014] 43 taxmann.com55/222

In the instant appeal, the sole grievance of the assessee was that the CIT(A) had erred in confirming the addition made by the Assessing Officer (AO) with the aid of section 41 of the Income Tax Act, 1961 (the Act) towards remission of the trade liability.

The AO had found that there were few creditors whose credit balance was outstanding from many years. According to the AO, there was no change in the opening balance, and closing balance of these creditors, hence, he harboured a belief that liability to pay was ceased and credit balances appearing against names of those entities deserved to be added to the income of the assessee. Appeal to the CIT(A) did not bring any relief to the assessee.   

The Tribunal observed that the section 41(1) applies where a trading liability was allowed as a deduction in an earlier year in computing the business income of the assessee and the assessee has obtained a benefit in respect of such trading liability in a later year by way of remission or cessation of the liability.

In such a case the section says that whatever benefit has arisen to the assessee in the later year by way of remission or cessation of the liability will be brought to tax in that year.

The Tribunal opined that the principle behind the section was that to ensure that the assessee does not get away with a double benefit – once by way of deduction in an earlier assessment year and again by not being taxed on the benefit received by him in a later year with reference to the liability earlier allowed as a deduction.

The Tribunal also took note of the findings recorded by the Hon’ble High Court on the scope of section 41 of the Act. It was observed that the AO had not brought any evidence on the record to show that liability had ceased, neither the assessee had written off the liability in the accounts.

The Tribunal held that under the above circumstance, there would not be any addition under section 41(1) of the Act.

The Tribunal observed that the Hon’ble High Court had considered this aspect and observed that even if debt itself is found to be non-genuine from the very inception that also in terms of section 41(1) of the Act, there is no solution for that. In other words, addition cannot be made unless liability in the accounts has been written off.

Therefore, following the decision of the Hon’ble High Court the Tribunal allowed the ground of appeal and deleted the disallowance made.

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