Unilateral writing off liability in the books of creditor can not be taxed u/s 41 in the hands of the assessee unless assessee was party to the settlement had the knowledge of writing off – ITAT
ABCAUS Case Law Citation:
ABCAUS 2279 (2018) (04) ITAT
Important Case Laws Cited/relied upon by the parties
CIT v. Sugauli Sugar Works (P) Ltd. (236 ITR 518)(SC)
CIT v. Shri Vardhman Overseas Ltd.  116 taxman.com 353 (Del).
The issue was related to the addition made by the Assessing Officer during the course of the re-assessment proceedings framed u/s 147 of the Income Tax Act, 1961 on account of cessation of liability u/s. 41(1).
The assessment was initially framed u/s. 143(1) of the Act. Later on the AO noticed that assessee had shown a credit balance in the name of a creditor in his books of account as reflected in the balance sheet and its annexure. However, during the course of scrutiny proceedings it surfaced that the said creditor, in its books of account had written off the debit balance of the assessee debtor.
Therefore, on the basis of these facts, the AO formed a belief that income chargeable to tax had escaped assessment and reopened the assessment by issue of notice u/s 148 of the Act.
The contention of the assessee was that the unilateral act of writing off of debt by the said creditor did not warrant treating the same as income u/s. 41(1) of the Act.
Being not convinced with the contentions of the assessee, the AO has held that on account of writing off the liability in the books of account of the said creditor, the liability in the books of the assessee ceased to exist. Accordingly the AO assessed the amount written off as income of the assessee u/s. 41(1) of the Act.
The assessee preferred appeal before the CIT(Appeals) and reiterated its contentions. However the CIT (A) confirmed the addition.
Aggrieved, the assessee approached the ITAT in this present appeal.
It was contended that if any credit was written off in the books of account of the creditor unilaterally and the debtor was not informed of the same, can it be claimed as income in the hands of the debtor u/s 41(1) of the Act. It was further contended that revenue had not placed any evidence on record to establish that assessee was duly informed about the writing off of the debt in the books of accounts of the creditor.
The Revenue contended that the AO was informed by the said creditor vide its letter that they had written off the entire outstanding balance in the books of account during the relevant financial year. But there was no movement of corresponding entries in the books of account of the assessee. It was contended that there was dispute between the assessee and the creditor with regard to balance payable and legal notice had also been exchanged.
Thus, it was contended that when all of a sudden, the entire amount was written off, some negotiation or understanding must have been developed between the assessee and the creditor on the basis of which the entire amount was written off. In this situation, the assessee cannot claim that he was not aware of the writing off of the entire liability in the books of account of the creditor.
The Tribunal found that undisputedly the creditor had written off the corresponding debit balance in its books of account. The correspondence exchanged between the parties established that there was dispute between both the parties with regard to the outstanding liability. Thereafter, an outstanding liability was written off in the books of account.
The Tribunal observed that though there was dispute with regard to the outstanding liability as legal notice was exchanged between them, but no evidence was placed by the Revenue that the assessee was informed about the writing off the debt in the books of account of sundry creditor.
The Tribunal opined that in any case, where the assessee had denied the knowledge of writing off of such huge amount of bad debt, it was incumbent upon the AO to dig out the truth by making necessary enquiries from the creditor, but it was not done and the AO without doing so, had made the addition of the same in the hands of the assessee, having invoked the provisions of section 41(1) of the Act. Thus in the absence of complete information, the conclusion drawn by the AO was not proper.
The ITAT opined that the matter required further enquiry and investigation from creditor with regard to any settlement undertaken between the parties under which the amount had been written off.
Accordingly, the Tribunal set aside the order of the CIT(Appeals) and restored the matter to the AO with a direction to make necessary enquiry from the creditor and from the assessee with regard to any settlement. It was further directed that if it is established that assessee was party to the settlement or assessee was in the knowledge of writing off, the liability will be ceased, otherwise it can not be taxed in the hands of the assessee on unilateral writing off in the books of the creditor.