A division bench of the Delhi HC comprising Justice Sanjiv Khanna and Justice Chander Shekhar denied the disallowance made in case of old creditors under section 40(1) of the Income Tax Act.
This appeal by the Revenue for the Assessment Year 1996-1997 and arises from the order of the ITAT in the case of M/s Banaras House Ltd.
The sole issue raised in the instant appeal was begun from the AO’s action of making the addition of Rs.18,90,273/- under Section 41(1) of the Act in case of old creditors who have stopped their transaction with them during the last three years or more.
The CIT (A) partly confirmed the addition made by AO who had tallied the list of old creditors with payments by the assessee to these creditors in the subsequent years.
On the said issue, ITAT said that the assessee had carried forward the balances from earlier years and further held that in case of 16 creditors, the credit balance was returned or adjusted for the next financial year accordingly provisions of Section 41(1) of the Act were not attracted.
The bench said that it does not find any error in the tribunal order and also added that assessee is a company which audited their accounts as per companies act so they had accepted and acknowledged its liability.
Finally, the court observed that no special facts or reasons were given by the Assessing Officer to hold and observe that the liabilities had ceased and amounts should be added under Section 41(1) of the Income Tax Act.
“The respondent-assessee is a company and accounts were audited as per the mandate of the Companies Act. In the accounts, the respondent-assessee had accepted and acknowledged its liability. The creditors can rely on the said acknowledgment. Even otherwise many of the creditors were paid, adjusted or eased in the subsequent years as accepted by the Commissioner of Income Tax (Appeals) and the Tribunal. No special facts or reasons were given by the Assessing Officer to hold and observe that the liabilities had ceased and amounts should be added under Section 41(1) of the Act.”
Accordingly, the High Court restored the tribunal’s decision regarding disallowance u/s 40(1) can’t be made in case of Old Creditors.
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