Addition u/s 41(1) of Income Tax Act not Allowable in Absence of Evidence of Cessation of Liability: ITAT [Read Order]

The New Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) held that unless and until there is evidence to show that the liability has ceased to exist, there cannot be any addition under section  41(1) of the Income Tax Act, and hence, deleted the addition made by Assessing Officer ( AO ).

Shashi Mittal wife of Late Mahender Kumar Mittal filed the petition. The assessee filed a return declaring Nil income and his case was selected for scrutiny. The assessment proceedings were initiated against the assessee and an order under section 143(3) came to be passed by making the addition of Rs.1,68,38,416/- treating the same as undisclosed income. On appeal, the CIT(A) sustained the addition of Rs.1,68,38,416/- under section 41(1) of the act.

It was found that the AO has invoked the provisions of section 68 by observing that the assessee has not given a satisfactory explanation concerning the identity of parties, genuineness of the transaction and capacity of creditors. Further noted that the CIT(A) sustained the addition by invoking the provisions of section 41(1) holding that these credits have been outstanding for a long time.

It was evident that the authorities have not brought anything on record to prove that the liability has ceased to exist and neither of the parties has written off the same in their books of accounts.

The two-member Bench of the ITAT comprising of Yogesh Kumar U.S. (Judicial Member) and Dr. B.R.R. Kumar (Accountant Member) observed that “When the inspector has visited the premises, it was reported that the firm was not operative from that address in the year 2015. However, the transaction took place before 01.04.2009 and the non-existence of this firm in 2015 cannot be reason to sustain addition and the report of the inspector cannot be relied on in its entirety since there was no basis for such information so recorded by him by following the due procedure as stipulated in Code of Civil Procedure. Hence, unless and until there is evidence to show that these credits have ceased to exist, there cannot be any addition under section 41 (1) of the Act.”

The Bench found that the balance sheet of the assessment year has been duly signed by the assessee itself thereby acknowledging the debt and in such circumstances, the lower authority is precluded in applying the provisions of section 41(1) of the. It was found that the AO has not brought anything to show that it ceased to exist in the assessment year under consideration, in such circumstance, it is not possible to hold that debt ceased to exist.

While referring to the judgment of the Supreme Court in the case of CIT Vs. SI Group India Ltd., the ITAT dismissed the applicability of section 41(1) of the Income Tax Act, 1961 and addition under said provision and partly allowed the assessee's appeal.

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