The Chennai bench of the Income Tax Appellate Tribunal ( ITAT ) upheld that an addition made on account of rescission of liability under Section 41(1) of the Income Tax Act 1961 is justified when the person from whom the amount was borrowed has written off the amount in his accounts, and the liability has ceased to exist.
In the instant case, the assessing officer (AO) concluded the assessment under section 143(3) of the Act and determined the assessee’s total income with an addition on account of the cessation of liability under section 41(1) of the Act and 14A of the Act in an order dated 31.13.2016.
The assessee filed for appeal before the Commissioner of Income-tax (Appeals)[CIT(A)], in which the commissioner upheld all the additions made by the assessing officer. The assessee then approached the ITAT for relief, where the ITAT set aside the additions and referred the case to the AO for fresh consideration in an order dated 16.02.2018.
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In the fresh round of assessment the AO made an addition on account of the cessation of liability under section 41(1) of the act to the extent of a lesser amount, and also, no addition was made on account of disallowance under section 14A of the act was made. The CIT(A) confirmed the AO’s order further aggrieved the assessee. This is the second round of litigation in front of the ITAT.
The Appellant representative submitted that the addition under section 41(1) of the Income Tax Act does not apply to a gift received from a brother. The AR pointed out that the AO thought the assessee received a gift 59,42,446 from his brother during the financial year 2007-08. Still, it was shown as an outstanding liability of the assessee towards his brother in the accounts.
The AR also pointed out that the assessee’s brother had confirmed that he wrote off the assessee’s debit balance in his accounts as personal help to come up in the assessee’s business.
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The AR raised another argument stating that even if accepted, the addition made under section 41(1) of the act on account of the cessation of liability is not maintainable in the year under consideration but should have been taxed in 2007-08. The AR prayed to delete the addition made on account of cessation of liability under section 41(1) of the Act. The AR relies on the case of Rajesh Kumar v. ACIT and argues that the gift given by a person to another who is personally related to him cannot attract addition under section 41(1)
The departmental representative for revenue submitted that the assessee had been taking advantage of expenditures, that the AO found outstanding liability in the assessee’s accounts up to the year under consideration, and that the argument that the gift received from his brother was not justified was not justified. It was also submitted that materials supporting the arguments put forth by the assessee were not given to the assessing officer, and such additions made by the assessing officer are correct.
The assessee representative argued that the AO made such additions after verifying the assessee’s accounts. This made it clear that the assessee had shown outstanding liability to his brother until the year under consideration instead of writing it off. This was a trading liability, and additions made under section 41(1) of the act were argued to be accurate.
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The ITAT held that the AO did not consider the confirmation letter of the assessee’s brother, who gave the amount as personal help, as the assessee continued to keep the amount as a liability in the balance sheet until the 2014-15 assessment years. The assessee’s representative did not dispute this and only submitted that this was due to a misunderstanding between the assessee and his brother.
The Division bench of ITAT consisting of Amitabh Shukla (Accountant Member) and S.S Viswanethra Ravi (Judicial Member) further held that the CIT(A) studied the matter in detail and held that when the person from whom the amount was borrowed had written off the amount in his accounts, the liability ceased to exist. As there was a cessation of liability, the same cannot be said for sundry creditors of the assessee.
The ITAT held that the provisions of section 41(1) could not be applied here, and the additions made by the AO were accurate and dismissed the appeal on those grounds.
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