Cessation of liability u/s 41(1) not charged, even absence of write-off of outstanding liabilities in Books of Account: ITAT [Read Order]

liability - outstanding liabilities - books of account - ITAT - taxscan

The Income Tax Appellate Tribunal (ITAT), New Delhi Shri Chandra Mohan Garg, judicial member & Shri Anadee Nath Misshra, accountant member has held cessation of liability u/s41(1) not charged even in the absence of write off of outstanding liabilities in books of account. 

The assessee contended that the books of accounts were audited, there were sundry creditors and the management had no intention to write off the same. Further stated that the company was unable to pay the impugned outstanding liability due to financial crunches and further submitted PAN and other details about 33 creditors out of a total of 42 creditors and the amount of these 33 creditors is approximate 90% of the total outstanding amount to examine and verify the number of liabilities/creditors showing in the balance sheet and the absence of such exercise, no addition can be made in the hands of the assessee u/s 41(1) of the Act as the appellant has not written of the impugned outstanding liability in the books of accounts and these are still in existence.

The revenue stated that the liability was being shown outstanding for many preceding years and the assessee could not provide confirmations from the respective creditors and also failed to provide necessary details like PAN, address etc. of the creditors.  CIT(A) was right in invoking the provisions of section 41(1) of the Income Tax Act, 1961 and making additions in the hands of the assessee.

It was observed that the appellant has provided the list of the sundry creditors along with confirmation on major parties and it is observed that the appellant has provided PAN No. of most of the parties except the creditors amounting to Rs. 31,69,207/-. The appellant has filed the confirmation in respect of 72% of creditors and provided the detail of the PAN in respect of 92% of creditors. The AO is not justified to make an addition treating cessation of liability as the creditors are outstanding many years as the appellant has not written off in their books of account.

The Tribunal observed that the assessee had shown outstanding sundry creditors for the last three years in its balance sheet and no provision was made to write off outstanding liabilities in its books of account, there would be no remission or cessation of liability under section 41(1) even if sundry creditors were not in existence at the address provided and PAN of creditors were found to be invalid. The Tribunal held that the revenue failed to establish that the assessee had obtained any benefit of reduction in the earlier years of such liabilities by way of their remission or cessation and upheld the order. 

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