Section 41(1) of Income Tax Act Cannot Be Invoked for Cessation of Trading Liability Due to Absence of Liability in Books: ITAT [Read Order]

The Kolkata bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that absence of liability in books of account, provision of Section 41(1) of Income Tax Act, 1961 cannot be invoked as cessation of trading liability.

The assessment Year 2020-21, pertains to the addition under Section 41(1) of the Income Tax Act at Rs.5,35,626/-. Facts in brief pertaining to this ground are that the assessee Syama Prasad Mookerjee Port which was a Government of India undertaking filed its return of income for Assessment Year 2020-21 on 30/03/2021. The case was selected for complete scrutiny followed by issuance of notice under Section 143(2) & 142(1) of the Income Tax Act.

The Assessing Officer was in possession of information as per which M/s. Premco Rail Engineers Ltd. and Ripley & Company Limited, booked the expenditure under the head bad debts written off at Rs.1,00,000/- and Rs.4,35,626/- claimed to be irrecoverable from the assessee company. Based on this information, the Assessing Officer asked the assessee to reply as to whether it had booked any income in the books of accounts. However, the assessee stated that it had no closing balance of these concerns in its books but the ld. Assessing Officer was not satisfied and he made and addition under Section 41(1) of the Income Tax Act at Rs.5, 35,626/-.

Mr. K M. Sundaram representing the assessee submitted that they have not dealt with these two companies in the year under appeal nor there is any brought forward balance of these concerns as sundry creditors. Though there were certain transactions entered with these concerns in the past, they were squared off. He further submitted that if an opportunity is granted, it can be explained before the lower authorities that no addition is called for u/s 41(1) of the Act as there was no liability standing in the name of the two companies, namely, M/s. Premco Rail Engineers Ltd. and Ripley & Company Limited

The bench noticed that the assessee was a Government of India undertaking. Copies of ledger account of M/s. Premco Rail Engineers Ltd. and Ripley & Company Limited, have been filed demonstrating the last transactions which took place with M/s. Premco Rail Engineers Ltd. was up to FY 2013-14 and that with Ripley & Company Limited was up to FY 2017-18 and also as on the opening of the financial year 2019-20, relevant to Assessment Year 2020-21, there is no opening credit balance in the name of these two parties.

Further, no transactions were carried out during the year and, therefore, as on 31/03/2020, there was nil balance in the account of both these companies. Therefore, in absence of any liability in the books of accounts, provisions of Section 41(1) of the Act cannot be invoked as the same refers to cessation of trading liability. In other words, liability standing in the books is sine qua non before proceedings to examine the transactions under Section 41(1) of the Act.

The two member bench of the tribunal comprising Sanjay Garg (Judicial member) and Dr. Manish Board (Accountant member) inclined to restore the issue to the file of the jurisdictional Assessing Officer for a fresh adjudication in light of the submissions of the assessee as well as the additional evidence adduced by the assessee. Needless to mention that the assessee shall produce all necessary documents/evidence, in support of its claim before the Assessing Officer and shall cooperate till the disposal of its appeal. Accordingly, this ground relating to addition under Section 41(1) of the Income Tax Act raised by the assessee was allowed for statistical purposes.

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