By TIOL News Service

AHMEDABAD, JULY 18, 2016: THE issue before the Court is - Whether addition u/s 41(1) is valid when assessee has shown liabilities in books and creditors have also not given up their rights to recover such sums from assessee. NO is the answer.

Facts of the case

The assessee is a company. During the year, assessee had shown total sundry creditors of Rs 1,76,21,509/-. AO with a view to ascertain the genuineness of the creditors called for various details such as complete name and address, confirmation etc. from the assessee. The assessee could produce confirmation from some of the creditors for a sum of Rs.94,61,159/-, however, in respect of the balance amount, the assessee could not produce any confirmation from the creditors and in some cases, the complete address could not be provided despite several opportunities having been granted. AO also noticed that not a single rupee had been paid by the assessee to the said creditors even after a span of twelve to thirteen years. AO issued notice u/s 133(6) to nineteen creditors in whose account, a total credit of Rs 57,46,631/- was shown, however, no compliance was received in several cases and in many cases, notices u/s 133(6) came to be returned with the remark "left". On perusal of the Balance Sheet of some of the creditors, it was found that none of them was showing the assessee as a debtor. AO thus held that these liabilities amounting to Rs.57,46,631/- were no more payable by the assessee as the persons to whom these were claimed to be payable no more claimed the same as was reflected in their Balance Sheet. As regards six creditors of Rs 24,13,719/-, the assessee was required to furnish complete address and confirmation or to produce the creditors before AO. It was also made clear to the assessee that if it fails to submit any concrete information in respect of these creditors or adduce any evidence to the effect that these liabilities are in fact payable, the same will be treated as ceased liabilities. The assessee, however, failed to furnish any detail to establish that these creditors still exist. AO recorded that the creditors were not available at the given address and the assessee himself was not aware about their whereabouts. The inter-departmental investigation of the records of eight creditors did not show any amount receivable from the assessee. AO held that it was clear that the liabilities amounting to Rs 81,60,350/- (Rs 57,46,631 + Rs 24,13,719) have ceased and accordingly added the same to the income of the assessee u/s 41(1).

On appeal, CIT(A) agreed with the contention of AR that section 41(1) introduces a fiction, which is an indivisible one. It cannot be enlarged by importing another fiction, namely, that if the amount was obtainable or receivable during the previous year, it must be deemed to have been obtained or received during that year. The only meaning that can be attached to the words 'obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure incurred in any previous year’ clearly refers to the actual receiving of the cash of that amount. The amount may be actually received or it may be adjusted by way of adjustment entry or a credit note or in any other form, when the cash or the equivalent of cash can be said to have been received by the assessee. Thus CIT(A) expressed the view that even if there was any unilateral act on the part of the parties in writing off the debt in their books of account, such unilateral act does not in any way translate into income in the hands of the company and this fact in itself in case of some of the creditors cannot be universally applied across the board to all the creditors in absence of any material to that effect. CIT was further of the view that the material and evidences gathered by AO and made part of the order were not conclusive enough and did not give the correct and complete picture of the action taken by the parties and the entry made in their books of account as logical. CIT(A) also agreed that it was highly unlikely that the concerned parties have written off the said amounts since the physical shares of the companies in which they are Directors, were still with the assessee company and thus, allowing a major stake in those companies to the assessee company without anticipating payment for such shares could not be said to be a prudent decision on their part. Since the assessee was still showing the liabilities in question as existing liabilities in its books of accounts and had not written off the same, it had furnished confirmation of majority of the parties along with evidences in support of the transaction and the shares in respect of which the liability had arisen had been duly shown as stock-in-trade in the books of the company. Since, AO had not confronted the assessee with the material gathered behind its back for rebuttal and cross examination of the parties as well as having regard to the fact that the unilateral act on the part of the parties does not in any way translate into income in the hands of the assessee, CIT(A) deleted the addition made by AO u/s 41(1). Revenue carried the matter in appeal before the Tribunal but did not succeed.

Held that,

++ the Tribunal observed that in the present case it is not the case of AO that the assessee company has received any cash or benefit in respect of trading liability by way of remission or cessation thereof as envisaged in the said section. The assessee has filed details and explanation in respect of outstanding creditors in the form of complete list of creditors, copy of ledger account of parties from the year 1996-97 in which the liability was raised till the year under consideration, original bills for purchase of shares for which liability was outstanding, etc. The assessee had also furnished confirmation of a few parties and also furnished the addresses as was available with it. It appears that the Tribunal noted that AO had not dealt with the confirmations filed in this regard. According to the Tribunal, section 41(1) would apply in cases where there had been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during previous year relevant to the AY under consideration. The Tribunal on an appreciation of the material on record found that both the elements were missing and there was nothing on record to suggest that there was remission or cessation of liability, that too, in the previous year relevant to the AY under consideration.

++ the Tribunal has held that there is nothing on record to suggest that there was any remission or cessation of liability in the previous year relevant to the assessment year under consideration. Even if the submission advanced by the counsel for the revenue that some of the creditors had written off the liability in their books was to be accepted, even then, such liability would have ceased in the year in which such amounts were written off in the books of those creditors. However, it is not the case of the Assessing Officer that the amounts were written off in the year under consideration. In these circumstances, the question of invoking section 41(1) would not arise. Moreover, this court is in agreement with the view adopted by the Commissioner (Appeals), as confirmed by the Tribunal, that a unilateral act on the part of the parties does not in any way translate into income in the hands of the assessee. As is evident from the material on record, the assessee has shown these liabilities in its books and continues to show the same. Thus, the assessee has not written off the liabilities in its books of account. There is nothing on record to indicate that the creditors have given up their rights to recover such amounts from the assessee. Under the circumstances, it is clear that the addition is based upon an assumption on the part of the Assessing Officer that the liabilities have ceased to exist. The Tribunal, therefore, did not commit any error in upholding the deletion made by the Commissioner (Appeals). For the foregoing reasons, this court is of the view that the impugned order passed by the Tribunal does not give rise to any question of law, much less, a substantial question of law, warranting interference. The appeal, therefore, fails and is accordingly summarily dismissed.

(See 2016-TIOL-1395-HC-AHM-IT)