SHRI ROHIT INDER SINGH ,JALANDHAR vs. ASSISTANT COMMISSIONER OF INCOME TAX,CIRCLE-1, JALANDHAR

That the CIT (Appeals) has erred in upholding the order of the AO assessing the business income at NIL as against the returned loss of Rs. 41,87,738/-.

That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition of Rs.32,41,130/-on account of sundry creditors u/s 41(1), inter alia by treating as cessation of liability and that too in the year under appeal.

The Learned CIT(A) has erred in confirming the addition made by AO under section 41(1) without considering the facts as well law on the point of applicability of provisions of sec. 41(1) of the I.T. act, 1961. A liability cannot be presumed to have ceased to exist, unless there is a conscious act on the part of the creditor to waive or forgo the liability, which is absent in the present case.

That the AO has arbitrarily alleged that the outstanding trade liabilities are not genuine liabilities without producing any evidence to support his allegations.

Without prejudice to the above, the Learned CIT(A) has erred in confirming the addition in entirety without appreciating the factual submissions made before him that substantial part of the

That the both the lower authorities have failed to appreciate that section 41(1) can only be invoked only where some benefit has arisen to assessee by way of remission or cessation of a liability. In the said case neither there has been any cessation nor has any benefit been obtained by the assessee.

That the CIT (Appeals) in view of the facts and circumstances of the case and in law, erred in affirming the disallowance of Rs 2,62,370/- u/s 40A(3) on account of cash payments made for purchase of Hide and Skin. The disallowance is unjustified and excessive.

That the CIT(A) and AO has not appreciated the evidence brought on record by the Appellant, proving the fact that the payments made are covered by exceptions as laid down in rule 6DD(e)(ii).

The CIT(A) is not justified in upholding the disallowance u/s 40A(3) read with rule 6DD of the Act without appreciating that the Appellant had furnish all the evidence to show that the payment has been made to actual producers of Hide and skin. The finding given by CIT(A), that the assessee has not furnished evidence to establish that the parties to whom payments were

That without prejudice to the contention that the suppliers are actual producers of hide and skin, the fact that the suppliers are skin peelers and process these hide and skin to some extent is undisputed. The view that processing in this case cannot be equated to production shall frustrate the provisions of Rule 6DD and render it nugatory.

That without prejudice to the above, in view of the facts of the case Rule 6DD(e) as well as Rule 6DD(f) both would be applicable in the case of the appellant.

That without prejudice to the above, since the genuineness of the transaction has not been doubted and the identity of the parties to whom payments have been made is proved, the said payments shall not fall within the rigors of section 40A(3) having regard to nature of trade, Business expediency and other relevant factor.

That the legal precedents relied upon by the Appellant have not been judiciously interpreted by the lower authorities. The order of the CIT(A) is against the settled legal principles and case laws relied upon by the Appellant have been wrongly distinguished.

That the disallowances made and the observations made are unjust, unlawful and based on mere surmises and conjectures.

That the explanation given and the evidence produced, material placed and available on record has not been properly considered and judicially interpreted and the additions made cannot be justified in view of the said material and explanation. All the above grounds are without prejudice to each other.”

The main issue challenged by the appellant is that Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition of Rs.32,41,130/- on account of sundry creditors u/s 41(1), inter alia by treating as cessation of liability in the year under appeal vide ground no. 3 to 7.

The facts of the case as per record are that during the course of assessment proceedings, the assessing officer noticed from the details provided by the assessee that there were 25 sundry creditors outstanding for more than 3 years as on 31.03.2013 out of which 2 sundry creditors were squared off in A.Y. 2014-15. These creditors appearing in the balance sheet were very old and were still shown as payable, necessary enquiries were made by the assessing officer to establish the identity of the creditors their creditworthiness and genuineness of transaction. As the assessee failed to establish the identity of the creditors and genuineness of transactions to the extent of Rs.32,41,130/-., the assessing officer invoked the provisions of section 41(1) of l.T. Act, 1961 and made an addition of Rs.32,41,130/- on account of cessation of liability.

The Ld. CIT(A) while confirming the addition made by the assessing officer has observed as under: ……..I have considered the observations as made by the assessing officer while making the impugned addition. I have also considered the written submissions filed by the Ld.AR of the appellant. I have further considered various judicial pronouncements relied upon by the Ld.AR of the appellant. The assessing officer has noted that these liabilities are trade abilities of earlier years and have already been allowed as a deduction in that year. Inspite of giving enough opportunity to the assessee, the assessee failed to establish the existence of liability for these sundry creditors to the tune of Rs.32,41,130/-. The assessee has drawn its balance sheet based on its books of account, in which the above amount, were being aimed as liabilities due to various parties, as at the end of the financial year under assessment. However, the assessee failed to establish the genuineness of these liabilities by tracing supporting evidence. Before the assessing officer, a number of sundry creditors - were outstanding for more than 3 years were issued query letters under section 133(6) of the Income Tax Act, 1961. In their reply to notice under section 133(6) it was replied by them that they had no

The Counsel for the assessee submitted that Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition of Rs.32,41,130/-on account of sundry creditors u/s 41(1), inter alia by treating as cessation of liability and that too in the year under appeal; that he confirmed the addition without considering the facts as well law on the point of applicability of provisions of sec. 41(1) of the I.T. act, 1961. A liability cannot be presumed to have ceased to exist, unless there is a conscious act on the part of the creditor to waive or forgo the liability, which is absent in the present case; that the AO has arbitrarily alleged that the outstanding trade liabilities are not genuine liabilities without producing any evidence to support his allegations; that the Learned CIT(A) has erred in confirming the addition in entirety without appreciating the factual submissions made before him that substantial part of the said amount has already been offered for tax in subsequent years (in respect of 8 parties), thereby bringing to tax the

The defendant Ld. DR stands by the impugned order and contended that when the assessee was not sure whether those creditors had ceased to exist, then how the AO is expected to ascertain the facts regarding the year of the cessation of liability. He requested that the addition be confirmed.

We have heard both the sides and perused the material on record. It is noted that the disputed sundry creditors were being outstanding for more than 3 years and in compliance to notice under section 133(6) it was replied by them that they had no outstanding balance with the assessee. Further, some of the parties were not found at the given address while others did not confirm the outstanding liability of the assessee. Whereas, before the Ld. CIT(A) the assessee has taken a plea that he has written off of the creditors in his books pertaining to Financial Year 2015-16. However, considering the factual finding recorded by the AO and the fact that whether the balance of creditors was written off as the assessee was not sure that those creditors had ceased to exist.

Under the facts and circumstances, we are of the considered opinion that it is the prerequisite to ascertain the fundamental fact regarding the financial year of cessation of liability with the supporting corroborative evidences on the record before application of the judicial precedents relevant in the present case. It is pertinent to mention that the assessee is required

The Ld. AR argued that the very fact that the parties have confirmed that there was no opening balance outstanding as of 01.04.2012 makes its clear beyond doubt, that even if accepted that there has been remission or cessation of liability with respect to said sundry creditors, no inference can be drawn that the same has taken place during the F.Y. 2012-13. The addition under section 41(1) of the Act can be made only in the year in which the remission or cessation of liability has taken place, consequent to which the assessee has obtained any benefit.

It is an admitted fact as evident from the impugned order that the ld. CIT(A) has endorsed the finding of the ld. AO in the matter of cessation of liability relying on the unilateral decision without rebuttal to the assessee and ascertain the fact that whether in the year under consideration i.e. the asstt. year 2013-14 any gains has accrued or arisen to the assessee in the given facts and circumstances of the case by way of remission or cessation as the said amounts were squared up / written off in earlier assessment years by the creditors. Any addition under section 41(1) of the Act, if at all can be made only in the year in which the remission or cessation of liability has taken place. The Assessing Officer has not rebutted the evidence that relied upon regarding cessation of liability of creditors collected u/s 133(6) of the act. It

In the result, appeal of the assessee is allowed for statistical purposes.