ASLAM KASSAM MERCHANT ,MUMBAI vs. INCOME TAX OFFICER WARD 20(1)(2), MUMBAI

During the course of assessment proceedings, the assessee was asked to furnish details regarding sundry creditors, import turnover, customs duty payments and sales turnover. The assessee submitted the required information relating to sales and customs duty mismatch. However, in relation to sundry creditors, the initial reply was found incomplete. Subsequently, the AO again called upon the assessee to provide the complete list of sundry creditors along with address, contact details, PAN, and confirmations. In response, the assessee submitted a list of 15 sundry creditors. It was also noticed by the AO from the records that some of these creditors were located outside India. Further, the assessee's auditor had grouped Bank Overdraft balances and Credit Card dues under the head „Sundry Creditors‟ which is an important distinction in the context of section 41(1) of the Act. The AO also issued notices u/s 133(6) of the Act to four creditors out of the list provided. However, there was no reply from these creditors and no confirmation was received. The AO inferred that the liabilities were no longer enforceable and considered the entire outstanding balance of sundry creditors amounting to Rs 4,97,25,718/- as deemed income u/s. 41(1) of the Act and an addition of Rs 4,97,25,718/- was made to the returned income of the assessee, citing cessation of liability.

Being aggrieved by the said assessment order, the assessee filed an appeal before the Ld.CIT(A) and submitted that the addition made u/s. 41(1) of the Act is erroneous, unjustified and contrary to the principles of natural justice. It was also contended that section 41(1) of the Act applies only in situations where there is remission or cessation of a trading liability, and that such remission must be either evidenced by way of settlement waiver, or unilaterally written-off by the assessee. Accordingly, the assessee emphasized that there was no remission or cessation of liability in the instant case and that the AO had not brought any positive evidence on record to demonstrate that the liabilities were not genuine or that they were no longer payable. It was also submitted that many of the sundry creditors were continuing from earlier years and had already been scrutinized and accepted u/s.143(3) of the Act in AY. 2014-15 Furthermore, the inclusion of Bank Overdraft balances Credit Card dues, and Audit Fees payable under the sundry creditors head and their subsequent addition u/s. 41(1) of the Act was factually and legally incorrect, as these do not constitute trading liabilities capable of cessation under the provisions of section 41(1) of the Act.

After consideration of the assessment order, the assessee's submissions and the documentary evidence submitted, it was observed by the Ld.CIT(A) that the total amount of sundry creditors disallowed and added back by the AO comprises of two components viz., Sundry Creditors for goods amounting to Rs. 4,81,84,845/- and Sundry Creditors for others amounting to Rs. 15,40,873/-. On verification of the documents submitted and facts on record, it was found by the Ld.CIT(A) that the component of Rs. 15,40,873/-, categorized as Sundry Creditors for Others, includes bank overdraft accounts, credit card balances, and audit fees payable, all of which are financial or statutory liabilities. These cannot be deemed to have ceased within the meaning of section 41(1) of the Act, as this section specifically applies to trading liabilities which have ceased or remitted and came to the conclusion that there is no evidence brought on record by the AO to prove that these liabilities were remitted or waived or are no longer payable. In fact, these liabilities continued in the subsequent year, which further substantiates the claim of the assessee. Therefore, the addition of Rs.15,40,873/- made u/s. 41(1) of the Act was deleted by the Ld.CIT(A) and thus, not under dispute before us.

As regards the balance amount of Rs. 4,81,84,845/- claimed as Sundry Creditors for Goods, the ld CIT(A) stated that the assessee has failed to furnish confirmations, ledger copies, or documentary evidence in support of these outstanding balances despite repeated opportunities. It was held that although some of these creditors were continuing from earlier years, the onus to prove the current existence and enforceability of the liability remained with the assessee, particularly when the balances were significantly higher than the sales turnover declared for the year. In the absence of corroborative documentary evidence such as confirmation letters payment evidence, or communication trail, the genuineness of the liabilities remains unsubstantiated. In view of the same, and in the absence of credible supporting documents or confirmations, the addition of Rs.4,81,84,845/- in respect of Sundry Creditors for Goods, made u/s. 41(1) of the Act was sustained by the ld CIT(A). Aggrieved by the said findings of the Ld.CIT(A), the assessee carried the matter in appeal before us.

During the course of hearing, the Ld.AR submitted that the assessee is in the business of trading in timber and was carrying on the business in the name and style of Swadesh Associates. It was submitted that during the course of assessment proceedings, the assessee attended the proceedings and submitted the necessary information/documentation, which was called for by the AO. It was submitted that during the course of assessment proceedings, the AO issued notice u/s. 142(1) of the Act on 26-10-2017, seeking additional information pertaining to Sundry Creditors, import turnover, customs duty payments and sales turnover. The assessee submitted the required information regarding sales turnover and offered an explanation for the mismatch in customs duty payments. Subsequently, another notice dt. 04-12-2017 was issued to the assessee calling for the details of Sundry Creditors. In response, on 15-12-2017, the assessee submitted a list of 16 Sundry Creditors, including their addresses, contact numbers and PAN details. Thereafter, the AO issued notice u/s. 133(6) of the Act to only four of the listed creditors on 18-12- 2017 and sought their responses by 27-12-2017. However, given the paucity of time and the fact that no replies were received from those parties and the AO proceeded and completed the assessment proceedings hurriedly and passed the assessment order u/s. 143(3) of the Act on 28- 12-2017 by making an addition of Rs. 4,97,25,718/- u/s. 41(1) of the Act.

It was submitted that the aforesaid amount includes the entire closing balance of Sundry Creditors along with bank overdraft balances, based solely on a comparison of purchase turnover with the Sundry Creditor‟s balance, without offering the assessee sufficient opportunity or providing detailed reasoning for such disallowance. Thereafter, the assessee filed an appeal before the Ld.CIT(A) on 27-01-2018 and as a part of its submissions, the assessee moved a prayer for submission of additional evidences under Rule 46A vide submission dt. 30-08-2018, wherein the assessee submitted that the necessary confirmations from the Sundry Creditors which was sought by the AO and also explaining the reason as to why the confirmations could not have obtained earlier. Thereafter, the appeal was migrated to NFAC, Delhi and before the Ld.CIT(A), NFAC, Delhi, again the assessee drawn reference to the fact that they have filed detailed submissions as well as additional evidences earlier and a copy was again submitted vide submission dt. 23-05-2025, wherein the assessee has given detailed explanation about the Sundry Creditors as well as copy of the confirmations so received from Sundry Creditors. However, the Ld.CIT(A) has failed to take the same into consideration and passed the impugned order, wherein only partial relief has been provided to the assessee to the tune of Rs. 15,40,873/-, while confirming the addition made by the AO to the tune of Rs. 4,81,84,845/-.

It was submitted that all these are genuine transactions in respect of which the assessee has made purchases in the earlier financial years as well as in the financial year relevant to the impugned assessment year and the payment liability has been duly reflected in the financial statements and in some of the cases, the amounts have been paid in subsequent financial year, therefore, the question of remission or cessation of liability doesn‟t arise for consideration. However, no cognizance has been taken on the submissions so filed by the assessee and the addition has been confirmed by the Ld.CIT(A).

Per contra, the Ld.DR is heard, who has relied on the orders of the AO as well as that of the Ld.CIT(A).

We have heard the rival contentions and perused the material available on record. Given the fact that the assessee moved an application for admission of additional evidences before the Ld.CIT(A) and as part of appeal migration process, it appears that the same has either not been transmitted appropriately or has skipped the attention of the Ld.CIT(A), NFAC and there is no adjudication by the Ld.CIT(A) to the prayer so made for additional evidence and consequentially, the additional evidences so submitted by the assessee have not been considered while adjudicating the instant appeal. Therefore, in the interest of justice and fair play, we are of the considered opinion that the assessee should be granted one more opportunity and we deem it fit and proper to set aside and restore the matter to the file of the Ld.CIT(A) to consider the assessee‟s application for admission of additional evidences and to decide the matter afresh as per law after providing reasonable opportunity to the assessee. All the contentions on merits have thus been left open and the assessee is at liberty to raise the same before the Ld. CIT(A) as so advised.

In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced in the open court on 27-10-2025 Sd/- Sd/- [RAJ KUMAR CHAUHAN] [VIKRAM SINGH YADAV] JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated: 27-10-2025 TNMM Copy to : 1) The Appellant 2) The Respondent 3) The CIT concerned 4) The D.R, ITAT, Mumbai 5) Guard file