INCOME TAX OFFICER, WARD -1, SONEPAT, SONEPAT vs. ADG ONLINE SOLUTIONS PRIVATE LIMITED, FARIDABAD

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ITA 4612/DEL/2026Status: DisposedITAT Delhi13 November 2026AY 2021-226 pages

In favour of the assessee: the Revenue's appeal was dismissed. From the AI summary of this appeal.

AI SummaryDismissed

What did the Tribunal hold?

The Tribunal held that the findings of the CIT(A) were logical and did not require any interference. The CIT(A) had reasoned that the addition under Section 41(1) was not sustainable because the essential condition of "remission or cessation" of liability had not been established by the AO. The CIT(A) noted that the liability was reflected in the assessee's books as outstanding, there was no evidence of the liability being written back, waived, or remitted, and the assessee had produced bank statements showing actual payments made to Skylark International in the subsequent period, establishing that the liability had not ceased but was discharged. The CIT(A) also clarified that the non-filing of a return by the vendor does not determine the subsistence of liability in the assessee's books, and that a substantial portion of the amount was treated as prepaid expense, not claimed as a deduction in the Profit & Loss Account, thus it could not be treated as income or cessation of liability. The remaining amount was debited to the P&L account as expenditure for services rendered, supported by agreements, ledger accounts, and TDS deduction details. The Tribunal agreed with the CIT(A)'s conclusion that the addition was made on suspicion rather than concrete evidence and that the statutory requirements of Section 41(1) were not satisfied. Accordingly, the addition was deleted.

What were the facts?

The appeal was filed by the Income Tax Department (Revenue) against an order dated February 18, 2026, passed by the CIT(A)/NFAC for Assessment Year 2021-22. The dispute centers on the deletion of an addition of Rs. 3,79,89,000/- made by the Assessing Officer (AO) under Section 41(1) of the Income-tax Act, 1961. The AO had treated this amount, credited to M/s Skylark International, as a cessation of liability because the creditor had not filed its return of income and the agreement was not registered. The assessee, ADG Online Solutions Private Limited, had reflected this amount as an outstanding liability in its books. The CIT(A) deleted the addition, finding that the liability had not ceased, evidenced by subsequent payments and proper accounting treatment of a portion as prepaid expense. The Revenue contested this deletion.

What were the issues?

1. Whether the CIT(A) erred in deleting the addition of Rs. 3,79,89,000/- made by the AO under Section 41(1) of the Income-tax Act, 1961, by failing to properly appreciate the facts and circumstances of the case? 2. Whether the CIT(A) erred in holding that there was no cessation of liability, ignoring the assessee's failure to substantiate the genuineness of the liability with credible evidence during assessment proceedings? 3. Whether the CIT(A) erred in relying upon subsequent payments made by the assessee, without appreciating that the liability remained unverified and unsupported by confirmation or the creditor's return of income? 4. Whether the CIT(A) erred in ignoring that the creditor, M/s Skylark International, had not filed its return of income, thereby casting serious doubt on the genuineness of the liability? 5. Whether the CIT(A) erred in not appreciating that the agreement produced by the assessee was not supported by credible evidence and was insufficient to establish the genuineness of the transaction? 6. Whether the CIT(A) erred in holding that Section 41(1) is not applicable, without considering that surrounding circumstances clearly indicated the liability was not genuine and had effectively ceased? Assessee's Contention: The assessee relied on the order of the CIT(A) and supported the facts on record as presented in that order. Revenue's Contention: The Revenue argued that the CIT(A) erred in considering there was a cessation of liability and in ignoring the assessee's failure to substantiate the genuineness of the liability. The Revenue further argued that the CIT(A) wrongly considered subsequent payments without appreciating that the liability remained unverified and unsupported, and that the creditor had not filed its return of income.

Which sections of the Income-tax Act were involved?

Section 41(1),Section 194C

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, DELHI

Before: SHRI ANUBHAV SHARMA & SHRI KRINWANT SAHAY

PER SHRI KRINWANT SAHAY, ACCOUNTANT MEMBER: This appeal is filed by the Department against the order dated 18-Feb-2026 passed by the Ld. CIT(A)/NFAC for the A.Y 2021-22.

2.

The Department has raised the following grounds of appeal:

1.

On facts and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.3,79,89,000/-made by the Assessing Officer u/s 41(1) of the Income-tax Act, 1961 without properly appreciating the facts and circumstances of the case.

2.

The Ld. CIT(A) has erred in holding that there was no cessation of liability, ignoring the fact that the assessee failed to substantiate the genuineness of the liability with credible evidence during the assessment proceedings. 3. The Ld. CIT(A) has erred in relying upon subsequent payment made by the assessee, without appreciating that the liability remained unverified and unsupported by confirmation OR return of income of the creditor. 4. The Ld. CIT(A) has erred in ignoring that the creditor, M/s Skylark International, had not filed its return of income, thereby casting serious doubt on the genuineness of the liability. 5. The Ld. CIT(A) has erred in not appreciating that the agreement produced by the assessee was not supported by credible evidence and was insufficient to establish the genuineness of the transaction. 6. The Ld. CIT(A) has erred in holding that provisions of section 41(1) are not applicable, without considering that the surrounding circumstances clearly indicated that the liability was not genuine and had effectively ceased. 7. The order of the Ld. CIT(A) is contrary to the facts on record and is not sustainable in law.

3.

Although the revenue has taken seven grounds of appeal but the issue involved in this appeal is the deletion of addition of Rs.3,79,89,000/- made by the AO u/s.41(1) of the IT Act.

4.

During proceedings before us the Ld. DR argued that vehemently against the order passed by the Ld. CIT(A) deleting the addition of Rs.37989000/- made by the AO. The Ld. DR argued that the Ld. CIT(A) has erred in considering that there was sucession of liability. He also ignored the fact that the assessee failed to substantiate the genuineness of liability with credible evidence during assessment proceedings.

5.

The Ld. DR also argued that the Ld. CIT(A) has wrongly considered the subsequent payment made by the assessee without appreciating the fact that the liability itself remained unverified and un supported by conformation or return of income of the creditor. Thus, the Ld. DR also brought it on record that the creditor M/s. Skylark International, had not filed its return of income.

6.

Per contra the Ld.Counsel of the assessee relied on the order of the Ld. CIT(A) and supported the facts on record in his order.

7.

We have considered the findings given in the assessment order and by the Ld. CIT(A) in his appellate order on this issue. We find that the Ld. CIT(A) has given a very speaking order which is reproduced as under :-

“6.2.4. I have carefully considered the assessment order and detailed submissions filed by the appellant along with documentary evidences. The addition of Rs. 3,79,89,000/- has been made by the Assessing Officer u/s 41(1) mainly on the ground that the appellant had credited the said amount in the name of M/s Skylark International and the said party had not filed return of income and therefore the genuineness of transaction could not be verified. The AO therefore treated the entire credit balance as cessation of liability. 6.2.5. On careful examination of the assessment order, it is observed that the Ld. AO has treated the outstanding balance payable to M/s Skylark International as ceased liability primarily on two grounds: firstly, that the vendor had not filed return of income; and secondly, that the agreement produced was executed on letterhead and not registered. Additionally, the Ld. AO observed that the liability had remained unpaid for a substantial period. 6.2.6. However, it is seen that the liability is reflected in the books of account of the appellant as outstanding and payable. There is no finding in the assessment order that the appellant has written back the liability in its accounts.

There is also no evidence brought on record to show that the creditor has waived or remitted the amount. In absence of such material, it cannot be inferred that the liability has ceased. The appellant has also produced bank statements showing actual payments made to Skylark International in subsequent period, which clearly establishes that the liability has not ceased but has been discharged through banking channels. 6.2.7. The reasoning that non-filing of return by the vendor leads to cessation of liability is not sustainable. The tax compliance of a third party does not determine the subsistence of liability in the books of the appellant. The existence of liability depends upon contractual and commercial relationship between the parties and not upon filing status of income tax return by the creditor. The fact that subsequent payment of Rs. 41,73,000/- was made in the next financial year assumes significance. Such payment is a clear acknowledgment of subsisting liability. If the liability had ceased during the year under consideration, there would have been no occasion to discharge part of it subsequently. The Ld. AO has not controverted this fact with any adverse evidence. 6.2.8. Further, the mere fact that agreement was not registered does not automatically render the transaction non-genuine. There is no statutory mandate in the present facts requiring compulsory registration for recognition of liability. Commercial agreements executed between parties cannot be disregarded solely on technical grounds unless supported by contrary evidence. 6.2.9. A crucial aspect not appreciated in the assessment order is the correct accounting treatment of the entire amount of Rs. 3,79,89,000/-, which has been duly explained by the appellant. The break-up of the amount is as under:  Total amount credited to Skylark International – Rs. 3,79,89,000/  Less: Amount booked as Pre-paid expense – Rs. 1,62,25,000/-  Net amount debited to Profit & Loss Account – Rs. 1,61,75,000 It is therefore evident that a substantial portion of the amount has been treated as prepaid expenditure and carried as an asset in the balance sheet. This amount has not been claimed as deduction in the Profit & Loss Account. Once the amount is shown as an asset, it cannot be treated as income or cessation of liability. The Assessing Officer has treated the entire credit balance as income without appreciating this fundamental accounting treatment.

6.2.10. It is further noted that the balance amount of Rs. 1,61,75,000/- has been debited to the Profit & Loss Account as expenditure incurred towards services rendered by M/s Skylark International in the ordinary course of business. The appellant has furnished the service agreement, ledger account and TDS deduction details evidencing that the expenditure relates to digital marketing and software development services obtained for business purposes. The expenditure is recorded in the regular books of account, subjected to tax audit and tax has been deducted at source under section 194C. The Assessing Officer has not brought any material on record to demonstrate that the services were not rendered or that the expenditure was fictitious or excessive. Accordingly, the said expenditure is allowable as business expenditure. 6.2.11. Most importantly, the appellant has produced bank statements evidencing actual payments made to M/s Skylark International in subsequent period, clearly establishing that the liability has not ceased but has been discharged through banking channels. Once the liability has been actually paid, the very basis of addition under section 41(1) ceases to exist. 6.2.12. It is also noted that no independent inquiry appears to have been conducted by the Ld. AO to establish that the liability was fictitious or had ceased. No material has been brought on record demonstrating that the creditor denied the transaction or that the liability had become legally unenforceable during the relevant year. The Hon’ble Supreme Court in the case of CIT v. Sugauli Sugar Works (P) Ltd. has clearly held that mere unilateral entry or mere lapse of time does not amount to cessation of liability unless there is evidence of remission. Applying the ratio of the said decision, it is evident that in absence of material establishing remission or cessation, section 41(1) cannot be invoked. 6.2.13. Considering the totality of facts and circumstances, it is held that the essential condition of “remission or cessation” has not been established by the Ld. AO. The addition appears to have been made on suspicion rather than on concrete evidence. The statutory requirements of section 41(1) are not satisfied in the present case. Accordingly, the addition of Rs. 3,79,89,000/- made under section 41(1) is deleted.”

8.

After considering the arguments made by both the parties during proceedings before us and the findings given by the Ld. CIT(A) in his order we find that the findings given by the Ld. CIT(A) is very logical. Therefore, in our considered view there is no need to make any interference on this issue in the findings given by the Ld. CIT(A). Accordingly, revenue’s appeal on this issue is dismissed.

9.

In the result, the appeal filed by the revenue is dismissed.

Order pronounced in the open court on 13.11.2026.

Sd/- Sd/-

[ANUBHAV SHARMA] [KRINWANT SAHAY] JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 13.11.2026 NEHA, Sr.P.S.* Copy forwarded to: 1. Appellant 2. Respondent 3. PCIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi

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