Provisions of Sec 41 not applicable when assessee was showing liabilities in his books
During the assessment proceedings, the AO noted that the assessee had raised unsecured loans amounting to Rs. 2,11,37,381 of which Rs. 1,12,37,381 had been raised from M/s Aadi Krishna Agro Foods, Sunam, and Rs. 99,00,000 had been raised from M/s Track Tech Engineering Ludhiana. In the assessment year 2012-13, these amounts were shown under ‘sundry creditors’, due to some mistake, these amounts were shown as ‘unsecured loans’. The AO added an amount of Rs. 2,11,37,381 as the assessment was completed at an income of Rs. 2,14,49,871.
Appeal before CIT(A): The assessee challenged the addition before the Ld. First Appellate Authority. The Ld. CIT(A) condoned the delay in filing the appeal as the assessment order had not been served upon and also allowed the appeal of the assessee on merits.
Appeal before ITAT: Regarding the ground relating to the deletion of addition on merits, S. 41(1) of the Act is relevant as it enacts adjustment provisions whereby the revenue takes back what has already been allowed if the following two conditions come to pass and as such , the conditions need to be fulfilled in order to treat the cessation of liability as income under section 41 (1) of the Act:
- The assessee has to avail an allowance or deduction in an earlier year in respect of loss, expenditure, or trading liability; and
- In the subsequent year, the assessee has to obtain benefits in cash or any other kind in respect of such loss, expenditure, and trading liability by way of remission or cessation of liability.
The tribunal observed that, in the present case, the assessee had not debited the aforesaid liability to its Profit and Loss account in any of the earlier years, and thus, the question of receiving any benefit, allowance, or deduction by the assessee in earlier years, as specified in (i) above, has not been fulfilled. Also, the assessee had also not received any benefit either in cash or otherwise during the relevant year, the assessee has not written back the liability during the relevant year and the said liability continued to appear as the closing liability and has been carried forward to next year. Thus, condition (ii) above has also not been fulfilled.
Therefore, both the conditions needed for the application of section 41(1) of the Act have not been fulfilled in the instant case and, therefore, the addition made under section 41(1) of the Act had no leg to stand and had been rightly deleted by the Ld. CIT(A) and the tribunal upheld the same. Hence, the appeal was dismissed.
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