INCOME TAX ACT, 1961

Section 41(1)

Business income - Remission or cessation of trading liability - Liability outstanding in the books of assessee towards sundry creditors -

During the course of assessment proceedings, AO observed that there was a liability outstanding in the books of assessee towards sundry creditors and assessee could not furnish the explanation, except the one company. Invoking the provisions of section 41(1), AO made addition. Assessee contended that AO, without providing adequate opportunity of hearing, completed the assessment. In support of genuineness of the existing liability in respect of which addition was made by AO, assessee submitted that AO wrongly invoked section 41(1) in respect of all the 45 creditors appearing in the books of account. Held: Section 41(1) states that where an allowance or deduction has been made in the assessment for any year in respect of loss or expenditure or trading liability incurred by the assessee and subsequently the assessee obtains some benefit in respect of such trading liability, etc., by way of remission or cessation thereof, the amount of benefit obtained by the assessee becomes income under section 41(1). It was evident that obtaining of any benefit by assessee in the form of remission or cessation was sine qua non for invoking section 41(1). If the liability continues to exist, the factum of delay in payment does not ipso facto require addition under section 41(1). Assessee categorically stated before AO that all the creditors were genuinely payable and there were some transactions in their accounts as well. Therefore, CIT(A) was justified in deleting the addition.

REFERRED :

FAVOUR : In assessee's favour

A.Y. : 2011-12

SUBSCRIBE FOR FULL CONTENT