Blaze Manufacturing Co Vs DCIT (ITAT Delhi)
ITAT Delhi allowed the assessee’s appeal for AY 2014-15 in Blaze Manufacturing Co., deleting the massive addition of ₹5.00 crore made u/s 41(1) on an estimated / percentage basis, holding that cessation of liability cannot be presumed.
The AO, while giving effect to PCIT’s order u/s 263, made enquiries only in 207 out of 680 sundry creditors and found 63 parties allegedly non-traceable / non-responsive. On this basis, he applied a 29.24% thumb-rule to the entire creditor balance of ₹17.12 crore and treated ₹5.00 crore as cessation of liability. CIT(A) mechanically confirmed the addition relying on Dattatray Poultry Breeding Farm (ITAT Ahmedabad).
The Tribunal dismantled the approach, holding that:
– Section 41(1) requires actual remission or cessation, not suspicion;
– Liabilities were continuously acknowledged in books, audited accounts and accepted in earlier 143(3) assessments;
– Purchases, sales and trading results were never doubted;
– Creditors were paid in subsequent years, proving they were live liabilities;
– No ad-hoc or percentage addition is permissible u/s 41(1);
– If liabilities were bogus, action lay u/s 68 in the year of creation, not u/s 41(1) later.
Crucially, the Tribunal noted that the very decision relied upon by CIT(A) (Dattatray Poultry Breeding Farm) stands reversed by the Gujarat High Court, which has categorically held that where liability itself is doubted, s.41(1) cannot apply.
Relying on SC in Kesaria Tea & Sugauli Sugar, Delhi HC in Vardhman Overseas & Ritu Anurag Agarwal, and multiple ITAT decisions, the Bench held that estimated cessation is alien to the statute.
Result:
– ₹5.00 crore addition u/s 41(1) deleted in full
– Ad-hoc / sample-based disallowance rejected
– Appeal allowed on merits
Section 41(1) taxes real remission, not imagined percentages—once purchases and trading results are accepted, sundry creditors cannot be knocked down by statistical guesswork.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal is filed by assessee against the order dated 29.05.2025 by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld.CIT(A)”] in Appeal No.CIT(A), Moradabad/10287/2019-20 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 30.12.2019 passed u/s 143(3)/263 of the Act pertaining to Assessment Year 2014-15.
