Case Law Details
Arintex Global Limited Vs ITO (ITAT Delhi)
Outstanding trading liabilities cannot be treated as deemed income under section 41(1) unless the assessee has actually obtained a benefit by way of remission or cessation of liability. Further, non-compliance with notices under sections 131/133(6), by itself, cannot justify treating sundry creditors as bogus where the assessee has furnished supporting evidence and the liabilities continue to subsist.
Summary : The content is a Legal Case/Judgment/Tribunal Order. The ITAT Delhi held that outstanding foreign trade liabilities could not be taxed under section 41(1) of the Income-tax Act, 1961, as there was no remission or cessation of liability and the assessee had not obtained any benefit. The Tribunal noted that the liabilities continued to be reflected as payable in the books, and the suspension or non-functioning of the foreign creditors or suspension of the assessee’s business did not establish cessation of liability. It further held that domestic sundry creditors could not be treated as bogus merely because they failed to comply with summons under section 131 or notices under section 133(6), where the assessee had furnished confirmations, ledger accounts and other documentary evidence, the Revenue had not pointed out defects or carried out further investigation, and the liabilities continued to subsist. The Tribunal also noted that two creditors were fully paid and one was partly paid in subsequent years. Accordingly, it set aside the CIT(A)’s order, deleted both additions and allowed the assessee’s appeal.
Core Issue: Whether (i) outstanding foreign trade creditors could be taxed under section 41(1) on the ground of cessation of liability, and (ii) domestic sundry creditors could be treated as bogus merely because they failed to comply with notices issued under sections 131 and 133(6).
Facts: The assessee had disclosed foreign trade creditors of Galaxy Star Trading LLC and Yans Amir Ltd. as outstanding liabilities. The Assessing Officer invoked section 41(1) alleging cessation of liability because one foreign creditor’s licence had been suspended and the other had ceased business activities. The Assessing Officer also treated outstanding balances of three domestic creditors as bogus on the basis of investigation reports and their failure to respond to summons under section 131 and notices under section 133(6), despite the assessee furnishing confirmations, ledger accounts and other documentary evidence. The CIT(A) confirmed both additions.
ITAT Held: The Tribunal held that the essential condition for invoking section 41(1) is that the assessee must have obtained a benefit by way of remission or cessation of a trading liability. In the present case, the liabilities had neither been written back nor ceased to be reflected as payable in the books. Suspension of a creditor’s business, non-functioning of the creditor, or suspension of the assessee’s own business did not establish remission or cessation of liability or confer any benefit upon the assessee. Accordingly, section 41(1) had no application.
With regard to the domestic creditors, the Tribunal held that mere non-compliance with summons under section 131 or notices under section 133(6) cannot render creditors bogus when the assessee has furnished complete documentary evidence and the Revenue has neither conducted further investigation nor pointed out any defects in such evidence. The liabilities continued to be shown as payable in the books and documentary records established that two creditors were fully paid and the third was partly paid in subsequent years, reinforcing their genuineness.
Outcome: The Tribunal set aside the order of the CIT(A) and deleted both additions, holding that the conditions of section 41(1) were not satisfied in respect of the foreign creditors and that the domestic creditors could not be treated as bogus merely because they did not respond to notices issued under sections 131 and 133(6). The assessee’s appeal was allowed.
Cases Discussed
- PCIT v. Soorajmull Nagarmull (Cal. HC), 457 ITR 470
- CCIT v. Kesaria Tea Co. Ltd. (SC), 254 ITR 434
- CIT v. Sugauli Sugar Works (P.) Ltd. (SC), 236 ITR 518
- CIT v. Orissa Corporation (P.) Ltd. (SC), 159 ITR 78
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals),National Faceless Appeal Centre (hereinafter referred to as the “ld. CIT(A)”], dated 02.08.2025 for the Assessment Year (AY) 2015-16.
2. The issue raised in Ground No.5 is against the order of ld. CIT(A) confirming the addition of Rs. 3,44,51,900/- as made by the Assessing Officer (In short, ‘the AO’) u/s 41(1) of the Income-tax Act, 1961 (In short, ‘the Act’) in respect of liability(Sundry Creditors) shown in the books of account which according to the AO has ceased to exist.
3. The facts of the case in brief are that the assessee filed its original return of income on 30.09.2015, disclosing total loss of Rs. 41,96,652/-. The assessee-company is engaged in the business of trading of various commodities and manufacturing of knitted fabrics however during the year no business activities were there. The case was selected through CASS for three reasons, viz., (i) low income in comparison to high loans/advances/ investments in shares, (ii) large amounts of sundry creditors and (iii) mismatch of custom duty paid as shown in the ITR with the Duty paid as per Export Import Data. Accordingly, notices u/s 143(2) and 142(1) of the Act along with questionnaire were issued and fully complied with the details / evidences before the AO. The AO during the course of assessment noted that assessee has shown some international transactions payable under the head Trade Payable/Sundry Creditors for Goods. The AO noted that assessee has shown total trade payables at Rs. 23,64,75,751/- which comprised of both indigenous as well as foreign creditors. Accordingly, a show cause notice was issued to the assessee on 21.12.2018, which was replied by assessee. The AO after taking into account, the reply of the assessee, treated the creditors to the tune of Rs. 3,44,51,900/-, comprising of Rs. 79,65,216/- in respect of M/s Galaxy Star Trading LLC and Rs. 2,64,86,684/- in respect of M/s Yans Amir Ltd. as no more payable as the same ceased to be payable. The AO observed that M/s Galaxy Star Trading LLC, which is a UAE based party whose license has been already been suspended as reported by FTTR, New Delhi and therefore, he has strong reasons to believe that the liability towards the same has ceased. Similarly, in respect of M/s Yans Amir Ltd., the AO observed that the said party has not been filing return of income and also not doing any imports and exports. Therefore, this is a fit case of cessation of liability and is covered under the provisions of section 41(1) of the Act, accordingly, the AO added the same to the income of the assessee.
4. In the appellate proceedings, the ld. CIT(A) sustained the addition made by the AO by observing and held as under:
“(A) Addition of Rs. 3,44,51,900/- under section 41(1)
The said addition was made on account of cessation of liability towards Galaxy Star Trading LLC (Rs.79,65,216/-) and Yans Amir Ltd. (Rs.2,64,86,684/-). The AO relied on the FTTR reports that showed these entities had ceased functioning. Notably, Galaxy Star’s license had been suspended, and Yans Amir had not filed any tax returns or caried out business activity since 2011. These facts substantiate that there was no live claim of liability at the time of assessment.
The assessee has not produced any documentary proof indicating continued obligation to pay or acknowledgement of liability by these foreign parties. On the contrary, the age of transactions (dating back 15-20 years) and lack of any business continuation or legal enforceability of the claim substantiate that the liabilities ceased in substance and law. The AO rightly invoked section 41(1), and the assessee has failed to rebut this with cogent evidence. The claim suspension of license is irrelevant does not hold merit when considered in light of cessation of activity and regulatory non-existence.”
5. We heard the rival submissions and perused the materials available on record. We note from the records as placed before us that two entities which were treated as no more payable by the AO for the reason that both the parties were not carrying on an operation in India and the AO presumed that it is a case of cessation of liability and the same was added u/s 41(1) of the Act. In the appellate proceedings, the ld. CIT(A) has simply confirmed the order by passing a very cryptic and non-speaking order. We note that the assessee has not written back the outstanding liabilities in the books of accounts and the same recognized in balance sheet and its books of account as payable to both the parties under the head of sundry creditors. Therefore, these liabilities remained live, subsisting and payable by the assessee though, the assessee’s operation is suspended for the last so many years owing to some business exigencies, but it does not mean that liabilities are not legally payable by assessee and could be written back by the Department unilaterally. The provisions of section 41(1) apply where a deduction or allowance has been in the earlier year in respect of trading liability and subsequently the assessee obtains some benefit in respect of that liability way of remission or cessation, the value of such benefit is to be taxed as deemed income of the relevant previous year. In our opinion there is no such remission or cessation of liability during the year and the assessee has also not got any benefit, therefore the provisions of section 41(1) were wrongly invoked by the AO and thereafter confirmed by ld. CIT(A). Hence the order passed by the ld. CIT(A) is unsustainable under the Act. The assessee’s case is squarely covered by the decision of Hon’ble Supreme Court in case of CIT vs. Sugauli Sugar Works (P.) Ltd. (199) 236 ITR 518 (SC) wherein it has held that the obtaining by the assessee of a benefit by virtue of remission or cessation is sine qua non for the application of this section. The mere fact that the assessee has made an entry of transfer in his accounts unilaterally will not enable the Department to say that section 41(1) would apply “mere making of an entry in the books of the debtor unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end”. The ratio laid down by the Hon’ble Supreme Court is squarely applicable to the facts of the present case. We even observe that the assessee’s case even stands on better footing as in case of cessation the assessee has shown the liability as payable. Similar ratio laid down in cases of CCIT vs. Kesaria Ta Co. Ltd. (2002) 254 ITR 434 (SC) and PCIT vs. Soorjamull Nagarmull (2023) 457 ITR 470 (Cal.). Therefore, we are inclined to set-aside the order of ld. CIT(A) and direct the AO to delete the addition. Accordingly, Ground Nos.1 to 5 are allowed.
6. The Ground Nos.6 and 7 are against the order of ld. CIT(A) confirming the addition of Rs. 4,46,66,510/- as made by the AO on account of outstanding genuine sundry creditors when the said creditors failed to make any compliance to notices issued u/s 131/133(6) of the Act.
7. The facts of the case in brief are that during the assessment proceedings, the AO observed that there are some domestic corporate entities, namely, M/s Bahar Commodeal Ltd., M/s Glory Tradein Pvt. Ltd. and M/s Murlidhar Vincom Pvt. Ltd. which have already been identified as shell/jamakharchi companies for the reason that they are managed and controlled by Uday Shakar Mahawar and Devesh Upadhyay. The companies have no real business at all and all are exclusively involved in providing accommodation entries in the guise of unsecured loan/advance, share capital premium, bogus billing etc. in lieu of commission. Accordingly, the AO in order to verify the genuineness and creditworthiness of such liabilities as shown in the books of account against these three companies, issued notices u/s 131 of the Act for personal appearance, which were not complied with. Needless to mention, the assessee furnished all the details and evidences qua the sundry creditors before the AO, however, the AO was of the view that filing of evidences such as confirmations, bank statements, KYC forms cannot make sham transactions as genuine and treated the same as bogus sundry creditors on the ground that these are paper/shell companies and added the same to the income of the assessee.
8. In the appellant proceedings, the ld. CIT(A) again dismissed the appeal of the assessee on this issue by observing and held as under:
“Both additions made by assessing officer are based on factual investigations, corroborated with independent data from FTTR, ITO, and summons proceedings. The assessee has failed to substantiate the continuity, enforceability, and genuineness of liabilities. The additions are not based on suspicion alone but on verifiable facts, including field-level reports and shown statements.”
9. After hearing the rival submissions and perusing the materials available on record, we find that the amounts payable to three parties are coming earlier years. We note that AO on the basis of investigation report that these are paper companies and have no existence or no real business, treated the same as bogus creditors for the reason summon issued u/s 131 of the Act were not complied by these companies and thus remained unresponded. We note that ld. CIT(A) has confirmed the order of AO on the ground that the factual investigation was carried out by Investigation Wing. We note that the ld. CIT(A) just dismissed the appeal of the assessee by passing three lines of order without commenting the evidences filed by assessee. In our opinion, the sundry creditors cannot be added as bogus for the reasons that the summons/letters u/s 133(6) were not responded. The assessee continued to recognize these liabilities in its books of account as live and subsisting, therefore, we are not in agreement with the decision of ld. CIT(A). We note that in A.Y. 2012-13, the AO added the sundry creditors to the tune of ₹21,48,833,787 u/s 41(1) of the Act. Thereafter, the PCIT invoked the revisionary jurisdiction u/s 263 and revised the said assessment by setting aside the same by the AO and the AO in the set aside proceeding in the consequential order passed u/s 263/143(3) dated 17.05.2017 reversed the said amounts which were added u/s 41(1) of the Act in the original assessment proceedings. In other words, the said creditors written back and added to the income u/s 41(1) were again reversed in the consequential order. We further note that the two sundry creditors M/s Gloery Tradevin Pvt. Ltd. and M/s Murlidhar Wincom Pvt. Ltd. were fully paid whereas the creditor M/S Bahar Commodeal Pvt. Ltd. was paid partly based on documents in the form of bank statement and copies of ledgers accounts submitted by the assessee in form of paper book in the subsequent years. Therefore, the action of AO in invoking provisions of section 41(1) of the Act is wrong and so is the appellate order sustaining the assessment order on this issue. The case of the assessee is squarely covered by the decision of Hon’ble Supreme Court in case of CIT vs. Orissa Corporation (P.) Ltd., (1986) 159 ITR 78 (SC), where the Apex Court held that where the assessee has furnished all details and evidences before the AO and ld. CIT(A), the authorities below without having carried out any enquiry or investigation or failing to pin-point any defects into the evidences furnished by assessee then addition cannot be made u/s 68 of the Act merely on the ground that summons u/s 131 of the Act or enquiry letter issued u/s 133(6) of the Act were not complied with. Similarly, the issue is squarely covered by a series of decisions of the Hon’ble Supreme Court and High Courts in cases including the decisions as relied by us while deciding the ground no.5 (supra). In view of the above facts and circumstances of the case and respectfully following the ratio laid down by the decisions cited supra, we set-aside the order of ld. CIT(A) and direct the AO to delete the addition. Accordingly, Ground No.6 and 7 are allowed.
10. In the result, the appeal of the assessee is allowed.
The order is pronounced in the open Court on 17/07/2026.
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