Action Gold Vs DCIT (ITAT Mumbai)
In this case before the Income Tax Appellate Tribunal Mumbai, the assessee challenged the addition made under Section 41(1) of the Income Tax Act, 1961 on account of alleged cessation of liability relating to two sundry creditors. The assessee had declared income for Assessment Year 2022–23 and during scrutiny proceedings, the Assessing Officer identified outstanding balances of ₹28,69,575 in respect of two creditors. The assessee explained that these liabilities arose from disputes relating to jewellery manufacturing contracts, where finished goods were not accepted due to issues such as variation in purity, and therefore the amounts remained outstanding pending resolution.
The Assessing Officer observed that the assessee failed to provide confirmations or adequate supporting evidence to establish the continued existence of these liabilities. Considering that the amounts remained unpaid for a prolonged period, the Assessing Officer invoked Section 41(1) and treated the outstanding liabilities as ceased, adding the amount to the assessee’s income.
On appeal, the Commissioner (Appeals) upheld the addition, noting that the assessee failed to furnish corroborative evidence such as confirmations from creditors, GST records, or independent verification of settlement. Although the assessee claimed that the liabilities were later settled through adjustment against sale of ornaments, the appellate authority found the evidence to be self-serving and insufficient. It also observed that the liabilities had remained outstanding for several years, and in the absence of clear evidence, the provisions of Section 41(1) were rightly applied.
