Devisha Infrastructure Pvt. Ltd. Vs ITO (ITAT Mumbai)
Section 41(1) Can’t Be Invoked Merely Because Creditor Writes Off Liability; Capitalised Expenses Need Verification: ITAT Mumbai Grants Major Relief
Mumbai ITAT granted substantial relief to the Assessee, a real-estate developer, by deleting a major addition u/s 41(1) and remanding the expenditure issue for limited verification.
AY 2019-20 – Section 41(1) (₹10.23 Cr):
The AO treated an outstanding balance of ₹10.23 crore payable to M/s Blue Circle Infratech as cessation of liability u/s 41(1), solely because the creditor had written off the amount as bad debt in its own books. The Tribunal held that cessation of liability cannot be inferred merely from unilateral write-off by the creditor, especially when:
- the Assessee continued to reflect the amount as payable in its books;
- civil litigation and winding-up proceedings were pending between the parties;
- the Bombay High Court had observed that the Assessee was not commercially insolvent; and
- further payments of ₹3 crore had already been made by the Assessee.
Relying on CIT vs. Shri Vardhman Overseas Ltd. (Delhi HC), the ITAT held that neither remission nor cessation was established, and therefore, conditions of section 41(1) were not satisfied. The entire addition of ₹10.23 crore was deleted.
AY 2017-18 – “Other Expenses” (₹85.99 lakh):
The AO disallowed expenses on the ground that supporting documents were not furnished, despite the fact that the Assessee had capitalised the entire expenditure into work-in-progress, as there was no revenue during the year. The Tribunal noted that the AO had granted unduly short time for compliance and failed to verify the documentary evidence already on record. The CIT(A) also proceeded on an incorrect factual assumption that the expenses were claimed in the P&L account.
In the interest of justice, the ITAT restored this issue to the AO for limited verification, with a direction to grant reasonable opportunity and examine whether the expenditure was duly capitalised.
Accordingly, the appeal for AY 2019-20 was allowed in full, and the appeal for AY 2017-18 was allowed for statistical purposes, reinforcing that section 41(1) cannot be triggered on assumptions and that capitalised expenses require proper factual verification.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These two appeals of the assessee werefiled against the order of the National Faceless Appeal Centre(NFAC), Delhi [hereinafter, ‘Ld.CIT(A)] passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’) for the Assessment Years 2017-18 & 2019-20, date of order 21/08/2025. The impugned orders emanated from the order of the Learned Income-tax Officer, Ward-6(2)(2), Mumbai(in short, ‘Ld.AO’) for A.Y. 2017-18, under section 143(3) of the Act, date of order 30/12/2019 and order passed by Assessment Unit, Income-tax Department passed u/s 147 r.w.s. 144B of the Act, date of order 15/02/2024 for A.Y. 2019-20.
