No Sec 41(1) Addition for Non-Response from Creditors if Payments Made Later

Saket Agarwal Vs ITO (ITAT Jaipur)

In the case of Saket Agarwal vs. Income Tax Officer (ITO), the Income Tax Appellate Tribunal (ITAT) Jaipur deliberated on the Rs. 3.17 crore addition made by the Assessing Officer (AO) on account of unproved creditors. This case provides an insightful example of the application of Section 41(1) of the Income Tax Act, 1961, particularly in the context of trade liabilities and the conditions under which such liabilities are treated as income.

Case Background

Saket Agarwal, the proprietor of M/s. Saket Gems, was involved in the business of trading precious and semi-precious stones. In the relevant assessment year, Agarwal declared a total income of Rs. 5,12,690 after claiming a deduction under Chapter VIA. However, during the scrutiny proceedings, the Assessing Officer raised concerns regarding the sundry creditors shown in the balance sheet, amounting to Rs. 4.76 crore, which exceeded the total turnover of Rs. 2.87 crore.

The AO found the high proportion of sundry creditors unusual and sought verification of these creditors. Notices under Section 133(6) of the Income Tax Act were sent to several creditors, asking for details like copies of Income Tax Returns, ledgers, and bank statements. Some of these notices were returned by the postal authorities with the remarks “Not Known” or “No Firm in This Name,” while others went unanswered.

AO’s Observations and Addition

The AO observed that, in business practice, sundry creditors for goods should not remain outstanding for long durations, typically not exceeding two to three months. The significant amount of outstanding creditors raised suspicion, and the AO doubted the genuineness of the creditors. The lack of response from many creditors further compounded the issue.

After issuing a show-cause notice, the AO concluded that Saket Agarwal had failed to prove the identity, creditworthiness, and genuineness of many of the sundry creditors. As a result, the AO made an addition of Rs. 3.17 crore under Section 41(1) of the Income Tax Act, considering the unproved creditors as income due to the cessation of liability.

Assessee’s Contention

Saket Agarwal challenged the findings of the AO, arguing that the authorities did not adequately consider the evidence provided, including confirmations, invoices, and payment details. The assessee claimed that some payments were made via account payee cheques and that the transactions were genuine. Agarwal also pointed out that the AO had not rejected the books of accounts, which reflected both purchases and sales made during the year. Additionally, the assessee emphasized that most of the liabilities were settled in subsequent years.

CIT(A)’s Decision

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the addition made by the AO. The CIT(A) noted that the assessee failed to provide current addresses for the creditors when requested. The argument that the liabilities existed in the balance sheet and were paid off later was not enough to satisfy the CIT(A) regarding the genuineness of the creditors.

ITAT Jaipur’s Ruling

The matter was brought before the ITAT Jaipur, where the assessee reiterated the same arguments. Agarwal’s representative presented a chart showing regular transactions of purchase and payment for most of the creditors. The representative also pointed out that the AO did not dispute the sales made based on the purchases, nor did the AO reject the audited books of accounts.

The primary issue before the ITAT was whether the AO was justified in invoking Section 41(1) of the Income Tax Act to treat the outstanding liabilities as income.

Section 41(1) of the Income Tax Act

Section 41(1) deals with situations where a deduction for a trading liability has been allowed in previous years, and the liability ceases or is remitted in the current year. In such cases, the remission or cessation of the liability is treated as income of the current year. However, for Section 41(1) to apply, there must be evidence of remission or cessation of the liability.

The ITAT referred to the Rajasthan High Court decision in the case of CIT vs. Narendra Mohan Mathur, which held that merely because creditors do not respond or appear before the tax authorities, it does not automatically mean that the liability has ceased. The burden lies on the AO to prove that the liability has ceased to exist.

ITAT’s Conclusion

The ITAT held that the AO had failed to establish that there was a remission or cessation of liability as required under Section 41(1). The mere non-compliance of creditors to the notices issued under Section 133(6) was not sufficient to conclude that the liabilities had ceased to exist. Additionally, since the payments for many creditors were made in subsequent years and were recorded in the books of accounts, the liabilities could not be deemed to have ceased.

Thus, the ITAT ruled in favor of the assessee and deleted the addition of Rs. 3.17 crore made by the AO under Section 41(1).

Conclusion

The case of Saket Agarwal vs. ITO highlights the importance of proper documentation and evidence in proving the genuineness of trade liabilities. It also underscores the requirement for the Assessing Officer to provide concrete evidence of cessation of liability before invoking Section 41(1) of the Income Tax Act. While non-response from creditors may raise suspicion, it cannot be the sole basis for making an addition under this provision.

Assessee was represented by Sh. Sidharth Ranka, Adv.

FULL TEXT OF THE ORDER OF ITAT JAIPUR

Because the assessee is aggrieved by the order of the, Ld. CIT(A), National Faceless Appeal Centre, Delhi [for short “CIT(A)/NFAC”] passed on 14.03.2024 for the assessment year 2014-15 the present appeal is filed. That order of the ld. CIT(A) in turn arise because the assessee has challenged the assessment order passed on 28.12.2016 u/s. 143(3) of the Income Tax Act,1961 [ for short “Act” ] by the ITO, Ward-2(3), Jaipur.

2. The assessee has marched the present appeal on the following grounds: –

“1. The learned A.O. and CIT(A) has erred in making addition of Rs.3,17,55,786 on account of unproved sundry creditors u/s 41(1) of the I.T. Act, 1961 without appreciating the facts of the case in right perspective and ignoring the fact that the appellant had presented all the possible and relevant documentary evidences, like confirmations and original invoices, before the learned AO to prove the genuineness of the transactions entered into. Moreover, the appellant had made all the payments through account payee cheques, which further proves the identity and genuineness of the creditors appearing in the books. The intractability of some of the parties should not be charged upon the appellant as all the parties were in existence at the time of transaction and the over dues of most of the parties were settled in the ensuing financial years. While making such addition the ld. AO and CIT(A) had ignored such irrefutable documentary evidences and facts. Thus the addition so made is bad in law.

2. On the facts and in the circumstances of the case the learned A.O. and CIT(A) has legally and factually erred in issuing penalty notice u/s 271(1)(c) of the Act in a mechanical manner as the appellant did not furnish any inaccurate particulars of income.

3. The appellant craves the right to add, amend and alter the grounds on or before the hearing.

3. The fact as culled out from the record is that the assessee has filed his e-return of Income for the Assessment Year 2014-15 declaring total income of Rs. 5,12,690/- on 11.12.2014. The case was selected for Scrutiny under the Computer Aided Selection of Scrutiny [ CASS]. Accordingly, notice U/s. 143(2) issued on 01.09.2015 fixing the case for hearing on 16.09.2015 which was duly served upon the assessee. The assessee is engaged in business of purchase and sale of Precious and Semi precious stones and carrying out his business activities in the name and style of M/s. Saket Gems. The assessee has declared business income of Rs.6,20,094/- thereafter claiming deduction under Chapter VIA of Rs. 1,07,406/- declared total Income of Rs.5,12,690/-.

3.1 During assessment proceeding, the ld. AO noted that the assessee has shown sundry creditors of Rs. 4,76,48,248/- against the turnover of Rs. 2,87,60,719/- implying that the sundry creditors are more than the turnover, in any business the waiting time for payment cannot be much long for sundry creditors. From the above it is seen that the assessee has carry forwarded sundry credits of previous year. As per normal business norms sundry creditors for goods are never outstanding for more than 2-3 months depending on the trade, hence any point of time sundry credits should never be more than the entire purchases made during the year. As per common understanding sundry credits exists because the seller of the goods allows the purchaser certain period for payment of the goods, however, this time limit never goes more than a month or two. Since, the figure declared by the assessee in his balance sheet looked dubious, therefore, the issue is of deep concern. In the assessment proceeding assessee filed confirmation in some of the cases. To make cross verification of the information or to examine the issue, the assessee was asked to furnish complete name and address of the Sundry Creditors. As per address provided by the assessee, letters were issued to some of the Sundry creditors on test check basis with a request to supply, copy of ITR for A.Y.2014-15, Copy of ledger account in their books of account and copy of Bank Account for the F.Y. 2013-14 relevant to Assessment Year 2013-14. The said information was called for as per provision of section 133(6) of the I.T. Act, 1961.

However, in the 11 cases letters received back with the remarks of the postal authority “Not Known” or “no firm in this name” and in 6 cases no information could be received, even after service of the letters. Therefore, a show cause letter No.3095 dated 30.09.2016 was issued to the assessee asking him to file an explanation in this regard.

3.2      The show cause was duly served upon the assessee and he
was asked to prove the identity, creditworthiness of the Sundry Creditors and genuineness of the transaction on or before 05.10.2016, however, nothing has been received from the assessee in this regard. Therefore, notice u/s.142(1) was issued to the assessee giving reference to the show cause letter dated 30.09.2016 and made a request to furnish requisite information on or before 03.11.2016. Although, this time also the assessee failed to file any written submission or to furnish requisite information. Meanwhile, confirmation letters which were written in a cyclostyle manner were received from some of the Sundry Creditors through Regd. Post. The confirmation letters received through post in the following cases:

1. Sanmati Gems & Jewellery

2. Neelam Gems & Jewels

3. Pari Creations

4. Laxmi Enterprises

5. Gulmohar Creation

6  Shri Nath Gems

7. R. S. Jewellers

8. Anurodh Enterprises

9. Vardhman Enterprises

10. Harsha Impex

11. Mega Exports

12. Neensar Gems & Jewels

13. Natural Gems

3.3 After considering the written submission filed by the assessee, the ld. AO also made filed inquires and in 9 case he hold that the firm does not exists at the given address. Thus, ld. AO informed that in case of not proving the identity, creditworthiness and genuineness of the Sundry Creditors, the inference can be drawn that these parties have not supplied any goods to you and inflated expenditure has been declared by showing higher purchase price through fictitious invoices in the name of the parties mentioned in the letter.

3.4 In response to the Final Show cause notice the A/R of the assessee filed written submission on 23rd Dec., 2016. The assessee contended that the address taken from purchase bills has been supplied, further, during the year in some of the cases the amount has been paid through the bank account and the payments have been made through Account Payee Cheque. In order to confront the situation has taken pretext that the purchase are made through broker who submitted the purchase bill of the goods to the assessee. Thus, Ld. AR tried to examine following parties for purchase made by the assessee:-

1	M/s Akrati Gems & Jewels	Rs. 6,55,860/-
2	M/s Akrati Gems & Jewels	Rs. 5,35,930/-
3	M/s Anurodh Enterprises	Rs. 11,24,100/-
4	M/s Pari Creations	Rs. 19,93,793/-
5	M/s Neelam Gems & Jewels	Rs. 23,47,959/-
6	M/s Beensar Gems & Jewels	Rs. 17,35,510/-
7	M/s Gulmohar Gems & Jewels	Rs. 20,22,071/-
8	M/s Mega Exports	Rs. 16,01,562/-
9	M/s R.S. Jewellers	Rs. 5,71,298/-
10	M/s Shree Abhushan	Rs. 18,93,793/-
11	M/s Alankar Jewellers	Rs. 7,00,000/-
12	M/s Snmati Gems & Jewels	Rs. 10,75,500/-
13	M/s Shree Nath Gems	Rs. 39,90,040/-
14	M/s Laxmi Enterprises	Rs. 38,30,745/-
15	M/s Harsh Impex	Rs. 13,48,300/-
16	M/s natural Gems	Rs. 28,72,714/-
17	M/s Vardhman Enterprises	Rs. 34,56,611/-
	Total	Rs.3,17,55,786/-

3.5    The Ld. AO made addition of all the sundry creditors as listed herein above in the hands of the assessee on the reason that notices issued u/s 133(6) of the act and summons u/s 131 were issued but were not served to these parties. Since, the assessee could not proof these credits in the books of account in the name of the above parties the addition was made for an amount of Rs. 3,17,55,786/- as per provisions of section 41(1) of the Act holding it to be cession of liability in the form of sundry creditor. While doing so the ld. AO relied upon the decision of our high court in the case of Bright Future Gems.

4. Aggrieved, from the said order of assessment, assessee has filed an appeal before the ld. CIT(A). The ld. CIT(A) after hearing the contention of the assessee dismissed the appeal of the assessee by giving following findings on the issue:-

“5.0 Decision and Reason.

The statement of fact, grounds of appeal and the order appealed against have been perused.

5.1.1. Vide the first ground of appeal the appellant has challenged the addition of Rs.3,17,55,786/- on account of cessation of liability u/s.41(1) of the Income Tax Act on account of un-proved sundry creditors.

5.1.2. In the instant case, the appellant had shown sundry creditors of Rs.4,76,48,248/- against sales of Rs.2,87,60,719/- Finding, the amount of sundry creditors as abnormal in comparison to the turn-over, the Assessing Officer examined the genuineness of the creditors. During the assessment proceedings, the A.O. held seventeen creditors with credit balances of Rs.3,17,55,786/- as not-verified as notices issued u/s.133(6) and summons issued u/s.131 of Income Tax Act could not be served on these creditors as these creditors could not be found at the given addresses.

5.1.3. The Assessing Officer also observed that only undated confirmation letters were furnished and the appellant had failed to produce any of the creditors.

5.1.4. In respect of assessee’s contention that payments to these parties were made through cheques the Assessing Officer has placed his reliance of the judgement of Hon’ble Kolkata High Court in the case of CIT -v- Precision Finance Pvt. Ltd., 208ITR 465 (Cal) in which the Hon’ble High Court has held that the payment made by account payee cheques would not make it sacrosanct.

5.1.5. Further we want to say that appellant filed copies of purchase bills of all parties along with confirmation of all creditors to A.O along with in which their name address and PAN was given. We enclose copy of confirmation of creditors which we already submitted before AO during assessment proceedings. During the appellate proceedings, the appellant has contended that the creditors outstanding on 31.03.2014 whose liability have been added u/s. 41(1) of Income Tax At have been paid in subsequent years through banking channels. In support of his contentions the appellant has submitted the ledger copies of the creditors for subsequent years and copy of bank statements.

5.1.6. Further, the appellant has placed his reliance on the judgement of Hon’ble ITAT, Mumbai in case of Sri Madan Mohan -v- ITO (2010) 83 taxman.com 338 (Mumbai-Trib.). The appellant has also placed in reliance on various case laws which are mentioned in the submission part of the appellant order.

5.1.7. The submissions of the appellant and order appealed against have been perused.

5.1.8. In the instant case, the A.O. had sent notices u/s.133(6) and summons u/s.131(1) to the creditors, but these notices and summons could not be served as these creditors were not available on the given addresses. During the assessment proceedings the appellant was asked to produce these creditors but the assessee could not produce any of the creditors.

5.1.9. The Assessing Officer had also raised serious doubt on the confirmations submitted by appellant as these confirmations were undated.

5.1.10. During the appellate proceedings, the appellant was asked to provide current and correct addresses of the creditors. The appellant was also asked to provide current confirmations of the creditors.

5.1.11. However, the appellant expressed inability to provide current and correct addresses of the creditors as well as current confirmations of the creditors. The relevant parts of the submission of the appellant are summarized as under:-

“1. Current and correct address of the credits remained outstanding as on 31.03.2014.

In this regard we want to say that despite exhaustive efforts to obtain this information, we regret to inform you that appellant is unable to secure the current and accurate addresses of the creditors which outstanding as on 31.03.2024, however as on date there is no outstanding creditors, statement of creditors as on 31.03.2014 enclosed which clear that appellant paid all the creditors through banking channel which in due time. We again said that as on today there is no outstanding creditors which were outstanding on 31.03.2014. The passage of time since 2014 has posed significant challenges in locating and confirming these details. Many of the creditors have undergone changes in address, and in some cases, they may no longer be in operation or have updated contact information. Appellant made diligent attempts through various channels to gather the required information, including direct communication and investigative methods, but unable to locate them as on today. Due to heavy losses appellant closed jewellery business in this firm.

2. Purchase and sales register for the F.Y.2013-14. As required by your honor, we are enclosing copy of purchase and sales register of the appellant for the F.Y. 2013-14.”

5.1.12. Further, the appellant has filed few letters purportedly written by the creditors to the Assessing Officer in response to notice u/s. 133(6) of the Income Tax Act issued during the assessment proceedings.

From the perusal of the letters following points emerged: –

1. The letter purportedly written by the creditors to the Assessing Officer are being submitted by the appellant for whom the appellant has himself stated that he cannot contact them and cannot give their current confirmations. Further, the Assessing Officer has mentioned in the assessment order that notice u/s.133(6) of the IT Act could not be served to the creditors.

2. The letters do not mentioned the date of notice u/s. 133(6) of the IT Act.

3. All the letters have same dated 20.10.2016.

4. None of the letters have been contact number or e-mail addresses.

5. The style of writing, font and contents of the letter are almost identical (except figures).

6. None of the letter has the details of persons who have signed these letters.

5.1.13. In view of the above, it is held that the letters submitted by the appellant as confirmations are not reliable.

5.1.14. In view of the above, it is held that both during the assessment proceedings as well as during appellate proceedings, the appellant has failed to establish that these creditors are genuine. The failure on the part of appellant to provide the basic details like correct address, current confirmations and submissions of non-genuine letters as confirmation establishes that the credit balances on 31.03.2014 in the name of non-existent or non-verifiable creditors are not genuine liability.

5.1.15. The contention of the appellant that payments have been made through banking channels are adequately answered by the Assessing Officer. Further, reliance is placed on the issue of payments by cheque does not establish genuineness of the transaction, on following judgments.

1. CIT-v-Raipur Builder & Developers (2013) 350 ITR 407 (Del.)

2. Sh. Nemichand Kothare -v- CIT (2003) 264 ITR-254 (Gau).

5.1.16. It is also relevant that the appellant had failed to provide even the basic information like the permanent Account Number which could have helped the Assessing Officer to verify the persons whose correct addresses were not provided by the appellant. The addresses provided by the appellant were found incorrect.

5.1.17. Further, the case laws relied upon by the appellant are distinguishable to the extent that in the instant case, the appellant has failed to establish the genuineness of the creditors both during the appellant proceedings as well as during the Assessment Proceedings. Subsequent payments in case of non- existent creditors, will not help the cause of the appellant as the appellant himself failed to provide any credible information regarding existence of the 17 creditors, and as on balance sheet date, the appellant could not provide genuineness of creditors.

5.1.18. In view of the above and on account of failure on the part of appellant regarding evidences in respect of genuineness of creditors, it is held that there was no real liability as on 31.03.2014, in respect of seventeen creditors.

5.1.19. Therefore, the disallowance of Rs.3,17,55,786/- u/s.41(1) of the Income Tax Act on account of cessation of liability against non-genuine creditors are hereby confirmed.

5.1.20. Thus, first ground of appeal is dismissed.

6.1. The second ground of appeal in respect of initiation of penalty is premature and liable to be dismissed. This second ground of appeal is dismissed.

6.2. The third ground of appeal is general in nature. Therefore, it needs no separate adjudication.

7.0. The appeal of the appellant is dismissed.”

5. As the appeal of the assessee dismissed by the ld. CIT(A) the assessee preferred the present appeal before us on the grounds as reiterated in para 2 above. In support of the grounds so raised ld. AR of the assessee has relied upon the following written submission: –

• “The assessee appellant is engaged in the trading &export of precious and semi-precious stones in the name of his sole proprietorship firm M/s. Saket Gems. The assessee appellant maintains books of accounts including Cash book, Journal, Ledger, Stock Register, Vouchers, and bills. These accounts were subjected to thorough scrutiny and audit by a qualified firm of chartered accountants in compliance with section 44AB of the Act. The auditors provided a clean report after examining the books of accounts and other records, without making any qualifications in their report. The assessee appellant filed the return of income for the A.Y. 2014-15 on 11.12.2014 declaring therein Total Income of Rs. 5,12,690/-.
• The case was selected for scrutiny assessment and a notice u/s. 143(2) of the Act was issued on 01.09.2015. Subsequently, notices u/s. 142(1) of the Act was issued from time to time to which replies were filed by the assessee appellant from time to time.
• The assessee appellant submitted a detailed list of outstanding creditors as at 31.03.2014 along with their outstanding balances, purchase bills, accounts confirmation with PAN, bank statements, stock details and ledger accounts of the parties. Despite the comprehensive evidence and submissions furnished, the ld. Assessing Officer made an addition of Rs. 3,17,55,786/- u/s. 41(1) of the Act, alleging the cessation of liability in the form of sundry creditors vide his assessment order dated 28.12.2016.
• Aggrieved by the assessment order, the assessee appellant filed an appeal before the Ld. CIT(A), who upheld the additions made by the ld. Assessing Officer vide its order dated 14.03.2024.

Ground of Appeal No.1: Addition of Rs. 3,17,55,786/- u/s. 41(1) of the  Act

1. That for ready reference, section 41(1) of the Act is reproduced as hereunder:

Profits chargeable to tax.

41.(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading  liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,–

(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or

(b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year.

Explanation 1.-For the purposes of this sub-section, the expression “loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof” shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his  accounts.

Explanation 2.–For the purposes of this sub-section, “successor in business” means,-

(i) where there has been an amalgamation of a company with another company, the amalgamated company;

(ii) where the first-mentioned person is succeeded by any other person in that business or profession, the other person;

(iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm;

(iv) where there has been a demerger, the resulting company.

2. That the assessee appellant in order to carry out his business, purchases goods which are in the nature of precious and semi-precious stones from various suppliers. The assessee appellant has made payments to the said parties from time to time. The assessee appellant after purchasing the goods from the traders has subsequently exported the said goods. There are NO local sales. All the export sales were cleared by customs authorities at India and also the port of Import and verified by government authorities. The legitimacy of the sales was established and has not been doubted by the ld. Lower authorities. In order to export the goods, it was essential for the assessee appellant to have made purchases in order to carry out the sales. The assessee appellant had submitted amongst following documents:

• List of Creditors as at 31.03.2014
• Copy of Purchase Bills
• Confirmation of Account with PAN
• Bank Statement of the assessee appellant
• Stock Details
• Ledger Account of the parties

3. That the ld. Assessing Officer has made the addition on the sole ground that no goods were purchased from the creditors and that they were merely engaged in providing accommodation entries. That the ld. Assessing Officer has made the addition of even the purchases made during the year under consideration. That the ld. Assessing Officer has not rejected the trading results of the assessee appellant and has accepted the same. It is important to note that in any business transaction, there cannot be any sale without corresponding purchases, as the accounting is complete only when both sides of the transaction are taken into account. It is evident from the books of account of the assessee appellant that exports amounting to Rs. 2,62,66,645/- were made during the assessment year under consideration and this fact has not been disputed by the ld. Lower authorities.

4. That for ready reference, a comprehensive chart of party wise transaction from A.Y. 2012-13 to A.Y. 2018-19 is as under:-

SNO.	PARTICULARS	ASSESSMENT YEAR 2012-13				ASSESSMENT YEAR 2013-14
		OPEN ING BALA NCE	PURCH ASES	PAY MENT	CLOS  ING BALA NCE	OPEN ING BALA NCE	PURCH ASES	PAYM ENT	CLOS ING BAL ANCE
1	AKRATI GEMS & JEWELS	0	0	0	0	0	403873	0	403873
2	SHREE ABHUSHAN	0	1774772	0	1774772	1774772	470499	0	2245271
3	SHRINATH GEMS	0	1970585	0	1970585	1970585	1673615	0	3644200
4	VARDHAMAN ENTERPRISES	0	1523440	0	1523440	1523440	199200	0	1722640
5	AROHI GEMS & JEWELLERY	0	0	0	0	0	0	0	0
6	ANURODH ENTERPRISES	0	0	0	0	0	0	0	0
7	PARI CREATION	0	0	0	0	0	483638	0	483638
8	NEELAM GEMS & JEWELS	1100425	352227	1100425	352227	352227	220656	0	572883
9	BEENSAR GEMS & JEWELS	0	832737	0	832737	832737	211470	0	1044207
10	R.S.JEWELLERS	0	571298	0	571298	571298	0	0	571298
11	MEGHA EXPORTS	0	0	0	0	0	0	0	0
12	GULMOHAR CREATION	0	0	0	0	0	796871	0	796871
13	HARSHA IMPEX	0	0	0	0	0	1112850	0	1112850
14	LAXMI ENTERPRISES	0	1885494	0	1885494	1885494	1431001	0	3316495
15	SANMATI GEMS &JEWELLERS	0	0	0	0	0	0	0	0
16	NATURAL GEMS	0	1000567	0	1000567	1000567	149050	0	1149617
17	ALANKER JEWELLERS	0	1312546	0	1312546	1312546	408305	0	1720851
TOTAL		1100425	11223666	1100425	11223666	11223666	7561028	0	18784694

–

ASSESSMENT YEAR 2014-15				ASSESSMENT YEAR 2015-16				ASSESSMENT YEAR 2016-17
OPE   NING BALA  NCE	PURC HASES	PAYM ENT	CLO SING BAL ANCE	OPE NING BALA NCE	PURCH ASES	PAY MENT	CLO SING BALA NCE	OPEN ING BAL ANCE	PURC HASES	PAY MENT	CLO SING BAL ANCE
403873	655860	403873	655860	655860	969668	0	1625528	1625528	77580	0	1703108
2245271	283268	1850000	678539	678539	673096	0	1351635	1351635	101038	0	1452673
3644200	1095840	750000	3990040	3990040	452041	0	4442081	4442081	0	0	4442081
1722640	1983971	250000	3456611	3456611	1411844	0	4868455	4868455	0	1000000	3868455
0	535930	0	535930	535930	679678	0	1215608	1215608	154475	0	1370083
0	1124100	0	1124100	1124100	952500	0	2076600	2076600	0	0	2076600
483638	1410155	0	1893793	1893793	0	483638	1410155	1410155	0	0	1410155
572883	1775076	0	2347959	2347959	0	0	2347959	2347959	342461	0	2690420
1044207	1341303	650000	1735510	1735510	0	400000	1335510	1335510	907612	0	2243122
571298	0	0	571298	571298	0	571298	0	0	0	0	0
0	1601562	0	1601562	1601562	0	0	1601562	1601562	211545	0	1813107
796871	1543200	318000	2022071	2022071	997020	796871	2222220	2222220	0	0	2222220
1112850	235450	0	1348300	1348300	1283625	0	2631925	2631925	0	0	2631925
3316495	2264250	1750000	3830745	3830745	876055	0	4706800	4706800	0	600000	4106800
0	1075500	0	1075500	1075500	887695	0	1963195	1963195	0	0	1963195
1149617	1723097	0	2872714	2872714	0	0	2872714	2872714	435402	2872714	435402
1720851	700000	2220851	200000                 200000		0	0	200000	200000	0	0	200000
18784694	19348562	8192724	29940532         29940532		9183222	2251807	36871947	36871947	2230113	4472714	34629346

5. That the ld. Assessing Officer has wrongly recorded certain closing balances as per following chart:

Name of the Creditor	Closing Balance as per Assessment Order	Closing Balance as per Assessee’s Books
Pari Creations	19,93,793	18,93,793
Shree Abhushanam	18,93,793	6,78,539
Alankar Jewellers	7,00,000	2,00,000

6. That the ld. Assessing Officer has assumed and presumed cessation of trading liabilities on the part of the assessee appellant, however, the above chart shows that regular business transactions were carried out in the past and also in the year under consideration and in subsequent years and at the same time payment was made from time to time. All the payments are by way of account payee cheque. Thus the allegation of cessation of liability is devoid of any merits and is incorrect and false.

7. That it is settled law that in absence of sales being doubted, entire purchases cannot be disallowed. Reliance is placed upon:

• Hon’ble Bombay High Court in the case of PCIT v. Nitin Ramdeoji Lohia [2022] 145 taxmann.com 546hasheld that: Where  Assessing Officer made addition by disallowing expenses on purchases on ground that an information was received from sales tax department that assessee was beneficiary of accommodation entries on account of bogus purchases, since Assessing Officer had not disputed corresponding sales transactions, purchases also could not be bogus and, thus, impugned addition made on account of bogus purchases to be deleted.

• Hon’ble ITAT Delhi Bench in Bhartiya International Ltd. v. DCIT [2024 (1) TMI 157 – ITAT DELHI]has held that:AO in the final assessment order however continued to treat the purchases of fabric from STPL as bogus and refused the claim made under Section 37 of the Act.

We find that the additions made by the AO is not only erroneous but is also contrary to directions of DRP and settled legal position as held in Tejua Rohit Kumar Kapadia [2017 (10) TMI 729 – GUJARAT HIGH COURT]; CIT vs. JMD Computers and Communications P. Ltd. [2009 (1) TMI 855 – DELHI HIGH COURT]; Pr.CIT vs. Bansal Strips P. Ltd.[2021 (4) TMI 231 – DELHI HIGH COURT]and plethora of other judgments. Thus we find prima facie merit in the plea of the assessee.

While the AO has cast doubt on propriety of purchases of fabric made from Sun gold Trade P. Ltd. on the basis of assessment order passed in the hands of such supplier, the AO has accepted the corresponding sale transactions. The exclusion of purchases from the trading results is not permissible without corresponding exclusion of the sales in such trading activity for arriving at a fair and balanced view. The action of the AO patently offends the rudimentary principle of accounting. We accordingly direct the AO to reverse the additions made and restore the position taken by the assessee.

8. That in the instant case, it is crucial to emphasize that the trade creditors were duly recognized as liabilities in the balance sheet and the accounts confirmation &the fact that payments were made to them by account payee cheque serves as evidence that the liabilities & parties existed. Therefore, the impugned addition imposed by the ld. Assessing Officer exceeds the scope of jurisdiction outlined in section 41(1) of the Act. With the creditors’ confirmation on record, it would not be reasonable to claim that the liabilities no longer exist. It is incumbent upon the revenue to demonstrate, prior to applying section 41(1) for making additions or disallowing deductions, that the respondent’s liabilities towards these creditors have ceased in accordance with the law or have been formally waived by the creditors. In the instant case, the said factum is totally missing.

9. That the ld. Lower authorities failed to acknowledge and take into account the fact that the assessee appellant provided confirmation of accounts from the trade creditors in question. These creditors also directly sent confirmation letters to the ld. Assessing Officer, confirming the amounts payable by the appellant. Additionally, it was completely overlooked that all the creditors had been fully repaid as of 31.03.2018, which was evident from the bank statements submitted by the assessee appellant. The ld. Lower authorities did not identify any deficiencies in the documents submitted by the appellant. The only basis for the additions made by the ld. Lower authorities is the non-appearance of the creditors in response to the summons served under section 133(6) of the Act upon them. Mere non-appearance should not justify the aforementioned addition, as the creditors’ presence is beyond the assessee appellant’s control. Any default or failure on the part of the creditors cannot be attributed to the assessee appellant and should not be used to penalize the assessee appellant. The assessee appellant provided all available and within-control information and therefore, the case should be assessed based on the evidence the assessee appellant can provide, rather than being contingent upon the presence or absence of another party. The following judicial precedents are being relied upon to substantiate the case of the assessee appellant:

• Hon’ble Supreme Court in CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 102 Taxman 713 (SC)has held:

Section 41 contemplates that the obtaining by the assessee of an amount either in cash or in any other manner, whatsoever, or a benefit by way of remission or cessation and it should be of a particular amount obtained by him. Thus, 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 entry of transfer in his accounts unilaterally will not enable the department to say that section 41 would apply and the amount should be included in the total income of the assessee.

Just because an assessee made an entry in his books of account unilaterally, he cannot get rid of his liability. The question whether the liability is actually barred by limitation, is not a matter which could be decided by considering the assessee’s case alone but it is a matter which has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt was barred and had become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act. The principle that expiry of period of limitation prescribed under the Limitation Act cannot extinguish the debt but it will only prevent the creditor from enforcing the debt is well-settled.

Mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor would not enable the debtor to say that the liability had come to an end. Apart from that that would not by itself confer any benefit on the debtor as contemplated by the section. Therefore, the High Court was right in holding that the assessee’s unilateral entry in the accounts transferring the amount to the capital reserve account would not bring the matter within the scope of section 41.

Accordingly, the appeal was to be dismissed.

• Hon’ble Jurisdictional Rajasthan High Court in CIT v. Narendra Mohan Mathur [2013 (11) TMI 1707]has held:
• It is true that these liabilities were being shown in the books of accounts of the respondent-assessee from year to year and it was the claim of the respondent-assessee that these liabilities are payable to the persons from whom the goods were purchased earlier and are trade creditors. On perusal of the facts, it has not been proved by the assessing officer as to how the so-called liabilities ceased or crystallized during the previous year relevant to the assessment year under appeal. Merely because there was no response by the creditors it does not prove that the liabilities ceased during the assessment year 2002-03. Merely because the parties chose not to appear or did not respond or even did not come forward on the request of the respondent-assessee before the assessing officer, it does not prove that the trade creditors were not genuine and were not in existence so as to invoke provisions of section 41(1).

16. Section 41(1) requires that the onus is on the assessing officer to come to the conclusion that the liabilities ceased to exist or the assessee has obtained whether in cash or in any other manner whatsoever any amount in respect of such loss or expenditure, or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person. On the one hand, the assessee claims that the amount was payable and the assessee may be justified in saying so because one never knows when a creditor will come and raise the demand. May be, the creditor was justified that interest was being paid, so he did not turn up to take the principal amount. Therefore, it was for the assessing officer to come to a definite finding that the liability ceased to exist during the previous year relevant to the year under appeal which, in our view, has not been proved by the assessing officer.

17. The assessee, however, after a lapse of four years, when the parties did net turn up on his own, has written off the said amount of liabilities in its books of accounts and came to the opinion that the liabilities ceased to exist in the financial year 2005-06, relevant for the assessment year 2006-07 and offered the same to tax in the assessment year 2006-07. It is a finding of fact by the CIT(A) as well as by the Tribunal that in the case of Narendra Mohan Mathur, the assessee offered as deemed income under section 41(1) amounting to ₹ 55,77,779 and even paid total tax payment of ₹ 24,13,591 in the assessment year 2006-07. In the case of Smt. Rita Mathur, the assessee offered as deemed income under section 41(1) amounting to ₹ 94,08,970 (including interest) and even paid total tax payment of ₹ 38,87,002 in the assessment year 2006-07.

18. This factum has not been disputed by counsel for the Revenue also that such amount was not offered and that the tax thereon was not paid. Therefore, when the entire amount, as claimed by the assessing officer along with accrued interest, has been offered to tax, in the assessment year 2006-07, in our view, it could not have been taxed again in the year under appeal. The same cannot be taxed in two different years and the income has to be rightly taxed only in the year to which it pertains and in our view, both the appellate-authorities have come to a correct conclusion that the income, to be offered and shown, was the assessment year 2006-07 and not the assessment year 2002-03 i.e., the year under appeal. We also agree with the submission of counsel for the assessee that there is no loss to the Revenue whether to tax in this year or in assessment year 2006-07.

19. The Bombay High Court in the case of CIT v. Modest Maritime Services (P) Ltd. (2011) 338 ITR 64 (Bom), observed that the Tribunal, while deleting, held that there is no infirmity in the method followed by the assessee and moreover, the balance refund amount has been offered to tax in the subsequent assessment years which the Department has accepted and accordingly held that no question of law arises and accordingly did not entertain the appeal and dismissed the appeal as such.

20. The Punjab & Haryana High Court, in the case of CIT v. Smt. Sita Devi Juneja: (2010) 325 ITR 593 (P & H), held that merely because such liabilities are outstanding for the last six years, it cannot be presumed that the said liabilities have ceased to exist.

20.1. It is also a conceded position that there is no bilateral act of the assessee and the creditors, which indicates that the said liabilities have ceased to exist. In the absence of any bilateral act, the said liabilities could not have been treated to have ceased. Accordingly, it was held that no addition could be made by invoking provisions of section 41(1) of the Act. Same position exists in the present appeal though the liabilities may be outstanding for the last several years but it is the claim of the respondent-assessee, that they are payable and had it not been payable, the assessee would not have paid any interest and that too year after year. Therefore, the liabilities, in our view, certainly did not cease to exist in the year under appeal.

21. The Delhi High Court, in the case of CIT v. Rajasthan Golden Transport Co. (P.) Ltd. (2001) 249 ITR 723 (Del), held that if amount is received in the course of a trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessees own money because of limitation or by any other statutory or contractual right. When such a thing happens, common sense demands that the amount should be treated as income of the assessee and in the instant case, the assessee came to the conclusion and rightly so when the amount changed its character in the assessment year 2006-07 and not during the previous year relevant to the year under appeal.

22. The Delhi High Court, in the case of CIT v. Delhi Automobiles: (2005) 272 ITR 381 (Del), after referring to the judgment of the Hon’ble Apex Court in the case of CIT v. Sugauli Sugar Works (P.) Ltd. [reported at: (1999) 152 CTR (SC) 46–Ed.] and of Bombay High Court in the case of J.K. Chemicals Ltd. v. CIT (1966) 62 ITR 34 (Bom) has observed as under :

“The transfer of an entry is a unilateral act of the assessee, who is a debtor to its employees. We fail to see how a debtor, by his own unilateral act, can bring about the cessation or remission of his liability. Remission has to be granted by the creditor. It is not in dispute, and it indeed cannot be disputed, that it is not a case of remission of liability. Similarly, a unilateral act on the part of the debtor cannot bring about a cessation of his liability. The cessation of the liability may occur either by reason of the operation of law, i.e. on the liability becoming unenforceable at law by the creditor and the debtor declaring unequivocally his intention not to honour his liability when payment is demanded by the creditor, or a contract between the parties, or by discharge of the debt the debtor making payment thereof to his creditor. Transfer of an entry is neither an agreement between the parties nor payment of the liability.

This judgment has been quoted by the High Court in the present case and followed. We have no hesitation to say that the reasoning is correct and we agree with the same.”

23. The Hon’ble Apex Court, in the case of CIT v. T.V. Sundaram Iyengar & Sons Ltd. (1996) 222 ITR 344 (SC), held as under: “In the present case, the money was received by the assessee in the course of carrying on his business. Although it was treated as deposit and was capital in nature at the point of time it was received, by efflux of time the money has become the assessees own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its P & L a/c. There is no explanation from the assessee why the surplus money was taken to its P & L a/c even if. it was somebody else’s money. In fact, as Atkinson J. pointed out that what the assessee did was the common sense way of dealing with the amounts.”

24. In view of the above facts and circumstances, the amount having been already offered to tax in the year 2006-07 and it being a finding of fact, in our view, no substantial question of law arises for consideration by this Court.

25. Insofar as the issue of reopening of the assessment under section 147 r/w section 148 of the Income Tax Act is concerned, the same question is only academic in nature and remains academic as ultimately amount as found by the assessing officer has been taxed though in a subsequent year and therefore, is not required to be considered.

26. In view of the discussion made above, we do not find any illegality, infirmity or ambiguity in the orders impugned passed by the authorities below so as to call for interference of this Court. It is essentially a finding of fact and no substantial question of law can be said to arise.

27. Accordingly, both the appeals, being devoid of merits, are being dismissed and accordingly dismissed.

• Hon’ble Delhi High Court in PCIT v. Arvind Kumar Arora [2023] 156 taxmann.com 266 (Delhi) has held:

9. We have heard the learned counsel for the parties. In view of the fact that the entire basis of the AO for doubting the balance of Rs. 6,44,29,650/-was the order of the Commissioner, Central Excise & Customs, Meerut-II, and since the very said order has been set aside by the CESTAT and has become final, there can be no doubt that the finding of the AO that the purchases were bogus has no legs to stand on. The finding of the CIT(A) and ITAT that the said liability which was converted into an unsecured loan and subsequently stood repaid has not been challenged by the Revenue in the present appeal. Further, the reliance placed by the ITAT on the judgment of this Court in Shri Vardhman Overseas (supra) is also apposite wherein the Court held as follows:—

“20…If and when there is evidence in a particular later year to show that the liability has ceased or has been remitted, the same can be brought to tax as provided in section 41(1). In this manner the statute prescribes that a deduction for a trading liability allowed earlier can be brought to tax on the ground that the liability to pay the same has been remitted or ceased. “In the facts of the present case as well as noted above the unsecured loan had not been transferred to profit &loss account by the assessee and it was in fact repaid in the subsequent years.

10. The Revenue has also not challenged the findings of the CIT(A) that the two firms had been transacting for many years and had a running account which are fact findings. In light of concurrent findings of fact returned by ITAT and CIT(A), this Court, in view of the aforesaid facts, do not find that any substantial question of law arises in the present appeal and there is no infirmity in the order passed by the ITAT.

• Hon’ble Calcutta High Court in PCIT v. Soorajmul Nagarmull [2022] 145 com 245 (Calcutta) has held:

15. In the preceding paragraphs, we have noted the undisputed factual position which was rightly taken note of by the learned tribunal and in particular, noting that there is no dispute about the assessee to have been carrying forward the impugned liability in its books for a time span of almost three decades and the department did not raise any issue in all the intervening assessment years in question. The tribunal also noted that the assessing officer after the matter was remanded to him had issued summons to six directors of the concerned entities on test check basis, and four out of the six directors had appeared in response to the summons. The statements were recorded. The learned tribunal also notes that the creditors have given written reply in response to the summons reiterating their liability as also the fact that the assessee had settled some of the creditors even after 31-3­2001. Thus the assessee has fulfilled the duty cast upon them to provide evidence that the liability exist at the end of the year. The duty on the assessing officer is to prove that the liability has ceased to exist which in our considered view has been miserably failed to be established.

16. Thus, for all the above reasons, we find that the learned tribunal rightly declined to interfere with the orders passed by the CIT(A) by dismissing the appeal filed by the revenue.

• Hon’ble Gujarat High Court in PCIT v. Adani Agro (P.) Ltd. [2020] 118 com 307 (Gujarat)has held:

10. As per the aforesaid provisions of section 41(1) of the Act, 1961, there has to be remission or cessation oftrading liability. Merely because the liability has remained outstanding for more than three years and the sameis not written back in profit and loss account, application of provisions of section 41(1) of the Act, 1961cannot be made to consider such liability as income of the year under consideration without there being any remission or cessation of liability.

• Hon’ble Gujarat High Court in CIT v. Nitin S. Garg [2012] 22 com 59 (Guj.)has held:

15. In the case before us, it is not been established that the assessee has written off the outstanding liabilities in the books of account. The Appellate Tribunal is justified in taking the view that as assessee had continued to show the admitted amounts as liabilities in its balance sheet the same cannot be treated as assessment of liabilities. Merely because the liabilities are outstanding for last many years, it cannot be inferred that the said liabilities have seized to exist. The Appellate Tribunal has rightly observed that the Assessing Officer shall have to prove that the assessee has obtained the benefits in respect of such trading liabilities by way of remission or cessation thereof which is not the case before us. Merely because the assessee obtained benefit of reduction in the earlier years and balance is carried forward in the subsequent year, it would not prove that the trading liabilities of the assessee have become non existent.

16. Moreover, as pointed out in the case of Sugauli Sugar Works (P.) Ltd. (supra), vide the last five lines of the paragraph-6 of the judgement, the question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee’s case alone but has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act.

17. We, thus, find that the views taken by the Tribunal is absolutely consistent with the ones taken by the Supreme Court in the case of Sugauli Sugar Works (P.) Ltd. (supra) and other decisions which have been referred to in the judgment. We do not find any error much less an error of law in the judgment and order of the Tribunal.

18. In absence of any substantial question of law arising in these Appeals, all Appeals deserve to be dismissed and accordingly they are all dismissed. However, there shall be no order as to costs.

• Hon’ble Bombay High Court in PCIT v. Pukhraj S. Jain [2019 (1) TMI 1761]has held:

4. Itis well settled through series of judgments that merely because a debt has not been repaid for over three years, could         not         automatically         imply          cessation of liability. Exhaustion of period of limitation may prevent filing of recovery proceedings in a Court of law, never the lessit cannot be stated by itself that the liability torepay the amoun Thad ceased. Going by this logicit self, the Assessing Officer, in ourop inion, committedanerrorinvokingSection41(1) of the Act. Further the assessee had produced addition alevidenceonrec or be fore the Appellate Authority after following the procedure and pointed out that substantial portion of the debt was cleared in later assessment years.

5. We do not find any error in the decision of the Tribunal. The Income Tax Appeal is dismissed.

• Hon’ble Bombay High Court in CIT v. Chase Bright Steel [1989] 42 Taxman 146 (Bombay)has held:

In view of the decision of the Court in the case of J.K. Chemicals Ltd. v. CIT [1966] 62 ITR 34, it is well settled that the liability of an assessee does not cease merely because it has become barred by limitation. The liability ceases when it has become barred by limitation and the assessee has unequivocally expressed its intention not to honour the liability even when demanded. Essentially, therefore, it will always be a question of fact whether or not the assessee has expressed unequivocally his intention not to honour the liability after it has become barred by limitation. In a given set of facts, a finding either way may be possible.

In the instant case, the department had assumed that the assessee had no intention of honouring the liability on demand from the mere fact of the assessee’s writing off the liability and crediting the amount to the profit and loss appropriation account, but the Tribunal had held that the liability did not cease. Consequently, on the basis of facts found, it was not possible to interfere with the Tribunal’s conclusion that the amount in question was not taxable under section 41(1).

• Hon’ble Punjab & Haryana High Court in PCIT v. Eco Auto Components Private Limited [2019] 101 taxmann.com 216 (Punjab & Haryana) has held:

5. As regards question No.(ii), qua addition of Rs. 15,55,893/-made by the Assessing Officer on account of cessation of liabilities under Section 41(1) of the Act, relying upon the judgment of the Apex Court in CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 102 Taxman 713/236 ITR 518 (SC), it was held that merely by virtue of the fact that a debt becomes time barred, the right of the creditor will not come to an end nor the liability will cease and in these circumstances, Section 41(1) of the Act was not attracted. Thus, when the liability qua the amount which was still standing in the balance sheet of the assessee, which fact had not been disputed by the Assessing Officer, the same could not be said to have ceased. Thus, the Tribunal did not interfere with the findings recorded by the CIT (A) on this issue. The relevant findings recorded by the Tribunal on this issue read thus:—

’15.The A.O. made addition of Rs. 15,55,893/- under Section 41(1) on account of cessation of liability under Section 41(1) of the Act on the ground that the assessee had failed to prove that the liability subsists. Undisputedly, the liabilities to the tune of Rs. 15,55,893/- are still subsisting in the balance sheet of the assessee. Ld. A.R. by relying upon the judgment cited as CIT v. Sugauli Sugar Works Private Limited 236 ITR 518 (S.C.),CIT v. Shri Vardhman Overseas Limited 343 ITR 408, Mysore Agencies             PrivateLimitedv.CIT114       ITR 853, CIT v. Tamilnadu          Warehousing Corpn 292         ITR 310 and Ambica           Mills         Limitedv.CIT54ITR        167 (Guj.) contended that even unilateral entry in the accounts does not amount to cessation of liability. Hon’ble Apex Court in the judgment cited at Sugauli Sugar Works (supra) decided the issue in controversy and the operative part thereof is reproduced as under for ready reference.

“The principle that expiry of the period of limitation prescribed under the Limitations Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt, has been well settled. If that principle is applied, it is clear that mere entry in the books of account of the debtor made 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. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by the section. The decision of the Calcutta High Court inCITv.SugauliSugar Works Private Limited 140 ITR 286affirmed.”

15.1 The issue to be decided by the Tribunal is squarely covered by the judgment cited as Sugauli Sugar Works Limited (supra) because merely by virtue of fact that a debt become time barred the right of the creditor will not come to an end nor the liability will cease and in these circumstances, Section 41(1) of the Act is not attracted. So, when the liability qua the amount which is still standing in the balance sheet of the assessee, which fact has not been disputed by the A.O, the same cannot be said to have ceased. So, we are of the considered view that there is no scope to interfere in the findings returned by Ld. CIT (A). Hence, ground No.5 is determined against the revenue.

• Hon’ble Punjab & Haryana High Court in CIT v. Sita Devi Juneja [2010] 187 taxmann.com 96 (Punjab & Haryana)has held:

It was the conceded position that in the assessee’s balance sheet, the liability of Rs. 1.47 crores had been shown, which was payable to the sundry creditors. Such liability shown in the balance sheet indicated the acknowledgement of the debt payable by the assessee. Merely because such liability was outstanding for the last six years, it could not be presumed that the said liability had ceased to exist. It was also concede position that there was no bilateral act of the assessee and the creditors, which indicated that the said liability had ceased to exist. In absence of any bilateral act, the said liability could not have been treated to have ceased. In view of these facts, the Commissioner (Appeals) as well as the Tribunal had rightly come to the conclusion that the Assessing Officer had wrongly invoked the Explanation I to section 41(1) and made the aforesaid addition on the basis of presumptions, conjectures and surmises. It had been further found that the Assessing Officer had failed to show that in any earlier year allowance of deduction had been in respect of any trading liability incurred by the assessee. It was also not proved that any benefit was obtained by the assessee concerning such a trading liability by way of remission or cessation thereof during the concerned year. Thus, there did not accrue any benefit to the assessee which could be deemed to be the profit or gain of the assessee’s business, which would otherwise not be the assessee’s income. It had been further found as a fact that the assessee had filed the copies of accounts of sundry creditors signed by the concerned creditors. Inview of this fact, it was to be opined that the ITAT had rightly come to the conclusion that confirmations from the creditors were produced. [Para 4] In view of the above, there was no illegality in the impugned order passed by the ITAT and, therefore, no substantial questions of law arose from the order of the ITAT. [Para 5]

In the result, the revenue’s appeal was to be dismissed. [Para 6] · Hon’ble Karnataka High Court inLiquidator, Mysore Agencies (P.) Ltd. v. CIT [1978] 114 ITR 853 (Karnataka)has held:

A reading of section 41(1) shows that where any amount has been treated as an expenditure or trading liability in the assessment for any year and in a subsequent year the assessee has obtained any amount or benefit either in cash or in any other manner in respect of such expenditure or liability by way of remission or cessation thereof, such amount or the value of such benefit obtained by the assessee shall be treated as income during such subsequent year. Hence, in order to bring a case under section 41(1), it has to be shown by the department that there has been a remission or cessation of the liability in question. The remission of the liability arises when the creditor voluntarily gives up the claim. In the instant case, it was not a case of remission of the liability. The cessation of such liability arises only when it ceases to exist in the eye of law for all intents and purposes. The department’s submission that when a debt is barred by time it ceases to exist,could not be agreed with. When a debt becomes barred by time, the creditor would not be able to recover the amount by enforcing his right in court. But the right will not come to an end nor will the liability cease. This was not a case governed by section 27 of the Limitation Act, 1963. It was not, therefore, correct to hold that there was cessation of the liability of the assessee in respect of the said amount by reason of the law of limitation. The Tribunal was in error in treating the said sum as taxable under section 41(1).

• Hon’ble ITAT, Jaipur Bench in Anil Kumar Dangayach HUF v. ITO [2018 (3) TMI 1515]has held:

4. We have considered rival submissions as well as relevant material on record. The trade creditors are admittedly standing in the books of accounts of the assessee for a long time and, therefore, these are not pertaining to the year under consideration. It is also not the case of the AO that the assessee has introduced fresh trade creditors during the year under consideration. Once the trade creditors were accepted by the AO in the year these were first time in the books of accounts, then the genuineness of the trade creditors cannot be doubted only because of nonpayment of the same for such a long time. The AO held that trade creditors shown in the books of accounts to the extent of ₹ 3,34,38,259/- are not genuine and, therefore, the same are added to the income of the assessee though the counter part of the trade credits belonging to the foreigners were accepted by the AO. Thus the AO cannot apply a different parameter of outstanding period for the local trade creditors and foreign trade creditors. Even others, once the trade credits were accepted in the year when these are introduced in the books of accounts, the same cannot be treated as non-genuine in the subsequent year except the fact that the liability of the assessee to repay the amount ceased to exist. The AO has arrived to the conclusion based on the fact that the notices issued to the trade creditors were not served but that itself would not prove that the trade creditors are having no claim of the amount shown by the assessee in the books of accounts. Therefore, the condition for treating the same as income of the assessee under section 41(1) is that the liability ceased to exist as at the end of the financial year relevant to the year under consideration. The AO has not written any facts or any evidence on record to show that the said liability has ceased to exist except doubting the genuineness of the creditors. The decisions referred and relied upon by the ld. CIT (A) are based on the specific facts of each case. In the case of Palkhi Investments & Trading Co. Pvt. Ltd. 71 taxmann.com 322 (Bombay) when the AO conducted the enquiry from the creditors they denied having any amount due from the assessee. Thus the said decision was based on credits denied against the assessee. Similarly, in the case of Rama Steel Rolling Mils & General Engg. Works vs. ITO (supra), the Hon’ble High Court has observed only to the extent of settled position of law that if the liability is ceased to exist on the last date of financial year relevant to the assessment year then it will be added as income of the assessee. However, since it is a factual issue, the Hon’ble High Court set aside the issue to the record of the AO for conducting the proper enquiry. Similarly, in the cases as referred by the ld. CIT (A) are also in respect of facts where the creditors denied any amount due from the assessee and in another case CIT vs. Chipsoft Technology Pvt. Ltd., 26 taxmann.com 109 (Delhi) the issue involved was pertaining to bonus payable by the assessee and not trade creditor. Therefore, where the AO has given the finding based on the tangible material that the claim of the assessee is either false or the liability was otherwise ceased to exist then the creditors had denied any outstanding to be received from the assessee. In the case in hand the AO has not given any such finding or any supporting record to show that the creditors have denied any claim receivable from the assessee. The Hon’ble Jurisdictional High Court in the case of CIT vs. Sadul Textiles (supra) has observed and held in para 2 to 5 as under :-

“2. The relevant assessment year is 1972-73. The assessee was allowed deduction of the sums of ₹ 16,366 and ₹ 98,091 towards wages and bonus in earlier years but the same remained unclaimed by the work men. For this reason, the Question arose during the relevant assessment year 1972-73 whether these amounts of unclaimed wages and unclaimed bonus were taxable in that year under section 41(1) of the Act. The ITO included these amounts in the assessee’s income treating the same as profits and gains of business during the relevant assessment year and the assessee’s appeal to the Commissioner (Appeals) also failed. However, the Tribunal hereafter accepted the assessee’s contention that these amounts could not be deemed to be profits and gains of business in order to be taxable under section 41(1). This view was taken on the basis that these amounts representing: the unclaimed wages and bonus, though time barred had not resulted in either remission or cessation of the trading liability of the assessee without which the same could not be taxed under section 41(1). Aggrieved by the view taken by the Tribunal, the revenue applied for a reference under section 256(1) which was made by the Tribunal to answer the above- quoted question of law.

3. The preponderance of the authorities on the point is in assessee’s favour. The High Courts of Bombay, Kerala, Karnataka, Calcutta and Allahabad have held that where such amount represents time barred trading liability of the assessee, there is neither remission nor cessation in the trading liability inasmuch as the law of limitation merely bars the remedy but does not wipe out the liability. On this basis, the view taken by these High Courts is that there is neither remission nor cessation of the trading liability of the assessee in such cases, since there is neither any unilateral act of the creditor amounting to remission nor any bilateral act of the parties resulting in the liability ceasing to exist in law, merely because the recovery of the same has become time barred. It has also been held in these cases that the mere fact that the assessee has not shown such an amount as his trading liability in his account books does not affect this consequence since this unilateral act of the assessee is neither remission nor cessation of his trading liability. These decisions are Shridhar Udai Narayan v. CIT [1962] 45 ITR 577 (All.), J.K. Chemicals Ltd. v. CIT [1966] 62 1TR 34 (Bom.), Gannon Dunkerley & Co. Ltd. v. CIT [1976] 102 ITR 428 (Bom.), CIT v. Sadabhakti Prakashan Printing Press (P.) Ltd. [1980] 125 ITR 326 (Bom.), CIT v. V.T. Kuttappu & Sons [1974] 96 ITR 327 (Ker.), Liquidator, Mysore Agencies (P.) Ltd. v. CIT [1978] 114 ITR 853 (Kar.), CIT v. Sugauli Sugar Works (P.) Ltd. [1983] 140 ITR 286 (Cal.), Bijli Cotton Mill (P.) Ltd. v. CIT [1971] 81 ITR 400 (All.) and Bhagwat Prasad & Co. v. CIT [1975] 99 ITR 111 (All.).

4. The learned counsel for the revenue placed reliance on a decision of the Allahabad High Court in Indian Motor Transport Co. v. CIT [1978] 114 ITR 677. In our opinion, this decision of the Allahabad High Court cannot be construed as taking a contrary view on account of the fact that this too is a decision by the Division Bench alike the earlier decision and, therefore, it is reasonable to assume that a subsequent Division Bench of the same High Court would not take a view inconsistent with the earlier Division Bench. Moreover, Satish Chandra, CJ. who was party to this decision was also a party to the earlier decision in Bhagwat Prasad & Co.’s case (supra). That apart the earlier decision in Bhagwat Prasad & Co.’s case (supra)has also been distinguished in this case on the ground that in Bhagwat Prasad & Co.’s case (supra) the remedy had become time barred, whereas in this case it had not. This alone is sufficient to indicate that this decision relied on by the learned counsel for the revenue cannot be construed as a contrary decision. There is no other decision taking a contrary view cited at the bar.

5. We find no reason to take the contrary view suggested by the learned counsel for the revenue in the face of catena decision cited earlier, taking the view in assessee’s favour. Following those cases it is to be held that the Tribunal was justified in the view it has taken.”

Thus merely because the trade creditors are standing in the books for a period which is considered to be time barred it is neither remission or cessation of liability so long the assessee is willing to pay the same and the creditor has not waived off the credit. The Hon’ble Jurisdictional High Court in the case of CIT vs. Narendra Mohan Mathur (supra) has reiterated its view and held that for remission or cessation of a trading liability and for making addition under section 41(1) of the Act it is not enough that the creditors have not given any response. The revenue has to prove that how the trading liability ceased to exist. The Hon’ble Punjab & Haryana High Court in the case of CIT vs. Sita Devi Juneja (supra) has held in para 4 & 5 as under :-

“4. After hearing learned counsel for the appellant and going through the impugned order, we do not find any merit in the instant appeal. It is the conceded position that in the assessee’s balance sheet, the aforesaid liabilities have been shown, which are payable to the sundry creditors. Such liabilities, shown in the balance sheet, indicate the acknowledgement of the debts payable by the assessee. Merely because, such liability is outstanding for the last six years, it cannot be presumed that the said liabilities have ceased to exist. It is also conceded position that there is no bilateral act of the assessee and the creditors, which indicates that the said liabilities have ceased to exist. In absence of any bilateral act, the said liabilities could not have been treated to have ceased. In view of these facts, the CIT(A) as well as the ITAT have rightly come to the conclusion that the Assessing Officer has wrongly invoked the Explanation I of section 41(1) of the Act and made the aforesaid addition on the basis of presumption, conjectures and surmises. It has been further found that the Assessing Officer failed to show that in any earlier year, allowance of deduction had been in respect of any trading liability incurred by the assessee. It was also not proved that any benefit was obtained by the assessee concerning such trading liability by way of remission or cessation thereof during the concerned year. Thus, there did not accrue any benefit to the assessee which could be deemed to be the profit or gain of the assessee’s business, which would otherwise not be the assessee’s income. It has been further found as fact that the assessee had filed the copies of accounts of sundry creditors signed by the concerned creditors. In view of this fact, in our opinion, the ITAT has rightly come to the conclusion that confirmation from the creditors were produced.

5. In view of the above, we do not find any illegality in the impugned order passed by the ITAT and in our opinion, no substantial questions of law, as raised by the revenue in this appeal, arise from the order of the ITAT.”

Thus the Hon’ble High Court has held that merely because such liability is outstanding for last 6 years, it cannot be presumed that the said liability has ceased to exist. In the absence of any bilateral act of the assessee and creditors, the said liability could not be treated to have ceased. The Hon’ble Delhi High Court in the case of CIT vs. Jaipur Jewellers (Exports) (supra) has held in para 3 & 4 as under :-

“3. So far as the addition for unexplained credit entries with Banks, the CIT(A) deleted the same as the same was duly assessed for another assessee. The only submission of the learned counsel for the appellant is that the assessee never disclosed that the earlier firm had been dissolved and new firm had been established and this fact, for the first time, was brought by the assessee before the CIT (Appeals) and CIT (Appeals) accepted the same as a truth without verifying as to whether earlier firm had been dissolved and new firm had come into existence. She submitted that no necessary documents evidencing the creation of the new partnership were not even looked into by the CIT (Appeals) or ITAT. On our repeated queries made to the learned counsel as to whether this ground was raised before the ITAT while challenging the order of the CIT (Appeals) or not, Ms. Prem Lata Bansal was not able to point out any such ground having been raised before the ITAT. When such a plea was not taken before the ITAT, it is not permissible for the revenue to take this plea, for the first time, in this appeal, that too when the appeal is maintainable only on the substantial question of law. On the contrary, we find from the reading of the impugned order of the ITAT that as per the assessee, the fact that assessee was newly constituted firm and the business of the firm as now carried on is different than the business carried on by the erstwhile firm, was specifically argued and this was not even rebutted by the representative of the revenue who appeared before the ITAT. This can be seen from para 12 of the impugned order of the ITAT. On that basis, ITAT observed as under :

“After considering the rival submissions, we do not find any infirmity in the order of the learned CIT(A). Though at the first instance the Assessing Officer was not aware of the fact as to whom the money belongs being the deposit in the bank account. However, when this fact was brought to the notice of the Assessing Officer, the Assessing Officer has not been able to controvert the finding that the money do not belong to the present assessee. Accordingly, no addition could be made in the hands of the present assessee. Addition of ₹ 11,58,598 was therefore, rightly deleted by the learned CIT(A).”

4. On the addition of ₹ 38,77,174 we find that the ITAT has sustained the findings of the CIT(A) that the amounts payable to the creditors have been acknowledged by the assessee in its books and the liability pertains to the amount payable by the erstwhile firm being now taken over by the assessee, and that various creditors were paid and were being paid off by the assessee. The ITAT therefore held that so long as there is no cessation of liability by writing back the same, no addition can be made under section 41(1). This clearly pertains to the finding of facts.”

Therefore, the Hon’ble High Court has upheld the findings of the Tribunal that so long the liability is shown in the books of accounts and has not been treated as ceased to exist by writing back, no addition can be made under section 41(1) of the Act. Similarly, the Hon’ble Gujarat High Court in the case of Principal CIT vs. Matruprasad C. Pandey (supra) held in para 6 & 7 as under :-

“ 6. Heard Shri Varun Patel, learned advocate appearing on behalf of the revenue at length. We have perused and considered the assessment order, the order passed by the learned CIT(A) as well as the impugned judgment and order passed the learned Tribunal.

6.1 At the outset, it is required to be noted that the Assessing Officer made the addition of ₹ 56,96,645/- invoking Section 41(1) of the Income Tax Act by doubting certain sundry creditors amounting to ₹ 56,96,645/- appearing in the balance sheet of the assessee since past several years. However, it is required to be noted that as such those sundry creditors mentioned in the balance sheet of the assessee were shown as sundry creditors since past several years from the relevant assessment year and at no point of time earlier the Assessing Officer doubted the creditworthiness and/or identity. In any case the addition on the aforesaid ground under Section 41(1) of the Act cannot be made unless and until it is found that there was remission and/or cessation of the liability that too during the previous year, relevant to the assessment year in question, there cannot be any addition invoking the provision of Section 41(1) of the Act. Identical question came to be considered by the Division Bench of this Court in the case of Nitin S. Garg (supra) and in the similar set of facts and circumstances of the case when the addition was made invoking Section 41(1) of the Act by doubting the creditworthiness and/or identity of the sundry creditors mentioned in the balance sheet and it was found that those sundry creditors were very old and no interest had been paid on those loans, the Division Bench has deleted such addition made under Section 41(1) of the Act. In paragraph 15 the Division Bench has observed and held as under;

“15. In the case before us, it is not been established that the assessee has written off the outstanding liabilities in the books of account. The Appellate Tribunal is justified in taking the view that as assessee had continued to show the admitted amounts as liabilities in its balance sheet the same cannot be treated as assessment of liabilities. Merely because the liabilities are outstanding for last many years, it cannot be inferred that the said liabilities have seized to exist. The Appellate Tribunal has rightly observed that the Assessing Officer shall have to prove that the assessee has obtained the benefits in respect of such trading liabilities by way of remission or cessation thereof which is not the case before us. Merely because the assessee obtained benefit of reduction in the earlier years and balance is carried forward in the subsequent year, it would not prove that the trading liabilities the assessee have become non existent.

6.2 The aforesaid decision of the Division Bench in the case of Nitin S. Garg (supra) has been considered and followed by the Division Bench of this Court in the case of Bhogilal Ramjibhai Atara (supra) and the addition made under Section 41(1) of the Act in the similar facts and circumstances of the case is ordered to be deleted. In paragraph 8 the Division Bench has observed and held as under;

“We are in agreement with the view of the Tribunal. Section 41(1) of the Act as discussed in the above three decisions would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year relevant to the assessment year under consideration. In the present case, both elements are missing. There was nothing on record to suggest there was remission or cessation of liability that too during the previous year relevant to the assessment year 2007-08 which was the year under consideration. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. The Assessing Officer undertook the exercise to verify the records of the so called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi-parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income under section 41(c) f the Act. This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of section 41(1) of the Act there is no cure for it. Be that as it may, insofar as the orders of the Revenue authorities are concerned, the Tribunal not having made any error, this Tax Appeal is dismissed.”

In the present case there was no remission and/or cessation of the liability during the previous year relevant to the assessment year under consideration. As such, there is no remission and/or cessation of the liability during the year under consideration subject to the conditions contained in the statute being fulfilled. In the present case, both the aforesaid elements are missing.

7. Under the circumstances, as such, no error has been committed by the learned Tribunal in deleting the additions made under Section 41(1) of the Act. The proposed substantial questions of law (A) and (B) with respect to deleting the addition made under Section 41(1) of the Act are answered against the revenue.”

Thus the Hon’ble High Court has held that addition under section 41(1) cannot be made simply by doubting the creditor or his creditworthiness or his identity. Further, no addition can be made simply because the creditors are very old. In view of the above facts as well as the various binding precedents, we are of the considered opinion that no addition can be made under section 41(1) of the Act merely on the basis of doubting the genuineness of the creditor without establishing the actual cessation of liability. Hence when the assessee is showing the liability in the books of account and has repaid in the subsequent years then the addition under section 41(1) of the Act is not sustainable. Accordingly we delete the addition made by the AO and sustained by the ld. CIT (A) under section 41(1) of the Act.

• Hon’ble ITAT, Jaipur Bench in ITO v. Amit Agarwal [2021(9) TMI 887]has held:

9. From perusal of the record, we observed that in the instant case, the AO treated sundry creditors amounting to ₹ 2,59,97,837/- as non- genuine after summons issued/sent to these parties were returned back unserved and none of the party appeared before the AO. The AO held that these sundry credits are no longer payable and liable to be added u/s. 41(1) of the Act. The assessee submitted before the ld. CIT(A) that these outstanding trade creditors were not more than 2 years old, and out of ₹ 3,19,49,957/-, closing balance as on 31-03­2013 was ₹ 2,59,97,837/- which was received before 31-03­2013 and not during the year under reference. The assessee further submitted that these creditors were for supply of goods/services during the FY 2011-12, whom the payments had duly been made in subsequent years. The assessee further submitted that there was no cessation of liability as the assessee has not obtained any amount in respect of such expenditure or has not obtained any benefit in respect of such trading liability by way of remission or cession thereon. The assessee contended that these outstanding creditors do not satisfy the conditions prescribed in sec. 41(1) of the Act. The assessee referred to the provisions of sec. 41(1) and relied on various judicial decisions to argue that where the liabilities are outstanding for many years and the assessee had actually discharged the liability at future date, there is no justification to invoke or sustain any addition u/s. 41(1) of the Act. Thus, where a debt due from the assessee is foregone by the creditor in a later year, it can be taxed under section 41(1) of the Act in such later year when it was foregone. Section 41(1) of the Act, therefore, contemplates existence of a debt/liability and the remission or cessation thereof in the year under consideration. Therefore, for the purpose of taxing any income on account of remission or cessation of liability, the Assessing Officer has to establish that there was an existing liability and that there was remission or cessation of such liability in the previous year relevant to the assessment year in which such income is sought to be taxed. It was noted that while the assessee had shown these trading liabilities in his books of account, no benefit had been obtained in respect of such trading liabilities by way of remission or cessation thereof; under the circumstances, the requirements of section 41(1) of the Act are not satisfied in the present case. Moreover, any such cessation or remission of liability has to be in the previous year relevant to the assessment year under consideration, in the facts of the present case, it is not the case of the AO that these liabilities ceased to exist in the previous year relevant to the assessment year under consideration. In fact, the AO has doubted the very genuineness of such liabilities, therefore, the question of taxing any income on the ground that there was remission or cessation of such non-existent liabilities would not arise. The assessee’s case is squarely covered by the decision of the Coordinate Bench of ITAT Delhi Bench `G’ in the case of Satpal & Sons (HUE) vs. ACIT [2017] 85 taxmann.com 283 (Delhi – Trib.) wherein the Coordinate Bench had held that where assessee had shown outstanding sundry creditors for last three years in its balance sheet and no provision was made to write off outstanding liabilities in its books of account, there would be no remission or cessation of liability under section 41(1) even if sundry creditors were not in existence at address provided and PAN of creditors were found to be invalid, addition u/s. 41(1) cannot be sustained. Similarly, in the instant case the assessee had not written off outstanding liabilities in his books of accounts and made the payments to these creditors in subsequent years through banking channels. In view of the above facts and circumstances, we are of the view that no addition could have made under section 41(1) without proving that liability ceased to exist and that too in the year under consideration. Nothing has been brought on record to show that some benefit has actually accrued to the assessee during the year under consideration. We observe that the case laws relied on by the ld DR are not applicable in the facts of the present case. The ld. CIT(A) has passed a speaking and reasoned order discussing all the facts and circumstances as well as legal propositions of law therefore, considering the totality of facts and circumstances and case laws exactly similar to the facts and circumstances of the present case, we find no reason to interfere in the order of the ld. CIT(A) qua this issue, hence, we uphold the same.

In light of above, we humbly request to allow the appeal of the assessee appellant and delete the additions made.”

5.1 To support the various contentions so raised by the ld. AR of the assessee, filed a paper book containing as indexed herein below:

S. No.	Particulars	Page Nos.
1.	Written submission	127-151
2.	The Hon’ble Bombay High Court in the case of Pr. CIT v. Nitin Ramdeoji Lohia [2022] 145 taxmann.com 546.	152-154
3.	The Hon’ble ITAT Delhi Bench in Bhartiya International Ltd. Versus Dy. Commissioner Of Income-Tax, Circle-4 (2), New Delhi [2024 (1) TMI 157 – ITAT DELHI].	155-163
4.	The Hon’ble Supreme Court of India in the case of 164 Commissioner of Income-tax v. Sugauli Sugar Works (P.) Ltd. [1999] 102 Taxman 713 (SC).	164-168
5.	The Hon’ble High Court Of Rajasthan in the case of CIT v. Narendra Mohan Mathur [2013 (11) TMI 1707]	169-174
6.	The Hon’ble High Court Of Delhi in the case of Principal Commissioner of Income-tax v. Arvind Kumar Arora [2023] 156 taxmann.com 266 (Delhi)	175-178
7.	The Hon’ble High Court Of Calcutta in the case of Principal Commissioner of Income-tax v. Soorajmul Nagarmull [2022] 145 taxmann.com 245 (Calcutta)	179-188
8.	The Hon’ble High Court Of Gujarat in the case of Principal Commissioner of Income-tax v. Adani Agro (P.) Ltd. [2020] 118 taxmann.com 307 (Gujarat)	189-191
8.	The Hon’ble High Court Of Gujarat in the case of Commissioner of Income-tax-II v. Nitin S. Garg [2012] 22 taxmann.com 59 (Guj.)	192-196
1.	The Hon’ble High Court Of Bombay in the case of Principal Commissioner of Income-tax v. Pukhraj S. Jain 2019 (1) TMI 1761	197-198
2.	The Hon’ble High Court Of Bombay in the case of Commissioner of Income-tax v. Chase Bright Steel [1989] 42 Taxman 146 (Bombay)	199-202
3.	The Hon’ble High Court Of Punjab & Haryana in the case of Principal Commissioner of Income-tax, Faridabad v. M/s Eco Auto Components Private Limited [2019] 101 taxmann.com 216 (Punjab & Haryana)	203-206
4.	The Hon’ble High Court Of Punjab & Haryana in the case of Commissioner of Income-tax v. Smt. Sita Devi Juneja [2010] 187 taxmann 96 (Punjab & Haryana)	207-209
5.	The Hon’ble High Court Of Karnataka in the case of Liquidator, Mysore Agencies (P.) Ltd. v. Commissioner of Income-tax [1978] 114 ITR 853 (Karnataka)	210-2013
6.	The Hon’ble ITAT Jaipur Bench in the case of Anil Kumar Dangayach HUF, Jaipur v. ITO Ward 3(2), Jalpur [2018 (3) TMI 1515]	214-219
7.	The Hon’ble ITAT Jaipur Bench in the case of ITO Ward 4(1), Jaipur v. Shri Amit Agarwal [2021 (9)TMI 887]	220-237

6. The ld. AR of the assessee submitted that the sundry creditors are existed on account of the purchases so made by the assessee. As is evident from the chart placed on the records for the purchase made from these parties from A. Y. 2012-13 onwards. That the transaction with all the parties are recurring and invited our attention to the transaction recorded for the year under consideration. As is evident from the said chart that except for the party listed at Sr. no. 10 i.e. M/s. R. S. Jwellers purchases were made for an amount of Rs. 5,71,298/- were made in the A. Y. 2012­13 in all the parties transaction are recorded in the year under consideration. This aspect of the matter has not been appreciated by the ld. AO. The ld. AR of the assessee also submitted that while making the addition even the balance was added on a incorrect figure. This shows that the ld. AO was pre-determined set of mind to make the addition even though there were transaction with the parties and the liability still carried on by the assessee. The ld. AR of the assessee also submitted that the based on these sundry creditors while recording the purchases consequently made also the sales which has not been doubted and therefore, the addition made are purely based on the surmises and conjecture required to be deleted.

7. Per contra, ld. DR relied upon the order of the lower authorities and submitted that the AO while making the assessment issued letter to the parties as per the addresses given by the assessee and summons were issued u/s. 131 of the Act and the same were also not confirmed. Even at the stage of CIT(A), assessee has not given details of PA Number, VAT/TIN number, the confirmation filed before the ld. AO was undated. Thus, the assessee failed to establish genuineness of the credit shown by the assessee and thus, the addition is required to be sustained as per provision of section 41(1) of the Act. All these aspects of the matter suggest that the liability shown by the assessee does not existed and has rightly been added by the ld. AO. Ld. AO while doing so also relied upon the decision of the jurisdictional high court in the case of M/s Bright Future Gems and therefore, she relied upon the finding recorded in the order of the ld. AO & ld. CIT(A).

8. We have heard the counsel for both the parties and perused the material placed on record, judgment cited before us and the orders passed by the revenue authorities. In the present appeal the assessee has effectively challenged the finding of the lower authority while making the addition of Rs. 3,17,55,786/- being the amount of unproved creditors. While challenging the ground the assessee submitted that lower authorities did not appreciated the evidences such as confirmations, original invoices details of the payment and purchases made were not considered but merely the notices/summons issued u/s. 133(6)/131 were not complied. Brief facts related to the disputes are that the after filling the return of income by the assessee, case was selected for Scrutiny under the Computer Aided Selection of Scrutiny [CASS]. Accordingly, required notices were issued and served upon the assessee. The assessee is engaged in business of purchase and sale of Precious and Semi-precious stones and carrying out his business activities in the name and style of M/s. Saket Gems. The assessee has declared business income of Rs.6,20,094/-thereafter claiming deduction under Chapter VIA of Rs. 1,07,406/-declared total Income of Rs.5,12,690/-.

During the assessment proceedings, ld. AO noted that the assessee has shown sundry creditors of Rs. 4,76,48,248/- against the turnover of Rs. 2,87,60,719/- implying that the sundry creditors are more than the turnover. The ld. AO thus noted that in any business the waiting time for payment cannot be much long for sundry creditors. From the above it is seen that the assessee has carry forwarded sundry credits of previous year. As per normal business norms sundry creditors for goods are never outstanding for more than 2-3 months depending on the trade, hence any point of time sundry credits should never be more than the entire purchases made during the year. As per common understanding sundry credits exists because the seller of the goods allows the purchaser certain period for payment of the goods, however, this time limit never goes more than a month or two. Since, the figure declared by the assessee in his balance sheet looked dubious, therefore, to make cross verification of the information or to examine the issue, the assessee was asked to furnish complete name and address of the Sundry Creditors. As per address provided by the assessee, letters were issued to some of the Sundry creditors on test check basis with a request to supply, copy of ITR for A.Y.2014-15, Copy of ledger account in their books of account and copy of Bank Account for the F.Y. 2013-14 relevant to Assessment Year 2013-14. The said information was called for as per provision of section 133(6) of the I.T. Act, 1961. In 11 cases letters received back with the remarks of the postal authority “Not Known” or “no firm in this name” and in 6 cases no information was received, even after service of the letters.

Therefore, a show cause notice dated 30.09.2016 was issued to the assessee asking him to file an explanation in this regard. The show cause notice was duly served upon the assessee and he was asked to prove the identity, creditworthiness of the Sundry Creditors and genuineness of the transaction. The said notice was not replied. Therefore, notice u/s.142(1) was issued to the assessee giving reference to the show cause letter dated 30.09.2016 and made a request to furnish requisite information on or before 03.11.2016. Although, this time also the assessee failed to file any written submission or to furnish requisite information. Meanwhile, confirmation letters which were written in a cyclostyle manner were received from some of the Sundry Creditors through Regd. Post. The confirmation letters received through post in the following cases:

1. Sanmati Gems & Jewellery

2. Neelam Gems & Jewels

3. Pari Creations

4. Laxmi Enterprises

5. Gulmohar Creation

6. Shri Nath Gems

7. R. S. Jewellers

8. Anurodh Enterprises

9. Vardhman Enterprises

10. Harsha Impex

11. Mega Exports

12. Neensar Gems & Jewels

13. Natural Gems

After considering the written submission filed by the assessee, the ld. AO also made filed inquires and in 9 case he hold that the firm in whose name credit is appearing is not existed at the given address. Thus, ld. AO informed that in case of not proving the identity, creditworthiness and genuineness of the Sundry Creditors, the inference can be drawn that these parties have not supplied any goods to the assessee and he has inflated expenditure has been declared by showing higher purchase price through fictitious invoices in the name of the parties mentioned in the letter. In response to the Final Show cause notice the A/R of the assessee filed written submission on 23rd Dec., 2016. The assessee contended that the address taken from purchase bills has been supplied, further, during the year in some of the cases the amount has been paid through the bank account and the payments have also been made through Account Payee Cheque. In order to confront the situation the assessee stated that sometime purchases are made through broker who submitted the purchase bill of the goods to the assessee.

Since, the ld. AO was not satisfied about the genuineness of the of the following sundry creditors he has made the addition as unproved sundry creditors as provision of sectin 41(1) of the Act:-

1. M/s Akrati Gems & Jewels	Rs. 6,55,860/-
2. M/s Akrati Gems & Jeweller	Rs. 5,35,930/-
3. M/s Anurodh Enterprises	Rs. 11,24,100/-
4. M/s Pari Creations	Rs. 19,93,793/-
5. M/s Neelam Gems & Jewels	Rs. 23,47,959/-
6. M/s Beensar Gems & Jewels	Rs. 17,35,510/-
7. M/s Gulmohar Gems & Jewels	Rs. 20,22,071/-
8. M/s Mega Exports	Rs. 16,01,562/-
9. M/s R.S. Jewellers	Rs. 5,71,298/-
10. M/s Shree Abhushan	Rs. 18,93,793/-
11. M/s Alankar Jewellers	Rs. 7,00,000/-
12. M/s Snmati Gems & Jewels	Rs. 10,75,500/-
13. M/s Shree Nath Gems	Rs. 39,90,040/-
14. M/s Laxmi Enterprises	Rs. 38,30,745/-
15. M/s Harsh Impex	Rs. 13,48,300/-
16. M/s natural Gems	Rs. 28,72,714/-
17. M/s Vardhman Enterprises	Rs. 34,56,611/-
Total	Rs.3,17,55,786/-

When the assessee challenged that finding of the ld. AO before the ld. CIT(A) he has called for the current address of the parties in 2024 which the party stated that the same being paid of they were unable to provide and therefore, without appreciating the fact that the liability were existed in the balance sheet and were paid off in the subsequent year has not been considered by the ld. CIT(A) but has confirmed the addition made by the ld. AO.

Before us the ld. AR of the assessee presented a chart which reads as under:

Based on the above chart the ld. AR of the assessee submitted that except for the party named R. S. Jwellers in respect of all the parties regular transaction of purchase and the payment made by the assessee were recorded. This aspect of the matter has not been doubted by the ld. AO. Ld. AO did not reject the audited books of account wherein the purchases so made is recorded and based on that purchase invoices the sales were also made which were not disputed by the ld. AO. All the liabilities of the creditors where duly supported by the bills and the payment made in the year under consideration as well as in the subsequent years.

As the ld. AO made the addition merely the notice / summons issued u/s. 133(6)/131 were not responded he hold a view that the liability appearing in the case of 17 parties for an amount of Rs. 3,17,55,786/- out of total creditors of Rs. 4,15,39,855 added u/s. 41(1) of the Act. Since, the addition was made u/s. 41(1) of the Act it would be appropriate to go through the provision of section 41 which reads as follows:

Profits chargeable to tax.

41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,—

(a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or

(b) the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year.

Explanation 1.—For the purposes of this sub-section, the expression “loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof” shall include the remission or cessation of any liability by a unilateral act by the first-mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.

Explanation 2.—For the purposes of this sub-section, “successor in business” means,—

(i) where there has been an amalgamation of a company with another company, the amalgamated company;

(ii) where the first-mentioned person is succeeded by any other person in that business or profession, the other person;

(iii) where a firm carrying on a business or profession is succeeded by another firm, the other firm;

(iv) where there has been a demerger, the resulting company.

As is evident from the provision of the Act the assessee has not made any remission or cessation thereof, the amount shown as liability in the books of account the assessee has not received any benefit accruing to him and therefore, the said liability cannot be considered as income of the assessee. The decision our High Court relied upon by the ld. AO in the order of assessment in the case of CIT Vs. M/s. Bright Future Gems [ 88 taxmann.com 476 (Rajasthan) deals with the addition u/s. 69C of the Act, whereas in the case on hand the addition is in relation to section 41(1) of the Act and therefore, the same is pari material on the different facts.

Whereas the ld. AR of the assessee relied upon the decision of our Jurisdictional High Court having the similar set of facts in the case of CIT vs. Narendra Mohan Mathur (2013) (11) TMI 1707 wherein the High Court has held as under:-

“15. It is true that these liabilities were being shown in the books of accounts of the respondent-assessee from year to year and it was the claim of the respondent-assessee that these liabilities are payable to the persons from whom the goods were purchased earlier and are trade creditors. On perusal of the facts, it has not been proved by the assessing officer as to how the so-called liabilities ceased or crystallized during the previous year relevant to the assessment year under appeal. Merely because there was no response by the creditors it does not prove that the liabilities ceased during the assessment year 2002-03 Merely because the parties chose not to appear or did not respond or even did not come forward on the request of the respondent-assessee before the assessing officer, it does not prove that the trade creditors were not genuine and were not in existence so as to invoke provisions of section 41(1).

16. Section 41(1) requires that the onus is on the assessing officer to come to the conclusion that the liabilities ceased to exist or the assessee has obtained whether in cash or in any other manner whatsoever any amount in respect of such loss or expenditure, or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person. On the one hand the assessee claims that the amount was payable and the assessee may be justified in saying so because one never knows when a creditor will come and raise the demand. May be, the creditor was justified that interest was being paid, so he did not turn up to take the principal amount. Therefore, it was for the assessing officer to come to a definite finding that the liability ceased to exist during the previous year relevant to the year under appeal which, in our view, has not been proved by the assessing officer.

As the facts of the case on hand with that facts of the above case decided by our High Court we respectfully following the binding precedent direct the ld. AO to delete the addition of Rs. 3,17,55,786/- made in the year under consideration. Based on these observations ground no. 1 raised by the assessee stands allowed.

Ground no. 2 being the ground of initiation of penalty proceeding u/s. 271(1)(c) of the Act being premature at this stage does not require our adjudication.

In the result appeal filed by the assessee is allowed.

Order pronounced in the open Court on 01/10/2024.