Associated Projects Infra Vs DCIT (ITAT Hyderabad)
Section 41(1) Addition Not Automatic: Creditor’s Write-Off Requires Verification
The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) held that an addition under section 41(1) cannot be sustained merely because a creditor has written off an amount as bad debt in its books. In the present case, the Assessing Officer treated the amount of ₹56.23 lakh as income of the assessee on the premise that the creditor’s unilateral write-off resulted in cessation of liability.
The Tribunal observed that section 41(1) applies only where a liability, in respect of which a deduction was earlier allowed, is subsequently remitted or ceases, resulting in a real benefit to the assessee. A mere accounting entry in the creditor’s books, by itself, does not conclusively establish remission or cessation of liability in the hands of the debtor.
The assessee produced an affidavit from the creditor at the Tribunal stage explaining that the write-off was only an accounting adjustment to reconcile past expenditures incurred by the assessee on the creditor’s behalf, and that there was no waiver or benefit arising to the assessee. Considering that this affidavit went to the root of the controversy, the ITAT admitted it as additional evidence.
However, since the affidavit and the related facts had not been examined by the Assessing Officer, the Tribunal set aside the orders of the lower authorities and restored the matter to the file of the AO for verification of books and records of both parties and for fresh adjudication in accordance with law. The appeal was allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
