Whether provisions of Sec 41(1) come into play only when there is cessation of a liability - YES: ITAT

THE issue before the Bench is - Whether provisions of Sec 41(1) come into play only when there is cessation of a liability. And the answer is YES.

Facts of the case

Assessee derives income from construction of civil work of commercial and residential buildings. AO found that there are sundry creditors amounting to Rs.25.92 crores as on 31st March, 2009. It observed that in respect of four creditors, no transaction took place since 1.4.2008 to 31.03.2011. In respect of 19 creditors, notice was issued u/s 133(6) which return back as

unserved. Thus, AO presumed that the liability in respect of four persons and 19 persons to whom notice u/s 133(6) sent which return back, ceased to exist and applied the provisions of section 41(1). In four cases, where reply was received there was difference in confirmation and thus, the addition was made for the difference.

Assessee contended that the transaction between the assessee and those parties took place during the FY 2008-09 and the enquiry was conducted in the year 2011. The parties might have changed the address. Most of the outstanding amount in the name of these creditors has been paid by the assessee during the FY 2009-10 by cheque. That the Assessing Officer made the addition merely on the ground that summons issued under Section 133(6) have been returned unserved without asking for further explanation/clarification from the assessee. In such cases, assessee furnished evidence of payment made to those persons in subsequent year. With regard to four parties, in whose case there was a difference in the credit balance as informed by the parties and as per assessee's books of account, a reconciliation was given. In respect of four parties with whom no transaction took place in four years, he submitted that merely because in the four years' time no transaction took place, it does not conclusively prove that the liability has ceased. The conditions of Section 41(1) are not satisfied, there was no remission or cessation of liability on the part of the creditors and there cannot be any presumption of any remission or cessation.

The CIT (A) confirmed the order of AO arriving on the conclusion that the application of section 41(1) was justified. Revenue contended that if the Bench is not satisfied with the order of CIT(A), then the matter may be set aside to the file of the AO for re-examining the assessee's contention of the payment made to those parties in the subsequent year and also the verification of the reconciliation in the account of four creditors.

B) Assessee incurred expenditure under the head 'Pooja Expenses'. AO disallowed 50% of the Pooja expenses holding 50% to be non-business expenditure.

C) AO disallowed 3% of the building material expenses and consumable expenses on the ground that the assessee was unable to produce some of the bills and vouchers. CIT (A) reduced the disallowance to 1% considering the vouchers produced in appellate proceedings and the remand report from AO.

D) AO disallowed Rs. 4.18 lacs towards vehicle running and maintenance expenses on the ground of personal use of expenses. Assessee contended that if there is a personal use of the vehicles by the directors, it can be treated as a perquisite in their hands.

After hearing both the parties, the ITAT held that,

A) ++ the matter needs re-examination at the end of the Assessing Officer. AO made huge addition simply relying upon the decision of Apex Court in the case of T.V. Sundaram Iyengar and Sons Ltd. In the said case, the amount had become time barred and moreover, the assessee had transferred the amount to profit & loss account. In the case of the assessee, admittedly, no amount is transferred to the profit & loss account. Moreover, in respect of most of the amounts, there is no finding by the AO that the amount has become barred by limitation. On the other hand, it has been pointed out by the assessee that in respect of the major additions made by the Assessing Officer for Rs.6.79 crores being credit in the account of 19 parties, the payment has been made in the subsequent years. Therefore, in our opinion, the AO needs to examine the case of each and every creditor and has to ascertain whether the assessee has obtained any benefit by virtue of remission or cessation of any credit liability in respect of any creditor. Section 41(1) would be applicable only where there is a remission or cessation of any liability;

B) ++ AO himself admitted "However, keeping in view the prevailing Indian customs and traditions some expenditure on pooja is necessary for smooth business operations and making employees happy to boost their productivity". That the turnover of the assessee is more than Rs.92 crores and the Pooja expenses are only Rs.2,81,113/-. The business of the assessee is labour intensive because it is in the business of civil construction. Thus, the expenditure incurred is reasonable and disallowance is not justified;

C) ++ it is evident that during remand proceedings, the Assessing Officer considered all the bills and vouchers and then he found only few mistakes. AO has mentioned "the assessee has submitted the bills of all the parties for building material purchased and consumables along with copy of some ledger accounts and bank statements". After verification of all the bills, he found that the expenses to the extent of Rs.40.08 lacs are last year expenses but the same are already added back to the profit in the computation of income by the assessee itself. Apart from earlier year expenses, only two discrepancies were noted by him, one for Rs. 2.93 lacs and another for Rs.2.24 lacs. There was no justification for adhoc disallowance at 1%. AO himself has written to the CIT (A) that the quantum of disallowance should not be less than the mistake detected in the remand proceedings. Thus, the disallowance is restricted to Rs. 5.17 lacs only;

D) ++ the Government has brought in FBT and assessee has already paid tax under the FBT which will take care of personal use of vehicles, if any, by the directors/employees. In view of the above, there is justification to interfere with the order of CIT (A).