Unilateral Write-Off by Debtor Isn't Cessation of Liability Under Sec 41(1) Without Creditor's Confirmation.

Unilateral Write-Off by Debtor Isn’t Cessation of Liability Under Sec 41(1) Without Creditor’s Confirmation.

Issue

Can an addition be made under Section 41(1) for cessation of a trading liability solely on the basis that the assessee has written it off in their books of accounts and the creditor did not respond to a notice under Section 133(6), without any positive evidence of actual remission or cessation by the creditor?

Facts

For the Assessment Year 2012-13, the Assessing Officer (AO) made an addition under Section 41(1), treating certain liabilities as ceased.
The assessee had written off these liabilities in its books of account.
The AO’s conclusion was based on the fact that the creditor companies failed to reply to notices issued to them under Section 133(6).
The assessee, however, had provided all necessary details of the creditors, including their PAN. The authorities did not conduct any further verification from the jurisdictional AOs of those creditors.
There was no document or evidence on record to prove that the creditors had actually waived or remitted the debt.

Decision

The court held that the addition under Section 41(1) could not be sustained and was therefore deleted. The failure of creditors to respond to a notice is not conclusive proof that the liability has ceased to exist.

Key Takeaways

Unilateral Action is Insufficient: A mere write-off of a liability in the debtor’s (assessee’s) books of account does not automatically trigger taxability under Section 41(1).
Burden of Proof is on Revenue: The onus is on the Assessing Officer to bring cogent material on record to prove that the creditor has actually remitted or waived the liability.
Non-Response is Not Proof: A third party’s failure to respond to a statutory notice cannot be the sole basis for making an adverse inference against the assessee.

Cash Deposit Not an Unexplained Credit Under Sec 68 if Source is Verifiable from Records.

Issue

Can a cash deposit made into a bank account of a closed business be treated as an unexplained cash credit under Section 68 if the assessee can demonstrate that the source of the funds is from prior cash withdrawals from the same account and the sale of business assets, as documented in the cash book and bank statements?

Facts

The assessee deposited cash into a bank account belonging to their old, now-shut-down proprietorship business.
The AO made an addition under Section 68, treating the deposit as unexplained income, primarily because the assessee had not declared this bank account in the income tax return for the current year (AY 2012-13).
The assessee provided evidence to explain the source of the cash:
- The bank account was reflected in the previous year’s return (AY 2011-12).
- The cash book showed that the source was prior cash withdrawals from the very same bank account and funds from the disposal of old business assets.
The lower authorities had failed to properly examine the bank statement and cash book, which corroborated the assessee’s explanation.

Decision

The court found that the source of the cash deposit was adequately explained and verifiable from the records. Therefore, the addition made under Section 68 was deleted.

Key Takeaways

Source Explanation Defeats Section 68: The moment an assessee offers a plausible explanation for the source of a credit/deposit and supports it with evidence, the onus shifts to the AO to rebut it. If the AO fails to do so, no addition can be made under Section 68.
Duty of the AO: The Assessing Officer has a duty to properly examine the documents and evidence furnished by the assessee, such as bank statements, cash books, and prior year returns, before drawing adverse conclusions.
Funds from a Closed Business: An assessee is entitled to use funds from a previously closed business, and deposits from such sources cannot be treated as unexplained as long as a clear money trail is established.

IN THE ITAT DELHI BENCH ‘F’

Gurmeet Singh Sethi

Income-tax Officer

ANUBHAV SHARMA, Judicial Member
and KRINWANT SAHAY, Accountant Member

IT Appeal No. 334 (Delhi) of 2020
[Assessment year 2012-13]

SEPTEMBER 17, 2025

Anil Chopra, CA for the Appellant. Ms. Harpreet Kaur Hansra, SR. DR. for the Respondent.

ORDER

Krinwant Sahay, Accountant Member.- This appeal by the assessee is directed against the order of the Ld. CIT(A)-15, New Delhi dated 14.08.2019 pertaining to Assessment Year 2012-13 on the following grounds:-

. That Ld. CIT(A) has erred in law as well as in facts of the case for upholding the additions on account of cessation of liability Rs. 1,12,75,760/- even after furnishing of all the information along with PAN and address of sundry creditors available with him.

That the Ld CIT(A) has erred in imposing the burden of notices sent to creditors under section 133(6) which remained unanswered

That CIT(A) has failed to appreciate that fact that the AO has not given enough opportunity of being heard in the course of assessment proceedings for the sake of natural justice

That Ld CIT(A) has erred in not accepting the discount offered to customers amounting Rs 16,72,720/- for which sufficient documentary evidences were furnished to Ld CIT(A)

That CIT(A) has erred in not appreciating the evidences furnished by appellate in the course of proceedings of the case

That Ld CIT(A) has erred in upholding the additions made on account of cash deposited amounting to Rs 16,28,500/- in the relevant assessment year

The Ld CIT(A) failed to appreciate the fact that the cash was deposited out of cash received from debtors sales to whom are duly shown in the ITR filed by the appellant for the assessment year u/s 139(1) of the Income Tax Act

That on the facts and in the circumstances of the case and in law, Ld CIT(A) erred in sustaining additions u/s 68 on non existing basis of cash deposits with the bank which was not proved till passing of final order and an unsubstantiated and vague AIR information is sole basis for entire order

. That the order passed by CIT(A) Delhi is against the spirit of law and facts of the case.

.That the appellant craves to leave to add, alter, modify, amend or delete any of the ground of appeal of hearing and all above grounds are without prejudice to each other.

2. Brief facts of the case are that assessee filed his return of income on 30.9.2012 for AY 2012-13, declaring an income of Rs. 3,20,460/-. The assessment u/s. 143(3) of the Act was completed by the AO on 31.3.2015 by determining the assessed income at Rs. 1,50,31,470/-. IN appeal, Ld. CIT(A) has partly allowed the appeal of the assessee. Against the order of the Ld. CIT(A), assessee is in appeal before us.

3. As far as addition of Rs. 1,12,75,060/- on account of cessation of liability u/s. 41(1) is concerned, we note that Ld. CIT(A) sustained the addition in dispute even after furnishing of all the information alongwith PAN and address of sundry creditors available with him. It is noted that assessee has started a new proprietorship business in the name of M/s RJ Traders dealing in trading of mobile gadgets after shutting down the business in name of M/s United Fashions 2010 during the AY 2012-13. Additions have been made amounting to Rs. 1,12,75,060/- on account of cessation of liability u/s. 41(1) and the amount was received in the new business during the year as advance for supply of goods also the confirmation of major accounts were furnished in the course of assessment proceedings by the parties. It is further noted that addition of Rs. 16,52,720/- has been made on account of non-deduction of TDS from Commission, whereas in books of accounts it is reflected on discount account the amounts of which were credited to Sales A/c, and written as commission in profit and loss account. However, the commission was never paid via bank / cash, which facts is evident on perusal of books of accounts which were produced in the course of assessment proceedings. There should be benefit obtained by the assessee by way of remission or cessation of liability either in cash or in any other manner. There is no document on record which prove that there is actual remission and cessation or the liability. It has been decided in various cases, that where notices issued to sundry creditors u/s. 133(6) remained unanswered, the same cannot diminish the genuineness of creditors and additions on this behalf cannot be made. We note that in this case assessee has furnished all the necessary details of the companies alongwith PAN but none of the lower authorities have confirmed the same from AO’s having jurisdiction over the said companies. Thus, the assessee cannot be penalized merely on the ground that the said companies failed to reply to the notices issued to them under section 133(6) of the Act. It is further noted that AO has not brought any cogent basis and these amounts have been written off in the books of accounts, we do not find any reason to hold that the amount is liable to be added u/s. 41(1) of the Act. Hence, we delete the addition in dispute allow the ground in favour of the assessee.

4. As regards addition of Rs. 16,28,500/- on account of cash deposited in Canara Bank in name of Old Business United Fashions 2010 on the pretext that the assessee failed to show the bank account in the return of income for AY 2012-13. Whereas the same was reflected in return of income for period for AY 2011-12. In form of return of income there is scope of reflecting one bank account only in that period more over the business cease to exit and account were prepared for new business M/s RJ Traders. Source of cash deposit is withdrawal form same bank Rs. 11,60,000/- and disposal of assets of business as shown in the cash book. It is noted that lower authorities failed to check bank statement and the cash book properly. From the perusal of the bank statement itself primary source of cash deposit can be confirmed as cash withdrawals. The AO also failed to check the financials and return of income of preceding year which clearly reflects that the business was in existence last year. In view of above factual matrix, we delete the addition in dispute and decide the ground in favour of the assessee.

5. In the result, the appeal filed by the assessee stands Allowed.