ASST. COMMISSIONER OF INCOME TAX, MUMBAI V. FANCY DIAMOND INDIA PRIVATE LIMITED, MUMBAI

ITA 6892/MUM/2025

AI Insights

The case involves the Assistant Commissioner of Income Tax as the appellant and Fancy Diamond India Private Limited as the respondent. The dispute centered on the disallowance of Rs.4,58,25,064 made under section 41(1) of the Income-tax Act, 1961, due to alleged cessation of liability, and the quashing of penalty proceedings under section 270A. The Assessing Officer had added the amount to the assessee's income, citing unresolved disputes over trade payables. However, the CIT(A) found that the liabilities were settled in subsequent years and thus deleted the addition and quashed the penalty. The Tribunal agreed with the CIT(A)'s findings, noting the absence of any contrary evidence from the AO.

• Counselvise Citation: [2026] 140 COUNSELVISE.COM (IT) 848399 (ITAT-MUMBAI)
• Duration Of Justice: 4 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2026
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: Mumbai
• Assessment Year: 2017-2018
• Appeal Filed On: 29-10-2025
• Other Referred Cases: CIT vs. Sugauli Sugar Works Pvt. Ltd., (1999) 102 taxmann 713
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: NAKUL AGRAWAL VIRTUALLY
• Assessee Lawyers: HIMANSHU GANDHI
• Keywords: Additional evidence

Judgement Text

"1 IN THE INCOME-TAX APPELLATE TRIBUNAL, MUMBAI “F” BENCH, MUMBAI BEFORE SHRI ANIKESH BANERJEE, JUDICIAL MEMBER AND SHRI BIJAYANANDA PRUSETH, ACCOUNTANT MEMBER ITA No. 6892/MUM/2025 (AY:2017-18) Asst. Commissioner of Income Tax, Room No. 568, 5th Floor, Aayakar Bhawan, M.K. Road, Mumbai-400020. vs. Fancy Diamond India Private Limited, 52, Sidhpura Industrial Est, 2nd Floor, Gaiwadi, S.V. Road, Goregaon (West), Mumbai-400062. PAN/GIR No: AAACF3325J (Appellant) (Respondent) Assessee by Shri Himanshu Gandhi Revenue by Shri Nakul Agrawal (SR DR) (Virtually appear) Date of Hearing 16.02.2026 Date of Pronouncement 25.03.2026 O R D E R PER BIJYANANDA PRUSETH, AM: This appeal filed by the revenue emanates from the order passed under section 250 of the Income-tax Act, 1961 (in short, ‘Act’) by the Commissioner of Income-Tax (Appeals), National Faceless Appeal Centre [in short, ‘CIT(A)’], dated 13.08.2025 for the assessment year (AY) 2017-18. 2. The grounds of appeal raised by the revenue are as under: “1. Whether on the facts and circumstances of the case and as per law the Ld. CIT(A) is justified in deleting the disallowance of Rs.4,58,25,064/- made u/s 41(1) of the Income-tax Act, 1961 on account of alleged cessation of liability? 2. Whether on the facts and circumstances of the case and as per law the Ld. CIT(A) is justified in quashing the penalty proceedings initiated u/s 270A of the Income-tax Act, 1961 on account of mis-representation of facts?” Printed from counselvise.com ITA No.6892/MUM/2025 (AY 2017-18) Fancy Diamond India Pvt. Ltd. 2 3. Facts of the case, in brief, are that the assessee filed its return of income for the AY 2017-18 on 03.11.2017 declaring total income at Rs.2,07,93,160/-. The case was selected for scrutiny and the AO asked the assessee to explain the details of trade payables of Rs.11,12,57,689/-. In reply assessee filed details of the outstanding amounts of various parties. The assessee submitted that the outstanding amounts of Blooming Star Diamond Pvt. Ltd., Param Gems Pvt. Ltd., Piyush Gems Pvt. Ltd. and Sangam Exports totaling to Rs.4,58,25,064/- remained unpaid due to disputes regarding the quality of diamonds supplied. It was also submitted no liability has been written back in the books of the assessee and such dues were settled in the subsequent years by way of payments or sale of goods to the respective suppliers. However, the AO was not satisfied with the reply of the assessee and added Rs.4,58,25,064/- u/s 41(1) of the Act. 4. Aggrieved by the order of AO, the assessee filed appeal before the CIT(A). The CIT(A) called for a remand report from the AO, who furnished the same vide report dated 29.07.2025. The CIT(A) obtained rejoinder from the appellant. After considering the details and the above reports, he observed that there was no adverse comments by the AO on the submissions of the assessee made during the appeal. The AO did not dispute the fact that the impugned 4 sundry creditors had their liabilities fully discharged in subsequent years leaving no outstanding balance thereafter. In the rejoinder, the appellant reiterated that all liabilities arose from purchases in the ordinary course of business and were reflected in the books of account. Subsequently, these outstanding amounts were settled and the corresponding entries were made in the books of account. The CIT(A) found that the liabilities in question were reflected as outstanding in the books of account Printed from counselvise.com ITA No.6892/MUM/2025 (AY 2017-18) Fancy Diamond India Pvt. Ltd. 3 and were neither written back nor remitted during the year. The inference of the AO is based only due to absence of transaction during the year and prolonged non-settlement of disputes. He relied on the decision of the Hon’ble Supreme Court in case of CIT vs. Sugauli Sugar Works Pvt. Ltd., (1999) 102 taxmann 713 that mere non-payment or lapse of time does not constitute cessation of liability. The CIT(A) further found that assessee has substantiated with documentary evidence that each of the liability was discharged in full in the subsequent years through actual payments or sales. Further, the revenue rising from these settlements were subject to tax in respective years. The AO has also not disputed the claim of the assessee during remand proceeding and has not produced any contrary evidence to suggest cessation in AY 2017-18. Hence, the addition was deleted. The CIT(A) also quashed the penalty initiated u/s 270A of the Act for being purely consequential in nature. 5. Aggrieved by the order of CIT(A), the revenue filed appeal before the Tribunal. The Ld. Sr. DR supported the order of the AO and the grounds of appeal raised by the revenue. 6. On the other hand, the Ld. AR of the assessee supported the order of CIT(A). He filed a paper book giving various details including ledger accounts, ROC and GSTN Master Data, remand report and rejoinder to the remand report. He has made the same submission which was made before the CIT(A). He submitted that since no adverse remark was made by the AO in the remand report, the decision of CIT(A) may be upheld. 7. We have heard both parties and perused the materials on record. We have also gone through the remand report of the AO and the rejoinder to the remand Printed from counselvise.com ITA No.6892/MUM/2025 (AY 2017-18) Fancy Diamond India Pvt. Ltd. 4 report by the assessee. Copy of the remand report is at page 99 of the paper book wherein the AO has submitted that no additional evidence was submitted during the appellate proceedings. He submitted that no detailed remand report is required and appeal may be decided on the basis of facts and merits involved in the case. Thus, the AO has not made any adverse remark on the submission of the assessee explaining the transactions of the assessee with the 4 impugned creditors. In the rejoinder, the appellant has given the details about the settlement of the outstanding amount by the assessee in subsequent years. Thus, the liabilities were discharged in the subsequent years and were no longer outstanding. Therefore, the issue of cessation of liability u/s 41(1) of the Act does not arise. We find no infirmity in the order of CIT(A), which we confirm. Accordingly, the grounds of the revenue are dismissed. 9. In the result, the appeal of the revenue is dismissed. Order is pronounced on 25.03.2026. Sd/- Sd/- (ANIKESH BANERJEE) (BIJYANANDA PRUSETH) JUDICIAL MEMBER ACCOUNTANT MEMBER *Aniket Chand; Sr. PS MUMBAI Date: 25.03.2026 Copy of the Order forwarded to: 1. The Assessee 2. The Respondent 3. The CIT(A) 4. CIT 5. DR/AR, ITAT, MUMBAI 6. Guard File By Order Assistant Registrar ITAT, MUMBAI Printed from counselvise.com "