BLAZE MANUFACTURING CO,MORADABAD V. DCIT,CIRCLE-2, MORADABAD

ITA 4381/DEL/2025

AI Insights

The case involves Blaze Manufacturing Co, which appealed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, confirming the addition of INR 5,00,70,049 to the assessee's income for the Assessment Year 2014-15. The addition was based on the AO's conclusion that 29.24% of the sundry creditors were non-existent or bogus, derived from a sample inquiry. The Tribunal examined the validity of this addition under section 41(1) of the Income Tax Act, which pertains to the cessation of trading liabilities. The Tribunal noted that the AO's addition was based on presumptions without concrete evidence of cessation of liability, and the liabilities were acknowledged in the books and paid in subsequent years.

• Counselvise Citation: [2026] 140 COUNSELVISE.COM (IT) 834013 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-02-2026
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 15-07-2025
• Other Referred Cases: ACIT vs Dattatray Poultry Breeding Farm Pvt.Ltd. [2018] 171 ITD 615 [Ahmedabad Trib.], CIT v Shadilal Sugar Works (P.) Ltd [1999] 102 Taxman 713 (SC), CIT v Kesaria Tea Co. Ltd. [2002] 122 Taxman 91 (SC), CIT v Shri Vardhman Overseas Ltd 2011(12) TMI 77 - Delhi High Court, PR. COMMISSIONER OF INCOME TAX AHMEDABAD VERSUS MATRUPRASAD C PANDEY (2015) 377 ITR 363 (Gul), CIT V. SMT, SITA DEVI JUNEJA: (2010) 325 ITR 593 (P & H), CIT VERSUS NARENDRA MOHAN MATHUR 2013 (11) TMI 1707-RAJASTHAN HIGH COURT, JK. CHEMICALS LTD. VERSUS COMMISSIONER OF INCOME TAX 119661 62 ITR 34-BOMBAY HIGH COURT, M/S. FLO DYNE CONTROLS (INDIA) PVT. LTD VS ITΟ 2018 (6) ΤΜΙ 897 - ITAT MUMBAI, DCIT vs M/S, TRANS FREIGHT CONTAINERS LTD. 2018(5) TMI 419 - ITAT MUMBAI, ANIL KUMAR DANGAYACH HUF VERSUS THE INCOME TAX OFFICER, WARD 3(2), JAIPUR 2018 (3) TMI 1515-ITAT JAIPUR, JASHOJIT MUKHERJEE V ACIT (2018) (5) TMI 1311 ITAT, KOLKATA, Bangalore Electricity Supply Company Ltd. Versus The Assistant Commissioner of Income Tax, Circle 1 (1) (2), Bangalore 2025 (1) TMI 1476 - ITAT Bangalore, JCIT v. Yashmaan Pathak ITA No.265/Mum/2023 ITAT Mumbai, Girishbhai Ranchodlal Maliwad Versus The Dy. Commissioner of Income Tax, Circle 1 (3) 2021 (11) TMI 256- ITAT Ahmedabad, Income Tax Officer Versus Smt. Meena Gupta 2013 (10) TMI 210 -ITAT Agra, Shiv Hari Singla vs ITO in ITA No.1277/Del/2020 [Assessment Year 2012- 13] order dated 27.08.2025, Dattatray Poulty Breeding Farm Pvt. Ltd. vs ACIT [2019] (4) TMI 1171 (Gujarat), Commissioner of Income Tax v. Sugauli Sugar Works (P) Ltd., Commissioner of Income Tax v. Bharat Iron & Steel Industries, Commissioner of Income Tax v. Rashmi Trading, Commissioner of Income Tax v. Chipsoft Technology (P) Ltd., Palkhi Investments & Trading Co. (P) Ltd. v. Income Tax Officer, Mumbai, Rama Steel Rolling Mills & General Engg. Works v. Income Tax Officer, Ward-3(1)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KRISHNA KUMAR
• Assessee Lawyers: AMIT GOEL; PRANAV YADAV; WAY OF
• Keywords: Set aside; Additional evidence; Question of law; Unexplained cash credit; Period of limitation; Third party statement; Deemed to accrue or arise in india; Revision of order; Bogus
• Section: 143(3); 263; 68; 133(6); 6

Judgement Text

"ITA No.4381/Del/2025 Page | 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI “A” BENCH: NEW DELHI BEFORE SHRI ANUBHAV SHARMA, JUDICIAL MEMBER & SHRI MANISH AGARWAL, ACCOUNTANT MEMBER ITA No.4381/Del/2025 [Assessment Year : 2014-15] Blaze Manufacturing Co 175, Lajpat Nagar, Near Dr.Absar Ahmad, Moradabad-244001(U.P.) PAN-AAJCS1175L vs DCIT Circle-II Moradabad (U.P.) APPELLANT RESPONDENT Appellant by Shri Amit Goel, CA & Shri Pranav Yadav, Adv. Respondent by Shri Krishna Kumar Ramawat, Sr. DR Date of Hearing 02.12.2025 Date of Pronouncement 04.02.2026 ORDER PER MANISH AGARWAL, AM : The present appeal is filed by assessee against the order dated 29.05.2025 by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld.CIT(A)”] in Appeal No.CIT(A), Moradabad/10287/2019-20 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 30.12.2019 passed u/s 143(3)/263 of the Act pertaining to Assessment Year 2014-15. Printed from counselvise.com ITA No.4381/Del/2025 Page | 2 2. Brief facts of the case are that assessee engaged in the business of export of Indian handicrafts. The return of income was filed on 26.11.2024, declaring total income of INR 92,29,680/-. The assessment was completed u/s 143(3) dated 12.07.2016 at a total income of INR 93,74,390/- by making disallowance out of various expenses claimed. Thereafter, the PCIT, Moradabad passed the order u/s 263 on 28.03.2019, directing the AO to make fresh assessment after making inquiries with respect to the sundry creditors declared by the assessee. In compliance to the direction given by ld. PCIT u/s 263 of the Act, AO made the inquiries from the Sundry creditors, where out of total 680 parties, notices were sent to only 168 parties as tabulated at page 2 to 10 of the assessment order and finally, made the additions of INR 5,00,7049/- by doubting 29.24% of the total creditors of INR 17,12,38,198/-. 3. Against the said order, assessee preferred appeal before Ld. CIT(A) who confirmed the order of AO and dismissed the appeal of the assessee in summarily manner by placing reliance on the judgment of Co-ordinate Bench of Ahmedabad Tribunal in the case of ACIT vs Dattatray Poultry Breeding Farm Pvt.Ltd. [2018] reported in 171 ITD 615 [Ahmedabad Trib.] wherein it was held that in absence of PAN and confirmation, addition can be made on account of Cessation of Liability. 4. Aggrieved by the said order, the assessee preferred the appeal before the Tribunal by taking following grounds of appeal:- Printed from counselvise.com ITA No.4381/Del/2025 Page | 3 1. “On the facts and circumstances of the case and in law, the assessment order passed by the assessing officer is non-est as it does not have DIN on the body of the assessment order and CIT(A) erred in not holding so. 2. On the facts and circumstances of the case and in law, the ld. CIT(A) erred in confirming the addition of Rs. 5,00,70,049/- made by the assessing officer on account alleged bogus sundry creditors as cessation of liability on estimated basis. 3. On the facts and circumstances of the case and in law, the addition of Rs. 5,00,70,049/- made by the assessing officer is erroneous and arbitrary and CIT(A) erred in not holding so. 4. On the facts and circumstances of the case and in law, the order u/s 263 passed in this case is bad-in-law, without jurisdiction and therefore, the impugned assessment order passed on the foundation of such order u/s 263 is also bad-in-law and without jurisdiction. 5. On the facts and circumstances of the case and in law, the assessment order passed by the assessing officer is contrary to direction given by Hon'ble PCIT in the order passed u/s 263 of the Act.” 5. Ground of appeal No.1 raised by the assessee is with respect to DIN, which was not pressed thus, the same is dismissed. 6. Ground of appeal Nos. 2 to 4 are with respect to the addition of INR 5,00,70,049 made on account of sundry creditors alleged as bogus by making enquiries on sample basis based on which it was concluded that total creditors, 29.24% of the creditors are not verifiable. 7. Before us, Ld.AR for the assessee submits that liability towards Sundry Creditors was appearing in the financial statements of the assessee on continues basis wherein amount of sundry creditors was of INR 9,14,65,315.20 for the year ended on 31.03.2012; INR Printed from counselvise.com ITA No.4381/Del/2025 Page | 4 11,38,67,922.50 for the year ended on 31.03.2013 & INR 17,16,33,625.49 for the year ended on 31.03.2014 and INR 18,17,15,020.54 for the year ended on 31.03.2015. Ld.AR for the assessee submits that the assessee is dealing in the handicraft items where goods were purchased on credit basis from local artisan and payments were made to them as and when goods were exported /sold and realization was made. During the course of assessment proceedings, assessee has provided complete list of total 680 Sundry creditors containing their addresses etc., out of which AO has sent summon u/s 133(6) of the Act to 168 parties as tabulated at page 2 to 10 of the assessment order. In the said table in Column No.4, AO observed that in most of the cases, replies were submitted and in few cases, notices were returned unserved or reply was not filed. Thereafter, AO deputed the Inspector to verify 39 creditors and it is reported by the Inspector all the 39 parties were not traceable therefore the AO was of the opinion that out of 680 creditors, inquiries were carried out in case 207 (168 + 39) creditors and out of which 63 creditors were found as not available at the given addresses or notices sent were returned unserved which comprises of the amount of INR 1,46,72,415/- out of the total creditors of INR 5,01,86,101/- in cases of which inquiries were made and AO has made the disallowance by taking the percentage of 29.24% i.e. value of 63 creditors out of total value of 207 creditors. Ld. AR submits that AO has made sample inquiries and based on sample inquiries, doubted the existence of the creditors and disallowed 29.24% of the total amount outstanding of Sundry creditors without any cogent basis. Ld.AR submits that in the case of assessee, assessments for Printed from counselvise.com ITA No.4381/Del/2025 Page | 5 AY 2012-13 & 2013-14 were completed u/s 143(3) wherein after considering the details filed by the assessee which interalia includes PAN and addresses of sundry creditors, no adverse view was taken. Ld. AR further submits that the creditors were paid off in subsequent Assessment Years. Therefore, no addition could be made with respect to the creditors which were duly recorded and acknowledged in the books of accounts. Ld.AR further filed a written submissions which reads as under:- 1. “The appellant/assessee is a partnership firm engaged in the business of export of Indian Handicrafts. Return of Income for the year under consideration was filed on 26/11/2024 declaring income of Rs. 92,29,680/-. The case was selected for scrutiny and assessment u/s 143(3) was completed vide assessment order dated 12/07/2016 at income of Rs. 93,74,390/- after making certain disallowance out of miscellaneous expenses, staff welfare, telephone and vehicle maintenance expenses etc. 2. Subsequently order u/s 263 was passed by Ld. PCIT, Moradabad on 28/03/2019 for making fresh assessment. The impugned assessment order has been passed under section 143(3)/263 of the Act. 3. The issue involved in the present appeal is with regard to addition made by the AO on account of cessation of liabilities, which has been confirmed by CIT(A). The brief facts are that there were total of 680 creditors amounting to Rs. 17,12,38,198/-outstanding as at the year end. As per the assessment order, out of total creditors, the Assessing Officer issued notice/made inquiry from 207 creditors involving amount of Rs. 5,01,86,101/-. According to the Assessing Officer, response was not received from 63 parties amounting to Rs. 1,46,72,415/-i.e. 29.24% of Rs. 5,01,86,101 to whom notices were issued/inquiries were made. As per this methodology of Assessing Officer, he made addition of 29.24% of total creditors of Rs. 17,12,38,198/- which comes to 5,00,70,049/-. The Assessing Officer has made the addition on account of alleged cessation of liability. The CIT(A) has confirmed the addition made by the Assessing Officer. The addition made by the Assessing Officer and confirmed by CIT(A) can be tabulated as under: Printed from counselvise.com ITA No.4381/Del/2025 Page | 6 S. No. Particulars No of Parties Amount (Rs.) A Total creditors 680 17,12,38,198/- B Notice issued u/s 133(6) / inquiry made by Assessing Officer 207 5,01,86,101/- C Response not received according to Assessing Officer 63 1,46,72,415/- D % of C to A 29.24% Addition made by Assessing Officer: 29.24% is Rs. 17,12,38,198/- is Rs. 5,00,70,049/-. 4. It is humbly submitted that the addition made by the Assessing Officer and confirmed by CIT(A) is totally erroneous because of the following: I. There is no cessation of liabilities as the liabilities of the sundry creditors is duly recorded and acknowledged in the books of accounts and audited financial statement. II. All the purchases/expenses and trading results have been accepted and, therefore, there is no justification for addition of corresponding sundry creditors. III. There is no legal basis/justification for adhoc/estimated addition of the sundry creditors. Each of the above contention is elaborated as under: - I. There is no cessation of liabilities as the liabilities of the sundry creditors is duly recorded and acknowledged in the books of accounts and audited financial statement. 1.1. It is submitted that the assessing officer has erred in making the addition of Rs. 5,00,70,049/- on account of alleged cessation of liability and CIT(A) erred in confirming the same. It is humbly submitted that there is no remission or cessation of liability. The assessee has duly shown the liability in its books of account and audited statement of accounts. Thus, the assessee is duly acknowledging the liabilities and the assessing officer cannot treat the liabilities as having been ceased. 1.2. The head note in the case of CIT v Shadilal Sugar Works (P.) Ltd [1999] 102 Taxman 713 (SC) held as under :- Printed from counselvise.com ITA No.4381/Del/2025 Page | 7 Section 41(1) of the Income-tax Act, 1961 Remission or cessation of trading liability Assessment year 1965-66 - Whether obtaining by assessee of a benefit by virtue of remission or cessation is sine qua non for application of section 41(1) -Held, yes - Whether mere fact that assessee has made an entry of transfer in his accounts unilaterally would not enable department to say that section 41(1) would apply and amount should be included in total income of assessee - Held, yes The facts of the case of the appellant before your honour are even stronger. The appellant has not even made any entry of transfer in its accounts for writing off the liability. 1.3. The Hon'ble apex court in the case of CIT v Kesaria Tea Co. Ltd. [2002] 122 Taxman 91 (SC) held as under :- In order to apply section 41(1), the following points are to be kept in view: (1) in the course of the assessment for an earlier year, allowance or deduction has been made in respect of trading liability incurred by the assessee, (2) subsequently, a benefit is obtained in respect of such trading liability by way of remission or cessation thereof during the year in which such event occurred: (3) in that situation the value of benefit accruing to the assessee is deemed to be the profit and gains of business which otherwise would not be his income; and (4) such value of benefit is made chargeable to income-tax as the income of the previous year wherein such benefit was obtained. The Hon'ble Apex Court further held that even an unilateral action on the part of the assessee by way of writing-off the liability in its accounts does not necessarily mean that the liability ceased in the eye of law. The facts of the case of the appellant before your honour are even stronger. The appellant has not even written off the liability in its accounts. 1.4. In the case of CIT v Shri Vardhman Overseas Ltd 2011(12) TMI 77 - Delhi High Court addition u/s 41(1) was made in respect of Sundry Creditors outstanding for more than 4 years by treating them as non-genuine creditors as the assessee failed to file confirmation of the creditors. The Hon'ble High Court held that since the amounts were acknowledged as liability by the assessee Printed from counselvise.com ITA No.4381/Del/2025 Page | 8 in its audited statement of accounts, there was no remission/cessation of liability. 1.5. Reliance is also placed on the following case laws :- * PR. COMMISSIONER OF INCOME TAX AHMEDABAD VERSUS MATRUPRASAD C PANDEY (2015) 377 ITR 363 (Gul) * CIT V. SMT, SITA DEVI JUNEJA: (2010) 325 ITR 593 (P & H) * CIT VERSUS NARENDRA MOHAN MATHUR 2013 (11) TMI 1707-RAJASTHAN HIGH COURT * JK. CHEMICALS LTD. VERSUS COMMISSIONER OF INCOME TAX 119661 62 ITR 34-BOMBAY HIGH COURT * M/S. FLO DYNE CONTROLS (INDIA) PVT. LTD VS ITΟ 2018 (6) ΤΜΙ 897 - ITAT MUMBAI * DCIT vs M/S, TRANS FREIGHT CONTAINERS LTD. 2018(5) TMI 419 - ITAT MUMBAI * ANIL KUMAR DANGAYACH HUF VERSUS THE INCOME TAX OFFICER, WARD 3(2), JAIPUR 2018 (3) TMI 1515-ITAT JAIPUR * JASHOJIT MUKHERJEE V ACIT (2018) (5) TMI 1311 ITAT, KOLKATA II. All the purchases/expenses and trading results have been accepted and, therefore, there is no justification for addition of corresponding sundry creditors. In the present case the assessing officer has not doubted the purchases made by the appellant. The corresponding sales also have been duly accepted. The assessing officer has accepted all the purchases/expenses of the appellant. The trading results have been accepted. Books of account have been accepted. Books of accounts have been accepted. Once the purchases and trading results have been accepted, no addition can be made in respect of outstanding balance of sundry creditors as at the year end. The Hon'ble Delhi High Court in the case of CIT v. Ritu Anurag Agarwal 2009 (7) TMI 1247-Delhi High Court held as under:- This finding of AO remained undisturbed before the CIT(A) as well and has been accepted by the ITAT. Proceeding on this basis, the ITAT observed that the sales, purchases as well as gross profits as disclosed by the assessee have been accepted by the Assessing Printed from counselvise.com ITA No.4381/Del/2025 Page | 9 Officer. Once this is accepted, we are of the opinion that the approach of the ITAT was correct in as much as the Assessing Officer did not consider this aspect while making additions of the sundry creditors under Section 68 of the Income Tax Act. As there was no case for disallowance for corresponding purchases, no addition could be made under Section 68 in as much as it is not in dispute that the creditors outstanding related to purchases and the trading results were accepted by the AQ, We are, therefore, of the opinion that no substantial question of law arises for consideration in this case. The appeal is accordingly dismissed. (emphasis supplied) The CIT(A) has referred to/relied upon decision of Hon'ble Ahmedabad Tribunal in the case of ACIT v. Dattatray Poultry Breeding Farm 171 ITD 615 on the ground that in the absence of PAN number and confirmations, the addition can be made on account of cessation of liability. In this regard it pointed out that the aforesaid decision of Hon'ble Ahmedabad Bench of ITAT relied upon by the CIT(A) has been reversed by Hon'ble Gujarat High Court in the case reported at 415 ITR 407 (Guj). The Hon'ble Gujarat High Court has held that when the assessee has shown trading liabilities in its books of account, the question of invoking section 41(1) of the Act would not arise. III. There is no legal basis/justification for adhoc/estimated addition of the sundry creditors. There is no provision under Income-tax law for making ad-hoc disallowance of sundry creditors as has been made by the AO and confirmed by CIT(A). Reliance in this regard is placed upon the on the recent judgement in the case of Bangalore Electricity Supply Company Ltd. Versus The Assistant Commissioner of Income Tax, Circle 1 (1) (2), Bangalore 2025 (1) TMI 1476 - ITAT Bangalore wherein it has been held as under: - 19. We have carefully considered the rival contention and perused the orders of the learned lower authorities. The issue involved in this ground of appeal is that when the assessee has failed to furnish the complete details of the sundry creditors to the assessing officer stating it to be voluminous in nature, the learned assessing officer on his examination that assessee has failed maintain proper books of accounts, can result in to any addition u/s 41(1) of the Act. It was further stated that as the assessee has huge liability outstanding, he estimated 5% Printed from counselvise.com ITA No.4381/Del/2025 Page | 10 thereof as a liability ceased to exist and therefore chargeable to tax under section 41 (1) of the act. Before the learned CIT-A assessee furnished certain additional evidence. This additional evidence was forwarded to the learned assessing officer for his comments. Even after substantial lapse of time, the learned assessing officer did not submit his remand report on this issue. Thereafter the learned CIT-A examined the details himself. He found that the number of creditors outstanding at the end of the year are shown in the books of accounts of the assessee. In subsequent year, on sample basis, he verified that the payments have been made to these parties. Therefore, when the payments have been made to the sundry creditors which were outstanding on the last day of the accounting period, in subsequent accounting year, there cannot be any cessation of liability to that extent. The learned CIT-A further dealt with the doubt expressed by the learned assessing officer about the irregularity in sundry creditors and held that such doubt was unfounded. In paragraph number 9.5, he dealt with major creditors outstanding and how they have been dealt with in the books of accounts subsequently with respect to the payment. Therefore, he held that when the assessee has claimed to have made payments to the creditors in subsequent years, the fact of the outstanding liability in existence as on 31/3/2017 cannot be denied. He further held that the learned assessing officer has not pointed out any instance of any liability ceasing to exist out of the huge sum. He also rejected the criteria applied of 5% to make an addition to the total income of the assessee. In fact, according to the provisions of section 41 (1), there is no scope for any estimation of income, whatever liability has ceased to exist becomes the income of the assessee. Therefore, natural corollary would be that the amount of addition under section 41(1) cannot be made on ad hoc basis. The learned assessing officer has applied five percentage of the total liability outstanding in the books of the assessee and held that it has ceased to exist and therefore chargeable to tax under section 41 (1) of the Act. On reading of the provisions under section 41 (1) of the Act any ad hoc addition is not warranted. It must be the actual liability which has ceased to exist, is chargeable to tax in the hands of the assessee. Therefore, we do not find any infirmity in the order of the learned CIT-A in dealing with the additional evidences filed by the assessee, which were sent for remand report to the Printed from counselvise.com ITA No.4381/Del/2025 Page | 11 assessing officer but for substantial time no such remand report was submitted, and therefore on examination by the learned CIT-A, he has reached at a conclusion that the liability is stated by the assessee as on 31/3/2017 is in existence and has not ceased and therefore not chargeable to tax under section 41 (1) of the act. Accordingly, we dismiss ground number 2 of the appeal of the learned AO. Reliance is also placed upon the case of JCIT v. Yashmaan Pathak ITA No.265/Mum/2023 ITAT Mumbai wherein it was held as under: - 7. After considering the relevant finding given in the assessment order as well as the appellate order, we find that, nowhere the AO, or Ld. CIT (A) have discussed as to what was the details filed by the assessee before the AO & CIT (Appeals). Merely because there are Sundry Creditors appearing in the balance sheet, then it does not entail invoking of provision of section 41(1) automatically. There has to be something on record that there is a cessation of liability and the entire conditions precedent for invoking section 41(1) has to be fulfilled. There is no scope of any kind of adhoc or estimated addition u/s. 41(1). Thus, we do not find any infirmity in the order of the Ld. CIT (A) in deleting the said addition. Reliance is also placed upon the following case laws: - - Girishbhai Ranchodlal Maliwad Versus The Dy. Commissioner of Income Tax, Circle 1 (3) 2021 (11) TMI 256- ITAT Ahmedabad - Income Tax Officer Versus Smt. Meena Gupta 2013 (10) TMI 210 -ITAT Agra In view of the above, it is submitted that addition of Rs. 5,00,70,049/- made by the assessing officer and confirmed by CIT(A) is not sustainable and the same is liable to be deleted.” 8. On the other hand, Ld. Sr. DR for the Revenue submits that AO has made inquiry from 207 parties out of total 680 parties out of which 63 parties were found non-existent though spot enquiries or summons issued to them returned were unserved thus, the AO Printed from counselvise.com ITA No.4381/Del/2025 Page | 12 concluded that these are bogus parties. AO made the addition for only those who had not made the replies. Accordingly, the ld. Sr DR supported the orders of the AO and prayed for the confirmation of the orders of the lower authorities. 9. In re-joinder, Ld.AR for the assessee submits that the judgement of Co-ordinate Bench of Ahmedabad Tribunal relied upon by Ld.CIT(A) in the case of ACIT vs Dattatray Poultry Breeding Farm Pvt.Ltd. (supra) has already been reversed by the Hon’ble Gujarat High Court in the case of Dattatray Poultry Breeding Farm Pvt.Ltd. vs ACIT [2019] (4) TMI 1171 (Gujarat) and the copy of the same is placed before us in Paper Book at pages 56 to 65. 10. Heard the contentions of both the parties and perused the material available on record. In the instant case, AO had made the addition of 5,00,70,049/- being 29.24% of the total creditors of INR 17,12,38,198/- alleging as non-existent/ bogus. This percentage of 29.24% was derived from the conclusion that out of inquiries made in respect of 207 creditors, 63 parties were found non-existent or not filed any replies. Accordingly, the amount outstanding against the names of these 63 parties of INR 1,46,72,415/- was taken as the numerator and outstanding balances of 207 creditors from whom enquiries were made of INR 5,01,86,101/- was taken as denominator and percentage of 29.24% was worked out. The AO has taken this percentage as the basis for alleging that out of total outstanding balances of INR 17,12,38,198/- in the name of Sundry creditors, and made the addition of INR 5,00,70,049/- u/s 41(1) as cessation of Printed from counselvise.com ITA No.4381/Del/2025 Page | 13 liability solely on presumption basis without their being any concrete inquiry in this regard. For making addition u/s 41(1) of the Act, the burden to hold such liability as non-existent is on the AO. It is a fact on record that assessments for preceding AYs were completed u/s 143(3) of the Act where purchases made were accepted and also the Sundry creditors declared were not doubted and also in the impugned year, purchases declared by the assessee stood accepted and even the sales and trading results declared were also accepted. 11. It is the fact that amount of outstanding credits stood increased from INR 11.38 crores to INR 17.16 crores in the year under appeal. This is mainly due to increase in the volume of business which is reflected from the turnover as well as amount of purchases where the sales has increased from INR 15.52 crores in 31.03.2013 to INR 25.89 crores in the year under appeal. The assessee has never claimed the creditors as non-existent and were acknowledged in the books of accounts and also filed their complete particulars thus no addition should be made towards the Cessation of liability u/s 41(1) of the Act. It is further observed that these creditors were repaid in the subsequent years where no doubts were raised by the Revenue thus, their existence as well as the fact of creditors being live is established. The Hon’ble Supreme Court in the case of CIT vs Kesaria Tea Co. Ltd. (supra) under similar circumstances held that unilateral action on the part of the assessee by way of writing off the liability does not necessarily mean that the liability seized in the eyes of law. The Hon’ble Jurisdictional High Court in the case of CIT vs Shri Vardhman Overseas Ltd. (supra) has held that mere existence of Printed from counselvise.com ITA No.4381/Del/2025 Page | 14 liability for more than 04 years cannot be the ground for treating them as non-genuine even when the assessee has failed to file the confirmation. It is further held by the Hon’ble Court that amounts were acknowledged as liability in the books of accounts, the provision of section 41(1) of the Act, cannot be invoked. In the case of CIT vs Anurag Agarwal (supra), the Hon’ble Jurisdictional High Court has held as under:- “As there was no case for disallowance for corresponding purchases no addition could be made under section 68 in as much as it is not in dispute that the creditors outstanding related to purchases and the trading results were accepted by the AO. We are, therefore, of the opinion that no substantial question of law arises for consideration in this case. The appeal is accordingly dismissed.” 12. The Co-ordinate Bench of the Tribunal in the case of Shiv Hari Singla vs ITO in ITA No.1277/Del/2020 [Assessment Year 2012- 13] order dated 27.08.2025 under identical circumstances, has deleted the additions made on account of cessation of liability where trading result were accepted and there was no allegation of suppress sales and purchases and liabilities were discharged by payment in subsequent years and purely on assumptions and presumptions, creditors were doubted, no addition could be made u/s 41(1) of the Act. 13. Further, the Hon’ble Gujarat High Court in the case of ACIT vs Dattatray Poultry Breeding Farm Pvt. Ltd. (supra) after considering the provisions of section 141(1) of the Act, had reversed the order of the tribunal by making following observations:- 8. “The facts are not in dispute, in the present case, during the course of scrutiny assessment the Assessing Officer noted that Printed from counselvise.com ITA No.4381/Del/2025 Page | 15 in the balance sheet, the assessee had shown huge sundry creditors of Rs. 74,40,360/- as on 31.10.2010, The Assessing Officer carried out an inquiry into the genuineness creditors and came to the conclusion that the assessee company was doing job work only and hence, there would be no purchases and hence, there was no possibility of such huge amount outstanding in respect of such sundry creditors. He, however, issued notices to the creditors and found that in case of several creditors, the notices were returned unserved and that in case of some of the creditors, they categorically denied having had made any transactions with the assesses. The Assessing Officer, therefore, recorded a finding that there was no genuine creditors appearing in the balance sheet of Rs. 74,40,360/- as on 31.10.2010. The Assessing Officer held that the onus was cast upon the assessee to prove the genuineness of the creditors appearing in the balance sheet. The assessee had neither produced the creditors nor furnished even confirmations and proper addresses of the creditors and some of the creditors had also categorically denied having made any transactions with the assessee. Out of the total creditors, only two creditors namely C.R. Share Dalal & Co. Rs.3,210/- and Dattatrays Sales & Services Rs.187,962 were treated as genuine since contra confirmation, PAN had been received. The Assessing Officer held that the facts on record establish that except for the above two creditors there were no genuine creditors and, accordingly, treated the amount of 72,49,188/- (Rs. 74,40,360- ₹1,91,172) as cessation of liability within the meaning of section 41(1) of the Act and added the same to the income of the assessee. 9. The Commissioner (Appeals), in the order dated 20.5.2014, has compared the facts of the present case with the facts of the case in Commissioner of Income Tax-III v. Bhogilal Ramjibhal Atara (supra) and has found that the facts of the present case are more or less similar to the facts of the said case and has, accordingly, held that the issue is squarely covered in favour of the assessee by the above decision of this court and deleted the addition made under section 41(1) of the Act. 10. The Tribunal, in the impugned order, has concurred with the findings recorded by the Assessing Officer and has placed reliance upon the decision of this court in Gujtron Electronics (P) Ltd. v. Income Tax Officer (supra) and held that after detailed inquiry, the revenue authorities have found as a matter of fact that the liabilities shown in the balance sheet do not, in fact, exist, and that the revenue authorities are not expected to put blinkers while looking at the outstanding trading liability. Printed from counselvise.com ITA No.4381/Del/2025 Page | 16 According to the Tribunal, merely because the liabilities had been shown in the books of accounts and not written back, would not, the down the revenue to hold such liabilities to be subsisting liability. The Tribunal, in the facts of the present case, found that the liabilities shown in the balance sheet as existing by the assessee were found to be symbolic by the Assessing Officer. According to the Tribunal, the onus is on the assessee to show the reasons why it believed at the time of filing the return that the liabilities were true. No such attempt was even made to prove the existence of liabilities and that in this view of the matter, the incidence of taxation under section 41(1) of the Act cannot be escaped on non-existing liability. The Tribunal held that the onus is on the assessee to show that the year of cessation is different and that in the facts and circumstances of the case, the assessee did not admit cessation in the first place, and therefore, the Assessing Officer was within his right to hold the financial year in question as the right year for taxability when the facts regarding the non-existence were unraveled. The Tribunal, accordingly, set aside the order passed by the Commissioner (Appeals) and restored the order passed by the Assessing Officer. 11. It may be noted that in the facts of the present case, the addition is sought to be made on the ground that there was cessation of trading liabilities under section 41(1) of the Act. Section 41(1), to the extent the same is relevant for the present purpose, reads as under:- 41. Profits chargeable to tax.-(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 Printed from counselvise.com ITA No.4381/Del/2025 Page | 17 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) of the successor in business under clause (b) of that subsection by way of writing off such liability in his accounts. 12. The above provision has been interpreted by the Supreme Court in the case of Commissioner of Income Tax v. Sugauli Sugar Works (P) Ltd. (supra), wherein the court has concurred with the reasoning adopted by a Full Bench of this court in the case of Commissioner of Income Tax v. Bharat Iron & Steel Industries, (1993) 199 ITR 67 (Guj.), and held thus: \"9. One aspect of the matter has been completely ignored by the judgment of the Division Bench at the Bombay High Court. As pointed out already, the crucial words in the section require that the assessee has to obtain in cash or in any other manner some benefit. That part of the section has been omitted to be considered by the Division Bench of the Bombay High Court. The said words have been considered by a Full Bench of the Gujarat High Court in detail in CIT v. Bharat Iron & Steel Industries, (1993) 199 ITR 67 (Guj.). The following passages in the judgment bring out the reasoning of the Full Bench succinctly: \"11. In our opinion, for considering the taxability of amount coming within the mischief of Section 41(1) of the Act, the system of accounting followed by the assessee is of no relevance or consequence. We have to go by the language used in Section 41(1) to find out whether or not the amount was obtained by the assessee or whether or not some benefit in respect of trading liability by way of remission or cessation thereof was obtained by the assessee and it is in the previous year in which the amount or benefit, as the case may be, has been Printed from counselvise.com ITA No.4381/Del/2025 Page | 18 obtained that the amount or the value of the benefit would become chargeable to income tax as income of that previous year. 12. We fully agree with the view taken by the Division Bench in CIT v. Rashmi Trading, [1976] 103 ITR 312 (Guj), that the only meaning that can be attached to the words 'obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure' incurred in any previous year clearly refer to the actual receiving of the cash of that amount. The amount may be actually received or it may be adjusted by way of an adjustment entry or a credit note or in any other form when the cash or the equivalent of the cash can be said to have been received by the assessee. But it must be the obtaining of the actual amount which is contemplated by the legislature when it used the words has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure in the past. As rightly observed by the Division Bench in the context in which these words occur, no other meaning is possible.\" We are in agreement with the said reasoning.\" 13. The court held that the principle that expiry of the period of limitation prescribed under the Limitation Act could not extinguish the debt but it would only prevent the creditor from enforcing the debt has been well settled. It was further held that if that principle is applied, it is clear that mere entry in the books of counts 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. 14. In the facts of the present case, it is not even as if the assessee debtor has unilaterally made any entry in the books of account. Merely on the ground that a considerable time has elapsed since the debts were incurred and more particularly on the ground of genuineness of such debts, the Assessing Officer has passed the order under section 41(1) of the Act. There is no material whatsoever on record to show that there was cessation or remission of liability during the previous year relevant to assessment year 2010-11. namely the year under consideration. 15. From the findings recorded by the Assessing Officer as well as the Tribunal, it appears that the very genuineness of such Printed from counselvise.com ITA No.4381/Del/2025 Page | 19 entries has been doubted, inasmuch as the Assessing Officer has tried to verify the existence of such liabilities from the creditors, however, many were not found at the given address and some of them had categorically denied having any transaction with the assessee. in the opinion of this court, if the existence of such liabilities is doubted, the same could have been disallowed in the year in which it was claimed, or could have been treated as unexplained cash credit in the hands of the assessee under section 68 of the Act in the relevant assessment year, but the same cannot be taxed under section 41(1) of the Act, inasmuch as if the liability itself is not genuine, the question of remission or cessation thereof would not arise. 16. Section 41(1) of the Act can be applied, provided the following conditions are fulfilled: - In the assessment of any assessee, an allowance or deduction has been made in respect of any loss, expenditure or trading liability incurred by him; - any amount is obtained in respect of such loss or expenditure; or any benefit is obtained in respect of such trading liability by way of remission or cessation thereof, - such amount or benefit is obtained by the assessee; - such amount or benefit is obtained in a subsequent year, 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. 17. In the facts of the present case, while the assessee has shown the trading liability in its books of account, no benefit has been obtained in respect of such trading liability 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 Assessing Officer that the liabilities ceased to exist in the previous year relevant to the assessment year under consideration. In fact the Assessing Officer has doubted the Printed from counselvise.com ITA No.4381/Del/2025 Page | 20 very genuineness of such liabilities. Therefore, in the absence of any liability, the question of taxing any income on the ground that there was remission or cessation of such non-existent liability would not arise. 18. The Tribunal, in the impugned order, has held that the Assessing Officer was right to hold the financial year in question as the right year for taxability when the facts concurring the non-existence were unrevealed (sic, revealed/unraveled). Thus, the Tribunal has doubted the very existence of the trading liabilities. Thus, the reasoning adopted by the Tribunal is contrary to the provisions of section 41(1) of the Act, which can be invoked provided there is trading liability in existence and there is remission or cessation of such liability. If no trading liability exists, the question of invoking section 41(1) of the Act would not arise. 19. In the opinion of this court, the decision of this court in the case of Commissioner of Income Tax-II v. Bhogilal Ramjibhai Atara (supra) would be squarely applicable to the facts of the present case, wherein the court held thus: \"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 Printed from counselvise.com ITA No.4381/Del/2025 Page | 21 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 il the debt itself is found to be nongenuine 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.\" 20. The facts of the present case are more or less similar to the facts of the above case, and hence, the Commissioner (Appeals) was wholly justified in holding that the said decision would be squarely applicable to the facts of the present case and in deleting the addition. 21. Another relevant aspect of the matter is that the appellant has written of some of the liabilities in the subsequent assessment years and offered the same as income, therefore, taxing such income in the year under consideration would amount to taxing the same income twice, which is impermissible in law. 22. Insofar as the decisions on which reliance has been placed by the learned senior standing counsel for the respondent are concerned, the decision of the Delhi High Court in the case of Commissioner of Income Tax v. Chipsoft Technology (P) Ltd. (supra), is contrary to the settled view taken by this court in various decisions on which reliance has been placed by the learned advocate for the appellant. 22.1 The decision of the Bombay High Court in the case of Palkhi Investments & Trading Co. (P) Ltd. v. Income Tax Officer, Mumbai (supra) would also not be applicable to the facts of the present case, inasmuch as the same was rendered in the context of penalty proceedings. It may be further noted that in paragraph 7 of the said judgment, the court has categorically noted that the learned counsel appearing for the revenue attempted to take the court over the applicability of section 41(1) to the facts of the said case, but the court had stopped him from doing so. Under the circumstances, the controversy in issue in the present case was not in issue before the court in the said case and hence, the said decision does not carry the case of the revenue any further. 22.2 In Rama Steel Rolling Mills & General Engg. Works v. Income Tax Officer, Ward-3(1) (supra), the Rajasthan High Court held that though no principle of law has been laid down, no Printed from counselvise.com ITA No.4381/Del/2025 Page | 22 substantial question of law arose for consideration regarding the effect of section 41(1) of the Income Tax Act resulting into remission or cessation of the trade liability standing in the books of account; under the circumstances, the said decision does not in any manner come to the aid of the revenue. 23. In the light of the above discussion, the court is of the view that the impugned order passed by the Tribunal suffers from various infirmities as referred to hereinabove and therefore, cannot be sustained. 24. The appeal, therefore, succeeds and is, accordingly, allowed. The impugned order dated 19.6.2018 passed by the Income Tax Appellate Tribunal in ITA No.2193/Ahd/2014 is hereby quashed and set aside. The questions are answered in the negative, that is, in favour of the appellant and against the revenue. It is held that the Income Tax Appellate Tribunal was not justified in upholding the addition under section 41(1) of the Income Tax Act, 1961. The Tribunal was also not justified in upholding the addition under section 41(1) of the Act in respect of liabilities written off and offered as income in subsequent years.” 14. In view of the above facts and considering the submissions, we find that AO has not doubted the trading results and accepted the increase in purchases and sale thus, consequent increase in the amount of Sundry creditors and further, looking to the facts that in preceding years also, the creditors were accepted in the assessment order passed u/s 143(3) of the Act, no addition is required to be made u/s 41(1) towards cessation of liability. Our view is further supported by various judgements of hon’ble Supreme court and various hon’ble High Courts as stated herein above. Therefore, the addition made by the AO as cessation of liability cannot be made Accordingly, the same is hereby, deleted. Grounds of appeal Nos. 2 to 4 raised by the assessee are allowed. Printed from counselvise.com ITA No.4381/Del/2025 Page | 23 15. In the result, appeal of the assessee is partly allowed. Order pronounced in the open Court on 04.02.2026. Sd/- Sd/- (ANUBHAV SHARMA) JUDICIAL MEMBER Date:-04.02.2026 *Amit Kumar, Sr.P.S* (MANISH AGARWAL) ACCOUNTANT MEMBER Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT 6. Guard File ASSISTANT REGISTRAR ITAT, NEW DELHI Printed from counselvise.com "