For invoking section 41(1), there must be an allowance or deduction claimed by the assessee in the past concerning a trading liability, which is subsequently remitted or ceased.

 

In the case of Income Tax Officer Ward-2(1), Nagpur v. N. Kumar Housing and Infrastructure Pvt. Ltd., ITA No. 481/Nag/2024, dated February 25, 2025, the Income Tax Appellate Tribunal (ITAT) Nagpur Bench addressed the applicability of Sections 41(1) and 68 of the Income Tax Act, 1961, concerning the addition of lease advances and booking advances as alleged ceased liabilities.

Let us have a Short Overview of the case:

The assessee, engaged in constructing commercial and residential properties, filed its return for the assessment year 2020-21, declaring a total loss of ₹3,85,795. The case was selected for limited scrutiny due to high creditors/liabilities and investment in immovable property. During assessment, the Assessing Officer (AO) observed that the assessee had reported “other payables” amounting to ₹15,20,00,000, which included lease deposits and booking advances.

The AO questioned the genuineness and existence of these long-standing liabilities, leading to an addition of ₹5.20 crore under Section 41(1) of the Act, treating them as ceased liabilities.

Key Issues:
1. Applicability of Section 41(1): Whether the lease deposit of ₹3 crore and booking advances of ₹2.20 crore could be treated as income due to cessation of liability under Section 41(1).
2. Applicability of Section 68: Whether these amounts could be added as unexplained cash credits under Section 68.

Findings:
• Lease Deposit: The assessee received a lease advance of ₹10 crore from M/s. Poonam Resorts Ltd. before the financial year 2011-12 and an additional ₹3 crore during the financial year 2011-12. The AO, upon examining the lease agreement dated September 13, 2011, acknowledged the ₹10 crore advance but doubted the additional ₹3 crore, treating it as a ceased liability.
• Booking Advances: The assessee had booking advances totaling ₹2.20 crore, received from various parties for property bookings. The AO noted the absence of stock or work-in-progress in the assessee’s financial statements from the assessment year 2015–16 onwards and the lack of detailed information about the parties from whom these advances were received. Consequently, the AO treated these advances as ceased liabilities.

ITAT’s Analysis:

The ITAT observed that for Section 41(1) to apply, there must be an allowance or deduction claimed by the assessee in the past concerning a trading liability, which is subsequently remitted or ceased. In this case, the lease deposits and booking advances were not claimed as deductions in any assessment year. Moreover, there was no evidence of remission or cessation of these liabilities during the relevant assessment year. The mere passage of time or the AO’s suspicion does not justify the addition under Section 41(1).

Regarding Section 68, which pertains to unexplained cash credits, the ITAT noted that the amounts in question were not credits recorded during the relevant previous year but were longstanding entries. Therefore, Section 68 was not applicable.

The Copy Of the order is as under:

1740484271-mcxb99-1-TO