ITAT Upholds Rs 35 Lakh Addition Under Section 41(1) :

The assessee is an individual, filed his income tax return for Assessment Year 2017-18 on October 31, 2017, declaring total income of Rs 7,76,520. During the assessment proceedings, the AO made, among other adjustments, an addition of Rs 35 lakh under Section 41(1) of the Act and an addition of Rs 1,10,08,143 under Section 68. The assessee challenged the addition under Section 41(1), while the Revenue appealed against the relief granted by the CIT(A) concerning the addition under Section 68.

During the assessment proceedings, the AO issued a notice under Section 133(6) of the Income Tax Act to M/s Rao Tourist Service Private Limited, the creditor, seeking details of the transactions. However, the creditor did not respond or furnish the requested documents. The assessee argued that the outstanding liability could not be treated as having ceased merely because the creditor had failed to respond. Nevertheless, the AO treated the liability as having ceased and made an addition of Rs 35 lakh under Section 41(1). The CIT(A) upheld the addition, noting that the assessee had failed to furnish a confirmation or supporting evidence to establish the liability.

Before the Tribunal, the assessee submitted that the transactions had been undertaken in the ordinary course of business but failed to substantiate the claim with concrete evidence. The Tribunal observed that, in the absence of confirmation from the creditor, the liability remained unexplained and unsubstantiated. It further noted that the creditor had shown no interest in furnishing details or pursuing recovery of the amount. In these circumstances, the Tribunal found no infirmity in the CIT(A)’s findings and upheld the addition of Rs 35 lakh under Section 41(1). 

After considering the rival submissions and the material on record, the Tribunal observed that the AO had merely noticed a surge in cash deposits during the demonetisation period but had not produced evidence to establish that the assessee’s explanation regarding the source of the deposits was incorrect.

The Tribunal observed the settled legal principle that suspicion, however strong, cannot take the place of evidence. It held that an addition under Section 68 could not be sustained merely on the basis of the AO’s suspicion about the cash deposits. Accordingly, the Tribunal found no infirmity in the CIT(A)’s decision to delete the addition of Rs 1,10,08,143.

The Tribunal dismissed both appeals. It upheld the Rs 35 lakh addition under Section 41(1) because the assessee failed to substantiate the outstanding liability, while confirming the deletion of the Rs 1,10,08,143 addition under Section 68 because the Revenue had not established that the cash deposits represented unexplained income.