No Sec. 41(1) Additions for Unsecured Loans Not Claimed as Trading Liability; Only Interest Portion to be Added as Income

Case Details: Shimmer Textiles (P.) Ltd. vs. Income-tax Officer - [2023] 156 taxmann.com 624 (Kolkata - Trib.)

Judiciary and Counsel Details

• Sanjay Garg, Judicial Member & Dr. Manish Borad, Accountant Member
• Sunil Surana, A/R for the Appellant. 
• P.P. Barman, Addl. CIT, Sr. D/R for the Respondent.

Facts of the Case

The assessee took an unsecured loan. The assessee debited the interest on the loan, deducted TDS therefrom, and carried forward the loan amount’s net balance from year to year.

During the assessment proceedings for the impugned assessment year, the Assessing Officer (AO) noticed that the alleged sum (i.e., net balance) remained unpaid from the financial year 2001-02 onwards till the assessment year 2011-12. Accordingly, the AO invoked the provisions of section 41(1) and made an addition to the assessee’s income.

On appeal, the CIT(A) confirmed the additions made by AO, and the matter reached the Kolkata Tribunal.

ITAT Held

The Tribunal held that section 41(1) refers to trading liability. For instance, where the assessee purchases goods and the sundry creditors appear in the balance sheet. If the same has remained unpaid for a long time and the assessee fails to prove that such liability exists, then section 41(1) can be invoked in such cases.

In the instant case, the alleged sum was the outstanding loan balance. The assessee took a loan, but the same remained outstanding on the balance sheet only, and it had never been claimed as a trading liability. Only the interest on such a loan was claimed as an expenditure. Even the assessee contended that the loan liability existed as of the last day of the year under appeal.

Considering the facts, it was held that only the interest expenditure claimed by the assessee needed to be added back to the income of the assessee, but so far as the remaining amount was concerned, it being not in the nature of trading liability, cannot be added in the hands of the assessee under section 41(1).

Accordingly, the appeal was allowed.