ITAT Mumbai Strikes Down Rs. 9.59 Crore Addition Under Section 41(1): Creditor's Own Confirmation Seals the Fate of Revenue's Cessation Claim
Overview of the Dispute
In a significant ruling that reinforces the well-established legal boundaries governing Section 41(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal, Mumbai Bench, dismissed the Revenue's appeal in the case of ITO Vs Seth Carbon & Alloys Private Limited, upholding the deletion of a substantial addition of ₹9,59,78,916/- (approximately ₹9.59 crore) made on account of alleged cessation of a trading liability. The order was pronounced on 18th May, 2026, and pertains to the Assessment Year 2016-17, with the quantum assessment having been framed under Section 143(3) of the Income Tax Act, 1961.
The case presents a textbook illustration of how the Revenue can sometimes build an inference upon its own gathered evidence, only for that very evidence to dismantle the foundation of the addition. The ITAT's ruling serves as a crucial reminder that Section 41(1) is not a tool for presumptive taxation — it demands concrete proof of benefit derived through remission, waiver, or legal extinguishment of liability.
Background: Who Is the Assessee and What Was the Assessment About?
Seth Carbon & Alloys Private Limited is a company engaged in the trading of ferrous and non-ferrous metals. For the relevant assessment year, the assessee had filed its return of income declaring a total income of ₹18,51,959/-.
During the course of scrutiny proceedings under Section 143(3), the Assessing Officer (AO) noticed a significant outstanding payable reflected in the assessee's books in the name of M/s Pipavav Defence and Offshore Engineering Co. Ltd., amounting to ₹9,59,78,916/-. This large outstanding balance drew the AO's attention, prompting him to investigate whether the liability was still genuine and enforceable or had effectively ceased to exist.
The Assessing Officer's Action: Notice Under Section 133(6) and Erroneous Inference
To verify the nature and status of the outstanding liability, the AO issued a notice under Section 133(6) of the Income Tax Act, 1961 to M/s Pipavav Defence and Offshore Engineering Co. Ltd. (the creditor). In response, the creditor, vide its letter dated 26.11.2018, confirmed that an amount of ₹9,54,77,917/- was indeed receivable from the assessee and further stated that no payment had been received from the assessee during the relevant year or the subsequent period covered in the notice.
Now, here is where the AO's reasoning took a legally questionable turn. The assessee had, during the course of assessment proceedings, indicated that payments had been made to the creditor in subsequent years. Since the creditor denied having received such payments, the AO concluded that there was a contradiction — and on the basis of this supposed discrepancy, he inferred that the liability had ceased to exist and that the assessee had thereby derived a benefit in respect of its trading liability.
Acting on this inference, the AO invoked the provisions of Section 41(1) and made an addition of ₹9,59,78,916/- to the assessee's income, treating the entire outstanding payable as a ceased liability.
Critical Legal Point: The AO used the absence of payment confirmation as evidence of cessation — while simultaneously ignoring the creditor's explicit acknowledgment that the debt was still receivable and subsisting.
Proceedings Before CIT(Appeals): Assessee's Submissions and Deletion of Addition
The assessee challenged the addition before the learned CIT(Appeals)-48, Mumbai, raising several compelling arguments: