The burden of proof lies upon the Assessee to establish the current existence of the creditors and their debts due from the Assessee. The court emphasized the need for the Assessee to produce written confirmations from the Sundry Creditors to establish the current existence of the liabilities.

VINEET KOTHARI, J.

(Prayer: Tax Case Appeal filed under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, Chennai "C" Bench, dated 19.12.2007 in ITA No.2486/Mds/2006, for the Assessment Year 2003-04.)

1. The Assessee has filed this appeal under Section 260A of the Act raising the following substantial questions of law arising from the order of the Income Tax Appellate Tribunal dated 19th December 2007. The appeal was admitted by a Coordinate Bench of this Court on the following substantial questions of law on 17.6.2008:

"1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in confirming the assessment of Rs.58,60,105/- as income of the appellant, invoking Section 41(1) of the Income Tax Act? and

2. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in holding that in the absence of confirmation of balances and in the absence of evidence of claim for repayment during the previous year, the liability balances should be deemed to have ceased warranting the invocation of Section 41(1) of the Income Tax Act?"

2. The facts of the present case in a nut shell are as under:

The Assessment Year involved in the present case is 2003-04. The Assessing Authority added back a sum of Rs.58,60,105/- on account of the cessation of liability of Sundry Creditors in the hands of the Assessee. The Assessee was earlier engaged in the business of Timber, but about 10 years back from Assessment Year in the present case before us, it closed that Timber business and switched over to the business of Recruitment of Employees for sending to Gulf countries on behalf of certain foreign companies. The sundry creditors, about 16 in number, totalling to Rs.58,60,105/- represented the suppliers in the timber business of the Assessee and shown as Sundry Creditors in the Balance Sheet of the Assessee for the said Assessment Year 2003-04 also. The Assessing Authority asked the Assessee to produce the confirmations from those Sundry Creditors about the current existence of its liability in respect of the above parties. But, the Assessee company submitted that these are old balances outstanding for last several years and therefore, it was unable to produce such written confirmations. The Assessing Authority, therefore, held that the liability of the Assessee towards such Sundry Creditors had ceased to exist and therefore, the same was liable to be added back as income of Assessee as per Section 41(1) of the Act, in the present Assessment Year 2003-04. The appeals filed by the Assessee against such addition in the income under Section 41(1) of the Act also came to be dismissed by both the Appellate Authorities, namely, Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal. The findings of both the Appellate Authorities in this regard are quoted below for ready reference.

3. The findings of the Commissioner of Income Tax (Appeals) are as under:

"2.6. I am of the view that the facts of the appellant are entirely different from the above case and hence, the said ratio of the said decision of Hon'ble SC cannot be applied in the present case. In the case of the appellant, the sundry creditors were existing in the books for more than 7 years. None of those parties had admittedly approached the appellant for the recovery of their amounts. The said amounts were being utilised by the appellant for all these years without paying any interest. During the course of assessment as well as the appellate proceedings, the appellant has not been able to file confirmations from any of the above parties. I had given the option to the AR to file confirmation even at this stage but the same has not been availed by the appellant. These facts clearly indicate that the said liability has ceased to exist.

2.7. One of the main condition in Section 41(1) is that there should either be remission or cessatio