Re: Show cause notice for addition of loan u/s 41(a)

HUF taken loan from a company in which Karta is Director. The name of this company was automatically strike of by the ROC i.e. Closed. Now, the HUF cannot pay the loan as the company has been closed. HUF has received show cause notice for A.Y. 2018-19 why loan amount outstanding may not be added to your income u/s 41(a). HUF is ready to pay loan amount how to deal with this problem and case law may please be given. We seek your guidance.

With Highest Regards,

CA Suresh Goyal

The AO cannot invoke the provision of section 41(1) based on the facts stated by the querist.   The querist may refer ,CIT v. Mahindra And Mahindra Ltd. [2018] 404 ITR 1 (SC)  held that for application of section 41(1), it is sine qua non that there should be an allowance or deduction claimed by assessee in respect of loss, expenditure or trading liability incurred, however, assessee had not claimed deduction under section 36(1)(iii) for interest on loan and loan was obtained for acquiring capital assets, hence, waiver was on account of liability other than trading liability and, thus, provisions of section 41(1) were inapplicable

 

In  CIT v. Eco Auto Components Pvt. Ltd. (2018) 409 ITR 202 (P&H)(HC)  held that though the debt is time barred if the assessee is showing as liability addition cannot be made u/s 41(1) of the  Act .

The querist  may verify though the name of the company might have been  strike of by the ROC i.e. Closed, the bank account may be in operation . If the bank account is in operation the amount can be paid to the Company . If the company has gone voluntary winding up  one may have verify the condition prescribed for recovery or payment . The querist can take decision accordingly.

 

 

 

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