No addition can be made u/s 41(1) in respect of creditors outstanding at the end of the year:

AO found that there were certain outstanding creditors for goods at the end of the year and few of them were outstanding for over three years. AO issued notices u/s 133(6) to certain creditors which returned un-served and even the assessee couldn’t furnish confirmation of any of the creditors. Hence, AO concluded that the creditors no longer existed at the given places, the said outstanding sums were no more payable and the liability had ceased to exist. Accordingly, an addition was made in respect of such creditors u/s 41(1). The Hon’ble ITAT observed that the assessee had shown such creditors as its liability in the Balance-sheet and the same was in respect of purchases made by the assessee. The assessee had not written off the said amount and had acknowledged the liability to pay by reflecting the same in Balance-sheet. Even the Revenue had not brought anything on record to prove that the assessee had obtained any benefit either by way of remission or cessation of liabilities. In light of the aforesaid facts, the impugned addition was deleted by the Hon’ble ITAT.

[PURVIDEVI MAHENDRAKUMAR CHAUDHARY VS. ITO – ITA NOS.1426 & 1698/Ahd/2012]