Friday, December 8, 2023

Clarity on Unsecured Loans and Section 41(1)


In a recent decision by the Kolkata Tribunal, the case of Shimmer Textiles (P.) Ltd. vs. Income-tax Officer sheds light on the interpretation of section 41(1) of the Income Tax Act. The case revolves around the treatment of unsecured loans and the applicability of section 41(1) during assessment proceedings. This article aims to dissect the case facts parawise and pointwise to provide a clear understanding for taxpayers.

Case Background:

  1. Unsecured Loan and Treatment:

    • Shimmer Textiles (P.) Ltd. obtained an unsecured loan, for which the company debited the interest, deducted TDS, and carried forward the net balance from one financial year to the next.
  2. AO's Observation:

    • The Assessing Officer (AO) during the assessment for the relevant year noted that the outstanding sum (net balance) had not been repaid from the financial year 2001-02 until the assessment year 2011-12.
  3. Section 41(1) Invocation:

    • In response to the unpaid sum, the AO invoked the provisions of section 41(1) of the Income Tax Act, making an addition to the assessee’s income.

Appeal and CIT(A)'s Confirmation:

  1. CIT(A) Decision:

    • The case proceeded to the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the AO's addition, leading to the continuation of the dispute.
  2. Tribunal's Interpretation:

    • The matter eventually reached the Kolkata Tribunal, which delved into the interpretation of section 41(1).

Tribunal's Rationale:

  1. Section 41(1) and Trading Liability:

    • The Tribunal clarified that section 41(1) primarily pertains to trading liability. It is typically applicable when an assessee has purchased goods, and the sundry creditors, representing the unpaid amount, appear in the balance sheet. If such liabilities remain unpaid, and the assessee fails to substantiate their existence, section 41(1) can be invoked.
  2. Distinguishing the Case:

    • In the Shimmer Textiles case, the outstanding sum was the balance of an unsecured loan. Notably, this loan was never categorized as a trading liability on the balance sheet. The assessee solely claimed the interest on the loan as an expenditure.
  3. Nature of Liability:

    • The Tribunal emphasized that the loan liability, in this instance, was not akin to a trading liability. The loan amount, being outstanding on the balance sheet without being claimed as a trading liability, could not be subjected to section 41(1).

Tribunal's Verdict:

  1. Partial Addition:
    • In light of the facts, the Tribunal concluded that only the interest expenditure, which the assessee had claimed, needed to be added back to the income. However, the remaining amount, not constituting a trading liability, was excluded from the purview of section 41(1).


The Shimmer Textiles case sets a precedent emphasizing the specific applicability of section 41(1) to trading liabilities. Taxpayers should take note that unsecured loans, not claimed as trading liabilities, may escape the ambit of section 41(1). The decision provides clarity on the nuanced interpretation of the section and serves as a guide for taxpayers navigating similar situations.