PRINCIPAL COMMISSIONER OF INCOME TAX, SURAT-2 vs. RAMESHCHANDRA I. GANDHI(HUF)

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TAXAP/1092/2018HC GujaratGJHC24045306201804 September 2018Bench: HONOURABLE MR. JUSTICE AKIL KURESHI,HONOURABLE MR. JUSTICE B.N. KARIA4 pages
AI SummaryDismissed

What did the High Court hold?

The High Court focused on the second contention raised by the assessee, which was accepted by the CIT(A) and the ITAT. The Court found no error in the view of the CIT(A) and the ITAT. The Court noted that in the earlier assessment year (AY 2003-04), the Department had disbelieved the entire purchases and made additions on the basis of a revised estimate of gross profit. Once this was done, making a disallowance of the same amount or part thereof would amount to double taxation. The Court did not delve into the other contentions raised by the Revenue or the assessee, as the appeal could be decided on this specific ground. The operative direction was that the tax appeal is dismissed.

What were the facts?

The Revenue is in appeal against the Income-tax Appellate Tribunal's (ITAT) order dated March 20, 2018. The Assessing Officer (AO) had made an addition of Rs. 1,75,00,000 (rounded off) for Assessment Year 2004-05 on account of bogus sundry creditors related to purchases, invoking Section 41(1) of the Income-tax Act, 1961. The assessee appealed to the Commissioner of Income-tax (Appeals) [CIT(A)], who deleted the addition. The CIT(A) accepted the assessee's contention that mere passage of time does not imply cessation of liability. Crucially, the CIT(A) also accepted the alternative contention that the corresponding purchases amounting to Rs. 1.75 crores were already disallowed in Assessment Year 2003-04, with additions made based on estimated gross profit. The Revenue appealed to the ITAT, which upheld the CIT(A)'s order, leading to the present appeal by the Revenue.

What were the issues?

1. Whether on the facts and circumstances and in law, the ITAT erred in upholding the CIT(A)'s order deleting the addition of Rs. 1,75,06,500 on account of bogus sundry creditors towards purchases under Section 41(1) of the Act? 2. Whether on the facts and circumstances and in law, the ITAT failed to appreciate that the assessee failed to prove the genuineness of the parties from whom purchases were made in AY 2003-04 during the assessment proceedings? 3. Whether on the facts and circumstances and in law, the ITAT erred in not appreciating that barring three parties with whom purchases were disallowed in AY 2003-04, the rest of the parties in respect of which addition was made in AY 2004-05 under Section 41(1) were different? Assessee's contentions (as accepted by CIT(A) and ITAT): The assessee contended that the mere passage of time does not constitute cessation of liability. Furthermore, the purchases from these creditors amounting to Rs. 1.75 crores were already disallowed in AY 2003-04, and additions were made based on estimated gross profit. Therefore, making a further disallowance on the same ground would amount to double taxation. Revenue's contentions: The Revenue argued that at least three of the creditors had not shown any outstanding liabilities of the assessee and no matching creditor entries were made in their accounts for the relevant year. Therefore, the view of the CIT(A) and the ITAT was not correct.

Which sections of the Income-tax Act were involved?

Section 41(1)

AI-generated summary — verify with the full judgment below

C/TAXAP/1092/2018 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 1092 of 2018 ========================================================== PRINCIPAL COMMISSIONER OF INCOME TAX, SURAT-2 Versus RAMESHCHANDRA I. GANDHI(HUF) ========================================================== Appearance: MRS KALPANAK RAVAL(1046) for the PETITIONER(s) No. 1 for the RESPONDENT(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE B.N. KARIA

Date : 04/09/2018

ORAL ORDER (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. Revenue is in appeal against the judgment of the   Income­tax   Appellate   Tribunal   dated 20.03.2018   raising   following   substantial questions of law :­ “(A)

Whether

the

facts

and circumstances of the case and in law the Hon'ble   ITAT   has   erred   in   upholding   the order   of   the   ld.CIT(A)   deleting   the addition   of   Rs.1,75,06,500/­   made   on account of bogus sundry creditors towards purchases u/s.41(1) of the Act ?

(B)

Whether   on   the   facts   and circumstances of the case and in law, the Hon'ble ITAT has not appreciated that the assessee has failed to prove the genuiness of   the   parties   from   whom   purchases   were Page 1 of 4

C/TAXAP/1092/2018 ORDER made in A.Y. 2003­04 during the assessment proceedings ?

(C) Whether on the facts and circumstances  of the case and in law, the Hon'ble ITAT  has erred in not appreciating that barring  three   parties   purchases   with   whom   were  disallowed in the A.Y. 2003­04 rest of the  parties in respect of which addition was  made in A.Y. 2004­05 u/s.41(1) of the Act  were different ?”   2.  The issues pertain to the assessment year  2004­05. The Assessing Officer made addition  of   Rs.1,75,00,000/­   (rounded   off)   towards  bogus   sundry   creditors   relatable   to  purchases. The Assessing Officer invoked the  provisions of Section 41(1) of the Income­tax  Act, 1961.

3.

The assessee carried the issue further in CIT   (Appeals).   CIT   (Appeals)   accepted   the assessee's   contention   that   mere   passage   of time   would   not   be   sufficient   to   hold   that there   was   cessation   of   liability.   The assessee's   alternative   contention   was   also accepted   which   was   that   the   corresponding purchases   from   the   creditors   of   Rs.1.75 crores   was   already   disallowed   in   the assessment year 2003­04 and gross profit was estimated   for   making   additions.   Therefore since  the  purchases  have   already   been  held unexplained leading to additions being made Page 2 of 4

C/TAXAP/1092/2018 ORDER in  the  income,  further  disallowance  on  the same ground would amount to double taxation.

4.

Revenue carried the matter in appeal. The Tribunal focused on the second contention of the assessee which was accepted, upon which, the Revenue has filed this appeal.

5.

Counsel for the Revenue drew our attention to the materials on record to contend that at least three of the creditors had not shown any outstanding liabilities of the assessee. No   matching   creditor   entries   were   made   in their   accounts   for   the   relevant   year.   He, therefore,   argued   that   view   of   the   CIT (Appeals)   and   the   Tribunal   is   not   quite correct.

6.

We have focused only on the second of the two contentions raised by the assessee which succeeded before the CIT (Appeals). We do not find   any   error   in   the   view   of   the   CIT (Appeals)   and   the   Tribunal.   We   may   recall that   in   the   earlier   assessment   year   the Department   disbelieved   the   entire   purchases and therefore made additions on the basis of revised estimate of gross profit. Once that was   done,   making   disallowance   of   the   same amount or part thereof would amount to double taxation. Page 3 of 4

C/TAXAP/1092/2018 ORDER

7.

In the result, tax appeal is dismissed. (AKIL KURESHI, J) (B.N. KARIA, J) K.K. SAIYED Page 4 of 4

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