ITO 23 (2)(6), MUMBAI vs. MAHENDRA KUMAR L MEHTA (HUF), MUMBAI

This is an appeal by the revenue against order dated 18.10.2019 of learned Commissioner of Income Tax (Appeals)-24, Mumbai, for the assessment year 2014-15.

The dispute in the present appeal is confined to deletion of addition made of Rs. 2,20,36,370/- under section 41(1) of the Income Tax Act, 1961. 3. Briefly the facts are, the assessee is a resident Hindu Undivided Family (HUF) engaged in export of textile goods. For the assessment year under dispute, assessee filed its return of income declaring total income of Rs. 1,46,620/-. In course of assessment proceedings, the assessing officer (AO) on 2 Assessment Year: 2014-15 verifying the materials on record noticed that while the assessee has shown purchase of Rs. 1,11,47,495/-, the sundry creditors are shown at Rs. 4,64,38,512/-. Therefore, he called upon the assessee to furnish the details of sundry creditors along with their confirmation and postal address. As alleged by the AO, the assessee failed to furnish the required details. As observed by the AO, notices under section 133(6) of the Act were issued to six parties out of which four notices returned back un-served and in case of other two, though, notices were served but there was no response. Thus, alleging that the assessee failed to furnish the confirmations and other details relating to sundry creditors, the AO disallowed an amount of Rs. 2,20,36,370/- representing twenty three sundry creditors. Assessee contested the aforesaid disallowance before learned Commissioner (Appeals). In course of hearing, before the first appellate authority, the assessee furnished comprehensive details including ledger accounts of all twenty three parties, bank statements showing payments made to them etc. In course of appellate proceeding, learned Commissioner (Appeals) called further details from the assessee regarding the sundry creditors, which were furnished. After considering the submissions of the assessee in the context of facts and materials on record, learned Commissioner (Appeals) found that out of the twenty-three parties, in case of nineteen parties bulk of the purchases were made in Financial Year 2011-12and payments were also made in Financial Year 2011-12. He found that there are further purchase as well as repayment in Financial Year 2012- 13 and 2013-14 also. Whereas, there are no purchase after 2013-14 but only payments in Financial Years 2014-15 and 2015-16 and the entire outstanding 3 Assessment Year: 2014-15 were repaid by 31.03.2016. Learned Commissioner (Appeals) has noted that the assessee also explained the error in sundry creditors in the balance sheet in respect of other four parties. From the details furnished in respect of these four parties, learned Commissioner (Appeals) found that due to financial crunch the assessee could not repay the creditors for purchase of goods. Thus, considering the material available on record, learned Commissioner (Appeals) observed that the disallowance made by the assessee is unjustified. However, keeping in view the fact that certain purchases, specially from Bhiwandi, are not verifiable, some addition on account of profit margin can be made on estimate basis. Accordingly, he restricted the disallowance to 10% of the amount disallowed by the AO.

We have considered rival submissions and perused the materials on record. For deciding the issue, the following observations of learned Commissioner (Appeals) would be crucial: “4.5. In the appellate proceedings, it was emphasized that complete comprehensive details were filed on 27.12.2016, including ledger accounts of 23 parties, bank statements showing repayments made by account payee crossed cheques. The purchases for FY 2012-13 was Rs.1,03,80,859/and for FY 2013-14 was Rs. 1,35,27,173/-. Further, creditors as 0n31.3.2012 was Rs 705,34,047/-, and as on 31.3.2013 was of Rs. 7,32,54,830/and creditors as on 31.03.2014 was of Rs. 4,53,15,062/was furnished. Further, in its submission the appellant has stated that entire creditors has been repaid by the FY 2015-16 in support of which the entire ledger copies of creditors for FY 2015-16 was filed. This event had occurred prior to the assessment order being passed. Thus none of the amounts added by the assessing officer was remaining unpaid on the date of passing of the assessment order. It has been further stated that export of goods are through proper channels with thorough inspection by custom authorities and with adequate documentary evidences. Thus, it cannot be held that entire exports were 4 Assessment Year: 2014-15 made on paper without actual goods being sent across borders. The creditors details filed showed that the amount paid during FY 2012-13 was Rs, 76,60,103, and during FY 2013-14, it was Rs. 4,14,66,941. The copy of bank statement filed before the AO was submitted in the appellate proceedings, During the year sales turnover was Rs 111,47,495/- as against purchases of Ra 135,27,173/The books are audited u/s 44AB and no qualifications are put by the auditor. The appellant also filed its profitably across the years as under:- Particulars Year ended Year ended Year ended Year ended Year ended 31.03.2016 31.03.2015 31.03.2014 31.03.2013 31.03.2012 Sales 11974661 NIL 111,47,495 82,38,106 19,49,81,208 Purchase NIL NIL 135,27,173 103,80,859 20,12,15,686 Gross Profit 509781 NIL 14,01,525 12,60,464 103,39,139 Net profit 421021 NIL 246,622 135,437 744,833 G P Ratio 4.26% NA 12.57% 15.30% 5.30% N P Ratio 3.51% NA 2.21% 1.64% 0.38% The appellant was asked to tabulate the date of payments made to the outstanding creditors year wise and to crosstally the same with the ledger accounts. The appellant submitted that substantial payments has been made to the creditors up till FY 2015-16 and it had difficulty in obtaining further support from the creditors specifically obtaining their tax details, as called for by the AO. Nevertheless, the payments of these purchases has been made by account payee cheques/RTGS, which is duly reflected in the appellant’s bank statement. These details were filed before the AO in the assessment proceedings, but were ignored or not appreciated by the AO. 4.7 I have considered the submissions carefully. From the details called and filed by the appellant it is noted that in the case of 19 out of the 23 parties bulk of the purchases were made in FY 2011-12. There were payments also in FY 2011-12. There are further purchases as well as repayments in FY 2012-13 and FY 2013-14 also. There are no purchases after 2013-14 but only payments in FY 2014-15 and FY 2015-16 when the entire outstanding were repaid by 31.3.2016. The error in the listing of creditors in the balance sheet in respect of 4 parties is explained. In these cases also the outstanding were repaid by 31.3.2016. Key items and computation from the details of the audited accounts called for and filed by the appellant is tabulated below.