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Income Tax Appellate Tribunal, “A’’BENCH: BANGALORE
Before: SHRI B. R. BASKARAN & SMT. BEENA PILLAI
The assessee has filed this appeal challenging the order dated 4.8.2009 passed by Ld. CIT(A)-2, Bangalore and it relates to the assessment year 1998-99.
This is second round of proceedings. This appeal was originally disposed of by the coordinate bench, vide its order dated 29.3.2010. The assessee filed the appeal before Hon’ble High Court of Karnataka challenging the order passed by the Tribunal and the Hon’ble High Court vide its order dated 13.11.2018 passed in Page 2 of 9 Income Tax appeal No.283/2010 has restored all the issues to the file of the Tribunal for adjudicating them afresh. Accordingly, this appeal came to be placed before us for adjudication.
All the grounds urged by the assessee relate to the following two issues: a) Validity of reopening of assessment u/s 147 of the Act. b) Addition of trade creditors aggregating to Rs.46,61,745/- u/s 68 of the Act.
We heard the parties and perused the record. The assessee is engaged in the business of trading in iron & steel. The assessee filed return of income declaring a total income of Rs.76,685/-. The assessment was initially completed in the hands of the assessee on 29.12.2000 determining total income of Rs.2,27,940/-. However, during the course of original assessment proceedings, the A.O. had sent a letters to some of the trade creditors asking them to confirm the outstanding balance. Subsequently the AO also conducted survey operations u/s 133A of the Act. Later, the A.O. reopened the assessment u/s 147 of the Act by issuing notice on the assessee on 9.2.2001 and the impugned assessment order came to be passed by him.
During the course of assessment proceedings, the A.O. examined outstanding liabilities to trade creditors. He examined, inter alia, following parties:- a) Magnum Trading company Rs.18,89,884/- b) M/s. Sharda Enterprises Rs.27,71,861/- The A.O. asked the assessee to furnish addresses of both the creditors referred above and sent notices to both the parties. However, the letters were returned unserved by the postal authorities with the note “Left”. Hence, the A.O. caused enquiries
Page 3 of 9 through his Inspector. In respect of Magnum Trading Company, the Inspector reported that the said party is not available in the given address and further the owner of the building also confirmed that the same was not occupied by M/s. Magnum Trading company. With regard to M/s. Sharda Enterprises, the Inspector reported that the address itself could not be located. Subsequently, the A.O. conducted a survey operation u/s 133A of the Act. In the statement taken from the assessee at the time of survey operations, he admitted that both the above said creditors are bogus and there is no amount due to them. Accordingly, he agreed to voluntarily offer the aggregate sum of Rs.46,61,745/-, being the outstanding balances standing in the name of the above said two creditors as his income.
However, during the course of assessment proceedings, the authorized representative of the assessee furnished a letter stating that both M/s. Sharda Enterprises and M/s. Magnum Trading Company are registered with sales tax authorities and they have issued all statutory forms as required by law in respect of purchases made from them. Further, it was submitted that the payments have been made by the assessee to them by way of account payee cheques. The A.O. however did not accept the explanations of the assessee and accordingly, came to the conclusion that the amounts outstanding in their name is bogus in nature. Accordingly, he assessed the aggregate amount of Rs.46,61,745/- as income of the assessee u/s 68 of the Act. In the appellate proceedings, the Ld. CIT(A) confirmed the above said addition and hence, the assessee has filed this appeal before us.
The assessee has, inter alia, challenged the validity of reopening of assessment and also the addition relating to the two trade creditors mentioned above.
We heard the parties first on the merits of the addition. The Ld. A.R. submitted that the amount outstanding in the name of M/s. Sharda Enterprises and M/s. Magnum Company relate to the purchases made by the assessee from them and hence, they are in the nature of trade creditors. He submitted that the A.O. has made the addition u/s 68 of the Act, which is relatable to the cash credits. Accordingly, he submitted that the outstanding trade creditors could not be assessed u/s 68 of the Act. The Ld. A.R. further submitted that the A.O., having accepted the purchases, could not have doubted the liability in respect of the above said purchases.
With regard to the Magnum Trading company, the Ld. A.R. invited our attention to the copy of ledger account placed in pages 4 to 6 of the paper book. He submitted that the assessee has made purchases from the above said concern aggregating to Rs.38.09 lakhs and have also made payment to the tune of Rs.19.20 lakhs through banking channels. The balance outstanding as at the year end was Rs.18.89,885/-. The A.O. has added the outstanding balance only, i.e., he has accepted the entire purchases and also the payments made to the above said party through banking channels. The AO is doubting only the outstanding balance. The Ld. A.R. submitted that the A.O., having accepted the entire purchases and also the payments made to the above said party, is not justified in disbelieving the closing balance of outstanding amount. He submitted that the A.O. cannot disbelieve part of the transactions and accept other part of the transactions entered by the assessee with the same party.
The Ld. A.R. also invited our attention to the ledger account of M/s. Sharda Enterprises placed at pages 9 & 10 of the paper book.
Page 5 of 9 He submitted that the assessee has made purchases from the above said concern in the last month of the current year. The Ld. A.R. also invited our attention to page no.8 of the paper book, wherein the assessee has furnished a copy of certificate obtained from M/s. Indian Bank, wherein the bank has given the details of cheques issued by the assessee to M/s. Sharda Enterprises in the subsequent year. He also invited our attention to page no.11 of the paper book, wherein the ledger account copy of M/s. Sharda Enterprises for the succeeding year i.e. from 1.4.1998 to 31.3.1999 is furnished. The Ld. A.R. submitted that the assessee has cleared off the outstanding balance in the succeeding year. Accordingly, he submitted that there is no reason to suspect the outstanding balances when the assessee has made the payment by way of cheque to the above said parties.
The AO has made the impugned additions only for the reason that the suppliers did not confirm the outstanding balance and further they did not respond to the notices issued to them. He submitted that the assessee has proved purchases and also proved that the payments have been made through banking channels. Hence the assessee should not have been penalized for the failure of the creditors to respond to the notices issued by the AO.
The Ld A.R further submitted that the AO has made addition of outstanding trade creditors u/s 68 of the Act, which is not permissible under the Act, as the provisions of sec.68 relate to cash credits only.
13. The Ld. D.R. on the contrary, supported the order passed by Ld. CIT(A).By placing reliance on the decision rendered by the coordinate bench in the case of Suresh Kumar T. Jain (2019) 101
Page 6 of 9 Taxmann.com 164, the Ld. A.R. submitted that even trade creditors can be assessed u/s 68 of the Act.
We have heard rival contentions on this issue and perused the record. The undisputed fact is that the assessing officer has made addition of outstanding trade creditors u/s 68 of the Act. The question whether unpaid trade creditors could be added u/s 68 of the Act has been examined by various courts. The Five member special bench of ITAT has held in the case of Manoj Agarwal vs. DCIT (113 ITD 377) as under on this issue:-
“The argument that section 68 is not applicable where an asset is sold and the sale proceeds are credited in the books of account cannot be accepted having regard to the settled legal position that it is always for the assessee to explain the nature and source of the sums credited in his books of account. The section does not recognize any distinction between amounts credited in the books as gifts or loans or pure receipts, on the one hand, and amounts credited as sale proceeds. In either case, when called upon, the assessee is bound to explain the nature and source of the amounts credited. There may be a few exceptions to this general rule. For example, in the case of credit purchases, the account of the supplier is credited with the amount payable. In such a case, where the purchase is allowed as expenditure, it may not be possible for the Assessing Officer to again call upon the assessee to prove the nature and source of the credit, for the reason that the purchase itself was allowed as expenditure only on being satisfied that it was a genuine purchase on credit. Implicitly, the nature and source of the amount credited has also to be taken as having been explained satisfactorily. Another possible argument can be that in such a case, the amount credited is not a cash credit in the sense that some monies have been received by the assessee, but the credit represents a mere liability payable by the assessee in future. Under accounting principles, a liability can only be brought into account by making a credit entry in the books of account in favour of the person to whom the money is payable. Thus, there is marked difference between a credit representing a liability payable by the assessee and a credit representing monies received from another person. It is because of this distinction, a liability for purchase which has been credited in the account of the supplier cannot be added under section 68 of the Act, more so when the purchase has been accepted as genuine and a deduction there for has been allowed. In all other cases including the case of a credit representing the sale proceeds of an asset, the provisions of section 68 are applicable and it is for the assessee to prove satisfactorily the nature and source of the monies…..”
Page 7 of 9 12. Similar view has been expressed by Hon’ble Delhi High Court in the case of CIT vs. Ritu Anurag Agarwal reported in 2009 (7) TMI 1247 as under:- "This finding of AO remained undisturbed before the CIT(A) as well and has been accepted by the ITAT. Proceeding on this basis, the ITAT observed that the soles, purchases as well as gross profits as disclosed by the assessee have been accepted by the Assessing Officer. Once this is accepted, we are of the opinion that the approach of the ITAT was correct inasmuch as the Assessing Officer did not consider this aspect while making additions of sundry creditors under Section 68 of the Income Tax Act. As there was no case for disallowance for corresponding purchase, no addition could be made under Section 68 inasmuch as it is not in dispute that the creditors outstanding related to purchases and the trading results were accepted by the AO. We are, therefore, of the opinion that no substantial question of law arises for consideration in this case. The appeal is accordingly dismissed.”
The Ld D.R placed his reliance on the decision rendered by the Bangalore bench of ITAT in the case of Suresh Kumar T. Jain (supra), which was also confirmed by Hon’ble Karnataka High Court, vide its order dated 20-11-2018 passed in of 2010. The Ld D.R contended that the outstanding trade creditors could be added u/s 68 of the Act. We have gone through the above said decision and notice that the facts prevailing in that case were different. In the above said case, most of the creditors confirmed the outstanding balances as per their books of accounts, which were much lesser than the outstanding balances disclosed by the assessee before the High Court. Copies of confirmation letters received from the creditors were also furnished to the assessee, but he did not offer any explanation. Hence, it was considered to be a case of either payment outside books or cessation of liability. Under these set of facts, it was held that the addition made u/s 41(1) and 68 of the Act was justified.
14. In the present case, the facts are totally different. First of all, the outstanding balances related to the purchases made during the year under consideration and not brought forward balances. The Smt. Madhu Solanki, Mysore Page 8 of 9 AO did not get reply from both the trade creditors and hence he proceeded to assess the outstanding balances, while accepting the purchases made during the year & payments made during the year. The AO has made the addition u/s 68 of the Act and did not invoke provisions of sec. 41(1) of the Act. On the contrary, the assessee has shown that the payments have been made in the succeeding year through banking channels. Accordingly, we are of the view that the revenue could not rely upon the decision rendered in the case of Sureshkumar T Jain. Under these set of facts, we are of the view that the AO could not have made addition of trade creditors u/s 68 of the Act.
Accordingly, we set aside the order passed by Ld CIT(A) and direct the AO to delete the impugned addition of trade creditors.
Though the assessee has raised legal ground challenging the validity of reopening of assessment, the Ld A.R said that he will not press the same, if the appeal of the assessee is allowed on merits. Hence we do not find it necessary to adjudicate the legal ground.
In the result, the appeal of the assessee is allowed.