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Facts
During a survey under section 133A, the assessee declared an additional income of Rs. 1,00,00,000. The AO also added Rs. 3,81,68,114/- on account of alleged unexplained sundry creditors and debtors after issuing notices under section 133(6) and finding discrepancies or non-receipt of replies.
Held
The Tribunal held that the AO had failed to consider the documents and evidence filed by the assessee, including confirmations and reconciliations, and had made additions in haste and without proper verification. The CIT(A) was justified in deleting the addition.
Key Issues
Whether the AO was justified in making additions for sundry creditors and debtors without proper verification and opportunity to the assessee, and whether the CIT(A) erred in deleting such additions.
Sections Cited
133A, 131, 133(6), 143(3), 271(1)(c), 142(1)
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Income Tax Appellate Tribunal, LUCKNOW BENCH “B”, LUCKNOW
Before: SHRI. SUDHANSHU SRIVASTAVA & SHRI NIKHIL CHOUDHARY
This appeal has been preferred by the Revenue against the order dated 11.04.2018, passed by the ld. Commissioner of Income Tax (Appeals)-II (ld. CIT(A)), Kanpur for Assessment Year 2015-16.
2.0 The brief facts of the case are that the assessee filed its return of income for the year under consideration on 23.09.2015, declaring a total income of Rs.12,69,300/-. In this case, a survey under section 133A of the Income Tax Act, 1961 (hereinafter called “the Act’) was conducted on 18.02.2015 at the premises of the assessee. During the course of survey, various incriminating documents, such as books of account, loose papers, hard disc, Page 2 of 21 etc. were found and impounded by the search party. The seized documents included a Diary marked as BK-4, wherein, according to the Assessing Officer (AO), investments made by the assessee- company in immovable properties, were found to have been recorded, on the basis of which, statement of Shri Aslam Saeed, Director of the assessee-company was recorded. In the statement recorded under section 131 of the Act on 18.02.2015 and 11.03.2015, Shri Saeed Ahmad voluntarily surrendered an additional income of Rs.1,00,00,000/-, which was treated as income of the assessee from undisclosed sources and added to the total income of the assessee.
2.1 Further, on perusal of the Balance Sheet of the assessee- company, the AO proceeded to verify the genuineness of the sundry creditors and their creditworthiness by issuance of notices under section 133(6) of the Act. The list of such sundry creditors has been reproduced by the AO in his order at page 11, paragraph 5. From the total number of 41 sundry creditors, in some cases, notices were received back as un-served with the postal remarks like either “parties left” or ‘not known’. In some cases, replies were not received, and in some cases, there were differences in the closing balance shown by the assessee and as confirmed by the parties. As per the AO, since the assessee failed to furnish complete addresses and PAN details of the Page 3 of 21 creditors or confirmations from them, it was to be held that the liabilities shown in the sundry creditors’ accounts in the books did not exist. He, therefore, held that the liabilities/creditors had ceased to exist and accordingly, he made addition of Rs.3,81,68,114/- to the income of the assessee. The AO completed the assessment under section 143(3) of the Act, assessing the total income of the assessee at Rs.4,94,37,410/-.
2.2 The AO also initiated penalty proceedings under section 271(1)(c) of the Act.
2.3 Aggrieved, the assessee preferred an appeal before the ld. CIT(A), who partly allowed the appeal of the assessee, sustaining the addition of Rs.1,00,00,000/- and deleting the addition of Rs.3,81,68,114/-.
2.4 Now, the Revenue has approached this Tribunal challenging the impugned order of the ld. CIT(A) in deleting the addition of Rs.3,81,68,14/-, by raising the following grounds of appeal:
1. That the Commissioner of Income Tax (Appeals)-2, Kanpur has erred in law and on facts and circumstances of the case in deleting the addition of Rs.3,81,68,114/-, without appreciating the fact that no exhaustive chart of creditors/debtors along with confirmatory copies of accounts was submitted by the assessee during the course of Page 4 of 21 assessment proceedings till 27.12.2017, as is evident from the order sheet entries.
2. That the Commissioner of Income Tax (Appeals)-2, Kanpur has erred in law and on facts and circumstances of the case in accepting the contention of the assessee that no opportunity was given to reconcile the differences, without appreciating the fact that vide notice u/s 142(1) of the Income-tax Act, 1961 dated 19.12.2017, the assessee was specifically required to reconcile the discrepancies in balances of sundry creditors.
3. That the Commissioner of Income Tax(Appeals)-2, Kanpur has erred in law and on facts and circumstances of the case in accepting the additional evidences, without affording opportunity to the Assessing Officer as provided under Rule 46A(3) of the Income Tax Rules, 1962.
4. That the order of the CIT(A) being erroneous in law and on facts needs to be vacated and the order of the Assessing Officer dated 30.12.2017 be restored.
5. That the Revenue craves leave to add or amend any one or more of the grounds of the appeal as stated above as and when need for doing so may arise. 3.0 The Ld. CIT(DR) submitted that the Department was challenging the relief granted to the assessee because during the course of assessment proceedings, the assessee had not submitted any exhaustive Chart of Creditors and Debtors or filed confirmed copy of accounts, but the ld. CIT(A), all the same, had granted relief to the assessee even though the assessee had not Page 5 of 21 reconciled the discrepancies before the AO. It was submitted that the Ld. First Appellate Authority, before accepting the contentions of the assessee, had not even called for any Remand Report from the AO nor had conducted any independent enquiry himself and, therefore, the relief granted to the assessee was without considering the observations of the AO. Our attention was drawn to paragraphs 5.1 to 5.4 of the assessment order and it was submitted that the AO has duly recorded a finding that the assessee was unable to reconcile the balances in respect of Sundry Creditors/Sundry Debtors and that there were some cases where the responses to notice issued under section 133(6) of the Act were either not received or there were differences in balances as per the confirmatory letters and the balances as per the accounts of the assessee, but, all the same, the ld. CIT(A) had given relief to the assessee. Our attention was also drawn to page 151 of the paper book filed by the assessee which contains the copy of order sheet entry dated 27.12.2017, wherein, it has been noted by the AO that the assessee had not provided any reconciliation as directed by the AO. The Ld. CIT(DR) also placed reliance on the Report of the Department dated 06.06.2023, wherein, it has been stated that as per the case records, the assessee had not filed any exhaustive Chart. The Ld. CIT(DR)
3.1 The Ld. CIT(DR) prayed that the appeal of the Department be allowed and relief granted by the ld. CIT(A) be set aside.
4.0 In response to the arguments of the Ld. CIT(DR), the Ld. Authorized Representative for the assessee (Ld. A.R.) submitted that the only issue involved in the present Departmental appeal is that the Ld. CIT(A) deleted a sum of Rs,3,81,68,114/- made by the AO towards alleged unexplained balances of Sundry Creditors, by allegedly accepting additional evidence. The Ld. A.R. submitted that the AO had asked for the list of Sundry Creditors and Debtors and the same was duly provided by the assessee. However, the AO proceeded to verify the genuineness of the same by issuing notices under section 133(6) of the Act and some of these notices were complied with and some of the notices were received back un-served and in some of the confirmations so received, the balances differed. The Ld. A.R. submitted that the assessee on its part had filed duly confirmed copy of accounts of all the Sundry Creditors, as appearing in its books of account, but the AO did not agree with same and had proceeded to add the balances of the Sundry Creditors and Debtors as unexplained/non-genuine without even confronting the assessee Page 7 of 21 with the information collected in proceedings under section 133 of the Act. The Ld. A.R. further submitted that the Ld. CIT(A), on verification of the details, as filed before the AO, and as also filed again before ld. CIT(A), was satisfied with the explanations and the details furnished by the assessee and, accordingly, he deleted the addition made by the AO.
4.1 The Ld. A.R. submitted that there was no additional evidence filed by the assessee and, therefore, there was no petition under Rule 46A of the Income Tax Rules, 1962 for filing additional evidence from the side of the assessee. It was submitted that the assessee, with the details already filed and with the assistance of the material available on record, explained the facts and figures before the CIT(A), who found it to be satisfactory and, therefore, deleted the addition. It was further submitted that since there was no petition for additional evidence nor was there any additional evidence, the question of confronting the AO with the same did not arise. It was submitted that even otherwise, the powers of the Ld. CIT(A) are wide enough to embrace all what the AO has done and not done. He submitted that on facts, it is a simple case of reconciliation of accounts, which was at the close of the year and the Ld. CIT(A) himself being satisfied, deleted the addition. It was further submitted that the addition made on account of Sundry Creditors was to Page 8 of 21 quite an extent in respect of old balances brought forward and partly on account of non-reconciliation of the balances. He reiterated that even balances of the Sundry Debtors were added back. The Ld. A.R. submitted that addition of Opening Balances and Sundry Debtors could not be made under any circumstances by the AO and that the balances lacking reconciliation stood reconciled with the issue and receipt of cheques, which were outstanding and recorded later by the parties. The Ld. A.R. also submitted that the accounts of the assessee were audited and that on the credit side of the balance sheet, stood amounts under distinctive heads, namely Non-Current Liabilities, such as Long Term Borrowings, Deffered Tax Liability and Long Term Provisions and Current Liabilities, such as, Short Term Borrowings, Trade payables, other Current Liabilities and Short Term provisions. It was also submitted that the amount of Rs.12,07,08,998/- was appearing under the head "Trade Payables" and, thus, Sundry Creditors were on running account and were clearly distinct from Loans and Advances. He submitted that there was no dispute with respect to the same, nor there was any dispute with respect to the Other Current liabilities and Short Term Provisions. The Ld. A.R. submitted that the Sundry Creditors/Trade Payables were in respect of goods purchased and 4.2 The Ld. A.R. further submitted that the books of account of the assessee have not been rejected and the purchases and sales have been accepted and that the assessment had been made on the basis of net profit/net income as declared by the assessee and, therefore, no addition in respect of Trade Payables/Sundry Creditors could be made. The Ld. A.R. also submitted that when the books of accounts are accepted, then no addition relating to the purchases and expenses can be made unless and until there was a finding that the same are bogus, inflated or non-genuine and in absence of any such finding, balances of the Trade Payables/Sundry Creditors cannot be added back as unexplained. In support of his arguments, the Ld. A.R. has placed reliance on the judgment of the Hon'ble jurisdictional High Court in the case of Zazsons Export Ltd. vs. CIT in Income Tax appeal No.128 of 2015, vide order dated 18.05.2017.
4.3 The Ld. A.R. submitted that in view of the above facts, since the books of account have not been rejected, nor the purchases have been found to be non-genuine, the addition made on account of trade Payables was totally misplaced and had been rightly be deleted by the ld. CIT(A). He reiterated that the 4.4 As regards the issue relating to additional evidence, the Ld. A.R. placed reliance on the decision of the Hon'ble Delhi High Court in the case International Tractors Ltd. vs. DCIT in vide order dated 07.04.2021.
5.0 We have heard the rival submissions and we have also gone through the records as well as the impugned order. The only issue before us, being challenged by the Department, is the relief granted to the assessee by the ld. CIT(A) in respect of addition of Rs.3,81,68,114/- on account of unverified Creditors/Debtors. The main contention of the assessee before the ld. CIT(A) was that the assessee was not given any opportunity to reconcile some of the differences, where the AO had issued notices under section 133(6) of the Act and wherein some of the notices were served and some could not be served and in some cases, part confirmations were received wherein there were some differences. It was the submission of the assessee before the ld. CIT(A) that many of the balances outstanding included opening balances being brought forward from earlier years which could neither be said to be unexplained nor could be added to the income of the year. Another explanation/submission of the assessee before the ld. CIT(A) was Page 11 of 21 that there were cases where cheques against payments had been issued in the month of March, but were credited by the parties in their accounts in the month of April and, therefore, they could have been reconciled if the assessee was given adequate opportunity by the AO. It was also submitted before the ld. CIT(A) that the entire addition did not pertain to creditors but the amount of Rs.3,81,68,114/- included Debtors also and that the AO had added both the Debtors and Creditors arbitrarily to the income of the assessee without verification. It was pointed before the ld. CIT(A) that the amount of Rs.1,80,74,770/- related to Debtors, to whom assessee had sold goods, but the payment was either pending or was partly received. Similarly, the balance amount of Rs.2,00,93,344/- out of Rs.3,81,68,114/-, pertained to Creditors from whom assessee had purchased goods and bills issued by them had been duly recorded.
5.1 At this juncture, it will be worthwhile to reproduce the observations of the ld. CIT(A) while deleting the impugned addition, which is as under:
“I have gone through the facts and the written submissions filed along with the details filed enclose therein. AO in order to verify the genuineness of the sundry creditors, issued notices u/s 133(6) of the I.T. Act to various creditors. Since notices sent were received back un-served with the postal remarks either parties left or not known and where notices Page 12 of 21 was served, or replies from sundry creditors were not received, or wherever the reply was received certain differences in balances shown by the assessee and as confirmed by the parties were noticed, AO made the addition of Rs.3,81,68,114/-. Appellant's main contention is that no opportunity was given to reconcile the differences by the AO during assessment proceedings. The AO taxed the opening balances brought forwarded from earlier years as the current year's income. The cheque issued in the month of March and credited by the parties in their accounts in the month of April, had to be reconciled in order to arrive at the correct balances outstanding. Appellant has further pointed out that all items of addition are not of creditors, but debtors also. The Assessing officer has taken certain items from the details of creditors and certain from the details of debtors and both debtors and creditors have been taken together and addition made arbitrarily without proper verification, while all creditors or debtors are genuine and existing business. Appellant has filed the confirmatory copy of account along with PAN for each item and explained it to AO after reconciling the small discrepancies. AO has ignored all these submissions of appellant and completed the assessment in haste, without providing the adequate and reasonable opportunity to the assessee. The exhaustive chart of creditors/debtors giving them complete address and PAN as well as confirmatory copies of account submitted before AO are placed on record and each account stand reconciled without any discrepancy. It is seen from these details that out of the total addition of to. 3,81,68.114/- a sum of Page 13 of 21 Rs.2,00,93,344/- is relate to the creditors from whom the assesses has purchased goods and bills issued by them have been entered in the account and the payment have been made through banking channel. Whereas a sum of Rs.1,80,74,770/- relates to the debtors to whom the assessee has sold the goods, Issued bills but payment is either pending or partly received. If such debtors fail to make payment, the amount would become bad and is claimable as bad debt as allowable revenue expenditure but it cannot any way be said to be the income of the assessee for the year. Similarly if the creditors to whom payment to be made against goods purchased except reconciliation nothing can be said to the income of assessee. Likewise the opening balance brought forward cannot be taxed in this year.”
5.2 A perusal of the above observations of the ld. CIT(A) would show that he has pointed out that the assessee had filed confirmatory copy of accounts along with PAN number for each party, but the AO had ignored the submissions of the assessee. It has been further noted by the ld. CIT(A) that the Chart submitted by the assessee vis-à-vis Creditors and Debtors contained complete addresses and PAN details as well as confirmatory copies of accounts, which were submitted before the AO and that each of the account stood reconciled. This observation of the ld. CIT(A), that the record shows that the assessee had filed copies of confirmations before the AO, cannot be ignored. The ld. CIT(A) would have essentially gone through Page 14 of 21 the case records before reaching the conclusion that necessary evidence had in fact been filed before the AO and that the AO had failed in his duty to verify the same and had made the impugned addition in haste. A perusal of the impugned order also shows that there was no application from the side of the assessee to file additional evidence before the ld. CIT(A) and if the ld. CIT(A) was only giving due consideration to the documents already filed before the AO and the assessee was only explaining the same set of documents or reconciling the various figures, it cannot be said that the ld. CIT(A) was required, in terms of Rule 46A of the Income Tax Rules, 1962 to give an opportunity to the AO to submit a Remand Report on those documents which were already a part of the assessment record. Although the Ld. CIT(DR) has argued vehemently against the action of the ld. CIT(A) in deleting the addition and has pointed out that the relevant documents were not filed before the AO, the paper book filed by the assessee shows that vide letter dated 26.12.2017, the assessee had filed requisite information called for by the AO, which ran into almost 108 pages and contained details of Sundry Creditors complete with addresses along with other documents (in response to other queries) and in this letter, the assessee had also requested the AO that the information, which had been requisitioned under section 133(6) of the Act, be provided to the Page 15 of 21 assessee so as to enable it to reconcile the differences, if any, or to refute the same if the same was not correct. The ld. CIT(A) has also taken note of this fact and has observed that the relevant details had been indeed filed before the AO, but the AO did not consider the same. A perusal of the paper book at pages 29 to 33 also shows that the assessee had explained the reason for differences in as many as 21 accounts, but again these explanations seem to have not been considered by the AO.
5.3 On our direction, the Ld. A.R. had also filed a Chart of Sundry Creditors along with opening balances with respect to Sundry Creditors extracted from the paper book and this Chart is being reproduced hereunder for a ready reference:
Page 17 of 21 5.4 From a perusal from the above Chart, it is seen that in the case of Bombay Business International, the opening balance as on 01.04.2014 was Rs.3,78,653/- and during the year, total payments of Rs.5,61,794/- were made and goods received from them were to the tune of Rs.7,98,603/- and there was a closing balance of Rs.6,15,362/- which the AO has added to the income of the assessee very well ignoring that there was also an opening balance of Rs.3,78,653/-. Similarly, in the case of Tanchem Agencies, the closing balance in credit was Rs.30,63,325/- and it also had an opening credit balance of Rs.13,92,918.72, which has not been considered by the AO while adding the closing balance. Similarly, in the case of Shri Ramzan Ali & Sons, the opening credit balance was of Rs.34,76,625/- and the closing credit balance was of Rs.24,04,625/-, meaning thereby that the payments made to the party during the year were more than the amount of goods purchased from the party. But, even then, the AO added the entire outstanding balance of Rs.24,04,625/- to the income of the assessee. Similar is the case of S. M. Corporation, where the opening credit balance was of Rs.19,58,131/- whereas the closing credit balance was only Rs.15,00,000/-, meaning thereby that in this case also the payments to the party were more than purchases made during the year, but even then the AO chose to add the closing balance Page 18 of 21 to the income of the assessee. Similarly, in the case of Fardeen Leather, the opening balance was of Rs.60,79,482/- and the total payments made during the year to the party amounted to Rs.41,56,221/- thereby leaving a closing balance of Rs.19,24,865/-, which was added by the AO to the income of the assessee. Thus, while making addition, the AO has completely ignored the facts and figures and has acted in a hasty and illogical manner without considering the evidences before him.
5.5 Similarly, another Chart was extracted by the Ld. A.R. on our directions, containing the net balances of the Sundry Creditors and Sundry Debtors as at the close of the year, which have been added by the AO. This chart is being reproduced hereunder:
Page 19 of 21 5.6 A perusal of the above Chart shows that the AO has not only added the outstanding credit balances of Rs.2,00,93,344/- but had also made an addition of amounts due from debtors, amounting to Rs.18,074,770/-. The action of adding the debtors as well as the creditors without any rhyme or reason does not really make any sense.
5.7 Therefore, on the above factual matrix, we are in full agreement with the contentions of the Ld. A.R. as well as the finding of the ld. CIT(A) that the impugned additions have been made without considering the documents on record or the facts of the case, just because there were some differences in the balances as per Ledger Account and the balances as per confirmations received under section 133(6) of the Act. The AO could not have proceeded to add back the entire balances without recording a concrete finding of non-genuineness of credit. In our considered view, the AO’s action was not justified in view of the fact that even in cases where the parties had opening credit balances and the payments made to them were in excess of the purchases made from them, the AO has proceeded to add the entire outstanding balances. Similarly, there is no explainable reason for the AO to have proceeded to add back the balances due from debtors as being unexplained. It is seen that in the paper book, there are copies of invoices of purchases as Page 20 of 21 well as sales bills to evidence the making of purchases or sales, but all the same, they were not duly considered by the AO and were added to the income of the assessee in utmost haste and in an illogical manner, which we find difficult to sustain. We are not in agreement with the arguments advanced by the Ld. CIT(DR) that the AO should have been required to submit a Remand Report inasmuch as it is very much evident from record that the entire set of documents were before the AO during the course of assessment proceedings. Therefore, there was no reason for the ld. CIT(A) to call for a Remand Report, as no fresh evidence was being submitted before him. At the most, the assessee would have explained and reconciled the same before the ld. CIT(A) the various differences appearing as per order of the AO and such explanation/reconciliation before the ld. CIT(A) would not require any response from the AO in terms of Remand Report for the simple reason that in such matter, the ld. CIT(A)’s powers would be co-terminus with that of the AO. If only such a document was being submitted, which was not before the AO earlier, the ld. CIT(A) would be required to call for a Remand Report. Accordingly, we reject the grounds raised by the Department and confirm the deletion of addition made by the ld. CIT(A).