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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO & SHRI G. MANJUNATHA
Per G. MANJUNATHA, AM:
1. This appeal filed by the assessee is directed against order of the Commissioner of Income Tax (Appeals) 15, Chennai dated 27.09.2019 and pertains to assessment year 2014-15.
The assessee has raised the following grounds of appeal:-
The Order of the Ld. CIT (Appeals) and the Ld. AO is contrary to the law, facts and circumstances of the case.
2. Based on the facts and circumstances of the case, the Ld. AO has erred in making addition of credit balances in your appellant’s books for cessation of liability under section 41(1) of the Act whereas no allowance or deduction has been made in the assessment for any earlier years in respect of loss, expenditure, or trading liability of your appellant. The Ld. CIT (Appeals) has also erred by upholding this unwarranted addition made by the Ld. AO under section 41(1) of the Act. 3. Based on the facts and circumstances of the case, the Ld. AO has erred in making the addition for alleged credits of the past years as cash credits of the previous year relevant to subject AY 2014-15 and brought the same to tax under section 68 of the Act during the AY 2014-15, totally ignoring the settled principle that alleged credit can be brought to tax as income only in the year of such credit in the books of accounts. The Ld. CIT (Appeals) has also erred by upholding this unwarranted addition made by the Ld. AO under section 68 of the Act. 4. Based on the facts and circumstances of the case, the Ld. AO has failed to appreciate the fact that the amount of Rs. 52,78,707/- due to family members of your appellant had originated only out of the partition of various properties among your appellant’s family members and the Ld. CIT (Appeals) failed to acknowledge the above fact. 5. The Ld. CIT (Appeals) and the Ld. AO erred in ignoring the partition deed that was placed on record and the submissions made by your appellant in this connection narrating the details of balances of the family members before partition and after partition of properties. 6. The Ld. CIT (Appeals) has erred in upholding the balance addition of Rs. 13,49,600/- made by the Ld. AO with respect to loans and advances received by your appellant. 7. Your appellant craves the indulgence of your Honour to add, alter or supplement the grounds of appeal as well as file additional grounds of appeal to support the case of the appellant. For these and such other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld. AO be modified accordingly.
Brief facts of the case are that the assessee is a partner of M/s. Om Serma Enterprises, filed his return of income for the 2014-15 on 31.03.2015, declaring total income of Rs.26,85,900/-. The assessment for the impugned assessment year has been completed u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) on 29.12.2016, determining the total income at Rs.1,43,43,706/- by inter-alia making additions towards sundry creditors u/s.41(1) of the Act, as cessation of liability and further treated as unexplained credit u/s.68 of the Act, and charged to Maximum Marginal Rate of tax u/s.115BBE of the Act, on the ground that the assessee has failed to explain sundry creditors with necessary evidences to prove that credits shown in books of accounts are genuine.
Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee submitted that the AO was erred in making additions towards certain creditors shown in the books of accounts under the head ‘sundry creditors’ u/s.41(1) of the Act, by taking said credits as cessation of liability and further invoking provisions of section 68 of the Act and levied tax u/s.115BBE of the Act, ignoring all evidences filed by the assessee to prove that credits shown in the books of accounts is neither trade credits for which deduction was claimed in earlier years, nor said credits were taken during the impugned assessment year. The assessee has also taken support from various judicial precedents and argued that if provisions of section 41(1) of the Act need to be applied for any credits then the AO should prove that deduction for the same has been claimed in the earlier financial year. Unless, the AO brought on record, any evidences to prove that the credits for the same has been taken in the earlier financial year, the provisions of section 41(1) of the Act cannot be invoked. The assessee has also challenged the findings of the AO for invoking section 68 of the Act, on the ground that all the credits shown in the books of accounts are brought forward from financial year 2006-07 & 2007-08 and no credits were taken during the relevant financial year. Hence, no additions can be made u/s. 68 of the Act.
The ld.CIT(A) after considering relevant submissions of the assessee and also taken note of the provisions of section 41 and 68 of the Act, rejected the arguments taken by the assessee by holding that although the assessee claims that sundry creditors shown in the books of accounts is not a trade credit but the assessee has no explanation why it was treated as sundry credits in the books of accounts, even though, sundry credits are made
for trade credits. Further, the assessee has not offered any valid explanation, why so many credit entries are lying for so many years, since 2005-06. As regards, additions made u/s.68 of the Act, for similar credits the ld.CIT(A) noted that because the Department had no occasion to scrutinize those credits in the corresponding assessment years, the AO was very much within his powers to consider said credits for the impugned assessment year and hence, there is no merit in the arguments of the ld.counsel for the assessee. Hence, he rejected arguments of the assessee. However, the ld.CIT(A) has allowed partial relief in respect of two credits, one in the name of Shri Dhanabalan for Rs.25 lakhs on the ground that the assessee has filed necessary evidence to prove that the creditor has shown corresponding debit in his books of accounts. Similarly, the CIT(A) has deleted additions made in the name of M/s. Om Sharma Enterprises for Rs.25,14,1500/- on the ground that the assessee has explained the credits with the corresponding financial statements of M/s. Om Sharma Enterprises, in which the contra entry is available. Thus CIT(A) has partly allowed the appeal filed by the assessee. The relevant findings of the CIT(A) are as under:- 6. CIT(A)’s remarks and decision:
I have carefully gone through the observation of the AO in the assessment order as mentioned above under para 4, and the appellant’s submission before the CIT(A) Linder para 5.
1. After perusing the financials of the assessee, the AO has made an addition of Rs. 1.16 Crores by referring to Sections 41 (1) and 68 of the IT Act. The AO’s observations are briefly mentioned below: There are sundry credits in respect of eight parties lying for more than eight years in the assessee’s books of accounts. The assessee could file the balance sheet in respect of only four parties out of eight parties. In respect of some parties, the contra entry corresponding to the credits in the in the assessee’s books of accounts is missing, The assessee failed to show creditworthiness of the sundry creditors. Although the assessee claims that the credit entry was in consequence of properties transferred through a partition deed, the assessee failed to explain the description of the properties settled. For most, of the parties, the assessee failed to provide Return of income and financial statements.
6.2. Before the CIT(A), the assessee’s Authorised Representative(AR) furnished a paper hook with financial statement, copy of Return of Income and attested financials. The AO’s observations and the AR’s contentions with supporting documents are dealt with in respect of those eight parties one by one in the following paragraphs:
In respect of the credit entry in the name of Mr.A.R.K.A.Karuthapandian for Rs.26,99,730/- which is shown as outstanding from FY 2007-08, in spite of specific opportunity given, the AR could not furnish the balance sheet reflecting the contra entry in the books of the creditor. Therefore, I concur with the AO’s addition and the same is confirmed.
6.4, In respect of a credit amount of Rs, 15,000/- in the name of Late A.R.K.Arunachala Nadar, the assessee’s father, the credit entry is lying outstanding from FY 2007-08. The AR has admitted that the assessee’s father has not filed the Return of Income in the corresponding year and balance sheet is not available. Therefore, the AO’s addition is confirmed. 6.5. In respect of a credit entry in the name of the assessee’s brother, Mr.k.A.Sekar, for an amount of Rs,22,38,977/-, the AO has observed that the said sundry credit is lying outstanding from FY 2007-08 and the balance sheet of Mr.K.A.Sekar could not be furnished and there is no Similarly, there is a credit entry in the name of the assessee’s sister-in-law, Ms.M.K.Sivasundarappa for an amount of Rs.3,40,000/-, which is lying outstanding from AY 2007-08. In spite of specific opportunity given during appeal proceeding, the AR admitted that the balance sheets for the aforesaid persons are available, but the aforesaid credit entries are not reflected as debits in the balance sheet of the persons. When there is no contra entry in the books of the sundry creditors, it is clearly unexplained in the books of the assessee. Therefore, the AO’s addition of sundry credits in respect of the aforesaid two persons is confirmed.
6.6. In respect of credit entry in the name of Mr.Kumar for an amount of Rs. 10 Lakhs, which is outstanding from FY 2005-06, the AR could not furnish the Income Tax Return and balance sheet of the sundry creditor. Since the assessee has no valid explanation and could not prove in terms of financials in the books of the sundry creditor, the AO’s addition of Rs. 10 Lakhs is confirmed.
6.7. In respect of the credit entry in the name of the assessee’s sister-in- law, Ms. M.S.Swarnalatha, for an amount of Rs.3,49,600/-, the AR could not submit her account details or Income Tax Return. This credit is lying outstanding from IY 2006-07, for which the assessee has no valid explanation, Therefore, the AO’s addition in respect of the credit entry in the name of Ms.M.S.Swarnalatha is confirmed.
6.8. In respect of the credit entry in the name of the assessee’s brother- in- law, Mr.Dhanabalan of Rs.25 Lakhs, which is outstanding from November, 2013, the AR has furnished Income Tax Return of Mr.Dhanabalan along with balance sheet and attested financials. Perusal of the attested financials shows that there is a contra entry for Rs.25 Lakhs in the books of Mr.Dhanabalan. Since the assessee could prove the genuineness of the credit entry with supporting documents, the aforesaid addition of Rs.25 Lakhs is deleted.
6.9. In respect of the credit entry in the name of M/s Om Sarma Enterprises for an amount of’ Rs.25,14,500/-, lying outstanding from FY 2010-11, the AR has explained that the assessee is a partner in the aforesaid firm and the aforesaid amount was overdrawn from the said firm. In this regard, the AR furnished a copy of balance sheet and attested financials of M/s Om Sarma Enterprises, in which the contra entry is available. Since the assessee could prove the genuineness of the credit entry with supporting documents, the addition of Rs.25,14,500/- is deleted.
6.10. The AR’s contention before the CIT(A) is that the AO ought not to have made an addition u/s 41(1), as the aforesaid sundry credits can not be treated as cessation of liability as no deduction or allowance was claimed against these credits in earlier AYs and they were not trade credits, The AR has further contended that Section 68 is not applicable as these credit entries were not fresh credits in the AY 2014- 15 and they were only opening balance. The AR’s contentions have been considered. First of all, if it is not a trade credit, the assessee has no explanation why it was treated as sundry credit in his hooks of accounts, The sundry credits are meant for trade credits and therefore the AR’s contention is not acceptable. Further, there is no valid explanation why so many credit entries are lying outstanding for so many years since FY 2005-06 in the ease of Mr.Kumar, for an amount of Rs.10 Lakhs, and in respect of others from FY 200708. It is pertinent to mention that the Department had no occasion to scrutinize these credit entries in the corresponding AYs, Therefore, the AR’s contentions that it should not be questioned in this relevant AY 20 14-15 is not acceptable.
6. Being aggrieved by the CIT(A) order, the assessee is in appeal before us. The ld.AR for the assessee submitted that the ld.CIT(A) has erred in confirming sundry creditors shown in the books of accounts for Rs.66,43,307/-, even though, the assessee has explained with evidences that none of the credits are related to trade credits and the same cannot be brought to tax u/s.41(1) of the Act. The ld.AR further submitted that in order to invoke provisions of section 41(1) of the Act, there should be an allowance or deduction for any expenditure or loss or trade liability in the earlier years and further the assessee has derived
some benefit out of cessation of liability for the impugned assessment year. In this case, the credits shown in the books of accounts are related to partition of family properties for which, necessary evidence was filed before the AO as well as the CIT(A). The amounts shown under the head ‘sundry creditors’ for the simple reason that the partition was not final and there was some dispute between the parties on distribution of assets and hence, till final effect is given to the partition deed, the amounts received on account of family partition was shown under the head ‘sundry creditors’ and such credits were brought forward from assessment year 2007-08. The AR further submitted that as regard other credits, none of the credits were received during the impugned assessment years and all credits were brought forward from financial year 2006-07 & 2007-08. Therefore, the ld.CIT(A) was erred in confirming additions made by the AO towards sundry creditors u/s.41(1) / 68 of the Act.
The ld.DR on the other hand strongly supporting order of the ld.CIT(A), submitted that the assessee has failed to file any evidences to prove the identity, genuineness and credit- worthiness of the creditors and hence, the ld.CIT(A) has rightly
AO towards sundry creditors u/s.41(1) / 68 of the Act.
We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that all these credits were brought forward from earlier assessment years. In fact, the ld.AO as well as the ld.CIT(A) have categorically admitted that these credits were brought forward from financial year 2006-07 & 2007-08. But, the AO has made additions for the simple reason that said credits were carried forward in the books of accounts for many years and the assessee has not offered any explanation as why these credits continued in the books of accounts for such a long period. Hence, he has invoked the provisions of section 41(1) / 68 of the Act. The provisions of section 41(1) of the Act, deals with the cases were in the course of assessment for an earlier year, an allowance or deduction has been claimed in respect of trade liability incurred by the assessee and subsequently a benefit is obtained in respect of such trading liability by way of remission or cessation in that situation, the value of benefit accruing to the assessee is deemed to be profit and gains of business, which otherwise would not be his income. Therefore, from the plain reading of section 41(1) of the Act, it is very clear that in order to invoke the provisions of section 41(1) of the Act, it is a pre- requisite condition that the said amount must have been claimed as a deduction during any earlier assessment years and further in the present year, the assessee must have derived some benefit on account of remission or cessation of liability. In this case, on perusal of facts available on record, it is abundantly clear that the liability shown in the books of accounts under the head ‘sundry creditors’ were not a trade liability for which allowances or deduction was claimed in the earlier financial years. Further, the assessee has filed necessary evidences to prove that said credits were received in the financial year 2006- 07 & 2007-08, out of family partition and the same were treated as sundry creditors because full effect was not given to family partition on account of certain differences among family members. Therefore, we are of the considered view that the AO as well as the CIT(A) were erred in invoking provisions of section 41(1) of the Act, to bring to tax sundry creditors shown in the names of S/Shri ARKA. KaruthaPandian, K.A. Sekar and K. Sivasundarapappa, sundry payable amounting to Rs.52,78,707. As regards, other credits in the name of Late ARK Arunachala
Nadar, Smt. Swarnalatha and Shri Dhanabalan amounting to Rs.28,79,600/-, all these credits were carried forward from financial year 2007-08 and such credits were either a loan or advance but not trade credits for which deduction was claimed in the earlier financial year. Therefore, these credits cannot be brought to tax u/s.41(1) of the Act. Similarly, a sum of Rs.10,00,000/- shown in the name of Shri Kumar was a land advance received in the financial year 2005-06 and the same has been carried forward since 2005-06. Any loan or advance including land advance cannot be brought to tax u/s.41(1) of the Act, because said loan or advance was never claimed as deduction of an expenditure or allowance or trade loss in the earlier financial years. Therefore, we are of the considered view that the AO as well as the CIT(A) were erred in invoking provisions of section 41(1) of the Act, to bring into tax sundry creditors shown in the name of above persons. The above legal position is supported by the decision of Hon’ble Supreme Coiurt in the case of CIT v. Mahindra and Mahindra Ltd., reported in [2018] 404 ITR 1 (SC), where the Hon’ble Supreme Court held as under:- “For the applicability of section 41(1) of the Act, it is a sine qua non that there should be an allowance or deduction claimed by the assessee in any assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, the assessee is liable to pay tax under section 41 of the Act. The assessee had been paying interest at 6 per cent. per annum to K in terms of the contract but never claimed deduction for payment of interest under section 36(1)(iii) of the Act. Hence, the case of the assessee would not fall under section 41(1) of the Act.”
The Hon’ble Madras High Court in the case of ACIT vs. Transworld Garnet India Pvt. Ltd., reporte din [2017] 397 ITR 233, had considered an identical issue and held as under: “in order for the provisions of section 41(1) to be attracted, the benefit obtained by the assessee in the relevant year should have a direct nexus with an allowance or deduction for any previous year as a claim of loss, expenditure or trading liability which had not been established in the assessee’s case. The findings of the Commissioner (Appeals) were based upon the financials as well as all the relevant documents. He also found that there was nothing on record to lead to the conclusion that the advances from W had been claimed as an allowance or deduction in any previous year.”
Similarly, the Madras High Court in the case of Narayanan Chettiary Industries vs. ITO, reported in [2005] 277 ITR 426, had an occasion to consider the issue in light of provisions of section 41(1) of the Act and held that “section 41(1) creates a legal fiction and hence has to be strictly complied with if any addition to the income is sought to be made by the Revenue. Unless an allowance or deduction had been made in an earlier year in respect of loss, expenditure or trading liability, there can be no addition u/s.41(1).”
Coming to invocation of section 68 of the Act, the AO has simultaneously invoked provisions of section 68 in addition to section 41(1), to bring into tax, said credit for the impugned assessment years, but fact remains is that all these credits were brought forward from earlier financial years for which necessary evidences has been placed on record. On perusal of evidences filed by the assessee, we find that the credits in the name of S/Shri ARKA. KaruthaPandian, K.A. Sekar and K. Sivasundarapappa and Late ARK Arunachala Nadar, was received in financial year 2007-08. Similarly, credit in the name of Smt. Swarnalatha was received in the financial year 2006-07, likewise credit on account of land advance from Shri Kumar was received in the financial year 2005-06. From the above, it is very clear that none of the credits were received during the current financial year. Therefore, in our considered view these credits cannot be brought to tax as unexplained cash credits u/s.68 of the Act, because in order to bring any credits within the ambit of provisions of section 68 of the Act, said credits should be found in the books of accounts of the assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof or the explanation offered by the assessee in the hands of the AO is not satisfactory. In this case,
none of the credits were received during the current financial year and further, the assessee has offered explanation about source and nature of credits and further proved the identity / creditworthiness and genuineness of transactions. Therefore, these credits cannot be brought to tax even under section 68 of the Act. This view is fortified by the decision of the Hon’ble Delhi High Court in the case of CIT v. Usha Stud Agricultural Farms Ltd., reported in [2008] 301 ITR 384 (Del), where it was held as under:- “When the credit balance in the accounts of the assessee did not pertain to the year under consideration, the Assessing Officer was not justified in making the addition under section 68 of the Act and no fault could be found with the order of the Tribunal endorsing the decision of the Commissioner (Appeals).”
The ITAT, Chennai Bench in the case of ITO vs. Sooraj Leathers reported in had considered an identical issue and after considering relevant facts held as under:- “If the liabilities are old, no credit has been made in so far those credits in the books of accounts in the assessment year under consideration, Sec. 68 cannot be applied. This view of ours is supported by the judgement of Delhi High Court in the case of Usha Stud Agricultural Farms Ltd., cited supra wherein held that credit balance in the account of the assessee did not pertain to the year under consideration, the AO was not justified in making the addition u/s. 68 of the Act. Hence, in our opinion, the liabilities which were not credited in the previous year relevant to the assessment year under consideration, the provisions of the section 68 cannot be applied and the AO is directed to exclude the same from the addition u/s. 68 of the Act after duly verifying the same.”
In this view of the matter and considering facts and circumstances of this case, we are of the considered view that the ld.AO was erred in making additions towards credits shown in the books of accounts u/s.41(1) / 68 of the Act. The ld.CIT(A) without appreciating facts, has simply confirmed additions made by the AO. Hence, we reverse the findings of the CIT(A) and direct the AO to delete additions made towards sundry creditors u/s.41(1) & 68 of the Act.
In the result, appeal filed by the assessee is allowed.
Order pronounced on 23rd February, 2021 at Chennai.