2010 (8) TMI 982 - AT - Income Tax

Tribunal partially allows appeal, admits additional evidence on section 41[1][a], rejects argument on purchases. Liability under

Mrs. Shalikarani R. Goel, Versus Income Tax Officer, Ward 14 (2) (3), Mumbai.

The Tribunal partly allowed the appeal, admitting additional evidence for the issue of additions under section 41[1][a] and rejecting the argument ... - ISSUES PRESENTED AND CONSIDERED 1. Whether additions under section 41(1)(a) can be made in the assessment year when sundry creditor balances are opening balances pertaining to earlier years, where the assessee has not written back the liabilities and evidence of ongoing transactions (including goods returned and subsequent payments) exists. 2. Whether addition of purchases is permissible where the existence of the creditor/supplier could not be established at the given address and summons returned 'Not known', and whether only gross profit percentage (GP %) on such purchases can be added instead of the whole purchase amount. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of additions under section 41(1)(a) in respect of opening sundry creditor balances (earlier years) Legal framework: Section 41(1)(a) operates where a trading liability is deemed to have ceased to exist in the hands of the assessee; additions under that provision require that the liability has in fact ceased in the relevant year. Section 68 (inherent reference) concerns undisclosed capital or unexplained loans/credits, and assessment-year adjustments must respect the year to which the liability pertains. The burden on the Department to establish cessation of liability and on the assessee to substantiate the genuineness of liabilities and continuity of transactions is central. Precedent treatment: The Tribunal treated the applicability of section 41(1)(a) as contingent on satisfaction of its ingredients and recognized that liabilities arising in earlier years must be examined in the year to which they pertain. No contrary precedent was applied; the Tribunal followed the principle that the AO cannot indirectly achieve what ought to have been done in the earlier year. Interpretation and reasoning: The Court examined the nature of the balances - they were opening balances arising from earlier years with no purchases in the current year. The assessee produced ledger entries showing goods returned and asserted that transactions were ongoing. The Tribunal held that mere non-service of summons on creditors does not justify treating liabilities as non-existent for the current year when the assessee had not written back the amounts and when evidence indicated continuing dealings (goods returned, later payments). The Tribunal also considered the assessee's application to admit additional evidence showing yearwise payments made subsequently through banking channels; it concluded that such evidence, not available at earlier proceedings, should be admitted in the interests of justice and remitted the matter to the Assessing Officer for limited purpose of examination of those payments. Ratio vs. Obiter: Ratio - Additions under section 41(1)(a) cannot be made in the assessment year in respect of opening liabilities of earlier years where the assessee has not written back the liability and there is prima facie evidence of continued transactions and subsequent discharge; the AO must examine the year to which the liability pertains and cannot treat liability as ceased merely due to non-service of summons. Obiter - Observations on the proper interplay between sections 41 and 68 and on procedural fairness in admitting subsequent payments as additional evidence are ancillary but practically operative. Conclusions: The Tribunal allowed the ground in respect of Rs.10,93,245 (sundry creditors) for statistical purposes, admitted the additional evidence of subsequent payments, and remitted the issue to the AO to examine the newly admitted evidence. If payments are established, no addition under section 41(1) is called for on the ground of cessation of liability. Issue 2: Addition of purchases where supplier's existence not established and scope of adding only GP % Legal framework: For disallowance or addition in respect of purchases, the existence/genuineness of the counterparty or supplier must be established; where the supplier cannot be traced at the given address and enquiries return negative results, the AO may treat purchases as doubtful. The question of whether the AO should add only gross profit percentage (GP %) or entire purchase amount depends on the nature and strength of evidence of forgery/fictitiousness and the accepted method for estimating untraceable purchases. Precedent treatment: The Tribunal found the issue to be covered by a higher court decision favoring the Department's approach where the existence of the party was not established; the Tribunal followed that higher court decision in rejecting the assessee's contention that only GP % should be added. Interpretation and reasoning: The Tribunal observed that the assessee failed to establish the existence of the supplier at the given address: notices were returned 'Not known', and the Ward Inspector's personal visit corroborated non-existence at that address. The AO therefore correctly held that the onus of proving genuineness was not discharged. The Tribunal rejected the argument that only GP % of purchases should be added, reasoning that when existence of the party itself is not established, purchases from any other source cannot be accepted and the entire purchases are disbelieved; consequently, treating the full claimed purchases as non-genuine was justified. Ratio vs. Obiter: Ratio - Where the existence of a supplier cannot be established despite enquiries and summons, the whole purchase amount may be disbelieved and added back; adding only GP % is not warranted in such circumstances. Obiter - The Tribunal's reliance on higher court authority to support this approach is explanatory rather than expanding new law. Conclusions: The Tribunal rejected the assessee's contention regarding the purchases totaling Rs.6,57,126 and sustained the addition because the existence of the party was not established; the request to limit addition to GP % was not accepted. Cross-reference and final disposition As to the related issues, the Tribunal distinguished the two kinds of additions: (a) additions under section 41(1)(a) based on cessation of liability where liabilities were opening balances from earlier years and where subsequent payments and returned goods indicated ongoing obligations - these were remitted for fresh examination upon admission of additional evidence; and (b) additions for purchases from an untraceable supplier where non-existence justified sustaining the addition - this ground was rejected. The net result was a partly allowed appeal for statistical purposes, remitting only the section 41(1)(a) matter for verification of subsequent payments while upholding the addition relating to untraceable supplier purchases.