2012 (12) TMI 367 - AT - Income Tax

Tribunal dismisses Revenue's appeal on unproved trade creditors, stresses thorough investigation

The Income Tax Officer, Ward I(3), Erode Versus Shri A. Charles, Prop. M/s. Sony Leathers

The Tribunal upheld the CIT(A)'s decision to delete additions made by the Assessing Officer regarding unproved trade creditors. The Tribunal found that ... Addition made on account of unproved trade creditors – Bogus trade creditors - Additions were made based on the report of the Income Tax Inspector – Held that:- Following the decision in case of Smt. Rolex Sugunamary (2012 (10) TMI 412 - ITAT CHENNAI) that the purchases made by the assessee during the period and payments were also made through banking channels. The AO has not disputed the purchases and the payments made by the assessee. The trading results have also not been disturbed. The report of Inspector cannot stand against the overwhelming evidence referred. Delete the addition. Issue decides in favour of assessee Issues Involved:1. Deletion of addition made on account of unproved trade creditors.2. Justification of the Assessing Officer's reliance on the ITI report.3. Verification of the genuineness of transactions with specific trade creditors.Detailed Analysis:Issue 1: Deletion of Addition Made on Account of Unproved Trade CreditorsThe Revenue's appeal was centered on the Commissioner of Income Tax (Appeals) [CIT(A)] deleting the addition of Rs. 41,83,212/- made by the Assessing Officer (AO) due to unproved trade creditors. The AO had based the addition on an Income Tax Inspector (ITI) report, which claimed the creditors were non-existent. The CIT(A) held that the AO failed to prove the transactions were not genuine, thus the balance in the creditors' account as of 31.03.2007 could not be added as income.Issue 2: Justification of the Assessing Officer's Reliance on the ITI ReportThe Revenue argued that the AO was justified in making the addition based on the ITI report, which found the creditors non-existent. The AO had directed the ITI to conduct inquiries, which led to the conclusion that the creditors were bogus. However, the CIT(A) and the Tribunal found that the AO did not conduct further inquiries beyond the ITI report, which was insufficient to substantiate the addition.Issue 3: Verification of the Genuineness of Transactions with Specific Trade CreditorsThe assessee provided substantial evidence to support the genuineness of the transactions with the trade creditors, including account copies, bank statements, and sales tax assessment orders. The Tribunal noted that the AO accepted the purchases but questioned the closing balances, which indicated a lack of thorough investigation.- Sabari Leather Exports and Victory Tanners: The Tribunal referenced a similar case (Smt. Rolex Sugunamary) where additions based on the same ITI report were deleted. The Tribunal found that the AO accepted the purchases and payments made through banking channels, thus the closing balances could not be deemed non-genuine.- Jaihind Leathers: The assessee provided confirmation letters and account copies showing payments made in the subsequent year. The CIT(A) concluded that the AO's addition was based on non-application of mind, as the transactions were through banking channels and the purchases were accepted.- Chola Leathers: The assessee clarified that the balance was an advance received for sales to be effected in the subsequent year. The AO's addition was deemed unjustified as there was no evidence to support the claim that Chola Leathers was a fictitious concern.ConclusionThe Tribunal upheld the CIT(A)'s order, finding no material evidence to contradict the findings that the trade creditors were genuine and the transactions were through banking channels. The appeal by the Revenue was dismissed, affirming the deletion of the additions made by the AO. The Tribunal emphasized the need for the AO to conduct thorough inquiries and not rely solely on the ITI report.