2019 (2) TMI 783 - AT - Income Tax

Tribunal overturns AO's additions for bogus creditors, unsecured loans, 40A(3) disallowance, and undisclosed profit

The Tribunal allowed the appeals for all assessment years, deleting the additions made by the AO on account of bogus creditors, undisclosed unsecured ... Addition on account of bogus creditors - difference between creditors recorded in his books vis-à-vis balance in the books of creditors - conditions fulfilled in order to treat cessation of liability as income under section 41(1) - Held that:- Assessee explained the difference between creditors recorded in his books vis-à-vis balance in the books of creditors, stating that said difference was due to goods in transit or payment in transit. The assessing officer rejected the explanation of the assessee without providing any valid reasons. Besides, the assessing officer failed to adduce any evidence on record to prove that the difference in creditors is a bogus and out of unaccounted money. Just to work out the difference in sundry creditors is not sufficient, the AO ought to adduce any tangible material on record to prove that the said difference belongs to unaccounted money of the assessee. We note that assessee’s purchases had not been doubted by the Assessing Officer. AO also did not doubt the sales made by the assessee therefore,so far the accounting principles are concerned, if the total sales and total purchases are not doubted then balance of creditors are going to be genuine, if it is not otherwise proved by the assessing officer. We note that the difference between creditors recorded in his books vis-à-vis balance in the books of creditors, should not be treated as cessation of liability. We note that in the assessee’s case under consideration, the assessee had shown the closing balance of sundry creditors as on 31-03-2000 in its balance sheet and the said closing balance has been continued and carried forward as opening balance in the subsequent year i.e. as on 01-04-2000. Hence, it is clear that the assessee had not written back the same to its Profit &Loss account during the relevant year. As such, it cannot be said that the assessee had availed any benefit, as specified in (b) above, during the relevant year. Hence, the condition prescribed in section 41(1) of the Act has not been fulfilled in instant case. In instant case since the assessee has not credited the same to its Profit &Loss account for the relevant year. In such a situation, it cannot be contended that the liability of different assessment years, as mentioned in the grounds of appeal had ceased to exist. Furthermore, the above liabilities has been continued from earlier years. Hence, the addition on account of bogus creditors is wholly unjustified. Addition on account of not disclosing unsecured loan - Held that:- The said amount is not mentioned in the books of the assessee. The DR for the Revenue fairly agreed with the proposition canvassed by ld Counsel. We have heard both the parties and perused the material available on record, we note that said amount of ₹ 2,66,000/-, does not emanate from the books of accounts of the assessee. That is, the said amount does not belong to the assessee, therefore, the question of disallowance does not arise. Moreover, the AO failed to bring any evidence on record to establish that the said amount of ₹ 2,66,000/- is an unaccounted money of the assessee.Hence, we delete the addition. Disallowance u/s 40A(3) - Held that:- The books of accounts of the assessee were audited and books of accounts were not rejected by the Assessing Officer. The Assessing Officer has not taken any adverse view on the assessee’s books of accounts, so far this addition is concerned. Apart from this, the Assessing Officer has not doubted the purchase and sales made by the Assessing Officer. We note that the assessee’s claim falls under Rule 6DD(J) of the Income Tax Rules (vide old Rules). It will be pertinent to go into the intention behind introduction of provisions of section 40A(3) of the Act at this juncture. We find that the said provisions was inserted by Finance Act 1968 with the object to curbing expenditure in cash and to counter tax evasion. In the assessee’s case, there is no tax evasion, as the books of accounts were duly audited by the Chartered Accountant and AO has not rejected the books of the assessee and the payee has offered the tax. Therefore, the addition made by the Assessing Officer and confirmed by the Ld. CIT(A) needs to be deleted. Addition on account of undisclosed profit - Held that:- We note that the addition made by the Assessing Officer is purely on conjectures and surmises. The assessee has disclosed income ₹ 1.8 per tinwhereas the Assessing Officer made an addition on account of differential amount without any base and without any evidence on record. AO made this addition solely based on the statement of the assessee. We note that statement is a good evidence provided it is supported by any tangible material or corroborate evidence. We note assessee’s account are audited and not rejected by the Assessing Officer therefore to estimate the separate profit in addition to profit shown in the audited books of accounts is not tenable without any tangible material or corroborative evidence, therefore we delete the addition. Issues Involved:1. Addition on account of bogus creditors.2. Addition on account of not disclosing unsecured loan.3. Disallowance under section 40A(3) of the Act.4. Addition on account of undisclosed profit.Detailed Analysis:1. Addition on account of bogus creditors:The assessee filed appeals for the assessment years 2000-01 to 2004-05 against the orders of the CIT(A), which upheld the assessment orders adding amounts as bogus creditors. The Assessing Officer (AO) had made additions based on discrepancies found between the creditors' balances as per the assessee's books and the creditors' confirmations. The AO issued letters under section 133(6) to various creditors, many of which returned unserved. The AO concluded that the assessee overstated the credit payable and claimed bogus credits, making additions for each assessment year.Upon appeal, the Tribunal noted that the assessee's books were audited and not rejected by the AO. The Tribunal found that the AO did not provide valid reasons for rejecting the assessee's explanation regarding the discrepancies due to goods or payments in transit. The Tribunal emphasized that the AO failed to provide evidence to prove the differences were due to unaccounted money. The Tribunal held that merely working out the differences in sundry creditors was insufficient without tangible proof. The Tribunal also referred to Section 41(1) of the Act, noting that the conditions for treating cessation of liability as income were not met as the liabilities were carried forward and not written back in the profit and loss account. Citing precedents, the Tribunal concluded that the addition on account of bogus creditors was unjustified and deleted the additions for all assessment years.2. Addition on account of not disclosing unsecured loan:For the assessment year 2000-01, the AO added Rs. 2,66,000/- as an unsecured loan not disclosed by the assessee. The AO presumed that the loan was extended out of unaccounted cash. The CIT(A) upheld this addition.Upon appeal, the Tribunal noted that the said amount did not appear in the assessee's books. The Tribunal found that the AO failed to provide evidence to establish that the amount was unaccounted money of the assessee. The Tribunal, therefore, deleted the addition of Rs. 2,66,000/-.3. Disallowance under section 40A(3) of the Act:For the assessment year 2003-04, the AO disallowed Rs. 5,95,107/- under section 40A(3) of the Act, stating that the assessee made cash purchases exceeding Rs. 20,000/-. The AO did not accept the assessee's claim for exemption under Rule 6DD(J), arguing that gur/jaggery is not an agricultural product.The Tribunal, considering the nature of the assessee's business and the rural context, noted that transactions in cash were common. The Tribunal emphasized that the assessee's books were audited and not rejected by the AO, and there was no evidence of tax evasion. The Tribunal held that the disallowance was unjustified and deleted the addition of Rs. 5,95,107/-.4. Addition on account of undisclosed profit:For the assessment year 2003-04, the AO added Rs. 44,120/- as undisclosed profit, based on the assessee's statement that the commission was Rs. 4 per tin of 'gur'. The AO noted a discrepancy between the disclosed gross profit and the expected profit based on the commission rate.The Tribunal found that the addition was based on conjectures and not supported by evidence. The Tribunal noted that the assessee's accounts were audited and not rejected by the AO. The Tribunal held that estimating additional profit without tangible evidence was untenable and deleted the addition of Rs. 44,120/-.Conclusion:The Tribunal allowed the appeals for all assessment years, deleting the additions made by the AO on account of bogus creditors, undisclosed unsecured loans, disallowance under section 40A(3), and undisclosed profit.