2023 (4) TMI 1432 - AT - Income Tax

ITAT Rules Section 263 Revision Invalid for Misclassifying Opening Balances as Unexplained Credits

Shri Vijay Anandbhai Chavada Versus Pr. CIT-1, Rajkot

The ITAT Rajkot held that the PCIT erred in revising the assessment under section 263 by treating opening balances and trade creditors as unexplained ... Revision u/s 263 - unexplained sundry creditors and bogus liabilities as advance from debtor addition u/s 68 r.w.s. 115BBE - as per CIT AO erred in facts and in law by applying the normal rate of tax as opposed to the higher tax rate of 60% and therefore, the assessment order passed by the AO is erroneous and prejudicial to the interest of Revenue HELD THAT:- Assessee has been able to demonstrate the fact that the amounts represented opening balances / trade creditors. Further, various Courts and Tribunals have held that the same cannot be the subject matter of additions u/s 68. In the case of Ravindra Arunachala Nadar [2021 (2) TMI 1091 - ITAT CHENNAI] ITAT held that where credits in question were not received during current financial year but were brought forward from earlier years and assessee had offered explanation about source/nature of credits to prove identity, creditworthiness and genuineness of transactions, such credits could not be brought to tax as unexplained credits under section 68 of the Act. PCIT has not controverted the factual assertions made the assessee that the amount represented opening balances from earlier years/trade creditors of the assessee. Assessee also placed on record substantial evidences in 263 proceedings to prove the source and genuineness of the trade creditor. PCIT has not controverted the facts placed on record by the assessee that the amounts represented opening balances from earlier years or the evidence placed on record in support of genuineness of the party M/s Bajrang Cotton. Accordingly, PCIT has erred in the instant facts in holding that the AO has erred in facts and in law in not invoking the provisions of section 68 r.w.s 115BE of the Act in the instant set of facts. In the result, the order passed by the PCIT u/s 263 of the Act is hereby dismissed. Appeal of the assessee is allowed. ISSUES: Whether the order under section 263 of the Income Tax Act, 1961 is valid when the Principal Commissioner of Income Tax (PCIT) sets aside an assessment order for not applying the higher tax rate under section 115BBE on unexplained sundry creditors and advances from debtors treated as cash credits under section 68.Whether unexplained sundry creditors and advances from debtors can be treated as unexplained cash credits under section 68 of the Income Tax Act.Whether additions made by the Assessing Officer under section 144 without invoking section 68 and charging tax under section 115BBE are erroneous and prejudicial to the interest of revenue.Whether trade creditors and opening balances representing liabilities can be subjected to taxation under section 68 of the Income Tax Act. RULINGS / HOLDINGS: The order under section 263 of the Act is not sustainable where the Principal CIT fails to consider the submissions and evidences demonstrating that the amounts represented opening balances and trade creditors, which cannot be taxed under section 68 of the Act.Unexplained sundry creditors and advances from debtors that represent genuine trading liabilities and opening balances cannot be treated as unexplained cash credits under section 68 of the Act; hence, the provisions of section 68 and the higher tax rate under section 115BBE are not applicable.The Assessing Officer did not err in applying the normal rate of tax instead of the higher rate under section 115BBE when the additions related to trade creditors and opening balances that were not subject to section 68.Trade creditors and liabilities accepted as genuine and supported by evidence cannot be added as unexplained cash credits under section 68, as held in multiple judicial precedents. RATIONALE: The Court applied the legal framework under sections 68 and 115BBE of the Income Tax Act, 1961, which govern the treatment of unexplained cash credits and the applicable tax rates.Judicial precedents were relied upon, including decisions holding that a credit representing a liability payable by the assessee (such as trade creditors or purchases on credit) is distinct from monies received and cannot be taxed under section 68.Precedents cited include Manoj Aggarwal v. DCIT, Ravindra Arunachala Nadar (ITAT Chennai), CIT v. Pancham Dass Jain (High Court), PCIT v. Kulwinder Singh (High Court), and Zazsons Export Ltd. (High Court), all supporting the proposition that trade creditors and opening balances are not subject to section 68 additions.The Court noted that the Principal CIT did not controvert the factual evidence submitted regarding the genuineness of the creditors and the source of funds, nor did it dispute that the amounts represented opening balances or genuine trade liabilities.Accordingly, the Court found no error in the Assessing Officer's approach and dismissed the revision under section 263, affirming that the provisions of section 68 and section 115BBE were not applicable in the instant facts.