2018 (4) TMI 2021 - AT - Income Tax

Additions for fictitious debtors deleted; unconfirmed creditors and 80IB deduction remitted for fresh verification of trade balances

ITAT held that additions for alleged fictitious sundry debtors could not be sustained and were deleted, since audited books and undisputed sales/purchases ... Addition on account of fictitious debtors - HELD THAT:- According to us, in the instant case, the books of account are audited and sales and purchases are not doubted. Even if the sundry debtors have not confirmed balances in their account, then also the Assessee would only a looser, therefore in our considered opinion, addition can not be sustained on account of sundry debtors, hence stands deleted. In respect of sustaining the addition of unconfirmed creditors it was observed by the CIT(A) that the creditors have not brought forward balances from the last year and the PAN and the addresses of the said creditors were not provided. However, the said reasoning is contrary to the facts because, it reflects whereby the said balances have been confirmed in the books of the account of the appellant and in respect of Hakim Rai Labh Singh as well, the appellant has also confirmed as closing balance. Addition qua Arora Packers and qua Hakim Rai Labh Singh cannot be sustained on the reasoning given by the CIT(A), however, for just decision of case, so as to enable proper verification of the trade balances, we feel it appropriate to remand back the issue under consideration to the file of AO to decide afresh, in view of the submissions made by the Ld. AR and the observation made by us in the order. Deduction u/s 80IB - Small scale industry registered in the state of Himachal Pradesh which reflects from the application filed before the Govt. of Himachal Pradesh in respect of permanent registration as small scale industries - HELD THAT:- We have again revisited the orders passed by the authorities below as it reflects from the order passed by the CIT(A) whereby he has observed that the assessee is an auditable one and audit report in Form 10CCB was filed along with the return of income and books of account of the Assessee were subjected to audit as required u/s 44AB of the Act. We feel it appropriate to remand the issue under consideration also to the file of the AO, who shall consider the Assessee's claim in accordance with law. ISSUES PRESENTED AND CONSIDERED 1. Whether completion of assessment under best judgment is sustainable where the Assessing Officer proceeded without obtaining or verifying ledger accounts, confirmations, PANs or addresses of sundry debtors/creditors and where books were auditable. 2. Whether adequate opportunity and reasonable time was afforded to the assessee before making best judgment additions and whether failure to provide supporting particulars amounts to denial of opportunity or justification for additions. 3. Whether additions treating specified sundry debtors as fictitious can be sustained where sales are accepted as genuine, audited books are not doubted, and copies of trading parties' account statements and other evidence (including legal action) are on record. 4. Whether additions in respect of unconfirmed sundry creditors are sustainable where confirmations/ledger entries appear in the assessee's books and copies of creditors' accounts are on record but PANs/addresses/bring-forward balances are not furnished. 5. Whether differences in balances with a creditor (M/s R.K.M. Foods) can be treated as undisputed additions where the creditor has multiple units and the assessee produced partial account copies showing bank credit entries and contends that full account details were not confronted before assessment. 6. Whether deduction under section 80IB (industrial undertaking relief) can be denied where the assessee is an audited manufacturing unit, claims small-scale industry registration, and files audit report/Form 10CCB. ISSUE-WISE DETAILED ANALYSIS - 1. Validity of best-judgment assessment and adequacy of opportunity Legal framework: Best-judgment assessment arises where the Assessing Officer is not satisfied with the accounts or proper information is not furnished; however, statutory requirement of giving opportunity and acting on material is implicit in principles of natural justice and the Code. Precedent treatment: No precedents were invoked by the Tribunal; the Court examined the statutory record and audit status to test the reasonableness of the AO's action. Interpretation and reasoning: The Tribunal found the books were audited and sales/purchases were not doubted; the AO's reliance on audit remark that balances were unconfirmed did not, by itself, constitute sufficient material to make best-judgment additions. The absence of ledger confirmations, PAN or addresses, standing alone, does not justify treating trade balances as fictitious where the sales have been accepted and audited accounts exist. Ratio vs. Obiter: Ratio - A best-judgment addition cannot be upheld merely because confirmations, PANs or addresses were not furnished when audited books and other supporting documents are on record and sales are accepted; Assessing Officer must have positive material to displace recorded trade transactions. Obiter - Comments on the timing of assessment vis-à-vis limitation period (nine months before time-bar) are noted but not relied upon as sole basis. Conclusion: Best-judgment additions made on the ground of unconfirmed balances were not sustainable and were accordingly deleted insofar as they related to sundry debtors treated as fictitious. ISSUE-WISE DETAILED ANALYSIS - 2. Adequacy of opportunity and reasonableness of procedural conduct Legal framework: Principles of natural justice and statutory safeguards require the AO to provide reasonable opportunity and to confront the assessee with adverse materials before making additions. Precedent treatment: No specific precedent cited; Tribunal applied statutory fairness principles to the record. Interpretation and reasoning: The Tribunal noted absence of confrontation in specific instances (e.g., R.K.M. Foods discrepancy) and that audited accounts and copies of parties' ledgers were on record. Where no proper confrontation or independent material existed, sustaining additions amounted to acting in undue haste. Ratio vs. Obiter: Ratio - Where additions are based on discrepancies or lack of particulars, the AO must confront the assessee and afford opportunity to explain with available account copies; failure to do so undermines the additions. Conclusion: The Tribunal found procedural defects and directed remand in relation to certain creditors/claims to enable fresh verification by the AO with proper opportunity to the assessee. ISSUE-WISE DETAILED ANALYSIS - 3. Additions treating specified sundry debtors as fictitious (Rs.4,19,990) Legal framework: Revenue may disallow unsubstantiated trade receivables if proved fictitious; however, acceptance of sales and audited books weigh against such treatment. Precedent treatment: None cited; Tribunal relied on documentary record (audited books, account copies) and admission of sales by the Revenue. Interpretation and reasoning: The Tribunal emphasized that audited books and acceptance of sales by the department negate the presumption of fiction. Lack of PAN/address/confirmation does not convert genuine trade debts into fictitious ones where supporting account statements and other evidence (including institution of civil/criminal proceedings) exist. Making additions solely on unconfirmed balances would penalize the assessee despite documentary indicia of genuineness. Ratio vs. Obiter: Ratio - Additions on account of fictitious sundry debtors cannot be sustained when audited accounts, supporting party account statements and departmental acceptance of sales exist; mere absence of PAN or confirmations is insufficient. Conclusion: The Tribunal deleted the addition of Rs.4,19,990 treating those sundry debtors as fictitious. ISSUE-WISE DETAILED ANALYSIS - 4. Additions in respect of unconfirmed creditors (Arora Packers and Hakim Rai Labh Singh) Legal framework: Credit balances may be added back if not bona fide or not supported by records; the Revenue may require PANs/addresses and carry-forward proof to guard against bogus transactions. Precedent treatment: Not cited; Tribunal examined the paper record showing confirmations/ledger entries. Interpretation and reasoning: The Tribunal found that the assessee's books contained confirmations/closing balances for the named creditors and copies of creditors' accounts were on record. The CIT(A)'s reliance on absence of PAN/bring-forward balances contradicted these recorded confirmations. Nonetheless, because verification of trade balances is a factual exercise, the Tribunal determined that a remand to the AO for fresh verification in light of the assessee's submissions and the Tribunal's observations was appropriate. Ratio vs. Obiter: Ratio - Where ledger confirmations/entries in the assessee's books and supporting account copies exist, additions should not be sustained without further verification; remand is appropriate for factual reconciliation. Conclusion: The Tribunal set aside the additions but remitted the matter to the AO for fresh verification and decision in accordance with the observations made. ISSUE-WISE DETAILED ANALYSIS - 5. Additions relating to M/s R.K.M. Foods (Rs.91,511 and Rs.1,04,511) Legal framework: Discrepancies between assessee's books and counterparties' accounts can warrant adjustment, but reasoned confrontation and full disclosure of counterparties' accounts are required before additions. Precedent treatment: None cited; Tribunal reviewed evidence that the creditor had multiple units and that only partial account copies (Unit-II) were initially filed. Interpretation and reasoning: The Tribunal observed that the assessee produced account copies showing bank credit entries and contended that full account details were not considered by the AO. The AO did not confront the assessee prior to making additions. Given these peculiar facts, the Tribunal found it appropriate to set aside the additions and remand for fresh consideration, permitting the AO to examine complete accounts and explanations. Ratio vs. Obiter: Ratio - Additions based on balance differences should not be sustained without confronting the assessee and examining complete account particulars where a party maintains multiple units; setting aside and remitting for proper verification is warranted. Conclusion: The Tribunal set aside the additions and remitted the issue to the AO for fresh adjudication considering the assessee's submissions and the Tribunal's observations. ISSUE-WISE DETAILED ANALYSIS - 6. Disallowance of deduction under section 80IB Legal framework: Deduction under section 80IB is claim-based and allowable if conditions prescribed by statute are satisfied; audit and supporting registrations/certificates are relevant to entitlement. Precedent treatment: Not invoked; Tribunal looked to the audit status, Form 10CCB filing and small-scale industry registration material on record. Interpretation and reasoning: The Tribunal noted the assessee was an auditable manufacturing unit, filed the audit report and claimed small-scale registration. Given the factual nature of entitlement to section 80IB relief and the documentary material filed, the Tribunal considered it appropriate to remit the matter to the AO for fresh consideration in accordance with law, so that statutory conditions and supporting proof can be examined afresh. Ratio vs. Obiter: Ratio - Claims for statutory deductions should be adjudicated on the basis of relevant documentary evidence and statutory conditions; where record and audit report exist, remand for fresh adjudication is appropriate rather than outright denial. Conclusion: The Tribunal remitted the section 80IB claim to the AO for fresh consideration in accordance with law. OVERALL CONCLUSION The appeal was partly allowed: additions treating certain sundry debtors as fictitious were deleted; additions relating to specified creditors and to R.K.M. Foods were set aside with remand to the Assessing Officer for fresh verification; the claim for deduction under section 80IB was remitted to the Assessing Officer to decide afresh in accordance with law. The Tribunal found that audited books, acceptance of sales, lack of proper confrontation and insufficiency of mere non-furnishing of PAN/confirmations were central to its reasoning.