2017 (7) TMI 1483 - AT - Income Tax

Outstanding sundry creditor balances later settled-can they be taxed as unexplained cash credits under s. 68? Addition deleted

Whether outstanding sundry creditors could be treated as unexplained cash credits under s. 68 where the assessee demonstrated subsequent ... Disallowance of sundry creditor u/s 68 - CIT(A) deleted the addition on the ground that AO has completely ignored the fact put forward before at the time of assessment proceeding that all the creditors are duly settled in the succeeding years - HELD THAT:- The amount brought to tax u/s 68 pertains to outstanding balance of 13644 parties and the amount ranging from Rs. 28. The assessee has also produced documents as to how the credit balance were adjusted / squared off in the subsequent years. It is also pertinent to note that the sundry creditor pertains to AY 2011-12 and 2012-13 too. AR further relied on the decision in case of CIT Vs. Tulip Finance Ltd. [2008 (10) TMI 29 - DELHI HIGH COURT] wherein it has been held that advances received from the customers by way of security deposits were duly accounted for and for and were adjusted against the final sale price calls for no addition u/s 68. AR also relied upon the decision of Smt. Harshila Chordia [2006 (11) TMI 117 - RAJASTHAN HIGH COURT] wherein it was held that cash received from customers and adjusted against sale do not call for addition under section 68. Similarly in case of Dutta Automobiles(P) ltd. [2016 (6) TMI 115 - CALCUTTA HIGH COURT] it was observed that Section 68 had no applicability in case of amount received and adjusted against the delivery of the vehicles. Decided against revenue. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether outstanding balances shown as sundry creditors/current liabilities, arising in the course of business and subsequently adjusted/squared off, could be treated as unexplained cash credits and taxed under section 68 merely because confirmations were not produced for all such balances. (ii) Whether the deletion of the addition was justified where the assessee demonstrated that the impugned balances related to numerous small-value parties, pertained partly to earlier years, and were settled in succeeding years through business adjustments. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Applicability of section 68 to business-related sundry creditor balances lacking confirmations Legal framework (as discussed): The assessment treated certain outstanding sundry creditor balances as taxable under section 68 on the basis that confirmations were not furnished, implying failure to establish identity and genuineness for those credits. Interpretation and reasoning: The Tribunal examined the nature of the impugned amount as part of current liabilities comprising very large numbers of entries (over 13,000 parties), including extremely small individual balances. It accepted the assessee's explanation that these balances arose from routine business activities (including items like insurance, registration-related charges, and extended warranty) and were not in the nature of unexplained cash inflows. The Tribunal also relied on the principle applied in judicial precedents cited before it: where customer-related advances/security deposits/business receipts are duly recorded and later adjusted against delivery/sale/settlement, they do not warrant addition under section 68. On the facts, the Tribunal treated the impugned balances as business-linked credits that were capable of business adjustment rather than unexplained credits requiring taxation merely for want of confirmations. Conclusion: Section 68 addition was not sustainable on these facts solely because confirmations were not produced for the entire balance, where the credits were business-related liabilities/receipts and were subsequently adjusted/squared off. Issue (ii): Whether subsequent settlement/squaring off and linkage to earlier years justified deletion of the addition Legal framework (as discussed): The appellate deletion was examined against the assessing authority's approach of taxing the entire unconfirmed portion as unexplained credit. Interpretation and reasoning: The Tribunal noted that the assessee produced documents showing how the credit balances were adjusted/squared off in subsequent years, and that the outstanding creditors also related to earlier assessment years. It found that this material aspect had been ignored in making the addition. Given the demonstrated later settlement through business adjustments and the continuity of such balances across years, the Tribunal held that treating the remaining unconfirmed portion as unexplained under section 68 was not justified. The Tribunal accepted the appellate authority's reasoning that the later settlement supported the genuineness of the liabilities in the context of the assessee's business operations. Conclusion: The deletion of the addition was upheld; no interference was warranted because the impugned balances were shown to have been settled in succeeding years and were connected with business transactions and prior-year liabilities, undermining the basis for invoking section 68.