Closing balance mismatch with creditor books and later-year adjustment, addition u/s69 deleted for no hearing
Addition under s.69 was sustained solely on an alleged mismatch between the closing balance reflected in the assessee's books and that appearing in the creditor's books as on 31 March 2016. The ITAT held that s.69 can be invoked only after the assessee is afforded an opportunity to explain the impugned item, which was not done, and that the revenue authorities did not demonstrate that the assessee's reconciliation and supporting documents were incorrect or non-genuine. Further, once the reconciliation explaining that the outstanding was adjusted in the subsequent year was accepted, no basis remained for treating it as unexplained. The addition under s.69 was deleted and the appeal was allowed.
ISSUES PRESENTED AND CONSIDERED
1. Whether an addition for a ledger balance difference with a trade creditor could be sustained by invoking section 69 when the discrepancy was explained as a subsequent-year adjustment and the balances were ultimately reconciled through confirmations and ledger evidence.
2. Whether the addition under section 69 was vitiated because the assessee was not afforded an effective opportunity to explain the alleged undisclosed investment before such deeming addition was made.
ISSUE-WISE DETAILED ANALYSIS
Issue 1: Applicability of section 69 to a difference in closing balances with a creditor after reconciliation
Legal framework: The Court examined section 69 as a deeming provision applicable where (i) the assessee has made investments, (ii) such investments are not recorded in the books, and (iii) the assessee offers no satisfactory explanation regarding the nature and source of such investments.
Interpretation and reasoning: The Court found that the addition was made solely because of a mismatch between the creditor's closing balance and the assessee's closing balance as on 31 March 2016, initially coupled with absence of response/documentation. However, during appellate proceedings, additional evidence, confirmations, and ledger material were brought on record and examined via remand proceedings. On that material, the Court accepted the explanation that the difference was attributable to an adjustment relating to an associate concern, which was accounted for in the subsequent year, and that the balances stood reconciled as on 31 March 2017 between the parties. The Court further noted that the revenue did not demonstrate that the assessee's explanation supported by documents was wrong or non-genuine.
Conclusions: Since the balance difference was explained and reconciled through supporting ledger confirmations and subsequent-year adjustment, the essential factual basis for invoking section 69 (undisclosed "investment" not recorded and unexplained) was not established. The Court held that section 69 had no application on these facts and directed deletion of the addition.
Issue 2: Requirement of opportunity to explain before making an addition under section 69
Legal framework: The Court treated the opportunity to explain as an essential prerequisite for making a deeming addition under section 69, and expressly applied the principle that such an addition cannot be made without giving the assessee a chance to explain the nature and source of the amount sought to be treated as income.
Interpretation and reasoning: The Court held that section 69 is attracted only if the assessee is given an opportunity to explain before the Assessing Officer proceeds to make the addition. It found that this requirement was not complied with in the present case. This procedural deficiency reinforced the conclusion that the addition could not be sustained, particularly when the reconciliation and supporting documents were available and not found to be false.
Conclusions: The Court concluded that the absence of the requisite opportunity to explain rendered the section 69 addition unsustainable, and on this ground also, the addition was directed to be deleted.