2025 (3) TMI 719 - AT - Income Tax

Sundry creditors addition partially deleted as unserved notices insufficient grounds for disallowing genuine liability claims

ITAT Kolkata partially allowed the assessee's appeal regarding addition of sundry creditors treated as bogus. The tribunal found that notices returned ... Addition of sundry creditors treated as bogus - HELD THAT:-Notice issued was received back unserved from the postal authorities, which is against the facts of the case as both the units are proprietary concerns of the assessee and the income from both the units had been disclosed by the assessee. Further, initially the addition was made as the notices issued were returned unserved, for which some details/replies were received subsequently and partial relief was allowed. Both during the course of the assessment proceeding as well as during the remand proceeding, some confirmations were received in response to the notice issued. Hence, on the principle of preponderance of probability, which governs the assessment proceedings and the assessment of income, the sundry creditors earlier treated as unverifiable only for the reason of non-compliance on the part of the assessee/creditors is not wholly correct and only on this ground the liability claim could not be disallowed. As on appreciation of the submission made, the outstanding liability on account of Sarada Trading are directed to be deleted on furnishing of the required evidence before the AO as the same was not filed earlier before the Ld. AO and is additional evidence. That leaves a sum for which the assessee has submitted that he is not able to connect with those suppliers for getting their confirmations and, therefore, has submitted the certificate from the Chartered Accountant regarding the outstanding balances for the impugned. However, the certificate is regarding the outstanding balance being Nil as on 31/03/2023 but the same does not state anything regarding when these amounts have been repaid. Since the assessee himself is not able to furnish any confirmation in this regard from the creditors even before the Bench but claims that the amount was repaid, but the certificate is relating to March 2023, i.e. 10 years after the impugned A.Y., this issue relating to remaining sundry creditors of Rs. 14,51,991/- is set-aside before the Ld. AO who shall verify the mode of payment or any other evidence in possession of the assessee, and in case the payment has been made by cheque or satisfactory evidence is filed, delete the addition. Appeal filed by the assessee is partly allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this case include: Whether the addition of sundry creditors to the assessee's income due to non-verification is justified. Whether the assessment under Section 144 of the Income Tax Act, 1961, due to the assessee's non-compliance, was appropriate. Whether the disallowance of liabilities claimed by the assessee was proper, particularly in light of the provisions of Section 41(1) of the Act. Whether the evidence provided by the assessee, including confirmations from creditors and a Chartered Accountant's certificate, is sufficient to delete or reduce the addition made by the Assessing Officer (AO).ISSUE-WISE DETAILED ANALYSIS1. Addition of Sundry Creditors Due to Non-VerificationRelevant Legal Framework and Precedents: The assessment was conducted under Section 144 of the Income Tax Act, 1961, due to non-compliance by the assessee. The addition of sundry creditors was challenged by the assessee, who argued that the liabilities were genuine.Court's Interpretation and Reasoning: The Tribunal noted that the initial assessment included an addition of sundry creditors due to unserved notices. However, partial relief was granted when some confirmations were received. The Tribunal emphasized the principle of preponderance of probability, indicating that non-compliance alone is insufficient to disallow liability claims.Key Evidence and Findings: The assessee provided confirmations from some creditors and a Chartered Accountant's certificate stating that the liabilities were repaid by 31.03.2023. However, the certificate did not specify when the payments were made.Application of Law to Facts: The Tribunal found that the addition of Rs. 20,76,149/- related to Sarada Trading should be deleted upon furnishing of the required evidence, as the liabilities were repaid. For the remaining Rs. 14,51,991/-, the matter was remanded to the AO for verification of payments.Treatment of Competing Arguments: The Tribunal considered the assessee's argument that the addition was unjustified due to confirmations received and the repayment of liabilities. The Department argued that the liabilities were unverifiable due to non-compliance.Conclusions: The Tribunal directed deletion of the addition related to Sarada Trading upon submission of evidence. The issue regarding the remaining amount was remanded for further verification.2. Assessment Under Section 144 of the Income Tax ActRelevant Legal Framework and Precedents: Section 144 of the Act allows for best judgment assessment in cases of non-compliance by the assessee. The Tribunal assessed whether the application of this section was justified.Court's Interpretation and Reasoning: The Tribunal acknowledged that the initial assessment was made under Section 144 due to the assessee's failure to comply with statutory notices. However, it considered whether the subsequent evidence provided warranted a revision of the assessment.Key Evidence and Findings: The Tribunal noted that the assessee had responded to some notices and provided confirmations from creditors, which were initially unserved.Application of Law to Facts: The Tribunal found that the assessment under Section 144 was initially justified due to non-compliance. However, the subsequent evidence warranted a partial revision of the assessment.Treatment of Competing Arguments: The Tribunal considered the assessee's argument that adequate opportunity was not provided and that subsequent evidence should be considered. The Department maintained that the assessment was justified due to non-compliance.Conclusions: The Tribunal allowed partial relief based on subsequent evidence and directed further verification for unresolved issues.3. Application of Section 41(1) of the Income Tax ActRelevant Legal Framework and Precedents: Section 41(1) pertains to the remission or cessation of trading liabilities. The Tribunal considered whether this section was applicable to the disallowed liabilities.Court's Interpretation and Reasoning: The Tribunal noted that the disallowance was not specifically made under Section 41(1) and that non-verification alone does not trigger its application.Key Evidence and Findings: The Tribunal found that the liabilities were initially disallowed due to non-verification, not under Section 41(1).Application of Law to Facts: The Tribunal concluded that Section 41(1) was not applicable in this case, as the disallowance was based on non-verification rather than remission or cessation.Treatment of Competing Arguments: The Tribunal considered the assessee's contention that Section 41(1) was not applicable, which was not disputed by the Department.Conclusions: The Tribunal confirmed that Section 41(1) was not applicable, and the disallowance was based on non-verification.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: 'On the principle of preponderance of probability, which governs the assessment proceedings and the assessment of income, the sundry creditors earlier treated as unverifiable only for the reason of non-compliance on the part of the assessee/creditors is not wholly correct and only on this ground the liability claim could not be disallowed.'Core Principles Established: The Tribunal established that non-compliance alone does not justify disallowance of liabilities if subsequent evidence confirms their genuineness. The principle of preponderance of probability is key in assessing such claims.Final Determinations on Each Issue: The Tribunal directed deletion of the addition related to Sarada Trading upon submission of evidence. The issue regarding the remaining amount was remanded to the AO for further verification. Section 41(1) was deemed inapplicable in this context.