2025 (3) TMI 996 - AT - Income Tax

Department's appeal dismissed as outstanding purchase creditors cannot be deemed bogus without proving fictitious transactions under section 68.

Manoj Gupta Versus ACIT, Range-3, Lucknow Versus DCIT, Range-3, Lucknow Versus Manoj Gupta

ITAT Lucknow dismissed department's appeal regarding addition under section 68 for unconfirmed sundry creditors. The tribunal held that credit balances ... Addition u/s 68 - Sundry Creditors who failed to respond to the notices u/s 133(6) - as argued no addition could be made under section 68 of the Act, in respect of credit balances at the end of the financial year, if, the purchases from those parties and trading results had been accepted - estimation of Net Profit @ 8% on total turnover Unconfirmed Sundry Creditors - Credit balances do not represent loans or advances taken by the assessee where creditworthiness to extent the advances are essential point for examination. Rather these represent sundry creditors for purchases and the purchases have not been called into question. Therefore, merely because some part of the expenditure for the purchases have not been met during the concerned financial year, is not ground to hold that those credits are bogus, unless it can be shown that those purchases were never made at all. As the Ld. AO has not conducted any exercise to determine the bogus nature of the purchases, in view of the decision of Pancham Dass Jain[2006 (8) TMI 582 - ALLAHABAD HIGH COURT] and Ritu Anurag Agarwal [2009 (7) TMI 1247 - DELHI HIGH COURT] the decision of the Ld. CIT(A) to delete the additions made on account of unconfirmed Sundry Creditors is upheld. Accordingly, ground no. 1 of the Department appeal is dismissed. Difference in balances reported by Sundry Creditors - As this is a matter of re-conciliation, we restore this matter back to the file of the Assessing Officer so as to give the assessee of the opportunity to re-concile the differences and order that in the event of such re-conciliation being made to satisfaction of the AO, addition should not be made on this account. This ground of appeal is allowed for statistical purposes. Estimation of net profit rate @ 8% - CIT(A) has himself recorded the fact that VAT Authorities have examined and confirmed the sales and purchases of the assessee. In the circumstances, in the absence of finding any fault in the accounts of the assessee, in our opinion the rejection of the books and estimation of the profit @ 8% would not be justified. In any case, the 8% profit is presumptive tax for civil contractors having turnover less than of Rs. 2 crores. The turnover of the assessee is over Rs. 7 crores. In the circumstances, a rate not bearing any relation to the history of the assessee’s case or any comparable case cannot be justified. In the circumstances, we find it fit to delete the addition made on account of estimation of net profit and to restore the rate of net profit to that disclosed by assessee in the return. Failure of CIT(A) to consider the VAT assessment and the fact that the assessee supplied only to PSUs, which was the reason for higher estimation of income by him - As already observed that the Ld. CIT(A) has considered the VAT assessment and we observe that he has also recorded the fact of the purchases of the assessee being verifiable as they were from PSUs. However, since the estimation of income by him is at variance with these findings recorded by him in his order, the same is not maintainable. Accordingly, this ground of appeal is allowed. ISSUES PRESENTED and CONSIDEREDThe legal judgment primarily revolves around the following core issues:1. Whether the Ld. CIT(A) erred in deleting the addition of unconfirmed Sundry Creditors amounting to Rs. 1,66,80,021/- and the addition of Rs. 3,41,592/- due to differences in balances of Sundry Creditors.2. Whether the Ld. CIT(A) was justified in applying a net profit rate of 8% and upholding an addition of Rs. 18,89,682/- against the assessee.3. Whether the Ld. CIT(A) failed to appreciate the previous decision of the ITAT in the assessee's own case regarding net profit estimation.4. Whether the Ld. CIT(A) adequately considered the VAT assessments and the fact that the assessee supplied services only to PSUs, which affected the estimation of the income.ISSUE-WISE DETAILED ANALYSIS1. Deletion of Addition of Unconfirmed Sundry CreditorsRelevant Legal Framework and Precedents: The issue pertains to the addition under section 68 of the Income Tax Act, 1961, concerning unconfirmed Sundry Creditors. The legal framework requires that for an addition under section 68, the identity, creditworthiness, and genuineness of the creditors must be established. Precedents include CIT Vs. Pancham Dass Jain and CIT Vs. Ritu Anurag Agarwal, which hold that additions cannot be made under section 68 for credit balances if purchases from those creditors are accepted.Court's Interpretation and Reasoning: The Tribunal observed that the AO did not question the purchases made by the assessee, which were from the same creditors. Therefore, the addition of Sundry Creditors was unjustified as it was contradictory to accept the purchases but question the credit balances.Key Evidence and Findings: The Tribunal noted that the VAT assessments confirmed the purchases and sales, providing substantial evidentiary value. The Ld. CIT(A) also considered additional evidence submitted by the assessee, which was admitted upon finding reasonable cause for non-production earlier.Application of Law to Facts: The Tribunal upheld the deletion of the addition, aligning with the legal principle that credit balances cannot be added if purchases are not disputed.Treatment of Competing Arguments: The Revenue argued that the assessee failed to verify the creditors, but the Tribunal found that the purchases were not questioned, thus supporting the Ld. CIT(A)'s decision.Conclusions: The Tribunal dismissed the Revenue's appeal on this ground, affirming the deletion of the addition.2. Application of Net Profit Rate of 8%Relevant Legal Framework and Precedents: The issue involves the application of a presumptive net profit rate under section 44AD of the Act, which typically applies to small contractors with a turnover below Rs. 2 crores. The Tribunal considered the historical net profit rates in the assessee's case.Court's Interpretation and Reasoning: The Tribunal found that the Ld. CIT(A) applied an 8% rate without identifying defects in the assessee's books, which were not produced but not shown to be incorrect or incomplete.Key Evidence and Findings: The Tribunal noted that VAT authorities confirmed the sales and purchases, and no defects were pointed out in the books by the Ld. CIT(A).Application of Law to Facts: The Tribunal concluded that applying an 8% rate was unjustified without reference to the assessee's historical profit rates or comparable cases.Treatment of Competing Arguments: The Tribunal considered the absence of defects in the books and the confirmed purchases, finding the 8% rate inappropriate.Conclusions: The Tribunal allowed the assessee's appeal, restoring the net profit rate disclosed by the assessee.3. Consideration of Previous ITAT DecisionRelevant Legal Framework and Precedents: The principle of res judicata does not apply to income tax proceedings, but historical context is relevant.Court's Interpretation and Reasoning: The Tribunal acknowledged that while res judicata does not apply, the Ld. CIT(A) should have considered the historical profit rates.Key Evidence and Findings: The Tribunal noted the lack of reference to the assessee's historical rates in the Ld. CIT(A)'s decision.Application of Law to Facts: The Tribunal found the Ld. CIT(A)'s estimation without historical reference unjustified.Treatment of Competing Arguments: The Tribunal balanced the need for historical context with the principle that each tax year is separate.Conclusions: The Tribunal partly allowed the assessee's appeal on this ground.4. Consideration of VAT Assessments and PSU SupplyRelevant Legal Framework and Precedents: The VAT assessments and supply to PSUs were relevant to the income estimation.Court's Interpretation and Reasoning: The Tribunal found that the Ld. CIT(A) considered these factors but did not align his income estimation with them.Key Evidence and Findings: The Tribunal noted the confirmed purchases from PSUs and VAT assessments.Application of Law to Facts: The Tribunal found the Ld. CIT(A)'s estimation inconsistent with these findings.Treatment of Competing Arguments: The Tribunal considered the evidentiary value of VAT assessments and PSU supplies.Conclusions: The Tribunal allowed the assessee's appeal on this ground.SIGNIFICANT HOLDINGSThe Tribunal upheld the deletion of additions under section 68 for Sundry Creditors, emphasizing that credit balances cannot be added if purchases are not disputed. The Tribunal restored the net profit rate disclosed by the assessee, rejecting the Ld. CIT(A)'s application of an 8% rate without identifying defects in the books. The Tribunal acknowledged the need to consider historical profit rates and the evidentiary value of VAT assessments and PSU supplies.In conclusion, both the Revenue's and the assessee's appeals were partly allowed, with the Tribunal providing clear guidance on the application of section 68, the relevance of historical profit rates, and the consideration of VAT assessments in income estimation.