2025 (10) TMI 227 - AT - Income Tax

Appeal allowed: addition for difference in opening and closing sundry creditors deleted as AO failed to apply mind; turnover supported

ITAT, Delhi allowed the assessee's appeal and deleted the addition made by the AO on account of the difference between opening and closing sundry ... Addition on account of sundry creditors - Difference between opening and closing sundry creditors - HELD THAT:- We observe that the assessee has dealt with the suppliers who are different compared to the current assessment years - The parties are different in both the assessment years and in case, the AO is doubting the genuineness of the transactions, he should have rejected the whole purchases made by the assessee during the year rather making the addition only the difference of opening and closing sundry creditors. It shows that the AO has completed the assessment without application of mind and made the addition on the gross basis. We observe that assessee had declared turnover of Rs. 36.60 crores and declared purchases of Rs. 36.99 crores and maintained closing stock of Rs. 69.29 lakhs. Without there being purchases, the assessee would not have achieved such huge sales. AO has accepted the sales and made the addition on the genuineness of the purchases by adding in such gross manner. Therefore, we are inclined to delete the addition proposed by the AO and allow the grounds raised by the assessee - Appeal filed by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the difference between opening and closing sundry creditors (Rs. 1,03,09,347/-) can be treated as income where the Assessing Officer contends that suppliers are not traceable and purchases are not proved. 2. Whether third-party enquiries (inspector's inability to locate suppliers and non-receipt/return of notices) justify treating creditor balances as bogus and making additions to the assessee's income. 3. Whether acceptance by the Assessing Officer of sales and substantial portion of purchases, supported by ledger accounts, bank payments, VAT records and confirmations, precludes making a gross addition by treating the creditor difference as unexplained income. 4. Whether the Assessing Officer's approach of adding only the difference between closing and opening creditor balances (rather than disallowing entire purchases) reflects proper application of mind and is legally sustainable. 5. Whether alleged procedural defects (incorrect factual computation of opening balance, failure to confront adverse material and absence of opportunity for cross-examination) invalidate the addition. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legitimacy of treating difference in sundry creditors as income where suppliers are alleged non-existent Legal framework: The assessing authority may tax unexplained credits where the assessee fails to satisfactorily explain entries in books or genuineness of creditors and transactions; proof may include confirmations, ledgers, bank payments, VAT/tax records and third-party replies. Precedent treatment: The assessee relied on authorities holding that where AO accepts purchases and underlying transactions, mere non-confirmation or variation in creditor balances cannot be treated as income. The Tribunal examined these precedents and the parties' reliance as supportive of requiring substantive proof of bogusness before addition. Interpretation and reasoning: The Tribunal considered documentary evidence (detailed ledgers, confirmations, VAT registration, sales tax returns, banking proof) establishing purchases and payments from the three creditors. Although the AO's inspector could not locate the firms at given addresses and some notices were returned/unanswered, that incomplete third-party verification was insufficient to treat the creditor balances as income when (i) sales and most purchases were accepted, (ii) comprehensive ledger and bank/payment evidence existed, and (iii) there was no wholesale rejection of purchases during assessment. Ratio vs. Obiter: Ratio - where substantial documentary evidence corroborates purchases and sales and AO accepts sales, difference in creditor balances cannot be mechanically converted into income without satisfying the foundational finding of bogus or non-existent transactions. Obiter - observations about the sufficiency of individual inspection reports in every case. Conclusion: Addition by treating the creditor difference as income was not justified on the record; the Tribunal deleted the addition. Issue 2 - Weight of inspector's enquiries and returned/non-receipt of third-party notices Legal framework: AO may rely on third-party enquiries and statutory summons under s. 133(6) or notices to verify genuineness; however, adverse inference from non-responses must be consonant with material on record and reasoned application of mind. Precedent treatment: The Tribunal noted that inability of AO's inspector to trace parties can be a factor but does not automatically override contemporaneous documentary proof furnished by the assessee (ledgers, confirmations, VAT and tax filings, bank transactions). Interpretation and reasoning: The Tribunal treated the inspector's inability to trace firms and returned notices as only part of the material. Given that confirmations and extensive ledger entries were on record and sales were accepted, the Tribunal found the AO's reliance on returned notices and inspector reports insufficient to sustain addition. The Tribunal observed that when AO doubts transactions he should either reject whole purchases after due inquiry or explain why selective addition based on mere ledger differences is warranted. Ratio vs. Obiter: Ratio - negative findings from field enquiries must be reconciled with documentary evidence; they cannot be the sole basis for addition if independent corroborative material exists. Obiter - comments on practical difficulties in third-party verification. Conclusion: Inspector's negative report and returned notices did not justify the impugned addition standing against the assessee's documentary proof. Issue 3 - Implications of the AO accepting sales and a substantial portion of purchases Legal framework: Consistency in findings is required; acceptance of sales and part of purchases implies corresponding costing unless cogent reasons are recorded to disregard purchase entries. Precedent treatment: The assessee's reliance on authorities asserting that accepted purchases cannot be treated as unexplained income in absence of specific disproof was considered persuasive by the Tribunal. Interpretation and reasoning: The Tribunal emphasized that the AO accepted the assessee's turnover and declared purchases (turnover ~ Rs. 36.60 crores; purchases ~ Rs. 36.99 crores) and closing stock, which made the business results plausible. If AO suspected entire purchases to be bogus, the proper course would be to reject purchases in toto with reasons; instead AO added only the opening-to-closing creditor difference, an inconsistent and arbitrary method. The Tribunal held that such inconsistent approach reflects lack of application of mind. Ratio vs. Obiter: Ratio - acceptance of sales and substantial purchases constrains AO from making partial additions absent reasoned denial of the underlying transactions; Obiter - procedural recommendations for AO when suspecting bogus purchases. Conclusion: Because sales and major purchases stood accepted and were supported, the selective addition of creditor difference was unsustainable and was deleted. Issue 4 - Legality of adding only the difference between creditor balances vs. rejecting entire purchases Legal framework: Assessing officers must apply principled adjustments; additions should be based on coherent findings about genuineness or explanation of entries. Mechanical computation without reasoned analysis is impermissible. Precedent treatment: The Tribunal treated precedents as supporting that arbitrary or gross additions without addressing overall transaction genuineness are improper. Interpretation and reasoning: The Tribunal found the AO's approach-accepting purchases generally but adding only the Rs. 1.03 crore difference-internally inconsistent. If the AO doubted the creditors' genuineness, he should have disallowed purchases, not selectively add ledger differences. This indicated lack of application of mind and absence of satisfactory reasons for distinguishing between accepted purchases and ledger adjustments. Ratio vs. Obiter: Ratio - addition based merely on difference between opening and closing creditor balances, in presence of accepted purchases and corroborative evidence, is improper; Obiter - guidance on appropriate AO conduct in such situations. Conclusion: Addition limited to creditor difference was quashed for being arbitrary and not based on coherent reasoning. Issue 5 - Procedural fairness: incorrect factual computation, confrontation and cross-examination Legal framework: Principles of natural justice require that adverse material be confronted and opportunity be given to the assessee to meet it; computations of opening/closing balances must be factually correct before addition is made. Precedent treatment: The Tribunal noted the assessee's contention that opening balance used by authorities was factually incorrect and that adjustments (advances to suppliers) were not accounted for by the AO/CIT(A). Interpretation and reasoning: The Tribunal recorded that the assessee had furnished reconciliations, supporting documents and submissions contesting the AO's computation; the AO and CIT(A) proceeded on a figure which the assessee disputed and had sought to rectify with documentary proof. The Tribunal treated the failure to correctly reconcile opening balances and to fairly address the assessee's submissions as factors undermining the addition's validity. While the Tribunal did not dwell on an extensive natural justice ruling, it relied on incorrect factual basis and lack of reasoned confrontation as further infirmities in the assessment. Ratio vs. Obiter: Ratio - additions founded on incorrect factual computation and without proper confrontation of adverse material are invalid; Obiter - remarks on cross-examination procedures for third parties. Conclusion: Procedural lapses and incorrect factual calculation further warranted deletion of the addition. Final Conclusion of the Court The Court (Tribunal) held that the addition of Rs. 1,03,09,347/- by treating the difference in sundry creditors as unexplained income was unsustainable: the assessee had furnished corroborative ledger entries, confirmations, VAT/tax records and bank payment evidence; the AO's field enquiries and returned notices were insufficient to override that evidence; the AO's selective addition without rejecting purchases or applying reasoned analysis reflected a lack of application of mind. The appeal was allowed and the addition deleted.