2025 (10) TMI 569 - AT - Income Tax

Discrepancy in supplier ledger opening balance not taxable; delayed credit notes already taxed cannot be added again

Nitin Traders Versus Asstt. Commissioner of Income Tax Akola Circle, Akola

ITAT (Nagpur) set aside the CIT(A) order and allowed the assessee's grounds: the tribunal held that a discrepancy in the supplier ledger opening balance ... Difference in ledger balance of supplier with the books of assessee - HELD THAT:- As perused the material available on record and gone through the orders of the authorities below. As rightly contended by assessee, difference in opening balance cannot be treated as income of the assessee for the relevant year under consideration. Thus, the difference in opening balance does not call for any addition for the relevant year under consideration. As such, set aside the impugned order passed by the learned CIT(A) and allow the grounds no.1 and 3, raised by the assessee are allowed. Addition on account of unaccounted credit notes - As submitted that credit note for the claim/discount was received late by the assessee from the supplier, therefore, it was offered as income in the subsequent year and the addition made by the AO amounts to double addition - HELD THAT:- As addition is made because of the credit note difference which was not noted in the books of accounts. The assessee explained that the credit notes was given by the supplier M/s Konakan Agro Marine Pvt. Ltd. on 31/03/2014, and it was not accounted by the assessee as the claim was not settled between the parties. This amount got settled thereafter which was offered for taxation in the subsequent year. Therefore, there was no negligence on the part of the assessee not to post the credit notes in the books of accounts. Since the assessee has already offered the amount in question in the subsequent year and offered for taxation, therefore, it would amount to double taxation. Accordingly, set aside the impugned order passed by the CIT(A) on this issue and allow the ground raised by the assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether a difference in opening ledger balances with trade creditors constitutes assessable income of the assessee for the relevant assessment year. 2. Whether failure to record supplier-issued credit notes in the books for the relevant year can be treated as income of the assessee for that year where the credit note was later settled and offered to tax in a subsequent year (issue of potential double taxation). 3. Whether additions founded on unreconciled inter-company/party ledger balances can be sustained where reconciliation explanations and subsequent year tax treatment are shown. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Difference in opening ledger balance with supplier (Konkan Agro Marine) of Rs. 2,43,081: legal framework - Legal framework: Assessable income is determined by reference to the books of account and principles of income recognition; adjustments to income by the assessing authority require that unexplained receipts/credits be shown to be income of the year under consideration. Reconciliations of opening balances are relevant to determine whether a difference arises from an income event in the year or is attributable to prior-period accounting errors. - Precedent Treatment: No specific precedents were invoked by the authorities below or the Tribunal in the impugned order; therefore, no precedent was followed, distinguished, or overruled in the judgment. - Interpretation and reasoning: The Assessing Officer treated the excess liability/unreconciled opening balance as income of the assessee for the relevant year. The assessee provided reconciliation documents and explained the origin of the opening balance difference as not arising from an income event in the relevant year. The Tribunal accepted that a mere difference in opening balances does not ipso facto constitute assessable income for the year under assessment, particularly where the difference is attributable to accounting errors or prior year transactions and where reconciliation or later-year offer to tax is shown. - Ratio vs. Obiter: Ratio - where a difference in opening ledger balance is shown to arise from prior-period entries or accounting errors and no distinct income event in the relevant assessment year is established, such difference cannot be treated as income of the current year. Obiter - the wider evidential standards for acceptance of reconciliations were not exhaustively framed. - Conclusion: The addition of Rs. 2,43,081 made on account of difference in opening balance with the supplier is deleted. The Tribunal set aside the confirmed addition as not constituting income of the relevant assessment year. Issue 2 - Unaccounted credit notes (Rs. 9,92,930): legal framework - Legal framework: Credit notes issued by suppliers reduce the assessee's liability and, if reflected in the books, affect the computation of income; conversely, omission to account for such credits may be treated as unexplained receipts if they represent amounts in substance received or retained. Principles against double taxation require that the same economic item not be taxed in two different years absent error or omission unexplained by the taxpayer. - Precedent Treatment: No precedents were cited or applied by the authorities or Tribunal; therefore, no precedent treatment was identified. - Interpretation and reasoning: The Assessing Officer added the unaccounted credit notes as income for the year because they were not incorporated into the assessee's books. The assessee explained that the credit notes were issued on 31/03/2014 but the claim was not settled between the parties in that year; the credit ultimately got settled and was offered to tax in the subsequent year. The Tribunal accepted the factual explanation that there was no negligence in not posting the credit notes in the books for the year under assessment because the matter remained unsettled at year-end and the amount was subsequently offered to tax in the later year. The Tribunal found that allowing the addition for the earlier year, where the assessee already offered the amount in the later year, would amount to double taxation. - Ratio vs. Obiter: Ratio - where a supplier-issued credit note pertains to a claim unsettled as at the end of the assessment year and is subsequently recognized and taxed in a later year, treating the unaccounted credit as income of the earlier year may cause double taxation and is not justified absent evidence that the benefit accrued in the earlier year. Obiter - the decision does not lay down a general rule for all late-issued credit notes; fact-specific analysis is required to establish accrual. - Conclusion: The Tribunal disallowed the addition of Rs. 9,92,930, holding that since the credit was settled and offered to tax in the subsequent year, charging it in the year under appeal would amount to double taxation; the impugned addition was set aside. Issue 3 - Difference in opening ledger balance with M/s. Royal Drinks of Rs. 5,45,061: legal framework - Legal framework: Same principles as Issue 1 - unreconciled differences in opening balances must be examined to determine whether they represent current-year income or relate to prior periods/accounting errors; the burden lies on revenue to establish that an unexplained receipt is income of the year. - Precedent Treatment: No precedent cited or applied in the orders; Tribunal relied on statutory and accounting principles as applied to the facts. - Interpretation and reasoning: The Assessing Officer made the addition on the basis of an unreconciled difference between the party's opening balance and the assessee's opening balance. The assessee provided reconciliation material. The Tribunal held that difference in opening balance cannot be treated as income of the year under consideration absent a demonstration that the difference arose from a current-year income event rather than prior-period errors or omissions. - Ratio vs. Obiter: Ratio - unreconciled opening balance differences that are attributable to earlier periods or accounting errors do not constitute taxable income in the current year and cannot be added without appropriate proof of accrual in the relevant year. Obiter - none specific beyond the factual conclusion. - Conclusion: The Tribunal allowed the ground and deleted the addition of Rs. 5,45,061 relating to difference in opening balance with M/s. Royal Drinks. Cross-references and general observations - Cross-reference: Issues 1 and 3 are analytically linked - both concern unreconciled opening balances; the Tribunal applied the same legal reasoning to disallow additions based on such differences. Issue 2, while related by subject matter (supplier credits), required additional factual inquiry into settlement timing and later tax treatment to avoid double taxation. - Evidential standard: The Tribunal emphasized the need to distinguish prior-period accounting differences from current-year income and to avoid taxing the same economic benefit in two different years when the taxpayer demonstrates subsequent taxation in a later year. - Burden of proof: Implicit in the reasoning is that where the Assessing Officer makes additions based on ledger differences, the revenue must establish that those differences represent income of the particular year; reconciliations and explanations provided by the assessee must be given due weight. Final disposition (ratio of the judgment) - The Tribunal set aside the additions relating to unreconciled opening ledger differences of Rs. 2,43,081 and Rs. 5,45,061 and deleted those amounts from the assessee's income for the year under appeal. - The Tribunal also set aside the addition of Rs. 9,92,930 relating to unaccounted credit notes, holding that the amount was subsequently settled and offered to tax in the next year and that charging it in the year under appeal would result in double taxation.