Tribunal deletes bogus creditor addition, restricts income on Form 26AS mismatch by applying 4% net profit rate

ITAT Kolkata partly allowed the assessee's appeal. On the first issue, it held that the AO had erroneously compared only sundry creditors with total liabilities disclosed in the return, and since there was no actual discrepancy between creditors in the balance sheet and ITR, the addition was deleted, setting aside the CIT(A)'s order. On the second issue, regarding mismatch between contract receipts as per Form 26AS and ITR, the Tribunal accepted the assessee's reconciliation, treating only the marginal unexplained difference as relevant. Applying a reasonable net profit rate of 4% (as against 2.52% accepted by AO), it restricted the addition to 4% of Rs. 47,44,089/-, i.e., Rs. 1,89,763/-.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether addition on account of alleged difference in sundry creditors between the balance sheet and the return of income was sustainable.

1.2 Whether and to what extent addition was warranted on account of difference between gross receipts reported in the return of income and those reflected in Form 26AS, and at what profit rate such difference should be taxed.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition on account of alleged difference in sundry creditors

(a) Interpretation and reasoning

2.1 The Assessing Officer compared sundry creditors as on 31.03.2013 with those as on 31.03.2014, noticed a difference, called for reconciliation, and in absence of satisfactory explanation, made an addition treating the difference as income.

2.2 The appellate authority deleted this addition but, on its own examination, held that sundry creditors as per the audited balance sheet for the year were lower than the figure of "sundry creditors" in the return of income, and treated the arithmetical difference as unexplained, making a reduced addition.

2.3 The Tribunal noted that, as per the audited balance sheet, the figure of Rs. 19,15,43,325/- represented "total current liabilities", comprising (i) God Account 101, (ii) Sundry Creditors Rs. 19,00,89,296/-, and (iii) Provision for outstanding liabilities Rs. 14,53,938/-. The appellate authority had erroneously treated this total of current liabilities as if it were only sundry creditors in the return of income and compared it with the sundry creditors figure in the balance sheet.

2.4 On this factual examination, the Tribunal found no discrepancy between the creditors as per the audited balance sheet and the figure as reflected in the return of income, once the proper break-up of current liabilities was taken into account.

(b) Conclusions

2.5 The alleged difference in sundry creditors arose from a misconstruction of the figures in the balance sheet and return of income; there was in fact no difference in the creditors position.

2.6 The addition made by the appellate authority, as well as the original addition by the Assessing Officer on this count, was unsustainable and liable to be deleted in full.

Issue 2: Addition based on difference between Form 26AS and return of income

(a) Interpretation and reasoning

2.7 The Assessing Officer compared the gross receipts as per the return of income with the aggregate receipts reflected in Form 26AS and, noticing a difference, required the assessee to reconcile. Upon not accepting the reconciliation, the Assessing Officer added the entire difference as income.

2.8 The appellate authority accepted that the entire difference could not be added as income and instead directed that 10% of the difference between Form 26AS and the return of income be brought to tax.

2.9 Before the Tribunal, the assessee produced a chart for multiple assessment years (2012-13 to 2015-16) showing comparative figures of contract receipts as per the audited profit and loss accounts and as per Form 26AS. On a cumulative basis, the gross receipts as per audited financials were Rs. 78,27,50,907/- and the gross receipts as per Form 26AS were Rs. 79,74,94,996/-, resulting in a marginal unexplained difference of Rs. 47,44,089/- only.

2.10 The Tribunal accepted that the assessee had satisfactorily explained the difference to a substantial extent over the span of years, and that only the residual difference of Rs. 47,44,089/- remained to be dealt with. It rejected the contention that no addition at all was warranted merely because a large portion of the difference stood explained, holding that any remaining unexplained difference implied that receipts to that extent had not been offered to tax.

2.11 The Tribunal noted that, for the relevant year, the Assessing Officer had already accepted a net profit rate of 2.52% as per the tax audit report. Considering this, and the fact that only the profit element on the unexplained receipts should be taxed, the Tribunal held it reasonable to estimate income at 4% of the unexplained difference of Rs. 47,44,089/-, instead of adding the entire difference or 10% thereof.

(b) Conclusions

2.12 Only the residual unexplained difference between gross receipts as per audited financials and Form 26AS across the relevant years, quantified at Rs. 47,44,089/-, could be considered for addition.

2.13 The appropriate measure was to bring to tax the profit element embedded in such unexplained receipts, which, on the facts and accepted profit history, was reasonably estimated at 4% of Rs. 47,44,089/-, resulting in an addition of Rs. 1,89,763/-.

2.14 The direction of the appellate authority to add 10% of the entire difference between Form 26AS and return of income was set aside and substituted with the above quantified addition.

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