TaxTMI 
TaxTMI 
2015 (4) TMI 747
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....n account of sundry creditors u/s 68 of the Income Tax Act, 1961 without appreciating the fact that these sundry creditors were not verifiable in absence of their whereabouts, complete postal address etc. ; 4. That the ld. CIT(Appeals) has erred in law and on facts in making an observation that making any addition u/s 68, the books of account of the assessee should have been rejected by the Assessing Officer u/s 145 of the Income Tax Act, 1961; 5. That the ld. CTT(Appeals) has erred in law and on facts in holding that once the AO has accepted the trading results including the purchases made during the year under consideration, the creditors cannot be treated as bogus/non existent in as much as that the goods to the extent of these amounts are accepted to be received, purchases and traded/manufactured by the appellant during the year; 6. That the CIT(Appeals) has erred in law and on facts in holding that the addition made the AO is legally incorrect and section 68 cannot be pressed to service for addition of business liabilities. " 1.1 I have considered the submissions of both the sides with reference to the orders passed by ld. J.M. and Ld. A.M. In order to properly app....
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....s Gross Profit G.P. Rate 2003-04 6,329.90 lacs 427.14 lacs 6.75% 2004-05 6,223.18 lacs 617 39 lacs 9 92% 2005-06 5028.23 lacs 607.85 lacs 12.09%" 3. The only issue for consideration by me is with regard to the addition account of sundry creditors relating to raw hide supplier aggregating to F 10,78,71,656/-. Brief facts apropos this issue are that the assessee was required to furnish the details of sundry creditors aggregating to Rs. 13,13,54,090/-, which were as under: "Chemical Supplier Rs. 1,60,32,917/- Misc. Supplier Rs. 72,62,977/- Upper Supplier Rs. 1,86,540/- Raw Hides Supplier Rs. 10,78,71,656/-" 4. The AO has observed that assessee had provided complete names and postal addresses in respect of various sundry creditors other than raw hide/ leather suppliers for which assessee could not furnish the complete address and names of any of the supplier except the name of M/s Zaz Leather Compex Pvt. Ltd. against which the amount of Rs. 7,38,766/- had been shown as outstanding. He pointed out that in respect of other creditors the assessee had only given the details of the names of market of....
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....these vendors was unquestioned. The assessee explained the trade practice in this regard and pointed out that almost all the vendors assemble at the time of weekly market i.e. mandi and the employees of the assessee company negotiate the rate and make selection of the hide on the spot and it is tried to make the payment on the spot. However, in case of purchase of larger quantity from such vendors, the payments were made in instalments, either at the time of next visit for purchases or they collect the payments from factory, which is made on presentation of slip for outstanding amount. According to the assessee, since these persons resided in the city or nearby places, where these weekly markets were held, the assessee purchased hides from them and recorded the outstanding balance in the name of that person against the mandies. It was, therefore, submitted that the question of creditworthiness of such vendors for supply of raw hide was undoubted and unquestioned. As per the assessee, it was due to confidence and trust of these vendors that they supplied raw hides of goats on credit as they were assured to get their payment as and when demanded. 6.1 The assessee further submitted....
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....2.07.2004 and the balance amount was paid in instalment ranging from 12.08.2004 to 14.04.2005. These are some of the examples to suggest that its contention made earlier that all the payments were being made to such creditors within 1 to 4 months and no one was having credit of more than 20 months was not correct. " 7.1 From these facts, the AO concluded that assessee was introducing the names of fictitious persons as and when required and was itself introducing unaccounted money in its books of account against the names of various persons, whereabouts of which and identity in respect of which was neither verifiable nor available. He, accordingly, made an addition of Rs. 10,78,71,656/-, inter-alia, observing that the assessee failed to give postal address, whereabouts, creditworthiness of vendors and also could not prove the genuineness of the transaction. 8. Before ld. CIT(A) the assessee had submitted as noted in para 22, as under: "An amount of Rs. 10,78,71,656/- was outstanding and payable to around 600 to 700 vendors spread over 24 Mandies. Complete list of persons against whom amount is payable for su....
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.... above credit balances could not be added to total income by invoking section 41(1) at all sec. 41(1) applies to cases where a deduction has been allowed for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently the assessee has obtained in cash or kind or any other manner any amount in respect of such loss, expenditure or liability by way of remission or cessation thereof. 4. The addition could not be made even u/s 68. This section applies to cases where 'any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source of thereof or the explanation offered by the assessee is in the opinion of the AO is not satisfactory. 5. It is relevant to point out that sec. 68 has been introduced to check induction of unaccounted cash into the business in order to raise the corpus of the assessee. These provisions apply to receipts and not expenses, since expenses do not result in induction of cash into the business. 6. The section does not apply to those credits which are the result of liability payable for expenses or purchases which form par....
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....y ld. CIT(A) to look into the facts and circumstances of the case. This included list of parties from whom purchases were made and copies of complete set of audited accounts. Thereafter, again ld. CIT(A) in para 26 to 28 has noted assessee's contentions, which are reproduced hereunder: "26. In respect of above appeal we wish to state that during the course of assessment proceedings for the A.Y. 2006-07 ld. Dy. Commissioner of Income-tax 6, Kanpur we have filed confirmations from 1478 vendors of 11 Mandies confirming outstanding balance appearing as on 31.03.2006 as a part of verification/confirmation of sundry creditors (goat hide). Apart from the above there has been personal attendance of 105 vendors from different Mandies who have come before Dy. Commissioner of Income Tax-1 confirming the transaction and balance payable as on 31.3.2006. Most of the vendors were also raw hide supplier in the A.Y. 2005-06 (Appeal pending). We have highlighted the green Ink on whose names are common in the list of A. Y. 2005-06 and whose confirmations have been filed. Most the vendors are making supply since a long time. It ....
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....he department, it would not, in our opinion, be possible for the department to turn round and say that the debits appearing on account of these purchases in two wrong names'. " 9. Ld. CIT(A) deleted the addition for the following reasons: "(a) The admitted position in this case, on this issue, was that the credits were liabilities and dues relating to purchase/procurement of raw hide. Once these credits were accepted as debtors (creditors) against purchases of raw materials, some did not fall within the purview of unexplained credit within the meaning of section 68. Once the AO had accepted the trading results including the purchases made during the year, the credits could not be treated as bogus/not existent, in-as-much as that the goods to the extent of these amounts were accepted to be reasoned, purchased and credited/manufactured by the assessee during the year. (b) The AO had himself noted that these credits were part of current year only and perhaps he intended to hold that the purchased to the extent of Rs. 10,78,71,656/- were bogus. In that case, the addition could be made only in the trading account and gross profit if such purchases were found and treated as ....
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....entification for this purpose, I would only take note of the assessment order for A Y 2006-0/ where it can be seen that, provided an opportunity to the appellant for verification of such purchases, the same has been carried out and most importantly there is no adverse/incriminating material showing that any entry or transaction of the appellant has been contrarily proved/found wrong and false. At this stage I would also rely on the decision in the case of K.S. Kannan Kunhi v. CIT [1969] 72 ITR 757 (Ker.), where it was held that "the explanation of the assessee should not be summarily rejected without further examination and where such examination is possible and not undertaken and the ITO adds to the assessment on the basis of the mere rejection of the explanation, the Court will set-aside the assessment." (f) He also referred to the decision in the case of Jaisa Ram v. CIT, 75 ITR wherein it has been observed that AO cannot reject the account books merely because the address of the purchasers in respect of cash transactions were not entered. (g) The AO had not questioned the correctness and the completeness of the books of account. The account books were duly added and audit....
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....year leading to positive confirmation of the trade creditors rather than giving any reason for suspicion and doubt in respect of their genuineness. Taking note of all these facts and merits of the case and the legal position on this issue as discussed above, ground No. 1(b) of appeal is allowed." 10. In the backdrop of above factual matrix, ld. A.M. confirmed the CIT(A)'s order, for the following reasons: "(a) AO doubted the creditors against the purchases and made the addition of the entire amount outstanding against the purchases, however, he did not point out any mistake in the books of account maintained by the assessee in regular course of business and also not doubted method of accounting employed regularly. (b) The AO did not point out any suppressed sale and inflated purchase. Gross profit rate which was at 12.09% in comparison to the gross profit rate of 9.92% in the preceding year had not been doubted. (c) The AO did not rebut the contention of assessee that liability against the purchase had been paid in the succeeding year. (d) The ld. CIT(A) categorically stated that during the assessment proceedings for the A.Y. 2006-07, the assessee filed the confi....
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.... amounts paid or amounts payable. According to the assessee, whosoever purchases the parchi gets the payment shown in the parchi and, therefore, requirement of such evidence by the Revenue was outside the scope of provisions of law. " 11.1 Ld. J.M. confirmed the addition for the following reasons: "(a) The assessee's obligation under sub-section (1) of section 145 of the Act is that he has to maintain its books of account either on cash basis or on mercantile basis regularly employed by him and while doing so has to follow the accounting standard (sub-section (2) of section 145 of the Act) as notified by the Central Government in the official gadget from time to lime. As per section 145(3) AO has power to reject the books of account if he is not satisfied about the correctness or completeness of the account of the assessee or if the method of accounting provided in sub-section (1) or accounting standard as envisaged under sub-section (2) have not been regularly followed by the assessee and in that situation the AO has power to make assessment u/s 144. Therefore, if assessee succeeds in substantiating its books of account with authenticated evidence, then the assessee'....
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....t the admitted position in this case, on this issue, is that the credits are liabilities and dues relating to purchase/procurement of raw hide. He has pointed out that these observations are not correct because it was only the case of the assessee before the AO but the AO had not accepted it as no evidence in this regard had been furnished by the assessee either before the AO or before the CIT(A) or before the Tribunal and, therefore, the starting point of CIT(Appeals) findings itself was based on mistaken/distorted facts. (f) Ld. J.M. further pointed out that it is not correct that AO had accepted the trading results because he had not only disputed the valuation of closing stock for want of evidence but had made the addition also "meaning thereby" that observation of the CIT(A) and the AO having accepted the trading results including purchases was absolutely founded and unsustainable in law. (g) As regards reliance placed on the decision of Allahabad High Court in the case of CIT v. Puncham Dass Jain (2006) 156 Taxmann 507, Ld. JM observed that the said decision was not applicable to the facts of the case because in that case, the Revenue as well as the Tribunal had accepte....
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....e postal address of any of the seller of the goat skin and neither could prove the genuineness of the transactions nor could establish the identity of said sellers. The assessee was not able to give even complete list of the persons from whom the raw hide of goat was purchased and from whom the advance in the shape of credit had been taken by the assessee and to whom the huge amounts were payable. Ld. DR relied on following judgments: (A) Grover Fabrics (India) (P.). Ltd. v. CIT [2011] 332 ITR 312(Punj & Har.) (B) CIT v. Smt. Annamkuty Jose [2008] 174 Taxman 328 (Ker); (C) Jai Prakash Sahu v. CIT 2007] 295 ITR 268 (All.); (D) Kachwala Gems v. Jt. CIT [2007] 288 ITR 10 12.2 Ld. DR further submitted that purchases shown in the credit account were actually made against cash payment and assessee failed to establish that the liability was a trade liability on account of credit purchase. In further submissions dated 19th August, 2010, Id. DR referred to the decision relied by assessee in the case of Visisth Chay Vyapar Ltd. v. ITO, decided by Delhi 'G' Bench in ITA No. 2835, 2838, 2836 & 2837/Del/2003 for A.Ys. 1996-97, 1998-99, 1999-2000 vide order dated 19th Octo....
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....n page 7 & 8 of assessment order, would clearly establish that AO had not doubted about factum of the amount due to raw hide suppliers being trading liability. However, the addition had been made on account of alleged un-verifiability of raw hide credits. 13.1 Ld. Counsel pointed out that AO did not consider assessee's explanation that verification of the sundry creditors against raw hides was not readily possible due to the business practice for the purchase of raw hides from mandies particularly for the want of time, which had been explained by the assessee vide its reply dated 17/12/2007. Ld. Counsel pointed out that at pages 245 to 248 of paper book details of payment made in subsequent year, in respect of un-paid sundry creditors, is contained. Further, records of 20 vendors in respect of purchases of raw hide, payment made and un-paid amount is contained in paper book IIA at pages 533 to 553. Ld. Counsel further submitted that the Ld. J.M. has observed and recorded a finding that AO did not accept trading results since he had not only disputed valuation of closing stock for want of evidence but had made addition also in order to demolish findings of ld. CIT(A) that aft....
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....ctor, finding recorded by ld. J.M. that the details furnished later on regarding discharge of those liabilities in next year were fabricated, does not stand the factual test. 13.5 Ld. Counsel further referred to para 27, para 29 & para 30 of ld. CIT(A), which he has reproduced in his written submissions also. In these paras ld. CIT(A) has referred to the verifications carried out in AY. 2006-07 by AO on this count. ld. Counsel, inter alia, submitted as under: "Respondent further submits as under: (a) Identity of vendors is well established by the fact that petty vendors assessable at Mandi on Mandi day and pay charges to place their product in Mandi. Their names and addresses are recorded by Mandi committee who regulate this trade and settle dispute between buyers and vendors. That is why address of vendors have been shown careof Mandi and are made available as and when required. (b) In so far as creditworthiness of vendors are concerned, those vendors operate their business with small capital and carry on their business by collecting hides from butchers and mutton shop even from shops of remote places during the week by paying token amount and balance on credit and pla....
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..... This is not even the allegation of the AO, much less his case against the assessee. The third allegation can be that these credits do not represent the purchases which have been made by the assessee. The implication of this will be that the purchases debited in the trading account are not genuine to that extent and accordingly, that the trading account is not correct. However, on going through the assessment order, the CIT(A)'s order and the order passed by the ITAT in the earlier round, it is evident that the trading results have been accepted. Despite this, for the sake of analysis, if it is considered that the assessee has failed to prove the genuineness of the creditors and consequently, the purchases to that extent are not genuine, then the declared gross profit of Rs. 32,16,564/- will get further enhanced by Rs. 37,99,907/-i.e., a GP of Rs. 70,16,471/- on a total turnover of Rs. 2,51,55,930/- giving an exorbitant gross profit rate of 27.89%, which is not the case. It is also important to note that the assessee is in the business of exports and its entire income is exempt. There is, as such, no reason for the assessee to suppress the profit as its income. " 13.8 In....
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.... books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year." A bare perusal of section reveals that section 68 can be invoked in case of un-explained sundry creditors. However, a distinction has to be kept in mind while making addition u/s 68 in respect of loan creditors and trade creditors. Whereas trade creditors are linked to the trading results of assessee, loan creditors are not. Therefore, the reasonableness of explanation of assessee in regard to sundry creditors cannot be judged on the touchstone of the credibility of explanation to be judged with regard to loan creditors. The reason is simple. In case of loan creditors cash is received but in case of sundry creditors the assessee's claim is regarding purchases in normal course of business. In this regard I may also refer to Section 34 of the Evidence Act as per which books kept in normal course of business on day to day basis are relevant though not s....
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....al trade practices. It is also added that amount not paid on the spot remains due to be paid in future either on the next mandi date or at the subsequent mandi or convenient dates and it is the factor of postponement of the payment which accounts for credit in respect of raw hide suppliers under consideration by Hon'ble Third Member; (e) The credit balance on any date consists of outstanding for the current purchase made on a particular day and sometimes part of old outstanding. However, entire purchase price is cleared in 3-5 months time in instalments; (f) The purchase of with holding part purchase consideration is to minimize the bargain power of the Butcher/Supplier and ensuring continuity of supplies by them. " 14.3 It is pertinent to observe at this stage that AO did not dispute the modus operandi of purchase of raw hide of goats from Mandi. He did not dispute that in normal course of trade practice the purchases were made from petty suppliers. However, after considering the modus operandi of assessee regarding purchase of raw hides of goat and the records maintained in that regard, the AO did not accept only the valuation of closing stock of raw hide on account ....
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.... "From the details furnished in Schedule-4, the assessee has shown the opening stock of raw material of Rs. 5,02,85,232/- which pertains to raw hides of goats. In terms of number as per Annexure-4 to the Tax Audit Report, the raw material of goat skin are 4.95.307 in number. As such, the average cost of raw hide shown in the opening stock is @ Rs. 101.52 per raw hide. As against this, the closing stock of rawhides have been shown at Rs. 6,25,23,278/- in Schedule-15 in respect of 6,63,659 pieces of raw hides as per Annexure-4 to the Tax Audit Report. This gives the average cost per goal skin appearing in the closing stock at Rs. 94.21. The assessee could not explain the reason for such a reduced rates of raw hides of goats at the end of the Financial Year as against the cost of raw hide appearing in the opening stock. This clearly shows that the assessee has been inflating its purchases and expenses by maneuvering and manipulating the figures pertaining to the purchases of raw hides. It has already been stated in the previous paras that the rates of raw hides were being disclosed at the rates which could suit the assessee and which are not verifiable from any independent agency. ....
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....ly with the company, hence the assessee company is not concerned about their identity. Their payments are being made on presentation of supply slip issued by the company. As whole amount have been paid to these vendors within a span of 1 to 4 months or at the time of next visit question of adding such outstanding u/s 41(1) of the IT. Act, 1961 is unwarranted. This outstanding is normal outstanding and arrived at in the normal course of business and as per business practice. All the purchases are fully vouched and verifiable and properly recorded in the books of account." 14.9 After examining the assessee's contentions in para 10, the AO, inter- alia, observed that the assessee had been introducing the names of fictitious persons as and when required and was itself introducing unaccounted money in its books of account against the names and various persons, whereabouts of which and identity in support of which was neither verifiable nor available. Therefore, there was clear charge of AO that assessee had only shown fictitious creditors and actually met the liability by introducing its unaccounted money. Ld. Counsel's submissions to this extent are, therefore, not correct. ....
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....ums found credited in the books maintained by the assessee. " Further, I may also refer to the decision of Hon'ble Supreme Court in the case of CIT v. Smt. P.K. Noorjahan [1999] 237 ITR 570. In this case the assessee was unable to explain the source of investment for purchase of property attributed to the amount left by the assessee's stepfather, which could not be established by the assessee. Considering her age and the circumstances in which she was placed, the Tribunal held that the mere fact that she was unable to establish the source did not justify addition. The assumption that the only course for the Assessing Officer in such cases is to make an addition is incorrect as pointed out by the High Court, while endorsing the Tribunal's decision. Satisfaction in the opinion of the Assessing officer certainly involves an element of discretion in drawing an inference from the facts and circumstances of a particular case. It was this view of the High Court, which was endorsed by the Supreme Court, when it affirmed the decision of the High Court. In other words, the inference should rest upon the credibility of the explanation rather than the materiality of evidence. ....
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....mination and where such examination is possible and not undertaken and the ITO adds to the assessment on the basis of the mere rejection of the explanation, the Court will set-aside the assessment". 33. It is seen that the AC) has applied the criteria of section 68 on these trading liabilities which in first place is legally incorrect and secondly no proceedings are taken to further verification of the creditors and fiction of section 68 has been utilized to hold those credits unverifiable and unexplained. From the submissions made before me in the paper book, it is seen that the appellant has given the names and place of business with the creditors and if purchases were required to be verified, the proceedings could have been directed towards such verification without taking help of deeming provisions in this behalf. As noted above, the appellant has furnished explanation and details on this issue and same cannot be rejected summarily by help of deeming provisions as far as purchases and such credits relating to such purchases are concerned. The decision in the case of Jessaram v. CIT, 75 ITR supports the observation more specifically applicable to this case where it was held t....
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....e assessee filed its return of income for the AY. 1976-77. While framing the assessment of the assessee, the ITO asked the assessee to explain the nature and source of the cash deposits appearing in the books of account of the assessee in the name of two persons. As the assessee failed to give satisfactory explanation with regard to nature and source of aforesaid deposits, the ITO made addition u/s 68. On appeal, the assessee contended that the credits appearing in the name of the said two persons did not represent deposit of cash by them with the assessee and that they represented the value of goods supplied by them to the assessee and, therefore, the addition in question u/s 68 was not warranted. The assessee's contentions were accepted by ld. CIT(A) and the Tribunal which were confirmed by the Hon'ble Allahabad High Court observing as under: 8. "The submission is misconceived. The Tribunal has recorded a categorical finding of fact based on appreciation of materials and evidence on record that the Assessing Officer had accepted the purchases, sales as also the trading result disclosed by the respondent-assessee. It had recorded a finding that the aforesaid two amounts....
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....on on account unexplained credit entries was justified, in spite of the addition made to the declared trading results. No substantial question of law arose. " Thus, the entire controversy revolved around the fact whether trading additions could be telescoped against the additions made for unexplained cash credits or not. Hon'ble P&H High Court held that it would depend on facts of each case as to whether nexus with sundry creditors had been established or not. This decision was rendered on entirely different set of facts where AO had recorded a finding that the credit entries were from bogus entities. In the present case, there is no finding by AO that the sundry creditors were bogus. Here AO had only drawn an adverse conclusion only on account of non-verifiability of sundry creditors but no finding was given that creditors were bogus. On the contrary the AO had accepted assessee's contention regarding payment of opening creditors during the year. Therefore, this decision is of little assistance to the Department. (B) Smt. Annamkuty Jose's case (supra) In this case main issue before Hon'ble Kerala High Court was as to on whom the onus to prove the sundry cr....