Brief Facts and Question of Law:
Brief Facts of the Assessee:
The Assessee was engaged in the manufacturing of readymade garments and export to foreign countries. The Assessee had filed the Income Tax Return, declaring an income of Rs. 11,82,236/- which was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”). When the case was selected for scrutiny, the Assessing Officer (hereinafter referred to as “the AO”) noticed that the Gross Profit ratio was lesser as compared to last year. Also the AO selected nine creditors for which he required confirmed copies of Accounts.
The AO served notices u/s 133(6) of the Act on the selected creditors but were returned unserved. Hence the AO added back the closing balance of those creditors amounting to Rs. 3,57,17,506/- to the Income of the Assessee u/s 68 of the Act treating the same as unexplained cash credits.
Held by CIT (A):
The CIT(A)observed that assessee succeeded in producing the vouchers and the sale bills, copies of accounts, confirmations and bank statements having relationship with nine of the trade creditors. But the assessee miserably failed to produce trade creditors and satisfactorily explaining the reason for their non-production.
Hence CIT(A) held that assessee failed to establish the identity, genuineness and the creditworthiness of the trade creditors. He also observed that the essential evidence in the form of the “person” of the trade creditors was starkly missing and the genuineness of the transactions remained a suspect till the last day of the enquiry carried out by the AO personally. Accordingly, the addition of Rs. 3,57,17,506/- was confirmed.
Question of Law:
Whether addition can be made u/s 68 of the Act on account of outstanding balances of suspected creditors by considering the same as bogus.
Contention of the Revenue:
The Revenue contended that the AO had served notices u/s 133(6) on the chosen creditors which were received back as unserved. It was argued that liabilities were neither finally determined nor due and confirmed by the creditors, therefore, the same could not be accepted as liabilities. On enquiry it was also revealed that the address of suspected creditors were relating to the place where legal and professional work was done, then how the assessee purchased the goods was not clear. It was held that the Assessee did not produce stock register on demand also to substantiate the fact that goods i.e. fabrics received from the so called trade creditors were duly entered into the manufacturing account of the assessee, therefore, in the absence of the stock register it could not be demonstrated by the assessee whether the goods purchased on credit from the so called trade creditors were duly accounted for or not in the books of account. The law relating to evidence for claiming expenditure says that a person who claims that he has incurred certain expenditure is expected to have some documentary evidence.
It was argued that the assessee failed to produce the parties and their latest addresses. Therefore, the parties in the name of whom credit balances were shown by the assessee were not genuine, the addition was rightly made for the balances shown in the name of bogus parties.
It is for the assessee to prove identity of creditors, their creditworthiness and the genuineness of the transactions; mere furnishing of the particulars is not enough; mere payment by account-payee cheque is not sacrosanct nor can it make a non-genuine transaction genuine.
Contention of the Assessee:
The Assessee contended that the revenue has failed to appreciate the basic fact that the sum of Rs. 3,57,17,506/- represented closing balance of nine sundry creditors as per books of accounts of the assessee, which was added by the AO, whereas, purchases made and payments made to the said creditors through account payee cheques were accepted as genuine by the AO. Mere non production of the creditors cannot be taken as a basis to make and sustain the addition. All the documentary evidences filed by the Assessee established the genuineness of the transaction of purchase of goods from such creditors.
The Assessee argued the closing balance of such creditors was duly discharged in the succeeding year through verified banking channels. As there was no case for disallowance for corresponding purchases, no addition could be made under Section 68 in as much as it is not in dispute that the creditors outstanding related to purchases and the trading results were accepted by the AO.
It was also submitted that if an assessee took care to purchase material by way of account payee cheques from a third party and subsequently, three years after the purchase, the said third party did not appear before the AO for any reasons like cessation of business, change of place of business etc., pursuant to notices, the claim of the assessee could not be discarded merely on the ground of the disappearance of the sellers. The assessee could not be expected to keep track of addresses of all its creditors especially when payments had already been made.
Held by the Income Tax Appellate Tribunal (“ITAT”):
The ITAT observed that the Assessee had furnished the details of suspected creditors like Name, Address, PAN, Bank Account Number and confirmation of outstanding balance obtained from the said parties. The parties could not be produced for the reason that a prolonged litigation was going on and the parties were absconding. It was further observed that the AO made no investigation from the bank from which the cheques were cleared before drawing adverse inference against the assessee for its inability to produce the creditors.
It is an admitted fact that the purchases made from the parties in whose names, balances were outstanding have been accepted but the AO only doubted the genuineness the outstanding balance at the year end in the name of those parties for the reason that those were not produced before him. Moreover the books of account were duly audited by the independent Auditor. Hence the CIT(A) was not justified in confirming the addition made by the AO.
Hence, the addition made by CIT(A) is deleted and appeal is allowed in the favour of Assessee.