Case Law Details
ACIT Vs Debashis Roy (ITAT Kolkata)
ITAT Kolkata held that liabilities which are incurred as trading liabilities with corresponding purchases cannot be subject matter of addition under section 68 of the Income Tax Act.
Facts- AO during the course of assessment proceedings observed that the assessee has shown huge sundry creditors of Rs.4,35,27,806/- as on 31/03/2015 and called upon the assessee to furnish details thereof and also prove the genuineness of these liabilities. Accordingly, AO issued notices u/s 133(6) to 39 parties on 14/11/2017 on test check basis. However, 26 notices issued to the creditors were returned unserved whereas two creditors have denied to have had any transactions with the assessee and the remaining did not respond at all to the notices issued u/s 133(6).
AO called upon the assessee to produce the books of accounts, ledger, purchase invoices in respect of 39 parties which were duly furnished. The assessee also furnished the bills, documents pertaining to purchase bills, challans and AO did not find any mistake or deficiencies in these documents. However, he added the entire closing balance standing at the credit of these parties which aggregated to Rs.4,19,07,168/- as unexplained cash credit u/s 68 of the Act reasoning that the assessee has not furnished complete details and evidences.
CIT(A) allowed the appeal of the assessee.
Conclusion- We observe that these liabilities represented trading liabilities and are beyond the ambit of Section 68 of the Act. The case of the assessee finds support from the decision in case of CIT vs. Prameshwar Bohra (supra), wherein, the Hon’ble Gujarat High Court has held that credit which has come into existence in the earlier years and not during the year, cannot be brought to tax u/s 68 of the Act. Similarly, in the case of CIT vs. Usha Stud Agricultural Farms Limited (supra), the Hon’ble Delhi High Court has held that where the amount reflected in the accounts is coming over from the past 4 to 5 years or so and there was no fresh credit entry of the previous year under consideration, then this credit entries do not relate to the year under consideration for being considered u/s 68 of the Act.
We also note that these liabilities were incurred as trading liabilities with corresponding purchases and therefore cannot be subject matter of addition u/s 68 of the Act as the provisions of section 68 of the Act are applicable to the credits in the books of accounts of the assessee which could not be explained with respect to identity , creditworthiness and genuineness.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
The present appeal is directed at the instance of the revenue against the order of the Learned Commissioner of Income Tax (Appeals) – 7, Kolkata (hereinafter the “ld. CIT(A)”) dt. 19/11/2018, passed u/s 250 of the Income Tax Act, 1961 (“the Act’), for Assessment Year 2015-16.
2. The issue raised in Ground Nos. 1 & 2 is against the deletion of an addition of Rs. 4,19,07,168/- by the ld. CIT(A) which was added by the Assessing Officer u/s 68 of the Act to the income of the assesse on account of unexplained cash credit received during the year.
3. The facts in brief are that the assessee filed return of income for the instant year on 30/09/2015 declaring total income of Rs. 44,37,510/-which was processed u/s 143(1) of the Act and thereafter the case was selected for scrutiny and statutory notice were issued and duly served upon the assessee. The Assessing Officer during the course of assessment proceedings observed that the assessee has shown huge sundry creditors of Rs.4,35,27,806/- as on 31/03/2015 and called upon the assessee to furnish details thereof and also prove the genuineness of these liabilities. The Assessing Officer in order to verify the genuineness of the creditors and authenticity of the transactions, issued notices u/s 133(6) of the Act to 39 parties on 14/11/2017 on test check basis. However, 26 notices issued to the creditors were returned unserved whereas two creditors, namely, New Maa Kali Enterprise and Jagannath Traders have denied to have had any transactions with the assessee and the remaining did not respond at all to the notices issued u/s 133(6) of the Act.
5. The assessee is engaged in the business of construction under the name and style of “Sun Construction”. The Assessing Officer called upon the assessee to produce the books of accounts, ledger, purchase invoices in respect of 39 parties which were duly furnished. The assessee also furnished the bills, documents pertaining to purchase bills, challans and the Assessing Officer did not find any mistake or deficiencies in these documents. However, he added the entire closing balance standing at the credit of these parties which aggregated to Rs.4,19,07,168/- as unexplained cash credit u/s 68 of the Act reasoning that the assesse has not furnished complete details and evidences.
6. In the appellate proceedings, the ld. CIT(A) allowed the appeal of the assessee on this issue after taking into account the evidences and contentions presented by the ld. Counsel for the assessee in the appellate proceedings by observing and holding as under:-
“4.2 I have considered the submission of the ARs of the assessee in the backdrop of the assessment order on the pertinent issue at hand based on material facts on record. I have also considered the various case laws cited by them on the similar issue (supra) which is not repeated here for the sake of avoiding prolixity. I find the case of the AO to be that of non-fulfillment of the requirements of the provision of section 68 of the Act with respect to sundry creditors whereby their identities and genuineness of the transactions were in doubt. I find that the AO was probing into the liabilities of the assessee with regard to the transactions entered into with many trade parties and came to the conclusion that the said parties were bogus parties for the reason that many of them did not comply to the notices issued u/s 133(6) of the Act. In this respect, a sum of 4,19,07,168/- was added back to the total income of the assessee on the premise that due to non compliance of the assessee as well as the non receipt of information from the trade creditors, the said sum represented by the sundry creditors should be treated as unexplained income as per section 68 of the Act. I find that the observation of the AO is totally misplaced in as much as he has misconstrued the provisions of section 68 of the Act. As already contained in the submission of the AR of the appellant, section 68 deals with cash credit in the books of the assessee for any previous year which is not explained by the assessee. In the instant case, there is no such unexplained cash credit during the year under consideration which would warrant the importation of section 68 of the Act. Rather, the AO is dealing with liabilities of the assessee and in no way could relate to provisions of section 68 of the Act. In any case, as per ledger of each of the trade creditors in the books of the appellant and reflected in the audited Balance Sheet of the appellant, the closing balance on account of purchase was comprised of opening balance carried forward from earlier year. Therefore, the credits (opening balance) in question did not wholly relate to the previous year relevant to assessment year under consideration, even if at all provision of section 68 was to be imported in the matter aş envisaged by the A0. The AO’ s observation on the issue is totally on a wrong footing and hence not tenable under any circumstance. If at all the AO wanted to make an addition, it should have been done u/s 41 of the Act which is not the case here. In any case, there was no remission or cessation of liability inasmuch as in the subsequent assessment year the closing balance at the end of earlier previous year stood as opening balance in that year and there were debit and credit entries in the subsequent year also. Ledger copies have been placed in the paper book to substantiate the above position. Even otherwise, I find that the AR of the assessee had exhaustively supplied the relevant documents/ information during the course of the assessment proceeding and which have not been contradicted by the A0 in any manner. In fact, the AO writes in the second para of the assessment order as follows “the A/R of the assessee ShriG. Sikdar, GA appeared from time to time and produced the details and documents as called for……………………………………………………………. He also explained various issues and produced he books of accounts, bills and vouchers for the year under consideration”. OveralI, I find the AR of the assessee had duly discharged his obligation before the AO in providing all the necessary and relevant documentary details (as contained in the paper book and forming part of the written submission before me). In this backdrop, the action of the AO is not sustainable both on points of law as well as on merits. Therefore, the impugned addition of 4,19,07,168/- does not merit any sustenance that and is hereby directed to be deleted. This ground is allowed.”
7. The ld. D/R submitted before the Bench that the sundry creditors have shown outstanding at the year-end by the assessee were totally bogus and could not be verified in the assessment proceedings. The ld. D/R submitted that, the notices issued u/s 133(6) of the Act, either returned unserved and in couple of cases the parties denied having dealings with the assessee. The ld. D/R argued that under these circumstances, all these outstanding balances remained unverified and hence have been added by the Assessing Officer u/s 68 of the Act as unexplained cash credit. The ld. D/R also submitted that if at all the manner of conducting verification or examination by the Assessing Officer is not at par with the expectations of the ld. CIT(A), then the ld. CIT(A) himself had the co-terminus power. Besides the Assessing Officer, the ld. CIT(A) should have carried out a detailed investigation instead of finding fault with the assessment order that the addition has been made under the wrong section, for the reason that there was no unexplained cash credit in the books of the assessee.
8. The ld. Counsel for the assessee, on the other hand, submitted that while relying heavily on the order of the ld. CIT(A) submitted that the Assessing Officer has failed to establish the fact that this money was received during the year in which the provisions of Section 68 of the Act were invoked. These transactions represented the trading liability of the assessee which remained unpaid during the year under the head sundry creditors. The ld. A/R submitted that, the provisions of Section 68 of the Act are not applicable and that Section 68 is applicable where any sum which was found to be credited in the books of accounts by the assessee during the year, is not explained by the assessee with respect to its identity, creditworthiness and genuineness, then the same should be added u/s 68 of the Act. The ld. A/R argued that at the most, the Assessing Officer could have invoked Section 41(1) of the Act to treat these liabilities as income of the assesse subject to the condition, that these liabilities were extinguished during the year. But this is also not the case of the Assessing Officer. The ld. A/R submitted that the closing balance as on 31/02/2013 represents the opening balance of the sundry creditors as on 01/04/2014. The ld. A/R submitted that the credits even if unexplained could not be subjected to tax in the subsequent year and to buttress this contention, the ld. A/R relied on the following decisions:-
CIT vs. Prameshwar Bohra (2008) 301 ITR 0404 RajHC.
CIT vs. Usha Stud Agricultural Farms Limited (208) 301 ITR 384 (Del)
8.1 Further the ld. A/R submitted that addresses of the parties were available in the database of the Income Tax Department and in the event of non-receipt of the notices u/s 133(6) of Act by these suppliers , the Assessing Officer ought to have exercised his powers to trace these assessee and not to add the outstanding balances in the hands of the assessee. The ld. A/R submitted that the payments were duly made to the sundry creditors in the subsequent years and there was no remission/cessation of liability to invoke the rigors of Section 41(1) of the Act. The ld. A/R relied on the decision of Hon’ble Supreme Court in the case of CIT vs. Orissa Corporation (P) Ltd. (1986) 159 ITR 78 (SC) to defend his case.
9. Finally the ld. A/R submitted that since these liabilities were pertaining to earliers years and were accounted for as outstanding balances coming from earlier years , therefore the action of the Assessing Officer to treat them as unexplained cash credit is contrary to the provisions of the Act as has been held in Rita Stephen Pinto Vs ITO ITA 1219/Mum/2013. Besides the ld AR argued that since the goods were purchased from these creditors, the same do not fall within the fold of section 68 of the Act by relying on the decisions namely but provisions of section 41(1) of the Act could have been invoked subject to the cessation of these liabilities i) Nallam Manium textiles P Ltd Vs DCIT (ITA No. 776/Mds/2011), ii)Sugam Construction (p) Ltd (ITA No. 1828/AHD/2010) and iii) Sharda commercial Co. Ltd. Vs ITO ITA No. 1657/Kol/2011.Thereafter he submitted that in view of these facts and circumstances, the ld. CIT(A) has passed a very reasoned and speaking order which deserves to be upheld on this issue.
10. We have heard the rival submissions and perused the material available on record. Undisputed facts are that the assessee is a contractor and derives income mainly from construction activities under the name and style of his proprietary concern M/s. Sun Construction. At the outset the assessee has shown closing balance of the sundry creditors to the tune of Rs.4,35,27,806/- which was brought forward from the earlier years. Pertinent to mention that there was no fresh cash credit during the year in the form of introduction of funds into the assessee’s business but these creditors represent the goods purchased by the assessee in the normal course of business. The Assessing Officer issued notice u/s 133(6) of the Act to 39 parties majority of which returned unserved. Two of these parties stated that they are not having any business with the assessee. The remaining parties did not respond at all. The assessee filed the necessary documents before the AO comprising bills, vouchers, challans, payment details and confirmations etc. which were duly considered by the Assessing Officer. However, while framing the assessment, the Assessing Officer did not point out any defect and deficiency in the said documents and primarily relied on the fact that these are either unserved on the recipients or denied by the creditors. So we are to decide whether trade liability could be added u/s 68 of the Act. We have perused the provisions of Section 68 of the Act and find that the provisions of section 68 of the Act are applicable to the money credited during the year in the books of the accounts qua which the assessee has failed to furnish any details thereby not proving the identity, creditworthiness of the creditors and genuineness of the transactions. But this is not the case before us. We observe that these liabilities represented trading liabilities and are beyond the ambit of Section 68 of the Act. The case of the assessee finds support from the decision in case of CIT vs. Prameshwar Bohra (supra), wherein, the Hon’ble Gujarat High Court has held that credit which has come into existence in the earlier years and not during the year, cannot be brought to tax u/s 68 of the Act. Similarly, in the case of CIT vs. Usha Stud Agricultural Farms Limited (supra), the Hon’ble Delhi High Court has held that where the amount reflected in the accounts is coming over from the past 4 to 5 years or so and there was no fresh credit entry of the previous year under consideration, then this credit entries do not relate to the year under consideration for being considered u/s 68 of the Act.
11. On the issue of the addresses and details of these creditors being in the database of the Assessing Officer and these parties not receiving the notices u/s 133(6) of the Act, we are of the view that the Assessing Officer could have enquired about the whereabouts of these parties as the Assessing Officer had all the information with him. The Hon’ble Supreme Court in the case of CIT vs. Orissa Corporation (P) Ltd. (supra) has held as under:-
“In this case the assessee had given the names and addresses of the alleged creditors. It was in the knowledge of the revenue that the said creditors were the income-tax assessee. Their index number was in the file of the revenue. The revenue, apart from issuing notices under section 131 at the instance of the assessee, did not pursue the matter further. The revenue did not examine the source of income of the said alleged creditors to find out whether they were credit-worthy or were such who could advance the alleged loans. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the assessee could not do any further. In the premises, if the Tribunal came to the conclusion that the assessee had discharged the burden that lay on him, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence. If the conclusion was based on some evidence on which a conclusion could be arrived at, no question of law as such could arise.”
12. We also note that these liabilities were incurred as trading liabilities with corresponding purchases and therefore can not be subject matter of addition u/s 68 of the Act as the provisions of section 68 of the Act are applicable to the credits in the books of accounts of the assesse which could not be explained with respect to identity , creditworthiness and genuineness. The case of the assesse finds support from several decisions of the coordinate benches namely i) Nallam Manium textiles P Ltd Vs DCIT (Supra), ii)Sugam Construction (p) Ltd (supra) and iii) Sharda commercial Co. Ltd. Vs ITO (supra).Considering these facts and circumstances and the ratio of law laid down by various Courts of law as discussed hereinabove , we dismiss Ground Nos. 1 & 2 of the revenue.
12. The issue raised in Ground No. 3 is against the order of the ld. CIT(A) on the ground that the ld. CIT(A) has co-terminus powers with the Assessing Officer and could have enquired the matter himself instead of deleting the addition.
13. After hearing rival contentions and perusing the orders of the authorities below we find that the revenue has accepted that the provisions of Section 68 are not applicable. The ld. A/R submitted that at most Section 41 of the Act could have been resorted to, but in the present case the same is also not applicable as there was no cessation of liability. Thus we do not find any merit in the contentions of the ld DR that the ld CIT(A) have the co-terminus power and could have enquired the issue himself for the reason that these liabilities have not ceased to exist and even the ld CIT(A) could not have invoked section 41(1) to these liabilities. Accordingly this ground of the revenue is dismissed as devoid of merit and is dismissed.
14. Ground No. 4 is against the order of the ld. CIT(A) deleting the addition of Rs.16,97,688/- as made by the Assessing Officer u/s 56(2)(vii) of the Act in respect of purchase of property by the assessee the value whereof is less than the market value.
15. The facts in brief are that during the year, the Assessing Officer observed from the ITS details that the assessee had purchased immovable properties for a consideration of Rs.2,05,00,000/- the stamp value whereof is much higher and thus, there was difference of Rs.16,97,688/-. According to the Assessing Officer, the said amount is to be treated as income from other sources in consonance with the provisions of Section 43CA of the Act and accordingly, after issuing showcause notice to the assesse added the same to the income of the assessee. The ld. CIT(A) in the appellate proceedings, deleted this addition by holding that the provisions of section 43CA are not applicable to the purchase of property.
19. After hearing rival contentions, we observe that the assessee has purchased a land for consideration of Rs.2,05,00,000/- whose stamp value as per the stamp valuation authority was Rs.2,21,97,688/- and thus there is a difference of Rs.16,97,688/- which was added by the AO to the income of the assesse u/s 43CA of the Act. We note that this transaction of purchase done by the assessee has much higher stamp value. We have also perused the provisions of Section 43CA of the Act and considered the rival contentions on this issue and are of the considered view that provisions of Section 43CA of the Act are not applicable to the purchase of property but section 43CA of the Act deals with the case where the sale value of property held as stock-in-trade is sold during the year at a price lesser than stamp value. Accordingly, we uphold the order of the ld. CIT(A) on this issue by dismissing the ground raised by the revenue.
20.The remaining grounds raised in Ground No. 5 is akin to the issue raised in Ground No. 3 and does not require any adjudication.
21. In the result, appeal of the assessee is allowed.
Order pronounced in the Court on 9th November, 2022 at Kolkata.
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