Assessing Officer Must Substantiate Bogus Creditor Claim: ITAT Delhi

ACIT Vs Real Impact Pvt Ltd (ITAT Delhi)

In a recent case between the Assistant Commissioner of Income Tax (ACIT) and Real Impact Pvt Ltd, the Income Tax Appellate Tribunal (ITAT) Delhi rendered a decision highlighting the importance of substantiating creditor claims. The dispute arose from the assessment order, with the Revenue challenging the order of the Commissioner of Income Tax (Appeals) [CIT(A)] dated 11.09.2019. The grounds of appeal primarily revolved around the acceptance of additional evidence, contentions regarding payments to a specific company, and the genuineness of details submitted by the assessee.

Background: Real Impact Pvt Ltd, a private limited company engaged in the service sector, filed its income tax return on 29.11.2016, declaring an income of Rs. 3,47,32,676/-. The assessment was subject to limited scrutiny, focusing on the genuineness of sundry creditors and the compliance of outward foreign remittances with disclosure and withholding obligations.

Key Grounds of Appeal by the Revenue: The Revenue raised several grounds of appeal, contesting the decision of the CIT(A). These included objections to the acceptance of additional evidence, disputes over the timing of payments to a specific company (M/s. For-A Company Ltd.), and concerns about the genuineness of details submitted during the assessment proceedings.

Assessment by the ITAT Delhi: The Assessing Officer (AO) had examined a creditor, M/s. For-A Company, and 33 other creditors. Notices under section 133(6) were issued to these creditors, but due to non-compliance and the lack of requisite details, the AO added an outstanding amount of Rs. 6,59,03,929/- to the total income of the assessee.

The assessee, during the appeal before the CIT(A), sought to furnish additional evidence under Rule 46A. The CIT(A) admitted the additional evidence, considering the assessee’s claim that it was prevented by sufficient cause from producing the evidence before the AO.

The ITAT Delhi, after a detailed examination of the case, held that the confirmation from M/s. FOR-A Company Limited, the company from which equipment was purchased, was on record. The payments were made in foreign currency, supported by bank statements and payment details. The ITAT concluded that no addition could be made on the outstanding balance pertaining to M/s. FOR-A Company Limited.

Regarding other sundry creditors, the ITAT emphasized that the absence of replies from creditors did not entitle the AO to treat them as bogus without bringing evidence to prove that the payable amounts were not genuinely required to be paid. The ITAT also considered the applicability of section 41(1) and declined to interfere with the order of the CIT(A).

Conclusion: The ITAT Delhi’s decision underscores the importance of the Assessing Officer substantiating claims of bogus creditors. The acceptance of additional evidence was justified in this case, and the ITAT emphasized the need for independent verification and evidence before treating creditors as non-genuine. This decision provides valuable insights into the scrutiny of creditor claims and the importance of adhering to procedural rules during income tax assessments. 

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeal has been filed by the Revenue against the order of Ld. CIT( A)-7, New Delhi dated 11.09. 2019.

2. The Revenue has raised the following grounds of appeal are as under:-

1. ” The CIT( A), in facts and circumstances of the case, has erred in accepting the additional evidence filed under Rule 46 (1)(d) without giving independent finding and without appreciating the fact that several opportunities as per assessment order were given to be assessee to file all necessary “

2. The CIT(A), in facts and circumstances of the case, has erred in accepting the assessee contention that the payment in respect of M/ For- A Company Ltd. has already been made during the impugned year despite the fact that as per Para 4. 3 of the appellate order, the CIT(A) mentions that the payment was made in subsequent years which is perverse.

3. The CIT( A), in facts and circumstances of the case, has erred in accepting the assessee contention that all details in respect of M/ For- A Company Ltd. were submitted during the assessment proceedings despite the fact that no confirmation has been obtained by the assessee from the said entity along with relevant details of purchase and custom duties paid.”

4. ” The CIT( A), in facts and circumstances of the case, has erred in observing in para 4. 4 of the appellate order that the AO has overlooked the evidences furnished by the assessee despite the fact that the entity M/ For- A Company Ltd. was appearing as creditor in the books of the assessee as on 31. 03. 2016 which is perverse.”

5. ” The CIT( A), in facts and circumstances of the case, has erred in accepting the assessee submission in para 3.1 of the appellate order that the creditors could not have received notices issued u/ s 133 ( 6 ) despite the fact that the assessee’ s own submission that these creditors could have shifted and it was a duty of the assessee to submit confirmations during the assessment “

6. ” The CIT( A), in facts and circumstances of the case, has erred in accepting the contentions of the assessee as per para 4. 5 of appellate order without even calling for the details from the creditors or making independent enquiry as to the genuineness of the additional information submitted under Rule 46 A during the appellate “

7. ” Whether in facts and circumstances of the case, the observation of CIT( A) vide para 4. 7 of the appellate order is perverse despite the fact that the assessee has clearly filed written submissions during the appellate proceedings the assessment year wise cessation of liability in respect of some Further the CIT( A) has not enquired whether the suggestion of creditors has been treated as income in the subsequent years.”

8. ” The CIT( A), in facts and circumstances of the case, has erred in accepting the assessee submission that the balance creditors amounting to 35, 97, 680 should not be treated as creditors as on 31. 03. 2016 despite the fact that the payments as per para 4. 10 of the appellate order have been made in the subsequent years and that it was the duty of the assessee to furnish confirmation from these balance creditors during the assessment proceedings before the AO.”

9. ” Whether in facts and circumstances of the case, the observation of CIT( A) in para 4. 10 of the appellate order that addition should not be made in respect of balance creditors is perverse despite the fact that these sundry creditors were outstanding as on 31. 03. 2016 and that it was the duty of the assessee to provide confirmations irrespective of the fact of what has happened after 31. 03. 2016.”

10. ” The CIT( A), in facts and circumstances of the case, has erred in merely accepting the submissions of the assessee without conducting any independent enquiry to verify the genuineness of the submissions made by the assessee which is against the ratio as laid down by Hon’ ble Delhi High Court in the case of CIT Jansampark Advertising & Marketing Pvt. Ltd.”

3. The assessee is a private limited company, during the year under consideration the company was engaged in the Service The assessee filed its return of income on 29.11.2016 declaring an income of Rs.3,47,32,676 /-. The return was processed u/ s 143(1) of the Income Tax Act, 1961. The case was selected for Limited scrutiny on the following issues:

(a) Whether the sundry creditors are genuine.

(b) Whether outward foreign remittance is from disclosed sources and appropriate withholding and reporting on obligations have been complied with.

4. The Assessing Officer examined a creditor namely “ M/s. For-A Company ” whose credit balance as on 31.03.2016 was Rs.4,29,67, 923/- and other 33 creditors having closing balance of Rs. 2,29,36,006/- by issuing notices u/s. 133(6 ). Owing to the non compliance by these 33 creditors and owing to non furnishing of requisite details with regard to M/s. For- A Company Ltd, the Assessing Officer added the outstanding amount of Rs.6,59,03,929 /- to the total income of the assessee.

5. Aggrieved, the assessee filed appeal before the CIT(A).

6. The assessee has filed application for furnishing the additional evidence under rule 46A dated 24.04.2019. The request was made before the CIT( A) for furnishing the additional evidence by way of complying the circumstances following under clause b of sub- rule 1 of Rule 46A of Income Tax Rule, 1962.

7. The Assessing Officer has furnished his remand report vide letter dated 06.05.2019 and submitted that the additional evidences furnished by the assessee cannot be submitted under Rule 46A of Income Tax Rule, 1962.

8. After receiving the rejoinder from the assessee against the remand report of the Assessing Officer, the CIT(A) held that the assessee was prevented by sufficient cause from producing the evidence before the AO, and since the evidences are crucial for adjudication of appeal the same have been admitted.

9. Heard the arguments of both the parties and perused the material available on record.

10. We have gone through the order of the CIT( A) in detail. The confirmation of M/ s. FOR-A Company Limited from whom the assessee has purchased the equipment during the F.Y. relevant to the A. Y.2016 -2017 is on record. M/ s FOR-A Company Limited is a company incorporated in Tokyo and all the payments have been made in foreign currency to said company. The assessee has furnished the copy of bank statement and the details of payment which was made and M/ s. FOR-A Company Limited has also duly confirmed the same. The assessee has made the payment of the outstanding balance of Rs. 4,29,67,929/- to M/s. FOR- A Company Limited which was duly reflected in the bank statement of subsequent year. The assessee has already produced the confirmation of Sundry Creditors along with their PAN card, specifically bank statement and ledger account which was duly reflected in the payment of these creditors. Hence keeping in view the entire facts on record, we hold that no addition can be made on the outstanding balance pertaining to M/s. FOR- A Company Limited. The appeal of the Revenue on this issue is dismissed.

11. The assessee was enquired by the CIT(A) to provide complete details of Sundry Creditors justifying each in respect of identity, creditworthiness and genuineness. The assessee filed primary details before the AO. Subsequently, the AO issued notices u/ s 133(6) to creditors to confirm transactions with documentary evidence through e-mail ID. The notices were issued through ITBA Portal. The confirmation/ reply were not received from all the parties regarding outstanding balances as on 31.03.2016. It was submitted that the AO had not issued any show cause notice before making any addition or intimation to the assessee for non- reply from the various parties and made addition without confronting the assessee about the non- receipt of the replies by the Assessing Officer. Absence of reply from the creditors do not entitle the Assessing Officer to treat the creditors as bogus without bringing any evidence on record to prove the payable are not indeed not required to be paid.

12. Further, the assessee has submitted the details of payment in also the remission carried on in the subsequent The details are as under:-

13. Hence keeping in view the facts of the case, decision of the CIT( A), applicability of provisions of section 41(1) and the judgments in CIT v. Vardhman Overseas Ltd. in ITA No, 774/2009 decided on 23.12.2011, (2012 ) 343 ITR 408 (Del), the Delhi High Court, referring to the judgment in the case of Jay Engineering Works Ltd. v. CIT (2009) 311 TR 299 (Del) and applying the ratio laid down the case of CIT v. T. V. Sundaram Iyengar & Sons Ltd. (1996) 222 ITR 344 (SC) under sec. 28 of the IT Act, considered the applicability of clause (a) of sub- section (1) of section 41 as to what constitute remissions or cessation of trading liability, we decline to interfere with the order of the ld. CIT( A).

14. In the result, the appeal of the Revenue is dismissed.

Order Pronounced in the Open Court on 08 /12 / 2023.

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeal has been filed by the Revenue against the order of Ld. CIT( A)-7, New Delhi dated 11.09. 2019.

2. The Revenue has raised the following grounds of appeal are as under:-

1. ” The CIT( A), in facts and circumstances of the case, has erred in accepting the additional evidence filed under Rule 46 (1)(d) without giving independent finding and without appreciating the fact that several opportunities as per assessment order were given to be assessee to file all necessary “

2. The CIT(A), in facts and circumstances of the case, has erred in accepting the assessee contention that the payment in respect of M/ For- A Company Ltd. has already been made during the impugned year despite the fact that as per Para 4. 3 of the appellate order, the CIT(A) mentions that the payment was made in subsequent years which is perverse.

3. The CIT( A), in facts and circumstances of the case, has erred in accepting the assessee contention that all details in respect of M/ For- A Company Ltd. were submitted during the assessment proceedings despite the fact that no confirmation has been obtained by the assessee from the said entity along with relevant details of purchase and custom duties paid.”

4. ” The CIT( A), in facts and circumstances of the case, has erred in observing in para 4. 4 of the appellate order that the AO has overlooked the evidences furnished by the assessee despite the fact that the entity M/ For- A Company Ltd. was appearing as creditor in the books of the assessee as on 31. 03. 2016 which is perverse.”

5. ” The CIT( A), in facts and circumstances of the case, has erred in accepting the assessee submission in para 3.1 of the appellate order that the creditors could not have received notices issued u/ s 133 ( 6 ) despite the fact that the assessee’ s own submission that these creditors could have shifted and it was a duty of the assessee to submit confirmations during the assessment “

6. ” The CIT( A), in facts and circumstances of the case, has erred in accepting the contentions of the assessee as per para 4. 5 of appellate order without even calling for the details from the creditors or making independent enquiry as to the genuineness of the additional information submitted under Rule 46 A during the appellate “

7. ” Whether in facts and circumstances of the case, the observation of CIT( A) vide para 4. 7 of the appellate order is perverse despite the fact that the assessee has clearly filed written submissions during the appellate proceedings the assessment year wise cessation of liability in respect of some Further the CIT( A) has not enquired whether the suggestion of creditors has been treated as income in the subsequent years.”

8. ” The CIT( A), in facts and circumstances of the case, has erred in accepting the assessee submission that the balance creditors amounting to 35, 97, 680 should not be treated as creditors as on 31. 03. 2016 despite the fact that the payments as per para 4. 10 of the appellate order have been made in the subsequent years and that it was the duty of the assessee to furnish confirmation from these balance creditors during the assessment proceedings before the AO.”

9. ” Whether in facts and circumstances of the case, the observation of CIT( A) in para 4. 10 of the appellate order that addition should not be made in respect of balance creditors is perverse despite the fact that these sundry creditors were outstanding as on 31. 03. 2016 and that it was the duty of the assessee to provide confirmations irrespective of the fact of what has happened after 31. 03. 2016.”

10. ” The CIT( A), in facts and circumstances of the case, has erred in merely accepting the submissions of the assessee without conducting any independent enquiry to verify the genuineness of the submissions made by the assessee which is against the ratio as laid down by Hon’ ble Delhi High Court in the case of CIT Jansampark Advertising & Marketing Pvt. Ltd.”

3. The assessee is a private limited company, during the year under consideration the company was engaged in the Service The assessee filed its return of income on 29.11.2016 declaring an income of Rs.3,47,32,676 /-. The return was processed u/ s 143(1) of the Income Tax Act, 1961. The case was selected for Limited scrutiny on the following issues:

(a) Whether the sundry creditors are genuine.

(b) Whether outward foreign remittance is from disclosed sources and appropriate withholding and reporting on obligations have been complied with.

4. The Assessing Officer examined a creditor namely “ M/s. For-A Company ” whose credit balance as on 31.03.2016 was Rs.4,29,67, 923/- and other 33 creditors having closing balance of Rs. 2,29,36,006/- by issuing notices u/s. 133(6 ). Owing to the non compliance by these 33 creditors and owing to non furnishing of requisite details with regard to M/s. For- A Company Ltd, the Assessing Officer added the outstanding amount of Rs.6,59,03,929 /- to the total income of the assessee.

5. Aggrieved, the assessee filed appeal before the CIT(A).

6. The assessee has filed application for furnishing the additional evidence under rule 46A dated 24.04.2019. The request was made before the CIT( A) for furnishing the additional evidence by way of complying the circumstances following under clause b of sub- rule 1 of Rule 46A of Income Tax Rule, 1962.

7. The Assessing Officer has furnished his remand report vide letter dated 06.05.2019 and submitted that the additional evidences furnished by the assessee cannot be submitted under Rule 46A of Income Tax Rule, 1962.

8. After receiving the rejoinder from the assessee against the remand report of the Assessing Officer, the CIT(A) held that the assessee was prevented by sufficient cause from producing the evidence before the AO, and since the evidences are crucial for adjudication of appeal the same have been admitted.

9. Heard the arguments of both the parties and perused the material available on record.

10. We have gone through the order of the CIT( A) in detail. The confirmation of M/ s. FOR-A Company Limited from whom the assessee has purchased the equipment during the F.Y. relevant to the A. Y.2016 -2017 is on record. M/ s FOR-A Company Limited is a company incorporated in Tokyo and all the payments have been made in foreign currency to said company. The assessee has furnished the copy of bank statement and the details of payment which was made and M/ s. FOR-A Company Limited has also duly confirmed the same. The assessee has made the payment of the outstanding balance of Rs. 4,29,67,929/- to M/s. FOR- A Company Limited which was duly reflected in the bank statement of subsequent year. The assessee has already produced the confirmation of Sundry Creditors along with their PAN card, specifically bank statement and ledger account which was duly reflected in the payment of these creditors. Hence keeping in view the entire facts on record, we hold that no addition can be made on the outstanding balance pertaining to M/s. FOR- A Company Limited. The appeal of the Revenue on this issue is dismissed.

11. The assessee was enquired by the CIT(A) to provide complete details of Sundry Creditors justifying each in respect of identity, creditworthiness and genuineness. The assessee filed primary details before the AO. Subsequently, the AO issued notices u/ s 133(6) to creditors to confirm transactions with documentary evidence through e-mail ID. The notices were issued through ITBA Portal. The confirmation/ reply were not received from all the parties regarding outstanding balances as on 31.03.2016. It was submitted that the AO had not issued any show cause notice before making any addition or intimation to the assessee for non- reply from the various parties and made addition without confronting the assessee about the non- receipt of the replies by the Assessing Officer. Absence of reply from the creditors do not entitle the Assessing Officer to treat the creditors as bogus without bringing any evidence on record to prove the payable are not indeed not required to be paid.

12. Further, the assessee has submitted the details of payment in also the remission carried on in the subsequent The details are as under:-

13. Hence keeping in view the facts of the case, decision of the CIT( A), applicability of provisions of section 41(1) and the judgments in CIT v. Vardhman Overseas Ltd. in ITA No, 774/2009 decided on 23.12.2011, (2012 ) 343 ITR 408 (Del), the Delhi High Court, referring to the judgment in the case of Jay Engineering Works Ltd. v. CIT (2009) 311 TR 299 (Del) and applying the ratio laid down the case of CIT v. T. V. Sundaram Iyengar & Sons Ltd. (1996) 222 ITR 344 (SC) under sec. 28 of the IT Act, considered the applicability of clause (a) of sub- section (1) of section 41 as to what constitute remissions or cessation of trading liability, we decline to interfere with the order of the ld. CIT( A).

14. In the result, the appeal of the Revenue is dismissed.

Order Pronounced in the Open Court on 08 /12 / 2023.