1.If addition has to be made for bogus purchases then sales should also be disturbed ; 2.Until and unless both parties don’t confirm the cessation of liability then addition cannot be made u/s 41(1); 3.If books of accounts are rejected then net profit estimation basis should be considered for computation of income.
Brief of the case:
1.ITAT Delhi held in ACIT vs Advert Communication that if the AO had considered that the purchases claimed by the asseessee in the profit & Loss account were bogus then along with the adjustment made in the purchases, AO should also made adjustment in sales also because only addition made in the purchase was not valid because if the purchases were not made by the assesse then sales could also not be made. Without purchase sales could not be made so if adjustment had been made in purchases then adjustment should also be made in sales. So observation of the AO was not correct.
2.ITAT Delhi held in ACIT vs Advert Communication that as the AO had considered the creditors standing in the books of account as bogus which was not valid because that amount was also standing in the receiving party books of account So if the amount was standing in both the parties then AO could not made addition to the income of assesse for cessation of liability. AO’s conclusion that the amount was outstanding form long period would not be repaid was not correct.
ITAT Delhi held in ACIT vs Advert Communication that as the AO had rejected the books of account of the assesse and computed the assessed income after making addition in the purchase account as mentioned in point no 1, So making substantial addition of purchases to the income and also addition of cessation of liability u/s 41(1) was not correct. AO should estimate the income of the assesse on the net profit estimation basis because he had rejected the books of account.
Facts of the case:
Assessee had filed its return of income with Rs 15,74,431/- which was assessed u/s 143(3) at Rs 3,15,05,980/-. The AO had made addition considering that the purchases claimed by the assesse in the profit & Loss account was bogus.AO also made addition u/s 41(1) for the cessation of liability of the creditors considering the creditors to be bogus. AO rejected the books of account and made addition to the income by way of bogus purchases, cessation of liability u/s 41(1) which was challenged by assesse before CIT(A) who ordered in favor of assesse then revenue went into appeal before ITAT.
Contention of the assesse:
Assessee was of the view that it had submitted detailed written submissions before AO which were taken into consideration by proper appreciation of facts, therefore, the appeal of the revenue on this count has no merit and the same should be dismissed. Assessee also of the view that if the book of accounts of the assessee had been rejected by the Assessing Officer, then no addition on the statement of accounts and financial statements could be made. In that case only net profit estimation of sales should be the method to decide the income of the assesse.
Moreover assesse was of the view that when they were dealing with the creditors they were not required to verify their PAN No from income tax department. Their main motive was to get the quality raw material at cheapest cost and all their needs were fulfilled. So the contention of the revenue that the PAN No’s of creditors mismatch was not valid. Further it had submitted all the bills of purchase and the payment had been made through A/c payee cheque. So no question of bogus arises.
Neither the assesse had written off the amount outstanding to their books of account nor those parties had acknowledged the cessation of liability so addition made on the basis of cessation of liability is wrong.
Contention of the revenue:
Revenue was of the view that as revenue had asked for information u/s 133(6) but no information was obtained from the parties which means that the parties were bogus. Assessee failed to provide confirmation of account balances from some of the creditors. Moreover the PAN No of same creditors vary from year to year. Further assesse failed to provide full information about the purchases made as it had not produced the supporting of the purchase.
Moreover the creditors which were standing in the books of account were outstanding from long period so the same should be added to the income of the assesse as a cessation of the liability u/s 41(1).
Held by ITAT:
ITAT held that non- receipt of the confirmation from some of the parties did not make purchases and creditors bogus. ITAT also of the view that assesse was not required to verify the PAN no to judge the genuineness of party. Its requirement was just to confirm the deal fulfilling the business requirements. As AO had added the purchase amount to the income of the assesse considering the purchase to be bogus without disturbing the sales from Profit & Loss account which was not feasible. If the AO had rejected the books of account then again he was making addition of purchase which was totally wrong observation of the AO. If AO wanted to make addition of purchases then he should also make deduction of sales also.
As the books of account had been rejected the net profit would be computed as against the estimated net profit % of the sales but NP ratio should be based taking the average NP ratio of previous assessment years.
As neither the assesse had write off the creditors nor the other parties had written off the outstanding amount so cessation of liability u/s 41(1) did not arise. AO’s conclusion to write off the long outstanding amount of creditors was illogical.
Appeal of the revenue stood dismissed.