PCIT Vs Nandkishor Huaschand Jalan (Gujarat High Court)
The Revenue appealed against the Income Tax Appellate Tribunal’s order dated 20.04.2017 concerning addition of Rs.2,71,32,085/- towards unverifiable sundry creditors. The Assessing Officer had treated the entire outstanding creditor balance as non-genuine, reasoning that the assessee might have purchased goods in cash using unaccounted money and procured bogus bills to cover purchases corresponding to sales.
Read SC Judgment in this case: SC Upholds 25% Addition on Unverifiable Creditors in Nandkishor Jalan Case
The Commissioner of Income Tax (Appeals), however, restricted the addition to 25% of the total amount, i.e. Rs.67,83,020/-, representing the profit element, and both sides appealed to the Tribunal. The Tribunal rejected both appeals. Before the Gujarat High Court, the Revenue relied upon the decision in N.K. Industries Ltd. v. Dy. C.I.T., reported in (2016) 72 Taxmann.com 289, contending that the entire amount could be added.
The Court distinguished N.K. Industries on the factual basis that, in that case, the entire purchases were found to be bogus and the corresponding addition of the entire purchases had the effect of increasing the assessee’s profit by the corresponding figure. In the present case, the Court held that the Commissioner (Appeals) and Tribunal had correctly restricted the addition to 25%, following the judgment in Vijay Proteins Ltd. v. Commissioner of Income Tax, reported in 58 ITD 432.
The Gujarat High Court therefore dismissed the Revenue’s Tax Appeal. The decision consequently supports restricting the addition to the profit element where the factual circumstances do not establish that the entire purchase amount itself represents taxable income, while distinguishing cases where the entire purchases are categorically found to be bogus.
Cases Discussed
Vijay Proteins Ltd. v. Commissioner of Income Tax — relied upon for restricting the addition to 25% of the purchases.
N.K. Industries Ltd. v. Dy. C.I.T. — distinguished on the ground that the entire purchases were found to be bogus.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal dated 20.04.2017 raising following question for our consideration:
“Whether, on the facts and in the circumstances of the case and in laws, the Hon’ble ITAT is justified in holding the decision of the Ld Commissioner of Income tax (Appeal) is restricting the disallowances of unverifiable sundry Creditors of Rs.2,71,32,085/ to Rs.67,83,020/ i.e. 25% of total addition on accounts of bogus creditors despite the facts that issue has been settled in favour of the Revenue vide decision of the Hon’ble Apex Court in the case of N. K Proteins ltd in SLP No 769 of 2017′?
2. The Assessing Officer confronted the assessee with various creditors, total outstanding of which was Rs.2.71 crores (rounded off). The assessee presented that there were large number of debtors who did not make payment due to which, he could not gather sufficient funds to pay to the debtors. However, the assessee thereafter supplied no further information and the Assessing Officer therefore disbelieved all such transactions. He therefore, proceeded on the following basis and made addition of the entire amount.
“7.5 It may be mentioned here that assessee might have purchased the goods in cash using his unaccounted money and, only with a view to coverup the purchases corresponding to the sales, bogus bills might have been procured thereby creating the unproven credits in balance sheet. This is proved beyond doubt that such trade credits and creditor expenses are not genuine. That is why it is most reasonable and justified to add an amount of Rs.2,71,32,085/ to the total income of the assessee. 7.6At last, after discussing all the aspects of this matter and looking to the facts and circumstances of this case, a sum of Rs.2,71,32,085/ is added back to the income of the assessee on the basis dial all these creditors are merely book entries and have already been paid off in cash.”
3. In appeal, Commissioner of Income Tax (Appeals) restricted the additions to the profit element of 25%. Both sides went in appeal before the Tribunal on this issue. Tribunal rejected both appeals on this ground.
4. This is a case where the Commissioner of Income Tax (Appeals) and the Tribunal correctly limited the additions to 25% following the judgment of this Court in case of Vijay Proteins Ltd vs Commissioner Of Income Tax reported in 58 ITD 432. Counsel for the Revenue however submitted that in case of N.K. Industries Ltd. v. Dy. C.I.T. reported in (2016) 72 Taxmann.com 289, this Court had confirmed the addition of the entire amount. This was however a case where the entire purchases were found to be bogus which would have the effect of increasing the profit of the assessee by corresponding figure.
5. Tax Appeal is dismissed.
