No addition U/s. 68 if credits are not related to relevant Assessment year

Brief of the case

Assesse was a dealer of bakery products, filed its return. During assessment, it was found that assesse represented certain amount towards sundry creditors in its books. A.O. treated sundry creditors to tune of Rs. 65 lacs, as non-existent, and therefore added back to assesse’s income . CIT(A) upheld AO’s order. Assesse challenged said order before tribunal, on ground that neither order of A.O. , nor order of CIT (A), was clear as to whether addition was being made under Section 68 or Section 41(1). Tribunal held that since credit entries do not relate to previous year relevant to assessment year , same could not be brought to tax u/s 68. Similarly, there was nothing on record to show any cessation or remission of liability by creditor, or any unilateral act by assesse in regard to invoke provisions of Section 41(1). Thus, impugned addition was to be deleted.

There was a delay of 465 days for filing appeal before Tribunal. Assesse submitted that order of CIT(A)was received by his CA, who handed over it to his assistant , to deliver said order to assesse. However, assistant of assesse’s CA did not deliver said order .Revenue countered assesse’s submission by contending that they had issued a notice to assesse for penalty under section 271 (1) (c) and through said notice , assesse would have known fate of his appeal. Assesse raised a plea that since said letter/notice was with reference to penalty proceeding, he did not notice contents of same. Tribunal accepted assesse’s plea . It further held that by delaying proceedings assesse would not gain anything , nor there was prejudice to revenue by correct determination of tax liability .Thus, delay in filing appeal was condoned.

Issue 1- Addition Under Section 68 /41(1)

Facts of the case

• The assessee was a dealer in sale of bakery and confectionary products, filed his return of income.

• During the course of assessment proceedings, it was found that assesse represented certain amount towards sundry creditors in its books. The AO called for confirmations and complete names and addresses of sundry creditors. On account of failure of assesse to provide substantial details of creditors, A.O. treated sundry creditors to tune of Rs. 65 lacs, as non-existent, and therefore added back to assesse’s Income
• The CIT (A) upheld the AO’s order.

Contention of Assesse

• Neither the orders of AO nor the CIT(A) ,was clear as to whether the addition is being made u/s. 68 or 41(1) .

Held by ITAT

• It can be viewed that neither the order of the AO nor the order of CIT(A) is clear as to whether the impugned addition is being made u/s. 68 or 41(1) of the Act.

• On almost identical facts, the Hon’ble Delhi High Court in the case of Shri Vardhaman Overseas Ltd. (supra) , has clearly laid down that neither section 41(1) nor section 68 of the Act can be applied. Thus, on the applicability of section 68, it was viewed that those provisions will not apply as the balances shown in the creditors account do not arise out of any transaction during the previous year relevant to AY 2009-10.
• The provisions of sec. 68 are clear in as much as they refer to “sum found credited in the books of account of an assessee maintained for any previous year”. Since the credit entries in question do not relate to previous year relevant to AY 2009-10, the same cannot be brought to tax u/s. 68 of the Act. The proper course in such cases for the Revenue would be to find out the year in which the credits in question were credited in the books of account and thereafter make an enquiry in that year and make an addition in that year, if other conditions for applicability of section 68 are satisfied.
• As far as applicability of section 41(1) of the Act is concerned, the question before us is limited to the applicability of Section 41(1) of the Act. In order to invoke clause (a) of Sec.41(1) of the Act, it must be first established that the assessee had obtained some benefit in respect of the trading liability which was earlier allowed as a deduction. There is no dispute in the present case that the amounts due to the sundry creditors had been allowed in the earlier assessment years as purchase price in computing the business income of the assessee. The second question is whether by not paying them for a period of four years and above the assessee had obtained some benefit in respect of the trading liability allowed in the earlier years.
• The words “remission” and “cessation” are legal terms and have to be interpreted accordingly. In the present case, there is nothing on record to show that there was either remission or cessation of liability of the assessee. In fact, there is no reference either in the order of the AO or CIT(A) to the expression “remission or cessation of liability”. In such circumstances, it was viewed that the provisions of section 41(1) of the Act could not be invoked by the Revenue
• The court was of the view that there is nothing on record to show any cessation or remission of liability by the creditor or even an unilateral act by the Assessee in this regard. Finally, it was viewed that the impugned addition cannot be sustained and the same was directed to be deleted.

Issue 2 – Delay in Filing Appeal before ITAT

Facts

• There was a delay of about 456 days in filing the appeal before the Tribunal. The assessee has filed an affidavit explaining the reasons for the delay.
• In his affidavit, the assessee stated that the order of CIT(Appeals) was received by the CA of the assessee. The same was given by the CA to his assistant to be given to the assessee. The assistant of the CA however did not deliver the order of CIT(A) to the assessee.

• The revenue in meanwhile, proceeded to recover the arrears of tax due consequent to the order of CIT(A ) . A notice u/s. 271(1)(c) was issued to the assessee .

Contention of Revenue

• The assessee claims to have got the knowledge of the order of CIT(A) when recovery proceedings were initiated. He brought to our notice that the appeal was filed before the Tribunal. According to him, even as early as, a notice u/s. 271(1)(c) was issued to the assessee for AY 2009-10 and atleast when such notice was received by the assessee, he ought to have enquired about the fate of the appeal filed before the CIT(Appeals) with his CA. Therefore, the delay in filing the appeal has not been properly explained.

Contention of Assesse

• Since the letter was with reference to penalty proceedings, the assesse did not notice the contents of this letter.

Held by ITAT

• The assessee came to know about the impugned order when recovery proceedings were initiated against the assessee. The revenue had produced a letter sent to the assessee by the AO and the same is with reference to the penalty proceedings u/s. 271(1)(c).

• There was no doubt, there was a reference in the letter about factum of dismissal of the assessee’s appeal by the CIT(A) by order .The court is of the view that this explanation offered by the assessee is acceptable. Law is well settled that in income- tax proceedings, the assessee does not gain by delaying the proceedings, nor is there any prejudice to the revenue by correct and proper determination of tax liability.