Section 68- Trade credits cannot be taxed as unexplained cash credit

Brief Facts of the case:

The assessee is a partnership firm which is engaged in the business of manufacture and trading in edible oils. The return of income for the year under consideration was filed by it on declaring total income of Rs.45,008. In the assessment originally completed under section 143(3), the total income of the assessee was determined by the A.O. at Rs.59,14,923 after making additions of Rs.54,49,961 under Sec 68 treating the amount payable by the assessee to farmers towards purchase of sunflower seeds as unexplained cash credits.

Further AO added the opening balances standing to the credit of M/s.Ammireddy Oil Limited & M/s.Krishnaveni Agrotech Products of Rs.2,27,952/- & 1,91,992/-respectively are to be added as the corresponding balances were not found in the books of suppliers.

The appeal filed by the assessee against the said order was dismissed by the CIT (A) and when the assessee filed a further appeal beforethe Tribunal, the Tribunal vide its order dated 12.11.2010 set aside the orders of the authorities below and remanded back the matter to the file of the A.O. for completing theassessment afresh, after giving proper and sufficient opportunity of being heard to the assessee. As per the directions of the Tribunal, fresh assessment proceedingswere initiated by the Assessing Officer.

During the course of the said proceedings, the credit balances appeared in the books of account of the assessee in the name of seven farmers aggregating to Rs.54,49,961 were examined by the A.O. to verify their genuineness. In this regard, summons issued by him under section 131 to the seven creditors returned back un-served by the postal authorities stating that there were no such persons available on the given address. The AO, therefore, issued a commission to the ITO, Ward-1, Adoni who deputed hisInspector to conduct enquires with the concernedcreditors. Such enquires made by the Inspector revealed that the address of the creditors given by the assessee was not sufficient to trace thecreditors. He also reported that it was not possible to find out the address of the said creditors as they were farmers doing cultivation in some village.

The A.O. therefore required the assessee to produce the said creditors/farmers before him for verification along with their bank statements. The assessee however failed to do so and filed only the payment receipts duly acknowledged by the concerned creditors/farmers. The A.O. therefore held that theconcerned credit balances appearing in the name of theseven farmers were not satisfactorily explained by theassessee in terms of section 68 and accordingly, theaggregate amount of Rs.54,49,961 of such credits was added by him to the total income of the assessee under section 68 of the Act.

The AO also added the opening balances standing to the credit of M/s. Ammireddy Oil Limited & M/s.Krishnaveni Agrotech Products of Rs.2,27,952/- & 1,91,992/-respectively as the same were not appearing in the books of suppliers and assessee failed to provide any reconciliation for the difference.

The order of AO was confirmed by CIT (A), being aggrieved by the same assessee preferred an appeal before ITAT.

Contention of the Assessee:

The learned counsel for the assesse submitted, the additions made as cash credits being in nature of trade credits on account of purchase of sunflower seeds, thus, are not in the nature of cash credits as envisaged under section 68 and the same therefore cannot be added to the income of the assessee by invoking the said provision.

The learned counsel also pointed that the trading account of the assessee for the year under consideration the corresponding seeds purchased from the seven farmers for Rs.54,49,961 weresold in the year under consideration itself for Rs.58,89,195 and the said sale was duly credited to the trading account of the assessee. The purchase & corresponding sale clearly indicate that the transaction of purchase is not a bogus one.

In respect of additions made by AO for opening balances of two suppliers (as stated above) the learned counsel contended that the amounts appearing in the name of the said two parties being trade credits could not be added as unexplained cash credits by virtue of provisions of section 68.He also challenged the addition u/s 68C made by CIT(A) for the same stating that the corresponding expenditure on account of purchases having been incurred by the assessee in the immediately preceding year i.e., A.Y. 2004-05, addition under section 69C treating the same as unexplained expenditure could be made only in A.Y. 2004-05 and not in the year under consideration i.e., A.Y. 2005-06.

Contention of the Revenue:

As regards, the first issue the addition made by the A.O. under section 68 for (amounts payable to farmers for purchase of sunflower seeds) that the primary onus to explain the cash credits wason the assessee and the assessee having failed to discharge the said onus satisfactorily, the addition madeby the A.O. under section 68 was fully justified.

As regards, the additions made in respect of opening balances of two creditors (for which the assessee failed to explain the difference in the books of assessee and the creditors), the learned counsel for Revenue contended that the opening balance which could not be explained by the assessee represent liabilities which had ceased to exist could be added to the total income of the assessee alternatively under section 41(1).

Decision of the ITAT:

The ITAT after considering the rival submissions took up both the issues one by one.

As regard the first addition u/s 68 ITAT observed that the impugned credits being trade credits of the assessee on account of purchase of sunflower seedsare not in the nature of cash credits as envisaged undersection 68 and the same therefore cannot be added to the income of the assessee by invoking the said provision because the corresponding sale of the same products credited to the Trading A/c of the assessee. Therefore, it cannot be taxed as unexplained cash credit as the purchase could not be treated as bogus one.

As regards, the second addition in respect of unexplained of opening balances, ITAT observed that the in reply to a query raised by the Bench, that the two amounts in question have not been paid by the assessee till date nor any party has demanded the said amounts appearing in the books of account of the assessee as liabilities. Since the said amounts represented liabilities of the assessee on account of purchases which had been claimed as expenditure in the earlier years, thus, the provisions of section 41(1) are clearly applicable when it is established that the said liabilities as shown by the assessee actually ceased to exist in the year under consideration itself. We, therefore, confirm the addition made on this issue by invoking the provisions of section 41(1) and dismiss the appeal of assessee on this ground.

Appeal of assessee was allowed in part.