2015 (4) TMI 1018 - AT - Income Tax

Addition u/s 68 - taxability under section 41(1) of the Act in a case where long outstanding sundry creditors were treated as taxable - Held that - CIT(A) had dealt with the issue threadbare. The appellant has chosen not to file the confirmation letters in respect of all the creditors before the Assessing Officer. It was only during the course of proceedings before the learned CIT(A) the appellant has filed two confirmation letters in respect of M/s R 6, 76, 000/- and 7, 79, 101/- respectively and had not filed any confirmation in respect of M/s Ganesh Enterprises and M/s Goyal Fasterners for credit balance of 3, 70, 588/- and 1, 35, 347/- respectively. The appellant filed these two confirmation letters before CIT(A) as additional evidence along with the application under Rule 46A of the Income Tax Rules 1962. Apparently after admitting this additional evidence the learned CIT(A) has called for remand report from the Assessing Officer who in turn examined Mr. Rajesh Raheja Prop. of R&A Techniques and Mr. Anubhav Raheja Prop. of Millennium Marketing on oath. They stated on oath that there were no money payable to M/s Perfect Paradise Emporium Ltd. i.e. the appellant and they further stated that they never signed any confirmation letters. The remand report of the Assessing Officer was furnished to the Authorized Representative of the appellant by the learned CIT(A). This amounts to affording an opportunity to rebut the remand report. While responding to the remand report it is noticed that the appellant had not asked for the opportunity to cross examine those two parties except stating that the amounts were written off unilaterally by those two concerns. This in our considered opinion is not acceptable inasmuch as it is for those concerns to explain that the outstanding amounts have been written off in the earlier year itself. Pleading at this stage that the CIT(A) has not given opportunity to cross examine those parties is not tenable in the eyes of law since no party can take the advantage of its own mistakes. Therefore the depositions made by those two creditors have become final and the depositions remain uncontroverted. This clinches the issue that sundry creditors can be held to be fictitious and no longer payable by the appellant. Therefore in our considered opinion the CIT(A) is justified in holding that the sundry creditors are factious. The amount in question cannot be brought to tax in the year under appeal under the provisions of Section 41(1) of the Act. It is trite law that an addition under Section 68 can be made only in the year in which credit was made to the account of the creditors in the books of account maintained. Admittedly in this case the credit to the account of creditors was made in the earlier years and therefore the amount even cannot be brought to tax under Section 68 in the year under appeal. However it is open to the Department to levy tax on such amount by resorting to the remedies available under the provisions of Act by duly following the procedure known to the law. - Decided in favour of assessee.

Summary

Issues:
1. Alleged unsupported/unproved Sundry Creditors - Addition under Section 68 of the Income Tax Act, 1961.
2. Compliance with principles of natural justice by the CIT(A).
3. Taxability of the amount under Section 41(1) or Section 68 of the Act.
4. Initiation of penalty proceedings under Section 271(1)(c) of the Act.

Issue 1: Alleged unsupported/unproved Sundry Creditors - Addition under Section 68 of the Income Tax Act, 1961:
The appellant contested the addition of Rs. 19,61,036 as unwarranted by the Income Tax Officer under Section 68. The CIT(A) upheld the addition after considering confirmation letters from creditors, which the appellant failed to provide. The appellant argued that the CIT(A) did not comply with natural justice principles by not confronting the creditors' statements. However, the ITAT found that the CIT(A) properly examined the issue. The appellant only submitted confirmation letters for some creditors during the appeal, and those creditors, under oath, denied any liabilities to the appellant. The ITAT concluded that the sundry creditors were fictitious and not payable by the appellant.

Issue 2: Compliance with principles of natural justice by the CIT(A):
The appellant claimed that the CIT(A) did not follow natural justice principles by not allowing cross-examination of the creditors. However, the ITAT determined that the CIT(A) provided an opportunity to rebut the remand report, and the creditors' depositions remained uncontroverted. The ITAT held that the CIT(A) acted justly in considering the creditors' statements and concluding that the sundry creditors were fictitious.

Issue 3: Taxability of the amount under Section 41(1) or Section 68 of the Act:
The ITAT analyzed whether the amount should be taxed under Section 41(1) or Section 68. Referring to legal precedents, the ITAT concluded that the amount could not be taxed under Section 41(1) as there was no cessation of liability in the relevant assessment year. The ITAT cited cases where unilateral actions could not lead to remission of liability. As the credit to the creditors' accounts was made in earlier years, the amount also could not be taxed under Section 68 in the current year. The ITAT allowed the department to pursue tax remedies following proper procedures.

Issue 4: Initiation of penalty proceedings under Section 271(1)(c) of the Act:
The ITAT noted that the issue of penalty proceedings did not arise from the CIT(A)'s order and dismissed it accordingly.

In conclusion, the ITAT partially allowed the appeal, determining that the alleged sundry creditors were fictitious and not payable by the appellant. The ITAT clarified the taxability of the amount under Section 41(1) or Section 68, dismissing the penalty proceedings issue.