2014 (1) TMI 1724 - AT - Income Tax

Additions on unverifiable sundry creditors and excess outstanding balance of sundry creditors - Held that - In respect of some of the creditors, notices had not been served. In respect of the creditors to whom notices were served, but replies were not received; the AO did not choose to issue summons u/s. 131 of the Act and compel their attendance before him. More over, there is no break-up in Annexure-B creditors given by the AO in his remand report as to which of the creditors were served but not replied and which of the creditors on whom notices were not served. In these circumstances, we are of the considered opinion that in respect of creditors on whom notices were served and who did not send any reply to the AO, the addition made by the AO was rightly deleted by the CIT(A), since the AO did not issue summons to these creditors u/s. 131 of the Act and compel their attendance before him. In respect of the creditors of Annexure-B on whom notices could not be served because they were either not residing or carrying on the business at the address given by the assessee; we are of the view that the assessee should be given an opportunity to ascertain the whereabouts of those creditors and also file some other evidence to substantiate the genuineness of those credits. We are of the view that for this limited purpose, the issue should be remanded to the AO for fresh consideration As far as Annexure-C sundry creditors are concerned assessee has shown due and payable to the sundry creditors much more than the figures the sundry creditors had shown as receivable from the assessee. Such differences appear only in the case of 36 sundry creditors out of 120 sundry creditors set out in Annexure-C. It is seen that the assessee had filed reconciliation of some of these accounts before the AO and the same is at pages 4 to 6 of the assessee s paperbook. This reconciliation is in respect of 10 sundry creditors out of 36 sundry creditors in whose accounts discrepancies were found by the AO. For ready reference, the reconciliation so filed by the assessee in respect of 10 sundry creditors is enclosed as ANNEXURE-I to this order. Despite this reconciliation, in the remand report filed by the AO after receipt of this reconciliation, there is no whisper regarding the correctness of the claim made by the assessee nor did the AO demand any further documentary evidence to substantiate the reconciliation. In such circumstances, we are of the view that the reconciliation furnished in respect of these 10 creditors has to be accepted. With regard to the remaining 26 creditors, we are of the view that the assessee should be afforded an opportunity to explain the discrepancies and in this regard the assessee should also be given liberty to file any other supporting evidence to substantiate its case Estimation of GP percentage - non rejection of books of accounts - Held that - A perusal of the order of assessment shows that the AO has not made any reference to any of the factors referred to in section 145(3) of the Act. Law is well settled that AO is not entitled to resort to estimation of income without rejecting the book results of the assessee. For rejecting the books results of the assessee, the AO has to make out a case that the conditions laid down in section 145(3) are satisfied. In the present case, the order of the AO as well as the CIT(A) is silent on these aspects. Mere reference to absence of some supporting evidence in respect of entries in the books of accounts in the remand report of the AO before CIT(A) in our view would not be sufficient to invoke the provisions of Sec.145(3) of the Act. In such circumstances, we are of the view that the primary condition for resorting to an estimation of income by the AO is not sustainable - Decided in favour of assessee

Summary

Issues Involved:
1. Addition of Rs. 2,27,39,700 as unverifiable sundry creditors and excess outstanding balance of sundry creditors.
2. Estimation of Gross Profit (GP) percentage.

Issue-wise Detailed Analysis:

1. Addition of Rs. 2,27,39,700 as Unverifiable Sundry Creditors and Excess Outstanding Balance of Sundry Creditors:

The Revenue's appeal raised concerns about the CIT(A)'s decision not to confirm the addition of Rs. 2,27,39,700, which included unverifiable sundry creditors and excess outstanding balances. The AO had initially added Rs. 3,60,00,000 to the assessee's total income due to the non-furnishing of account extracts and confirmations of sundry creditors. The assessee later provided ledger extracts, postal addresses, and confirmations to the CIT(A), who confronted the AO with this evidence. The AO's remand report categorized the sundry creditors into three groups: those with no variation in outstanding balances (Annexure-A), those with unserved or unresponsive letters (Annexure-B), and those with excess outstanding balances (Annexure-C).

The CIT(A) concluded that the assessee had furnished sufficient evidence, including ledger extracts, postal addresses, and bank account details, to substantiate the genuineness of the sundry creditors. The CIT(A) observed that the AO had not issued summons under section 131 to verify the creditors and had based his assessment on presumptions. Consequently, the CIT(A) deleted the addition of Rs. 3,60,00,000.

The Tribunal noted that the AO had accepted the genuineness of creditors listed in Annexure-A. For Annexure-B creditors, the Tribunal agreed with the CIT(A) that the AO should have issued summons to those who did not respond to notices. The Tribunal remanded the issue back to the AO to allow the assessee to provide further evidence for creditors whose notices were unserved. Regarding Annexure-C creditors, the Tribunal found that the assessee had provided a reconciliation for some discrepancies, which the AO did not contest. The Tribunal remanded the issue for the remaining creditors to allow the assessee to explain discrepancies and provide supporting evidence.

2. Estimation of Gross Profit (GP) Percentage:

The Revenue contested the CIT(A)'s reduction of the GP addition, while the assessee appealed against the partial sustenance of the GP addition. The AO had adopted a 4% GP rate based on comparisons with similar traders, resulting in an addition of Rs. 32,43,994. The CIT(A) reduced this addition to Rs. 5,99,101, considering the assessee's higher turnover and additional transportation costs.

The Tribunal emphasized that the AO must reject the book results under section 145(3) before resorting to income estimation. The AO had not explicitly invoked section 145(3) in the assessment order. The Tribunal concluded that the AO's reference to incomplete books in the remand report was insufficient to reject the book results. Consequently, the Tribunal held that the CIT(A) should have deleted the entire GP addition and allowed the assessee's appeal while dismissing the Revenue's appeal on this ground.

Conclusion:

The Tribunal partly allowed the Revenue's appeal for statistical purposes and fully allowed the assessee's appeal, directing the AO to reconsider certain aspects and provide the assessee with opportunities to furnish additional evidence. The Tribunal upheld the CIT(A)'s findings regarding the verification of sundry creditors and the rejection of the GP addition.