2016 (2) TMI 1096 - AT - Income Tax

Addition on account of sundry creditors - Held that - AO had erred in on the one hand accepting the trading results of the assessee, and at the same time rejecting his books of account. The ld. CIT(A) went wrong in failing to appreciate that such a course of action is impermissible in law. The books of account need to be either accepted, or rejected in totality. And once the trading results of the assessee were accepted, there remained no scope for the AO to make any addition of sundry creditors. Further, even if, for the sake of argument, the aforesaid action of the AO is treated as valid, the one and only course left available to the AO after rejecting the books of the assessee was to proceed u/s 144 of the Income Tax Act and to make best judgment assessment. Per contra, he made addition of sundry creditors, holding that the assessee had not been able to substantiate the existence of the sundry creditors as claimed and thus, they could not be accepted. The ld. CIT(A) was incorrect in sustaining this addition made against the law by the AO. Thus, looked at from any angle, the ld. CIT(A) has fallen into error in sustaining the unsustainable addition made by the AO. The grievance of the assessee in this regard is, therefore, justified. It is accepted. The orders of the ld. CIT(A) on this issue are reversed. - Decided in favour of assessee. Disallowance of car expenses - 10% of car expenses incurred by the assessee in each of the years on account of interest on loan, repair and maintenance and depreciation - use of car for personal purposes - Held that - Here, the assessee has not been able to controvert the findings of the Taxing Authorities. No log book has been produced at any stage so as to prove that the car had been used exclusively for the business purposes of the assessee and not at all for his personal purposes. The assessee has not even raised any alternative ground that the disallowance for either of the years is excessive. The grievance of the assessee in this regard for both the years is rejected. The disallowances of ₹ 36,034/- for AY 2008-09 and ₹ 31,406/- for AY 2009-10, as confirmed by the ld. CIT(A), are upheld.

Summary

Issues: Addition of sundry creditors for assessment years 2008-09 and 2009-10; Disallowance of car expenses.

Analysis:

Issue 1: Addition of Sundry Creditors
The primary issue in this case revolves around the addition of &8377; 5,63,888/- for the assessment year 2008-09 and &8377; 1,47,062/- for the assessment year 2009-10 on account of sundry creditors. The Assessing Officer (AO) raised concerns regarding the legitimacy of these creditors as the assessee failed to provide adequate details and evidence to substantiate the claims. The AO noted discrepancies in the books of account and rejected them, leading to the additions. The Commissioner of Income Tax (Appeals) upheld the AO's decision, prompting the assessee to challenge it.

The argument put forth by the assessee was that the rejection of the books of account by the AO was unjustified, especially considering that the turnover was below the prescribed limit and the books were prepared based on bank statements. The AO's acceptance of trading results while rejecting the books was deemed legally impermissible. Furthermore, it was contended that if the books were to be rejected, the AO should have proceeded with a best judgment assessment under Section 144 of the Income Tax Act, rather than making specific additions like in this case. The Appellate Tribunal found merit in the assessee's contentions and reversed the decisions of the lower authorities, canceling the additions for both assessment years.

Issue 2: Disallowance of Car Expenses
The secondary issue pertains to the disallowance of &8377; 36,304/- for AY 2008-09 and &8377; 31,406/- for AY 2009-10 on account of car expenses. The disallowance, amounting to 10% of car expenses, was attributed to personal use of the car by the assessee. Despite the assessee's failure to provide evidence, such as a logbook, to prove exclusive business use of the car, no alternative grounds were raised challenging the disallowance. Consequently, the Appellate Tribunal upheld the disallowances for both years, stating that the findings of the Taxing Authorities were not contested effectively.

In conclusion, the appeals were partly allowed, with the additions related to sundry creditors being canceled, while the disallowances of car expenses were upheld for both assessment years. The judgment highlights the importance of maintaining accurate and verifiable records to substantiate claims and expenses in income tax assessments.