2012 (7) TMI 390 - AT - Income Tax

Addition under section 68 of the Act - alleged that assessee was not able to produce creditor confirmation - Assessing Officer, in the assessment order allowed set off of this addition against business loss and reduced the business loss Held that - Assessing Officer made addition under section 68 as unexplained cash credits though the said credits are only trade credits and that too most of them are opening balances of the previous year - lower authorities should have considered these balances in creditors accounts as income under section 41 and not as unexplained cash credits under section 68 - since the balances in creditors accounts are income falling under section 41(1), the set off of this income against business loss allowed by the Assessing Officer in the assessment order passed under section 143(3) is correct - appeal of the assessee is allowed

Summary

Issues Involved:
1. Validity of addition under Section 68 of the Income-tax Act, 1961.
2. Permissibility of set-off of business loss against deemed income under Section 68.
3. Correctness of the order passed under Section 263 by the Commissioner of Income Tax.

Issue-wise Detailed Analysis:

1. Validity of Addition under Section 68 of the Income-tax Act, 1961:

The primary issue revolves around the addition of Rs. 47,01,519/- under Section 68 by the Assessing Officer (AO). The AO added this amount as unexplained cash credits due to the assessee's failure to produce creditor confirmations. The assessee contended that these amounts were actually trade credits and not cash credits, and hence should have been considered under Section 41(1) instead of Section 68. The assessee provided a detailed chart and ledger accounts showing that the credits were related to trade creditors for the purchase of raw materials. The Tribunal observed that the opening balances of the previous year cannot be considered as cash credits under Section 68, citing decisions from the Hon'ble Delhi High Court and the Hon'ble Rajasthan High Court. The Tribunal concluded that the amounts in question were indeed trade liabilities and should have been considered under Section 41(1).

2. Permissibility of Set-off of Business Loss against Deemed Income under Section 68:

The Commissioner of Income Tax (CIT) issued a notice under Section 263 to revise the AO's assessment order, arguing that the deemed income under Section 68 cannot be set off against business loss as per Section 71. The assessee argued that the deemed income under Section 68 should be categorized under one of the heads of income specified in Section 14, and since the credits were trade-related, they should fall under the head of business income. The Tribunal referenced various judicial precedents, including the Hon'ble Andhra Pradesh High Court and the Mumbai Bench of ITAT, which supported the view that unexplained cash credits, if related to business, should be assessed under the head of business income. Consequently, the Tribunal held that the set-off allowed by the AO was correct.

3. Correctness of the Order Passed under Section 263 by the Commissioner of Income Tax:

The CIT's order under Section 263 was based on the decision of the Hon'ble Gujarat High Court, which stated that deemed income under Section 68 does not fall under any of the heads specified in Section 14. However, the Tribunal found that the CIT did not adequately consider the detailed submissions and evidence provided by the assessee, which demonstrated that the amounts were trade credits. The Tribunal disagreed with the CIT's view and held that the AO's original assessment was neither erroneous nor prejudicial to the interests of the Revenue. Therefore, the Tribunal set aside the CIT's order under Section 263.

Conclusion:

The Tribunal allowed the appeals of the assessees, holding that the amounts added under Section 68 were actually trade credits and should have been considered under Section 41(1). Consequently, the set-off of business loss against this income was permissible, and the CIT's order under Section 263 was set aside. The Tribunal's decision was based on a thorough examination of the facts, submissions, and relevant judicial precedents.