2013 (6) TMI 17 - HC - Income Tax

Disallowance of unsubstantiated sundry creditors - ITAT deleted the addition - ex-parte assessments been made u/s 144 due to non-cooperation of the assessee - Held that - There was no cooperation by the assessee before the AO. On 01.12.2005, the balance sheet and profit & loss account were filed. The balance sheet filed with the return shows sundry creditors to the turn of Rs. 23,14,417/-. These creditors are not verifiable in absence of their full names and complete addresses. As per balance sheet the details of creditors appears available as per Schedule C , but no such schedule attached therewith. The perusal of record shows that right from start of firm business the assessee though mentioning (in balance sheet) about availability of details of creditors as per preschedule but no such schedule has ever been enclosed with the audit report/return. Bogus liability has been created in the garb of sundry creditors whose name & balances are not known to assessee. This also indicates that no regular books of account have been maintained by the assessee, as not a single detail from the books of account has been furnished in the past fifteen months. The creditors are, therefore, not verifiable. The assessee must be held to have failed to establish that the unexplained sundry creditors were referable to the business income. The addition of the unexplained sundry creditors as income from other sources by the AO, therefore, was held valid. Case of CIT vs. Devi Prasad Vishwanath Prasad 1968 (8) TMI 5 - SUPREME Court observed that where there is an unexplained credit, it is open to the AO to hold that it is income of the assessee, and no further burden lies on the AO to show that the income is from any particular source - order passed by the Tribunal set aside and remit the matter back with a direction to examine the identity, creditworthiness and genuineness of the transactions of the sundry creditors - in favour of revenue for statistical purpose.

Summary

Issues:
1. Disallowance of unsubstantiated sundry creditors.
2. Disregarding assessments under Section 144 due to non-cooperation of the assessee.

Issue 1: Disallowance of Unsubstantiated Sundry Creditors:
The High Court dealt with the appeal filed by the Department under Section 260A of the Income Tax Act, 1961 against the decision of the Income-Tax Appellate Tribunal regarding the disallowance of unsubstantiated sundry creditors. The AO had added Rs. 23,14,417 to the income of the assessee due to non-verifiability of these creditors. However, the first appellate authority deleted this addition citing the application of an 8% net profit rate under Section 44AD. The Tribunal upheld this decision. The Department contended that the sundry creditors represented undisclosed business income, and the AO had the right to make additions for non-verification. The Court noted the lack of cooperation by the assessee and the absence of details regarding the creditors, leading to the addition of the amount to the total income.

Issue 2: Disregarding Assessments Under Section 144:
The Court examined the argument regarding the assessments made under Section 144 due to the non-cooperation of the assessee. The assessee's counsel justified the impugned order, emphasizing that the net profit rate was estimated at 8% as per Section 44AD, and the sundry creditors were not disputed by the AO. The counsel relied on various case laws to support the contention that no further addition was necessary once the net profit rate was applied. The Court considered the precedents cited and observed that the unexplained sundry creditors could be treated as income from other sources if not referable to the estimated business income. The Court referred to the burden of proof on the assessee to establish the source of income. Consequently, the Court set aside the Tribunal's order and directed a re-examination of the sundry creditors' identity, creditworthiness, and genuineness within three months.

In conclusion, the High Court allowed the appeal filed by the department for statistical purposes, emphasizing the need for a thorough examination of the sundry creditors' transactions and sources. The judgment highlights the importance of cooperation, verification, and proper documentation in income tax assessments to prevent the creation of bogus liabilities and ensure accurate tax calculations.