2014 (1) TMI 552 - AT - Income Tax

Suppressed purchases - Held that - The Assessing Officer observed difference in the amount of purchases recorded by assessee from Shri K.S. Ahluwalia and sales shown by that party - The Assessing Officer did not confront the assessee with the details received from Sh. K.S. Ahluwalia showing the sales made to the extent of Rs.46.04 lakh - The ld. CIT(Appeals) was not justified in deleting this addition by observing that increase in such purchases would affect the closing stock and thus neutralise the difference - The issue was set aside for fresh adjudication. Addition on account of cessation of liability - Held that - The sundry creditor s account in the assessee s books for the earlier year as on 31.02.2007 shows that a sum of Rs.16.23 lakhs was debited on 31.03.2007 with the remarks Sundry creditors written off - This amount debited to the account of Roy Industries was credited to the Other income with the remarks Credit balance written back totalling Rs.72,51,225.80 - This amount of Rs 72.51 lakh included a sum of Rs.16.23 lakh, which fact was observed by ld. CIT(Appeals) for deleting this addition - As per section 41(1) - Charge of income is attracted in the year in which the cessation or remission takes place - In assessee s case the cessation or remission took place in the preceding year when the assessee debited the account of this party with a sum of Rs.16.23 lakhs - No event happened in the current year by means of which the assessee received any remission or cessation of liability on this account - The CIT(Appeals) was justified in deleting this addition because the amount stood remitted in the earlier year and not the current year - Decided against Revenue.

Summary

Issues:
1. Deletion of Rs.15,38,350 on account of suppressed purchases and Rs.65,257 on account of sales tax penalty.
2. Deletion of Rs.16,23,510 made on account of 'cessation of liability' under section 41(1) of the Act.

Analysis:
1. The first issue involves the deletion of Rs.15,38,350 due to suppressed purchases. The Assessing Officer noted a variance in purchases recorded by the assessee from a party and the sales shown by that party. The Tribunal found that the assessee had indeed underreported purchases, justifying the addition. The Tribunal disagreed with the CIT(A) who deleted the addition, citing that such unrecorded expenses fall under section 69C, which prohibits deduction for unexplained expenditures. The Tribunal set aside the CIT(A)'s decision and directed the Assessing Officer to reevaluate the issue after confronting the assessee with relevant statements.

2. The second issue concerns the deletion of Rs.65,257 on account of sales tax penalty. The Assessing Officer treated this amount as a penalty, but the CIT(A) reduced the addition to Rs.12,000 after examining the challans. The Tribunal upheld the CIT(A)'s decision, as only Rs.12,000 was paid as a penalty, while the rest was a regular sales tax demand. No evidence was presented to challenge the CIT(A)'s findings, leading to the affirmation of the deletion.

3. Moving to the deletion of Rs.16,23,510 under section 41(1) for 'cessation of liability,' the Tribunal analyzed the transactions involving Roy Industries. The Assessing Officer added the outstanding balance as income, but the CIT(A) disagreed, noting that the amount had been written back in the previous year. The Tribunal concurred with the CIT(A), emphasizing that section 41(1) applies when a liability ceases in the current year, not in a prior year. Since the cessation occurred earlier, the addition was unwarranted, and the CIT(A)'s decision to delete the amount was upheld.

In conclusion, the Tribunal partially allowed the appeal for statistical purposes, maintaining the deletions related to suppressed purchases, sales tax penalty, and cessation of liability based on the detailed analysis and application of relevant legal provisions.