2015 (10) TMI 2250 - AT - Income Tax

Addition made of the closing balance of the sundry creditors - Held that - The assessee during the course of assessment proceedings furnished the confirmation of outstanding balance obtained from the said parties but those parties could not be produced for the reason that a prolonged litigation was going on and the parties were absconding. However, the assessee furnished the details of their bank account wherein the payment made by the assessee in the subsequent year was credited. The assessee also furnished copy of its bank Account No. 27971 with Bank of Rajasthan to substantiate that the payments were made to the parties in question, through account payee cheques. In the present case, it is an admitted fact that the purchases made from the parties in whose names, balances were outstanding have been accepted but the AO only doubted the genuineness the outstanding balance at the year end in the name of those parties for the reason that those were not produced before him. The assessee vide letter dated 30.07.2012 written to the AO during the course of remand proceedings informed that the confirmation of the said nine parties are filed before the Hon ble CIT(A)and bank statement of the assessee for the year under consideration, perusal of which clearly reveals that all the payments were made to the parties through regular banking channel . In the present case, when the purchases from the parties were accepted and the sales made out of those purchases were not doubted, the payments outstanding in the name of those parties were accepted in the subsequent year than there was no reason to doubt the genuineness of the outstanding balance. Moreover, in the present case, the books of account were duly audited by the independent Auditor, those books were accepted by the AO and all the trading results except the outstanding balance in the name of 9 parties to the extent of ₹ 3,57,17,506/- were accepted. In our opinion, the AO at the same time cannot blow hot and cold from the same wind pipe. In the instant case, the AO accepted the trading results and the explanation for fall in the G.P rate furnished by the assessee, so there was no reason for doubting the outstanding balance in the name of sundry creditors when the purchases made from them were duly accepted as genuine. In our opinion, the ld. CIT(A) was not justified in confirming the addition made by the AO. There was no cessation of the liability and even the payment made to the creditors in the subsequent year was not doubted, so there was no occasion to make the addition by considering the creditors as bogus for the year under consideration particularly when the purchases from the same creditors were considered by the AO as genuine and even the payments made to them for the amount outstanding at the end of the year under consideration was not doubted in the subsequent year. We, therefore, are of the confirmed view that the addition made by the AO and sustained by the ld. CIT(A) was not justified - Decided in favour of assessee.

Summary

Issues Involved:
1. Sustaining the addition of Rs. 3,57,17,506/- as closing balance of creditors.
2. Levy of interest under sections 234A, 234B, and 234C of the Income Tax Act.

Detailed Analysis:

1. Sustaining the Addition of Rs. 3,57,17,506/- as Closing Balance of Creditors:
The primary issue was whether the addition of Rs. 3,57,17,506/- to the closing balance of creditors was justified. The assessee argued that the sum represented the closing balance of nine sundry creditors, which was added by the Assessing Officer (AO) despite the purchases and payments to these creditors being accepted as genuine. The assessee contended that the non-production of creditors should not be a basis for the addition, especially when documentary evidence supported the genuineness of the transactions.

Facts and Arguments:
- The assessee filed its return of income declaring Rs. 11,82,236/- and was engaged in manufacturing and exporting readymade garments.
- The AO noticed a decline in the Gross Profit (G.P.) rate and asked the assessee to explain the reasons.
- The AO observed trade creditors of Rs. 4,63,89,077/- and requested confirmation of accounts, but the notices issued to nine creditors were returned unserved.
- The AO made an addition of Rs. 3,57,17,506/- due to the non-confirmation of liabilities by the creditors.

Assessee's Submissions:
- The assessee provided confirmations of the creditors during the assessment proceedings.
- The payments to creditors were made through banking channels, and the transactions were genuine.
- The creditors were assessed to tax, and their PAN details were provided.
- The AO accepted the trading account, purchases, and payments made during the year.
- The assessee submitted that the AO made the addition without confronting the inspector's report to the assessee and without providing an opportunity for cross-examination.

CIT(A)'s Findings:
- The CIT(A) observed that the assessee failed to produce the creditors and satisfactorily explain their non-production.
- The confirmations provided were identical in format and style, raising doubts about their authenticity.
- The assessee did not produce a stock register to substantiate the receipt of goods from creditors.
- The CIT(A) upheld the addition, citing the failure to establish the identity, genuineness, and creditworthiness of the creditors.

ITAT's Decision:
- The ITAT noted that the purchases from the creditors were accepted, and the payments made in the subsequent year were not doubted.
- The ITAT held that the AO could not doubt the outstanding balance when the purchases and payments were accepted.
- The ITAT relied on various judgments, including CIT Vs Pancham Dass Jain and CIT Vs Nikunj Eximp Enterprises (P.) Ltd., which supported the assessee's case.
- The ITAT concluded that the addition made by the AO and sustained by the CIT(A) was not justified and deleted the addition.

2. Levy of Interest under Sections 234A, 234B, and 234C of the Income Tax Act:
The assessee also contested the levy of interest under sections 234A, 234B, and 234C of the Income Tax Act. However, the detailed analysis of the ITAT primarily focused on the addition of the closing balance of creditors, and the issue of interest levy was not elaborately discussed in the judgment.

Conclusion:
The ITAT allowed the appeal of the assessee, deleting the addition of Rs. 3,57,17,506/- made by the AO and sustained by the CIT(A) on account of the closing balance of creditors. The ITAT found that the AO's actions were based on suspicion and not supported by substantial evidence, especially when the purchases and subsequent payments were accepted as genuine. The ITAT's decision was based on the principles of natural justice, emphasizing the need for proper confrontation and cross-examination of evidence used against the assessee.