2016 (9) TMI 1437 - AT - Income Tax

Addition u/s. 40A(3) and 40A(3A) - cash payment exceeding the prescribed limit - assessee has made payments exceeding ₹ 20,000/- in a single day through bearer cheques to suppliers of raw hide - Held that - the consequence, which were to be fallen on account of non-observation of Section 40A(3) of the Act must have nexus to the failure of such object. Therefore, the genuineness of the transactions being free from vice of any device of evasion of tax is relevant consideration. With regard to the purpose of bringing the provisions of section there is no doubt about the identity of the party. AR has produced the sales bills along with the transport details and road permit issued by the Government to the company. So in the instant case, there is no evasion of tax by claiming the bogus expenditure in cash. We also find that the assessment was framed under section 143(3) of the Act for the assessments years 2012-13 and 2013-14 without making any disallowance under section 40A(3) of the Act. From this fact we find that the parties from whom the raw hide and skin purchased were accepted as producers. No such issue was raised by the AO in the assessment. - Decided against revenue Bogus sundry creditors - purchases of goods from these parties have been accepted to be genuine - Held that - revenue had failed to prove that the amounts were credited to the books of account of the assessee in the year under consideration. These amounts were brought forward from earlier years and it is settled law that the addition under section 68 could be made only if the amount was credited in the accounts of the assessee in the relevant financial year. In Shri Vardhman Overseas Ltd. v. Asstt. CIT (2008 (7) TMI 617 - ITAT DELHI) it was held that no new amount had been credited by assessee in its account during the year under consideration. Therefore, applicability of section 68 of the Act is also ruled out and addition could not be made under section 68 of the Act - Decided against revenue

Summary

Issues Involved:
1. Deletion of disallowance under Section 40A(3) and 40A(3A) of the Income Tax Act.
2. Deletion of bogus sundry creditors.

Issue-wise Detailed Analysis:

1. Deletion of disallowance under Section 40A(3) and 40A(3A) of the Income Tax Act:

The first issue raised by the Revenue was the deletion of the disallowance of ?3,23,88,960/- under Section 40A(3) and 40A(3A) of the Income Tax Act, 1961. The Assessing Officer (AO) found that the assessee made payments exceeding ?20,000/- in a single day through bearer cheques, which violated Section 40A(3). The assessee argued that the payments were made to producers of raw hides, invoking Rule 6DD(e) of the Income Tax Rules, 1962, which exempts such payments from the purview of Section 40A(3). However, the AO noted that the suppliers were merchants, not producers, and the notices issued under Section 133(6) were returned unserved.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, observing that:
- The appellant purchased raw hides from producers, supported by purchase bills, transport documents, and way bills issued by VAT authorities.
- The transactions were genuine and covered under Rule 6DD(e)(ii), which exempts payments made to producers of animal husbandry products.
- The jurisdictional High Court and other courts have held that genuine transactions with producers of hides and skins are not disallowable under Section 40A(3).

The Tribunal upheld the CIT(A)'s order, emphasizing that the genuineness of the parties was not doubted, and the AO did not provide evidence that payments were made to non-producers. The Tribunal cited several judicial precedents supporting the exemption under Rule 6DD for payments to producers of hides and skins.

2. Deletion of bogus sundry creditors:

The second issue involved the deletion of ?4,29,02,130/- treated as bogus sundry creditors by the AO. The AO observed that notices sent to the creditors under Section 133(6) were returned unserved, leading to the conclusion that the creditors were non-existent. The assessee argued that the sundry creditors related to genuine purchases and could not be treated as income without rejecting the purchases.

The CIT(A) deleted the addition, noting that:
- The purchases from the sundry creditors were genuine, supported by purchase bills and books of accounts.
- The AO accepted the purchases but treated the creditors as bogus based on unserved notices.
- The sundry creditors were consistently shown in the balance sheet and were accepted in earlier years.
- The provisions of Section 68 and Section 41(1) were not applicable as the creditors were not written off and the liabilities had not ceased.

The Tribunal upheld the CIT(A)'s order, stating that:
- The AO's action of adding sundry creditors without disallowing corresponding purchases was incorrect.
- Sundry creditors can only be added as income under Section 41(1) if written off in the books, which was not the case here.
- Judicial precedents support the view that old outstanding balances cannot be added under Section 68 or Section 41(1) without evidence of cessation of liability.

Conclusion:
The Tribunal dismissed the Revenue's appeal, confirming the deletion of disallowances under Section 40A(3) and 40A(3A) and the deletion of bogus sundry creditors. The judgments were based on the genuineness of transactions, proper application of exemptions under Rule 6DD, and adherence to judicial precedents regarding the treatment of sundry creditors.