2014 (6) TMI 1038 - AT - Income Tax

Addition u/s 68 - addition on account of bogus sundry creditors the genuineness of which the assessee utterly failed to prove - HELD THAT - A.O. has rejected the books of account by mentioning numerous defects therein which has been discussed from page 2 to 9 of the assessment order. Thus there is implied rejection of books of account. To meet out any pilferage etc. by enhancing and increasing the net profit rate in our considered opinion the ld. CIT(A) has justified his action. The trade creditors obviously have to be included in the turnover of the year and in case of a civil contractor the net taxable income can be arrived by applying the net profit rate of the total receipts. Although a lumpsum addition has been sustained by invoking different net profit rate but a separate addition of sundry creditors by treating them as bogus particularly when these are trade creditors the entire amount qua them is not justified. When the assessee is showing receipt of all these creditors and in that case even if the names and complete addresses thereof could not be given but the trade creditors cannot be treated at par with the cash creditors. - Appeal of the department stands dismissed.

Summary

Issues:
1. Addition of bogus sundry creditors.
2. Treatment of trade creditors and net profit rate.

Issue 1: Addition of bogus sundry creditors
The appeal involved the deletion of an addition of Rs. 1,13,30,726 made on account of bogus sundry creditors. The assessee, engaged in civil sub-contract work, failed to prove the genuineness of these creditors. The AO treated certain creditors as unexplained due to incomplete information provided by the assessee. The CIT(A) deleted the entire addition, justifying it by invoking section 145 of the Act and estimating the income by adopting a higher net profit rate. The Tribunal upheld the CIT(A)'s decision, stating that a separate addition of sundry creditors as bogus was not justified, especially when the books of account were rejected. The Tribunal confirmed the CIT(A)'s decision, dismissing the department's appeal.

Issue 2: Treatment of trade creditors and net profit rate
The AO rejected the books of account due to numerous defects, leading to the CIT(A) justifying the estimation of income by applying a higher net profit rate. The CIT(A) sustained a lump sum addition on the total turnover, including the amount of trade creditors. The Tribunal agreed with the CIT(A), emphasizing that trade creditors should be included in the turnover, and applying a net profit rate to determine the taxable income of a civil contractor is appropriate. The Tribunal found no infirmity in the CIT(A)'s decision and confirmed the same, ultimately dismissing the department's appeal.

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