2022 (1) TMI 1255 - AT - Income Tax

Disallowance of creditors - addition being 0.55% of closing creditors and debtors as bogus - HELD THAT - Disallowance of creditors @ 0.55% of the total value is absolutely based upon the surmise and conjectures. If the AO is not satisfied about the books of the assessee, he can reject the same and make an estimate of the income based upon industry trend or past record of the assessee. No such exercise has been done by the AO. This is fatal to the assessment here. Moreover, outstanding creditors which are trade creditors can be added only under provisions of section 41(1) - No case has been made out that section 41(1) has been invoked and there is disallowances as per provisions of section 41(1). Hence, no merit in additions - we set aside the orders of the authorities below and direct that addition in this regard should be deleted. - Decided in favour of assessee.

Summary

Issues:
1. Addition of 0.55% of closing creditors and debtors as bogus.
2. Reassessment proceedings not based on new material facts.
3. Burden of proof on genuineness of creditors and debtors.
4. Purchase and sale transactions not on a rotational pattern within a specific group.
5. Treatment of debtors and creditors in relation to purchases and sales.
6. Acceptance of purchases and sales as genuine while disputing creditors and debtors.

Detailed Analysis:
1. The appeal challenged the addition of 0.55% of closing creditors and debtors as bogus. The CIT(A) confirmed the addition, citing lack of proof for the rationale behind the entries in the books. The AO observed a rotational pattern in high-value transactions within specific entities, leading to the conclusion of bogus transactions. The ITAT disagreed, stating the addition was based on conjecture without industry trend analysis or invoking relevant provisions. Consequently, the addition was directed to be deleted.

2. The issue of reassessment proceedings not being based on new material facts was raised. The CIT(A) upheld the reassessment, emphasizing the lack of proof for the genuineness of high-value transactions. However, the ITAT found no merit in the addition, as the AO failed to conduct an industry trend analysis or invoke relevant provisions, leading to the deletion of the addition.

3. The burden of proof regarding the genuineness of creditors and debtors was disputed. The CIT(A) held that the transactions defied the human probability test and treated 0.55% of the creditors as bogus. The ITAT disagreed, emphasizing the lack of industry trend analysis or invoking relevant provisions, leading to the deletion of the addition.

4. Concerning the purchase and sale transactions not following a rotational pattern within a specific group, the CIT(A) upheld the AO's decision based on a perceived lack of genuine business activity. However, the ITAT found no industry trend analysis or invocation of relevant provisions, resulting in the deletion of the addition.

5. The treatment of debtors and creditors in relation to purchases and sales was challenged. The CIT(A) confirmed the addition, citing a lack of proof for the genuineness of transactions. The ITAT disagreed, emphasizing the absence of industry trend analysis or invoking relevant provisions, leading to the deletion of the addition.

6. The acceptance of purchases and sales as genuine while disputing the genuineness of creditors and debtors was raised. The CIT(A) found the transactions beyond the test of human probability, treating 0.55% of the creditors as bogus. However, the ITAT disagreed, highlighting the absence of industry trend analysis or invoking relevant provisions, resulting in the deletion of the addition.