2016 (5) TMI 164 - AT - Income Tax

Addition u/s 68 - A.O. made additions solely on the ground that the trade creditors are not confirmed the transactions - Held that - No addition can be made on trade creditors, when purchase has been accepted as genuine. The CIT(A) after considering the relevant details filed by the assessee has rightly deleted the additions made by the Assessing Officer. We do not find any error or infirmity in the order passed by the CIT(A). Hence, we inclined to uphold the order passed by the CIT(A) and reject the ground raised by the revenue. - Decided in favour of assessee Disallowance of cash payments u/s 40A(3) - Held that - Assessing Officer has no reason to disallow cash payments by invoking the provisions of section 40A(3) of the Act, when he has not doubted the genuineness of the purchases. The assessee has made the cash payment against purchases. The assessee has reported the purchases and the Assessing Officer has accepted such purchases and computed the profit as per the financial statement filed by assessee. Under these circumstances, we are of the opinion that making additions by invoking the provisions of section 40A(3) of the Act amounts to double additions which is not permissible under the law. There exists a business expediency in making the cash payments towards purchase of goods. The assessee was obliged to make the cash payments required by the suppliers. Therefore, no disallowance can be made towards cash payments by invoking the provisions of section 40A(3) of the Act. The CIT(A) rightly deleted the additions. We do not see any error or infirmity in the order passed by the CIT(A). - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of additions made by the Assessing Officer (A.O.) towards trade creditors under Section 68 of the Income-Tax Act.
2. Disallowance of cash payments under Section 40A(3) of the Income-Tax Act.

Issue-Wise Detailed Analysis:

1. Deletion of Additions Made by the A.O. Towards Trade Creditors Under Section 68 of the Income-Tax Act:

The A.O. invoked Section 68 of the Income-Tax Act to make additions towards trade creditors, citing the assessee's failure to furnish confirmation letters from trade creditors, thus failing to prove the identity, genuineness, and creditworthiness of the transactions. The A.O. observed that the letters issued to trade creditors were returned un-serviced, leading to the conclusion that the creditors were not genuine.

The assessee contended that she purchased garments from the unorganized market of Kolkata and Howrah, where sellers often do not disclose their identity. The purchases were made on credit and payments were made subsequently. The assessee argued that the A.O. accepted the purchases and sales as genuine, and thus, the trade creditors arising from these purchases should also be accepted as genuine.

The CIT(A) deleted the additions made by the A.O., holding that when trading results, i.e., sales and purchases, have been accepted as genuine, no addition under Section 68 of the Act can be made for unexplained sundry creditors. The CIT(A) emphasized that merely because the assessee was unable to furnish confirmation letters from sundry creditors, addition under Section 68 of the Act could not be made.

The Tribunal upheld the CIT(A)'s decision, stating that when purchases and sales are accepted as genuine, the trade creditors arising from these purchases cannot be treated as bogus liabilities. The Tribunal cited various judicial precedents supporting the view that once the department has accepted the purchases and sales as genuine, no additions can be made towards trade creditors for want of confirmation letters.

2. Disallowance of Cash Payments Under Section 40A(3) of the Income-Tax Act:

The A.O. disallowed cash payments made towards the purchase of goods by invoking Section 40A(3) of the Act, which mandates that payments exceeding ?20,000 in a single day should be made through account payee cheques or drafts. The A.O. noted that the assessee admitted to making payments either by cash or bearer cheques and failed to produce any confirmation from the respective agents to prove the necessity of such payments.

The assessee argued that she was compelled to make cash payments as requested by the suppliers from the unorganized market of Kolkata. The suppliers insisted on cash or bearer cheques, and unless the assessee obliged, she could not conduct business with them. The assessee claimed that there was a business expediency in making the cash payments.

The CIT(A) deleted the disallowance, holding that the assessee was prevented from issuing crossed cheques due to the nature of the business and the unorganized market conditions. The CIT(A) noted that the payments were genuine and there was a business expediency in making the cash payments, thus falling under the exceptions provided in Rule 6DD of the I.T. Rules, 1962.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the primary objective of Section 40A(3) is to curb the use of black money. The Tribunal noted that the genuineness of the purchases and sales was not doubted by the A.O., and thus, the cash payments made under business expediency should not be disallowed. The Tribunal cited judicial precedents supporting the view that where there is a business expediency and the genuineness of the transactions is not doubted, cash payments should not be disallowed under Section 40A(3) of the Act.

Conclusion:

The Tribunal dismissed the appeals filed by the revenue, upholding the CIT(A)'s decision to delete the additions made towards trade creditors under Section 68 and disallowance of cash payments under Section 40A(3) of the Income-Tax Act. The Tribunal emphasized the importance of considering the business realities and the genuineness of transactions while making additions or disallowances under the Income-Tax Act.