2018 (10) TMI 729 - AT - Income Tax

Additions towards outstanding liabilities - treating the liabilities as bogus - one party did not appear against notice issued u/s 131 - however written statement was submitted before AO - Held that - Creditors had only stated before the ld AO that they are all small time labourers and workers and do not have that much income left with them. We find that they had deposed correctly that in as much as their income component in the entire services rendered to the assessee would be miniscule but the total transactions carried out through them for and on behalf of the assessee would be more. The assessee had engaged them for rendering of specific services . The assessee cannot be expected to know how those parties render the services i.e either on their own or through outsourced agencies. For the services rendered by those creditors, the assessee would make total payments to them. - Those parties in turn would pay the respective dues to the outsourced agencies such as truck owners and lorry drivers. By this process, the amounts that would be left with those creditors would only be commission income which would be miniscule. The entire modus operandi of these transactions were explained by those parties in the statement given on oath before the ld AO. The fact of these creditors rendering services to the assessee is not denied or disputed by those parties or by the revenue. All these parties except one party had appeared before the ld AO with their respective identity proofs and statement recorded on oath from them. The fact of reimbursement of expenses made by the assessee is not disputed by the revenue before us and hence the corresponding liability thereon cannot be disputed. None of those creditors had denied having rendered services to the assessee. - Additions deleted. - Decided in favor of assessee.

Issues Involved:

1. Addition towards liabilities standing in the names of M. Tewari, S. Tewari, Md. Islam, and inspection charges treating the liabilities as bogus.
2. Treatment of interest income on fixed deposits as income from other sources.

Issue-wise Detailed Analysis:

1. Addition towards liabilities standing in the names of M. Tewari, S. Tewari, Md. Islam, and inspection charges treating the liabilities as bogus

The first issue revolves around the legitimacy of liabilities recorded in the names of M. Tewari, S. Tewari, Md. Islam, and inspection charges. The assessee, a partnership firm in the customs clearing and forwarding agency business, had shown a liability for expenses amounting to ?4,16,53,151/- in its balance sheet. The Assessing Officer (AO) questioned the genuineness of these liabilities, especially since the assessee could only provide evidence for a portion of the outstanding liabilities.

Upon further verification, the AO issued notices under section 133(6) of the Income Tax Act to the creditors. While some creditors responded, others did not, leading the AO to treat the liabilities as bogus. Specifically, the AO added ?46,06,610/- as bogus liabilities to the total income of the assessee.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision for certain creditors, namely M. Tewari, S. Tewari, and Md. Islam, due to their inability to confirm the transactions or non-appearance. However, the CIT(A) accepted the transactions for other creditors who appeared and confirmed their dealings with the assessee.

The Tribunal observed that the creditors did not deny having transactions with the assessee and confirmed their services rendered. It was noted that these creditors were small-time laborers and workers, unfamiliar with income tax procedures, and had handed over the notices to the assessee's partner. The Tribunal held that the creditors' statements on oath confirmed the transactions and that the liabilities could not be treated as bogus. Consequently, the Tribunal allowed the appeal in favor of the assessee for the liabilities related to M. Tewari, S. Tewari, and Md. Islam but dismissed the appeal regarding the inspection charges of ?7,02,500/- as it was not pressed by the assessee.

2. Treatment of interest income on fixed deposits as income from other sources

The second issue concerns the classification of interest income from fixed deposits. The assessee reported an interest income of ?12,83,327/- as business income. However, the AO reclassified this as income from other sources, leading to the disallowance of remuneration paid to partners under section 40(b) of the Act due to the absence of positive business income.

The CIT(A) upheld the AO's decision, stating that the assessee failed to demonstrate any business connection with the interest income. The assessee argued that this interest income had been consistently treated as business income in prior years, including the assessment year 2014-15, where the assessment was framed under section 143(3).

The Tribunal noted that there was no discussion in the assessment order for the assessment year 2014-15 regarding the taxability of interest income. It emphasized the need for a clear finding on the purpose of the investments and their business connection. Therefore, the Tribunal remanded the issue back to the AO for de novo adjudication to determine the correct classification of the interest income and the consequent allowability of partner remuneration under section 40(b).

Conclusion:

The Tribunal partly allowed the appeal for statistical purposes, remanding the issue of interest income classification back to the AO and dismissing the addition towards inspection charges as not pressed. The liabilities related to M. Tewari, S. Tewari, and Md. Islam were held to be genuine, overturning the AO's and CIT(A)'s findings.

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