2018 (11) TMI 644 - AT - Income Tax

Addition of unexplained credit entries recorded in the impounded papers - Held that - As perused the impounded documents appearing at BI-1 to BI-3 which pertains to transactions entered into with the farmers with whom the transactions did not materialize and amount was refunded by the by the assessee. In these impounded documents there are credits and debit entries. However this fact is not disputed that the A.O has merely made the addition if the unexplained credit entries without giving any set off of unexplained debit entries appearing in these documents. Complete details of such debit and credit entries were placed before the first appellate authority and they were duly incorporated in the appellate orders of CIT(A). We find that the peak credit is shown at ₹ 2,90,346/-. This figure of peak credit has not been controverted by the revenue authorities. In the case of Tirupati Construction Company 2014 (11) TMI 806 - GUJARAT HIGH COURT has upheld the decision of I.T.A.T Ahmedabad Bench holding that only peak of debit and credit entries of the seized papers/diary could be assessed as undisclosed income in the hands of the assessee, and there was no justification for adding the entire receipt side of the seized papers - Thus both the lower authorities erred in confirming the addition of ₹ 6,02,895/- being the total of unexplained credit amount appearing in the impounded documents and set off of debit entries appearing in the very same documents should have been given to the assessee. - Decided in favour of assessee Addition made u/s 41(1) - liability outstanding for more than 3 years - cessation of liability - Held that - A.O has merely made addition u/s 41(1) being the creditors pending for payments more than 3 years without providing on record any evidence to prove that the alleged creditor M/s. Kartik Traders is not genuine. In case the information was called for by the revenue authorities from M/s. Kartik Traders and it refused to have any such outstanding liability then would have been the merit for the addition made by AO. However in the instant case the genuineness is not challenged by M/s. Kartik Traders as the credit balance of alleged sundry creditors appears in audited balance sheet. During the financial year 2012-13 the alleged amount has been paid by the assessee as on 31.01.2001 and the outstanding balance is Nil. No merit in the addition confirmed by the first appellate authority u/s 41(1) - decided in favour of assessee.

Summary

Issues Involved:
1. Sustaining the addition of ?6,02,895 made by the Assessing Officer (AO) based on entries in impounded papers.
2. Sustaining the addition of ?2,72,389 under Section 41(1) of the Income Tax Act for sundry creditors outstanding for more than three years.

Detailed Analysis:

Issue 1: Addition of ?6,02,895 based on impounded papers
The assessee argued that the lower authorities failed to consider debit entries along with credit entries in the impounded documents and that only the peak credit should be added. The assessee explained that farmers often give token money for potential transactions, which, if not materialized, are refunded without recording in books. The AO added the unmatched credit entries as income from other sources, which the assessee contested, stating all entries relate to business transactions.

The Tribunal observed that the AO did not set off unexplained debit entries against credit entries in the impounded documents. The Tribunal noted that the peak credit, calculated at ?2,90,346, was not contested by the revenue authorities. Citing the Gujarat High Court decision in Tirupati Construction Company, the Tribunal held that only the peak credit should be assessed as undisclosed income, not the entire receipt side. Thus, the Tribunal partly allowed the assessee's appeal, confirming the addition at ?2,90,346 instead of ?6,02,895.

Issue 2: Addition of ?2,72,389 under Section 41(1)
The AO added ?2,72,389 for sundry creditors outstanding for more than three years, treating it as cessation of liability. The assessee argued that the liability to Kartik Traders still existed and no benefit was received regarding this liability. The Tribunal noted that the AO did not provide evidence that the liability ceased or that the creditor was not genuine. The Tribunal referenced the Supreme Court decision in Bombay Dyeing & Mfg Co Ltd, which held that the expiry of the limitation period does not extinguish the debt but only makes it unenforceable in court.

The Tribunal also cited the Indore Bench decision in Shapers Industries Limited, which held that without evidence of cessation or non-genuineness of the creditor, no addition under Section 41(1) is justified. The Tribunal found that the alleged amount was paid in the subsequent financial year, confirming the liability's genuineness. Therefore, the Tribunal deleted the addition of ?2,72,389, allowing the assessee's appeal on this ground.

Conclusion:
The Tribunal partly allowed the assessee's appeal on the first issue, reducing the addition to ?2,90,346, and fully allowed the appeal on the second issue, deleting the addition of ?2,72,389. The order was pronounced in the open court on 13.11.2018.