2019 (6) TMI 46 - AT - Income Tax

Addition u/s. 41 (1) or u/s. 68 - addition of sundry creditors and unsecured loan - difference between the sundry creditors as on 31.03.2013 and 31.03.2012 in respect of 4 creditors as unexplained - notices u/s. 133 (6) returned unserved - HELD THAT - Observation of the Assessing Officer in the assessment order that all the letters were returned back is incorrect. Since in the instant case the purchases are not doubted and the assessee has made payments to the creditors in the subsequent years through banking channels and the purchases made from some of the above parties in the subsequent years were not doubted and the notices u/s. 133 (6) issued to the 3 parties were never returned back meaning thereby these were served on the parties, therefore, addition in our opinion on account of difference in the opening and closing balance of sundry creditors in absence of non production of the creditors is not justified. It is also not understood as to under which provision the addition has been made i.e. either u/s. 41 (1) and section 68. Since in the instant case it is not understood as to whether the addition has been made u/s. 41(1) or 68 and since the Assessing Officer has accepted purchases as genuine and the amount outstanding in the name of sundry creditors have been paid through banking channels in subsequent years and purchases made from the said parties in subsequent years has been accepted by the revenue without any doubt and since the notices issued to the three parties were never returned back as per the letter addressed by the Assessing Officer to the assessee, therefore, merely because the said creditors were not produced before the Assessing Officer for his examination, in our opinion, cannot be a ground for making the disallowance. - Decided in favour of assessee Disallowance of 25% of the various expenses claimed in the P L account (except bank interest and bank charges) - assessee did not furnish the bills and vouchers - CIT(A) restricted the same to 10% of the expenses - HELD THAT - While disallowance of expense on adhoc basis is justified on account of non submissions of bills and vouchers, however, considering the totality of the facts of the case disallowance of 10% of the expenses sustained by the CIT(A) appears to be on the higher side. We, therefore, restrict such disallowance to 7.5% of expenses. This ground raised by the assessee is partly allowed.

Summary

Issues Involved:
1. Addition on account of unexplained creditors.
2. Disallowance of expenses due to lack of supporting documents.
3. Non-admission of additional evidence by CIT(A).
4. Alleged violation of principles of natural justice.

Issue-wise Detailed Analysis:

1. Addition on Account of Unexplained Creditors:
The Assessing Officer (AO) observed creditors amounting to ?2,01,85,243/- and unsecured loans of ?67 lakh in the assessee's balance sheet. The AO issued notices under section 133(6) to verify the creditors, which were returned unserved, leading to the inference that the creditors were not genuine. Consequently, an addition of ?1,50,26,811/- was made. The CIT(A) upheld this addition, noting the assessee's failure to provide ledger accounts or produce creditors for verification. However, the Tribunal found that the AO did not doubt the purchases or sales and that payments to creditors were made through banking channels in subsequent years. It was also noted that not all notices were returned unserved. The Tribunal concluded that the addition was not justified, especially since it was unclear under which section (41(1) or 68) the addition was made. The Tribunal directed the AO to delete the addition.

2. Disallowance of Expenses:
The AO disallowed 25% of the expenses claimed in the Profit & Loss account, amounting to ?6,80,218/-, due to the assessee's failure to produce supporting documents, citing a fire that destroyed records. The CIT(A) reduced the disallowance to 10%, sustaining ?2,72,087/-. The Tribunal found that while an ad-hoc disallowance was justified due to the lack of documentation, 10% was on the higher side. The Tribunal reduced the disallowance to 7.5% of the expenses.

3. Non-Admission of Additional Evidence by CIT(A):
The assessee sought to file additional evidence before the CIT(A), including audited balance sheets, details of payments to creditors, bank statements, and sales tax returns. The CIT(A) rejected these under Rule 46A of the IT Rules, stating they could not be admitted as additional evidence. The Tribunal did not specifically address this issue in detail but focused on the merits of the additions and disallowances.

4. Alleged Violation of Principles of Natural Justice:
The assessee contended that the CIT(A) passed the order without giving a reasonable opportunity to be heard, violating the principles of natural justice. The Tribunal's detailed analysis and directions for deletion and reduction of additions/disallowances implicitly addressed the fairness of the proceedings.

Conclusion:
The Tribunal partly allowed the appeal, directing the deletion of the addition on account of unexplained creditors and reducing the disallowance of expenses to 7.5%. The judgment emphasized the importance of substantiating additions with clear evidence and ensuring fair opportunity in tax proceedings.