2019 (9) TMI 1232 - AT - Income Tax

Addition on account of outstanding balance of sundry creditors - whether the impugned sundry creditors for the purchases and the expenses are liable to be taxed under section 41 (1) of the Act or 68 ? - HELD THAT - Regarding the applicability of the provisions of section 41(1) of the Act, we note that it is applicable when the assessee has claimed deduction in respect of any loss, expenditure or trading liability and subsequently such liability ceases to exist. Indeed, the assessee in the case on hand has claimed the deduction for the purchases and the expenses incurred by it. But the same has not ceased to exist in the books of accounts. Therefore we are of the view that the provisions of section 41(1) of the Act cannot be applied to the case on hand. As per scheme, the assessee would enroll a member, who would deposit a sum of ₹ 500 with the company. If such member in turn enrolls four members within a period of 12 month, would be entitled to get a black and white TV set manufactured by the assessee for free of cost. By this scheme assessee has collected huge sum of 7.87 cr. treated the same as outstanding trade liability under the head customer advances. In the subsequent year assessee used the fund for investment purpose and earned interest income on the same. The fact of the above case is completely different from the case under observation, in current case sundry creditors are against the purchases and expenses incurred in earlier year and as well as in year under consideration. However in case of Gujtorn Electronics 2017 (7) TMI 574 - GUJARAT HIGH COURT as per scheme it was very clear that the scheme was for 12 months and after that right of the member will be seized. Therefore in our opinion above case submitted by learned DR is not applicable to the case under observation. Whether the impugned sundry creditors can be treated as unsecured cash credit within the meaning of the provisions of section 68 ? - HELD THAT - Provisions of section 68 do not apply to the sundry creditors for the purchases and expenses. It is because such sundry creditors are represented against the purchases and the expenses. In case the AO was to disturb the sundry creditors, then he cannot do so without disturbing the corresponding purchases or expenses. Therefore in our considered view the provisions of section 68 are not applicable with respect to the sundry creditors for the purchases and the expenses. In addition to the above, we also note that the impugned sundry creditors for the purchases of ₹ 98,26,896/- are representing the opening balances which were carried forward from the earlier year except for 1 for the amount of ₹ 5,72,360/-. Thus it is inferred that the account of the assessee was not credited in the year under consideration. If At all the addition needs to be made under section 68 of the Act, then it can be made in the preceding previous year in which such credit was found in the books of accounts. Disallowance being 1/5 of the other expenses - HELD THAT - There is no provision under the Act to make the disallowance on ad-hoc basis and without pointing out any specific defect in the claim of the assessee. Therefore, we disagree with the finding of the learned CIT (A). However, at the same time we note that the assessee has not discharged his onus by furnishing the supporting vouchers and the bills in respect of such expenses. Therefore, we are not inclined to delete the addition made by the learned CIT (A) in its entirety. To our mind, the justice will be served to both the assessee and the revenue, if the disallowance is restricted to the tune of 10% of all the other expenses except depreciation. Accordingly we direct the AO to restrict the disallowance of all the expenses except depreciation to the tune of 10% claimed in the profit and loss account under the head other expenses. Hence the ground of appeal of the assessee is partly allowed. Addition on account of interest income - HELD THAT - Copy of form 26AS was not supplied to the assessee by the AO on the basis of which the addition was made to the total income on account of interest income. However, we are of the view that the assessee should have been supplied the information based on which the addition was made by the AO. Thus in the interest of justice and fair play we are setting aside the issue to the file of the AO for fresh adjudication as per the provisions of law and after giving the due opportunity to the assessee. Hence the ground of appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Addition of outstanding balances of sundry creditors.
2. Disallowance of 1/5 of expenses including depreciation allowance.
3. Addition of interest income.

Issue-wise Detailed Analysis:

1. Addition of Outstanding Balances of Sundry Creditors:

The first issue raised by the assessee was the confirmation of the addition of ?1,09,29,037/- on account of outstanding balances of sundry creditors. The facts revealed that the assessee, engaged in the Cotton business, failed to provide necessary details for current liabilities amounting to ?1,09,29,037/- during the assessment proceedings. As a result, the AO treated the liability as unexplained and added it to the total income.

The assessee contended before the CIT(A) that the amount was treated as cessation of trading liabilities initially but was later treated as unexplained cash credit under section 68 of the Act. The assessee provided a breakup of the liabilities and argued that the provisions of section 68 were inapplicable since the sundry creditors were carried forward from the previous year.

The CIT(A) confirmed the AO's order, stating that the assessee failed to satisfactorily explain the sundry creditors, as only ledger copies without postal addresses or confirmations were provided. The Tribunal observed that the provisions of section 41(1) of the Act were inapplicable as the liabilities had not ceased to exist. Additionally, the Tribunal found that the provisions of section 68 were also inapplicable as the sundry creditors represented purchases and expenses, and were carried forward from the previous year. Consequently, the Tribunal directed the AO to delete the addition, allowing the assessee's appeal on this ground.

2. Disallowance of 1/5 of Expenses Including Depreciation Allowance:

The second issue involved the disallowance of ?14,25,298/- being 1/5 of the total expenses. The AO disallowed the entire expenses amounting to ?71,26,489/- due to the assessee's failure to justify their genuineness. The CIT(A) partially agreed with the AO, confirming the disallowance of 1/5 of the expenses, as not all expenses were verifiable.

The Tribunal noted that depreciation, amounting to ?23,32,170/-, is an allowance and not an expenditure, and thus should not be disallowed. The Tribunal also observed that similar expenses were allowed in the preceding year without any disallowance. It emphasized that disallowance on an ad-hoc basis without pointing out specific defects is not permissible under the Act. Consequently, the Tribunal directed the AO to restrict the disallowance to 10% of all other expenses except depreciation, partly allowing the assessee's appeal on this ground.

3. Addition of Interest Income:

The third issue pertained to the addition of ?1,83,166/- on account of interest income. The AO added ?2,33,235/- based on AIR information, claiming the assessee did not disclose this income. The assessee contended that it had disclosed ?50,041/- as interest income from UGVCL and had not earned any other interest income.

The CIT(A) directed the AO to verify the assessee's claim regarding the ?50,041/- interest income and deleted this amount from the addition. The Tribunal noted that the AO did not provide the assessee with the form 26AS, which was the basis for the addition. It directed the AO to supply this information to the assessee and re-adjudicate the issue, allowing the assessee's appeal for statistical purposes.

Conclusion:

In summary, the Tribunal allowed the assessee's appeal regarding the addition of sundry creditors and partially allowed the appeal concerning the disallowance of expenses. It remanded the issue of interest income back to the AO for fresh adjudication. The appeal was thus partly allowed for statistical purposes.