2020 (11) TMI 816 - AT - Income Tax

Addition u/s 68 - unverified/non-existent /bogus sundry creditors in respect of six creditors on the ground that the assessee could not substantiate the identity and credit worthiness of the creditors and the genuineness of the transaction - HELD THAT - Payments have been made by the assessee to the creditors in subsequent years and there is nothing on record to show that such payments made to the above parties have come back to the assessee in some form or the other. Books of account of the assessee has not been rejected and the addition u/s 68 of the Act has been made in respect of six creditors from whom the assessee has purchased goods, but, no payments have been made to those parties during the impugned assessment year and the assessee was unable to produce the above six parties before the AO during remand proceedings although three of them were produced before the AO during assessment proceedings. Under these circumstances, it is to be seen as to whether addition can be made of the whole of the amount or profit embedded in these purchases can be added to the total income of the assessee. In the instant case, the sales made by the assessee has been accepted and the books of account have not been rejected and the assessee has made the payments to the sundry creditors in the subsequent years and there is nothing on record to suggest that the money so paid has come back to the assessee directly or indirectly in any form, therefore, making addition of the entire amount payable to the six sundry creditors in the instant case in our opinion is highly unjustified. Assessee also cannot get scot free by not producing the sundry creditors and making purchases from parties who are not maintaining proper records or who have made adverse statements and, therefore, the assessee cannot be equated with another assessee who is maintaining records meticulously and not making purchase from grey market. Since the assessee in the instant case is showing GP rate of less than 4%, therefore, considering the totality of the facts of the case, we are of the considered opinion that adoption of GP rate of 16% on such unsubstantiated purchases from the six creditors will meet the ends of justice. We, therefore, direct the AO to adopt GP rate of 16% on such purchases of ₹ 3,05,34,283/- from the six creditors which comes to ₹ 48,85,485/- as against the addition of the entire amount payable to the six parties u/s 68 - we direct the AO to restrict the addition - Decided partly in favour of assessee.

Issues Involved:

1. Large increase in sundry creditors with respect to turnover.
2. Verification and confirmation of sundry creditors.
3. Identity, creditworthiness, and genuineness of transactions with sundry creditors.
4. Application of Section 68 of the Income Tax Act.
5. Treatment of unsubstantiated purchases and corresponding sales.

Detailed Analysis:

1. Large Increase in Sundry Creditors with Respect to Turnover:

The case was selected for limited scrutiny due to a significant increase in sundry creditors compared to the turnover. The assessee declared a taxable income of ?47,10,000 and showed total sales of ?5,56,39,544 and purchases of ?5,39,91,884, with sundry creditors amounting to ?6,71,74,832.

2. Verification and Confirmation of Sundry Creditors:

The Assessing Officer (AO) requested detailed information about the sundry creditors, including their PAN and latest addresses. The assessee provided names and amounts but failed to furnish complete details. The AO issued summons under Section 131 to the creditors for personal attendance and submission of relevant documents. Field enquiries revealed that some creditors denied issuing bills to the assessee, and others were not found at the specified addresses.

3. Identity, Creditworthiness, and Genuineness of Transactions with Sundry Creditors:

The AO observed that the confirmations filed lacked supporting documents, such as PAN, identity proof, and bank statements. The AO concluded that the identity, creditworthiness, and genuineness of transactions with six creditors could not be established. Consequently, the AO proposed to add back the credit balance of ?3,20,92,833 as income under Section 68.

4. Application of Section 68 of the Income Tax Act:

The AO made an addition of ?3,05,34,283 under Section 68, citing unverified/non-existent/bogus creditors. The AO's decision was based on the failure to prove the identity, genuineness of transactions, and creditworthiness of the creditors. The CIT(A) upheld this addition, emphasizing that the creditors failed the tests of creditworthiness and genuineness, as they did not file income tax returns or provide PAN in some cases.

5. Treatment of Unsubstantiated Purchases and Corresponding Sales:

The assessee argued that the sales were genuine and accepted by the AO, and the books of account were not rejected. The assessee provided quantitative details of purchases and sales, and payments to creditors were made in subsequent years. The Tribunal noted that the sales were accepted, and the books of account were not rejected. The Tribunal considered various judicial precedents and concluded that the entire amount of purchases could not be added as bogus. Instead, the profit element embedded in such transactions should be considered.

Conclusion:

The Tribunal found that the addition of the entire amount payable to the six creditors was unjustified, given that the sales were accepted, and the assessee maintained proper records. The Tribunal directed the AO to adopt a Gross Profit (GP) rate of 16% on the unsubstantiated purchases from the six creditors, amounting to ?48,85,485, instead of the entire addition of ?3,05,34,283. The appeal was partly allowed, restricting the addition to ?48,85,485.

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