2021 (2) TMI 1091 - AT - Income Tax

Addition towards sundry creditors u/s.41(1) / 68 - addition of credit balances in appellant s books - HELD THAT - Liability shown in the books of accounts under the head sundry creditors were not a trade liability for which allowances or deduction was claimed in the earlier financial years. Further, the assessee has filed necessary evidences to prove that said credits were received in the financial year 2006- 07 2007-08, out of family partition and the same were treated as sundry creditors because full effect was not given to family partition on account of certain differences among family members. AO as well as the CIT(A) were erred in invoking provisions of section 41(1) to bring to tax sundry creditors shown in the names of S/Shri ARKA. KaruthaPandian, K.A. Sekar and K. Sivasundarapappa, sundry payable amountingAO was erred in making additions towards credits shown in the books of accounts u/s.41(1) / 68 - CIT(A) without appreciating facts, has simply confirmed additions made by the AO. Hence, we reverse the findings of the CIT(A) and direct the AO to delete additions made towards sundry creditors u/s.41(1) 68 of the Act. As regards, other credits in the name of Late ARK Arunachala Nadar, Smt. Swarnalatha and Shri Dhanabalan amounting to ₹ 28,79,600/-, all these credits were carried forward from financial year 2007-08 and such credits were either a loan or advance but not trade credits for which deduction was claimed in the earlier financial year. Therefore, these credits cannot be brought to tax u/s.41(1) of the Act. Similarly, a sum of ₹ 10,00,000/- shown in the name of Shri Kumar was a land advance received in the financial year 2005-06 and the same has been carried forward since 2005-06. Any loan or advance including land advance cannot be brought to tax u/s.41(1) of the Act, because said loan or advance was never claimed as deduction of an expenditure or allowance or trade loss in the earlier financial years. Therefore, we are of the considered view that the AO as well as the CIT(A) were erred in invoking provisions of section 41(1) of the Act, to bring into tax sundry creditors shown in the name of above persons. Coming to invocation of section 68 AO has simultaneously invoked provisions of section 68 in addition to section 41(1), to bring into tax, said credit for the impugned assessment years, but fact remains is that all these credits were brought forward from earlier financial years for which necessary evidences has been placed on record. Credits cannot be brought to tax as unexplained cash credits u/s.68 of the Act, because in order to bring any credits within the ambit of provisions of section 68 of the Act, said credits should be found in the books of accounts of the assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof or the explanation offered by the assessee in the hands of the AO is not satisfactory. In this case, none of the credits were received during the current financial year and further, the assessee has offered explanation about source and nature of credits and further proved the identity / creditworthiness and genuineness of transactions. Therefore, these credits cannot be brought to tax even under section 68. AO was erred in making additions towards credits shown in the books of accounts u/s.41(1) / 68 - Decided in favour of assessee.

Issues Involved:
1. Addition of credit balances under section 41(1) of the Income Tax Act.
2. Addition of alleged credits under section 68 of the Income Tax Act.
3. Treatment of amounts due to family members from the partition of properties.
4. Ignoring the partition deed and related submissions.
5. Addition of loans and advances received by the appellant.

Detailed Analysis:

1. Addition of Credit Balances under Section 41(1) of the Income Tax Act:
The assessee contested the addition of credit balances as cessation of liability under section 41(1), arguing that no allowance or deduction had been made in earlier years for these liabilities. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the addition, stating that the assessee failed to explain the nature of sundry credits, which are typically trade credits. The Tribunal noted that section 41(1) applies only if there was an allowance or deduction in earlier years, which was not the case here. The credits were related to family partition and not trade liabilities. The Tribunal cited the Supreme Court's decision in CIT v. Mahindra and Mahindra Ltd., emphasizing that section 41(1) requires an allowance or deduction in earlier years, which was absent in this case. Therefore, the Tribunal ruled that the addition under section 41(1) was erroneous.

2. Addition of Alleged Credits under Section 68 of the Income Tax Act:
The Assessing Officer (AO) invoked section 68, treating the credits as unexplained cash credits. The CIT(A) supported this, noting the lack of evidence for the credits' genuineness. The Tribunal observed that the credits were brought forward from earlier years (financial years 2005-06, 2006-07, and 2007-08) and not received during the current financial year. Section 68 applies to credits found in the books of the current year, which was not the case here. The Tribunal referred to the Delhi High Court's decision in CIT v. Usha Stud Agricultural Farms Ltd., which held that credits not pertaining to the current year cannot be added under section 68. Therefore, the Tribunal concluded that the addition under section 68 was incorrect.

3. Treatment of Amounts Due to Family Members from the Partition of Properties:
The assessee argued that the amounts due to family members originated from the partition of properties and should not be treated as credit balances. The Tribunal agreed, noting that the credits were related to family partition and not trade credits. The amounts were shown under 'sundry creditors' due to ongoing disputes in the partition process. The Tribunal found that these amounts could not be taxed under section 41(1) or section 68.

4. Ignoring the Partition Deed and Related Submissions:
The assessee claimed that the AO and CIT(A) ignored the partition deed and related submissions. The Tribunal found that the partition deed and related evidence were crucial in explaining the nature of the credits. The Tribunal noted that the credits were not trade liabilities but related to family partition, thus supporting the assessee's argument.

5. Addition of Loans and Advances Received by the Appellant:
The CIT(A) upheld the addition of ?13,49,600 related to loans and advances. The Tribunal found that these were old credits, not received during the current financial year. The Tribunal reiterated that section 68 could not be applied to credits from earlier years. Therefore, the Tribunal ruled that the addition of loans and advances was incorrect.

Conclusion:
The Tribunal concluded that the additions under sections 41(1) and 68 were erroneous, as the credits were not trade liabilities and were brought forward from earlier years. The Tribunal reversed the CIT(A)'s findings and directed the AO to delete the additions. The appeal filed by the assessee was allowed.

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