2021 (5) TMI 250 - AT - Income Tax

Addition u/s 68 - non maintenance of books of accounts - AO has given notice u/s. 133(6) of the Act to the sundry creditors and advances from customers and when none of these could be served the assessee came with this explanation that there was bogus accounting by the accountant of the assessee - HELD THAT - As fixed deposits were made by the assessee over a period of time during the AYs 2012-13 2013-14 2014-15 2015-16. This is evident from the record. It is also recorded by the AO that these sundry creditors and advances from customers appearing in the balance sheet are bogus and that no such creditors or customers exist. If on the asset side of the balance sheet the fixed deposits belonging to the earlier assessment years are taken as the opening balance as these are brought forward from earlier year then in the liability side of the balance sheet the amount received from the sundry creditors and advances from customers should be opening balances or deleted. It is clear from the balance sheet that the figure of sundry creditors and advances from customers is only balance sheet figure to counter the asset in the form of fixed deposit brought in as an asset in the balance sheet this year. The figure of sundry creditors and advances from customers are not of any cash or credit amount received by the assessee. There was no actual credit of cash or otherwise received by the assessee. No entries are made in the books of account as admittedly no books of account are maintained. Thus based on the real income thereon no addition can be made based on these false or bogus figures. No addition can be made u/s. 68 of the Act unless the assessee maintains books of account as held by the Hon ble Bombay High Court in the case of CIT vs. Bhaichand N. Gandhi 1982 (2) TMI 28 - BOMBAY HIGH COURT and in the case of CIT Vs. Ms. Mayawati 2011 (8) TMI 12 - DELHI HIGH COURT An addition u/s. 68 of the Act was made on bogus figures which are not true and when no such entries were made in the books of account. In view of the above discussion we delete the addition made u/s. 68 of the Act on facts of this case. This ground of the assessee is allowed. Addition in this year can be made u/s. 69 - We restore the matter to the file of the AO for fresh adjudication in accordance with law. The AO shall consider by the investments in the fixed deposits and interest thereon were brought to tax in the earlier assessment years i.e. AYs 2012-13 2013-14 2014-15 2015-16 or not. The AO as per law is permitted to re-open the assessment of those earlier years on bringing them in case if any to tax.

Issues Involved:
1. Validity of addition under Section 68 of the Income Tax Act, 1961.
2. Validity of addition under Section 69 of the Income Tax Act, 1961.
3. Consideration of bogus entries in the balance sheet.
4. Taxability based on real income theory.
5. Role of ignorance and errors by the accountant.
6. Compliance with CBDT Circulars and directives.
7. Penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961.

Detailed Analysis:

1. Validity of addition under Section 68 of the Income Tax Act, 1961:
The Assessing Officer (AO) added ?2,19,08,976/- to the total income of the assessee under Section 68 of the Act, citing that the sundry creditors and advances from customers were bogus. The assessee argued that these figures were erroneously entered by the accountant to balance the fixed deposits brought into the balance sheet. The Tribunal found that no actual cash or credit was received by the assessee, and no books of account were maintained. Citing the Supreme Court's ruling in Kedarnath Jute Mfg. Co. Ltd. vs. CIT, it was held that taxability should depend on the provisions of law and not on the entries in the books of account. Hence, the addition under Section 68 was deleted.

2. Validity of addition under Section 69 of the Income Tax Act, 1961:
The Tribunal remanded the issue of addition under Section 69 to the AO for fresh adjudication. The AO was directed to verify if the investments in fixed deposits and the interest thereon were taxed in earlier assessment years (AYs 2012-13, 2013-14, 2014-15, and 2015-16). The AO is permitted to reopen assessments for those years if necessary.

3. Consideration of bogus entries in the balance sheet:
The Tribunal acknowledged that the bogus entries of sundry creditors and advances from customers were made to counterbalance the fixed deposits brought into the balance sheet. It was concluded that these entries did not represent actual transactions and were merely to balance the sheet.

4. Taxability based on real income theory:
The Tribunal emphasized the real income theory, stating that no addition can be made based on false or bogus figures when there is no actual receipt of money. The addition based on non-existent sundry creditors and advances from customers was thus invalidated.

5. Role of ignorance and errors by the accountant:
The assessee, an octogenarian, argued that the errors were due to the accountant's ignorance and not deliberate. The Tribunal considered this argument and noted the CBDT Circular No. 14(XL-35) dated 11.4.1955, which states that officers should not take advantage of an assessee's ignorance. The Tribunal accepted that the errors were not intentional and should not penalize the assessee for the accountant's mistakes.

6. Compliance with CBDT Circulars and directives:
The Tribunal referred to the CBDT Circular No. 14(XL-35) dated 11.4.1955, which mandates that officers assist taxpayers in claiming reliefs and not take advantage of their ignorance. This directive was considered in deciding not to penalize the assessee for the accountant's errors.

7. Penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961:
The AO had initiated penalty proceedings for furnishing inaccurate particulars of income and concealment of income. However, given the Tribunal's findings that the entries were bogus and not actual transactions, the basis for penalty proceedings was undermined.

Conclusion:
The Tribunal allowed the appeal in part, deleting the addition under Section 68 based on the bogus entries and remanding the issue under Section 69 to the AO for verification of fixed deposits and interest taxation in earlier years. The Tribunal emphasized compliance with CBDT directives and the real income theory, protecting the assessee from penalties due to the accountant's errors.

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