2021 (11) TMI 256 - AT - Income Tax

Ad-hoc disallowance being 25% of certain outstanding creditors - HELD THAT - It was not supposed to maintain the books of accounts and other details. If it was not having those details, how these sundry creditors appearing in the books of accounts of the assessee become bogus? It is an irregularity, if any, at the end of the manpower supplier. The existence of the party is not in dispute. Where is the necessity to take work in this year? It can be an outstanding sundry creditor from the earlier years out of which partly paid in this year. We failed to appreciate the logic given by the learned First Appellate Authority. One of the observations made by learned CIT(A) is that a credit entry of ₹ 3,00,000/- was shown in the bank statement of M/s. Globe Trade followed by transferring the same amount back to the assessee. But this aspect has not been further elaborated by reproducing the bank statement and why the learned CIT(A) has not issued a notice for enhancement of disallowance. Because, in that case, the whole amount should be considered as bogus and not 25% of that. To our mind, both the authorities have not appreciated the facts in right perspective and, therefore, no disallowance is called for. We, therefore, delete the disallowance and allow the appeal of the assessee.

Summary

Issues:
Ad-hoc disallowance of outstanding creditors

Detailed Analysis:

Issue 1: Ad-hoc disallowance of outstanding creditors
The assessee appealed against the order of the CIT(A) confirming the ad-hoc disallowance of ?11,62,648, being 25% of certain outstanding creditors for the Assessment Year 2015-16. The Assessing Officer disallowed 25% of the total sundry creditors amounting to ?46,50,593, relying on a Tribunal order. The CIT(A) examined the cases of three specific creditors individually. One of the creditors, Globe Trade, had an opening debit balance of ?13,84,952, a closing debit balance of ?10,84,952, and a TDS deduction of ?9,080, raising questions about the genuineness of the transaction. The CIT(A) required Globe Trade to submit various certificates and details, but Globe Trade had filed its income return under Section 44AD, showing income at 8% of total turnover, not requiring detailed accounts maintenance. The CIT(A) also noted a credit entry of ?3,00,000 in Globe Trade's bank statement, followed by transferring the same amount back to the assessee, raising doubts about the transaction's authenticity.

Issue 1 Analysis Continued:
The Tribunal found that both the Revenue Authorities failed to appreciate the true facts and the correct application of the law. The Assessing Officer's reliance on a different case for the disallowance was deemed misplaced. The Tribunal clarified that a sundry creditor can be either true or false, and ad-hoc disallowance at 25% without further investigation is inappropriate. If a creditor like Globe Trade had worked for the assessee and had an outstanding balance, the 25% disallowance cannot be termed as non-genuine. The Tribunal highlighted the need for a firm conclusion based on thorough investigation before making such disallowances. The Tribunal concluded that both authorities did not assess the facts correctly, leading to the deletion of the disallowance and allowing the appeal of the assessee.

Issue 1 Conclusion:
The Tribunal overturned the ad-hoc disallowance of outstanding creditors, emphasizing the importance of thorough investigation and proper assessment before making such disallowances. The judgment highlighted the need for a clear understanding of the transactions and the genuineness of outstanding balances to avoid arbitrary disallowances.