2022 (3) TMI 1234 - AT - Income Tax

Unexplained credit u/s 68 - notice u/s. 133(6) was issued to various sundry creditors to ascertain their creditworthiness and most of the creditors have not replied with satisfactory explanation except few - HELD THAT - AO has not been able to specify the deficiency and could not bring any material on record to substantiate his findings in light of the fact that all the necessary documents in respect of purchase creditors were furnished by the appellant during the course of assessment proceedings. Considering the facts mentioned above the action of the AO appears to be arbitrary and is found to be not supported with cogent reasons and material. In view of the above addition cannot be upheld and the same is deleted. Accordingly the above grounds of appeal of appeal are allowed.

Issues:
- Addition of unexplained credit under section 68 of the Income Tax Act based on sundry creditors.
- Failure to provide opportunity of being heard before making the addition.
- Lack of specificity in the assessment order regarding the creditors in question.
- Appellant's submission of necessary documents and reconciliation of accounts.
- Credibility of the sundry creditors and their income as per their ITRs.

Analysis:
1. Addition of Unexplained Credit under Section 68:
The appeal was filed by the Revenue against the order of the CIT(A) regarding the addition of ?3,68,85,701 under section 68 of the Income Tax Act. The AO had made this addition on account of unexplained credit based on sundry creditors. The AO issued notices to ascertain the creditworthiness of the creditors, but many did not respond satisfactorily. The appellant submitted relevant documents, including confirmation of accounts and ITRs of certain creditors, to establish their lending capacity. The AO, however, proceeded with the addition without providing an opportunity of being heard to the appellant.

2. Failure to Provide Opportunity of Being Heard:
The AO did not provide the appellant with an opportunity to present their case before making the addition under section 68. This lack of procedural fairness raised concerns about the validity of the addition. The appellant had submitted various documents and replies during the assessment proceedings, including confirmed ledger accounts of creditors and reconciliation of accounts, which were not adequately considered by the AO.

3. Lack of Specificity in Assessment Order:
The assessment order lacked specificity regarding the creditors in question. The AO made a general observation about a sudden increase in sundry creditors compared to the previous year but did not provide detailed findings on individual creditors. This lack of specific information hindered the appellant's ability to address the concerns raised by the AO effectively.

4. Appellant's Submission of Necessary Documents:
The appellant diligently submitted relevant documents, such as confirmation of accounts, ITRs of creditors, and bank statements showing payments to creditors, to support the legitimacy of the credits. The appellant also furnished reconciliation of accounts with certain parties and explained the reasons for non-responses from other creditors. This proactive submission of documents demonstrated the appellant's efforts to address the AO's queries.

5. Credibility of Sundry Creditors and Their Income:
Upon examination, it was found that the AO failed to specify any deficiencies or provide material substantiating the addition of unexplained credit. The appellant's submission of necessary documents during the assessment proceedings, along with the income details of creditors as per their ITRs, indicated the credibility of the sundry creditors. The Tribunal deemed the AO's actions arbitrary and lacking cogent reasons, leading to the deletion of the addition of ?3,68,85,701 under section 68. The Tribunal upheld the order of the CIT(A) based on the examination and acceptance of the sundry creditors' credibility, ultimately dismissing the Revenue's appeal.

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