2022 (10) TMI 901 - AT - Income Tax

Addition u/s 68 - credit entries reflecting creditors for purchases of goods - onus to prove - non discharge of burden placed upon assessee by revenue - HELD THAT - The impugned credit entries reflecting creditors for purchases of goods, in our considered view, are not satisfactorily explained. As regards the claim that since sales are not being doubted, the purchases cannot be doubted either, as what is sold must have been purchased as well, this theory is relevant only when purchases are being sought to be disallowed as bogus, and profit on the sale is being thus computed without providing for the cost of purchases; that is not the case here. What is held to be unexplained is the bunch of entries showing credits in the names of certain vendors and the existence and means of these vendors is not proved and the genuineness of the transactions is not established. None of the three necessary ingredients of a credit, i.e. existence of the creditor, means of the creditor and genuineness of the transaction involved, are established on the facts of this case. In the case of CIT Vs Precision Finance Pvt Ltd 1993 (6) TMI 17 - CALCUTTA HIGH COURT Hon ble Calcutta High Court has summed up this principle by observing that It is for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. In our view, on the facts of this case, the Tribunal did not take into account all these ingredients which have to be satisfied by the assessee. Mere furnishing of the particulars is not enough. The enquiry of the ITO revealed that either the assessee was not traceable or there was no such file and, accordingly, the first ingredient as to the identity of the creditors had not been established. If the identity of the creditors had not been established, consequently, the question of establishment of the genuineness of the transactions or the creditworthiness of the creditors did not and could not arise. The Tribunal did not apply its mind to the facts of this particular case and proceeded on the footing that since the transactions were through the bank account, accordingly, it is to be presumed that the transactions were genuine. Referring to the judgment of Hon ble Patna High Court, 1985 (3) TMI 57 - PATNA HIGH COURT . Their Lordships observed that The Patna High Court emphasised that as to the nature of the explanation to be rendered by the assessee, it was plain on principle that it was not the law that the moment any fantastic or unacceptable explanation was given, the burden placed upon him would be discharged and the presumption rebutted. We agree. We further agree that it is not the law that any and every explanation by the assessee must be accepted. It must be an acceptable explanation, acceptable to a fact-finding body. These observations are equally relevant in the context of explanations for the purpose of application of section 68. Viewed in this light, we reject the explanation of the assessee as an explanation unacceptable to this final fact finding body. As regards the learned CIT(A) s stand that the amount shown as outstanding for the credit purchases can never be covered by the scope of Section 68, in our considered view, that is a very superficial way of looking at the provisions of Section 68. The law is simple and unambiguous. When a sum is found credited in the books of accounts of the assessee, he has to explain the same, and in the event of the assessee s failure to do so, that amount is treated as unexplained credit under section 68. When an assessee purchases something from a vendor, obviously, the account of such a vendor is credited and the purchases are debited and, therefore, when the assessee does not have a reasonable explanation about the credit appearing in the account of the vendor- as in this case, the Assessing Officer is perfectly justified in making the addition under section 68. The assessee explains that these people keep changing their office and are not easily traceable, but could it be an acceptable explanation that someone owes huge amounts to the vendors and these vendors are untraceable? The answer, in our humble understanding, is emphatically in negative. Another explanation of the assessee is that the goods were found defective and, therefore, no payments were made but there is no evidence whatsoever of the goods having been returned; this explanation does not merit acceptance either. Yet another facet of the explanation is that entire supplies were found to be defective, and this explanation is also highly unlikely. There is no explanation for why did it take so long to discover that the goods were defective, and there is not even a whisper of evidence that there were any issues in this aspect. A lot of emphasis is then placed on the fact that section 68 is titled cash credit and, therefore, purchases on credits cannot be covered by this section. This plea is also ex-facie incorrect as wordings of Section 68, as we have noted above, are categorical, and these words cover any unexplained credit in the books of accounts. This matter has been under hearing before this Tribunal for almost a decade, and a lot of papers are placed on record, but there is not one confirmation from the purported vendors evidencing the transaction, evidencing the goods return or evidencing the payment. When we specifically asked the learned counsel to point out one confirmation filed by the assessee, he could not do so. We have carefully perused the submissions filed by the assessee before the CIT(A) there is not one averment on this aspect. Learned counsel for the assessee expressed inability to file any confirmation from the persons from whom such purchases were purportedly made. It was once again explained that these persons being small traders of limited means and operating from table space etc are no longer available for any verification, but then these persons were not available even at the stage of the assessment proceedings. There is a mention about some confirmations having been filed by these persons in the next year but even those confirmations could not be produced before us. There is nothing to establish identity of these persons; no payments have been made to them, and there is no evidence before us about the current status of amounts payable to them. All that is being reiterated are the self-serving statements, based on sweeping generalizations, unverified statements, and without any supporting evidence. The onus is on the assessee to prove the identity of these persons, the means of these persons to have allowed these credits to the assessee, and the genuineness of the transactions leading to these credits. On each of these counts, the assessee has miserably failed in discharging his onus. The factual foundation of the case of the assessee is devoid of any substance or merits. The credits appearing in the books of the assessee, with respect to the purported purchase of goods on credit, in our considered view, are, therefore, not at all reasonably explained, and the Assessing Officer was, therefore, fully justified in making the impugned addition under section 68. We must, therefore, restore the addition made by the Assessing Officer. - Decided in favour of revenue.

Summary

Issues Involved:
1. Applicability of Section 68 of the Income Tax Act, 1961, to credit purchases.
2. Genuineness of transactions and identity of creditors.
3. Evidentiary value of documents submitted by the assessee.
4. Interpretation of "cash credits" under Section 68.

Issue-wise
Detailed Analysis:

1. Applicability of Section 68 of the Income Tax Act, 1961, to Credit Purchases:
The primary issue revolves around whether Section 68, which deals with unexplained cash credits, can be applied to credit purchases. The learned CIT(A) concluded that Section 68 could not be applied to credit purchases as it pertains specifically to sums of money or cash credits. The CIT(A) referenced various legal dictionaries to define "sum" and "cash credits," concluding that credit purchases do not fall under this definition. However, this Tribunal found this interpretation superficial, emphasizing that Section 68 applies to any unexplained credit in the books of accounts, regardless of whether it pertains to cash or credit purchases.

2. Genuineness of Transactions and Identity of Creditors:
The Assessing Officer (AO) questioned the genuineness of transactions due to the lack of evidence supporting the delivery of goods, absence of transportation expenses, and untraceable vendors. The AO noted that most notices sent to creditors were returned unserved, and the assessee failed to provide satisfactory explanations or evidence. The Tribunal agreed with the AO's findings, emphasizing that the assessee's explanations were implausible and lacked corroborative evidence. The Tribunal highlighted the improbability of all vendors being untraceable and all goods being defective, deeming the explanations as not credible.

3. Evidentiary Value of Documents Submitted by the Assessee:
The Tribunal scrutinized the documents submitted by the assessee, including ledger accounts and confirmation letters. It found these documents insufficient to establish the identity, genuineness, and creditworthiness of the creditors. The Tribunal noted that the assessee did not provide any evidence of goods being returned or payments being made to the vendors. The Tribunal emphasized that mere submission of self-serving documents without corroborative evidence does not discharge the assessee's burden of proof under Section 68.

4. Interpretation of "Cash Credits" under Section 68:
The Tribunal addressed the CIT(A)'s interpretation that Section 68 applies only to cash credits and not to credit purchases. It clarified that Section 68's scope is broader, covering any unexplained credits in the books of accounts. The Tribunal emphasized that the provision applies when the assessee fails to provide a satisfactory explanation for the nature and source of the credits, regardless of whether they pertain to cash or credit transactions. The Tribunal rejected the CIT(A)'s narrow interpretation and upheld the AO's application of Section 68 to the credit purchases in question.

Conclusion:
The Tribunal found that the assessee failed to provide satisfactory explanations or evidence to substantiate the identity, genuineness, and creditworthiness of the creditors. It concluded that the impugned credit entries were not satisfactorily explained and upheld the AO's addition of Rs 19,22,05,496 under Section 68. The appeal by the Assessing Officer was allowed, and the relief granted by the CIT(A) was vacated. The Tribunal emphasized the importance of considering the surrounding circumstances, human probabilities, and ground realities in assessing the genuineness of transactions.