2022 (11) TMI 658 - AT - Income Tax

Addition u/s. 41(1) - bogus creditors - cessation of liability in case of outstanding of above sundry creditors - addition by observing that the liability of alleged sundry creditors had ceased to exist in the case of assessee - HELD THAT - The liability which is appearing in the books of account for which the assessee has claimed purchases in the P L account is bogus and both the sundry creditors, M/s. Anurag Packaging M/s. Maa Kamakhya Packaging, in our considered view are fictious creditors and in real term there is no liability to pay. Therefore the given facts and circumstances suggests that the liability to pay the creditors, M/s. Anurag Packaging M/s. Maa Kamakhya Packaging, had ceased to exist being bogus in nature as there is no real business concern selling/purchasing of goods and these are merely paper adjustment entry and since the liability in books ceased to exist, provisions of section 41(1) of the Act are attracted. Thus, we confirm the addition made in the case of M/s. Anurag Packaging made in the case of M/s. Maa Kamakhya Packaging made u/s. 41(1) treating it as cessation of liability. Grounds are partly allowed.

Issues Involved:

1. Justification of deletion of addition of Rs. 29,15,73,211/- by CIT(A).
2. Ignoring the enquiry conducted by the AO regarding sundry creditors.
3. Justification of the sundry creditor not filing ITR except for A.Y. 2011-12.
4. General grounds for adding, altering, or amending the appeal.

Issue-wise Detailed Analysis:

1. Justification of Deletion of Addition by CIT(A):

The revenue challenged the deletion of Rs. 2,91,57,521/- by the CIT(A), arguing that the assessee failed to produce purchase details and confirmations from sundry creditors. The AO had made additions under section 41(1) of the Income Tax Act, citing cessation of liability for sundry creditors, including M/s. Anurag Packaging, M/s. Maa Kamakhya Packaging, and Shree Balaji Udyog. The CIT(A) overturned these additions, stating that the liabilities were still recorded as 'payable' in the assessee's books and had not been written off, indicating no cessation of liability.

2. Ignoring the Enquiry Conducted by the AO:

The AO conducted spot enquiries and found that the sundry creditors, particularly Dip Sarma, lacked credibility. Dip Sarma, an auto van driver, had no business premises and did not maintain books of accounts. The AO's enquiries revealed that the creditors did not comply with notices under section 131 of the Act. The CIT(A) disregarded these findings, leading to the revenue's appeal.

3. Justification of Sundry Creditor Not Filing ITR Except for A.Y. 2011-12:

The AO noted that Dip Sarma, proprietor of M/s. Anurag Packaging and M/s. Maa Kamakhya Packaging, had not filed income tax returns except for A.Y. 2011-12 and had no details of sundry debtors. The CIT(A) did not consider this non-compliance significant enough to uphold the additions made by the AO.

4. General Grounds for Adding, Altering, or Amending the Appeal:

The appellant reserved the right to add, alter, or amend the appeal during its course, though this ground was deemed general and required no adjudication.

Detailed Judgment Analysis:

Background and AO's Findings:

The assessee, engaged in manufacturing BOPP Self Adhesive Tapes and Paper Core, declared an income of Rs. 19,320/- for A.Y. 2015-16. During scrutiny, the AO requested purchase details and creditor confirmations, which the assessee failed to provide. Consequently, the AO issued notices under sections 133(6) and 131(1) of the Act to the creditors, who did not respond, leading to additions under section 41(1) for cessation of liability.

CIT(A)'s Rationale:

The CIT(A) held that the AO exceeded his powers under section 41(1) as the liabilities were still recorded as 'payable' and not written off in the books. The CIT(A) relied on the Supreme Court's judgment in CIT Vs. Sugrauli Works (P) Ltd., emphasizing that the actual cessation of liability, not just non-compliance with notices, is necessary for invoking section 41(1).

Tribunal's Observations:

The Tribunal examined the AO's findings and the CIT(A)'s rationale. It agreed with the CIT(A) regarding the liability to Alok Sonthalia, the assessee's husband, as genuine and not requiring addition under section 41(1). However, for M/s. Anurag Packaging and M/s. Maa Kamakhya Packaging, the Tribunal found the AO's spot enquiry revealing the creditors as fictitious, with no real business operations or financial capacity to justify the liabilities. The Tribunal concluded that these liabilities had ceased to exist, invoking section 41(1) and confirming the additions for these creditors.

Conclusion:

The Tribunal partly allowed the revenue's appeal, confirming the additions for M/s. Anurag Packaging and M/s. Maa Kamakhya Packaging while upholding the CIT(A)'s deletion of the addition for Alok Sonthalia. The general ground for adding, altering, or amending the appeal was not adjudicated. The judgment was pronounced in open court on 19-09-2022.

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