2012 (11) TMI 281 - AT - Income Tax

Addition on account of sundry creditors and advance from customers as deemed income u/s. 41(1) - Held that - There is no dispute on this aspect that the total amount was shown as liability in the balance sheet and there is no credit in current year. In the light of these facts, we find that the provisions of Section 41(1) are not applicable because nothing has been brought on record to show that the liability in question has ceased to exist. Addition is therefore deleted - Decided in favor of assessee Addition u/s 68 treating cash sales as unexplained cash credits - cash sale is only on three dates in the year and not on other dates - Held that - Claim of the assessee regarding cash sales under peculiar conditions that the assessee was discontinuing its business and therefore some sales were made in cash cannot be summarily rejected. It cannot be said that in the case of cash sales, the assessee is bound to keep record of the names and addresses of the buyers. Under these facts, ground of the assessee is allowed and addition made is deleted - Decided in favor of assessee

Summary

Issues:
1. Addition of outstanding amounts as deemed income under Section 41(1) of the Income Tax Act.
2. Addition of cash sales as unexplained cash credits under Section 68 of the Act.

Issue 1: Addition of outstanding amounts under Section 41(1) of the Income Tax Act:
The appellant contested the addition of outstanding amounts as deemed income under Section 41(1) of the Income Tax Act for the assessment year 2007-08. The Assessing Officer (A.O.) noted that the appellant company had outstanding credits from creditors and advance from customers, which were not confirmed by the parties involved. The A.O. invoked Section 41(1) and added these outstanding amounts to the appellant's income. The appellant argued that these amounts were opening balances, shown as liabilities in the balance sheet, and no fresh credits were made in the current year. The appellant provided details and explanations regarding these outstanding amounts, including instances where goods were returned by customers, disputes with creditors, and subsequent adjustments made in the following year. The Tribunal, after considering the submissions and relevant case laws, held that the provisions of Section 41(1) were not applicable as there was no evidence to suggest that the liabilities had ceased to exist. The Tribunal referred to judgments by the Hon'ble Apex Court and concluded that the additions made by the A.O. and confirmed by the CIT(A) were not justified. Therefore, the Tribunal deleted the addition of outstanding amounts under Section 41(1).

Issue 2: Addition of cash sales as unexplained cash credits under Section 68 of the Act:
The appellant challenged the addition of cash sales as unexplained cash credits under Section 68 of the Act. The A.O. questioned the cash sales made on specific dates and raised concerns about the lack of sales on other dates. The appellant explained that due to discontinuation of business, grey cloth was sold in cash after being called back from process houses, and in some cases, cash was given in place of untraceable cloth. The Tribunal considered the peculiar circumstances of the case and opined that the claim regarding cash sales under such conditions could not be summarily rejected. The CIT(A) upheld the A.O.'s decision based on the appellant's inability to provide details of the parties involved in cash sales. However, the Tribunal, relying on a judgment of the Hon'ble Bombay High Court, held that the absence of names and addresses of buyers for cash sales could not be a basis for rejecting the book results. Consequently, the Tribunal allowed the appeal and deleted the addition of cash sales as unexplained cash credits under Section 68 of the Act.

In conclusion, the Appellate Tribunal ITAT Ahmedabad ruled in favor of the appellant, allowing the appeal against both issues raised regarding the addition of outstanding amounts under Section 41(1) of the Income Tax Act and the addition of cash sales as unexplained cash credits under Section 68 of the Act. The Tribunal provided detailed analyses for each issue, considering the facts, submissions, and relevant legal precedents to reach its decisions.