2014 (7) TMI 549 - AT - Income Tax

Addition u/s 41(1) - outstanding liability since long hawala transactions - Necessity of verification of the genuineness of creditors Held that - confirmation of the account statement as appearing in the assessee s books of account is bearing the pan numbers - Even though the said confirmation is accompanied by a certificate by the ld. AR to the effect that the same stood furnished before the A.O., it is clearly false in-asmuch as the assessment order is dated 19.12.2011. How could a transaction dated 28.03.2012, which would only be confirmed by the creditor on or after the said date, be reported to the A.O. on 19.12.2011, even as the hearing before him would have presumably closed prior thereto? This falsity on behalf of the assessee is highly condemnable to say the least and needs to be depreciated in the strongest terms. - What anguishes us equally is that the same was not pointed out by the ld. DR during hearing, and which is particularly astonishing considering that the Revenue s main charge is that the concerned creditors are not genuine traders but only hawala operators, providing accommodation entries, and that evidence had been admitted and acted upon by the ld. CIT(A) in contravention of rule 46A. - matter remanded back for fresh adjudication. Additions towards unconfirmed creditors - Held that - No confirmation or any other material evidencing the existence of the liability to the other party, Swastik Enterprises, stands furnished at any stage, with the notice to him by the AO returning unserved, for which again no explanation stands furnished by the assessee - The amount is outstanding since 09.07.2003, i.e., for a period of almost six years as at the end of the relevant previous year, and for over 9 years by the time the matter stood decided by the first appellate authority - Nor reason for the same stands advanced at any stage, and even no claims with regard thereto were made, i.e., after a further lapse of another 1 years it is clearly unproved and the application of section 41(1) in relation to the credit is confirmed. - Additions confirmed - Decided against the assessee. Addition u/s 68 of the Act Genuineness of credit cannot accepted Held that - There is no finding to that effect that the payment to the stated extent may find reflection in the assessee s books of account for the following year - it needs to be appreciated that if the entries in books were final or conclusive, no addition u/s 68 could at all be made - It is on the failure of the assessee to prove the veracity or the truth of the entries appearing in his accounts, which would lead to invocation of section 68 or any other relevant provision for that matter Relying upon CIT vs. Kamaraia Pandian 1983 (9) TMI 65 - MADRAS High Court decided against Assessee.

Summary

Issues Involved:
1. Addition under Section 41(1) of the Income Tax Act, 1961.
2. Addition under Section 68 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition under Section 41(1) of the Income Tax Act, 1961:

The Revenue's appeal raised an issue concerning the addition of Rs. 13,28,469/- under Section 41(1) of the Income Tax Act, 1961. The Assessing Officer (A.O.) observed that the assessee's accounts had trade credits amounting to Rs. 259.93 lacs, with a significant portion remaining outstanding. Notices were issued under Section 133(6) to four creditors, with responses received from two, aggregating to Rs. 65.41 lacs. The remaining liability of Rs. 13.29 lacs was either unconfirmed or unresponsive. Consequently, the A.O. added this amount as income, considering it as a cessation of liability.

The Commissioner of Income Tax (Appeals) [CIT(A)] ruled in favor of the assessee, stating that the relevant details were submitted, and there was no evidence of remission or cessation of liability. The CIT(A) directed the deletion of the addition under Section 41(1).

Upon appeal by the Revenue, it was noted that the genuineness of the liability is a matter of fact. The tribunal highlighted that the non-discharge of a liability over a long period, without any dispute or legal recourse, could lead to an inference of remission or cessation of liability. The tribunal referenced several cases, including CIT vs. Chipsoft Technology (P.) Ltd., to emphasize that pragmatic realities should guide the interpretation of fiscal legislation.

For Pasad Steels, the tribunal found a confirmation of the account statement and subsequent payment, but noted procedural lapses in evidence submission. The matter was remanded back to the A.O. for verification. For Swastik Enterprises, no confirmation or evidence was provided, and the amount was outstanding since 2003. The tribunal confirmed the application of Section 41(1) for this liability.

2. Addition under Section 68 of the Income Tax Act, 1961:

The assessee's appeal involved the confirmation of an addition of Rs. 3,52,090/- under Section 68. The A.O. noted advances from debtors amounting to Rs. 76.78 lacs, with the assessee failing to provide confirmations or addresses. Consequently, the entire amount was added as income. The CIT(A) confirmed the addition for the amount pertaining to the current year, i.e., Rs. 3,52,090/-.

The tribunal noted that no improvement in the assessee's case was made before them. The assessee's claim of payment in the subsequent year was found unconvincing. The tribunal emphasized that the veracity of entries in the books must be proven, and mere reflection in accounts does not preclude additions under Section 68. The tribunal upheld the addition.

Conclusion:
The Revenue's appeal was partly allowed and partly allowed for statistical purposes, while the assessee's appeal was dismissed. The tribunal directed further verification for Pasad Steels and confirmed the addition for Swastik Enterprises and the advances under Section 68. The order was pronounced in the open court on May 28, 2014.