2015 (3) TMI 610 - AT - Income Tax

Ingenuine sundry creditors - CIT(A) sustained part addition - Held that - The assessee was not able to furnish the bank statement copy, however, the AO procured the bank statement from the bank and found certain discrepancies in the statement regarding payment to sundry creditors. Finally he made an addition of ₹ 35,13,739/- in respect of outstanding creditors treating as cessation liability. However, CIT(A) called for remand report from the AO in the course of first appellate proceedings and once again the AO called for details of sundry creditors and payment to them. The assessee failed to furnish the details in respect of sundry creditors amounting to ₹ 23,34,721/-. Admittedly, these credits continued to be carried forward year after year.In this case, the liability remains to be recovered year after year. For invoking provisions of section 68 of the Act, if any sum is to be found credited in the books of the assessee maintained during the previous year, only then it would be possible to make addition under section68 of the Income tax Act. In the case of carried forward credit, which is from earlier year, provisions of section 68 cannot be applied. In the present case, the liabilities outstanding in the books of account of the assessee for the assessment year under consideration and only the provisions of the section 41(1) of the Act could be applied. In the present case the assessee failed to establish the actual existence of the impugned disputed amount in the books of account of the assessee. The assessee has drawn its balance sheet based on its books of account, in which the above amount, were being claimed as liabilities due, to various parties, as at the end of the accounting year under dispute. However, the assessee failed to establish the genuineness of these liabilities by producing supporting evidence. Simply the liabilities being reflected against certain names in the books of account would not establish the genuineness of liabilities. - Decided against assessee. Estimation of net profit - rejection of books of accounts - out of total addition made ₹ 6,95,770/- addition to the extent of ₹ 4,87,038/- was confirmed and balance addition of ₹ 2,08,732/- was direct to be deleted by CIT(A) - Held that - In the present case during the course of remand proceedings before AO the assessee produced the books of account. The AO also confirmed the examination of books of account and observed that the has not produced the bills in respect of conveyance expenses ₹ 75,710/-; general expense ₹ 69,361/-, motor car expenses ₹ 48,000/-, telephone expenses ₹ 20,052/-. Once the books of account of the assessee was produced before the lower authorities and if there is certain discrepancy the authorities were free to make addition to that extent of discrepancies noticed by the authorities and, authorities were precluded in rejecting the books of account of the assessee. In such circumstances in our opinion, in this case rejection of books of account of the assessee is not justified. However, there is certain discrepancy noticed by the authorities in the course of first appellate proceedings. Accordingly, in our opinion instead of adhoc estimation, we are inclined to sustain the disallowance in respect of expenses incurred in cash and no bills or vouchers were produced by the assessee for verification namely conveyance expenses, ₹ 75,710/-, general expenses ₹ 69,361/-, motor car expenses ₹ 48,000/-, telephone expenses ₹ 20,052/-. - Decided partly in favour of assessee.

Issues Involved:

1. Sustained addition of Rs. 23,34,721/- by CIT(A) out of the addition made by AO at Rs. 35,13,739/-.
2. Rejection of books of accounts under section 145(3) and estimation of net profits.
3. Making separate addition despite rejection of books of accounts.

Issue-wise Detailed Analysis:

1. Sustained Addition of Rs. 23,34,721/-:

The assessee, a proprietor of M/s. Naughty Girls, was involved in manufacturing and trading ready-made garments. The AO noted outstanding sundry creditors from the return of income and issued notices under section 133(6) to 14 parties to verify the genuineness of these creditors. Eight notices were returned unserved with remarks "not known." The AO concluded that out of Rs. 35,49,294/- shown as outstanding sundry creditors, only Rs. 35,555/- were genuine, leading to an addition of Rs. 35,13,739/- under section 41(1) of the I.T. Act, 1961.

On appeal, CIT(A) observed that the assessee failed to furnish proof for creditors amounting to Rs. 23,34,721/- and could only prove creditors for Rs. 11,79,018/-, thus sustaining the addition of Rs. 23,34,721/-. The assessee argued that the amount had ceased to exist and there was no remission of liability, citing several judicial precedents to support their position. However, the Tribunal noted that the assessee failed to establish the actual existence of the disputed amount in the books of account and upheld the CIT(A)'s decision, stating that the liabilities did not exist at the end of the accounting year.

2. Rejection of Books of Accounts and Estimation of Net Profits:

The AO rejected the books of accounts under section 145(3) due to the assessee's failure to furnish them during the assessment proceedings. During the appellate proceedings, the assessee provided the necessary details, which were admitted as additional evidence. The AO, in his remand report, did not report any defect but noted the existence of cash expenses. CIT(A) confirmed the rejection of books but reduced the net profit ratio from 10% to 7%.

The assessee argued that the book results should not be rejected merely because of cash expenses, especially when they are audited. The Tribunal noted that the AO had not commented adversely about the purchases and that the rejection of books was not justified. Instead, the Tribunal sustained the disallowance of expenses incurred in cash without bills or vouchers, amounting to Rs. 75,710/- for conveyance, Rs. 69,361/- for general expenses, Rs. 48,000/- for motor car expenses, and Rs. 20,052/- for telephone expenses.

3. Separate Addition Despite Rejection of Books of Accounts:

The assessee contended that once the books of accounts were rejected and net profit estimated, no further addition for cessation of liabilities under section 41(1) was justified. They relied on the decision of ITAT in M/s Exim Kargo Kare v. ITO, where it was held that no further addition could be made when AO estimated the net profits.

The Tribunal, however, noted that the assessee failed to establish the genuineness of the liabilities and upheld the CIT(A)'s decision to sustain the addition of Rs. 23,34,721/- as cessation of liability under section 41(1).

Conclusion:

The Tribunal partly allowed the appeal, sustaining the disallowance of specific cash expenses but rejecting the assessee's contention regarding the cessation of liabilities and the rejection of books of accounts. The final order was pronounced in the open court on 05/03/2015.

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