2016 (11) TMI 444 - AT - Income Tax

Addition of all sundry creditors - denial of natural justice - AO issued a show cause to assessee on the basis of statements of two creditors and added all the sundry creditors to the income of assessee without allowing any opportunity to assessee to cross examine the creditors - Held that - According to settled legal proposition in case Revenue collected material behind the back of the assessee and used the same against him and no opportunity was given to him to cross the person whose statement has been used against the assessee for making the addition. Then it is clear violation of principles of natural justice justifying deletion of addition. In view of above, CIT(A) rightly observed that Assessing Officer was not justified in making the addition of entire sundry creditors to the income of assessee on the basis of inquires conducted from only two creditors. The purchase and sales reflected in the audited books of accounts have been examined and accepted. There is no adverse inference in respect of any entry relating to sale, purchase or payments made to creditors. Assessee filed confirmatory letters of balances of all creditors, who have been paid off in subsequent years. The confirmatory letters filed by assessee include the confirmatory letters of the two creditors whose statements have been recorded by Assessing Officer. The two creditors, whose statements were recorded, were not allowed to be cross-examined by assessee. - Decided in favour of assessee

Summary

Issues Involved:
1. Addition of Sundry Creditors to Assessee's Income.
2. Validity of Notice Issued Under Section 143(2) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition of Sundry Creditors to Assessee's Income:

The Revenue appealed against the CIT(A)'s order, which had granted relief to the assessee by deleting the addition of ?1,58,55,454/- made by the Assessing Officer (A.O.). The A.O. had added back all sundry creditors to the assessee's income, treating them as bogus, since notices issued under Section 133(6) to verify these creditors were returned unserved, and the assessee failed to produce these creditors before the A.O. The A.O. concluded that the creditors were fictitious and represented the assessee's own money invested in the business.

The assessee contended that they maintained regular books of accounts, which were audited under Section 44AB of the Act, and the A.O. had accepted these books. The assessee provided a list of 25 sundry creditors, confirmed copies of their accounts, and argued that the purchases from these creditors were properly recorded and verified. The CIT(A) observed that the A.O. had issued notices to only three creditors, and the statements of two creditors were recorded without allowing the assessee to cross-examine them, violating the principles of natural justice.

The CIT(A) found that the assessee had sufficiently discharged the onus by providing names, addresses, and confirmed copies of accounts of the sundry creditors. The purchases and corresponding sales were reflected in the books of accounts, which were audited and accepted by the A.O. The payments to most of the creditors were made in subsequent years, and the sales made during the year were not doubted by the A.O. The CIT(A) concluded that there was no justification in adding the sundry creditors as unverified when the purchases and sales were not disputed.

The Tribunal upheld the CIT(A)'s decision, noting that the A.O.'s addition of the entire amount of sundry creditors based on inquiries from only two creditors was unjustified. The Tribunal emphasized that the assessee's purchases and sales were verified, and the confirmatory letters from all creditors, including the two whose statements were recorded, were provided. The addition made by the A.O. was rightly deleted by the CIT(A), and no interference was warranted.

2. Validity of Notice Issued Under Section 143(2) of the Income Tax Act:

The assessee raised a cross-objection challenging the validity of the notice issued under Section 143(2) with the approval of the Chief Commissioner of Income Tax (CCIT). The assessee argued that such notice must be based on the satisfaction recorded by the A.O. himself, and approval from higher authorities does not validate the notice.

The Tribunal dismissed the cross-objection as academic, given the decision on the Revenue's appeal on merit.

Conclusion:

The Tribunal dismissed both the Revenue's appeal and the assessee's cross-objection. The addition of ?1,58,55,454/- made by the A.O. was deleted, and the CIT(A)'s order was upheld. The cross-objection regarding the validity of the notice under Section 143(2) was dismissed as academic. The decision was pronounced in open court on September 09, 2016.