2018 (5) TMI 627 - AT - Income Tax

Addition being sundry creditors u/s. 68 - purchases have been accepted as genuine - Held that - AO is wrong in making the impugned addition on account of sundry creditor, which are related to purchases and the same also accepted by the AO as genuine. Without rejecting the purchases, the sundry creditors cannot be treated as income of assessee. Case of Ms/ Standard Leather Pvt. Ltd. 2016 (9) TMI 1437 - ITAT KOLKATA to be followed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition of sundry creditors under Section 68 of the Income Tax Act.
2. Acceptance of credit purchases as genuine expenditure.
3. Applicability of Section 41(1) regarding remission or cessation of trading liability.

Detailed Analysis:

1. Addition of Sundry Creditors under Section 68 of the Income Tax Act:
The primary issue was whether sundry creditors could be added under Section 68 of the Income Tax Act when the corresponding purchases were accepted as genuine. The Assessee argued that since the purchases were verified and accepted by the Assessing Officer (AO), the sundry creditors related to these purchases could not be treated as income. The Tribunal found that the AO had accepted the purchases as genuine but still added the sundry creditors to the income, which was inconsistent. The Tribunal referred to a similar case, M/s. Standard Leather Pvt. Ltd., where it was held that without rejecting the purchases, sundry creditors could not be treated as income under Section 68. The Tribunal concluded that the AO's addition of sundry creditors without disallowing the corresponding purchases was based on a wrong interpretation of the Income Tax Laws.

2. Acceptance of Credit Purchases as Genuine Expenditure:
The Tribunal noted that the AO had accepted the expenditure incurred on purchases as genuine. The Assessee maintained regular books of accounts, including a stock register, and the purchases were recorded and found to be consumed. The AO did not disallow the purchases from the creditors nor disturb the trading results. The Tribunal emphasized that when the purchases were accepted as genuine, the corresponding sundry creditors could not be treated as bogus. The Tribunal cited multiple judgments, including CIT vs. Ritu Anurag Aggarwal, to support the view that if purchases are accepted, no addition can be made under Section 68 for the corresponding sundry creditors.

3. Applicability of Section 41(1) Regarding Remission or Cessation of Trading Liability:
The Tribunal also examined whether the provisions of Section 41(1) were applicable. The Assessee did not write back the sundry creditors to its profit and loss account, and there was no evidence of remission or cessation of liability. The Tribunal referred to the case of CIT v. Vardhman Overseas Ltd., where it was held that Section 41(1) could not be applied if the liability was not written back or ceased to exist. The Tribunal concluded that no addition could be made under Section 41(1) as the sundry creditors were still reflected in the books and the liability had not ceased.

Conclusion:
The Tribunal found that the AO was confused and had inconsistently applied Section 68 and Section 41(1). The Tribunal held that the CIT(A) was not justified in confirming the additions made by the AO. The Tribunal set aside the order of the CIT(A) and directed the AO to delete the additions related to sundry creditors. The appeal of the Assessee was allowed, and the order was pronounced on 04-05-2018.