2023 (2) TMI 114 - AT - Income Tax

Addition u/s 41 - trade deposits receipts - addition as liability of the assessee ceases to a exist - AR submitted that neither Section 41(1) of the Act nor Section 68 of the Act applies to the trade depositors who have given their full name and address, PAN, and the amount of deposits is as per custom and usage and practice of business and the said deposits were received by cheque through banking channel and amount being trade liability and that no remission or cessation is done - HELD THAT - It is pertinent to note that the assessee s books, at no point of time, was rejected by the Assessing Officer. AO at no point of time stated that the trade deposits were not that of trade depositors but has element of liabilities except to that of business of the assessee. The contention of the assessee that the assessee has not paid the amount in respect of these trade depositors as it being amount received as trade deposits from trade merchants who are known and identifiable persons and the amount received during the course of business and creditworthiness is already proved through the full name, address, PAN and the amount of deposits as well as the customers usage and practice of business with these trade merchant. Merely not filing confirmation will not shun away that the trade credits and deposits were for purchase of goods and that recovery of the said amount has not become impossible and, therefore, the same was not being written off by the assessee in the books of account as element of these amounts were not coming under the purview of Section 41(1) - Appeal of assessee allowed.

Summary

Issues:
1. Applicability of Section 41(1) of the Income Tax Act.
2. Addition of Rs.13,80,000/- under Section 68 of the Act.
3. Disallowance of bad debts under Section 36(2)(iii) of the Act.
4. Late payment of Provident Fund contributions.

Issue 1: Applicability of Section 41(1) of the Income Tax Act:
The appellant contested the CIT(A)'s decision to confirm the applicability of Section 41(1) of the Act, resulting in the addition of Rs.26 lakhs from various parties. The appellant argued that the decisions relied upon were applicable as per the facts and law, and the CIT(A) failed to distinguish them adequately. The appellant maintained that the amount in question was trade credits and deposits towards goods purchases, not time-barred or written off, hence Section 41(1) was inapplicable. The appellant also argued that since the amount was not allowed as an expenditure, Section 41(1) did not apply. The tribunal agreed with the appellant, allowing the appeal and modifying the CIT(A)'s order accordingly.

Issue 2: Addition of Rs.13,80,000/- under Section 68 of the Act:
The Assessing Officer added Rs.13,80,000/- under Section 68 of the Act, contending that the assessee failed to explain certain deposits. The appellant argued that these deposits were from known trade merchants, received through proper banking channels, and were not liable under Section 68. The appellant further contended that even if some amount was to be added, it should only be the net profit. The tribunal sided with the appellant, stating that the deposits were for the purchase of goods, creditworthiness was proven, and the deposits were part of the business transaction. Consequently, the tribunal allowed the appeal on this ground.

Issue 3: Disallowance of bad debts under Section 36(2)(iii) of the Act:
The Assessing Officer disallowed Rs.24,82,822/- towards bad debts, citing non-compliance with Section 36(2)(iii) of the Act. However, detailed arguments or decisions related to this issue are not provided in the summary.

Issue 4: Late payment of Provident Fund contributions:
The Assessing Officer made an additional disallowance of Rs.1,87,329/- for late payments of Provident Fund contributions. However, detailed arguments or decisions related to this issue are not provided in the summary.

In conclusion, the Appellate Tribunal ITAT Ahmedabad, through the judgment delivered by Ms. Suchitra Kamble, Judicial Member, ruled in favor of the assessee on the issues of applicability of Section 41(1) and the addition under Section 68 of the Income Tax Act. The tribunal allowed the appeal, modifying the CIT(A)'s order and emphasizing the proven creditworthiness and business nature of the transactions. Detailed arguments or decisions related to the disallowance of bad debts and late payments of Provident Fund contributions were not explicitly provided in the summary.