2023 (8) TMI 1009 - AT - Income Tax

Unexplained credit u/s 68 - assessee has not been able to explain the genuineness and creditworthiness of the sundry creditors - assessee submitted that since the assessee has submitted additional evidences and which was remitted back to the file of the AO for taking remand report however AO has not submitted any remand report therefore it is not a mistake on the part of the assessee - HELD THAT - Additions cannot be made towards trade creditors u/s 68 as unexplained credits when purchases are accepted as genuine. Thus we note that no additions can be made u/s 68 towards trade creditors when genuineness of the purchases are not doubted. In the assessee s case on hand the A.O. has not doubted the genuineness of the purchases. We note that in assessee s case the creditors have confirmed the transactions with the assessee. The confirmation of all creditors and their income tax returns containing PAN number and their addresses were there before the CIT(A). A.O. was not correct in making additions towards trade creditors u/s 68 of the Act hence we delete the addition. AO has disallowed sundry creditors on estimated basis at the rate of 25% of the sundry creditors without rejecting the books of accounts of the assessee. As per assessing officer an individual creditor is true up to 75% level and untrue up to 25% level which is unheard practice because a purchase bill issued by creditor cannot be bogus for 25% and true for 75% level particularly when books of accounts are not rejected and purchases made from the said creditor has not been treated as bogus. CIT(A) has decided the issue on merit based on the evidences submitted by assessee and the material on record and therefore order passed by ld CIT(A) cannot be treated as an ex parte order hence matter cannot be remitted back to the file of the ld CIT(A) (for second inning) for fresh adjudication as contended by ld DR for the Revenue. Hence considering these facts and circumstances we delete the addition. Enhancement of assessment by CIT(A) - expenditure u/s 40A(3) - Revenue submitted that Ld. CIT(A) has co-terminus power as that of the AO and therefore has right to enhance the assessment - HELD THAT - We find that the issue involved in the second ground of appeal of assessee is no longer res integra. The question as to whether the ld CIT(A) can enhance the assessment without giving notice to the assessee was considered by various judicial forums across India wherein it was held that ld CIT(A) cannot enhance the assessment without giving notice to the assessee. See Sureshchandra Parekh 2017 (2) TMI 1540 - ITAT AHMEDABAD - Decided in favour of assessee.

Summary

Issues involved:
1. Addition of Rs. 53,97,017/- on account of unexplained credit under section 68.
2. Enhancement of assessment by Rs. 1,20,442/- on account of disallowed expenditure under section 40A(3).
3. Enhancement of addition without issuing a Show Cause Notice.

Summary:

Issue 1: Addition of Rs. 53,97,017/- on account of unexplained credit under section 68

The assessee, a partnership firm, was subjected to an addition of Rs. 53,97,017/- by the Assessing Officer (AO) under section 68 of the Income Tax Act for unexplained cash credits. The AO noticed sundry creditors amounting to Rs. 2,15,88,066/- in the assessee's balance sheet and demanded documentary evidence to prove the genuineness of these creditors. The assessee provided copies of Income Tax Returns and audit reports, but the AO found these insufficient and added 25% of the total creditors to the income.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, despite additional evidence submitted by the assessee. The Tribunal noted that the AO did not issue notices under section 133(6) to verify the creditors' genuineness and relied on the case of CIT vs Pancham Dass Jain, which held that section 68 does not apply to trade creditors if purchases are accepted as genuine. The Tribunal concluded that the AO's addition was unjustified as the purchases were not considered bogus, and thus, the addition under section 68 was deleted.

Issue 2: Enhancement of assessment by Rs. 1,20,442/- on account of disallowed expenditure under section 40A(3)

The CIT(A) enhanced the assessment by disallowing Rs. 1,20,442/- under section 40A(3) without giving notice to the assessee. The Tribunal referred to the case of Sureshchandra Parekh vs ITO, where it was held that enhancement without notice is unsustainable. The Tribunal found that the CIT(A) should have given the assessee an opportunity to respond before making the enhancement and thus deleted the addition.

Issue 3: Enhancement of addition without issuing a Show Cause Notice

The assessee argued that the CIT(A) enhanced the addition without issuing a Show Cause Notice, which is required by law. The Tribunal agreed, citing judicial precedents that mandate giving notice before enhancement. The Tribunal emphasized that the CIT(A) must provide a reasonable opportunity to the assessee to explain the enhancement, and failure to do so renders the enhancement invalid.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, deleting the additions made under section 68 and the enhancement under section 40A(3), and emphasized the necessity of issuing a Show Cause Notice before any enhancement of assessment.