Addition for Bogus creditors converted into cessation of liability for defective goods where liability had ceased

Addition for Bogus creditors converted into cessation of liability as goods were defective and vendors had not shown amount as receivable proving that liability had ceased.

ABCAUS Case Law Citation:
ABCAUS 3171 (2019) (10) ITAT

The appellant assessee was an individual and was engaged in the trading business. The return of the assessee was selected for limited scrutiny to verify-

(i) contractor receipts/fees mismatch;

(ii) custom duty payment mismatch;

(iii) sundry creditors; and

(iv) sales turnover mismatch.

The Assessing Officer (AO) observed that during the year under consideration, the assessee had made trade purchases from one vendor but had not made any payment to the said concern. He also noticed that the assessee made similar purchases from another creditor but no payment had been made so far.

When enquired, the assessee’s submitted that the assessee had purchased the goods from both the parties, but since they were found to be defective, the assessee had not made payment for such purchases and payment remained with the assessee.

However, the AO was not convinced and held that these were bogus purchases and that the parties being shown as sundry creditors was also bogus. Therefore, he treated total amount as bogus sundry creditors and brought it to tax.

Aggrieved assessee preferred appeal before the CIT(A) who confirmed the order of AO. Assessee was in second appeal before the Tribunal.

The assessee submitted that the assessee had purchased goods from those two parties and had produced purchase invoices from both the parties before the AO as well as CIT(A). He admitted that the payment was not made against these purchases because they were found to be defective and were not used for assessee’s business. He also admitted that goods still remained with assessee and the said parties have also accepted that goods were defective.

The assessee submitted that if at all these amounts were to be brought to tax, they could only be brought to tax u/s 41(1) of the Act but they cannot be treated as bogus sundry creditors. It had to be treated as income of the assessee towards cessation of liability in the year in which it had been written-off by other parties.

The Tribunal observed that during the course of assessment proceedings, the statements of the proprietors of boththe vendors had been recorded wherein they had confirmed that the goods were sold but due to some manufacturing defects, they were rejected by the assessee and no payment had been made for the same. They also admitted that they have not shown it as receivables and has not received any income on the same.

The Tribunal further observed that the fact that these two vendors had supplied material to the assessee and that they have been found with manufacturing defects, had not been proven to be false but only for the reason that the assessee had not made payments to vendors and also that they had not recorded the said transaction in their books of accounts, the AO had held the purchases as bogus and the creditors as bogus sundry creditors.

The Tribunal opined that though, we agree with the assessee that these parties could not have been treated as bogus, the fact that the goods were found to be defective during the relevant year itself and for that reason alone the vendors also have not shown the amount as receivable from the assessee proved that the liability also got ceased during the relevant financial year itself.  Therefore, it has to be treated as the income of the assessee during the relevant assessment year itself not as bogus creditors, but as cessation of liability.

Accordingly, the AO was directed to recompute the income accordingly.

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