Bogus purchases addition whether as cash credits u/s 68 or u/s 41(1) as cessation of liability

Addition for bogus purchases as unexplained cash credits whether u/s 68 or u/s 41(1) as cessation of liability? No additions on opening balances

ABACUS Case Law Citation
ABCAUS 3382 (2020) (09) ITAT

In this case appeal was preferred by the Revenue against the  order of  Commissioner of Income Tax (Appeals) in restricting the addition made by the Assessing Officer (AO) u/s 68 of the Income Tax Act, 1961 (the Act).

During the course of the assessment proceedings, the AO verified  the genuineness of the creditors appearing in the balance sheet of the assessee.   

The AO required the assessee to furnish ledger account extracts and confirmations from certain sundry creditors. Although the assessee furnished ledger account extracts of the creditors, he failed to file their confirmations.   

The AO, therefore, issued summons u/s 131 of the Act calling for the relevant details from the said creditors relating to the assessee  as appearing in their books of account.

Although some of the creditors complied there was no response from other creditors. In the case of some creditors, even the summons issued by the AO through postal authority were returned back “unserved”. 

The AO, therefore, deputed the Inspector of Income Tax to make necessary enquiries in case of such creditors. Two creditors were found to be not in existence at the address given by the assesse.

The AO, required the assessee to produce the said creditors along with the relevant evidences to establish their identity as well as to confirm the relevant transactions.  The assessee however failed to comply with the said requirement. 

The AO, therefore, treated the credit balances of the said two creditors in the books of account of the assessee as unexplained/unproved and made addition u/s 68 of the Act.

The CIT(A) confirmed the findings of AO that there was a failure on the part of assessee to establish the genuineness of concerned two parties. He, however, found that out of the entire credit balance appearing in the books, it also represented opening balances which had been carried forward from the earlier year.

The CIT(A) held that since, the opening balances pertained to the transactions entered into by the assessee in the earlier years, the same could not be added u/s 68 of the Act in the year under consideration as unexplained cash credits.

Therefore, the CIT(A) deleted the addition made by the AO u/s 68 of the Act to the extent of opening balance.

Aggrieved by the order of CIT(A), the Revenue had preferred this appeal before the before the Tribunal.

Addition for bogus purchases as cash credits or remission of liability

The Tribunal opined that the CIT(A) had rightly held that credit balances representing opening balances pertaining to the earlier year could not be added on unexplained cash credits in the year under consideration u/s. 68 of the Act which provides that “where  any sum is found credited in the books of assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof  or  the  explanation  offered  by  him  is  not  in  the  opinion  of  the Assessing  Officer  satisfactory, the  sum  so  credited  may  be  charged  to Income Tax as the income of the assessee of that previous year”.

The Revenue contended that the addition made by the AO on account of credit balance appearing in the accounts of concerned two creditors found bogus can be confirmed alternatively by recourse to sub-section (1) of section 41 of the Act as cessation of liability.

However, the Tribunal rejected this contention and stated that it is  well  settled that the provisions of section 41(1) can be invoked  only when trading liability incurred by the assessee has subsequently found to have ceased to exist in the relevant year  and the onus in this regard is on the AO to establish on evidence that there was indeed remission or cessation of such liability. 

Accordingly, the Tribunal upheld that order of the CIT(A) and dismissed the appeal of the Revenue.

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