Addition u/s 68 for differences in outstanding balances not confirmed by parties without doubting transactions

Addition u/s 68 for differences in outstanding balances not confirmed by parties cannot be made without doubting identity, creditworthiness and genuineness of transactions.

ABCAUS Case Law Citation:
ABCAUS 2529 (2018) 09 ITAT

Important Case Laws Cited/relied upon by the parties:
Aurobindo Sanitary Stores vs. CIT 2005-(IT3)-GJX-0127-ORI.
DCIT vs. Divine International [2012] 134 ITD 148-TDEL
Astha Infra Heights Pvt. Ltd. vs. Income Tax Officer

The appellant assessee was aggrieved by the order of CIT(A) in inter alia confirming addition made by the Assessing Officer (AO) u/s 68 of the Income Tax Act, 1961 (the Act) on account of outstanding balances of sundry creditors.

The assessee was a Management Institute and was engaged in providing training to various candidates for becoming a service agent sponsored by various insurance companies and in return the assessee was getting fee from these insurance companies.

During the assessment proceedings the Assessing Officer observed that there was credit balance outstanding in respect of some insurance companies.

The Assessing Officer issued letters u/s 133(6) of the Act to five companies but confirmations was received from only three parties and in respect of three insurance companies, no reply was received and therefore, the assessee was show caused.

The assessee requested the Assessing Officer to issue a reminder to them calling for the information. As regards the differences in ledger account of two companies, it was submitted that there might be some entries relating to other parties which might have been entered by these parties in the assessee’s account.

However, the Assessing Officer without requiring the insurance companies to file confirmation and without confronting the assessee with the differences in confirmations from the two companies, held the credits to be unexplained u/s 68 of the Act and made addition accordingly.

Before the Tribunal, the assessee submitted that the addition u/s 68 could not be made as all the insurance companies were well established insurance companies and all the payments were received through cheques for services to be rendered and therefore, the addition was not warranted.

Placing reliance on the judgment of Hon’ble Supreme Court, it was submitted that merely because of non furnishing of reply by insurance companies, the addition could not be made. The Hon’ble Supreme Court had held that if the notice issued u/s 133(6) returns back unserved, the assessee cannot be held liable and addition cannot be made for credits standing in their names.

It was further submitted that Coordinate Bench of the Tribunal relying on the judgment of Hon’ble Supreme Court had also taken the same view.

The Tribunal observed that all the insurance companies were big names whose identity, creditworthiness and genuineness could not be doubted as all the payments were received through cheques which was verifiable.

The Tribunal stated that for making addition u/s 68 of the Act, the Assessing Officer has to satisfy himself that the sum credited in the books of the assessee are unexplained. or the explanation offered by him is not satisfactory.

However the Tribunal observed that the Assessing Officer in his order had not doubted the creditworthiness, identity or genuineness of transactions. The AO made the addition only due to difference in amounts relating to two companies and for remaining two companies he had made addition as the notices issued to them u/s 133(6) had returned back.

The Tribunal opined that this action of Assessing Officer was not justified as the differences in balances confirmed in two companies cannot be termed as unexplained credits without doubting the identity, creditworthiness and genuineness of transactions.

The Tribunal was of the view that the difference could have been due to debit or credit notes. Moreover, the Assessing Officer did not confront these confirmations to assessee. Therefore, no addition could have been made by Assessing Officer due to differences u/s 68 of the Act.

In view of the facts and circumstances of the case and judicial precedents, the Tribunal held the addition confirmed by learned CIT(A) u/s 68 of the Act as unsustainable and directed it to be deleted.

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