If creditors are found to be bogus, entire purchases to be disallowed and not only balance outstanding – ITAT
ABCAUS Case Law Citation
ABCAUS 3647 (2023) (01) ITAT
Important Case Laws relied upon:
Ipsita Naik vs. ITO
In the instant case, both the assessee and the Revenue had challenged the order passed by the CIT(A) in deleting the addition of bogus purchase towards outstanding balances of sundry creditors.
The assessee firm was engaged in the business of construction work as developer of buildings, commercial/residential complex, road projects etc.
During assessment proceedings additions were made as unexplained credit balances towards outstanding balances of current liabilities reflected in the books of the assessee for alleged failure of the assessee to establish their genuineness.
During the appellate proceedings before the CIT(A) the assessee submitted additional evidence to prove genuineness of the credit balances, which was admitted and thereafter considering the remand report from the AO and the comments of the assessee thereon, the CIT(A) deleted the entire addition.
The case of the Revenue was that CIT(A) had ignored the fact that the AO had noted the bills raised by parties to be fabricated, being drawn in identical pattern with common hand-writing and also that no third party evidence to prove genuineness of the balances was furnished by the assessee.
The assessee contended that all necessary details of the sundry creditors had been filed by the assessee giving their names, address and copies of bills, and also the fact that the payment was made through banking channel. He contended that the Revenue had not controverted any of the above facts except for stating that bills appeared to be manipulated/ fabricated. It was also contended that this alone was not sufficient to hold the balance to be ingenuine, more particularly, when the creditors were shown to have been paid through banking channels.
The assessee also relied upon the detailed submission made before the CIT(A) in response to the discrepancies noticed by the AO.
The Tribunal noted that the AO had disallowed balance outstanding of the sundry creditors for the reason that their bills appeared to be bogus, and there was no confirmation of their outstanding balance which in turn implies two situations:
First that the purchases booked relating to these parties was bogus and their outstanding balances were also not confirmed. Secondly, that considering that only addition of outstanding balances was made in the absence of balance confirmations, it could either be a case of addition made u/s 41(1) of the Act on account of cessation of liabilities or u/s 68 of the Income Tax Act 1961 as unexplained credit balances as the AO had not specified the section under which he made the addition.
The Tribunal opined that if the purchases are found to be bogus, then it is the entire purchases made from such parties which are to be disallowed and not only the balance outstanding as at the end of the year. Disallowing only the balance outstanding tantamounts to accepting the purchases made from these parties balances of which are not outstanding since payments pertaining to them have been made by the assessee.
ITAT further opined that by disallowing only balance outstanding of these parties as at the end of the year, the Revenue has both accepted purchases as genuine with respect to balance that are not outstanding, while at the same time holding them to be ingenuine or bogus in relation to purchases whose balances are outstanding at that end of the year. The department has therefore taken a contradictory stand on the issue by disallowing only outstanding balances of sundry creditors finding them to be bogus.
Further, the ITAT observed that treating the purchases as bogus, even otherwise can attract disallowance only of purchases made during the year. If the outstanding balances contain the balance relating to the preceding year, the addition of these opening balance cannot be made by treating the purchases of the current year to be bogus. The disallowance pertaining to opening outstanding balances can be made only in the year in which the purchases relating to them are booked by the assesse.
The Tribunal further observed that addition u/s 68 in any case could have been made only of balances pertaining to the impugned year and invocation of section 41(1) for cessation of liability could not have been possibly done on balances pertaining to the impugned year considering the very short period of the liability for treating it as ceasing to exist.
The Tribunal opined that the assessee had discharged its onus of establishing genuineness of sundry creditors having furnished all details relating to the sundry creditors and also establishing the fact that the payment to all of them was made through banking channel, which fact has not been controverted by the Revenue.
The Tribunal further stated that Revenue’s case for holding them as non-genuine only on account of bills of these parties appearing to be manipulated does not stand well as no exercise was carried out by the Revenue to confirm this aspect from an expert.
Accordingly, the ITAT declined to interfere with the order of the CIT(A).
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