Sundry creditors are not loans or advances where creditworthiness to give advances is essential point for examination – ITAT
In a recent judgment, the ITAT Lucknow has held that sundry creditors do not represent loans or advances taken by the assessee where creditworthiness to extending the advances are essential point for examination.
ABCAUS Case Law Citation:
4480 (2025) (03) abcaus.in ITAT
In the instant case, the Both the Revenue and the Assesseee had challenged the order passed by the CIT(A). While the Revenue had challenged the order passed by the CIT(A) in deleting the addition made under section 68 of the Income Tax Act 1961 (the Act) towards unconfirmed sundry creditors and instead of adopting an enhanced net profit rate for the assessee. The assessee had challenged the action of CIT(A) in rejecting the books of account and adopting a higher net profit rate.
The appellant assessee was an individual and was engaged in the business of Civil Contracting. During the course of the assessment proceedings, the AO made an addition of under section 68 of the Act, on account of Sundry Creditors who failed to respond to the notices under section 133(6) of the Act, that were issued by the AO and also in some cases where there were differences in the balances shown by the assessee and as confirmed by the sundry creditors.
The CIT(A) noted that the adding of Sundry Creditors outstanding without disputing the purchases was not justified. He further noted the fact that another quasi-judicial authority i.e. the VAT Authority had accepted the purchases and sales of the assessee as was evident from the VAT assessment order. He held that the same could not be brushed aside as it carried substantial evidentiary value. Therefore, after considering all the facts of the case, the CIT(A) held that no case was made out for sustaining of the additions under section 68 of the Act in respect of unverified Sundry Creditors or the difference in balances of creditors as reported by them.
However, the CIT(A) observed that it was a fit case for rejection of books of account under section 145(3) of the Act and since the power of the CIT(A) is co-terminus with that of the AO, he exercised the same to reject the books of accounts under section 145(3) of the Act as in his opinion books of account did not reflect true and correct affairs of the business of the assessee.
The CIT(A) noted that the purchases were mostly from PSUs and therefore could not be manipulated. Thereafter, relying upon the decision of the ITAT in the case of assessee for a preceding Assessment Year, where ITAT had enhanced the NP rate of 4.43% to 5% and no appeal against the same had been filed against the same, either by the Revenue or by the assessee, he enhanced the NP rate of 5.5% disclosed by the assessee in this year to 8% holding the same to be fair and reasonable.
Before the Tribunal, the Revenue contended that the assessee had not produced the books before the Assessing Officer, which has been noted by the CIT(A) also and that the assessee was not able to provide verification of the sundry creditors that were reflected in his balance-sheet. Therefore, the Assessing Officer was justified in concluding that neither the identity nor the creditworthiness of these sundry creditors had been proved, casting doubt on the genuineness of the transaction.
The Revenue therefore, pleaded that there was no justification for the CIT(A) to delete the addition made on account of section 68 of the Act and instead of adopting an enhanced net profit rate. On the other hand, there was no representation from the assessee at the time of hearing the case.
For Sundry creditors creditworthiness is not an essential point for examination
The Tribunal observed that the credit balances of sundry creditors do not represent loans or advances taken by the assessee where creditworthiness to extent the advances are essential point for examination. Rather these represent sundry creditors for purchases and the purchases have not been called into question. Therefore, merely because some part of the expenditure for the purchases had not been met during the concerned financial year, is not ground to hold that those credits were bogus, unless it can be shown that those purchases were never made at all.
As the AO has not conducted any exercise to determine the bogus nature of the purchases, in view of the decision of Hon’ble Allahabad High Court and the Hon’ble Delhi High Court, the Tribunal upheld the decision of the CIT(A) to delete the additions made on account of unconfirmed Sundry Creditors.
Failure to produce of the books of account would not constitute sufficient reason to hold that the books were incomplete or incorrect
On the ground of appeal raised by the assessee, the Tribunal observed that the CIT(A) had not pointed out any defects in the books of account of the assessee, which could form the basis for rejection of the books of the assessee under section 145(3) of the Act. All he had pointed out, was that the assessee had not produced the books of account as per the request of the Assessing Officer and at the time of appellate proceedings. However, appellate order did not show that the CIT(A) called for production of the books of account in the course of appellate proceedings.
The Tribunal opined that the failure to produce of the books of account can be a good ground for presuming the books of account are not maintained and even presuming the books of account have not been audited, which in return invite consequential penalty proceedings. But, it would not constitute sufficient reason to hold that the books were incomplete or incorrect.
A net profit rate cannot be estimated without reference to the history of the assessee’s case or comparable cases.
The Tribunal further observed that the CIT(A) had himself recorded the fact that VAT Authorities have examined and confirmed the sales and purchases of the assessee. In the circumstances, in the absence of finding any fault in the accounts of the assessee, the rejection of the books and estimation of the profit @ 8% would not be justified.
The Tribunal also observed that in any case, the 8% profit is presumptive tax for civil contractors having turnover less than of Rs. 2 crores. The turnover of the assessee was over Rs. 7 crores. In the circumstances, a rate not bearing any relation to the history of the assessee’s case or any comparable case cannot be justified.
Accordingly, the Tribunal deleted the addition made on account of estimation of net profit and restored the rate of net profit to disclosed by assessee in the return.
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