Section 68 not applicable to liabilities representing old opening balances. Assessee’s Consent / acceptance do not give jurisdiction/right to make addition

In a recent judgment, ITAT Chennai has stated that consent/acceptance given by assessee could not give jurisdiction and a right to the assessing authority to make an addition. The taxing authority can act only if there is power under the statute to do so. It further held that if the liabilities are old representing opening balances only , Section 68 cannot be applied.

Case Law Details:
ITA No. 305/Mds./2016 Assessment Year :2009-10
M/s.Sooraj Leathers vs. Income Tax Officer
Date of Judgment/Order: 22/04/2016

Important Case Laws referred:
CIT Vs. Usha Stud Agricultural Farms Ltd. reported in [2008] 301 ITR 384 (Del).
Mariam Aysha V. Commissioner of Agricultural Income-Tax  [1976] 104 ITR 381 (Mad)

Brief Facts of the Case:
The appellant assessee was a partnership firm and was engaged in the processing and whole sale trading of Raw and Wet blue Leathers. The return of income of the assessee was initially processed u/s 143(1) and later was selected for scrutiny by issue of notice u/s 143(2) of the Income Tax Act, 1961. During the course of the assessment, the Assessing officer sought confirmation of the balance of sundry creditors outstanding in the books of account by issuing summons u/s 131.

The managing partner of the assessee firm by a sworn affidavit agreed that sundry creditors amounting to Rs. 99,69,331 were bogus. Subsequently the Assessing officer completed the assessment u/s 143(3) and made among other things, an addition of the said amount.

CIT(A) partially allowed the appeal on the basis of the remand report of the Assessing officer wherein some more confirmations were obtained by the assessee but he sustained the addition of Rs. 66,98,357/- made u/s.68.

Aggrieved by the order, the assessee approached ITAT.

Contention of the Assessee:
The assessee contended that out of total additions made, certain credits were only opening balance and it could not be considered for addition in the assessment year under consideration and prayed that the same may be deleted.

Contentions of the Revenue:
1. that the assessee was miserably failed to prove the genuineness and credit worthiness of the parties.
2. the assessee had agreed for the additions which cannot be proved as genuine to be sustained.
3. the assessee cannot file the appeal before Tribunal against admission made by him.
4. opening credit is not out of purview of Section 68 as in view of language of Sec.68 the same was found credited in the books of accounts of the assessee, maintained for in that previous year.

Important Excerpts from ITAT Judgment:
The contention of the Departmental Representative is that these credits are accepted by the assessee as unexplained and offered it as income u/s.68 of the Act before the lower authorities and the same cannot be questioned before the Tribunal. In our opinion, this argument of the Departmental Representative cannot be upheld in view of the judgment of Jurisdictional High Court in the case of Mariam Aysha V. Commissioner of Agricultural Income-Tax reported in [1976] 104 ITR 381 (Mad) wherein held that “that consent/acceptance given by assessee cannot give jurisdiction and a right to the assessing authority to make an addition, is an essential principle of law. The taxing authority can act only if there is power under the statute to do so”. Further, the addition was made by invoking the provisions of the section 68 of the Act. If the liabilities are old, no credit has been made in so far those credits in the books of accounts in the assessment year under consideration, Sec.68 cannot be applied. This view of ours is supported by the judgement of Delhi High Court in the case of Usha Stud Agricultural Farms Ltd., cited supra wherein held that credit balance in the account of the assessee did not pertain to the year under consideration, the AO was not justified in making the addition u/s.68 of the Act. 

Related Update: Section 68 not applicable to opening balances-ITAT Bangalore dt 07/08/2015