No provision under Income-tax law for ad-hoc disallowance of sundry creditors

There is no provision under Income-tax law for making ad-hoc disallowance of sundry creditors – ITAT

In a recent judgment, ITAT Surat has quashed ad-hoc addition of creditors holding that there is no provision under Income-tax law for making ad-hoc disallowance of sundry creditors. 

ABCAUS Case Law Citation:
ABCAUS 4028 (2024) (05) ITAT

Important Case Laws relied upon:
Toplight Corporate Management (P) Ltd. (2021) 128 taxmann.com 221

In the instant case, the assessee had challenged the order passed by the CIT(A), National Faceless Appeal Centre (NFAC) in deleting ad-hoc addition made treating 30% of sundry creditors as bogus.

The respondent assessee was engaged in the business of textile. The case of assessee was selected for complete scrutiny. During the assessment, the Assessing Officer (AO) recorded that the assessee was operating two proprietory concerned. In both the concern the assessee had shown large amount of sundry creditors.

The assessee was asked to furnish complete names and address of the sundry creditors. The assessee furnished list of sundry creditors alongwith their names and addresses. The Assessing Officer in order to verify the genuineness of sundry creditors, issued notice under Section 133(6) of the Income Tax Act, 1961 (the Act) for seeking confirmation.

The Assessing Officer noted that out of notices sent to 10 creditors, reply was received from only two parties.

The Assessing Officer further recorded that the assessee had not given confirmation of those parties despite allowing opportunities. The Assessing Officer disallowed 30% of amount outstanding against two sundry creditors.

Before the CIT(A), the assessee contended that no show cause notice before making such disallowances was issued to the assessee. If the parties have not responded, the Assessing Officer has to inform the assessee about the party who has not responded to the notice under Section 133(6) of the Act. The assessee also filed confirmation of those two parties and reiterated that complete details were furnished before the Assessing Officer.  The assessee stated that he was in the textile trading and made purchases which were brought in the Profit & Loss Account.

The submission of assessee was forwarded to the Assessing Officer for seeking his remand report.  In the remand report, the Assessing Officer reiterated his contention as recorded in the assessment order. The remand report of assessee was forwarded to the assessee for his comment.

The comment/ rejoinder of assessee stated that the Assessing Officer had not verified the record property and that he had given complete details of all the creditors during the course of assessment proceedings about the creditors. He had also given copy of account of creditors and their books of account. The assessee stated that there was no provision in the Act to estimate 30% of creditors for making addition in the total income without giving any show cause notice. No sale is possible if there is no purchases. The assessee also relied on certain case laws.

The CIT(A) after considering the submission of assessee, held that if the genuineness of sundry creditors is doubted, the Assessing Officer has to disprove the corresponding purchases.

The CIT(A) observed that the Assessing Officer made addition merely on suspicious and doubtfulness of evidence produced by assessee without making a basis for disallowances. The books of assessee was also not rejected.

The CIT(A) further held that in various cases law, the Tribunal held that the addition made without issuing show cause notice, is invalid. On the basis of aforesaid observation, the CIT(A) deleted the entire disallowances.

The Tribunal observed that the as recorded by the CIT(A), the Assessing Officer had not informed the assessee about the non-response of creditors and no opportunity was given to assessee to produce such creditors. In the remand report, the Assessing Officer had not brought any adverse finding about the creditors. No show cause notice was issued for proposed addition during the assessment was issued.

Further, the ad hoc addition by disallowance of sundry creditors is without any adverse finding and issuing show cause notice which is against the principles of natural justice and the assessment order was held, as invalid by the CIT(A).

The Tribunal observed that the revenue failed to bring any material on record to show that any specific show cause notice was issued to the assessee before making  disallowance or there is any provision under Income-tax law for making disallowance of sundry creditors on ad-hoc basis.

The Tribunal fully concurred with the finding of CIT(A) that there was no basis or adverse material for making disallowance of sundry creditors on ad hoc basis.

Accordingly, the grounds of appeal raised by the revenue was dismissed. 

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