Contact us   Feedback   Annual Subscription   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2016 (5) TMI 164 - ITAT VISAKHAPATNAM

2016 (5) TMI 164 - ITAT VISAKHAPATNAM - TMI - Addition u/s 68 - A.O. made additions solely on the ground that the trade creditors are not confirmed the transactions - Held that:- No addition can be made on trade creditors, when purchase has been accepted as genuine. The CIT(A) after considering the relevant details filed by the assessee has rightly deleted the additions made by the Assessing Officer. We do not find any error or infirmity in the order passed by the CIT(A). Hence, we inclined to u .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ases and computed the profit as per the financial statement filed by assessee. Under these circumstances, we are of the opinion that making additions by invoking the provisions of section 40A(3) of the Act amounts to double additions which is not permissible under the law. There exists a business expediency in making the cash payments towards purchase of goods. The assessee was obliged to make the cash payments required by the suppliers. Therefore, no disallowance can be made towards cash paymen .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e revenue are directed against the separate, but identical orders of the CIT(A), dated 18.4.2013 and it pertains to the assessment years 2007-08 to 2011-12. Since, the issues involved in these appeals are common, they are clubbed, heard together and disposed off, by way of this common order for the sake of convenience. 2. The brief facts of the case are that the assessee Smt. Vutukuri Jayanaga Anitha is a proprietrix of M/s. Sri Ambica Readymade Garments. Shri V. Murali Krishna, the husband of a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ash seized from her husband belongs to her. She further stated that her husband Shri V. Murali Krishna is managing the affairs of the business of M/s. Shri Ambica Readymade Garments in her name and has collected the cash from the customers located at Guntakal, Tadipatri, Ananthapur, Hindupur and adjoining areas. The said cash is collected towards amount due from the customers towards sales made by her proprietrix concern and which was duly recorded in the books of accounts maintained by her for .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s 143(2) of the Act was issued. In response to notice, the authorized representative of the assessee present and the case was discussed with him. During the course of assessment proceedings, the assessee vide letter dated 9.5.2012 has requested for Xerox copies of the books of accounts and loose sheets, which have been impounded u/s 131(3) of the Act. As requested by her, the A.O. allowed her to take photo copies of books of accounts and other loose sheets impounded under sec. 131(3) of the Act. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

, however, remaining bills are with the accountant who has taken the bills for writing the books of accounts. Therefore, she is unable to produce the purchase bills/sale bills for the above period. During the course of assessment proceedings, the A.O. noticed that the assessee has shown trade creditors of ₹ 1,58,52,399/-. In view of assessee s failure to produce purchase and sale bills, letters were addressed to the trade creditors as per the address given by the assessee, calling for acco .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ge their place of business frequently and hence, confirmation letters cannot be obtained. The assessee further submitted that in fact all the purchases were made from the suppliers located in the city of Kolkata and Howrah and the bills which were issued by the suppliers during the relevant period were misplaced. 5. The A.O. after considering the submissions of the assessee, issued a show cause letter and asked to explain why the total credits of ₹ 1,23,87,919/- should not be treated as de .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he purchases are genuine and all the purchases have been reported to the authorities. Under these circumstances, no disallowance can be made for sundry creditors for want of confirmation letters. The A.O. after considering the explanations offered by the assessee made additions u/s 68 of the Act towards trade creditors. While doing so, the A.O. held that the assessee has not filed the return of income for the assessment year within the due date specified u/s 139(1) of the Act, though she has got .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e creditors, thereby fails to prove the identity, genuineness of the transactions and creditworthiness of the creditors. Therefore, by invoking the provisions of section 68 of the Act, the entire trade creditors of ₹ 1,23,73,373/- has been brought to tax. 6. During the course of assessment proceedings, on verification of the books of accounts, the A.O. noticed that the assessee has made cash payments towards purchase of goods. The A.O. further noticed that on verification of the bank state .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

are issued, the cheques are issued as directed by the suppliers, therefore, there exist a business expediency in making the cash payment and hence, no disallowance can be made u/s 40A(3) of the Act. The A.O. after considering the explanations furnished by the assessee disallowed the payments by invoking the provisions of section 40A(3) of the Act. While doing so, the A.O. held that the assessee, while deposing the statement before the investigating officer stated that she had purchased goods and .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

efore the CIT(A). Before the CIT(A), the assessee reiterated the submissions made before the A.O.. The assessee further submitted that as regards the disallowance of sundry creditors u/s 68 of the Act, it was submitted that she had purchased garments from Kolkata and Howrah and the garment market in Kolkata is an unorganized market. The dealers do business on a platform provided under a tin shed. They purchase cloth from wholesale dealers and stitch the cloth and make readymade garments. The who .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ime. Unless the customers accept their conditions, it is impossible to carry any trade with them. Under these circumstances, the trade creditors remain at the end of the financial year, therefore, no disallowance can be made for want of confirmation letters. The assessee further submitted that the A.O. has not disputed the financial year results declared by her. The A.O. has accepted purchases and sales and also accepted the net profit declared for the year under consideration. Once the financia .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of cash payments u/s 40A(3) of the Act is concerned, the assessee submitted that she has made the cash payment and also bearer cheques as per the request of the sellers. The sellers being unorganized business people never accepted any cheque payments. She had paid cash as directed by the suppliers and there was a business expediency in making the cash payments, therefore, no disallowance can be made by invoking the provisions of section 40A(3) of the Act. 8. The CIT(A) after considering the expl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

because the assessee is unable to furnish confirmation letter from sundry creditors, addition u/s 68 of the Act cannot be made. Similarly, the CIT(A) deleted the additions made u/s 40A(3) of the Act. The CIT(A) deleted the additions by holding that the assessee is prevented from issuing crossed cheques. Therefore, her case is coming under the exceptions provided u/s 40A(3) of the Act read with rule 6DD of the I.T. Rules, 1962. The CIT(A) further held that on examination of the facts of the prese .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

for our consideration is deletion of additions made by the A.O. towards trade creditors, u/s 68 of the Act. The Ld. D.R. submitted that the CIT(A) was erred in deleting the additions made by the A.O., towards trade creditors by invoking the provisions of section 68 of the Act. The CIT(A) deleted the additions by stating that when the purchases and sales are acceptable to the department, the trade creditors cannot be rejected. This view of the Ld. CIT(A) cannot be accepted on account of the fact .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nd sales recorded in her books of accounts. All these important factors are completely brushed aside and deleted the additions, simply based on observation that when purchases are accepted as genuine, no addition can be made towards trade creditors. The Ld. D.R. further submitted that during the course of assessment proceedings, the assessee could not able to substantiate any trading results including purchases and sales by filing necessary bills. The assessee failed to furnish any confirmation .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e of her reputation in the market and also in good faith. The assessee has purchased the goods on credit and made the payments subsequently. The A.O. at the time of assessment has accepted the purchases declared by the assessee and at the same time made additions towards trade creditors, by stating that the assessee has not proved the identity and genuineness of the transactions. Once the purchases have been accepted as genuine, no additions can be made towards trade creditors, because of the re .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the end of the financial year. It was further submitted that these creditors are arising from out of purchases accepted by the department. It goes without saying that the department has accepted the sales and the sales are arising out of these purchases only. It is a well known fact that there cannot be any sales without purchases. When all these facts are interlinked, the assessing officer could not have disbelieved sundry creditors for want of confirmation letters. The A.R. further submitted .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e made u/s 68 of the Act, as the amounts represents purchases made on credit. When the assessing officer has accepted the purchases as genuine, no additions can be made towards trade creditors by holding that creditors are bogus. The assessee relied upon the following judgements: 1) CIT Vs. Pancham Dass Jain (2006) 156 Taxman 507 (All) 2) CIT Vs. Nikunj Eximp Enterprises Pvt. Ltd. (2015) 372 ITR 619(Bom) 3) JCIT Vs. Mathura Das Ashok Kumar (2006) 101 TTJ 810 (All) 4) High Court of Delhi Appeal N .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

low. The A.O. invoked the provisions u/s 68 of the Act and made additions towards trade creditors. The A.O. was of the opinion that the assessee has failed to furnish confirmation letters from trade creditors, therefore, fails to discharge initial onus cast upon her to prove the identity, genuineness and creditworthiness of the transactions. The A.O. further observed that the assessee has failed to furnish even bills for purchases claimed in the books of accounts. The A.O. further held that the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

but applies to any liability shown in the account, which is found to be bogus and there is no plausible and reasonable explanations from the assessee, then the amounts can certainly be added towards trade creditors. It was the contention of the assessee that she had purchased the goods from the unorganized market of Kolkata and Howrah, where the sellers of the goods sometimes do not give their identity because of various reasons. Since the suppliers facilitated her to buy the goods on credit, sh .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

se, naturally the creditors at the end of the year in the books of accounts will be quite high. The assessee further stated that when the A.O. has not doubted the genuineness of the creditors and sales, there is no reason for him to doubt the trade creditors as these creditors are arose out of credit purchases in the business. 12. The A.O. made additions solely on the ground that the trade creditors are not confirmed the transactions. The A.O. further stated that all the letters issued to the cr .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

not doubted the financial results declared by the assessee. But, he has doubted the trade creditors on the sole ground that confirmation letters have not been filed. Therefore, we are of the opinion that when the purchases having been accepted to be genuine, balance remaining outstanding at the end of the year against such purchases cannot be treated as bogus liability and additions made on that basis cannot be sustained. 13. The assessee contends that she had purchased garments from Kolkata and .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

transactions happen purely on trust and belief. As contended by the assessee, they facilitate credit purchases and allowed the customers to purchase goods on credit and make the payment subsequently. This fact was not disputed by the revenue. In fact the A.O. has accepted the purchases as genuine. Under these circumstances, addition u/s 68 of the Act towards trade creditors by holding that the confirmation letters has not been filed his not correct. 14. The A.R. submitted that the assessee is a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ters obtained from few trade creditors along with bank statements. On verification of the financial statements filed by the assessee, we find that the assessee balance sheet does not contain any asset or liability, other than the business assets such as stock in trade, sundry debtors and sundry creditors. On perusal of the financial figures declared by the assessee, we noticed that the sundry creditor payable to the suppliers of the goods is almost equal to the stock in trade held by the assesse .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

we found that for the period from financial year 2007-08 to 2011-12, the assessee declared a gross profit of 5 to 10% from her business. After meeting all expenditure, she has declared a net profit of 2 to 4%. As against this, the Assessing Officer has determined the total income for the above period and the percentage of profit to the total turnover as per the Assessing Officer is 40% to 205%. On perusal of the details submitted by the assessee, we noticed that the Assessing Officer has made a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ee, we are of the view that no businessman can earn such a huge profit in this line of business. Therefore, we are of the opinion that the A.O. has simply created high pitched demand without any valid reasons. 16. The assessee has relied on plethora of judgements and submitted that when purchases and sales are accepted as genuine, no additions can be made towards trade creditors as bogus. Therefore, it is pertinent to discuss the case laws in the light of the facts of the present case. The asses .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

see. It had recorded a finding that the two amounts represented the purchases made by the assessee on credit and, therefore, the provisions of s. 68 could not be attracted in the present case. The view taken by the Tribunal on this issue is sustainable inasmuch as, on the basis of the findings recorded by it that these two amounts represented purchases made by the assessee on credit and the purchases and sales having been accepted by the Department, the question of addition of the said two amoun .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

reproduced hereunder: Tribunal had deleted the additions on account of bogus purchases not only on the basis of stock statement i.e. reconciliation statement, but also in view of the other facts. The Tribunal recorded that the Books of Accounts of the respondent-assessee had not been rejected. Similarly, the sales had not been doubted and it was an admitted position that substantial amount of sales had been made to the Government Department i.e. Defence Research and Development Laboratory, Hyder .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ly on the basis of suspicion because the sellers and the canvassing agents had not been produced before them. 18. The assessee relied upon ITAT, Allahabad bench decision, in the case of JCIT Vs. Mathura Das Ashok Kumar (2006) 101 TTJ 810 (All). The coordinate bench of this Tribunal, under similar circumstances held as follows: All the purchases made by the assessee wherever the same have been made from the Karigars are supported by the 'Purjas' issued by it. Such 'Purjas' were fo .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

igars in whose favour such Purjas' have been issued is really not necessary; the reason being that it is the Karigar who come to the saree dealers and offers his stock for being dealt with by the same dealers. The dealers also have no occasion to feel concerned about the names and addresses of such Karigars as purchases from them are made on "credit and that too after due approval of the same through inspection and otherwise. In other words, it is only the verification of sarees that ar .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

sessment in a particular line of trade. This logic is applicable with all its force in the present case. Necessity to have the addresses of the Karigars may arise only for the purposes of making enquiries from the Karigars, so far as the assessment of the same dealers is concerned. If such a verification is not required to be made, in view of the regular system of accounting followed by the assessee as per the practice prevalent in this trade, one fails to understand as to why non-furnishing of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

by the Karigar themselves. Beyond this, the assessee is not concerned to ascertain correct or full addresses of the Karigars as the purchases have been made on credit. It is for the Karigars concerned or his nominee and/or transferee of the 'Purja' to collect his payment from the office of the saree dealer. Not that the same dealer itself has to approach the Karigars for making payments to them. It has, therefore, to be held that even if the address is incomplete or even in an extreme s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

en the liability in relation to such 'Purja' has to be treated as genuine unless of course some material is brought on record that the assessee has actually made payment against the same which is not recorded. In the present case, no such material having been brought on record, it could not be said that the liability is bogus. Even at the cost of repetition, it is stated that bogus liability presupposes two things, firstly, there is a liability incurred and secondly such liability has be .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ases of sarees made on credit basis. As the purchases have been held to be genuine and accepted as such, the credits that remained outstanding in such account cannot be treated to have remained unexplained. The balance appearing in this account, which included the disputed addition also is the sum total of purchases that remained unpaid at the end of the year. As the genuineness of such purchases has not been disputed, rather the same has been accepted, the credits stand fully explained and no a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ITO Ward-4, Rajahmundry in ITA No.316/Vizag/2009 dated 25.10.2010, held that amounts representing purchases on credit, provisions of section 68 of the Act cannot be applied. The relevant portion is reproduced hereunder: We have heard the rival submissions and carefully perused the record. The main objection of the assessee is that the trade credits cannot be added as unexplained credits under section 68 of the Act. In this regard, the Learned Authorised Representatives has relied upon the decisi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ted the purchases as genuine. The bench also noticed that the outstanding amount had been paid in the subsequent period. Hence the bench did not find any infirmity in the decision of the Learned CIT(A). 20. The Ld. D.R. relied upon the judgement of Punjab & Haryana High Court, in the case of Uplaksh Metal Industries Vs. CIT (2009) 177 Taxman 298 and also ITAT, Bangalore bench decision, in the case of Sri Abdul Gaffar Vs. ITO 99/Bang/2009. We have considered the case laws relied upon by the L .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

reditors u/s 68 of the Act. The coordinate bench, in the above mentioned case, simply rejected the miscellaneous petition filed by the assessee without any findings with regard to the additions made u/s 68 of the Act. 21. Considering the facts and circumstances of the case, we are of the opinion that no addition can be made on trade creditors, when purchase has been accepted as genuine. The CIT(A) after considering the relevant details filed by the assessee has rightly deleted the additions made .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

before investigation and also before the Assessing Officer that she has made the payment either by way of cash or bearer cheques. Therefore, there is a clear violation of section 40A(3) of the Act and accordingly, the disallowance made by the Assessing Officer should be upheld. The Ld. D.R. further submitted that though assessee claims that she has made the payments to the agents of the suppliers, failed to produce any confirmation from the respective agents, to prove that she had been under obl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

CIT(A) has rightly deleted the additions. The A.R. further submitted that the assessing officer is not correct in arriving at the above amounts for addition by holding that the payments were made in cash. The payments considered by the Assessing Officer for disallowance u/s 40A(3) of the Act, in fact includes payment made through account payee cheques. The assessee has issued account payee cheques in the names of the agents nominated by the supplier of the goods and also in few cases she has mad .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

eques in favour of the agents nominated by the suppliers. However, invoked the provisions of sec. 40A(3) and disallowed the amount for the simple reason that the assessee has not filed any confirmation letters from the agents. The A.R. further submitted that when Assessing Officer has not doubted the genuineness of the purchases, trade creditors cannot be added, by invoking the provisions of section 40A(3) of the Act. To this proposition relied upon the judgement of the High Court of Bombay, rep .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

igation that she had made the payment either by way of cash or bearer cheques. The Assessing Officer further was of the opinion that though assessee claims to have made the payment through the agents of the supplier, failed to furnish any evidences in support of her claim, therefore, disallowed the amount by invoking the provisions of section 40A(3) of the Act. It was the contention of the assessee that she was under the obligation to make the cash payment, as the suppliers have insisted for eit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

from the unorganized market of Kolkata and as per the instructions of the suppliers she made the cash payments. Unless, she obliges the instructions of the suppliers, she cannot do any business with them. The assessee further submitted that she was a small retail trader, started her business with initial investment of just ₹ 18,000/-. She had done the business because of credit facility extended by the supplier of goods, unless the supplier extends the credit facility, she cannot do any bu .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s and invoked the provisions of section 40A(3) of the Act. 26. Section 40A(3) of the Act, provides for disallowance of expenditure, where the assessee incurs any expenditure, in respect of which any payment is made to any person, in cash in excess of ₹ 20,000/-, in a single day. Similarly, proviso provided to section 40A(3) of the Act, provides for no disallowance shall be made and no payments shall be deemed to be the profit & gains of business or profession under sub section (3) and .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

prescribed. The proviso provided to section 40A(3) of the Act, exempts the payment in cash, where the assessee proves to the satisfaction of the Assessing Officer that there exist a business expediency and also other relevant factors. In the present case on hand, on perusal of the facts, we find that the assessee is a retail trader in garments. It is a well known fact that the garment industry is mostly run by the unorganized sectors of the society. As contended by the assessee, she had purchase .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ail the credit facility. Therefore, there exist a business expediency and accordingly, no disallowance can be made by invoking the provisions of section 40A(3) of the Act. We find force in the arguments of the assessee, for the reason that each and every payment in cash are not automatically get disallowed u/s 40A(3) of the Act. In a particular case, where there exists a business expediency and other relevant factors, then, the Act provides for immunity from disallowance of expenditure. If the a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

at certain payments should be made either by way of account payee cheques or drafts. But, at the same time, all payments made in cash or bearer cheques cannot be disallowed, unless the Assessing Officer proved that the payments are not genuine. Therefore, we are of the opinion that when the Assessing Officer did not doubt the genuineness of the transaction or the identity of the sellers, if the payments are genuine and if the business expediency so requires the payments in cash, then the technic .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ssing Officer was not correct in coming to the conclusion that the assessee has made the cash payments which attracts the disallowance u/s 40A(3) of the Act. 28. The primary objects of insertion of section 40A(3) of the Act in the statute is to curb the use of black money with an intention to avoid tax. In the present case on hand, on perusal of the facts, we find that there is no element of avoidance of any tax by paying the cash, as assessee has declared the purchases and sales which was accep .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

siness carried out by the assessee, such a huge profit from the retail trade of garments cannot be earned. Therefore, we are of the opinion that the Assessing Officer, without any valid reason simply made additions by invoking the provisions of section 40A(3) of the Act. If you take into account the total additions made by the Assessing Officer, it exceeds the total purchases made by the assessee in all the financial years, which cannot happen in any case. Therefore, we are of the opinion that t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of section 40A(3) of the Act amounts to double additions which is not permissible under the law. 29. The assessee relied upon the judgement of ITAT, Cuttack bench in the case of Radha Shyam Panda Vs. ITO (2015) 37 ITR (Trib) 386. The coordinate bench of this Tribunal, after considering the facts of the case held that the proviso provided to section 40A(3) of the Act, taken into consideration of nature and extent of banking facilities available, consideration of business expediency and other rele .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version