Dy. CIT v. Divine Internationl

SUBSCRIBE FOR FULL CONTENT


The Tax Publishers2012 TaxPub(DT) 0990 (Del-Trib) : (2012) 134 ITD 0148 INCOME TAX ACT, 1961 --Income from undisclosed sources --Addition under section 68Genuineness --During the assessment proceedings, assessee was required to prove and justify the sundry creditors of and to furnish complete names, addresses and PANs of all the sundry creditors. Assessee failed to furnish the same within the stipulated time and could furnish the details of only 20 creditors. AO disallowed sundry creditors holding that out of 75 sundry creditors, assessee could furnish details only in 20 cases, which were not found genuine; and that assessee grossly failed to produce any material evidence in support of genuineness of the transaction. Assessee argued that these creditors were only small time karigars, doing job works of finishing and polishing from their homes located in and nearby villages. Admittedly, they were not registered, nor were maintaining any books of account. Their income being below the prescribed limit, no income-tax returns were being filed. So to say, they did not have any record from which to confirm the transactions. The records of assessee were burnt in the fire and there was no evidence or any identification to identify them or to prove the credit balances and further argued that in the subsequent year most of the creditors were paid. Assessee further submitted that since the trading results had been accepted, the purchases made obviously stand accepted too; and therefore, no addition could have been made. Held: As per balance sheet, assessee had an outstanding liability of sundry creditor and at the same time it had assets in the form of advance to suppliers, debtors, stock, etc. which showed that creditors were genuine Taking into consideration above facts of assessee, it was a fit case not to make any addition by invoking the deeming fiction of section 68 in respect of the sundry creditors, despite the fact that assessee could not supply the addresses of these creditors. In the case of the assessee these creditors represent the outstanding amount on account of the purchases. There can be three alternative allegations against the assessee. One can be that these credits represent the credit for earlier years. If that be the case, no addition can be made in this year under section 68. The second allegation can be that these credits represent the purchases for which payments have been made by the assessee during the year itself. If this is so, the onus will be on the department to establish that assessee has made payment to these creditors. This is not even the allegation of the AO, much less his case against the assessee. The third allegation can be that these credits do not represent the purchases which have been made by the assessee. The implication of this will be that the purchases debited in the trading account are not genuine to that extent and accordingly, that the trading account is not correct. However, on going through the assessment order, the Commissioner (Appeals)'s order and the order passed by the ITAT in the earlier round, it is evident that the trading results have been accepted. Despite this, for the sake of analysis, if it is considered that the assessee has failed to prove the genuineness of the creditors and consequently, the purchases to that extent are not genuine, then the declared gross profit of Rs. 32,16,564 will get further enhanced by Rs. 37,99,907, i.e., a GP of Rs. 70,16,471 on a total turnover of Rs. 2,51,55,930 giving an exorbitant gross profit rate of 27.89%, which is not the case. It is also important to note that the assessee is in the business of exports and its entire income is exempt. There is, as such, no reason for the assessee to suppress the profit as its income. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 0990 (Del-Trib) : (2012) 134 ITD 0148

INCOME TAX ACT, 1961

--Income from undisclosed sources --Addition under section 68Genuineness --During the assessment proceedings, assessee was required to prove and justify the sundry creditors of and to furnish complete names, addresses and PANs of all the sundry creditors. Assessee failed to furnish the same within the stipulated time and could furnish the details of only 20 creditors. AO disallowed sundry creditors holding that out of 75 sundry creditors, assessee could furnish details only in 20 cases, which were not found genuine; and that assessee grossly failed to produce any material evidence in support of genuineness of the transaction. Assessee argued that these creditors were only small time karigars, doing job works of finishing and polishing from their homes located in and nearby villages. Admittedly, they were not registered, nor were maintaining any books of account. Their income being below the prescribed limit, no income-tax returns were being filed. So to say, they did not have any record from which to confirm the transactions. The records of assessee were burnt in the fire and there was no evidence or any identification to identify them or to prove the credit balances and further argued that in the subsequent year most of the creditors were paid. Assessee further submitted that since the trading results had been accepted, the purchases made obviously stand accepted too; and therefore, no addition could have been made. Held: As per balance sheet, assessee had an outstanding liability of sundry creditor and at the same time it had assets in the form of advance to suppliers, debtors, stock, etc. which showed that creditors were genuine Taking into consideration above facts of assessee, it was a fit case not to make any addition by invoking the deeming fiction of section 68 in respect of the sundry creditors, despite the fact that assessee could not supply the addresses of these creditors.

In the case of the assessee these creditors represent the outstanding amount on account of the purchases. There can be three alternative allegations against the assessee. One can be that these credits represent the credit for earlier years. If that be the case, no addition can be made in this year under section 68. The second allegation can be that these credits represent the purchases for which payments have been made by the assessee during the year itself. If this is so, the onus will be on the department to establish that assessee has made payment to these creditors. This is not even the allegation of the AO, much less his case against the assessee. The third allegation can be that these credits do not represent the purchases which have been made by the assessee. The implication of this will be that the purchases debited in the trading account are not genuine to that extent and accordingly, that the trading account is not correct. However, on going through the assessment order, the Commissioner (Appeals)'s order and the order passed by the ITAT in the earlier round, it is evident that the trading results have been accepted. Despite this, for the sake of analysis, if it is considered that the assessee has failed to prove the genuineness of the creditors and consequently, the purchases to that extent are not genuine, then the declared gross profit of Rs. 32,16,564 will get further enhanced by Rs. 37,99,907, i.e., a GP of Rs. 70,16,471 on a total turnover of Rs. 2,51,55,930 giving an exorbitant gross profit rate of 27.89%, which is not the case. It is also important to note that the assessee is in the business of exports and its entire income is exempt. There is, as such, no reason for the assessee to suppress the profit as its income.