Income from undisclosed sources—Addition under section 68—Liability payable as a consequence of trading transaction

short overview : Since transaction between assessee and truck owners was a liability which assessee had to pay arising from trade transaction and same could not be added under section 68.

Assessee was engaged in transportation activities. AO treated outstanding balance in the account of certain parties as appearing in assessee’s books as unexplained creditors on the ground that assessee failed to provide supporting documentary evidence, i.e., copy of ITR, capital account, balance sheet bank statement. Accordingly, AO made addition under section 68. Assessee’s case was that outstanding amount/balances were in the nature of amount due against truck owners who had transported goods for assessee; and when assessee received payments from principal it was paid to the truck owners. Assessee was only a conduit for disbursing freight to individual truck owners and that truck owners got entire freight received from respective parties after deducting booking charges of each booking which was the assessee’s income from transportation. Therefore, temporary balance in the account of above parties for a nominal period could not be termed as cash credit. Also, assessee furnished entire details of trade creditors and list showing names of truck owners, truck number, GIR No., PAN of the Truck owners, amount of freight payable.

it is held that There is a difference between credit representing a liability payable by assessee and credit representing monies received from another person. It is because of this distinction a liability which arises as a consequence of any purchase resulting in a corresponding credit to the account of supplier cannot be added under section 68. In the instant case, transaction between assessee and truck owners was a liability which assessee had to pay arising from trade transaction and same could not be added under section 68.

In assessee’s favour.

IN THE ITAT, JODHPUR BENCH

N.K.SAINI, V.P. & A.T. VARKEY, J.M.

ITO v. Ashok Transport Co.

ITA No. 336/Jodh/2018

10 May, 2019

Appellant by: P.K. Singi, Departmental Representative

Respondent by: Rajendra Jain, Advocate

A.T. Varkey, J.M.

This is an appeal preferred by the Revenue against the order of learned Commissioner (Appeals)-1, Jodhpur, dated 18-4-2018 for assessment year 2014-15.

2. The first ground of appeal of the revenue is as under :–

“1. The Commissioner (Appeals) has erred in law and in facts in deleting the addition of Rs. 78,22,863 made by assessing officer on account of unexplained payable sundry creditors ignoring the fact that identity, creditworthiness and genuineness of the transactions had not been proved during assessment proceedings.”

3. Brief facts of the case are that during the assessment proceedings the assessing officer noted that the assessee has submitted only list of sundry creditors which was shown as payable in the audit report of Rs. 78,22,863. According to the assessing officer, the assessee has failed to give supporting documentary evidence i.e. copy of ITR, capital account, Balance Sheet, bank statement to prove the creditworthiness, identity and genuineness of the sundry creditors which is shown as payable in the audit report.

According to assessing officer, the assessee also failed to produce cash book, ledger, bilty, registered log book etc. and in the absence of books of account and relevant documents it could not be verified the veracity of the outstanding shown as creditors in the Balance Sheet and, therefore, the assessing officer made an addition of Rs. 78,22,863 on account of unexplained payable sundry creditor under section 68 of the Act. Aggrieved, the assessee preferred an appeal before the learned Commissioner (Appeals) who was pleased to delete the same. Aggrieved, the assessee is before us.

4. We have heard rival submissions and gone through the facts and circumstances of the case. It was brought to our notice that during the assessment proceedings the assessee has explained not only before the assessing officer but also before the JCIT, Range-1 that the outstanding amount of Rs. 78,22,863 is in respect of outstanding liability shown in respect of freight payable as on 31-3-2014 and it was clearly brought to the notice of the authorities below that the outstanding amount to its parties are not in the form of credits or loan at any given point of time. It was also brought to the notice of the authorities below that the outstanding amount/balances were in the nature of amount due against truck owners who had transported the goods for the assessee; and when the assessee receives the payments from principal on behalf of such transferee it is paid to the truck owners. It was brought to our notice that the assessee is only a conduit for disbursing the freight to individual truck owners and that the truck owners got the entire freight received from the respective parties after deducting booking charges of each booking which is the assessee’s income from the transportation. Therefore, according to the assessee, the temporary balance in the account of the above parties for a nominal period cannot be termed as cash credit. It was also brought to our notice that the entire details of the trade creditors (freight payable as on 31-3-2014) and list showing names of the truck owners, truck number, G.I.R. No., PAN of the Truck owners, amount of freight payable and date on which same was paid by the assessee were placed on record of the assessing officer & JCIT during assessment proceeding itself. However, the assessing officer has turned a blind eye on these documents and has wrongly stated that no documents were produced and on that pretext has made the addition. We note that during appeal the learned Commissioner (Appeals) appreciating the aforesaid facts has rightly observed that these creditors are trade creditors as these payments are made on regular basis after these truck owners deliver the goods as per instruction of assessee. On this issue, we note that the Special Bench of this Tribunal comprising of five Members in the case of Manoj Agarwal v. DCIT reported as (2008) 113 ITD 377 (Del) : 2009 TaxPub(DT) 0672 (Del-Trib) has explained by the Tribunal as under :–

“The argument that section 68 is not applicable where an asset is sold and the sale proceeds are credited in the books of account cannot be accepted having regard to the settled legal position that it is always for the assessee to explain the nature and source of the sums credited in his books of account. The section does not recognize any distinction between amounts credited in the books as gifts or loans or pure receipts, on the one hand, and amounts credited as sale proceeds. In either case, when called upon, the assessee is bound to explain the nature and source of the amounts credited. There may be a few exceptions to this general rule. For example, in the case of credit purchases, the account of the supplier is credited with the amount payable. In such a case, where the purchase is allowed as expenditure, it may not be possible for the assessing officer to again call upon the assessee to prove the nature and source of the credit, for the reason that the purchase itself was allowed as expenditure only on being satisfied that it was a genuine purchase on credit. Implicitly, the nature and source of the amount credited has also to be taken as having been explained satisfactorily. Another possible argument can be that in such a case, the amount credited is not a cash credit in the sense that some monies have been received by the assessee, but the credit represents a mere liability payable by the assessee in future. Under accounting principles, a liability can only be brought into account by making a credit entry in the books of account in favour of the person to whom the money is payable. Thus, there is marked difference between a credit representing a liability payable by the assessee and a credit representing monies received from another person. It is because of this distinction, a liability for purchase which has been credited in the account of the supplier cannot be added under section 68 of the Act, more so when the purchase has been accepted as genuine and a deduction therefor has been allowed. In all other cases including the case of a credit representing the sale proceeds of an asset, the provisions of section 68 are applicable and it is for the assessee to prove satisfactorily the nature and source of the monies…..”

5. From a bare reading of the aforesaid dictum of law as made by the Special bench, we note that there is a difference between credit representing a liability payable by the assessee and a credit representing monies received from another person. It is because of this distinction a liability which arises as a consequence of any purchase resulting in a corresponding credit to the account of the supplier cannot be added under section 68 of the Act, more so, when the purchase has been accepted as genuine. In other cases involving actual receipt of money, the provisions of sec. 68 are applicable and then the onus is on the assessee to prove satisfactorily the nature and source of the monies. In the present case we note that the transaction between the assessee and the truck owners is a liability which assessee had to pay arising from the trade transaction of Rs. 78,22,863 which is reflected under the head ‘other payable’ has arisen as a consequence of the aforesaid trade transaction and the sum of Rs. 78,22,863 represented the liability to pay the truck owners by the assessee once he receives from the principal. We note the entire turnover on transportation of Rs. 11,70,63,030 has been accepted by the assessing officer as genuine, so question of addition of the sum of Rs. 78,22,863 which represented the liability to pay the truck owners by assessee cannot be added under section 68 of the Act. Therefore, we do not find any infirmity in the order of the Commissioner (Appeals) and we agree that section 68 of the Act was wrongly invoked in the present case in respect of the outstanding liability payable by the assessee to the truck owners.

6. Similar view was also taken by the Hon’ble Delhi High Court in the case of CIT v. Ritu Anurag Agarwal reported as in (ITA No. 325/2008, dt. 22-7-2009) wherein the Hon’ble High Court held :–

“This finding of assessing officer remained undisturbed before the Commissioner (Appeals) as well and has been accepted by the ITAT. Proceeding on this basis, the ITAT observed that the soles, purchases as well as gross profits as disclosed by the assessee have been accepted by the assessing officer. Once this is accepted, we are of the opinion that the approach of the ITAT was correct inasmuch as the assessing officer did not consider this aspect while making additions of sundry creditors under section 68 of the Income Tax Act. As there was no case for disallowance for corresponding purchase, no addition could be made under section 68 inasmuch as it is not in dispute that the creditors outstanding related to purchases and the trading results were accepted by the assessing officer. We are, therefore, of the opinion that no substantial question of law arises for consideration in this case. The appeal is accordingly dismissed. “

7. We also rely on the decision of the Hon’ble Allahabad High Court in the case of CIT v. Pancham Das Jain (2006) 205 CTR 444 (All) : 2006 TaxPub(DT) 1807 (All-HC) wherein it was held as under :–

6. We have heard Sri Shambhoo Chopra, learned standing counsel for the revenue.

7. He submitted that as the respondent-assessee was unable to produce the alleged creditors the provisions of section 68 of the Act was squarely attracted in the present case and the assessing authority has rightly added the two amounts at the hands of the respondent-assessee. According to him section 68 of the Act also covers up the case of purchases made on credit.

8. The submission is misconceived. The Tribunal has recorded a categorical finding of fact based on appreciation of materials and evidence on record that the assessing officer had accepted the purchases, sales as also the trading result disclosed by the respondent-assessee. It had recorded a finding that the aforesaid two accounts represented the purchases made by the assessee on credit and, therefore, the provisions of section 68 of the Act could not be attracted in the present case. We fully agree with the view taken by the Tribunal on this issue, inasmuch as, on the boss of the findings recorded by it that these two amounts represented purchases made by the respondent-assessee on credit and the purchases and sales having been accepted by the department, the question of addition of the aforesaid two amounts under section 68 of the Act did not arise inasmuch as the provisions of section 68 of the Act would not be attracted on the purchases made on credit.

9. We, accordingly, answer the question referred to us in affirmative, i.e., in favour of the assessee and against the revenue. There will be no order as to costs.”

8. We also rely on the findings recorded in the decision of the Hon’ble Punjab High Court in the case of PCIT v. Sh. Kulwinder Singh in (ITA No. 72 of 2017, dt. 12-7-2017) : 2017 TaxPub(DT) 5079 (P&H-HC) wherein the Hon’ble Court held as under :–

4. A perusal of the order passed by the Tribunal shows that the assessee had shown numerous sundry creditors along with details in his balance sheet. The assessee being a road Contractor received material for the construction of the road. The amounts in question represented purchases made on credits. According to section 68 of the Act, where any sum is found credited in the books of account of an assessee maintained for any previous year and the assessee offers no explanation about the nature and source of the same or the explanation offered by him is not satisfactory in the opinion of the assessing officer, the sum so credited may be charged to income tax as the income of the assessee of that previous year. It has been categorically recorded by the Tribunal that the provisions of section 68 of the Act were clearly not attracted to the amount representing purchases made on credits. Further the trade creditors in the earlier gears i.e. assessment years 2007-08 and 2008-09 stood accepted in scrutiny assessments. Thus, the genuineness of expenses under consideration could not be doubted. The relevant findings recorded by the Tribunal in this regard read thus :–

“Having heard the rival contentions in the light of the material available on record, it is seen that in para-3 of the assessment order, the assessing officer observed that the assessee had shown numerous sundry creditors along with details as was available from the examination of the assessee’s books of account vis-a-vis his balance sheet. The assessee is a road contractor. He received material for the construction of the road. The amounts in question represented purchases made on credits. The provisions of section 68 of the Act are clearly not attracted to amount representing purchases made on credits, as is also held in ‘CIT v. Pancham Dass Jain’, (2006) 205 CTR 444 (All) : 2006 TaxPub(DT) 1807 (All-HC). The assessee raised this issue by Way of written submissions (APB 37 to 160, relevant portion at para-5, on page 43), dated 10-5-2014 filed before the Commissioner (Appeals). The learned Commissioner (Appeals) has, however, not addressed this grievant at all and merely upheld the addition made under section 68 of the Act On behalf of the assessee, a comparative chart of net profit rate of the assessee for the assessment years 2005-06 to 2011-2012 has been filed before us. In the earlier years also, no such addition was made. For the assessment year 2007-08, under scrutiny assessment, the assessment was made at 8%. The position remained much the same for the assessment year 2008-09. The year under consideration is assessment year 2009-10. The material supplied to the assessee by the concerned department is part of the assessee’s turnover. The net profit rate of the assessee for the year under consideration u)as in line with the preceding assessment year. Further, the trade creditors in the earlier years, i.e. assessment years 2007-08 and 2008-09 stands accepted in scrutiny assessments. Thus, the genuineness of the expenses under consideration cannot be doubted. Moreover, the genuineness of the expenditure was not at all called into question. It was only that no-verification thereof raised doubt of the incurrence thereof. Then, even if the credits concerning the purchases and transportation of the material are not to be accepted, as discussed, still, the provisions of section 68 of the Act cannot be invoked to make the addition.”

5. Learned counsel for the appellant-revenue has not been able to show that the findings recorded by the Tribunal are illegal or perverse or based on misreading of any material on record, warranting interference by this Court. Thus, no substantial question of law arises. Consequently, the appeal stands dismissed.”

9. In the light of the above judicial precedents, we confirm the order of the learned Commissioner (Appeals) that the addition under section 68 of the Act was erroneously made by assessing officer against the sundry creditors of Rs. 78,22,863 to whom the assessee had to pay the truck owners which is a liability for delivering goods and the learned Commissioner (Appeals) has rightly deleted the same. Therefore, we dismiss this ground of appeal of the revenue.

10. Second ground of appeal of the revenue is against the action of the learned Commissioner (Appeals) in deleting the addition of Rs. 11,86,100 on account of showing low bilty charges.

11. Brief facts of the case are that the assessing officer noted that after receiving direction from the JCIT, Range-1, Jodhpur he asked the learned Authorised Representative in respect of certain details about bilty charges received by the assessee. According to the assessing officer, it was asked specifically asked as to whether bilty charges is inclusive in the receipt from the company or whether it is collected separately from the truck owners. According to assessing officer, the learned Authorised Representative of the assessee failed to give reply on this issue and the written reply given by the assessee was found inadequate and improper and taking note that the assessee failed to give the list of bilty received amount of Rs. 11,55,100, the assessing officer estimated the bility charges received during year at 2% of Rs. 11,70,63,030 which comes to Rs. 23,41,260 and since the assessee has already declared bilty charges of Rs. 11,55,100 the difference of Rs. 11,86,160 on account of showing low biltly charges was added in the hands of the assessee. Aggrieved, the assessee preferred appeal before the learned Commissioner (Appeals), who was pleased to delete the same. Aggrieved, the revenue is before us.

12. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessing officer had asked the learned Authorised Representative of the assessee whether the bilty charges was inclusive in the receipt from the company or whether it is collected separately from the truck owner and since the learned Authorised Representative of the assessee failed to give satisfactory answer, he had proceeded to make the addition as aforesaid. We note that the learned Commissioner (Appeals) has called for the assessment records and the learned Commissioner (Appeals) has made a finding of fact that bility charges were inclusive in the receipt from the company, which finding of fact has not been challenged by the Revenue, so, this finding of fact by learned Commissioner (Appeals) crystalises. Moreover, we note that the assessee had produced the books of account during the assessment proceedings. However, the assessing officer for reasons best known to him has stated that the assessee failed to produce any books of account. It was submitted before us that during the assessment proceeding the books of account were also produced before the JCIT, Range-1, Jodhpur in the proceedings under section 144A of the Act and it was also brought to our notice that the JCIT, Range-1 after due verification from the documentary evidence, material information submitted by the assessee had given limited directions to the assessing officer for verification.

We note that the assessee had already declared bilty charges to the tune of Rs. 11,55,100 which is 0.98% of the total receipt. It was brought to our notice that in the previous assessment year 2013-14 when the freight receipt was Rs. 8,.10,32,496 bilty charges was Rs. 8,65,025 which was 1.06% whereas in this assessment year 2014-15 freight receipt was Rs. 11,70,63,030 bilty charges was reflected by the assessee at Rs. 11,55,100 which is 0.99%. We note that since the assessee has produced all the books of account etc. without finding any defect or irregularities therein, the assessing officer ought not to have gone for estimation of income, without rejecting the books as per the procedure prescribed under section 145(3) read with sec. 144 of the Act, and, therefore, the action of the assessing officer was arbitrary in nature and so vitiated, therefore, the action of the learned Commissioner (Appeals) who after due verification made by him does not require any interference from our part and, therefore, we confirm the action of learned Commissioner (Appeals) and dismiss this ground of appeal of revenue.

13. In the result, appeal of the revenue is dismissed.