Failure to produce reconciliation difference in creditor’s account is liable for addition as undisclosed income u/s 68

Short Overview Where there was a difference in creditor’s account, which was shown excess credit balance and in absence of proper reconciliation and source, entire difference of credit balance was required to be brought to tax.

AO made addition under head ‘sundry creditors’ as assessee did not furnish confirmation letters from sundry creditors in respect of outstanding balance of Rs. 2,38,22,971. AO treated 20% of unproved credits of Rs. 2,38,22,971, which worked out to Rs. 47,64,594 and added back to income. On appeal, CIT(A) held that assessee failed to reconcile  balance, (excessive credit balance shown in the hands of certain party) and confirmed addition of Rs. 25,00,000. 

It is held that When CIT(A) gave a clear finding that assessee failed to produce purchases book, stock register etc. to verify purchases or unaccounted sales, assessee took a different stand before Tribunal and argued that difference was not related to purchase and sales and it was due to the amounts received and supplies made to creditor. In any case there was a difference in creditors account which was shown excess credit balance and in absence of proper reconciliation and source, entire difference of credit balance was required to be brought to tax.

Decision: Against the assessee.

IN THE ITAT, VISAKHAPATNAM BENCH

V. DURGA RAO, J.M. & D.S. SUNDER SINGH, A.M.

Jupudi Venkateswara Rao v. ITO

I.T.A. No. 126/Viz/2019

A.Y. 2014-15

11 March, 2020

Appellant by: D.L. Narasimha Rao, AR

Respondent by: V. Rama Mohan, DR

D.S. Sunder Singh, A.M.

This appeal is filed by the assessee against the order of the Commissioner (Appeals) [CIT(A)]-2, Guntur in ITA No. 401/GNT/Commissioner (Appeals)-2/2016-17, dated 9-1-2019 for the assessment year (A.Y.) 2014-15.

2. All the grounds of appeal are related to the addition made by the assessing officer (AO) under the head ‘sundry creditors’. During the assessment proceedings, the assessing officer found outstanding ‘sundry creditors’ to the extent of Rs. 4,52,79,448 in sixteen cases out of which in nine cases, the outstanding balance remained the same. Fresh creditors were introduced in five cases. In the earlier year, the assessing officer treated 20% of the sundry creditors as unproved for assessee’s failure to furnish the confirmations. In the year under consideration also, the assessee did not furnish the confirmation letters from the sundry creditors in respect of outstanding balance to the extent of Rs. 2,38,22,971. Hence, the assessing officer treated 20% of the unproved credits of Rs. 2,38,22,971 which worked out to Rs. 47,64,594 and added back to the income.

3. Against which the assessee went on appeal before the Commissioner (Appeals) and filed written submissions. The learned Commissioner (Appeals) forwarded the written submissions of the assessee to the assessing officer and called for remand report. The assessing officer submitted the remand report which was forwarded to the assessee for submitting counter comments. In the remand report, the assessing officer submitted that there was difference of Rs. 25,50,000 in the case of M/s. Sri Venkateswara Iron Corpn., and the remaining difference was reconciled. Before the learned Commissioner (Appeals) as well as the assessing officer, the assessee explained the difference was due to non-traceability of different vouchers, bills and nonrecording of certain sale transactions and the closing stock differences. The assessee also submitted that the stock was shown at higher value for bank loan purposes and therefore, requested the assessing officer to quantify the income from such unaccounted sales and not to make the addition of the entire difference amounting to Rs. 25,50,000. However, the assessing officer submitted the remand report suggesting for addition of 20% of the difference amount in the case of M/s. Sri Venkateswara Iron Corpn., which works out to Rs. 5,10,000. Before the learned Commissioner (Appeals) also the assessee did not produce any evidence with regard to differences in sales, purchases or the stock register to support his explanation. Since the assessee failed to prove the burden and failed to reconcile the balance, (excessive credit balance shown in the hands of Sri Venkateswara Iron Corporation), the learned Commissioner (Appeals) treated the same as unexplained credit under section 68 of the Act and confirmed the addition of Rs. 25,00,000. Subsequently, the learned Commissioner (Appeals) passed corrigendum Order, dated 28-2-2019, correcting the addition of Rs. 25.50 lakhs instead of Rs. 25 lakhs.

4. Against which the assessee is in appeal before us. During the appeal hearing, the learned A.R. argued that the learned Commissioner (Appeals) has enhanced the addition without giving enhancement notice, therefore, argued that the issue should be remitted back to the file of the learned Commissioner (Appeals) or the addition should be restricted to Rs. 5,10,000, being 20% of the difference of Rs. 25,50,000 as suggested by the assessing officer in the remand report.

4.1. The learned A.R. further argued that alternatively the learned Commissioner (Appeals) ought to have sustained the addition of Rs. 1,50,000 representing the GP as per the legal position. The learned A.R. further submitted that there were factual mistakes in the order of the learned Commissioner (Appeals) and stated that as per the account copy, the difference was due to amounts received from the party, whereas in the order of the learned Commissioner (Appeals) it was stated that the difference was due to sales, which is incorrect finding, hence, submitted that the issue needs verification and hence required to be to be remitted back to the file of the assessing officer to decide the issue after verification of facts.

5. Per contra, the learned D.R. argued that in the instant case, the assessee has submitted written submissions which were forwarded to the assessing officer and the remand report of the assessing officer was also given to the assessee for his comments. Afterwards the learned Commissioner (Appeals) heard the assessee and passed the orders, thereby learned Commissioner (Appeals) followed the principles of natural justice. There was a difference of Rs. 25,50,000 in the case of Sri Venkateswara Iron Corporation, which the assessee failed to reconcile either before the assessing officer or before the learned Commissioner (Appeals). As seen from the assessment order before the assessing officer as well as the learned Commissioner (Appeals), the assessee has stated that the discrepancy could not be reconciled due to non availability of vouchers and bills. The assessee further stated that sales were affected in favour of the party, but the same were not entered in the books and he has also requested to assess the gross profit @ 5.58% on unaccounted sales. Thus the assessee himself has stated before the assessing officer as well as the learned Commissioner (Appeals) that the difference was due to unaccounted sales. The assessee has taken different argument before the ITAT stating there were mistakes in the order of learned Commissioner (Appeals) with regard to unaccounted sales, which is nothing but an afterthought and argued that the assessee is taking inconsistent stand before the Commissioner (Appeals) and ITAT, hence no credence to be given to the argument of the learned A.R. with regard to submission of factual mistakes. The assessee thought that estimation of gross income would be beneficial to him on unaccounted sales, therefore, submitted before the learned Commissioner (Appeals) that the difference was due to unrecorded sales or the inflation of purchases and stock for bank loan purposes. When the learned Commissioner (Appeals) has given a clear finding that the assessee failed to produce the purchases book, stock register etc to verify the purchases or the unaccounted sales, the assessee has taken a different stand before the ITAT and argued that the difference was not related to purchase and sales and it was due to the amounts received and the supplies made to the creditor. In any case there was a difference in creditors account which was shown excess credit balance and in the absence of proper reconciliation and the source the entire difference of credit balance required to be brought to tax. Hence argued that no interference is called for in the order of the learned Commissioner (Appeals).

6. With regard to next issue of enhancement of income by the learned Commissioner (Appeals), the learned D.R. argued that there was no enhancement in this case. As against the addition of Rs. 47,64,594, the learned Commissioner (Appeals) confirmed the addition of Rs. 25,50,000, thus, the learned Commissioner (Appeals) has given partial relief and there was no enhancement made by the learned Commissioner (Appeals), hence, no requirement of giving the enhancement notice.

6.1. Without prejudice, the learned D.R. submitted that even if it is considered that the learned Commissioner (Appeals) has enhanced the addition in the case of Sri Venkateswara Iron Corporation, the assessing officer made the addition of 20% of fresh credits accepted during the year and in the case of Sri Venkateswara Iron Trading Corporation, fresh credit was Rs. 1.00 crore, thus addition works out to Rs. 20.00 lakhs, but not Rs. 5,10,000 as contended by the learned AR. If the closing balance as on 31-3-2014 is considered, the outstanding balance was at Rs. 2,02,23,204 and 20% of the addition would come to Rs. 40,44,000. Hence submitted that there was no enhancement made by the learned Commissioner (Appeals) and further submitted that suggestion given by ITO in the remand report is not binding on the learned Commissioner (Appeals).

6.2. The learned D.R. further argued that the learned Commissioner (Appeals) has given full opportunity to the assessee to explain the difference and the assessee failed to explain the difference before the learned Commissioner (Appeals) and even before the ITAT. The learned A.R. has no explanation whatsoever with regard to difference, therefore, argued that the learned Commissioner (Appeals) has rightly confirmed the addition of Rs. 25,50,000 and no interference is called for. Accordingly, requested to dismiss the appeal of the assessee.

7. We have heard both the parties and perused the material placed on record. The first objection of the assessee in this case is that the learned Commissioner (Appeals) has enhanced the assessment without giving the enhancement notice which according to him is bad in law. We have gone through the orders of the lower authorities and observed that the assessing officer made the addition of Rs. 47,64,594 under the head ‘unproved sundry creditors’ and the learned Commissioner (Appeals) confirmed the addition of Rs. 25,50,000, thus given part relief to the assessee. Since there was no enhancement of addition made by the assessing officer, there is no case for giving enhancement notice, hence the order passed by the learned Commissioner (Appeals) is within the law. In addition to the above, the learned Commissioner (Appeals) has accepted the written submissions and forwarded the same to the assessing officer. The remand report was furnished to the assessee, calling his objections. As per the remand report, there was a difference of Rs. 25,50,000 in respect of sundry creditor, M/s. Sri Venkateswara Iron Corporation, for which the assessee was given opportunity to explain difference, thus the learned Commissioner (Appeals) has followed all formalities adhering to the principles of natural justice, thus, there is no violation of law. Therefore, we dismiss the ground of the assessee on this issue.

7.1. Even if it is presumed that the learned Commissioner (Appeals) has enhanced the addition in respect of M/s. Sri Venkateswara Iron Corporation, the assessing officer made the addition of 20% of the fresh credit accepted during the year in the case of Venkateswara Iron Corporation which was Rs. 1.00 crore and 20% of which works out to Rs. 20 lakhs, but not Rs. 5,10,000 or Rs. 5,00,000 as argued by the learned A.R. in Ground No. 3. Since we have held that no enhancement was made by the learned Commissioner (Appeals), this issue has no relevance except of academic interest.

7.2. The remaining grounds are related to confirming the addition of Rs. 25,50,000. During the appeal hearing, the learned A.R. submitted that the difference was due to the payments received, but not related to the trading transactions as observed by the learned Commissioner (Appeals). Therefore, argued that there was factual mistake in the order of the learned Commissioner (Appeals). We have gone through the assessment order as well as the learned Commissioner (Appeals) order. Before the assessing officer at the stage of remand report which was reproduced in page No. 15 of the learned Commissioner (Appeals) order in para No. 6, the assessee has submitted that the discrepancy was due to non-reconciliation of bills and vouchers. It was also stated that sales affected in favour of party during the year under review or in the earlier years, certain sale transactions might not have been reflected in the books of accounts as such transactions might have been included in the closing stock itself. It was also explained before the assessing officer that the stock was shown at higher value so as to obtain the bank loan. Thus, the assessee has requested the assessing officer to accept the gross profit @ 5.58% which would work out to Rs. 1,42,290. From the explanation offered by the assessee, it was clear that the assessee himself has submitted before the lower authorities that the transactions were due to the differences in purchases and sales which could not be reconciled. In spite of giving the opportunity to the assessee at the remand stage and before the learned Commissioner (Appeals), the assessee failed to reconcile the difference. The assessee did not prove the difference with purchase, sales registers and stock register. Hence, the learned Commissioner (Appeals) confirmed the addition. Before us, the learned A.R. advanced argument stating that there was a factual mistake in the order of the learned Commissioner (Appeals) and the difference was due to payments received. The argument of the assessee is inconsistent and not acceptable without proper reconciliation. The assessee has furnished the account copy in page No. 82 of the paper book for the period 15-6-2013 to 30-10-2013 with brought forward balance, but has not furnished the complete account. However, it is undisputed fact there was a difference of Rs. 25,50,000 which the assessee has over stated as at the end of the year under consideration and it is the obligation of the assessee to reconcile the difference and explain the reasons for difference with documentary proof. During the appeal hearing, the assessee was asked to explain the difference and reconcile the difference for which the learned A.R. could not offer any explanation. Therefore, we do not see any reason to interfere with the order of the learned Commissioner (Appeals) and the same is upheld.

7.3. The learned A.R. argued for assessment of gross profits @ 5.58% on the difference amount of Rs. 25,50,000 without any evidence for the sales and explanation of source for purchases. In the absence of proper reconciliation and evidence for purchase and sales and sources thereof, estimation of gross profit on the unreconciled difference is incorrect, hence, we dismiss the grounds raised by the assessee in Ground No. 4 to 6 for estimation of gross profit. Accordingly, we uphold the order of the learned Commissioner (Appeals) and dismiss the appeal of the assessee.

8. In the result, appeal of the assessee is dismissed.