The Delhi bench of the Income Tax Appellate Tribunal (ITAT) granted relief to Serco India and held that the addition under Section 68 of the Income Tax Act, 1961 cannot be made when the assessee established the genuineness of the sundry creditors.
The company was established as a captive service center with an objective to provide IT and IT-enabled services to Serco Group. The assessee company filed its return of income declaring a loss of Rs. 5,68,34,642/- which was processed under Section 143(1) of the Income Tax Act.
The assessment was completed under Section 143(3) of the Income Tax Act wherein addition under Section 68 of the Income Tax Act of Rs. 11,73,19,373/- was made on account of the difference between the opening balance and closing balance of sundry creditors, and ad-hoc disallowance of Rs. 4,43,77,875/- was also made on account of 20% of net ‘other expenses’ of Rs. 22,18,89,377/- debited in profit & loss account.
The assessee company preferred an appeal before the Commissioner of Income Tax (Appeal) [CIT(A)], who has decided the appeal vide order dated 21 .01.2019 wherein the CIT(A) has confirmed the addition under Section 68 of the Income Tax Act and enhanced the disallowance out of expenses at Rs. 10,18,44,938/- as against disallowance of Rs. 4,43,77,875/- made by the Assessing Officer (AO).
The Commissioner of Income Tax (Appeal) [CIT(A)] held that the mere claim of payment of these creditors through a bank does not prove that the creditors were in fact genuine. The genuineness of the sundry creditors claimed by the assessee was therefore not established. It was also mentioned that the assessee failed to furnish confirmations from creditors. With these observations, the CIT(A) confirmed the addition of Rs. 11,73,19 ,373/- under Section 68 of the Income Tax Act made by the AO.
It was submitted that sundry creditors payable as on 31.03.2013 of Rs. 21,17,67,393/- were genuine. The assessee has furnished details of sundry creditors before the CIT(A). The major amount of Rs. 17,51,45,528/- of sundry creditors was towards Serco UK. The trade payables to Serco UK have increased in Indian Rupees to Rs. 19,21,00,000/- mainly due to the increase in the exchange rate of the UK Pound.
The Two-member bench comprising of B.R.R Kumar (Accountant member) and Astha Chandra (Judicial member) held that no addition was called for under Section 68 of the Income Tax Act of Rs. 11,73,19,373/- on account of unexplained increase in sundry creditors in the books of account during the previous year.
Therefore, the disallowance of Rs. 10,18,44,938/- out of the expenses and addition under Section 68 of the Income Tax Act of Rs. 11,73,19,373/- made on account of difference in opening balance and closing balance of sundry creditors was deleted and the appeal of the assessee was allowed.
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