Income Tax Authorities fails to discuss difference in Sundry Creditors before Confirming Addition u/s 41(1): ITAT remands Matter to AO [Read Order]

The Hyderabad bench of the Income Tax Appellate Tribunal ( ITAT ) remanded the matter to the Assessing Officer ( AO ) after noting that the Income Tax Authorities failed to discuss the difference in sundry creditors before confirming the addition under Section 41(1) Income Tax Act, 1961.

The assessee Jonna Iron Mart is  a partnership firm engaged in the business of trading in iron and steel, filed its return of income for the A.Y 2017-18 declaring total income of Rs.31,98,300/-. The case was selected for scrutiny and during the course of assessment proceedings, the Assessing Officer noticed that as per the balance sheet as on 31.3.2017, the assessee has shown sundry creditors at Rs.24,58,14,826/-. The Assessing Officer called upon the assessee to file the account copies in the books of account of sundry creditors.

The assessee furnished the account copies in the books of sundry creditors. On verification, it is noticed that in some cases, there is a difference in closing balances in the books of account of the creditors and in the books of account of the assessee and thus, the Assessing Officer made addition of Rs.6,29,194/- under Section  41(1) of the Income Tax Act as cessation of liabilities.

The assessee preferred an appeal before the first appellate authority and challenged the addition made by the Assessing Officer towards difference in sundry creditors balance under Section 41(1) of the Income Tax Act. The first appellate authority has posted the appeal for hearing on 5 dates and in some dates, there was no response from the assessee and in some occasion, the assessee has requested for adjournment.

The appeal was posted for hearing finally on 29.1.2024 for which the assessee has filed a letter dated 28.1.2024 and sought adjournment on the ground that the Accountant is undergoing treatment. The CIT (A) without considering the adjournment sought by the assessee, decided the appeal and sustained the addition made towards the difference in sundry creditors balance under Section 41(1) of the Income Tax Act.

K.A. Sai Prasad, C.A representing the assessee submitted that the learned CIT (A) has erred in sustaining the addition made towards the difference in sundry creditors balance under Section 41(1) of the Income Tax Act without appreciating the fact that the assessee has filed necessary details of sundry creditors with reconciliation explaining the difference.

 Although the assessee has furnished all the details, but the Assessing Officer has made addition under Section  41(1) of the Income Tax Act without appreciating the fact that the provisions of section 41(1) only apply, when there is cessation of liabilities on account of write off of creditors by any one party. 

On the other hand, Mr. V.M. Mahidhar, representing the revenue supported the orders of the CIT (A) and submitted that, the assessee could not explain the difference in parties accounts with necessary details. Although, the assessee claimed to have filed the reconciliation explaining the difference, but no supporting evidence has been filed to prove that the said difference is on account of trade discount etc. The Assessing Officer and the CIT (A) after considering the relevant facts has rightly made the addition towards the difference in sundry creditor’s balances under Section 41(1) of the Income Tax Act.

The bench  find the  CIT (A) has also disposed of the appeal filed by the assessee for non-prosecution by rejecting the petition filed by the assessee for adjournment, but the issues involved in the appeal was not discussed on merit on the basis of material available on record.

Since, both the authorities have failed to consider the issues in the light of the relevant provisions of the Act and also contrary to the principles of natural justice, further the considered opinion, the issues need to go back to the file of the Assessing Officer for fresh consideration.

Thus, the single member bench of the tribunal comprising Manjunatha G (Accountant member) set aside the order of the CIT (A) and restore the issue back to the file of the Assessing Officer and direct the Assessing Officer to verify the claim of the assessee with reference to the evidences that may be filed to explain the difference in certain parties account

Further the assessee was directed to submit necessary evidence before the Assessing Officer and explain the difference computed in respect of sundry creditors balance in few accounts with details. Accordingly appeal filed by the assessee was allowed.

To Read the full text of the Order CLICK HERE

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