Trade Advances for Gold Purchase Not ‘Unexplained Credit’: ITAT Rules Creditworthiness Test Not Required against Jewellery Trader [Read Order]
Test of creditworthiness is not required when the nature of advances established that credits is related to sale advances.
The Income Tax Appellate Tribunal ( ITAT ), Hyderabad Bench has held that customers in the ordinary course of jewellery business cannot be treated as unexplained cash credits under Section 68 of the Income-tax Act, 1961.
The tribunal held that “once it is proved that the credits relate to trade advances, then the question of examination of creditworthiness of the advance received from customers does not arise, and also additions cannot be made towards sale advances under Section 68 of the Act, as unexplained credit”.
Lalitha Padmaja Thallapalli, the appellant - assessee is engaged in the retail trade of gold, jewellery and silver articles. The appeal was filed before the appellate tribunal. It submitted that it had received advances from customers for the sale of jewellery during Assessment Year 2017-18.
The Assessing Officer treated these advances as unexplained cash credits, alleging that the assessee failed to prove the identity, genuineness and creditworthiness of the customers, and made additions under Section 68.
The Commissioner (Appeals) upheld the additions due to non-prosecution.
The assessee argued that the funds in question were trade advances, primarily obtained through banking channels, that were then juxtaposed with sales invoices that were produced either during the same fiscal year or soon after.
It was also argued that in a retail jewellery business, receipt of advances from customers is a normal commercial practice, and once the linkage between advances and sales is shown through books of account, sales bills and stock records, such receipts cannot be equated with loans or unexplained credits.
However, the income tax department asserted that the assessee had not proved creditworthiness of the customers under Section 68. It was also argued that some sales bills did not specify item-wise details, casting doubt on the genuineness of the transactions.
The two - member bench of Ravish Sood (Judicial member ) and ManjunathaG ( Accountant member) held that the assessee is not required to prove the creditworthiness of the customers once it is established that the advances were received from the customers.
Therefore it set aside the orders of the lower authorities and directed deletion of additions made under Section 68 in respect of customer advances received for purchase of gold jewellery.
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