Court upholds tax additions when assessee fails to request cross-examination of creditors

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Case Name:

Suresh Kumar T. Jain Vs Income Tax Officer (High Court of Karnataka)

Income Tax Appeal No.160 of 2010

Key Takeaways:

1. The Revenue is justified in making additions when the assessee doesn't request to cross-examine witnesses, even after being given substantial opportunity.

2. Cessation of liability must be a cessation in law, not merely because a creditor couldn't be traced.

3. The court distinguished between cases where creditors couldn't be traced and cases where creditors confirmed different balances.

Issue:

Was the Tribunal justified in upholding the additions made by applying Sections 41(1) and 68 of the Income Tax Act, based on creditors' statements, without giving the assessee an opportunity for cross-examination?

Facts:

1. Suresh Kumar T. Jain, an individual dealing in telephone instruments and electronic goods, filed a return for the assessment year 2005-06.

2. A survey under Section 133-A of the Income Tax Act was conducted on 12-3-2007.

3. The assessee failed to produce complete books of accounts despite several reminders.

4. Discrepancies were found between the creditor balances shown by the assessee and those confirmed by the creditors.

5. The Assessing Officer made additions to the assessee's income based on these discrepancies.

6. The assessee appealed to the Commissioner of Income Tax (Appeals) and then to the ITAT, both of which were dismissed.

Arguments:

Assessee's arguments:

1. Sections 41(1) and 68 of the Act couldn't be invoked.

2. There was no cessation of liability just because creditors couldn't be traced.

3. The assessee wasn't given an opportunity to cross-examine the creditors.

Revenue's arguments:

1. The case was different from situations where creditors couldn't be traced.

2. Creditors had confirmed balances different from what the assessee claimed.

3. The assessee never requested to cross-examine the creditors.

Key Legal Precedents:

1. Income Tax Appeal No.658 of 2015 (dated 24-3-2016):

This judgment held that merely because a creditor couldn't be traced, it doesn't mean there's a cessation of liability.

2. M/S. ANDAMAN TIMBERS INDUSTRIES v. COMMISSIONER OF CENTRAL EXCISE, KOLKATA-II (Civil Appeal No.4228 of 2006):

This Supreme Court judgment held that failure to grant an opportunity for cross-examination when requested makes the order untenable.

Judgement:

The High Court dismissed the appeal, ruling in favor of the Revenue. The court held that:

1. The Tribunal was justified in upholding the additions under Sections 41(1) and 68 of the Income Tax Act.

2. The assessee was given substantial opportunity but never requested to cross-examine the creditors.

3. The case was different from situations where creditors couldn't be traced, as here, creditors had confirmed different balances.

FAQs:

Q1: Why did the court dismiss the assessee's appeal?

A1: The court dismissed the appeal because the assessee never requested to cross-examine the creditors, despite being given substantial opportunity.

Q2: How is this case different from the one where creditors couldn't be traced?

A2: In this case, many creditors responded and confirmed balances different from what the assessee claimed, unlike cases where creditors couldn't be traced at all.

Q3: What sections of the Income Tax Act were applied in this case?

A3: The Assessing Officer applied Sections 41(1) and 68 of the Income Tax Act to make the additions.

Q4: Can the Revenue make additions based on creditors' statements without cross-examination?

A4: Yes, if the assessee doesn't request to cross-examine the creditors despite being given the opportunity, the Revenue can make additions based on creditors' statements.

Q5: What's the key lesson from this judgment for taxpayers?

A5: Taxpayers should actively request to cross-examine witnesses if they dispute the statements or evidence presented by the Revenue during assessment proceedings.

1. The assessee is an individual dealing in telephone instruments, mobile accessories and electronic goods. On 31-3-2006, he filed his return of income for the assessment year 2005-06 declaring a total income of Rs.6,06,780/-. The said return was processed under Section 143(1) of the Income Tax Act, 1961, (for short, ‘the Act’). On 12-3-2007, a survey under Section 133-A of the Act was conducted in the business premises. During the course of survey, the assessee was asked to produce the books of accounts for the assessment years 2005-06 and 2006-07. He did not produce the same at the time of survey. The books produced were pertaining only to purchasers and that too partly. There was no Sales Register, Stock Register, Cash Book, etc. He stated that the books are in the Auditor’s Office and would be submitted later. A physical stock was taken at the time of survey. In spite of issuing several reminders and opportunities, neither the books of accounts nor any material were produced by the assessee. Notice under Section 148 of the Act was served on the assessee. In response to the notice, the assessee filed a letter dated 30-8-2007, wherein he has stated that he has already filed his return of income on 31-3-2006, which is to be considered as a return filed in response to the notice. The assessee was heard.

2. During the course of assessment proceedings, the assessee was asked to produce the details of sundry creditors with complete addresses and confirmation letters from the creditors. He furnished the list of creditors with addresses in 39 cases and in 10 cases, no addresses were provided. No confirmation letter was filed by the assessee, in spite of several reminders, except in 2 cases. Thereafter, letters were addressed to the sundry creditors as per the addresses given by the assessee. In response to these letters, 23 creditors have furnished the details called for. On considering the same, it is found that the return of income did not tally with the figures confirmed by the sundry creditors. The details of outstanding balances as confirmed by 23 sundry creditors amounted to Rs.24,579/- as against Rs.35,57,868/- shown by the assessee for the same 23 creditors. The discrepancy amounted to Rs.35,33,289/-. (Rs.35,57,868 minus Rs.24,579/-). Out of the balance 26 creditors, in 4 cases, the credit balance were confirmed as nil. In 10 cases, the assessee did not furnish the addresses. In balance of 12 creditors, notice were returned unserved on the grounds of ‘insufficient address’, ‘no such person’, etc. and the total of such amount was worked out to Rs.29,75,621/-. In view of such discrepancies, the assessee was given a show-cause letter to furnish his explanation as to why the said discrepancies in the sundry creditors’ balances should not be added back to the income. In response, a reply was furnished, wherein the assessee has taken the following objections:

a. To qualify for inclusion or addition of any income, investments or credit, such income, investment or credit should accrue or arise during the period from 1-04-04 to 31-3-2005.

b. Although the business income is considered u/s.28, certain special item of income or investment or credit are brought to tax under specified section of the Act. It is not clear as to under which head the impugned amount would be brought to tax.

c. The sundry creditors are only “trade creditors” and not “cash creditors”. “Trade creditors” represents persons who have supplied goods and to whom the assessee has not paid purchase consideration at the end of the relevant assessment years.

d. If at all the said amount is to be assessed it should be assessed u/s.68 of the I.T. Act.

e. By applying the provision of Sec. 68, the so called “Credit” should pertain to “that previous year” i.e. previous year ended on 31-3-2005 and hence any credit pertaining to any other “previous year” cannot be charged to tax for the previous year ended on 31-3-2006, i.e. A.Y.2005-06.

The assessee has also furnished details of such amounts which totals to Rs.32,39,713/- in the said letter. The assessee contended further that out of Rs.35,33,289/- proposed by me for addition on unexplained credit, a sum of Rs.32,39,713/- does not pertain to the previous year ended on 31-3-2005 and provision of Section 68 does not apply.

f. The assesssee also submitted that out of total creditors amounting of Rs.29,75,621/- shown in annexure-II, a sum of Rs.17,69,486/- was old balance brought forward from 31-3-2004 and does not pertain to the accounting year ended on 31-3-2005 and therefore, this amount of Rs.17,69,686/- also cannot be added for the A.Y. 2005-06. Thus, the difference as detailed below was worked out by the assessee.”

3. With regard to the creditors, whose addresses were not furnished, the assessee submitted that balance of total creditors as arrived at was Rs.29,75,621 and reducing the balance as pertaining to the period ended 31-3-2004 of Rs.32,39,713/-. The difference was Rs.12,06,135/-. It was argued that some of them have closed their business or have shifted to other towns. However, the assessee undertook to produce proper and cogent evidences in support of the purchasers made by those creditors. The assessee requested for the copies of the sworn statement recorded and the confirmation letters obtained by the Department from the creditors. The same was furnished to him. Thereafter, the assessee has not raised any objections regarding the additions proposed. Thereafter, the Assessing Officer came to the conclusion that the amount brought forward balances of creditors of Rs.50,09,199/- is proven to be no longer liable and as the trading liability ceased to exist, it was added back to the returned income as cessation of liability and the balance amount of Rs.14,99,711/- was also proven to be not a genuine and this, too, was added back to the returned income as unexplained credits. Questioning the same, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals), which was dismissed. The same was challenged before the Tribunal, which was also dismissed. Hence, the present appeal.

4. By the order dated 13-6-2011, the appeal was admitted to consider the following substantial question of law:

“Whether the finding of the Tribunal upholding the impugned addition made by applying the provisions of Section 41(1) and 68 which were made by mere accepting the statements of the creditors who had not been examined and without giving opportunity for cross-examination and upholding the application of Section 68 in respect of trade credits outstanding at the end of the year on account of purchases, when the purchases have not been disputed and the trading results have been fully accepted is perverse and arbitrary?”

5. Smt. Jinita Chatterjee, the learned counsel appearing for the appellant, contends that the provisions of Sections 41(1) and 68 of the Act could not have been invoked by the Revenue. It is contended that the list of creditors having been furnished, there is cessation of liability and therefore, the findings recorded by the Assessing Officer and as confirmed by the Tribunal is incorrect. She relies on the judgment of this Court dated 24-3-2016 passed in Income Tax Appeal No.658 of 2015 with reference to paragraph No.9, wherein it was held that in legal parlance, merely because the creditor could not be traced on the date when the verification was made, the same is not a ground to conclude that there was cessation of liability. Cessation of liability has to be cessation in law, of the debt to be paid by the assessee to the creditor. The debt is recoverable even if the creditor has expired, by the legal heirs of deceased creditor. Under the circumstances, in the present case, it can hardly be said that the liability had ceased. If the liability had not ceased or the benefit was not taken by the assessee in respect of such trade liability, the conditions precedent were not satisfied for invoking Section 41(1) of the Act in the instant case. 6. The same is disputed by Sri K.V. Aravind, the learned counsel for the respondent. He contends that the judgment is not applicable to the facts and circumstances of the case on hand. In the said judgment, the creditors could not be traced on the date when the verification was made. However, in the instant case, i.e. the creditors have replied and he places reliance on paragraph No.5.1 of the order of the Assessing Officer. He pleads that details of the outstanding balances as confirmed by 23 sundry creditors amounts to Rs.24,579/- as against Rs.35,57,868/- shown by the assessee for the very same 23 creditors. In paragraph No.5.2, it is indicated that out of the balance 26 creditors, in 4 cases, the credit balance confirmed as nil and in 10 cases, the assessee has not furnished the addresses of the creditors and in 12 cases, the notice are returned as unserved for ‘insufficient address’, ‘no such person’, etc. and the total of such amounts worked out to Rs.29,75,621/-. Therefore, this is not a case, where the creditors could not be traced on the date when the verification was made as in the aforesaid judgment relied upon. Here is a case, where the creditors have confirmed the balance and provided the details as called for.

7. Therefore, on considering the contentions, we are of the view that the judgment would not come to the aid of the appellant, as the facts narrated are different to the facts of the present case. Therefore, the said judgment would not be applicable to the case on hand.

8. It is further contended that there was no opportunity granted to the appellant for cross- examination of the creditors. The appellant’s counsel relies on the judgment of the Hon’ble Supreme Court in the case of M/S. ANDAMAN TIMBERS INDUSTRIES v. COMMISSIONER OF CENTRAL EXCISE, KOLKATA-II, (Civil Appeal No.4228 of 2006), disposed off on 2-9-2015, wherein it was held that even when the assessee disputed the correctness of the statements and wanted to cross-examine, the Adjudicating Authority did not grant the opportunity to the assessee. Therefore, on failure to grant such opportunity, the impugned orders become untenable. Therefore, by placing reliance on the said judgment, she pleads that an opportunity to cross-examine may be granted.

9. The same is disputed by the learned counsel for the respondent. These are not statements made on oath. These are replies given by the creditors. Therefore, the question of enabling the assessee to cross-examine them is misplaced. He further contends that there was no request made by the assessee to cross-examine these persons.

10. The reply furnished by the assessee has been extracted at paragraph No.7 of the assessment order therein. There is no request made by the assessee seeking to cross-examine any of the persons. No material is brought on record to indicate that such a request was made.

11. In the aforesaid judgment of the Hon’ble Supreme Court, the statements made by the creditors were disputed. Further, the assessee made a request to cross-examine the creditors. Such request was not acceded by the Assessing Officer. Therefore, the Hon’ble Supreme Court was of the view that the failure to grant an opportunity to cross-examine the creditors would render the impugned order as bad in law. However, in the facts of this case, no such request was made to cross-examine the creditors. In the absence of any request being made, the question of granting an opportunity would not arise for consideration. In fact, the assessee requested for copies of the sworn statement and the confirmation letters obtained by the Department from the creditors. All of them were furnished to him. No objections were raised by him. Thereafter, the Assessing Officer passed the impugned order.

12. Under these circumstances, the plea of the assessee that accepting the statement of the creditors without granting an opportunity to the assessee to cross-examine is incorrect. Therefore, we are of the view that the Tribunal was justified in upholding the impugned additions by applying the provisions of Section 41(1) and Section 68 of the Act. That the statement of the creditors were accepted, after granting substantial opportunity to the assessee, wherein the assessee has not made any request to cross-examine the witnesses and therefore, cannot contend that no opportunity was given to cross- examine the creditors. Consequently, the substantial question of law is answered in favour of the Revenue and against the assessee.

In these circumstances, the appeal is dismissed.

SD/- SD/-

JUDGE JUDGE