Section 68 – Where purchases were accepted as genuine, addition of credit balance at the end of the year which was entirely out of purchases for the year, could not be made

FACTS I
In the course of assessment proceedings, the A.O. asked the assessee to explain certain amounts of sundry creditors. Notices u/s 133(6) were issued, but many of them were not complied with. Consequently, the A.O. made addition for the amount of sundry creditors. On further appeal by the assessee, the Commissioner (Appeals) confirmed the additions only in respect of two parties and deleted the entire balance addition. This was done considering the details filed by the assessee before him. The additions that were sustained were on account of failure of the assessee to furnish account details and relevant pay-out details.

Aggrieved, the assessee as well as Revenue preferred appeals before the ITAT.

HELD I
The Tribunal took into consideration the fact that the A.O. simply added the balance as on 31st March, 2004 without realising that the entire credit balance was out of the purchases made during the year, which were accepted as genuine and no adverse inference was drawn in respect thereof. Further, the assessee had paid all the outstanding amounts in the immediately succeeding years. Therefore, the ITAT allowed the assessee’s appeal and dismissed the Revenue’s ground of appeal. In reaching this conclusion, apart from the facts stated above, it also placed heavy reliance on the decision of the Delhi ITAT Special Bench in the case of Manoj Aggarwal vs. Dy. CIT (2008) 113 ITD 377. The principle upheld in that case was that once a certain amount was accepted as genuine, the same cannot be questioned later on. (The case was in respect of amount offered to tax under a Voluntary Disclosure of Income Scheme, which was credited in the books of accounts as per the requirement of the respective law on the scheme. It was held that once the amount is taxed under the scheme, the same could not be taxed again u/s 68.)

Therefore, by the same rationale, once purchases were accepted as genuine in the instant case, addition of credit balance which was entirely out of purchases for the year could not be made.

Section 40A(2)(b): Where the A.O. had not brought any comparable case to demonstrate that payments made by assessee to directors were excessive / unreasonable, no disallowance could be made

FACTS II
The assessee claimed certain amount expended towards directors’ remuneration. On asking for an explanation in respect of the same, the assessee furnished the details of remuneration paid to the directors and claimed that the same was as per industry norms and was not in excess of either the limits prescribed under the Act, or the industry norms for the particular class of industry. However, the A.O. was of the opinion that the assessee failed to justify the nature of services rendered by the directors so as to command such a huge remuneration. Therefore, the A.O. disallowed a part of the remuneration on the basis that it was excessive.

Before the Commissioner (Appeals), the assessee contended that the A.O. did not give any cogent reasons to justify the disallowance and that he grossly failed to show that such expenditure was excessive and / or unreasonable. Thus, the Commissioner (Appeals) deleted the disallowance made.

The Revenue filed a further appeal before the ITAT.

HELD II
The ITAT observed that the A.O. did not bring any comparable case to demonstrate that the payments made by the assessee were excessive / unreasonable, which is an onus cast upon him by the mandate of section 40A(2)(b).

A further observation was that the payees were also assessed to tax at the same rate of tax. The CBDT Circular No. 6-P dated 6th July, 1968 states that no disallowance is to be made u/s 40A(2) in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax. Considering the totality of the facts in light of the CBDT Circular (Supra), the ITAT dismissed the ground of appeal raised by the Revenue, thereby allowing the assessee’s claim of remuneration.