Utpal Sarkar Vs DCIT (ITAT Kolkata)

SEO Title: ITAT Kolkata Ruling: Utpal Sarkar vs. DCIT on Sundry Creditors

Summary: In the case of Utpal Sarkar vs. DCIT, the assessee filed a belated return for AY 2013-14, which was selected for scrutiny due to low reported income despite substantial commission receipts. The assessment was completed ex parte under Section 144, with an addition of ₹49,86,306/- treating sundry creditors from two proprietary concerns—Sarada Trading (₹5,87,924/-) and Sarada Electronics (₹43,98,382/-)—as bogus. The CIT(A), after a remand report, reduced the disallowance to ₹35,28,140/- since ₹14,15,020/- was confirmed by creditors under Section 133(6), but the remaining amount was considered unverifiable due to unserved notices.

The ITAT found that the inter-unit transactions between the two proprietary concerns were mistakenly treated as bogus. It emphasized the principle of preponderance of probability, ruling that unverified creditors alone do not constitute bogus liabilities unless there is clear evidence of cessation under Section 41(1). A CA certificate submitted by the assessee confirmed full repayment by 31.03.2023, but lacked details on timing and mode of payment. Consequently, the ITAT directed the deletion of ₹20,76,149/- on submission of further evidence and remanded ₹14,51,991/- for verification. The appeal was partly allowed, pending reassessment by the AO.

The assessee, Utpal Sarkar, filed a belated income tax return on 30.09.2013, declaring total income of Rs. 14,15,020/-. The return was selected for scrutiny under CASS, citing the reason “Low income compared to large Commission receipt”. Subsequently, notices under section 143(2) and section 142(1) were issued.

Due to non-compliance with the hearing notice issued on 21.01.2016, the assessment was completed ex parte under section 144 of the Act. The AO made an addition of Rs. 49,86,306/- on account of unverified sundry creditors, treating them as bogus liabilities, resulting in an assessed income of Rs. 64,01,330/-.

Two Proprietary Concerns:

1. Sarada Trading

• Sundry creditors shown: Rs. 5,87,924/-

2. Sarada Electronics

• Sundry creditors shown: Rs. 43,98,382/-

The AO observed that the creditors were not verified, and the liabilities were treated as bogus. The addition represented the sundry creditors in both concerns.

CIT(A) PROCEEDINGS:

• The assessee filed an appeal before the CIT(A).
• Notices were issued, and submissions were made by the assessee on 13.11.2021.
• The CIT(A) called for a remand report from the AO.
• In the remand report dated 19.06.2018, the AO: Reduced the addition to Rs. 35,28,140/- after Rs. 14,15,020/- worth of creditors confirmed their balances in response to notices under section 133(6).
• Remaining sundry creditors for Rs. 35,28,140/- were considered bogus, as notices were returned unserved with remarks “not known”.
• The AO treated the outstanding liabilities as non-genuine and disallowed them.

ITAT FINDINGS:

(1) Proprietary Concerns Are Same Person:

• Both Sarada Trading and Sarada Electronics are proprietary concerns of the assessee.
• An inter-unit balance of Rs. 20,76,149/- shown as sundry creditor of Sarada Trading in the books of Sarada Electronics was treated as bogus, solely because the notice was returned unserved.
• ITAT found this approach to be factually incorrect, as both concerns belong to the same person, and the inter-unit entries are internal transactions.

(2) Preponderance of Probability Principle:

• Assessment proceedings are civil in nature and governed by the preponderance of probability, not strict evidence rules (refer Dhakeswari Cotton Mills Ltd. vs. CIT [1954] 26 ITR 775 (SC)).
• The failure of creditors to respond to section 133(6) notices or postal remarks like “not known” does not, by itself, make the liability bogus (see CIT vs. Raj Kumar [2014] 366 ITR 386 (Del)).

(3) Section 41(1) Not Applicable Automatically:

• The AO did not invoke section 41(1), which relates to cessation/remission of liability.
• The mere fact that creditors are not verifiable or not responding does not trigger section 41(1) unless there is evidence of remission/cessation (refer CIT vs. Alvares & Thomas [2015] 60 taxmann.com 313 (Bom)).
• The liability was not written off in the assessee’s books; hence no cessation.

(4) Confirmation & Evidence Filed:

• Assessee submitted a CA certificate, stating that all liabilities have been paid off by 31.03.2023, but no details regarding how or when these were paid.
• For Rs. 20,76,149/-, ITAT deleted the addition, subject to submission of evidence before the AO (additional evidence accepted).
• For Rs. 14,51,991/-, as the assessee failed to produce confirmations or clear repayment details, ITAT remanded the matter back to the AO for verification of repayment mode (cheques/cash) or any other satisfactory evidence.Note :-Section 41(1) – Remission or Cessation of Liability:
• No automatic application unless liability is ceased or remitted.

Case Law:

• CIT vs. Sugauli Sugar Works (P) Ltd. [1999] 236 ITR 518 (SC): A unilateral action by the assessee does not amount to cessation unless liability is clearly extinguished.
• CIT vs. Vardhaman Overseas Ltd. [2012] 343 ITR 408 (Del): Liability not ceased simply because time barred or creditor not traced.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

This appeal filed by the assessee is against the order of the Ld. Addl/Jcit(A)-13, Mumbai [hereinafter referred to as the ‘the Ld. Addl./Joint CIT(A)’] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for AY 2013-14 dated 10.04.2024, which has been passed against the assessment order u/s 144 of the Act, dated 02.12.2016 of the DCIT, Circle-23, Hooghly while the name of the respondent has been left blank in Form No. 36.

2. The assessee is in appeal before the Tribunal raising the following grounds of appeal:

“We have already declared the facts that SARADA TRADING is one of the proprietary Concern of the Assessee and also submitted the confirmation from the same.

Because the assessing officer has not rejected the purchases or the payment for the creditors.

Because there is no remission or cessation of trading liability.”

3. Brief facts of the case are that the assessee had submitted belated return through electronic medium on 30.09.2013 disclosing total income of Rs. 14,15,020/-. The return was selected under CASS for scrutiny assessment on the reason “Low income compared to large Commission receipt” and statutory notices u/s 143(2) and 142(1) of the Act were served. However, since the notice u/s 142(1) of the Act was issued on 21.01.2016 for fixing hearing on 28.01.2016, but the same could not be complied with, therefore, the assessment was completed u/s 144 of the Act ex parte. The assessee is running two separate business units in the names of Sarada Trading and Sarada Electronics whereas balance sheets of both the businesses were filed; however, a copy of profit and loss account for Sarada Trading only was filed. From perusal of the balance sheets of the two business units, it appeared that sundry creditor amounts were shown at Rs. 5,87,924/- and Rs. 43,98,382/- for Sarada Trading and Sarada Electronics respectively. Due to non-compliance on the part of the assessee, the sundry creditors remained unverified and the liability claims were added to the total income of the assessee and the total income was assessed u/s 144 of the Act at Rs. 64,01,330/- which included addition of Rs. 5,87,924/-and Rs. 43,98,382/- to the returned income of Rs. 14,15,020/-.

3.1 Aggrieved with the assessment order, the assessee filed an appeal before the Ld. CIT(A) who issued notices of hearing and in response to which the assessee filed submission on 13.11.2021. The Ld. CIT(A) also called for the remand report from the Ld. AO and in the remand report received on 19.06.2018 by the Ld. CIT(A), the quantum of disallowance was reduced to Rs. 35,28,140/- from Rs. 49,86,306/- made in the assessment order as sundry creditors amounting to Rs. 14,15,020/-had confirmed the balances in response to notices issued under section 133(6) of the Act. The assessee disputed the remaining addition as well. The Ld. CIT(A) has reproduced the remand report in respect of the claim of Rs. 49,86,306/- as sundry creditors (page 2 of the remand report of the Ld. AO has inadvertently been omitted) and out of which total disallowance being sundry creditors outstanding in Sarada Electronics and Sarada Trading at Rs. 29,40,216/- and Rs. 5,87,924/- respectively i.e. Rs. 35,28,140/- were added as the notices u/s 133(6) of the Act were returned unserved with the postal remark ‘not known’ and the claim was treated as bogus as per the remand report and disallowed. The findings of the Ld. CIT(A) in para 5.6 are as under:

“5.6 During the course of remand proceedings, the appellant could not explain that amount of Rs.35,28,140/- out of Rs.49,86,310/- is a genuine claim before the AO. It is onus of the appellant to justify all its claim made in its books of accounts with documentary evidences. Vide submission filed on 25.04.2024, the appellant submitted confirmation from Sarada Trading for amount of Rs.20,76,149/-. The appellant failed to submit this confirmation before the AO. The AO had provided an opportunity to furnish the details, but the notice issued u/s 133(6) was unserved with the remark “not known”. This fact was not brought before the AO during the inquiry for remand proceedings. However the appellant has failed do so which clearly indicates that the appellant has made his stand taking afterthought decision. Therefore, all grounds of appeal taken by the appellant are required to be dismissed and amount of disallowance is restricted to amount of Rs.35,28,140/- as per findings of the AO submitted as remand report.”

4. Aggrieved with the order of the Ld. CIT(A), the assessee has filed the appeal before this Tribunal.

5. Rival contentions were heard and the submissions made have been examined. We have considered the submission made by the assessee wherein it was submitted that the initial assessment was made u/s 144 of the Act. The assessee had responded to the first notice received in September, 2015 and the second notice was served on 22.01.2016 but adequate opportunity was not allowed. Notices were issued to the creditors, many of which confirmed the outstanding balances. The assessee could not file proper submission before the Ld. AO, therefore, the assessment order was made u/s 144 of the Act. Even in the remand report, the outstanding balance in the name of the proprietary business of the assessee in the name of Sarada Trading in the books of Sarada Electronics, which was on account of inter-unit transactions between the two concerns of the assessee himself, also was added as the notice issued was received back with a remark ‘not known’ and a sum of Rs. 20,76,149/- in the name of Sarada Trading was treated as bogus. It appears that the assessee has filed copy of the certificate of the Chartered Accountant confirming the outstanding balances against respective creditors as on 31.03.2023 which are NIL as against the sum of Rs. 14,51,991/- remaining unconfirmed during the remand proceeding, thereby stating that the outstanding balances have been repaid. The assessee has also relied upon the following judicial pronouncements.

i. M/s. Gulf Steel and Minerals V ITO ITA No. 57/RAN/16 order dated 04.05.2018 of Ranchi Bench

ii. CIT v. Vishal Transformers and Switchgears Private Limited

6. We have considered the submission made and find that even in the case of assessee’s own business, the outstanding sundry creditor of Rs. 20,76,149/- in the name of Sarada Trading in the books of Sarada Electronics has been held to be bogus since the notice issued was received back unserved from the postal authorities, which is against the facts of the case as both the units are proprietary concerns of the assessee and the income from both the units had been disclosed by the assessee. Further, initially the addition was made as the notices issued were returned unserved, for which some details/replies were received subsequently and partial relief was allowed. Both during the course of the assessment proceeding as well as during the remand proceeding, some confirmations were received in response to the notice issued. Hence, on the principle of preponderance of probability, which governs the assessment proceedings and the assessment of income, the sundry creditors earlier treated as unverifiable only for the reason of non­compliance on the part of the assessee/creditors is not wholly correct and only on this ground the liability claim could not be disallowed. The assessee contends non-application of provisions of section 41(1) of the Act, however, the disallowance has not been made specifically under section 41(1) the Act. The liability remaining unverifiable does not automatically lead to application of section 41(1) of the Act. The assessee further contends by virtue of the certificate of the Chartered Accountant that all the liabilities have been paid off as on 31.03.2023. Hence, on appreciation of the submission made, the outstanding liability on account of Sarada Trading of Rs. 20,76,149/- are directed to be deleted on furnishing of the required evidence before the Ld. AO as the same was not filed earlier before the Ld. AO and is additional evidence. That leaves a sum of Rs. 14,51,991/- for which the assessee has submitted that he is not able to connect with those suppliers for getting their confirmations and, therefore, has submitted the certificate from the Chartered Accountant regarding the outstanding balances for the impugned. However, the certificate is regarding the outstanding balance being Nil as on 31/03/2023 but the same does not state anything regarding when these amounts have been repaid. Since the assessee himself is not able to furnish any confirmation in this regard from the creditors even before the Bench but claims that the amount was repaid, but the certificate is relating to March 2023, i.e. 10 years after the impugned A.Y., this issue relating to remaining sundry creditors of Rs. 14,51,991/- is set-aside before the Ld. AO who shall verify the mode of payment or any other evidence in possession of the assessee, and in case the payment has been made by cheque or satisfactory evidence is filed, delete the addition.

6. In the result, the appeal filed by the assessee is partly allowed subject to verification as above in para 5.

Order pronounced in the open Court on 12t^h March, 2025.