Addition made by Dept is Invalid in view of Quashing of Penalty Proceedings: SC [Read Judgment]

The Supreme Court, on Friday, held that that the addition under section 68 of the Income Tax Act, 1961 is needed to be quashed since the appellant or assessee, in subsequent and separate penalty proceedings offered an explanation and caused to produce affidavits and record statements of the concerned unregistered dealers and established their credentials following which penalty proceedings qua same assessment year he was exonerated from findings of concealment of Income.

The assessee, Basir Ahmed Sisodiya was served with a notice under Section 143(2) of the Income Tax Act, 1961 by the Assessing Officer, and order was passed.

This appeal involves a limited challenge to certain additions made under the heads ­ “Trading Account” and “Credits” in the assessment order. The Officer, inter alia, while relying on the Balance Sheet and the books of account, took note of the credits amounting to Rs.2,26,000/­-. The Officer treated that amount as “Cash credits” under Section 68 of the Income Tax Act and added the same in the declared income of the assessee. The Officer then proceeded to compute the income of the assessee for the concerned assessment year.

The appellant/assessee aggrieved by the order preferred an appeal before the Commissioner of Income Tax (Appeals) where the appeal was partly allowed. The appellant/assessee then filed an appeal before the High Court and the High Court opined that the amount shown as credits was nothing but bogus entries and was justly added to the income of the appellant/assessee and dismissed the appeal.

The division bench consisting of Justice A.M. Khanwilkar and Justice Dinesh Maheshwari set aside the addition made by the Assessing Officer by holding that “what needs to be noted is that the stated penalty proceedings were the outcome of the

assessment order in question concerning the assessment year 1998-1999. Indeed, at the time of assessment, the assessee had failed to produce any explanation or evidence in support of the entries regarding a purchase made from unregistered dealers. In the penalty proceedings, however, the appellant/ assessee produced affidavits of 13 unregistered dealers out of whom 12 were examined by the officer. The Officer recorded their statement and did not find any infirmity therein including about their credentials. The dealers stood by the assertion therein including about their credentials. The dealers stood by the assertion made by the appellant/assessee about the purchases on credit from them.”