Having bogus or unexplained debtors in books may result in double jeopardy for a taxpayer. Taxpayers should exercise caution while recording sundry debtors in their books of accounts. The presence of bogus or unexplained debtors may expose the taxpayer more than usual —not only the credits on that account are taxed but also going forward the amounts held in sundry debtors balances may also be taxed as undisclosed income.
In a recent case, the Hon’ble Delhi Tribunal held that bogus debtors can be treated as income in the absence of satisfactory explanation or supporting documentation. [2024] 163 taxmann.com 38 (Delhi – Trib.) [09-05-2024].
The Tribunal found that the sundry debtors were non-genuine due to the following findings, which highlighted lack of basic features in any commercial trading set up:
- Selective Dealing: Sales and purchases were conducted with only select set of selected parties.
- Mismatch in Expenses: Business expenses were not proportionate to the volume or nature of transactions.
- No freight Cost: Despite recording sales, there were no associated transportation or delivery costs—an unusual trait for any commercial trading setup.
These anomalies led to the conclusion that the debtors recorded were not real and merely book entries, justifying their addition as income under the Income Tax Act.
While the practice of obtaining confirmations from creditors is common and emphasized during audits, equal importance must be given to obtaining and maintaining confirmations from debtors. Failure to do so may result in serious tax consequences, especially where the genuineness of the debtor is in question.