sectin 226(3)

Dear Sanket Sir,

In my view, If the dispute between your client and the supplier is of the nature that your client claims no liability to pay any amount to the supplier then in that case, your client should simply discuss the matter with the AO etc. and testify that there is no amount due to the supplier.

If there is some money due, but the dispute is w.r.t the amount alone, then ur client must pay up to the amount that he accepts to be payable to the supplier (or the demand, whichever is lower) (and also discuss with AO in case of shortfall.)

If however the matter is under litigation then it would be better for ur client  to simply pay off the demand and obtain the receipt from the AO regarding the payment. You would be able to get back the payment (from the supplier) so made, in case the litigation turns out to be in favour of ur client.

First of all; see if you have any proof of dispute.

If not, generate such proof by sending a registered post to the supplier that no such amount is due because of.................(show reason). If he does not recive; you can establish the dispute now. If more than three years have elapsed from the date of purchase; law of Limitation Act prevails and nobody can claim the amount due.

If previous correspondence is there; keep it ready to show. 

When you have sufficient proof of dispute,  your client can make an affidavit (statement on oath) that the sum demanded or any part thereof is not due to the assessee or that he does not hold any money for or on account of the assessee, to the best of his knowledge and belief.

This affidavit is to be filed with the Officer who has sent the notice. 

Section 226(3)(vi) of the Income Tax Act.  

Thnx Mr rakhecha, for urreply. Actually there is no proof of dispute. Shall i advice my client to ask for the statement of accounts, since he has never got that. He doesnt knw what is the outstanding according to his books. Moreover whole amount is not under dispute, but since he is not agreeing to tally the accounts payment has been held by my client.Kindly suggest.

Tell me the amount roughly and whether return for AY 09-10 has been filed by your client or not. 

Please read my PM. 

Dear Rakhecha Sir, can you pls send me the reply?? the same PM that u sent to saket? I also have a similar case in my office

Dear Sanket Sir,

I would like to draw ur attention  -

AS -29 requires Disputed amounts to be shown as Contingent Liabilty under the balance sheet, so if this is being followed then I would think this amounts to sufficient proof......Specially in case of Audited Balance Sheet..

I think the AO should withdraw his demand if u show these facts......