DCIT, NEW DELHI vs. M/S C.P.& ASSOCIATES PVT. LTD., NEW DELHI

Date of hearing 02.12.2022 Date of pronouncement 23.01.2023 ORDER

PER ASTHA CHANDRA, JM:

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) is not justified in deleting the addition on cash credit u/s. 68 of the I.T. Act amounting to Rs.1,07,32,329/- on the basis of additional evidence produced during the appellate proceedings, without seeking the comments of the jurisdictional Assessing Officer thereby ignoring the Income Tax Rules 46A of the Income Tax Rules, 1962.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) is not justified in deleting the addition on cash credit u/s.68 of the I.T. Act amounting to Rs.17,16,76,161/- on the basis of additional evidence produced during the appellate proceedings, without seeking the comments of the jurisdictional Assessing Officer thereby ignoring the Income Tax Rules 46A of the Income Tax Rules, 1962.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) is not justified in deleting the addition on cash credit u/s.68 of the I.T. Act amounting to Rs.12,01,52,147/- on the basis of additional evidence produced during the appellate proceedings, without seeking the comments of the jurisdictional Assessing Officer thereby ignoring the Income Tax Rules 46A of the Income Tax Rules, 1962.

4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) is not justified in deleting the addition/disallowance of selling and administrative expenses amounting to Rs.3,79,29,870/- on the basis of additional evidence produced during the appellate proceedings, without seeking the comments of the jurisdictional Assessing Officer thereby ignoring the Income Tax Rules 46A of the Income Tax Rules, 1962.

ii) Unexplained cash credit under section 17,16,76,161 68 of the Act being sundry creditors iii) Disallowance of direct expenses 12,05,57,147 iv) Disallowance of selling an administrative 3,79,29,870 expenses v) Addition on account of STCG on sale of 5,99,76,000 shares vi) Disallowance under section 14A of the Act 21,36,764 vii) Disallowance under section 43B of the Act 76,72,171

5. The assessee filed appeal before the Ld. CIT(A) challenging the ex-parte assessment on ground of notices not validly served and the additions /disallowances made by the Ld. AO. The Ld. CIT(A) rejected the assessee’s contention that the statutory notices issued by the Ld. AO were not validly served upon the assessee. His findings are recorded in para 3.3.3 of his appellate order. Thereafter, the Ld. CIT(A) proceeded to decide the appeal on merit.

“4.3.1 I have perused the order of assessment and the submissions made by the appellant alongwith material placed on record. On going through the balance sheet and profit and loss account of the appellant for the year under consideration, it is observed that during the year there has been increase in loans taken by the appellant to the tune of Rs. 1.07 crores. In_ exercise of the powers conferred on me u/s 250 (4), the appellant was asked to furnish necessary evidences in regard to the identity and creditworthiness of the party/parties extending the loan(s) as well as the genuineness of the transactions. It was submitted before me that loan has been received during the year from one M/s Aadi Dev Investment & Finance Ltd., an NBFC company. It was also submitted that such loan was repaid through banking channels in the succeeding assessment years. The creditor is an income tax assessee duly assessed to tax. A confirmation of the creditor has been placed on record. The assessment records of M/s. Aadi Dev Investment & Finance Ltd., which is assessed to tax with the ITO, Ward- 1 (1), were called for by the office of the undersigned and perusal of the same shows that total sources of funds of the company as on 31.03.2010 and 31.03.2011 were as follows.- S.No. Sources of funds As on 31.03.2010 As on 31.03.2011 Share Capital 1,77,63,400/- 1,77,63,400/-

1. 1. Securities Premium Account 10,37,60,600/- 10,37,60,600/- 2.

3. Statutory Reserve 71,217/- 71,217/- 4. Total Loan Funds 7,95,43,058/- 6,97,35,341 /- Total sources of funds 20,11,38,275/- 19,13,30,558/- .. 4.3.2 As against the above, the company has shown loans and advances to the tune of Rs.8.90,07,569/- on the assets side of its balance sheet as on 31.03.2011. The company is also an existing company as per the website of the Registrar of Companies (RoC). In other words, the identity and creditworthiness of the lender company stand established. The fact that the transaction took place through banking channels proves its genuineness as well. As per the bank statements of the appellant company filed before me during the course of appellate proceedings, the loan was received by the appellant by cheque on 05.05.2010 and returned on 22.02.2012. Further it is also a matter of record that during the instant year, the appellant credited the account of the creditor with the interest accrued of Rs. 7,32,329/- on the loan raised from the creditor. The AO has allowed the said interest but held the credit to be unexplained credit which is contrary to the judgment of the Homble Allahabad High Court in the case of CIT vs. Paneham Dess Jain 205 CTR 444, wherein it has been held as under: "3. We have heard Shri Shambhoo Chopra learned standing counsel for the Revenue. He submitted that as the respondent assessee was unable to produce the alleged creditors the provisions 68 of the Act was squarely attracted m the present ease and the assessing authority has rightly added the two amounts at the hands of the respondent-assessee. According to him. s. 68 of the Act also covers up the case of purchases made on credit. 4 The submission is misconceived. The Tribunal has recorded a categorical finding of fact based on appreciation of materials and evidence on record that the AO had accepted the purchases, sales as also the trading result by the respondent-assessee. It had recorded a finding that the aforesaid two amounts represented the purchases made by the assessee on credit and therefore the provisions of s. 68 of the Act could not be attracted in the present case We fully agree with the view taken by the Tribunal on this issue inasmuch as, on the basis of the findings recorded by it that these two amounts represented purchases made by the respondent-assessee on credit and the purchases and sales having been accepted by the Department the question of addition of the aforesaid two amounts under s. 68 of the Ad did not arise inasmuch as the provisions of s. 68 of the Act would not be attracted on purchases made on credit: 4.4 In such circumstances the factual matrix which emerges is that interest on the loan has been allowed as deduction yet the liability of loan and interest due thereon have been held as unexplained credit u/s 68 of the Act, which is judicially impermissible. Tax deducted at source on the interest on loan has been paid into the Government account on 11.03.2011 as per the challan produced before me. In any case even otherwise from the facts as laid out by the appellant the burden u/s 68 of the Act stands discharged in as much as all the three necessary ingredients i.e. identity, creditworthiness, genuineness of transactions stand satisfied. The Hon’ble Gujarat High Court in the case of DCIT vs. Rohini Builders 256 ITR 360 has held as under: “Thus it is clear that the assessee had discharged the initial onus which lays on it terms of section 68 by proving the identity of the creditors by giving their complete addresses, GIR numbers/permanent accounts numbers and the copies of assessment orders wherever readily available. It has also proved the capacity of the creditors by showing that the amounts were received by the assessee by account payee cheques drawn from bank accounts of the creditors and the assessee is not expected to prove the genuineness of the cash deposited in the bank accounts of those creditors because under law the assessee can be asked to prove the source of the credits in its books of account but not the source of the source as held by the Bombay High Court in the case of Orient Trading Co. Ltd. v. CIT [1963] 49 1TR 723. The genuineness of the transaction is proved by the fact that the payment to the assessee as well as repayment of the loan by the assessee to the depositors is made by account payee cheques and e interest is also paid by the assessee to the creditors by account payee cheques. Merely because summons issued to some of the creditors could not be served or they failed to attend before the Assessing Officer, cannot be a ground to treat the loans taken by the assessee from those creditors as non-genuine in view of the principles laid down by the Supreme Court in the case of Orissa Corporation [1986] 159 ITR 78 In the said decision the Supreme Court has observed that when the assessee furnishes names and addresses of the alleged creditors and the GIR numbers, the burden shifts to the Department to establish the Revenue’s case and in order to sustain the addition the Revenue has to pursue the enquiry and to establish the lack of creditworthiness and mere non-compliance of summons issued by the Assessing Officer under section 131, by the alleged creditors will not be sufficient to draw an adverse inference against the assessee.’’ 7. The next addition of Rs.17,16,76,161 on account of increase in sundry creditors under section 68 of the Act has been discussed by the Ld. CIT(A) in para 5 of his appellate order. In paras 5.2, 5.3, 5.4 and 5.5 of his order, the Ld. CIT(A) incorporated the submissions of the assessee. On consideration thereof, the Ld. CIT(A) came to the conclusion that the addition is neither judicially nor factually tenable and deleted the same. His findings are given in paras 5.6 and 5.7 of his order which read as under:

“5.6 I have perused the order of assessment/as well as the submissions made by the appellant alongwith material placed on record. In exercise of the powers conferred on the undersigned by section 250 (4), the undersigned called for the list of sundry creditors of the appellant as on 31.03.2011 as well as the preceding year. The books of account of the appellant were also called for and examined. The facts which emerge are that sundry creditors at the close of the year represent outstanding purchases/payments to contractors/payments for expenses at the close of the year. The AO has accepted the genuineness of the purchases. In such circumstances the creditors outstanding at the close of the year cannot be held to be unexplained credit u/s 68 of the Act as held by following judgment cited in the case of CIT vs. Pancham Dass Jain (supra). In view of the above the conclusion of the AO to regard the creditors as income is perse erroneous. Also Special Bench of Hon’ble Tribunal in the case of Manoj Aggarwal vs. DC IT 310 ITR 99 (AT) (Del) has held as under:

“For example, in the case of credit purchases, the account of the supplier is credited with the amount payable. In such a case, where the purchase is allowed as expenditure, it may not be possible for the Assessing Officer to again call upon the assessee to prove the nature and source of the credit, for the reason that the purchase itself M>as allowed as expenditure only on being satisfied that it was a genuine purchase on credit. Implicitly, the nature and source of the amount credited has also to be taken as having been explained satisfactorily. Another possible argument can be that in such a case, the amount credited is not a cash credit in the sense that some monies have been received by the assessee, but the credit represents a mere liability payable by the assessee in future. Under accounting principles, a liability can only be brought into account by making a credit entry in the books of account in favour of the person to whom the money is payable. Thus, there is marked difference between a credit representing a liability payable by the assessee and a credit representing monies received from another person. It is because of this distinction, a liability for purchase which has been credited in the account of the supplier cannot be added under section 68 of the Act, more so when the purchase has been accepted as genuine and a deduction therefore has been allowed. ” 5.7 During the course of proceedings the learned counsel has pointed out that creditors are running accounts appearing from year after year. It has been stated that assessments for six preceding assessment years have been framed u/s 153C/143(3) of the Act for A.Y(s) 2005-06 to 2010-11 and even the assessment for the succeeding A.Y. 2012-13 has been framed u/s 143(3) of the Act, with no adverse inference having been drawn about sundry creditors. During the course of proceedings the learned counsel also highlighted the replies furnished viz-a-viz the sundry creditors. It has also been stated that apart from creditors, the only other item is of advance against property of Rs. 6,45,00,000/-. In support of the same, confirmation has been placed on record, as called for u/s 250 (4). It has also been stated that in succeeding assessment year the appellant had sold a property and declared necessary profit which has been accepted. In other words, the fact remains that advance declared has been offered and assessed as income in the succeeding assessment year. In such circumstances, I have no hesitation in accepting the claim of the appellant that creditors as outstanding at the close of the year stand duly explained and the burden of the appellant stands discharged. The addition made is neither judicially nor factually tenable and is thus deleted.”

“8.5 I have perused the order of assessment and the submissions made by the appellant alongwith material placed on record. It is well settled law that no disallowance can be made on adhoc basis even in assessment u/s 144 of the Act. The Delhi Bench of Tribunal in the case of Hughes Escorts Communications Limited vs. JCIT 106 TTJ 1065 has held as under: “The assessee had claimed business promotion expenses of Rs. 8,62,152 out of which a sum of Rs. 3,00.984 was identified and reported by the tax auditors as entertainment expenses. In the original return filed, the assessee added back a sum of Rs. 1,45,492 in the computation of income as disallowable portion of entertainment expenditure. In the revised return, the assessee claimed that l/3rd of the entertainment expenses of Rs. 3,00,984 could be attributed by the participation of the employees and that only a sum of Rs. 2.00.656 could be considered as disallowable entertainment expenses under s. 37(2) of the Act. In the revised return the assessee, therefore, considered only a sum of Rs. 95.325 as disallow able portion of the entertainment expenses. The AO, however, disallow ed the entire claim of the assessee holding that the entire expenses were of an entertainment nature. The CIT(A), however, refused to allow’ the claim of the assessee that I 3rd of the entertainment expenses should be treated as not of the nature of entertainment expense because the employees of the assessee participated while entertaining the clients. Aggrieved by the order of the CIT(A), the assessee has preferred the present grounds of appeal

9. We have heard the rival submissions. The Hon'ble Delhi High Court in the case of CIT vs. Expo Machinery Ltd. (1992) 107 CTR (Del) 4 : (1991) 190 ITR 576 (Del) has held that where in the discharge of their official duties the employees of a company have their food along with the company's customers in a hotel they take food while at work because it is their duty and work to entertain the customers of the company. The Court further held that any expenditure on the food and beverages of the employees w>hen they are discharging their duties to entertain the customers of the company is to be excluded from the purview! of entertainment expenses. The Court further held that when the entertainment expenses are composite consisting of expenses on customers as well as the employees, resort has to be made to an estimate in ascertaining that part of the expenses incurred on food and beverages on the employees and the part so excluded cannot be disallowed as entertainment expenses. Considering the ratio laid down by the Hon'ble Delhi High Court in the case of CIT vs. Expo Machinery Ltd. (supra), we are of the view that the claim of the assessee that l/3rd of the entertainment expenses has to be attributed towards employees participation is just and fair and deserves to be allowed. We accordingly direct the AO to consider l/3rd of the entertainment expenses as attributable towards employees' participation and not disallowable under s. 37(2) of the Act. This ground of appeal of the assessee is allowed.” 8.6 Further the Hon’ble Gujarat High Court in the case of Dinesh Mills Ltd. vs. CIT 254 ITR 673 has held as under: “We have heard Mr. J.P. Shah, learned Advocate appearing on behalf of the assessee and Mr. Akil Qureshi, learned Counsel appearing on behalf of the revenue. Both the sides reiterated the contention raised by them before the Tribunal. Mr. Shah made a statement to the effect that in assessment year 1981-82, when the compromise decree w>as arrived at, though the assessee had claimed the balance amount of loss which w-as not allowed as a deduction during the year under consideration, the same was not allowed in the light of the fact that the assessee was claiming entire loss during the year under consideration. He further stated that out of abundant caution even if in the appeal or further proceedings pertaining to assessment year 1981-82 any deduction, from the balance of loss was allowed, the petitioner assessee would not raise any objection and surrender the same for the purpose of taxability. In view of the fact that Mr. Shah has made a statement to the effect that no deduction has been allowed in any subsequent year we hold that the assessee would be entitled to deduction of loss during the year under consideration as this is the year in which the loss on amount of embezzlement M as in f act discovered. There is no dispute as to the fact that the loss is incidental to business carried on by the assessee. The Tribunal while giving effect to this judgement shall ascertain the allowability or otherwise of the loss in the light of the aforesaid statement made by Mr. Shah and then allow deduction of the balance amount of loss in the year under consideration.” 8.7.1 In exercise of the powers conferred on the first appellate authority u/s 250 (4), the appellant was required to furnish details of selling and administration expenses claimed during the year. It is found that out of total of such expenses, the following relate to bad debts written off:- (a) M/s Jaipuria Infrastructure Developers Pvt. Ltd. : Rs.82,78,632/- (b) M/s Crown Buildtech Private Limited : Rs.3,09,54,171/- 8.7.2 Perusal/examination of the details, confirmations and copies of accounts of the above parties filed by the appellant as well as books of account in compliance to directions issued by the undersigned u/s 250 (4) reveals that income corresponding to the above amounts has been shown by the appellant in earlier assessment years and since the amounts could not be recovered from the parties in question, the same have been written off, thereby satisfying the requirements/conditions for writing off of bad debts. Accordingly, these amounts are allowable as deduction during the year. If the aforesaid amounts are excluded from the total selling and administration expenses, there is actually a decline in the same during the year vis- a-vis previous year. Accordingly, it is held that adhoc disallowance made by the learned AO is uncalled for and it is thus deleted.”

11. The addition of Rs.5,99,76,000 on account of profit earned on sale of shares made by the Ld. AO has been held to be a case of double taxation and consequently deleted by the Ld. CIT(A) observing in paras 9.5 and 9.6 as under:

“9.5 I have perused the order of assessment and submissions made by the appellant alongwith material placed on record. Perusal of the computation of income would show that appellant had declared long term capital gain of Rs. 5,75,11,874/- in the manner hereunder:

9.6 It will be thus evident that the entire profit/capital gain stands duly declared and assessed to lax. Thus it is a case of double taxation and as such the addition made is deleted.”

14. The grievance of the Revenue as canvassed by the Ld. DR is that the Ld. CIT(A) admitted additional evidence produced before him during appellate proceedings without affording an opportunity to the Ld. AO to offer his comments which is violative of Rules 46A of the Income Tax Rules, 1962. The Ld. AR submitted that the Ld. CIT(A) exercised his powers vested under him under section 250(4) of the Act.

15. We have given careful thought to the rival submissions of the parties and perused the material on records. Sub-section (2) of section 250 of the Act confers right of hearing to the assessee as also to the Ld. AO before the Ld. CIT(A). Perusal of the appellate order shows that none attended for the Department before the Ld. CIT(A) in hearings. It is well known that the proceedings before the Ld. CIT(A) are quasi-judicial proceedings and therefore, it is incumbent upon him to conform to the rules of natural justice.

16. No doubt, the Ld. CIT(A) may ask the assessee to produce additional evidence in exercise of his powers but such additional evidence should also be made available to the Ld. AO who is likely to be adversely affected by the inference drawn from such evidence. Since, in the instant case before us, the Ld. AO did not have the opportunity to have his say on the additional evidence admitted by the Ld. CIT(A), we deem it fit, in the interest of justice, to restore the impugned issues to the file of the Ld. AO to decide them afresh taking into consideration the evidence adduced by the assessee before the Ld. CIT(A) and after allowing reasonable opportunity of hearing to the assessee who will, of course cooperate in the proceedings before the Ld. AO. We order accordingly.