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Income Tax Appellate Tribunal, “ B ” BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED & Ms. MADHUMITA ROY
O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)–7, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)-7/446/14-15 dated 20/02/2017 arising in the assessment order passed under s.143(3) r.w.s.144 of the Income Tax Act, 1961(hereinafter referred to as "the Act") dated 13/01/2015 relevant to Assessment Year (AY) 2012-13.
The assessee has raised the following grounds of appeal:-
1) The order passed by the Ld CIT(A) is against law, equity and justice.
Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 2 - 2) The Ld CIT(A) has erred in law and/or facts in upholding the order of the Ld.AO of addition of outstanding balances of sundry creditors of Rs.1,09,29,037/-. 3) The Ld CIT(A) has erred in law and/or facts in upholding the 1/5 of expenses including depreciation allowance being Rs.14,25,298/- out of total expenses disallowed by the Ld.A.O. 4) The Ld.CIT(A) has erred in law and/or facts in upholding the order of the Ld.AO of addition of Rs.1,83,166/- of interest income. 5) The appellant craves liberty to add, amend alter or modify all or any grounds of appeal before final disposal.
2. At the outset, we note that the issue raised by the assessee in ground No. 1 and 5 are general and therefore no separate adjudication is required. Accordingly, we dismiss the same as infructuous.
3. The 1st issue raised by the assessee in ground No. 2 is that the learned CIT (A) erred in confirming the addition made by the AO for Rs. 1,09,29,037/- on account of outstanding balance of sundry creditors.
The facts in brief as culled out from the order of the authorities below are that the assessee in the present case is a partnership form and engaged in Cotton business. The AO during the assessment proceedings required the assessee to furnish the necessary details for the current liabilities amounting to Rs. 1,09,29,037/- as shown in the Balance Sheet as on 31st March 2012. But the assessee failed to appear before the AO and also fails to submit any documentary evidence. Thus the AO in the absence of any documentary and explanation treated the impugned
Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 3 - liability as unexplained and therefore the same was added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT (A).
The assessee before the learned CIT (A) in support of its contention filed the necessary details which were forwarded to the AO for his remand report. The AO in his remand report dated 9th January 2017 submitted as under: i. The assessee has furnished only the ledger copies in support of the current liabilities/ sundry creditors. ii. In the majority of the cases, there was no postal address of the sundry creditors. iii. There was no confirmation from creditors filed by the assessee in support of the sundry creditors. iv. There was no reply in response to the notices issued under section 133(6) of the Act in respect of the sundry creditor where the addresses were available. v. The impugned addition was not made under the provisions of section 41(1) of the Act as claimed by Assessee but the same was made under section 68 of the Act as assessee failed to explain the credit entries appearing in Balance Sheet.
Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 4 - The assessee in response to the remand report submitted in its rejoinder dated 10th February 2017 that the AO in the original proceedings treated the amount of Rs. 1,09,29,037/- as the cessation of trading liabilities whereas the AO in the remand proceedings treated the same as unexplained cash credit under section 68 of the Act.
The assessee furnished the breakup of the impugned trading liability as detailed under: (i) Sundry creditors (farmers) of Rs. 98,26,896/-. (ii) Other Sundry Creditors for expenses of Rs. 10,82,141/-. Further, the assessee regarding the sundry creditors (farmers) of Rs. 98,26,896/- submitted that most of such liabilities arising from the preceding year, which was reflecting on the balance sheet of the previous. There was scrutiny assessment in the previous year under section 143(3) of the Act in which the amount of sundry creditors was accepted.
The assessee also claimed that the purchases corresponding to such sundry creditors have been accepted by the Revenue in the previous year in the assessment framed under section 143(3) of the Act.
Moreover, the provisions of section 68 can’t be applied in the case on hand, as the sundry creditors were carried forward from the earlier year.
Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 5 - The assessee regarding the remaining sundry creditors for expenses of Rs.10,82,141/- submitted that it includes an opening balance of Rs.1,91,500/- which was carried forward from the earlier year.
The assessee also claimed that the expenses corresponding to such sundry creditors had not been disputed. Therefore the same cannot be treated as cash credit under section 68 of the Act.
The assessee also claimed that it had produced the books of accounts and supporting vouchers during the remand proceedings before the AO which were accepted without pointing out any defect therein.
However, the learned CIT(A) disagreed with the contention of the assessee and confirmed the order of the AO by observing as under:
“7.2. I have considered the assessment order, facts of the case and the submissions made by the appellant. During remand proceedings, the AO verified all the submissions made by the appellant and it is seen that the appellant only produced the ledger account of sundry creditors. It is seen from the submission made before me as well that no confirmed copies of sundry creditors have been produced. In fact, even the complete addresses of the creditors are not available. Therefore, the appellant has not been able to satisfactorily explain the sundry creditors and merely producing copies of ledger accounts, that too unsigned accounts, does not have any evidentiary value. Further, the claim of the appellant that the addition was made u/s.41(1) of the Act is misplaced since the addition was not made by the AO on account of remission of liabilities but in the absence of any evidence or explanation in respect of the amount of Rs.1,09,29,037/-. In view of the discussion above, the addition made by the Assessing Officer is confirmed. Ground of appeal No.3 is dismissed.”
Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 6 - Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.
The learned AR before us filed a paper book running from pages 1 to 129 and reiterated the submissions as made before the learned CIT (A). The learned AR also submitted that the liabilities on account of sundry creditors are very much appearing in the balance sheet of the assessee. As such, these were not written off in the books. Therefore, there is no possibility of treating such sundry creditors as ceased to exist in the books of accounts.
The learned AR also claimed that the addition was made by the AO and the learned CIT (A) under section 68 of the Act. Therefore, there cannot be any reference to the provisions of section 41(1) of the Act.
The learned AR also submitted that the provisions of section 68 are applicable where there is cash credit found in the books of accounts of the assessee. As per the learned AR, the sundry creditors were carried forward from the previous year. As there was no cash credit in the year under consideration, therefore the impugned creditors cannot be treated as unexplained cash credit under section 68 of the Act.
On the other hand, the learned DR submitted that the liabilities have ceased to exist in the books of accounts as the assessee failed to furnish the necessary details in support of its contention. The learned DR in support of his claim relied on the following orders:
Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 7 - 1. Gujtron Electronics (P.) Ltd. v. ITO (2017) 83 taxmann.com 389 (Gujarat) 2. West Asia Exports & Imports (P.) Ltd. v. ACIT Company circle III (2019) 104 taxmann.com 170 (Madras) 3. CIT v. Chipsoft Technology (P.) Ltd. (2012) 26 taxmann.com 109 (Delhi) The learned DR also claimed that the addition was made by the authorities below under section 41(1) of the Act. The learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The AO in the assessment proceedings has treated the sundry creditors amounting to Rs. 1,09,29,037 /- as unexplained and therefore the same was added to the total income of the assessee. However, the AO in the remand report submitted that the impugned sundry creditors in the absence of sufficient documentary evidence were treated as unexplained cash credit under section 68 of the Act.
The 1st issue before us arises for our adjudication whether the impugned sundry creditors for the purchases and the expenses are liable to be taxed under section 41 (1) of the Act or 68 of the Act.
Regarding the applicability of the provisions of section 41(1) of the Act, we note that it is applicable when the assessee has claimed deduction in Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 8 - respect of any loss, expenditure or trading liability and subsequently such liability ceases to exist. Indeed, the assessee in the case on hand has claimed the deduction for the purchases and the expenses incurred by it. But the same has not ceased to exist in the books of accounts. Therefore we are of the view that the provisions of section 41(1) of the Act cannot be applied to the case on hand. In this regard we find support and guidance from the judgment of Hon’ble Gujarat High Court in the case of CIT Vs. Bhogilal Ramji Bhai Atara reported in (2014) 43 Taxmann.com 55 (Gujarat) wherein it was held as under: � Section 41(1) would apply in a case where there has been remission or cessession of liability during the year under consideration subject to the condition contend under the statute being fulfilled. Additionally such cessation or remission has to be during the previous year. � In the instance case, both the elements are missing. There was nothing on record to suggest that there was remission or cessation of liability that too during the previous year relevant to assessment year under consideration. It undoubtedly a curious case. Even the liability itself seems under serious doubt. The assessing officer undertook the exercise to verify the record of so called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee, nor did they know him. Of course the enquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of the liability. Therefore the amount in question can’t be added back as deemed income u/s 41(1). � This is one of the strange case where even if the debt itself found to be non genuine from very inception, at least in term of section 41(1) there is no cure for it. Regarding the case laws relied by the learned DR in support of his contention, we note that the same are distinguishable from the present facts of the case.
In the case of Gujtron Electronics Private Ltd(supra).
Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 9 - The assessee has launched a scheme of sales promotion in F.Y 1986-87. As per scheme, the assessee would enroll a member, who would deposit a sum of Rs. 500 with the company. If such member in turn enrolls four members within a period of 12 month, would be entitled to get a black and white TV set manufactured by the assessee for free of cost. By this scheme assessee has collected huge sum of 7.87 cr. treated the same as outstanding trade liability under the head customer advances. In the subsequent year assessee used the fund for investment purpose and earned interest income on the same.
The fact of the above case is completely different from the case under observation, in current case sundry creditors are against the purchases and expenses incurred in earlier year and as well as in year under consideration. However in case of Gujtorn Electronics as per scheme it was very clear that the scheme was for 12 months and after that right of the member will be seized. Therefore in our opinion above case submitted by learned DR is not applicable to the case under observation.
In case west Asia Export & Import (P.) Ltd (Supra)
The assessee was earlier engaged in the business of Timber, but about 10 year back from assessment year, closed its timber business and switched over to Recruitment of manpower for sending personnel to gulf countries. However assessee was steel showing in his balance sheet sundry creditors representing timber supplier.
Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 10 - In this case, Hon’ble Madras HC noted that the assessee has changed its business of Timber to an entirely different nature of business about 10 year back, and then no any old timber business creditor came forward to make any claim from assessee in all these year. And also assessee did not submit any written confirmation from such creditors. In such circumstances certainly an inference that the business link of the creditors with the assessee and the survival of the claim has totally vanished.
In our considered view that the facts of the above case and other cases cited by the ld. DR are also different from the facts of the current case under observation, therefore, we are not inclined to take the guidance from such judgments.
The 2nd question arises whether the impugned sundry creditors can be treated as unsecured cash credit within the meaning of the provisions of section 68 of the Act. In this regard we note that the provisions of section 68 do not apply to the sundry creditors for the purchases and expenses. It is because such sundry creditors are represented against the purchases and the expenses. In case the AO was to disturb the sundry creditors, then he cannot do so without disturbing the corresponding purchases or expenses. Therefore in our considered view the provisions of section 68 are not applicable with respect to the sundry creditors for the purchases and the expenses.
Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 11 - In addition to the above, we also note that the impugned sundry creditors for the purchases of Rs 98,26,896/- are representing the opening balances which were carried forward from the earlier year except for 1 for the amount of Rs. 5,72,360/-. Thus it is inferred that the account of the assessee was not credited in the year under consideration. If At all the addition needs to be made under section 68 of the Act, then it can be made in the preceding previous year in which such credit was found in the books of accounts.
In view of the above, we do not find any merit in the order of the authorities below. Accordingly, we set aside the order of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.
9. The 2nd issue raised by the assessee is that the learned CIT (A) erred in holding the disallowance of Rs. 14,25,298.00 being 1/5 of the other expenses.
The AO during the assessment proceedings found that the assessee has incurred other expenses amounting to Rs. 71,26,489/- only. But the assessee during the assessment proceedings failed to appear before the AO to justify the genuineness of the expenses. Therefore the same was disallowed and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT (A).
Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 12 - The assessee before the learned CIT (A) in support of its contention filed the necessary details which were forwarded to the AO for his remand report. The AO in his remand report dated 9th January 2017 submitted that the assessee has furnished the ledger copies in support of the expenses but all the supporting vouchers and bills were not filed.
The assessee in response to the remand report submitted in its rejoinder dated 10th February 2017 the breakup of the expenses which is recorded on page 23 of the learned CIT (A) .
The assessee also claimed that similar expenses were also claimed in the immediate preceding assessment year and no disallowance was made in the assessment framed under section 143(3) of the Act .
The learned CIT (A) after considering the submission of the assessee has deleted the addition made by the AO in part by observing as under:
“11.2 I have considered the assessment order, facts of the case and the submissions made by the appellant. A perusal of the submission made shows that various types of expenses were included in the disallowance of the impugned amount. These items include kesar vatav, cloth expenses, telephone expenses, travelling expenses, kitchen expenses, miscellaneous expenses, stationary expenses, diesel expenses, etc. The AO made in the impugned disallowance on account of the fact that all the vouchers and bills produced were not verifiable. It is seen from the submissions made by the appellant that the appellant has submitted ledger copies in respect of the expenses incurred. However, I am also inclined to agree with the AO when the says that all the expenses were not verifiable since it is not possible to verify whether all expenses have been incurred for the purpose of business. Since the non business nature of expenses cannot be ruled out, in my view, a disallowance of 1/5th of the total expenses incurred would meet the ends of Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 13 - justice. Therefore, a disallowance of Rs.14,25,298/- is confirmed and the appellant gets relief accordingly. Ground of appeal No.7 is partly allowed.”
Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.
The learned AR before us submitted that all the supporting vouchers and the bills were submitted before the AO during the assessment proceedings. The learned AR in support of his claim drew our attention on the copies of the ledger for the expenses placed on pages 77 to 128.
On the other hand, the learner DR vehemently supported the order of the authorities below.
We have heard the rival contentions and perused the materials available on record. The issue in the instant case relates to the expenses claimed by the assessee which have been duly elaborated before the learned CIT (A). As per the AO there was no expenses incurred by the assessee therefore he disallowed the entire expenses claimed by the assessee. However, the ld. CIT-A restricted the addition to the extent of 1/5 of the total expenses and the remaining amount was deleted.
From the preceding discussion, we note that the assessee as claimed depreciation amounting to Rs 23,32,170/- which was disallowed to the Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 14 - tune of 1/5 of the total expenses by the learned CIT (A). In this regard we note that the depreciation is not an expenditure but allowance which the assessee has to claim compulsory under section 32 of the Act. Therefore, in our considered view the disallowance made by the learned CIT (A) is not sustainable. Accordingly we direct the AO to delete the addition for the disallowance of the depreciation made by him.
Regarding the other expenses, we note that the assessee has also claimed similar expenses in the immediate preceding area which were admitted by the Revenue in the assessment framed under section 143(3) of the Act. The copy of the assessment for the year 2011-12 is placed on pages 31 to 34 of the paper book.
We further note that there is no provision under the Act to make the disallowance on ad-hoc basis and without pointing out any specific defect in the claim of the assessee. Therefore, we disagree with the finding of the learned CIT (A). However, at the same time we note that the assessee has not discharged his onus by furnishing the supporting vouchers and the bills in respect of such expenses. Therefore, we are not inclined to delete the addition made by the learned CIT (A) in its entirety. To our mind, the justice will be served to both the assessee and the revenue, if the disallowance is restricted to the tune of 10% of all the other expenses except depreciation. Accordingly we direct the AO to restrict the disallowance of all the expenses except depreciation to the tune of 10% claimed in the profit and loss account under the head other expenses. Hence the ground of appeal of the assessee is partly allowed.
Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 15 - The next issue raised by the assessee is that the learned CIT (A) erred in confirming the addition of Rs. 1,83,166/- on account of interest income.
The AO during the assessment proceedings, based on AIR information, found that the assessee has been credited for the amount of interest from certain parties after deducting the TDS. The AO found that the assessee has not disclosed such income in the income tax return. Therefore the AO added the sum of Rs 2,33,235/- to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT (A).
The assessee before the learned CIT (A) claimed that it has earned an interest income of Rs 50,041 on the deposits with UGVCL which was duly disclosed in the income tax return. Accordingly the assessee claimed that it has not earned any interest income as alleged by the AO. The assessee also submitted that the AO has not furnished the copy of the form 26AS based on which the addition was made by him.
The learned CIT(A) after considering the submission of the assessee deleted the addition made by the AO in part by observing as under: “13.2. I have considered the assessment order, facts of the case and the submissions made by the appellant. The AO has noted in his remand report that the appellant had claimed TDS from UGVCL and SBI and had not offered the corresponding income for taxation. The appellant has claimed that the interest received from UGVCL amounting to Rs.50,069/- was credited to its interest income. A perusal of the submission made shows that the appellant has shown the income
Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 16 - of Rs.50,069/- as interest income in its books of accounts. However, no income has been shown in respect of other interest received. Therefore, out of the total addition of Rs.2,33,235/-, the A.O. is directed to verify the claim of the appellant in respect of the amount of Rs.50,069/- received from UGVCL. The addition of Rs.50,069/- is deleted subject to verification. Ground of appeal No.9 is partly allowed.”
Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.
The learned AR before us submitted that it has not earned any interest income as alleged by the AO and accordingly it has not claimed the credit of any TDS deducted by the concerned parties. The learned AR further submitted that the copy of form 26AS was not supplied to it.
On the other hand, the learner DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note that the copy of form 26AS was not supplied to the assessee by the AO on the basis of which the addition was made to the total income on account of interest income. However, we are of the view that the assessee should have been supplied the information based on which the addition was made by the AO. Thus in the interest of justice and fair play we are setting aside the issue to the file of the AO for fresh adjudication as per the provisions of law and after giving the due opportunity to the assessee. Hence the ground of appeal of the assessee is allowed for statistical purposes.
Shree Sagar Industries vs. ITO Asst.Year – 2012-13 - 17 -