DCIT, RANGE-3, LUCKNOW vs. SHRI BHUPENDRA KUMAR AGARWAL, LUCKNOW

The facts giving rise to the present appeal are that in this case the assessee filed his return of income for the A.Y. 2014-15 on 30.09.2014, declaring total income at Rs.17,83,720/-. The case was selected for scrutiny under Computer Assisted Scrutiny System (CASS). Accordingly, a notice u/s 143(2) of the Income Tax Act, 1961 (“Act”, for short) was issued on 28.09.2015 by the Assessing Authority and duly served upon the assessee. Thereafter, another notice u/s 142(1) of the Act was issued on 31.05.2016 along with questionnaire which was duly served upon the assessee. In response to the statutory notices, the Ld. Authorized Representative of the assessee attended the proceedings. The assessee is engaged in the business of manufacturing and trading of bakery products on wholesale 122/LKW/2021 Page 3 of 14 basis in the name and style of M/s. Kamla Foods and M/s. Shree Kashi Vishwanath Industries and M/s. Vinayak Electricals. The accounts of these entities are separately maintained and duly audited. The Assessing Officer during the course of assessment noted there were various ups and downs in the gross and net profit ratio. Considering the submissions and material placed on record, the Assessing Officer made additions on account of disallowance of expenses of Rs.4,05,43,505/-. The Assessing Officer further made additions in respect of unsecured loan of Rs.26,00,800/- and unsecured creditors of Rs.2,27,59,337/-. Thus, the Assessing Officer assessed the total income at Rs.6,76,87,360/-. Aggrieved by this, the assessee carried the matter in appeal before the Ld. CIT(A), who partly allowed the appeal. Out of the impugned additions related to unsecured loan, unsecured creditors and the expenses debited into the profit and loss account (P&L), the Ld. CIT(A) fully deleted the addition made on account of unsecured loan, partly allowed the claim with regard to unsecured creditors out of Rs.2,27,59,337/- addition of Rs.3,47,043/- was sustained and in respect of addition made on account of disallowance of expenses debited in P & L part relief was granted, thereby he made ad hoc disallowance @ 15% on the certain expenses only. Aggrieved against this, both the Revenue and assessee have filed the cross appeals.

Ground no. 1 of Revenue appeal is related to the deletion of addition which was made on account of sundry creditors.

The Ld. Departmental Representative for the Revenue contended that the assessee failed to prove the genuineness of the creditors by filing the supporting evidences. He further submitted that the Ld. CIT(A) committed an error in deleting the 122/LKW/2021 Page 4 of 14 addition. Further, he also submitted that the Ld. CIT(A) considered the additional evidences without giving adequate opportunity to the Assessing Authority for making objection and rebuttal of such additional evidences. He placed reliance on the finding of the Assessing Authority. He, therefore, prayed that the finding of the Ld. CIT(A) may be reversed and addition made by AO be sustained.

On the other hand, the Ld. Counsel for the assessee opposed the submissions and contended that the Assessing Officer had incorrectly recorded the facts. Further, the Assessing Officer in the assessment order stated that there was no response from the creditors. However, the Ld. CIT(A) has categorically recorded a finding that out of the 14 notices issued by the Assessing Officer to the creditors, 10 had responded and confirmed the credit balance. The finding of the Ld. CIT(A) is based upon the material available in the assessment record. He, therefore, prayed that ground no. 1 of the Revenue appeal be dismissed being devoid of any merit.

We have heard the rival submissions and perused the materials available on record. The Assessing Officer made addition of the creditors amounting to Rs.2,24,12,294/- treating such creditors as bogus. The Assessing Authority has observed that the assessee had supplied the complete details of creditors and accordingly letters for verification u/s 133(6) of the Act were sent to all of them. It is noted by the Assessing Authority that three parties who confirmed the credit purchases made by the assessee. There was difference of Rs.9,44,867/-, the amount claimed by the assessee and confirmed by the creditors. Therefore, the assessing Officer made addition of 122/LKW/2021 Page 5 of 14 Rs.2,27,59,337/- treating the creditors as bogus. However, the Ld. CIT(A) at para 5.5 to 5.7 of the appellate order, has given a finding on facts by observing as under: - “5.5. Thus out of 14 notices u/s 133(6) issued by the AO replies were not received in case of 5 Sundry Creditors and in two cases there were slight differences, In case of 5 persons who did not respond it has been verified from the bank statements and ledgers of the appellant that payments have been made ‘in cases of M/s Ratnagarbha Agro (P) Ltd. M/s Finolex Bakeware and M/s New Basant Automobile Co. in subsequent assessment years. Thus, no adverse view can be drawn in case of above 7 Sundry Creditors who submitted confirmations and, their balances tallied with the balances disclosed by the appellant. In case of two Sundry’ Creditors in whose case there is slight variation in balances the appellant has furnished explanations but failed to furnish evidences. In case Sheel Trading Company and Prakash Company neither the confirmations have been filed nor the balance have been paid. 5.6 “in view of above factual findings as per the details available in the assessment record, it is held that the appellant failed to establish the identity of Creditors, ‘creditworthiness of creditors and genuineness of transactions in cases of Shel Trading Company and Prakash Trading Company. The credit balances sin respect of these two Sundry Creditors are Rs.87,280/- and Rs. 93,800/-. Thus, Rs 1,81,080/- is held as unexplained cash credit u/s 68. Besides the above, the differences of Rs.1,65,963/- in case of above two Creditors – Amkap Marketing Pvt. Ltd. (Shree KashiVishwanath) and Kothari fermentation & Biochem Lid are also held as unexplained as the appellant failed to reconcile the differences. 5.7 No adverse view can be taken in respect of Sundry Creditors to whom no Notices n/s 133(6) were issued by the AO as the appellant has discharged his burden by furnishing names and addresses not all Sundry Creditors to the AO along with copies of their ledgers during the assessment proceeding as well as during remand proceedings. Besides the above, it is also evident that all the above are running Sundry Creditors and appellant has made purchases from them in subsequent assessment years as well.”

In respect of the variation in the outstanding amount related to Sheel Trading Company and Prakash Trading Company, the Ld. CIT(A) treated as unexplained. Further, in respect of the creditors namely Amkap Marketing Pvt Ltd (Shree Kashi Vishwanath) and Kothari Fermentation & Biochem Ltd were also held to be unexplained. Therefore, the difference of Rs.1,65,963/- was sustained. Further, the Ld. CIT(A) in respect of the creditors where no notice was found to be issued by the Assessing Officer seeking confirmation treated such creditors as 122/LKW/2021 Page 6 of 14 explained. Thus, out of the total addition of Rs.2,27,59,337/-, the Ld. CIT(A) had sustained the addition of Rs.3,47,043/-. Before us, the Revenue has not brought any material suggesting that the Assessing Officer had in fact sought confirmation from all the creditors. Undisputedly, the Ld. CIT(A) in respect of the evidences filed by the assessee had sought remand report from the Assessing Officer and on two occasions the remand report was submitted but nothing related to verification of the creditors was furnished by the Assessing Authority. In the absence of due verification, at the end of the Assessing Officer when the assessee had given the complete details even recorded in the assessment order itself, when the Assessing Authority failed to cause necessary inquiry from the creditors and bring adverse materials on record. Unter these controverted facts, the action of the Ld. CIT(A) in deleting the addition cannot be faulted with. The ground no. 1 raised by the Revenue is dismissed.

Ground no. 2 of the Revenue’s appeal is against the deletion of addition of Rs.26,00,800/- made on account of unverifiable unsecured loan. The Ld. CIT-DR supported the assessment order and contended that the Assessing Officer made addition stating that the unsecured loan could not be verified. He contended that burden was on the assessee to prove the identity, creditworthiness of creditors and genuineness of transaction.

On the other hand, the Ld. Counsel for the assessee opposed the submissions and supported the orders of the Ld. CIT(A) on this issue. He contended that the assessee duly discharged burden by filing relevant evidences. But the AO chose for not making any verification even opportunity provided in the form of remand proceedings.

We have given our thoughtful consideration to the rival contention of the Ld. Representatives of the parties. We find that the Assessing Authority, in respect of the issue relating to unsecured loans, has stated in the assessment order that an amount of ₹20,00,000/- was shown as squared up but it was paid to the proprietary concern Vinayak Electricals which is the proprietary concern of the assessee himself. Secondly, Rs.6,00,800/- was also added on account of non-verification. The Ld. CIT(A), while dealing with this issue in paragraphs 7.2 to 7.4 of the appellate order, has decided the issue by observing as under: - “7.2 During the appellate proceedings, it was submitted that the loans were paid through banking channels and the same were reflecting in the bank statement of the appellant a copy of the same was submitted in support of the contention further details regarding the unsecured loans taken during the year was also submitted. The details are given below: - S No Party Name Party address PAN Amount Remarks borrowed during the year 1 Jyoti C-8, Industrial Estate II, AAEFJ1163F 20,00,000/- Confirmation, ITR Bank Modern Rice Amawan Road, Rae Bareili statement and ledger Mill copy in books of lender and personal a/c of assessee are enclosed herewith. 2 Gauri Foods 01, Mohibullapur, Sitapur Road, AADFG4556A 1,25,000/- Running A/c (opening Lucknow Bal 47,55,000/- received during year Rs.1,25,000) 3 Prime View 187, Mohibullapur, Sitapur AAHCP1312N 4,75,800/- Confirmation ITR, Bank Estate Pvt Road, Lucknow statement of lender Ltd 7.3 During the appellant proceedings the appellant submitted confirmations, copies of ITRs, bank statement in respect of above three persons. The appellant has submitted that these details were provided even during the assessment proceeding, as evident from the perusal of the assessment record. Even during the remand proceeding the above details were forwarded to the AO for comments and inquiry but in two Remand reports submitted by the AO no comments were made on these details. 7.4 In view of the above facts it is evident that the appellant has established identity and creditworthiness of these loan creditors and genuineness of these transactions. Hence, the addition of Rs.26,00,800/- made by the AO is deleted.”

This finding of the Ld. CIT(A) has not been rebutted by the Assessing Officer. The Ld. CIT(A) has categorically stated that the 122/LKW/2021 Page 8 of 14 said amount is duly reflected in the bank statement of the assessee. The Revenue has not controverted this finding on facts by bringing any adverse material on records. Therefore, we do not see any reason for disturbing the finding of Ld. CIT(A) same is hereby affirmed.

Ground No. 3 of the Revenue’s appeal is against the partly deleting the addition amounting to Rs.3,98,16,951/- made on account of disallowance of expenses as claimed in the profit and loss account. The Ld. CIT(DR) appearing on behalf of the Revenue strongly supported the finding of AO and submitted that despite having been given adequate opportunity by the Assessing Authority, the assessee failed to furnish the requisite evidences in support of the expenses and also did not produce the books of account before the Assessing Authority for verification. The Ld. DR submitted that, in the absence of the books of account, the expenses claimed in the profit and loss account could not be verified. Therefore, in the facts and circumstances of the present case, the Assessing Officer was justified in drawing adverse inference and disallowing the entire expenses claimed in the profit and loss account. It was further submitted that the Ld. CIT(A) has erroneously deleted these expenses without taking note of the fact that the assessee failed to produce books of accounts along with other supporting evidences.

On the other hand, The Ld. Counsel for the assessee opposed the submission and contended that the Ld. CIT(A) had twice sought remand report from the Assessing Authority regarding the evidences furnished by the assessee. He further submitted that the books of account were duly audited and that, during the appellate proceedings, all the relevant evidences were 122/LKW/2021 Page 9 of 14 supplied to the Assessing Officer for verification. However, the Assessing Officer chose not to carry out any verification. He submitted that the assessee had claimed only those expenses which were duly audited. He contended that under these facts that the Assessing Authority was not justified in making the disallowance arbitrarily. He, therefore, submitted that no addition was warranted in the facts and circumstances of the present case.

We have heard the Ld. Representatives of the parties and perused the material available on records. It is not in dispute that the books of account of the assessee are duly audited. The auditor of assessee has not made any adverse remark. During the course of appellate proceedings, the Ld. CIT(A) had twice sought remand report from AO. However, instead of verifying the expenses claimed by the assessee, the Assessing Officer merely reiterated its earlier submissions. It is strange that, on two separate occasions, despite directions by the Ld. CIT(A) to submit report after verifying the evidence furnished by the assessee, the Assessing Officer failed to carry out any such verification. We are in agreement with the observation made by the Ld. CIT(A) that entire expenditure claimed in the Profit and Loss Account cannot be disallowed. In the present case, the Assessing Officer has not brought any material or records to suggest that the assessee was not carrying out business. On the contrary, the Assessing Officer himself has categorically observed regarding the business activity carried out by the assessee. Therefore, the disallowance of 100% expenses is ex facie not justified. Under the circumstances, the Assessing Officer was expected to exercise his best judgment; however, he failed to do so. Moreover, in the assessment order, 122/LKW/2021 Page 10 of 14 there is no finding that the expenses claimed in the profit and loss account could not have been incurred for business purposes. Therefore, looking to the totality of the facts, we do not find any merit in the contention of the Ld. CIT-DR that the Assessing Officer was justified in making 100% disallowance of the expenses without bringing any material to suggest that the assessee did not carry on the business. This ground of the Revenue’s appeal is dismissed. Consequently, the appeal of the Revenue in for the A.Y. 2014-15 is dismissed.

Now, coming to the assesse’s appeal in pertaining to the A.Y. 2014-15. The assessee has raised the following grounds of appeal: -

Ld. Counsel for the assessee contended that the assessee had discharged the primary onus by filing the details of the sundry creditors. However, the Ld. CIT(A) treated the same as unverifiable without making due verification. Therefore, the Ld. CIT(A) committed error in sustaining the impugned addition.

On the other hand, the Ld. Departmental Representative for Revenue supported the assessment order and finding of the Ld. CIT(A) in respect of sundry creditors in question. He submitted that the finding of the Ld. CIT(A) is well reasoned. He contended that the assessee failed to satisfy requisite ingredients of valid unsecured credit.

We have heard the rival contention and perused the materials available on records. We find that the Ld. CIT(A), in paragraphs 5.6 and 5.7 of the appellate order, has decided the issue by observing as under: -

Ground no. 2 is against the ad hoc disallowance of various expenses by the Ld. CIT(A).

The Ld. Counsel for the assessee vehemently argued that the assessee had furnished all the details relating to the expenses and that the accounts were duly audited by the auditors, with no adverse remark made in the audit report. Therefore, merely following the order of the earlier assessment year and making basis of his finding thereon, without pointing out that the expenses claimed by the assessee were not incurred for business purposes, is not justified. Under these facts, the Ld. Counsel for the assessee urged that ad hoc disallowance of expenses may be deleted.

On the other hand, the Ld. Departmental Representative for Revenue supported the orders of the lower authorities regarding the disallowance of the expenditure related to Telephone expenses, Conveyance expenses, Travelling expenses, Repair & Maintenance expenses, Staff Welfare expenses, Route and Sales Promotion expenses. He, therefore, prayed for sustaining the finding of the Ld. CIT(A).

From the above finding of the Ld. CIT(A), it is clear that the following the assessment year 2012-13, the Ld. CIT(A) observed that the facts are identical and consequently disallowed the expenses by way of an ad hoc disallowance at 15%. He has failed to explain the basis for applying a 15% disallowance, especially when, in the assessment year 2012-13, the ad hoc disallowance was made at 10%. It is well settled that ordinarily, ad hoc disallowances should be avoided, and specific instances must be given to justify such disallowance. In the present case, the Ld. CIT(A) has made no discussion in this regard he has merely followed the preceding year’s order, which, in our considered 122/LKW/2021 Page 14 of 14 view, is not justified. However, looking to the totality of facts and circumstances of the present case, as per the Assessing Authority, the assessee had not produced the relevant evidences. We, therefore, restrict the disallowance to the extent of 10% as was done in the assessment year 2012-13. The grounds of the assessee’s appeal are partly allowed. In the result, the appeal of the assessee is partly allowed.

In the result, the appeal of the Revenue is dismissed and appeal of the assessee is partly allowed.