ACIT-24(2), MUMBAI vs. RAMJAN & CO., MUMBAI

This appeal has been filed by the revenue against the order dated 27.09.2018 passed by the Commissioner of Income Tax (Appeals)-36 (for short ‘the CIT(A), Mumbai, for the assessment year 2013-14, whereby the Ld. CIT(A) has partly allowed the appeal filed by the assessee, against the assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short the ‘Act’).

Brief facts of the case are that the assessee a partnership firm working as civil contractors and engineers, filed its return of income for the assessment year under consideration declaring total income of Rs. 1,71,48,704/-. The AO passed assessment order u/s 143 (3) of the Act and determined the total income of the assessee at Rs. 3,81,92,220/- , inter alia making addition of Rs. 1,88,96,549/-, treating the sundry creditors as bogus and Rs. 17,94,574/- u/s 40A (3) of the Act. The assessee challenged the assessment order before the CIT(A). The Ld. CIT(A) after hearing the assessee, deleted the aforesaid Assessment Year: 2013-14 additions made by the AO. Against the said order, the revenue has filed the present appeal. 3. The revenue has challenged the impugned order passed by the Ld. CIT (A) on the following effective grounds:- “1. On the facts and circumstances of the case and in law, the Ld.CIT (A) has failed to appreciate the fact that the AO has disallowed Rs. 18,96,549/- u/s 41 (1) of the Act in view of the fact that there were several sundry creditors of large amounts to whom no payments have been made for nearly three years and the assessee has not brought anything on record to show that these creditors have been following up for payments due to them.

On the facts and circumstances of the case and in law, the Ld. CIT (A) has failed to appreciate the fact that the AO has disallowed Rs. 17,94,574/- as non-genuine/bogus purchases, with the observation that even some of the payments may be covered u/s 40(A)(3), details of which cannot be ascertained from available records.”

Vide Ground No. 1 and 2, the revenue has challenged the action of the Ld. CIT (A) in deleting the addition of Rs. 1,88,96,549/- made by the AO u/s 41 (1) of the Act. The Ld. Departmental Representative (DR) submitted before us that the Ld. CIT (A) has erred in deleting the addition in question without appreciating the fact that the assessee has not brought anything on record to show that the creditors have been following up for payments due to them. The Ld. DR further submitted that the Ld. CIT (A) has failed to refer the additional Assessment Year: 2013-14 evidence produced by the assessee under Rule 46A of the Income Tax Rules, to AO for verification. The Ld. DR further pointed out that in some of the cases, the creditors have filed civil suits for recovery against the assessee, however, the assessee failed to produce documentary evidence before the AO. Since, the documents were produced before the CIT (A) under rule 46A of the Income Tax Rules, the Ld. CIT (A) ought to have forwarded the same to the AO for verification of the additional evidence placed on record. The Ld. DR accordingly submitted that the order passed by the Ld. CIT(A) may be set aside and the findings of the AO may be restored.

On the other hand, the Ld. counsel for the assessee supporting on the order passed by the Ld. CIT (A), submitted that since the AO had passed the assessment order without appreciating the evidence on record and contrary to the settled principles of law, the Ld. CIT (A) has rightly deleted the addition made u/s 41 (1) of the Act. The AO had not even issue notices u/s 133 (6) and called the details of the outstanding balances and disallowed 63.49% of the total sundry creditors without assigning any cogent reason. The Ld. counsel pointed out that during the assessment proceedings, the ledger accounts of most of the parties, whose outstanding amounts were paid in the subsequent years, were produced before the AO. The assessee also placed on record the other relevant documents to prove the payments made by the assessee in subsequent years. The Ld. counsel further pointed out that the assessee has placed on record the documents pertaining to seven creditors who have moved the courts for recovery of their due. Under these circumstances, the AO had no reason to make disallowance u/s 41(1) of the Act. Hence, there is no infirmity in the order passed by the Ld. CIT (A) to interfere with.

We have heard the rival submissions and perused the material on record in the light of the rival contentions. The Ld. CIT (A) has deleted the addition made by the AO holding as under:- “4.2.2 I have gone through the submissions of the appellant along with the views enumerated by the AO in his Order and have come to the understanding that there is weight in the argument and reasoning given by the Ld. AR. It is incorrect on the part of the AO to assume that the liabilities of sundry creditors stand cancelled or that Assessment Year: 2013-14 the liabilities of the creditors are not genuine. If a debt becomes time barred, it does not become extinguished but only unenforceable in the court of law. However, the debt will remain a debt which is payable and the contractual liability will not be extinguished. The said observations are made in the case of CIT vs Sugauli Sugar Works Pvt Ltd.(1999), 236 ITR as under: "Just because an assessee made an entry in his books of account unilaterally, he cannot get rid of his liability. The question whether the liability is actually barred by limitation, is not a matter which could be decided by considering the assessee 's case alone but it is a matter which has to be decided only if the creditor is bej6re the concerned authority. In the absence of the creditor, it is not possible for the authority to conic to a conclusion that the debt was barred and had become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act. The principle that expiry of period of limitation prescribed under the Limitation Act cannot extinguish the debt but it will only prevent the creditor from enforcing the debt is well-settled. Mere entry in the books of account of the debtor made unilaterally without any act on the part of the creditor would not enable the debtor to say that the liability had come to an end. Apart from that that would not by itself confer any benefit on the debtor as contemplated by the section. Therefore, the High Court was right in holding that the assessee 's unilateral entry in the accounts transferring the amount to the capital reserve account would not bring the, matter within the scope of section 41." 4.2.3 The Ld. AR stated that in spite of submitting the details of the payments made to the sundry creditors as appearing in the books as on 31st March 2013 along with details of payments being made to the sundry creditors in the subsequent years, the AO disallowed a sum of Rs. 1,88,96,549/- u/s. 41(l). If the A.O. had any doubt about the credit balances of the creditors he should have issued notices u/s. 133(6) and called the details of the outstanding balances which has not been done. It shows that the A.O. has not followed the due procedure for verification of Sundry creditors and merely disallowed 58% of total sundry creditors at his own notion. 4.2.4 The Ld. A.R. has placed on record 7 creditors whose credit balances are quite substantial and who have moved the Courts for recovery of their dues. It shows that the creditors are Assessment Year: 2013-14 genuine, but the payments are much delayed by the assessee in the ordinary course of business. The parties which have filed their cases in the city civil court or served the legal notices are: