ITO, NEW DELHI vs. M/S. OPERA HOUSE EXPORTS LTD., NEW DELHI

ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the Revenue against the order of the CITI(A) dated 24.02.2015 for the assessment year 2010-11 on the following grounds :

1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs.3,44,26,263 made by A.O. on account of unexplained cash credit u/s. 68 of the IT Act, 1961.

2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs.4,18,46,093/- made by A.O. on account of cash credit u/s. 68 of the IT Act, 1961.

3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.4,84,53,923/- on account of sundry creditors u/s. 41(1) of the Income Tax Act, 1961.”

2. The brief facts of the case are that the assessee company filed its return of income declaring a loss of Rs.16,02,414/-. During the course of assessment proceedings the Assessing Officer asked the assessee to furnish the details of sundry creditors for year under consideration as well as the preceding two years, which the assessee filed before the Assessing Officer. On examination of the list, the Assessing Officer noticed that there was a credit balance of Rs.7,62,72,356/- as on 31.03.2010 in the name of Opera Global P. Ltd., a sister concern of the assessee company and being assessed with the same Assessing Officer. The AO further noticed that this amount is not being shown as outstanding in the balance sheet of Opera Global P. Ltd. The Assessing Officer, therefore, asked the assessee to explain this inconsistency. The assessee submitted a reply explaining that this credit is appearing on account of the repayment of secured loan taken by it from SBI and SIDBI to whom payments have been made by Opera Global P. Ltd. on behalf of the assessee company. Being not satisfied with the reply of assessee, the Assessing Officer made addition of Rs.3,44,26,263/- being the credit during the year. The AO further made an addition of Rs.4,18,46,093/- being the difference in the balance outstanding as on 31.03.2010 (Rs.7,62,72,356/- minus Rs.3,44,26,263/-) under section 68 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). The Assessing officer further made an addition of Rs.4,84,53,923/- on account of the sundry creditors outstanding in the books of the assessee as on 31.03.2010 on the ground that these are loans outstanding creditors by invoking the provision of section 41(1) of the Act. Aggrieved by the order of the Assessing Officer, the assessee appealed before the CIT(A), who after considering the facts of the case, submissions of both the parties and the assessment order, deleted all the three additions made by the Assessing Officer vide impugned order dated 24.02.2015. Aggrieved by the order of the CIT(A), the Revenue is in appeal before the Tribunal.

3. It was submitted by the Ld. DR that this addition has been deleted by the CIT(A) ignoring the findings reached by the Assessing Officer. The Ld. DR has also filed a written synopsis which reads as under:-

“In this case, the AO made an addition of Rs.3,44,26,263/- on account of unexplained creditor M/s Opera Global P. Ltd. As noted in para 4 on page 2 of the assessment order, the assessee has shown M/s Opera Global P. Ltd. as Sundry Creditors for an amount of Rs.7,62,72,356/- as on 31.03.2010 as against Rs.4,18,46,093/- as on 31.03.2009 and there was an increase of Rs.3,44,26,263/- during the relevant assessment year. On perusal of the above balance sheet of M/s Opera Global P. Ltd. as on 31.10.2010, it was noted by the AO that the assessee M/s Opera House Exports Ltd. is not appearing as debtor in the books of M/s Opera Global P. Ltd. the assessee could not satisfactorily explain the above credit of Rs.3,44,26,263/- and the said amount was added to total income of the assessee under section 68 of the Act.

2. In para 5.6 of her order, the Ld. CIT(A) overlooked the above fact and finding of the AO. In case M/s Opera Global P. Ltd. has repaid loans to SBI and SIDBI on behalf of the assessee, the said amount should appear in the ledger account of the assessee in the books of the aforesaid company as sundry debtor. The assessee has not been able to explain the above finding of the AO as regards unexplained credit of Rs.3,44,26,263/-.

5.1 On ground No.2, the Ld. AR submitted that the Assessing Officer has made addition of Rs. 4,18,46,093/- by treating the balance of M/s Opera Global Pvt. Ltd as on 31.03.2009 as unexplained credit u/s 68 of the Act. The Assessing Officer while making this addition has alleged that the entire credit balance of Rs. 7,62,72,356/- pertaining to M/s Opera Global Pvt. Ltd remains unexplained as there is no corresponding debit balance showing the assessee as a debtor in the balance sheet of M/s Opera Global Pvt. Ltd. 5.2 It was next contended that the sum has been received during preceding years which is evident from para 4 page 2 of the assessment order u/s 143(3) wherein balance of M/s Opera Global Pvt. Ltd as on 31.03.2009 as Rs. 4,18,46,093/- is stated and accordingly this addition has been made in respect of such opening balance. It was further contended that firstly no addition u/s 68 can be made in respect of such opening balance in the year under consideration and secondly, even otherwise, the allegation of the Assessing Officer that there is no corresponding debit balance showing the assessee as a debtor in the balance sheet of M/s Opera Global Pvt. Ltd. is incorrect since the debit balance in respect of assessee has been adjusted against the creditors amount and the net creditors are duly reflected in the current liabilities of M/s Opera Global Pvt. Ltd’s balance sheet as on 31st March, 2010.

5.3 As regards ground No.3, the Ld. AR submitted that the AO has made addition of Rs. 4,84,53,923/- merely on the basis that the said amount was not claimed by the creditors for a long time and accordingly the same should be added to the income u/s 41(1) of the Act as cessation of trading liability. The Ld. AR submitted that it is pertinent to note that the fact that the balances were standing as creditors and duly reflecting in the balance sheet and the fact that such balances were not written off was not doubted by the ld. AO. Further, the genuineness of the creditors has also not been doubted by the Assessing Officer. It was submitted that when the company still acknowledges its debt and no benefit has accrued to it, addition could not have been made merely because the balances were unclaimed for a long time. The Ld. AR placed reliance upon the judgment of Hon’ble Jurisdictional High Court in the case of CIT Vs Shri Vardhman Overseas 343 ITR 408 (Del.), wherein the Hon’ble Court has held that since the amount payable to the sundry creditors was not credited to assessee’s profit and loss account for the year, and as the amount was still shown as outstanding at the end of the relevant year, the provisions of section 41(1) of the Act could not be attracted. Further reliance is placed on the judgment of Karnataka High Court in the case of CIT vs. Alvares& Thomas [ITA No. 658/2015 dated 24-03-2016] wherein the judgment of Delhi High Court in the case of CIT Vs Shri Vardhman Overseas (supra) has been followed.

7. Ground No.1 is regarding deletion of addition of Rs.3,44,26,263/- made by the AO on account of unexplained cash credit under section 68 of the Act. The Assessing Officer made this addition on the premise that this amount is not appearing as debit in the balance sheet of the sister company M/s Opera Global Pvt. Ltd. The CIT(A) has deleted the same holding that the assessee has led evidences to show that Opera Global Pvt. Ltd. has repaid the loans to SBI and SIDBI on behalf of the appellant. The CIT(A) has further stated that he has examined this with the help of documents which demonstrate that Opera Global Pvt. Ltd. has made payment to SBI and SIDBI on behalf of the appellant. After examination of the documents placed in the paper book, we are of the view that the ld. CIT(A) has committed no error while deleting the impugned addition addition. The AO has ignored the reply submitted by the assessee vide letter dated 25.03.2013 alongwith the supporting evidences. In his letter dated 25.03.2013, the assessee has submitted copy of account with SBI and SIDBI alongwith the bank statement and photocopy of cheques issued by the Opera Global Pvt. Ltd. on behalf of the assessee company( placed at paper book page 63 to 80). The assessee has also placed copy of account with details of payment received from Opera Global Pvt. Ltd. at paper book page 81 and 82. The assessee has also explained that in the balance sheet of Opera Global Pvt. Ltd., on the basis of which adverse inference has been drawn by the AO, this amount is appearing below the head current liabilities at paper book page 115 to 128 relevant page 128 of the paper book. The figures stated at page 128 as on 31.03.2008, 31.03.2009 and as on 31.03.2010 of the net current liabilities match with the figures stated on the first page of the balance sheet at paper book page 115. The total current liabilities as on 31.03.2010 as per the list was Rs.12,24,92,114.64/- which after deduction of debit balance of Opera House Export Pvt. Ltd. i.e. assessee company of Rs.7,62,72,356.63/- comes to Rs.4,62,19,758.01/- which is the figure mentioned at first page of the balance sheet as current liabilities. Similarly, as on 31.03.2009 the total of the current liability at paper book page 128 comes to Rs.8,58,55,902.48/- which after deduction of balance against assessee company of Rs.4,18,46,093.65/- comes to Rs.4,40,09,808.83/- which matches with the figure at the front of balance sheet. In view of these facts we are of the view that Assessing Officer was not justified in drawing adverse inference against the assessee. The assessee has led sufficient evidences which are supported by bank statement of Opera Global Pvt. Ltd. and its balance sheet read with the schedules attached thereto. Hence, the CIT(A) was correct in deleting the addition. Accordingly, we uphold the order of the CIT(A) on this score and ground no.1 of the Revenue appeal deserves to be dismissed.

8. Ground No.2 is regarding deletion of addition of Rs.4,18,46,093/- in respect of the opening balance of Opera Global Pvt. Ltd. This addition has been made on the same reasoning as discussed in ground No.1. The AO has added the opening balance in the name of Opera Global Pvt. Ltd. on the ground that same is not reflected in the balance sheet of the Opera Global Pvt. Ltd. In ground No.1, we have held that the balance in the two accounts between assessee and Opera Global Pvt. Ltd. matches on examination of the balance sheet with a schedules attached thereto of Opera Global Pvt. Ltd. Further, we are in agreement with the contention of the Ld. AR, addition under section 68 can be made only with respect to any credit during the year. From the facts it is evident that this amount was not the credit of the year under consideration. On this reasoning also this addition is found not tenable in the eye of law. Thus, the ld. CIT(A) has rightly deleted this addition too. Accordingly, ground No.2 of the Revenue’s appeal also deserves to be dismissed.

9. Ground No.3 is regarding deletion of addition of Rs.4,84,53,923/- made by the Assessing Officer on account of sundry creditors by invoking the provisions of section 41(1) of the Act. The AO had called for the details of creditors for the last 3 years. On the basis of this list, the AO held that creditors are not being paid since long and as such the same has become income of the assessee under section 41(1) of the Act and added all the creditors as income of the assessee. The CIT(A) has deleted the addition holding that these creditors have been continued to be payable in the books of the assessee and the same have not been written off, hence there is no remission or cessation of the liability and accordingly, section 41(1) cannot be invoked. The main argument of the Ld. DR before us was that since the assessee has not paid for long, it should be assumed that these amounts are no more payable and hence, it has become income of the assessee. It was contended by the Ld. DR that though section 41(1) may not be applicable in this case but section 28(iv) will be applicable as this is the benefit which the assessee has derived from its business. We are of the view that both section 41(1) and section 28(iv) will not be applicable in the facts of the present case. From the assessment order, it is evident that the assessee company has filed an application under section 15(1) of the Sick Industrial companies (special provision) Act, 1985. The assessee company on being questioned by the AO had given the reasoning as to why these creditors have not been paid so far. It was explained that the company has become sick and it has approached BIFR for restructuring of its liabilities. This, in our opinion, was plausible reason for delay in payment of the creditors. Section 41(1) is applicable when the trade creditors are written off as not payable. In the present case, it is not the case of the assessee that these trade creditors are not payable. It is also not the case of the AO that these creditors have been written off by the assessee. These creditors continue to be payable in the books of accounts of the assessee. The assessee has also explained the reason for the delay in making payment to these creditors. In these circumstances, the assumptions by the AO that these creditors had become income of the assessee cannot be sustained. On the contrary, the circumstances do explain the delay in payment of these creditors. In these facts, provisions of section 41(1) cannot be invoked. Similarly, the contention of the Ld. DR for invoking provision of section 28(iv) is misplaced as section 28(iv) is regarding value of any benefit or perquisite arising from business is chargeable to tax. These trade creditors are payable and by no stretch of imagination it can be said that assessee has received any benefit or perquisite. We have also gone through the various case laws relied upon by the Ld. DR and after going through the same we are of the view that the same are on different set of facts and are not applicable to the facts of this case. As against this, the judgment of jurisdictional High Court in the case of CIT vs. Shri Vardhman Overseas Ltd.343 ITR 408 (Del.) is direct on this issue wherein Hon’ble Court has differentiated the scope of section 28(iv) and section 41(1) of the Act and held that section 28(iv) would apply generally to all benefits or perquisites which arise to the assessee from the business carried out by him. The benefit which he obtains by way of remission or cessation of a trading liability in a later year, in respect of which he has obtained a deduction in an earlier year in computing the business income, should be governed by Section 41(1) which is the specific provision governing the factual situation and not the Section 28(iv) of the Act. In view of the above judgment it is clear that that provisions of section 28(iv) are not applicable to the facts of the present case. Accordingly, ground no.3 of the Revenue’s appeal is also dismissed sans merit.

10. Ground no.4 is general in nature and need no adjudication.

11. In view of what has been discussed above, we are of the considered opinion that the ld. CIT(A) was justified in deleting all these additions, being not tenable in law.

Order pronounced in the open court on 27.02.2019.