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Income Tax Appellate Tribunal, DELHI BENCHES “F” : DELHI
Before: SHRI BHAVNESH SAINI & SHRI L.P. SAHU
ORDER PER BHAVNESH SAINI, J.M. This appeal by Revenue has been directed against the Order of the Ld. CIT(A), Muzaffarnagar, Dated 01.09.2015, for the A.Y. 2010-2011, challenging the deletion of addition of Rs.1,38,32,012/- made by the A.O. on account of sundry creditors as per Section 41 of the I.T. Act, 1961.
2 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad.
The facts of the case are that assessee is an individual deriving income from steels fabrication work etc. The return was filed declaring income of Rs.6,66,800/-. During the course of assessment proceedings, it was gathered by the A.O. that on the sales and other receipts totaling to Rs.3,01,26,254/-, the assessee had shown gross profit at Rs.19,47,068/- giving gross profit rate of 6.46% as against gross profit rate of 21.17% and 7.69% on the sales and other receipts of Rs.1,11,73,140/- and Rs.5,37,65,829/- in the preceding years i.e., A.Ys. 2009-2010 and 2008-2009 respectively. As per details of sales filed along with the return, sales of Rs.3,01,26,654/- for the year under consideration, included the amount of Rs.1,57,79,080/- being written off. Assessee was asked to explain the same. It was submitted that the impugned sum related to the creditors which had been written off and added to the amount of sales and in support furnished details which have been reproduced by the A.O. as under :
3 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. Details of calculation of write off Name of the Balance as Amount Balance as on parties on written off 31.03.2010 01.04.2009 M/s. Deewan 19,94,665 19,94,665 NIL Steels M/s. Nandi 38,14,845 15,88,960 22,25,885 Steels M/s. Noni Steels 14,85,406 14,85,406 NIL (P) Ltd., Patiala 13,43,240 13,43,240 NIL Enterprises Shreejee 16,02,447 16,02,447 NIL Enterprises M/s. Timi Steels 51,22,042 51,22,042 NIL M/s. Steel India 26,42,320 26,42,320 NIL Total 1,57,79,080 1,57,79,080 2.1. According to the A.O. if the amount of Rs.1,57,79,080/- added to the sales was excluded from the gross profit of Rs.19,47,068/- (as shown by the assessee) there would be gross loss of Rs.1,38,32,012/- from trading activities. The assessee was asked to justify the gross loss supported by evidence. The A.O. also required the assessee to show cause as to why in the absence of any justification for the same, the addition be not made on this amount accordingly.
4 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. 2.2. The assessee submitted before A.O. that in the year under consideration, assessee had written off creditors amounting to Rs.1,57,79,080/- in his books of account because of his inability to pay for the same. As per assessee due to inferior quality of raw material supplied by the assessee to the manufacturer, the assessee was not able to sell his manufactured products at pre-determined price of Rs.49,500/- per tonne and thus forced to sell them as scrap at the rate of Rs.15,000/- per tonne only. Due to this, assessee was not able to pay his suppliers and had written off the same in his books of account and added back to his income as per Section 41(1) of the I.T. Act. It was contended that from A.Y. 1997-1998 even unilateral act of writing off a trading liability, attracted Section 41(1) of the I.T. Act. In case assessee would not have added the amount to his income, then the department would have brought the same to tax. In this case, assessee himself added the same amount to his income under section 41(1) of the I.T. Act. It was gathered by the A.O. that assessee had shown sales and other receipts by adding the 5 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. amount of Rs.1.57 crores written off on account of creditors to the sales in earlier year also only to move away bogus liability created by him in the balance sheet and to evade tax liability on account of business profits. According to the A.O, if the amount of Rs.1,61,498/- from interest on FDR, Rs.1,20,000/- being generator rent and Rs.1,20,000/- rent from trucks, (Totaling to Rs.4,01,498/-), were deducted from the net profit of Rs.4,69,636/- as shown by the assessee, there would be net profit of Rs.58,138/- only from the business activities. The interest is not related to business activity. Therefore, A.O. rejected the submission of the assessee and considered the explanation of assessee to be an afterthought. According to A.O, if the raw material was having inferior quality, the assessee could have returned the same to the supplier. No evidence of inferior quality of the goods and any legal action taken have been filed on record. The A.O. considering the total factual matrix above, disallowed the gross loss of Rs.1,38,32,012/- and treated the same as undisclosed income of assessee and added the same to the income of the assessee.
6 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad.
The assessee filed written submissions before Ld. CIT(A) which is reproduced in the impugned order in which the assessee briefly reiterated the same facts as were submitted before A.O. and also submitted that books of account of assessee are audited and supported by vouchers. There is no contravention of provisions of Section 145 of the I.T. Act. The assessee complied all the notices of the A.O. and support the loss suffered by assessee through evidence and material. The A.O. did not bring any evidence against the assessee on record. The records of the assessee have been accepted by independent authorities like Sales Tax/Excise etc., The copies of the returns and their orders were filed on record and Independent Authorities accepted the book results of the assessee. The assessee has credited the above written off amount of the creditor in the books of account and shown as income. Even if written-off amount is shown separately, it has no impact on income. Merely because assessee’s treatment, would not as per choice of the A.O, it cannot be said that assessee made a wrong claim. If the A.O;s
7 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. justification is accepted, it would give a different position and rather better picture of the trading results. The assessee produced sufficient evidence to explain inferior quality of the material was supplied to the assessee by the suppliers. The sale was rejected due to inferior supplies. The assessee also filed additional evidence for admission which have not been objected to by the A.O, therefore, the same were admitted. The Ld. CIT(A) considering the material on record, deleted the entire addition. His findings are reproduced as under :
“The facts of the case as well as submissions made by the appellant have been fully considered. It is observed that the appellant was carrying on the business of fabrication. During the assessment proceedings it was gathered by the AO that the amount of Rs.1,57,79,080/- was written off on account of old outstanding creditors and the same was clubbed with the sales whereas, the same should have been shown separately in profit & loss account. After excluding the amount of Rs.1,57,79,080/- from the gross
8 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. profit there was a loss of Rs.1,38,32,012/- . Hence it was held by the AO that the written off amount was knowingly added to the sales to reflect better picture of the trading results.
During enquiry it was also gathered that in the earlier year there was substantial gross profit over 20% against current year loss. The appellant’s contention about inferior quality of material sold at low price was rejected by the AO on the ground that the appellant could have returned such material and could have taken action against the parties besides no proper evidence is filed about poor quality. The explanation of the appellant that the amount at Rs.1,57,79,080/- was written off u/s 41(1) of the Act was rejected by the AO holding it as an after thought.
Against the adverse inference drawn by the AO as discussed above, the appellant’s detailed written submissions have gone through and I find considerable force in the arguments of assessee. No doubt that amount
9 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. written off should have been depicted separately but that itself cannot be the ground for making addition when the ultimate result of profit will be same. It Is on the record that total sales and purchases are vouched and records were before Excise etc. independent authority who_have accepted the same. The appellant has filed plethora of evidences with copy of copy of VAT invoices of such rejected material on which VAT was charged in support of claim of loss that substantial material was sold @ Rs.15000/- per piece as against Rs.49,500/- per piece. The explanation of the appellant that though sales declined substantially but wages which were subject to ESI/PF and other direct expenses did not decline in the same ratio is also held as plausible when such expenses are properly verified by AO. Copy of few mails to the parties about their sub-standard/inferior quality is also on record. Thus there is nothing wrong in writing off disputed liabilities in the year in which sub-standard material was sold and this is also correct that had the appellant not 10 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. written off than there would have been huge loss. All the liabilities are outstanding in the earlier year and accepted under scrutiny hence they are carried forwarded to current year. In any case such written off does not justify the rejection of loss though supply of substandard material by creditor justify the reason loss.
The crux of the exercise of AO is to disallow the gross loss. The appellant is correct in submitting that his sale/purchases were fully supported and the AO has not found any discrepancies in the same. The appellant has filed few examples of sales tax/excise returns. At page No. 40 copy of opening/closing stock has been filed wherein scrap etc. is over 80 lakhs which is practically sold. Copy of order of Trade tax has been filed which specifically dealt with the stock of tower component which is sold at loss i.e. Rs.15,000/- per piece against Rs.49,500/- per piece. Trade tax authorities have accepted the loss as well as trading results/ accounts.
11 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. Let see examine the issue from the other angle. The AO has mentioned that the appellant had filed requisite details/documents with book of accounts, bills etc. though at one place he has mentioned that trading results were not open to verification but the same is held as only a cursory remark and against the facts of the case on the record. Even before such remark, the AO has again mentioned about production of book/sale-purchase bills etc. Factually, the book of accounts have been accepted by the AO and no specific detail or transaction or entry has been rejected. Neither defects in the system of accounting employed the appellant has been pointed out by the. AO. nor provisions of section 145 of the Act are invoked. Such passing remark without any adverse material on record are a futile exercise and as such are accordingly rejected. The AO by not rejecting the books of account has in other words accepted the trading results. The undisputed facts as given in submissions by appellant are relevant to the facts of the case under consideration. To reiterate, no 12 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. adverse material has been' brought on record by AO except general remarks or presumptions/surmises.
In the light of above detailed discussion I find that there is absolutely no material or basis for sustaining the addition made by the AO. It is a settled law that without rejecting accounts, and without finding any adverse material and without rejecting any tranction, additions cannot be made merely on the basis of suspicion. Mere decline in gross profit or loss camiot be a ground for addition or disallowance of loss. Thus I hold that there is absolutely no material or basis to justify the disallowance of loss. Case law relied by appellant is relevant on the issue and there are so may other cases on the same issue upholding the same ratio.
Thus in the light of the above, it held that the AO was not justified to make addition of Rs.1,38,32,012/-. The same is directed to be deleted. Grounds of appeal Nos. 1 to 3 are allowed.
13 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. 4. In result, the appeal is allowed.”
We have heard the Learned Representatives of both the parties and perused the material available on record.
The Ld. D.R. relied upon the order of the A.O. and submitted that explanation of assessee is an afterthought and the income declared under section 41(1) should not have been added to the sales. When the liability of the creditor is ceased to exist, the creditor’s amount would be added to the income of the assessee and not to the sales amount. The C.A. of the assessee prepared a fabricated trading account.
On the other hand, Learned Counsel for the Assessee reiterated the submissions made before the authorities below and filed complete details pertain to assessment year under appeal as well as of the earlier orders and also filed copies of the purchase bills of the parties who have supplied materials to the assessee along with copy of the income tax returns, VAT returns and Excise records for preceding A.Ys. 2009-2010 and 2008-2009. He has submitted 14 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. that assessee made genuine purchases and since purchases have not been doubted by the VAT authorities and Excise authorities in assessment year under appeal as well as in earlier years, therefore, no such addition should be made against the assessee. He has also filed re-casted Trading & P & L A/c. He has submitted that if the trading liability written off is excluded from the Trading Account and added to the P & L A/c, it would declare the same net profit as was declared in the P & L A/c filed with the return of income and in case, the amount written off of the creditor is not taken into consideration either in the Trading or P & L A/c and taken to the computation of income, there would be loss of Rs.1.53 crores. He has submitted that ultimately assessee has declared income under section 41(1) of the I.T. Act. Therefore, addition on account of loss to the P & L A/c is wholly unjustified.
We have considered the rival submissions and do not find any justification to interfere with the Orders of the Ld. 15 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. CIT(A) in deleting the addition. The assessee produced complete books of account supported by vouchers and bills at the assessment stage. The A.O. found that assessee has written off the amount of Rs.1.57 crores of unpaid creditor which have been added as income to the Trading Account as it was added to the sales. This prompted the A.O. to exclude the same and assessed the loss as undisclosed income in the hands of the assessee. Learned Counsel for the Assessee was not able to satisfy us as to how the income declared under section 41(1) could have been added to the sales declared by assessee. Therefore, the Trading & P & L A/c filed by the assessee with his return of income was actually incorrect and the income declared under section 41(1) should not have been added to the sales of the assessee because it would give a distorted picture of the Trading Account. We agree with the submissions of the Ld. D.R. that the C.A. who has prepared the Trading A/c for the assessee for assessment year under appeal, has not prepared the accounts property and as such, the Income Tax Authorities are required to be vigilant to see 16 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. that such type of practice should not have followed in future. The action of the concerned C.A. is wholly in appropriate and we do not approve his conduct in preparing such a Trading Account. However, we have directed the Learned Counsel for the Assessee to prepare re-casted Trading & P & L A/c and if the amount in question written off (creditor) of Rs.1.57 crores is excluded from sales in Trading Account and taken to the P & L A/c, according to Learned Counsel for the Assessee net profit will remain the same. In the second alternative contention, Learned Counsel for the Assessee further recasted the Trading & P & L A/c and if the entire amount of Rs.1.57 crores is excluded from Trading & P & L A/c and taken directly to the computation of income, there would be loss of Rs.1,53,09,443/- and ultimately, it would have no impact on the computation of income of the assessee. Learned Counsel for the Assessee was directed to produce details of bills, vouchers, VAT returns and VAT orders for earlier years to explain that assessee made genuine purchases. Learned Counsel for the Assessee as per the directions, filed details of 17 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. the same on record and demonstrated that assessee made genuine purchases in the earlier years which have been written off in assessment year under appeal. The purchases have been accepted by the VAT Authorities as well as submitted to the Excise Authorities. Therefore, there is no reason to doubt purchases made by assessee in earlier years. Further, it is not reported as to if any action have been taken by the Department against the assessee in earlier year against the purchases so made. The assessee maintained books of account which are audited and the A.O. has not pointed out any specific defect in maintenance of the books of account by the assessee. The book results of the assessee have not been rejected under section 145(3) of the I.T. Act.
Considering the totality of the facts and circumstances of the case in the light of finding of fact recorded by the Ld. CIT(A), we are of the view that there was no justification to disbelieve the purchases made by assessee in earlier year. Therefore, there is no reason to make such 18 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. addition against the assessee on account of loss considering the same as undisclosed income of the assessee. Ultimately, assessee has declared income on account of written off creditors. Therefore, the claim of assessee should not have been rejected by the A.O. The Ld. CIT(A) on proper perspective, correctly deleted the addition. We may again note at the risk of the repetition that in case Trading & P & L A/c have been prepared properly by the concerned C.A, the present situation would not have arisen for making the addition against the assessee. However, assessee is responsible for the acts of his own C.A. who has prepared incorrect Trading Account for the assessee. In view of the above discussion, we confirm the finding of fact recorded by the Ld. CIT(A). The Departmental Appeal has no merit and the same is accordingly dismissed.
In the result, appeal of the Department is dismissed.
19 ITA.No.6156/Del./2015 Shri Jitendra Singh, Ghaziabad. Order pronounced in the open Court.