VENKATESAN P ,BANGALORE vs. INCOME TAX OFFICER WARD-7(2)(3), BANGALORE

Per Jason P Boaz, Accountant Member

2.1 These are the second round of proceedings in the case on hand. In the first round, a Co-ordinate Bench of this Tribunal vide its order in ITA No. 946/Bang/2014

Page 2 of 6 dated 12.04.2016 set aside the issue of addition of Rs.9,17,410/- made in the order of assessment for Assessment Year 2008-09 dated 15.12.2010 to the file of the AO for re-examination in the light of the judgment of the Hon’ble Delhi High Court in the case of Usha Stud Agricultural Farm Ltd., (301 ITR 384); holding as under at para 4 thereof:

“4. We have considered the rival submissions as well as the relevant material on record. We find that the amount in question is a brought forward balance as shown in the account of the two parties viz., M/s.Beijia Industrial Co. Ltd., and M/s.S.I.International Co., who are stated to be suppliers of the assessee. This fact has not been disputed by the CIT(A) as recorded in para.6 of the impugned order: "6. Before me also the appellant has not furnished any confirmation from the impugned sundry creditors and only reiterated the arguments made before the AO. Copy of ledger account of Beijia Industrial Co. Ltd. furnished for FYs 2005-06, 2006-07 & 2007-08 shows that the transactions have started in FY 2005-06 and have continued in the two following years. The ledger account of SI International Company shows no transactions during FY 2007-08 against the opening balance of Rs.1,37,860(Cr.) of 1.4.2007.” Thus it is clear that the CIT(A) has recorded the fact that the assessee has claimed this amount being a brought forward balance in the ledger accounts of the creditors of M/s.Beijia Industrial Co. Ltd., and M/s.S.I.International Co.,. The AO made the addition on the ground that the assessee failed to produce the confirmation of the creditor. It is pertinent to note that this amount was shown as credit for the financial year 2005-06 and continued as carried forward till this year, then it would not be a case of credit entries in the books of account of the assessee during the year under consideration. Therefore, when no cash credit was entered into books of account during the year under consideration, then no addition u/s 68 of the Act can be made in respect of this amount of credit balance shown in the books of account. As regards the genuineness of the transaction is concerned, if the assessee failed to prove the existence of the liability in question then the addition can be made under the provisions of sec.41(1) or sec.28 of the Act and not u/s 68 of the Act. Accordingly, we set aside this issue to the record of the AO to re-examine the same in the light of the judgment of the Hon'ble Delhi High Court in the case of Usha Stud Agricultural Farm Ltd.(supra). The assessee is also directed to explain the status of the repayment of the liability.”

2.2 Consequent to the directions in the aforesaid order of the Tribunal (supra), the Assessing Officer (‘AO’) took up assessment proceedings afresh on the issue remanded back to his file. The AO completed the assessment proceedings ex-parte u/s 143(3) r.w.s. 254 of the Income Tax Act, 1961 (in short ‘the Act’); observing that since the assessee has neither responded to notices issued nor furnished any details for verification, the addition of Rs.9,17,410/- in respect of sundry creditors pertaining to M/s. Beijia Industrial Co. Ltd., amounting to Rs.7,79,550/- and S. I. International Ltd., amounting to Rs.1,37,860/- is made to the assessee’s taxable income; now determined at Rs.21,86,330/-.

2.3 Aggrieved by the order of assessment dated 26.12.2017 for Assessment Year 2008-09, the assessee filed an appeal before the CIT(A)-7, Bangalore. The learned CIT(A) dismissed the assessee’s appeal vide the impugned order dated 03.07.2018 holding as under at para 3.3 thereof:

“The submission of the appellant has duly been considered. The appellant M/s Associate Impex (Proprietorship Concern of the appellant P Venkatesan) purchased glasses valued at Rs. 7,79,550 from M/s Beijia Industrial Company Ltd and in turn supplied the same to M/s Associated Safety Glasses Pvt Ltd. These glasses were found to be defective by M/s Associated Safety Glasses Pvt Ltd. As per the tripartite settlement reached between t these three parties on l0-01-2008 (a copy of settlement pasted above) the final due amount of Rs. 5,25,000 from the appellant to the supplier M/s Beijia Industrial Company Ltd was agreed to be paid by M/s Associated Safety Glasses Pvt Ltd directly to M/s Beijia Industrial Company Ltd. It was further agreed that there is no due from the appellant to M/s Beijia Industrial Company Ltd. Thus, the entire liability of Rs 7,79,550/- shown by the appellant in his books of account for AY 2008-09 in respect of M/s Beijia Industrial Company Ltd stood extinguished. Since the appellant has claimed this amount as a sundry credit against M Is Beijia Industrial Company Ltd during the year, the action of the AO to add back this amount to the income of the appellant for the year is found to be correct. However, as this sundry creditor is carried over from earlier year, it cannot be added to the income of the appellant for the current year u/s 68

Page 4 of 6 of the Act. Nevertheless, this addition has to be made u/s 41(1) of the Act for cessation of liability which has been carried forward from the earlier financial year 2005-06. As regards, the liability of Rs 1,37,860/- shown against M/s SI International Ltd, the appellant has submitted that this liability has been waived by M/s SI international Ltd and the amount has been offered for tax. Therefore, the action of the AO to add this amount of Rs 1,37,860/- to income of the assessee for the year is found to be correct and hence confirmed.”

3.1 The assessee, being aggrieved by the order of CIT(A)-7, Bangalore dated 03.07.2018 for Assessment Year 2008-09 has field this appeal wherein he has raised the following grounds:

1. CIT Appeal's order is opposed to the law and facts of the case.

2. CIT Appeal wrongly confirmed the addition under pretext that liability is extinguished and appellant's claim of creditor is wrong.

3. CIT Appeal failed to appreciate the appellant's prayer that liability was discharged after tripartite agreement.

4. CIT Appeal erred to examine Hon'ble ITAT finding that credit is carried forward from earlier and is not assessable u/s68.

5. Hon'ble ITAT may kindly allow the appeal for these and such other grounds that may be taken at the time of hearing.

6. Appellant craves to add any fresh ground or delete any ground at the time of hearing.

3.2 All the grounds raised (supra) are basically raised in respect of addition of Rs.9,17,410/- in respect of sundry creditors of Rs.7,79,550/- pertaining to Beijia Industrial Co. Ltd., and Rs.1,37,860/- pertaining to S.I. International Ltd., made and confirmed by the authorities below.

3.3 I have heard the rival contentions of the learned AR for the assessee and the learned DR for Revenue, and perused and carefully considered the material on record. At the outset of proceedings, both Counsels pointed out that there was no dispute in respect of the liability of Rs.1,37,860/- shown against M/s. S. I. International Ltd., and the amount is offered to tax as cessation of liability u/s 41(1) of the Act. In these circumstances, the finding rendered in impugned order of the learned CIT(A) on this Page 5 of 6 issue in respect of Rs.1,37,860/- is upheld and to this extent the assessee’s appeal is dismissed.

3.4.1 The other sundry creditor balance is of Rs.7,79,550/- (Rs.9,17,410/- less Rs.1,37,860/-) pertaining to M/s. Beijia Industrial Co. Ltd. From an appraisal of the details on record and the submissions of the learned AR, it is seen that vide a tripartite settlement dated 10.01.2008 [copy of which has admittedly been placed before the CIT(A)], an amount of Rs.5,25,000/- was drawn up as the final amount due from the assessee to M/s. Beijia Industrial Company Ltd., which was agreed to be paid by M/s. Associated Safety Glass Pvt. Ltd; the recipient of the goods through the assessee; directly to M/s. Beijia Industrial Co. Ltd. Thus, the entire liability of Rs.7,79,550/- shown by the assessee in his books of accounts stood extinguished. In this regard, the learned AR pointed out that as per details filed, M/s. Associated Safety Glass Pvt. Ltd., had paid M/s. Beijia Industrial Company Ltd., the amount of Rs.5,25,000/- in the year under consideration as under:

1) On 1.2.2008 vide cheque No. 580837 of Karur Vysya Bank – Rs.2,00,000/- 2) On 19.2.2008 vide cheque No. 879844 of Karur Vysya Bank – Rs.1,00,000/- 3) On 6.3.2008 vide cheque No. 580840 of Karur Vysya Bank – Rs. 50,000/- 4) On 13.3.2008 vide cheque No. 580845 of Karur Vysya Bank – Rs.1,00,000/- 5) On 29.3.2008 vide cheque dated 543185 of Vijaya Bank – Rs. 75,000/- Total - Rs.5,25,000/-

Page 6 of 6 3.4.2 From the above details, I find that even after acknowledging the agreement dated 10.01.2008 and the recitals therein, the CIT(A) went on to uphold the addition of Rs.7,79,550/- u/s 41(1) of the Act as cessation of liability; without giving credit for the amount of Rs.5,25,000/- paid towards clearing the sundry creditor’s balance of M/s. Beijia Industrial Co. Ltd. In my view, after giving credit for the payments of Rs.5,25,000/- as per agreement dated 10.01.2008; being the full and final amount due by the assessee to M/s. Beijia Industrial Co. Ltd; the addition u/s 41(1) of the Act on account of cessation of liability is to be sustained only to the extent of Rs.2,54,550/- (i.e., Rs.7,79,550/- less Rs.5,25,000/-) and I hold and direct accordingly. Consequently, the assessee’s grounds are partly allowed.

Pronounced in the open court on this 14th day of November, 2018.