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Income Tax Appellate Tribunal, “B”, BENCH KOLKATA
Before: SHRI A.T. VARKEY, JM & DR. A.L.SAINI, AM
Since, the issues involved in all the appeals are common and identical; therefore, these appeals have been heard together and are being disposed of by this consolidated order.For the sake of convenience, the grounds as well as the facts narrated in the assessee`s appeal in A.Y. 2000- 01, is taken as the leadcase for adjudication of above summarized ground nos. 1 and 2, and the assessee`s appeal in for A.Y. 2003-04, is taken as the lead case for adjudication of above summarized ground nos. 3 and 4.
Now we shall take summarized ground nos.1 and 2.At the cost of repetition the summarized ground no.1 and 2 is given below for ready reference: Ground No.1 Addition on account of bogus creditors. For assessment year 2000-01 Rs. 10,03,082/- For assessment year 2001-02 Rs. 8,25,545/- For assessment year 2002-03 Rs. 7,26,621/- For assessment year 2003-04 Rs.13,13,668/- For assessment year 2004-05 Rs.10,04,556/- Ground No.2. A.Y. 2000-01- Addition Rs. 2,66,000/- on account of not disclosing unsecured loan.
3 Tum Nath Shaw A.Ys.2000-01 to 2004-05 5. The facts of the case which can be stated quite shortly are as follows. The assessee filed his return of income declaring total income of Rs.1,50,010/- on 30.10.2000. Subsequently, the Assessing Officer issued notice u/s 148 of the Act on 01.04.2005 and assessment u/s 143(3) read with section 147 was completed on 29.12.2006. In the said order u/s 143(3) read with section 147 of the Act, the Assessing Officer made total addition to the tune of Rs. 12,69,082/-, consisting bogus creditors of Rs. 10,03,082/- and unsecured loan of Rs. 2,66,000/-.
6 On appeal by the assessee, the said order u/s 143(3) r.w.s. 147 of the Act was, upheld by the ld. CIT(A) on 12.10.2007. On further appeal by the assessee against the order of ld CIT(A), dated 12.10.2007, the Hon’ble Income Tax Appellate Tribunal in its order no. 2425 to 2429/Kol/2017, dated 18.07.2008 set aside the orders of the lower authorities for assessment years 2000-01 to 2003-04, directing that the Assessing Officer shall furnish the copy of the reasons recorded u/s 148 of the Act to the assessee and if the assessee files any objection, the Assessing officer should dispose of the same by passing a speaking order and thereafter complete the assessment as per law.
As per the direction of the Hon’ble ITAT in I.T.A.Nos.2425to 2429/Kol/2017, order dated 18.07.2008 (supra) the reasons recorded were provided by the Assessing Officer to the assessee. The Assessing Officer also provided the opportunity of being heard to the assessee on several occasions, and then after completed the assessment u/s 144/147 of the Income Tax Act, 1961, on the basis of material available on record.
During the assessment proceedings,u/s 144/147 of the Act, the Assessing Officer noted that the assessee had disclosed Rs. 19,40,677/- as sundry creditors and Rs. 77,90,185/- as sundry debtors in his books of accounts. The assessee was asked to file the details of the sundry debtors and creditors and their postal addresses. Accordingly, the assessee submitted the postal addresses of the sundry debtors and creditors. After getting postal address from the assessee, the 4 Tum Nath Shaw A.Ys.2000-01 to 2004-05 Assessing Officer issued letters to various creditors u/s 133(6) of the Act, on test check basis. Many letters u/s 133(6) of the Act, returned unserved with postal remark “Not Known”.
The Assessing officer based on the report of the commission U/s 131(d) of the Act, noted that assessee had overstated the credit payable and claimed bogus credits in many cases, which are given below: Name of the party A.Y. Credit as Credit as per Difference per party assessee Agarwal Cane Crusher 2000-01 60922/- Nil 60922/- Agarwal Industries 2000-01 158982/- 1038/- 157944/- Baldev Singh Bhim Singh 2000-01 124181/- 73328/- 50853/- Hari Shankar Khandsari 2000-01 149471/- 266000 149471/- Udyog (Unsecured loan) Ganga Sugar Works 2000-01 104943/- Nil 104943/- KishanKhandasari Udyog 2000-01 225794/- 16170/- 209624/- Shri Hanuman Rab Udyog 2000-01 271539/- 118789/- 152750/- Sree Ganapati PashuAher 2000-01 158481/- 41906/- 116575/- Total 1003082/- Based on the above analysis, the Assessing officer, asked the assessee to submit the reasons of the discrepancy, as noted in the table above. In response the assessee filed written submission stating that the above noted discrepancy in the table above was due to goods in transit or payments in transit. The Assessing Officer noted that the reply of the assessee was without basis and without any evidence therefore he rejected the contentions of the assessee and made the addition to the tune of Rs. 10,03,082/-.
The Assessing Officer also noted that the assessee had given an unsecured loan to the tune of Rs. 2,66,000/- to Hari Shankar Khandsari Udyog but the assessee has not shown the loan in his books of accounts. The AO presumed that the assessee had extended this loan out of his unaccounted cash and therefore the Assessing Officer made an addition to the tune of Rs. 2,66,000/-
5 Tum Nath Shaw A.Ys.2000-01 to 2004-05 10. Aggrieved the addition made by the Assessing Officer the assessee carried the matter in appeal before the ld. CIT(A) who has confirmed the addition made by the Assessing Officer. Aggrieved by the order of the ld. CIT(A) the assessee is in further appeal before us.
We have heard both the parties and perused the material available on record. We note that the ld. Counsel for the assessee submitted before us that assessee’s books of accounts were audited. The books of accounts were not rejected by the assessing officer. The ld Counsel also pointed out that some of the creditors were paid by assessee in subsequent years therefore it cannot be said that creditors are bogus. On the other hand, ld DR for the Revenue submitted before us that the assessee has not explained the difference in creditors therefore, the difference worked out by the assessing officer should be sustained. We note that assessee has participated in the assessment proceedings and submitted the details and documents required by assessing officer. The assessee also explained the difference between creditors recorded in his books vis-à-vis balance in the books of creditors, stating that said difference was due to goods in transit or payment in transit. The assessing officer rejected the explanation of the assessee without providing any valid reasons. Besides, the assessing officer failed to adduce any evidence on record to prove that the difference in creditors is a bogus and out of unaccounted money. Just to work out the difference in sundry creditors is not sufficient, the AO ought to adduce any tangible material on record to prove that the said difference belongs to unaccounted money of the assessee. We note that assessee’s purchases had not been doubted by the Assessing Officer. The Assessing officer also did not doubt the sales made by the assessee therefore,so far the accounting principles are concerned, if the total sales and total purchases are not doubted then balance of creditors are going to be genuine, if it is not otherwise proved by the assessing officer.
We note that thedifference between creditors recorded in his books vis-à-vis balance in the books of creditors, should not be treated as cessation of liability. At 6 Tum Nath Shaw A.Ys.2000-01 to 2004-05 this juncture it is appropriate to go through the relevant provisions of section 41(1) of the Act, the relevant extracts of which is reproduced below: “Section 41(1):Where an allowance or deduction has been made in the assessment for any yearin respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year, - (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-fax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b) the successor in business . . ........... Explanation 1.- For the purposes of this sub-section, the expression “loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts.
On perusal of the aforesaid provision it could be seen that the following two conditions need to be fulfilled in order to treat cessation of liability as income under section 41(1) of the Act in the year of cessation of liability: a) Assessee has to avail an allowance or deduction in any earlier year in respect of loss, expenditure or trading liability and b) In subsequent year the assessee has obtained cash or any other benefit in respect of such loss, expenditure and trading liability by wav of remission or cessation of liability.
In other words, if an assessee incurred any loss, expenditure or trading liability in respect of any year and subsequently has obtained cash or any other benefit in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, then, the amount of cash /benefit so received shall be treated as income in the year of receipt or cessation of liability.
We note that in the assessee`s case under consideration, the assessee had shown the closing balance of sundry creditors as on 31-03-2000 in its balance sheet and 7 Tum Nath Shaw A.Ys.2000-01 to 2004-05 the said closing balance has been continued and carried forward as opening balance in the subsequent year i.e. as on 01-04-2000. Hence, it is clear that the assessee had not written back the same to its Profit &Loss account during the relevant year. As such, it cannot be said that the assessee had availed any benefit, as specified in (b) above, during the relevant year. Hence, the condition prescribed in section 41(1) of the Act has not been fulfilled in instant case. Besides,the Explanation 1 to section 41(1) of the Act is also not applicable in instant case since the assessee has not credited the same to its Profit &Loss account for the relevant year. In such a situation, it cannot be contended that the liability of different assessment years, as mentioned in the grounds of appeal had ceased to exist. Furthermore, the above liabilities has been continued from earlier years. Hence, the addition on account of bogus creditors is wholly unjustified.
13.In this regard it is also pertinent to note that the AO has not brought on record any evidence to justify that the aforesaid liabilities had actually ceased to exist during the relevant year. In such a situation the question of addition does not arise. Reliance in this regard is placed on the decision in the case of CIT -vs.- Sugauli Sugar Works (P). Ltd. (1999) 236 ITR 518 (SC) wherein, affirming the decision of the Hon'ble Calcutta High Court, the Hon'ble Apex Court held as follows: “It will be seen that the following words in the section are important; the assessee had obtained whether in cash or in any other manner whatsoever any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him'. Thus, the section contemplates the obtaining by the assessee of an amount manner, whatsoever, or a benefit by wav of remission or cessation and it should be of a particular amount obtained by him. Thus, the obtaining by the assessee of a benefit by virtue of remission or cessation is sine qua non for the application of this section".
In the instant case, the assessee has shown sundry creditors in the books of accounts and as such, applying the ratio of the above decision, it cannot be said that the assessee has received cash or other benefit in respect of such creditors or there has been cessation/remission of liabilities during the relevant respect year so as to justify addition under section 41(1) of the Act.
8 Tum Nath Shaw A.Ys.2000-01 to 2004-05 Further, in the case of CCIT -vs.- Kesaria Tea Co. Ltd. (2002) 254 ITR 434 (SC) the Hon'ble Apex Court held as follows: "In order to apply section 41(1) in the context of the facts of the present case, the following points are to be kept in view (1) in the course of the assessment for an earlier year, allowance or deduction has been made in respect of trading liability incurred by the assessee; (2) Subsequently, a benefit is obtained in respect of such trading liability by wav of remission or cessation thereof during the year in which such event occurred; (3) in that situation the value of benefit accruing to the assessee is deemed to be the profit and gains of business which otherwise would not be his income; and (4) such value of benefit is made chargeable to income-tax as the income of the previous year wherein such benefit was obtained. The High Court, agreeing with the Tribunal, rightly held that the resort to section 41(1) could arise only if the liability of the assessee can be said to have ceased finally without the possibility of reviving it. On the facts found by the Tribunal, the Tribunal as well as the High Court were well-justified in coming to the conclusion that the purchase tax liability of the assessee had not ceased finally during the year in question"
In the assessee`s case under consideration, the assessee has not received any benefit by way of remission or cessation of liabilities during the relevant year towards balance of sundry creditors and as such, it can be stated that it has not fulfilled the conditions as specified by the Hon'ble Apex Court in the above referred decision. Thus, applying the ratio of the Hon'ble Apex Court, it can be stated that the aforesaid liabilities cannot be added back under section 41(1) of the Act for the relevant respective assessment year. Our views are also fortified by the judgment of Co-ordinate Bench in the case of Puspal Kumar Das in for assessment year 2007-08 wherein it was held as follows: “10. We have given a very careful consideration to the rival submissions. In our view the addition was rightly deleted by the CIT(A) for the following reasons: i. There was no evidence to show cessation of liability. ii. Assessee still shows the liability in its books of accounts which itself is prima facie evidence that the liability exists. iii. The transaction of purchase, if regarded as bogus then there is no liability in law and hence the question of applying section 41(1) will not arise for consideration. iv. The sums in question has been repaid in the subsequent assessment years, thereby rendering the theory of cessation of liability not sustainable.
9 Tum Nath Shaw A.Ys.2000-01 to 2004-05 We therefore concur with the view of the CIT(A) and dismiss Gr. No. 2 raised by the revenue also.” Considering the factual position explained above and the position in law we are of the view that the addition made by the Assessing Officer should be deleted accordingly we delete the following additions made by the Assessing Officer: For assessment year 2000-01 Rs. 10,03,082/- For assessment year 2001-02 Rs. 8,25,545/- For assessment year 2002-03 Rs. 7,26,621/- For assessment year 2003-04 Rs.13,13,668/- For assessment year 2004-05 Rs.10,04,556/- 14.Ground No.2. A.Y. 2000-01 relates toaddition Rs. 2,66,000/- on account of not disclosing unsecured loan. The ld counsel for the assessee pointed out that the said amount of Rs.2,66,000/- does not belong to assessee. The said amount is not mentioned in the books of the assessee. The DR for the Revenue fairly agreed with the proposition canvassed by ld Counsel. We have heard both the parties and perused the material available on record, we note that said amount of Rs.2,66,000/-, does not emanate from the books of accounts of the assessee. That is, the said amount does not belong to the assessee, therefore, the question of disallowance does not arise. Moreover, the AO failed to bring any evidence on record to establish that the said amount of Rs.2,66,000/- is an unaccounted money of the assessee.Hence, we delete the addition of Rs.2,66,000/-.
Now we shall take Ground No.3. for A.Y. 2003-04, which relates to disallowance of Rs. 5,95,107/- under section 40A(3) of the Act.
Brief facts qua the issue are that the assessee being a commission agent, is also a trader in Jaggery. This is clearly reflected in the trading account of the audited accounts of the assessee and the assessee made purchases of Gur of Rs.29,75,538/-.The assessee submitted before the Assessing Officer that Gur trading was done with those customers who did not have bank account in village and as such the assessee will get the benefit under Rule 6DD(J) of the IT Rules. However, the Assessing officer noted that gur/ jaggery is a by-product of sugar
10 Tum Nath Shaw A.Ys.2000-01 to 2004-05 cane and as such it is not an agricultural product but rather it is a product of the sugar cane and hence the benefit under Rule 6DD cannot be extended to the assessee in the instant case. The Assessing Officer noted that almost all the payments in both the businesses were in cash, exceeding Rs.20,000/- therefore the Assessing Officer made a disallowance of 20% of the entire purchases amounting to Rs. 5,95,107/-( that is, 20% of Rs.29,75,538), u/s 40A(3) of the Act.
17.Aggrieved by the addition made by the Assessing Officer, the assessee carried the matter in appeal before the Ld. CIT(A) who has confirmed the addition made by the Assessing officer. Aggrieved by the order of the Ld. CIT(A) the assessee is in appeal before us.
18.We have given a careful consideration to the rival submissions and perused the material available on record. We note that considering the size and nature of the business and the product in which the assessee deals, we are of the view that in the village and remote area and kind of the peoples involved in this business (that is, most of the peoples are farmers), the gur and jaggery trading were being done mostly on cash basis. Most of the farmers have factory to produce gur and jaggery in the farm house itself where the sugarcane is produced therefore it cannot be said that farmers are not involved in manufacturing gur and jaggery. When it comes to the farmers, the general phenomenon and perception is that the Indian farmers are mostly uneducated and do not know how to operate the bank account. We know that the gur and jaggery production is not an agricultural activity but farmers are involved in producing gur and jaggery, as explained above, therefore, there are more chances to do the transactions in cash. We also note that the books of accounts of the assessee were audited and books of accounts were not rejected by the Assessing Officer. The Assessing Officer has not taken any adverse view on the assessee’s books of accounts, so far this addition is concerned. Apart from this, the Assessing Officer has not doubted the purchase and sales made by the Assessing Officer. We note that the assessee’s claim falls under Rule 6DD(J) of the Income Tax Rules (vide old Rules). It will
11 Tum Nath Shaw A.Ys.2000-01 to 2004-05 be pertinent to go into the intention behind introduction of provisions of section 40A(3) of the Act at this juncture. We find that the said provisions was inserted by Finance Act 1968 with the object to curbing expenditure in cash and to counter tax evasion. In the assessee`s case, there is no tax evasion, as the books of accounts were duly audited by the Chartered Accountant and AO has not rejected the books of the assessee and the payee has offered the tax. Therefore, the addition made by the Assessing Officer and confirmed by the Ld. CIT(A) needs to be deleted. Accordingly, we delete the addition to the tune of Rs. 5,95,107/-.
19.Ground No.4. for A.Y. 2003-04, relates toaddition of Rs. 44,120/-, on account of undisclosed profit.
Brief facts qua the issue are that the assessee in his statement given by him, during the survey, had mentioned that the commission was 4 per tin of ‘gur’ sold. Based on the analysis of the trading account of the assessee, it was noted by the Assessing Officer that the assessee had sold 20,966 tins in the year and disclosed a gross profit of Rs. 37,744/- which is at the rate of Rs. 1.8 per tin. The Assessing Officer also noted that the profit earned from trading activity was much less than the income earned from commission, therefore the income disclosed in the trading activity was grossly understated. Therefore, the Assessing Officer noted that even if the income earned per tin from the commission is considered @ Rs.4 per tin, the income from the said 20,966 tins should be Rs. 83,864/-. Therefore, the Assessing Officer made an addition for the differential amount to the tune of Rs. 44,120/- (Rs.83,864 - Rs. 39,744).
On appeal by the assessee, the Ld. CIT(A) confirmed the addition made by the Assessing Officer. Aggrieved, the assessee is in appeal before us.
We have heard both the parties and perused the material available on record, we note that the addition made by the Assessing Officer is purely on conjectures and surmises. The assessee has disclosed income Rs.1.8 per tinwhereas the Assessing Officer made an addition on account of differential amount without
12 Tum Nath Shaw A.Ys.2000-01 to 2004-05 any base and without any evidence on record. The ld AO made this addition solely based on the statement of the assessee. We note that statement is a good evidence provided it is supported by any tangible material or corroborate evidence. We note assessee’s account are audited and not rejected by the Assessing Officer therefore to estimate the separate profit in addition to profit shown in the audited books of accounts is not tenable without any tangible material or corroborative evidence, therefore we delete the addition of Rs. 44,120/-.
23.In the result, the appeal filed by the assessee for assessment year 2000-01 to 2004-05 are allowed.
Order pronounced in the open court on this 31/ 12/2018.