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Income Tax Appellate Tribunal, DELHI BENCH ‘E’ NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI L.P. SAHU
Per L.P. Sahu, Accountant Member:
The appeal is filed by the Revenue and the cross-objection by assessee against the order of ld. CIT(A)XVI, New Delhi dated 28.10.2013 for the assessment year 2010-11 on the following grounds :
Grounds in Revenue’s appeal:
“1. On the facts & in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs.1,90,91,323/- on account of disallowance of bogus sundry creditors by ignoring the facts that vide audited balance sheet of M/s Sonu Trading Company, Cochin for the relevant A.Y. 2010-11, the assessee Co. has not been shown as debtor.
1.1 On the facts & in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs.1,90,91,323/- on account of disallowance of bogus sundry creditors by ignoring the fact that the assessee could not substantiate its claim even after providing proper opportunity of being heard during assessment proceedings.
2. On the facts & in the circumstances of the case, the Ld. CIT(A) has erred in reducing the disallowance of expenses on account of consumption of stores & spare parts, sales promotion, advertisement & conveyance from Rs.48,39,537/- to Rs.7,25,930/- ignoring the fact that during assessment proceedings, the assessee failed to produce the relevant bills/vouchers for verification in support of its claim & could not give any justification/explanation in this regard.
2.2 On the facts & in the circumstance of the case, that Ld. CIT(A) has erred in reducing the disallowance of expenses from Rs.48,39,537/- to Rs.7,25,930/- as the Ld. CIT(A) relied upon the evidences filed by the assessee during appellate proceedings and did not remand back the matter and give an opportunity to AO to give comments/counter the same.
Grounds of cross objection:
“1. On the facts and in the circumstances of the case, the CIT(A)-XVI New Delhi had erred, both on facts and in law, in sustaining illegal additions and disallowances of adhoc nature made by the ITO to the extent of Rs.7,25,930/-, which is unwarranted and unsustainable and the illegal addition is liable to be deleted.
2. On the facts and in the circumstances of the case, the appeal filed by the Revenue in regard to the illegal addition of Rs. 1,90,91,323/-
perversely made by the ITO without any fair and objective application of mind having been rightly deleted in first appeal, the pleas and grounds taken by the Revenue to sustain the addition through the present appeal are totally baseless, erroneous and misconceived and the appeal wrongly filed by the Revenue is liable to be dismissed by upholding the deletion of such illegal additions by the first appellate authority as lawful and justified.
3. The CIT(A) has properly appreciated the correct factual and legal position after analyzing the complete facts, records and documents as well as confirmation by the supplier of goods and also the banks and the order rightly passed by him does not call for any interference in the departmental appeal erroneously filed.
The appeal filed by the Revenue is patently intended to harass the assessee and such baseless and frivolous appeal being filed by the Revenue is not only liable to be dismissed but also warrants imposition of heavy costs on the Revenue to prevent unwarranted litigation being created or continued by the Revenue.”
Briefly stated, the facts of the case are that the assessee filed its return of income on 15.10.2010 declaring an income of Rs. Nil. Subsequently, the case was selected for scrutiny and statutory notices were issued. The main activity of the assessee company is the business of manufacturing and export of Bicycle tyres and tubes and automobile tubes. During the course of scrutiny proceedings, the Assessing Officer noted that balance of Rs.1,90,91,323/- is appearing in the list of sundry creditors named M/s. Sonu Trading Co. Cochin.
A letter u/s. 133(6) was issued to the said creditor on 19.12.2012 requiring him to give the details of transactions made with Noslar International Pvt. Ltd. and accordingly, M/s. Sonu Trading Company filed his reply in response to the notice u/s. 133(6). In the copy of accounts submitted for F.Y. ending 31.03.2010, the opening balance and closing balance was showing as nil. From the bank statement submitted by M/s. Sonu Trading Co., all the payments were reflected in his bank account against their sales made to the assessee company, either through RTGS or Hundi but in the books of account of the assessee company, there is credit balance of a sum of Rs.1,90,91,323/- in the name of Sonu Trading Company. With reference to the difference appearing in the account books of the assessee and M/s. Sonu Trading Company, the appellant submitted as under :
“ As regard opening and closing balances of Sonu Trading Co. this is to bring to your kind knowledge that we have discounted bills of Sonu Trading Co. through our L.C. Limit i.e., all payments due to Sonu Trading Co. were released by Bank (through LC Limit) but we received this payment from bank after the tenure of LC limit. So we are showing opening and closing balances of Sonu Trading Co. but Sonu Trading Co. is showing nil balance.
Details of outstanding LC’s and copies of LC’s as on 31.03.2010 are enclosed herewith along with reconciliation statement which truly reflects the correct position as on account of Sonu Trading Co. is also enclosed herewith for your reference.
There is no difference either in the opening balance or in the closing balance. So no adverse inference may be drawn on this account.”
3. On further scrutiny of accounts, the Assessing Officer noted that the assessee has claimed huge expenses on the following account heads of expenses :
S. No. Expenses claimed AY 2010-11 AY 2009-10 % of increase over last year under head 1. Consumption of stores & 55,48,483/- 19,88,817/- 178.98% spare parts 2. Sales Promotion 52,94,283/- 7,24,656/- 630.59% 3. Advertisement 21,93,330/- 2,43,588/- 800.42% 4. Conveyance 14,82,522/- 2,33,488/- 534.94% The AO observed that there are huge increase in the expenditure compared to the last year. The reply of the assessee on the reasonableness of the expenditure is as under :
"Increase in sales promotion & advertisement: Since the company is yet at its initial stage and expenditure on Branding is indispensible, there has been aggressive marketing and branding initiatives which reflects in increased sales figures by 72%. The budget for this increase was duly passed in Board of Directors meeting (copy enclosed). Photocopies of major bills are enclosed to justify the genuineness of expenses. “2. Increase in Bonus/Ex-gratia/Wages: Is basically due to increased cost of labour i.e. wages, overtime, incentive etc. which was warranted for increased production in the year 2009-10.
Insurance Expenses increased: due to acquisition affixed assets, large inventory for finished goods etc.
4. Increase in conveyance expenses: It was shown as a part of personnel expenses in the previous year 2008-09 which is shown separately in the year 2009-10 which is quite evident by declined figure of personnel expenses in 2009-10 i.e. rescheduling of figures in the main reason for the same.
Repair & Maintenance Expenses: Increased due to increase fixed assets by 150 lacs and their extensive usage in the manufacturing
process which is evident by the increased production in year 2009-10 as compared to the year 2008-09.”
The Assessing Officer was not satisfied with the above reply of the assessee.
The assessee was asked to produce complete books of accounts and bills/vouchers with respect to the above expenditure. Many opportunities were granted to the assessee, but complete books and bills/vouchers were not produced before the AO. Ultimately, on 30.01.2013, the Assessing Officer disallowed 1/3rd of the total expenses claimed under the above heads.
Aggrieved by the order of the AO, the assessee appealed before the first appellate authority, who after examination of the submissions of the assessee, deleted the addition of Rs.1,90,91,323/- in regard to sundry creditors and further noted that the assessee has produced some internal vouchers in support of the claim of expenses which had been disallowed on adhoc basis by the AO. He, therefore, restricted the disallowance to Rs.7,25,930/-. Aggrieved by the order of the ld. CIT(A), the Revenue as well as assessee are before the Tribunal by way of appeal and cross-objection.
4. The ld. DR relied on the order of the Assessing Officer and submitted that the appellant has filed additional evidence before the first appellate authority who did not call for any remand report. Therefore, the matter should go back to the file of AO for verification of the expenses allowed by the ld. CIT(A). In respect of deletion of addition of Rs.1,90,91,323/-, he submitted that the books of account of the assessee company have been audited by a qualified Chartered Accountant and balances appearing as on the date of balance sheet but in respect of M/s. Sonu Trading Co., the balance is shown as nil. Therefore, the AO was justified in making the addition of the difference in both the accounts.
5. On the other hand, the ld. AR relied on the order of the first appellate authority with respect to the deletion of addition of Rs.1,90,91,323/-.
However, regarding the confirmation of addition of Rs.7,25,923/- on account of expenditure, the ld. AR submitted that the authorities below have not pointed out as to which voucher or bill is not reliable. Therefore, the adhoc addition sustained by the ld. CIT(A) has to be deleted. He also referred to page No. 177 of the paper book to submit that complete books of accounts were produced before the Assessing Officer.
We have heard both the sides and perused the material available on record. In respect of sundry creditors balance of Rs.1,90,91,323/-, the ld. CIT(A) has made an elaborate discussion. For the sake of convenience, we are reproducing the finding of the ld. CIT(A) as under :
“4.1.1 I have carefully considered the submissions of the appellant, the facts of the case as well as the findings of the A.O. Ground no. 1 of appeal is directed against addition of Rs. 1,90,91,323/- made by the AO u/s 68 of the IT Act. The appellant company is engaged in the business of manufacture and sale including export of bicycle tyres & tubes and automobile tubes. The AO observed that as per the list of sundry creditors a credit balance of Rs. 1,90,91,323/- has been shown from M/s Sonu Trading Company, Cochin. However, from the copy of account statement of M/s Sonu Trading Company for the period ending 3 1 .03 .20 1 0 AO observed that the opening debit balance as on 1st April 2009 and the closing debit balance at the end of 31st March 2010 has been shown at Nil. Therefore, from the account statement confirmation of M/s Sonu Trading Company it is established that the assessee has shown bogus liability of Rs. 1,90,91,323/- on account of sundry creditor M/s Sonu Trading Company, Cochin. AO, therefore, held that the assessee has created bogus and fictitious liability of Rs. 1,90,91,323/- in the books of account and added back the same to the Income of the assessee u/s 68 of the IT Act.
4.1.2 From the reconciliation statement submitted by the appellant it is seen that the above balance of Rs. 1,90,91,323/- pertains to the following payments which were shown as received in the books of M/s Sonu Trading Co. but no such payments were shown in the books of the appellant company.
A/C Noslar International Ltd. Date Hundi No. Amount (Rs.) 08/01/2010 35 8,50,000 14/01/2010 36 18,00,000 21/01/2010 37 21,73,600 23/01/2010 39 21,81,920 27/01/2010 40 13,50,000 23/02/2010 41 15,69,260 23/02/2010 42 7,13,300 16/03/2010 23 20,50,000 22/03/2010 44 23,58,560
26/03/2010 46 25,17,280 30/03/2010 47 25,34,080 Total 20,098,000
4.1.3 In the books of Sonu Trading Co. the above amounts were shown as received by way of Hundi. From the bank statement of Sonu Trading Co. with Allahabad Bank, Cochin it is seen that the above payments by way of Hundis were issued by Allahabad Bank. It was also confirmed by Allahabad Bank, Cochin that above amounts were credited by discounting letter of credits issued by Axis Bank, Bhopal. From the letter of credit issued by Axis Bank Ltd., Bhopal, the banker of the appellant company, it is seen that all the above payments received by Sonu Trading Co. are on the basis of letter of credit issued by Axis Bank, Bhopal to Allahabad Bank, Cochin. The letter of credits were issued for 90 days and after 90 days in the months of April, May and June 2010 Axis Bank has debited the account of the appellant by the corresponding amount along with other charges for the letter of credits issued. The appellant has also debited the account of Sonu Trading Co. in the months of April, May and June 2010 on the dates on which Axis Bank has debited its accounts. From the above it is seen that on the basis of the letter of credits issued by Axis Bank, the account of Sonu Trading Co. was credited by Allahabad Bank by discounting the bills and accordingly M/s Sonu Trading Co. credited the account of the appellant. Because of this the balance in the books of M/s Sonu Trading Co. is appearing as Nil. On the other hand, as no payments were made by the appellant and letter of credits (L/c) were issued by Axis Bank against the credit limits available, therefore, the balance continued to remain in the books of the appellant till the end of the financial year. As stated above, payments of the above amounts are verifiable in the books of the appellant and in the Axis Bank account statement in the months of April, May and June 2010 after the expiry of 90 days L/C limit. In view of the above, the additions of Rs. 1,90,91,323/- made by the AO is not justified and, therefore, the same is deleted. The appeal is allowed on Ground no. 1 of appeal.”
From the above findings of the ld. CIT(A), it is clear that the assessee company has recorded the transactions in his books of account after 90 days from the letter of credit issued. The Axis Bank has debited the account of the appellant by the corresponding amount along with other charges in the letter of credit issued. Accordingly, the assessee has debited to Sonu Trading Co. in the month of April, May & June, 2010 as debited by the Axis Bank to the appellant’s account. M/s. Sonu Trading Co. has credited the accounts of the assessee company when he received the discounting of the bills from the Allahabad Bank. Therefore, the ld. CIT(A) is justified in deleting the addition of Rs.1,90,91,323/-. Accordingly, ground Nos. 1 & 1.1 of the Revenue are dismissed.
Adverting to the second issue regarding claim of expenditures, it is evident from record that during the disputed year the assessee has claimed enormous expenditure under the above heads, which are about 800% more than that claimed in the last year. It is no doubt true that the ld. Assessing Officer has made adhoc addition, but keeping in view the enormous increase in expenditure, it was incumbent upon both the authorities below to verify all the expenditure from the bills/vouchers submitted by the assessee. A perusal of the assessment order reveals that the AO has recorded categorical finding that complete books of accounts and complete bills/vouchers were not produced by the assessee before him despite several opportunities afforded to assessee. Per contra, the contention of the assessee has been that all the bills/vouchers and complete books of account were produced before the AO.
This contention of assessee appears to have been accepted by the ld. CIT(A) perhaps on the basis of a letter of AO dt. 28.01.13 addressed to the Security Officer, which nowhere reveals as to which of the account books or vouchers for how much expenditures were produced by assessee before the AO.
Keeping in view the enormous increase in expenditure, which according to the AO does not commensurate to the increase in sales etc., in our opinion, only those expenditures would be allowable to the assessee which are supported and verified from the bills/vouchers placed by the assessee and recorded in the books of account. The ld. CIT(A) at his own appears to have made random checking of some of the vouchers for only two months, which do not give the figure of actual expenditure incurred during the whole year. Some of the internal vouchers, perhaps self made vouchers, submitted by assessee before the CIT(A) have also been accepted by the ld. CIT(A), which according to the Revenue were not produced before the AO nor the ld. CIT(A) called for any remand report from the AO for comments/verification. In our considered opinion, this issue needs proper and thorough examination/verification of expenditures claimed by assessee from the books of accounts and supporting bills/vouchers thereof before arriving at the correct figure of inflation of expenditure. We, therefore, think it just and proper to restore this issue back to the file of Assessing Officer to decide this issue afresh after making proper verification of expenditure with reference to the account books of assessee and the supporting bills/vouchers produced by the assessee before the authorities below. Needless to say, the assessee shall be given reasonable opportunity of being heard.
In the result, the appeal of the Revenue and cross-objection of the assessee are partly allowed for statistical purposes.
Order pronounced in the open court on 23.01.2017.