ACIT, NEW DELHI vs. SHRI RISHIKESH SHARMA, NEW DELHI

2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”

In ground No. 1(ii), the Revenue has challenged reduction of gross profit rate to 20.78% by the learned Commissioner of Income-tax (Appeals), as against the gross profit rate of 25% applied by the Assessing Officer on the sales turnover of the assessee. 3.1 The facts in respect of issue in dispute are that the Assessing Officer observed that besides non-payment of some of the bills for material purchase, payments to two parties by cheque not reflected in their books of accounts and most of the bills in respect of purchase of material for installation were without any TIN, the assessee also did not maintain any stock register in respect of the material purchased for installation. In respect of stock register, it was explained by the assessee that he was engaged in installing the equipments at the customer site and, therefore, the entire stock either gets consumed or remained with the customer, which is evident from the closing stock in books of account. The Assessing Officer concluded that there might be a closing stock available at the end of customer but same has not been considered by the assessee in the books of account. In view of the discrepancies, the Assessing Officer invoking the provisions of section 145(3) of the Act rejected books of accounts and the gross profit rate of 25 % was applied over the sales of the assessee, which yielded the gross profit of Rs.2,53,56,334/-. After subtracting the gross profit of Rs.1,33,81,416/-declared by the assessee in the return of income, the balance amount of Rs.1,19,74,919/-was added to the return of income. Before the learned Commissioner of Income-tax (Appeals), the assessee submitted that he had maintained the books of accounts in the normal course of the business activity and the books were duly audited by the Chartered Accountant and the assessee followed Mercantile System of accounting in terms of section 145(2) of the Act and no defect was pointed out by the auditor in the books of accounts maintained by the assessee. The assessee relied on various decisions in support of contention. However, the learned Commissioner of Income-tax (Appeals), rejected the contention of the assessee as regard to the rejection of books of account, however, applied the gross profit rate of 20.78%, which was declared by the assessee in the immediately preceding assessment year, holding that there was no major change in the business of the assessee during the year under consideration as compared to the immediately preceding year. Accordingly, the learned Commissioner of Income-tax (Appeals) allowed part relief to the assessee. Against the said part relief in gross profit rate allowed to the assessee, the Revenue is in appeal. 3.2 Before us, the learned Senior Departmental Representative, relying on the findings of the Assessing Officer, submitted that in view of the defects in maintenance of vouchers and payments to creditors and no closing stock reflected in the books of accounts, the estimation of gross profit at the rate of 25% was a reasonable and same might be upheld. 3.3 On the other hand, the learned Authorized Representative of the assessee submitted that rejection of books of accounts in absence of maintenance of stock register was not justified and no defects have been pointed out specifically by the Assessing Officer. In support of the contention that books of account cannot be rejected merely due to non- maintenance of day-to-day stock register, the learned Authorized Representative of the assessee relied on the judgment of the Hon’ble High Court of Punjab and Haryana in the case of Jhandu Mal Tara Chand Rice Mills Vs. Commissioner of Income Tax, reported in 73 ITR 192. 3.4 We have heard the rival submissions and perused the relevant material on the record. We find that Revenue in its ground has taken issue only in respect of gross profit rate reduced by the learned Commissioner of Income-tax (Appeals) to 20.78% from the gross profit rate of 25% applied by the Assessing Officer. We find that the rate of 25% applied by the Assessing Officer was without any comparable case, whereas the learned Commissioner of Income-tax (Appeals) has applied the gross profit rate shown by the assessee in the immediately preceding assessment year. We find that learned Senior Departmental Representative could not controvert the fact that there is no material change in the business activity of the assessee in the year under consideration as compared to the immediately preceding year. As regard Authorized Representative of the assessee, we find that the assessee has neither filed any cross objection or appeal contesting the issue of rejection of books of accounts and not taken any additional ground in this respect and therefore the arguments of learned Authorized Representative, not to reject the books of accounts, cannot be considered. 3.5 In view of the facts and circumstances of the case, we are of the considered opinion that the findings of the learned Commissioner of Income-tax (Appeals) on the issue in dispute are well reasoned and we do not find any infirmity in the same, accordingly, we uphold the same and thus the grounds no. 1(ii) is dismissed.

In another ground No. 1(i), the Revenue has challenged the deletion of the addition of Rs.3,56,54,400/- made by the Assessing Officer under section 41(1) of the Act on account of cessation/remission of liability in respect of two creditors. 4.1 The facts in brief in respect of issue in dispute are that in assessment proceeding, the Assessing Officer observed that in the balance sheet under the head sundry creditors has shown outstanding credit balance as on 31/03/2008 in respect of two parties as under:

In Books of M/s. Nil Nil Scientech Technology Pvt. Ltd., Indore Nil Nil 4.6 The Assessing Officer confronted the copies of accounts of the two-parties in reference to the Authorized Representative the assessee, who explained that the difference in accounts existed because of opening balances not shown by the parties in their respective accounts. But the Assessing Officer observed that not only there was a discrepancy in the opening balance but the payments shown by cheque by the assessee were not tallying with the Ledger account of the assessee maintained in the books of those parties and the assessee failed to give any explanation in respect of amount shown to have been paid by the cheque. 4.7 The Assessing Officer concluded that the assessee had no liability to pay the above amounts to those parties and hence treated the opening balances related to the above two parties of Rs.3,56,54,400/- as remission /cessation of liabilities under section 41(1) of the Act. 4.8 Before the learned Commissioner of Income Tax (Appeals), the assessee submitted that respective balances in the account of the creditors were existing liability in his books of account and same had not been ceased to exist and nor had been remitted. It was further submitted that the opening balance in the case of M/s Fastech Telecommunication Private Limited was on account of invoice number T-075/05-06 dated 15/3/2006 amounting to Rs.2,10,02,800/-. Similarly, the opening balance in the case of M/s Scientech Technology Private Limited was in respect of the debit note No. 255/05-06 dated 29/10/2005, amounting to Rs.2,46,51,600/-. In view of submission of the assessee, the learned Commissioner of Income-tax (Appeals) held the liabilities outstanding in the books of account of the assessee in respect of the two parties could not be held as remission/cessation of the liability for the following reasons: “(i) The circumstances under which cessation of a liability may occur have been clarified by the Hon’ble SC in the case of Sugauli Sugar Works (supra). In the books of accounts of the appellant these liabilities were created in pursuance of the respective invoice/debit note details of which have been mentioned above. This invoice/debit note has not been held to be false. In the books of accounts' of the appellant, liabilities towards both the parties have been shown as outstanding liabilities i.e. there is neither any discharge of the liabilities by the appellant; nor is there any contract between the appellant and the creditors with regard to their cessation/ remission. (ii) In the books of accounts of the creditors, they have neither shown any opening balance nor any closing balance due from the appellant. Thus even as per the books of accounts of the creditors the liabilities of the appellant towards them have not ceased/ remitted during the year under consideration. (iii) The books of account of the appellant have been rejected by the AO on account of specific defects pointed out in the same. The rejection of books of accounts of the appellant and application of a profit rate has been upheld as discussed in later part of this order.” 4.9 The learned Commissioner of Income-tax (Appeals) also held that books of account have been rejected and the gross profit rate has been upheld, no further addition should have been made on the basis of Rs.3,56,54,400/- made on account of cessation/remission of liabilities under section 41(1) of the Act. 4.10 Before us, the learned Sr. Departmental Representative relying on the order of the Assessing Officer submitted that the in the books of accounts of the two parties under reference, the opening balances of Ledger account of the assessee are NIL, whereas in the Ledger account of those parties in the books of accounts of the assessee opening balances are appearing, and, therefore, the assessee has either made payment or those parties have written off the payments due from the assessee and for ascertaining those facts the issue in dispute may be restored to the file of the Assessing Officer. According to learned Senior Departmental Representative, if those parties have waived the amounts due from the assessee, then the assessee has been benefited to the extent and the liability should have no longer been existed in the books of accounts of the assessee. 4.11 On the other hand, the learned Authorized Representative of the assessee, firstly submitted that the Assessing Officer has not given categorical findings that the allowance or deduction has been made in respect of the trading liability in earlier years and an amount, either in cash or any other manner is obtained by the assessee in this year on account of such loss or expenditure or any benefit is obtained in respect of such trading liability by way of remission or cessation thereof. 4.12 Secondly, it was contended that the assessee had been showing the liability in the year under consideration. In this connection, he referred to the decision of the Hon’ble Supreme Court in the case of CIT Vs. Sugauli Sugar Works (P.) Ltd, 236 ITR 516 wherein it has been held that there cannot be any cessation/remission of the liability by the unilateral Act of the debtor. He further relied on the order of the Tribunal Madan Lal & Bros. Vs. ACIT, circle Faridabad in ITA No. 908/Del/1995. 4.13 Thirdly, supporting the order of the learned Commissioner of Income-tax (Appeals), it was submitted that books of accounts have been rejected and the gross profit rate has been estimated in the case of the assessee, then in such circumstances, no further addition under section 41(1) of the Act was required. In this connection, the learned Authorized Representative, relied on the following decisions: (i) Indwell constructions, reported in (1998) 232 ITR 776 (AP); (ii) Bhandari Lal Bansi Dhar, reported in (1998) 229 ITR 229 (All); (iii) M/s. Exim Cargo Kare, in Mum/2011(Trib.)(Mum.) 4.14 We have heard the rival submissions and perused the relevant material on record. We have also gone through the provisions of section 41(1) of the Act. We find that under the provisions of section 41(1) of the Act, following benefits obtained by the assessee are brought to tax: (i) any amount obtained in cash or in any other manner in respect of loss or expenditure; (ii) any benefit obtained in respect of any trading liability by way of remission or cessation thereof; where such loss or expenditure or trading liability was allowed as deduction in earlier year or years. 4.15 In the case in hand, there is no dispute as to the trading liability was allowed in earlier year. The only dispute between the parties is that whether the trading liability has been remitted during the year. The contention of the assessee that the liability exists as opening balance is appearing in the Ledger accounts of the parties in the books of accounts of the assessee and the assessee has not remitted the liability and, therefore, the assessee has not obtained any benefit in respect of the trading liabilities, accordingly the provisions of section 41(1) are not applicable in the case of the assessee. The contention of the Revenue is that no such liability existed in the books of accounts of those parties. 4.16 We find that in the case of M/s. Sugauli Sugar Works Private Limited (supra), on the issue of remission/cessation of liability, the Hon’ble Supreme Court has held that mere entry in the books of accounts of the debtor made unilaterally without any act on the part of the creditor, will not enable the debtor to say that the liability has come to an end and apart from that will not by itself confer any benefit on the debtor as contemplated by the section. 4.17 In view of the fact of the case in hand, we find that trading liability of both the parties, i.e, M/s. Fastech Telecommunication Private Limited and M/s Scientech Technology Private Limited are appearing as opening balance in the Ledger accounts of the parties in the books of accounts the assessee irrespective of the fact that in the books of accounts of the parties the balances of the assessee are shown as nil. Thus, it is clear that in books of account of the assessee, liability has not been remitted or ceased to exist. Secondly, from the nil opening balances in ledger accounts of the assessee in the books of accounts of those parties, it manifests that the liability has been either paid or waived in earlier years and not in the year under consideration. Thus, it is evident that the liabilities of both the parties have not been remitted by the assessee in its books of accounts at least in the year under consideration and no benefit has been obtained in respect of the trading liabilities, therefore, the provisions of section 41(1) of the Act are not applicable in the facts of the assessee in the year under consideration,. Accordingly, the addition Rs.3,56,54,400/-, made by the Assessing Officer under section 41(1) of the Act cannot be sustained.

Since the assessee has already been allowed relief on the issue in dispute, we are not giving any finding on other argument of the learned Authorized Representative, that no addition can be made under section 41(1) of the Act, if books of accounts of the assessee are rejected and gross profit has been estimated as same are merely rendered academic. Accordingly, the ground of the appeal is dismissed.

The ground no. 2 being general in nature, not required to adjudicate by us.

In the result, appeal of the Revenue is dismissed.