DCIT, NEW DELHI vs. M/S. TASHU INTERNATIONAL, NEW DELHI

This is an appeal by the Revenue against the order of ld. CIT(A)-XXVI, New Delhi dated 10.01.2013 for the assessment year 2008-09 on the following grounds : “

The brief facts relating to first ground of appeal are that during the assessment proceedings, the Assessing Officer noticed that the assessee paid a remuneration of Rs.60,000/- to one of its partners Sh. Jagmohan Sawhney. The AO observed that since the assessee suffered losses during the year under consideration the remuneration paid to partner cannot exceed the sum of Rs.50,000/- as per the provisions of section 40(b)(v) of the IT Act. Therefore, the AO disallowed excess amount of salary paid under the above section and the salary worth Rs.50,000/- was also disallowed as per provision of section 40A(3) as according to the AO this remuneration was paid in cash. The ld. CIT(A) accepting the contention of the assessee that no payment was made above Rs.20,000/- at one time, but the salary was paid at the rate of 5000/- per month, deleted the addition vide impugned order. The Revenue has challenged the deletion by way of this appeal before the Tribunal.

The learned DR submitted that that ld. CIT(A) was not justified in deleting the addition which was disallowed as per provisions of section 40A(3). The remuneration so paid by assessee was in defiance of provisions of the Act. He, therefore, urged for sustenance of the addition made by the AO.

The ld. AR of the assessee, on the other contented that the provisions of section 40A(3) are not attracted in the instant case for the reason that no single payment of Rs.20,000/- or more in any day was made in cash and that the salary to partner was paid at the rate of Rs.5000/- per month. Thus, there being no payment in excess of Rs.20,000/- in cash, the ld. CIT(A) was justified in deleting the addition made by the AO.

Having considered the rival submissions, we find no justification to interfere with the findings of the ld. CIT(A) inasmuch as the provisions of section 40A(3) are not attracted in the present case, as nothing is brought on record from the side of the Revenue that the assessee had made any single payment of salary in excess of Rs.20,000/- in cash. The conclusion of the ld. CIT(A) in this regard, is, therefore, affirmed and ground No. 1 of the Revenue deserves to be dismissed.

The brief facts pertaining to ground No. 2 are that in the assessment proceedings, the AO noticed from schedule of “current Liabilities & provisions that the assessee firm had claimed sundry creditors of Rs.76,57,016/-. The AO required to assessee to furnish the details of sundry creditors along with the details viz., date since outstanding and subsequent payments being made, if any, along with the account confirmations from the parties. As to the confirmation of the creditors, the assessee stated that the assessee is not able to arrange the same at present because of dispute with the parties and the amount is still outstanding. However, the assessee submitted a list of sundry creditors, which is reproduced at page 3 of the appellate order. On perusal of this list, the AO noticed that out of the total sundry creditors of Rs.76,57,016/- outstanding as on 31.03.2008, the sundry creditors worth Rs.28,35,622/-,i.e., 17 parties, are shown as opening balance as on 01.04.2007 pertaining to the period prior to A.Y. under consideration, but the same are not being still cleared. The AO, therefore, observed that the creditors claimed by the assessee in respect of various expenditure including purchases have still not been paid and the assessee failed to submit any documentary evidence regarding the existence of such liability. The AO, thus, considered such liability having been ceased to exist, more particularly when the assessee firm had stopped functioning at the end of the year under consideration. The AO, therefore, considered the sum of Rs.28,35,622/- as income of the assessee on account of cessation of the liability and added the same to the income of the assessee firm as income from business. The assessee carried the matter before the ld.CIT(A) in appeal, where the ld. CIT(A) restricted the addition on this account to Rs.1,50,330/- with respect to five sundry creditors, which the assessee failed to provide even their addresses. The observations made by the ld. CIT(A) on this issue read as under : “11. I have considered the facts of the case, submissions of the appellant, remand report of the Assessing Officer and the appellant's rejoinders. The Assessing Officer added an amount of Rs.28,35,622/- on the ground that i) liabilities pertained to period prior to assessment year under consideration, ii) no confirmation in respect of these liabilities were filed and iii) the appellant discontinued its activities/operations from the end of the financial year relevant to assessment year under consideration. In the course of the appeal proceedings, on a specific request by the appellant, the Assessing Officer was directed to verify these creditors under the provisions of the IT Act 1961. In compliance to the same, the Assessing Officer issued notices u/s 133(6) to 10 out of 15 parties, and the addresses of the remaining 5 parties were not provided by the appellant. The report of the Assessing Officer was received which is reproduced above in para 4.4 of this order. On perusal of the report of the Assessing Officer, I find that out of 10 parties, in case of 5 parties neither the notices u/s 133(6) were returned back to the sender nor any reply was received. In two cases, the notices were returned back to the sender with postal remarks, as "half address" and in the second one as "no such firm on this address". Replies were received in case of three parties, out of which one party confirmed the balance amount and other two parties confirmed the transactions with the appellant with some difference in the closing balance as shown in their accounts. The Assessing Officer did not confront the appellant with the difference in the closing balance of the two parties and did not ask the appellant to reconcile the same. Mere difference in the closing balance cannot be a ground to disbelieve the existence of the liability. Therefore, the liability on account of the amounts outstanding against the names of these 3 creditors namely M/s. Universal Silk House, M/s. Aman Packaging Industries Pvt. Ltd. and M/s. Dwarka Math & Company amounting to Rs.2,40,273/-, Rs.2,14,584/- and Rs.38,703/- respectively aggregating to Rs.4,93,560/-cannot be treated as liability that ceased to exist. 11.1 In case of the parties where the notices which were neither returned back nor any reply was received, I find that the Assessing Officer did not make or conduct any further enquiries nor had he confronted the appellant regarding the same. The AO also did not make any efforts to verify whether the notices were actually served on the concerned parties. The appellant had already explained that in the course of assessment proceedings the reasons for not furnishing the confirmations of these parties was due to the disputed relations with these creditors. In these Circumstances, it would not be proper to arrive at a logical conclusion that the liabilities shown outstanding in the names of five parties namely M/s. Chauhan Crafts, M/s. DNT Sales, M/s. Moti Packaging Industries Pvt. Ltd., M/s. Sagar Print Pac and M/s. Chand Handicrafts ceased to exist. Therefore, considering the facts and circumstances of the case, the liabilities aggregating to Rs.9,96,390/- shown as outstanding in the names of these five parties cannot be held as liabilities ceased to exist. It is pertinently mentioned here that in case of one of these parties namely M/s. Chauhan Craft suit against the appellant was filed in court, the details of which are on record. 11.2 In case of two parties namely M/s. Ever Green Printers and M/s. Ajay Handcrafts in whose cases the notices were returned back un-served. I find that in these two cases also the Assessing Officer did not make any further enquiries by deputing his Inspector. The appellant may have in his possession the old addresses of these parties, and the Assessing Officer did not confront the appellant regarding the same and also did not ask the appellant to furnish the new address of these parties to conduct necessary enquiries. In these circumstances, it would not be proper to treat these two creditors as non- existent. Therefore, the liabilities aggregating to Rs. 11,95,342/- outstanding in the names of these parties cannot be held as liabilities that ceased to exist. 11.3 In case of the remaining 5 parties, notices u/s 133(6) could not be issued because the appellant did not provide to the Assessing Officer the addresses of these parties. I find that the appellant had neither made any submissions in this regard nor filed any other documentary evidence to show the existence of these five creditors. In these circumstances since the appellant failed to establish the existence of these parties, the addition of the outstanding amounts shown against the names of the these five parties aggregating to Rs. 1,50,330/- is confirmed. 11.4 In view of the above detailed discussion pertaining to each creditor, the addition made by the AO to the extent of Rs.1,50,330/- out of total addition of Rs.28,35,622/- is therefore confirmed and the balance addition of Rs. 26,85,292/- is hereby deleted. This ground of appeal is partly allowed, and direct the AO to pass an order accordingly.”

We have heard the submissions of both the parties on this issue and we find that there is no good reason to disturb the findings reached by the ld. CIT(A), as above. It is notable that the ld. CIT(A) has dealt with each and every sundry creditors. The creditors who did not offer any reply in response to notices u/s. 133(6) or on whom the notices could not be served or no further enquiry was made by the AO with respect thereto, the ld. CIT(A) has observed that liability to such sundry creditors cannot be deemed to have been ceased or that such sundry creditors do not exist. There is nothing from the side of the Revenue to rebut this conclusion of the ld. CIT(A). We, therefore, do not find any justification to sustain the addition, which has been deleted by the ld. CIT(A) with respect to such sundry creditors. With respect to five sundry creditors, the ld. CIT(A) has itself sustained the addition of Rs.1,50,330/-. Hon’ble Karnataka High Court in the case of CIT vs. Alvares & Thgomas in vide order dated 24.03.2016 has held that in legal parlance, merely because the creditor could not be traced on the date when the verification was made, same is not a ground to conclude that there was cessation of the liability. The cessation of the liability has to be cessation in law, of debt to be paid by assessee to the creditor. The debt is recoverable even if the creditor has expired, by the legal heirs of the deceased creditor. In view of the above discussion, ground No. 2 of the appeal of the Revenue is liable to be dismissed.

The facts relevant to ground No. 3 are that during the course of assessment proceedings, the AO noticed that out of total sundry creditors amounting to Rs.76,57,016/-, the liability to 17 sundry creditors aggregating to Rs.38,62,375/- was also existing during the year under consideration. The assessee could not file confirmation from such creditors, therefore, the AO made addition of Rs.38,62,375/- to the total income of the assessee u/s. 68 of the IT Act. The ld. CIT(A) after considering the submissions of the assessee and the remand report sought from the AO, restricted the addition to Rs.31,938/- only with respect to such sundry creditors, whose addresses could not be provided by the assessee for enquiry by the AO. The Revenue is in appeal before the Tribunal.

The ld. DR relying upon the order of the AO submitted that the ld. CIT(A) was not justified in deleting the addition made by the AO for no good reason. The assessee could not file the confirmations from the sundry creditors and substantial part of the liability shown could not be verified during the enquiries made by the AO in the remand proceedings. He, therefore, urged to sustain the addition as done by the AO.

On the other hand, the ld. AR of the assessee opposed the submissions of the ld. Dr and submitted that no sufficient opportunity was provided to produce the relevant confirmation of the creditors, as he demanded for the same at the last moment of assessment. List of all the sundry creditors was furnished by assessee. It was also submitted that all these sundry creditors were the trade creditors. The credit is appearing on account of purchase/sales in the books of account of assessee. The books of account have not been rejected by the AO. It is not the case of the Revenue that the purchases made were bogus, as no disallowance has been made on this account. Therefore, the trade creditors could not be disbelieved. Reliance is placed on the decision of ITAT Delhi Bench in the case of DCIT vs. Devine International (ITA No. 1995/Del./2011).

We have considered the rival submissions and have perused the entire material on record. It is not in dispute that the trading account has been accepted by the department, meaning thereby that the purchases made have been accepted. There is nothing on record to show that these were not the trade creditors. It is no doubt true that the assessee could not furnish the confirmations of the trade creditors, but once the purchases declared by the assessee have been accepted, it cannot be straightway said that the assessee has shown bogus liability against the trade creditors unless there is credible material with the Revenue to prove the creditors as bogus. For this, the decision of ITAT Delhi Benches in the case of CIT vs. Divine International is relied upon. However, it is a fact on record that the business of the assessee has closed its function at the end of the year under consideration and that the assessee failed to furnish the confirmations of the creditors before the AO as contemplated u/s. 68 of the Act. The AO has also failed to enquire into the fact whether the assessee has been making any payment towards the impugned liability in the subsequent year(s) or has been showing the same as carry forward of earlier liability. In presence of these peculiar facts, we deem it expedient in the interest of justice that the matter should go back to the file of AO for deciding the issue afresh after making deep enquiries as discussed above. We accordingly, restore this issue to the file of AO for decision afresh as noted above. Needless to say, the assessee shall be given reasonable opportunity of being heard to furnish requisite evidences and to put its case on merits before the AO. As a result, ground No. 3 of the Revenue is allowed for statistical purposes.