GAURAV TRIYUGI SINGH,MUMBAI vs ITO - 24(3)(1), MUMBAI

Income Tax Appellate Tribunal, “G” BENCH, MUMBAI

Before: SHRI MAHAVIR SINGH, JM & SHRI RAJESH KUMAR, AM Shri Gaurav Triyugi Singh

Hearing: 22.3.2017Pronounced: 11.5.2017

आदेश / O R D E R PER RAJESH KUMAR, A. M:

By way of this appeal the assessee is challenging the order of ld.CIT(A)-42, Mumbai dated 4.7.2016 for the assessment year 2010-11, wherein he has taken following grounds of appeal:

1) The Learned Commissioner of Income tax (Appeals) - 42, Mumbai on the facts and in the circumstances of the case and in Law erred in confirming the addition made by the ITO 24(3)(1) u/s. 68 of the I.T.Act of Rs. 26,35,0001- being unexplained cash credits i.e. loans taken from the following parties: Name of the Party Loan Amount Meena Singh 3,95,000 Dhirendra Sinqh 5,40,000 Savitri Thakur 17,00,000 Total 26,35,000 2) The Learned Commissioner of Income tax (Appeals) - 42, Mumbai on the facts and in the circumstances of the case and in law erred in confirming the addition made by the ITO 24(3)(1) of Rs.721,607/- being disallowance of commission expenses u/s 40(a)(ia) of the Ac well as on the round that the same were not genuine. 3) The Learned Commissioner of Income tax (Appeals) - 42, Mumbai on the facts and in law erred in confirming the addition made by the ITO (3)(1) u/s. 40(a)(ia) of the I.T. Act of Rs. 82,725/- being disallowance of Audit fees. 4) Without prejudice to ground number 2 and 3 above, the Learned Commissioner of Income tax (Appeals) - 42 erred in not directing the ITO 24(3)(1) to allow deduction of expenses of Rs.7,27,607 and Rs. 82,725/- in the year in which the payment of TDS was made. 5) The Learned Commissioner of Income tax (Appeals) - 42, Mumbai on the facts and in the circumstances of the case and in Law erred in confirming the addition made by the ITO 24(3)(1) u/s. 40A(2)(b) of the I.T. Act of Rs. 2,67,6871- being disallowance of 25% of the labour charges of Rs.10,70,749/- paid to Mr. Dhirendra T Singh, brother of the assessee treating the said disallowance as very nominal.

6) The Learned Commissioner of Income tax (Appeals) – 42, Mumbai on the facts and in the circumstances of the case and in Law erred in confirming the disallowance made by the ITO 24(3)(1) of Rs.1,55,918/- being ad hoc disallowance out of certain expenses as per details given below:

Nature of expenses Total Amount Disallowance made Disallowance - by the Assessing Officer confirmed by of Expenses being 20% of expenses Car expenses 64,196 12,839 6,420 Credit Card charges 37,684 7,537 7,537 Hotel expenses 1,08,721 21,745 21,745 Petrol 54,027 10,805 5,403 Telephone expenses 1,15,336 23,068 23,068 Travelling expenses 4,58,737 91,745 91,745 Total 8,38,701 1,67.739 1,55,918 7) The Learned Commissioner of Income tax (Appeals) - 42, Mumbai on the facts and in the circumstances of the case and in Law erred in directing the Assessing Officer to enhance the income of the appellant by Rs.11,38,798/- u/s.41(1) of the LT. Act being cessation of liability as on 31/03/2010 of 10 parties. 8) Without prejudice to the ground number 7, the Learned Commissioner of Income tax (Appeals) - 42 erred in not giving relief of Rs. 5,54,887/- in the AY 2011-12, as the appellant had himself treated the same as income for the AY 2011-12. Thus, by not giving relief of Rs.5,54,8871- for the AY 2011-12, the appellant had suffered double taxation on the said amount.”

Grounds of appeal no.1 is against the confirmation of addition of Rs.26,35,000/- by the ld.CIT(A) as made by the AO u/s 68 of the Income Tax Act, 1961 as unexplained cash credit from three parties i.e. Meena Singh, Dhirendra Sinqh and Savitri Thakur.

During the course of assessment proceedings, the AO observed that the assessee has borrowed a sum of Rs.26,35,000/- from three parties i.e. Rs.3,95,000/- from Meena Singh, Rs.5,40,000/- from Dhirendra Singh and Rs.17,00,000/- from Savitri Thakur. The AO called upon the assessee to file confirmations from these parties and return of income of all the loan creditors. However, the assessee vide letter dated 4.3.2013 submitted reply to the said show cause notice by filing return of income of Meena Singh without enclosing bank statement, in the case of Savitri Thakur, the assessee submitted that the she is not filing return of income and the same is the status in respect of Shri Dhirendra Singh. Finally the AO added the same u/s 68 of the Act to the total income of he assessee for the reasons that three main ingredients have not been proved by the assessee i.e. creditworthiness of the creditor, identity of the lender and genuineness of the transactions.

Aggrieved by the order of AO, the assessee preferred an appeal before the ld.CIT(A) who also dismissed the appeal of the assessee by observing and holding as under : “In view of the above settled legal position it is seen that in the case at hand the assessee has been able to establish only the identity of the cash creditors but their capacity to pay and the genuineness of the transactions are not established. It is clear that Smt. Meena Singh does not have adequate financial capacity to lend Rs. 3,95,0001- to the assessee. The loan creditor has no explanation for the cash deposited in her bank account immediately before issuance of the cheques to the assessee. It is also seen that in the entire financial year there are hardly any worthwhile transactions or bank deposits in the accounts of Smt. Meena Singh other than those connected with the loan transactions. The cash creditor Smt. Meena Singh has no explanation for the cash deposits in her bank and the replies given are not substantiated by any evidence. It is held that this cash credit is not proved. In the case of loan transactions of Rs. 5,50,0001- with Mr. Dhirendra T Singh also there is no explanation for the cash deposited in his bank account immediately before issuance of the cheques to the assessee. It is also seen that in the entire financial year there are hardly any worthwhile transactions or bank deposits in the accounts of Shri Dhirendra T Singh other than those connected with the loan transactions. It is held that this cash credit is not proved. The assessee has declared Shri Dhirendra T Singh as his labour contractor also in Mumbai and it is not explained how this creditor

keeps cash in Rae Bareli to give loans to the assessee and the source of the cash is also unexplained. In the case of this loan creditor it has claimed that there was an opening cheque deposit of Rs. 2,00,0001- in the bank of the loan creditor and this amount was paid to the loan creditor as labour contract charges in the earlier previous year by the assessee. It was also argued that this cheque deposit can explain Rs. 1.5 lac out of the Rs. 3.5 lacs given to the assessee on 29.05.2009. However the claim of the assessee is not acceptable for the limited purpose also. The assessee has adduced no evidence of the genuineness of the source of the sum of Rs. 2 lakhs Moreover the assessee is required to establish the genuineness of the cash credit in the previous year under consideration. It was held in the case of ACIT vs. Expresso Investments (2006) 8 SOT 287 (Mum) as under:- "The principles of res judicatta are also not applicable in income-tax proceedings particularly the cases relating to applicability of section 68. Each loan is independent in itself. In each case, the assessee has the onus to prove the identity of the creditor, his creditworthiness and the genuineness of the transaction. In some cases, the assessee might be able to prove and the authorities concerned may be satisfied with the evidence furnished by the assessee but that does not lead to the inference in all cases either in the same year or in subsequent years or in the case of other assessees that onus is deemed to have been discharged as required under section 68." (emphasis supplied) Therefore it is for the loan creditor to satisfy each and every loan and the genuineness thereof before the cash credit is accepted. The cash creditor Shri Dhirendra T Singh has no explanation for the cash deposits in his bank and the replies given are not substantiated by any evidence. Similarly the genuineness of the cheque of Rs. 2,00,0001- is not established by records. (the issue of non genuine labour charges paid to Shri Dhirendra T Singh is also one of the grounds of appeal in this year). It is therefore held that this cash credit is also not proved. In the case of Smt. Savitri Thakur the facts are very simple. The lady has no regular source of income and no evidence of her earning any sort of income is produced in these proceeding.Further the lady is not an income tax assessee and the deposits in her bank account have come from other relatives of the assessee and these people. in turn have no explanation for the cash deposited by them in their own bank account before transferring the money to Smt. Savitri

Thakur. The entire regimen of generation of funds by the assessee through his relatives and family members makes it necessary to examine the actual source of cash credit and in this respect the assessee has not been able to discharge the onus. It is held that this cash credit is also not proved. In view of the above addition of Rs.26,35,000/- made by the AO u/s 68 is confirmed and the ground of appeal no.2 of the assessee is dismissed.”

Aggrieved by the order of the ld.CIT(A) the assessee is in appeal before this Tribunal.

Before us, the ld.AR submitted that the assessee has filed necessary confirmations, balance sheets, banks statements and copies of income tax return in the case of first two creditors viz. Meena Singh and Dhirendra Singh from whom the assessee borrowed Rs.3,95,000/- and Rs.5,40,000/- respectively. Whereas in the case of Savitri Thakur no return has been filed as she was a retired government employees and confirmation of Savitri Thakur was also filed along with the bank statement. The ld. AR further argued that the assessee has proved source of borrowings, and three main ingredients as envisaged by section 68 of the Act and therefore the additions sustained by the ld.CIT(A) u/s 68 were bad in law and should be reversed. The ld. AR of the assessee submitted that the assessee was required to prove source of funds raised which were adequately substantiated and not sources of source as have been held in number of judicial pronouncements.

The ld. DR, on the other hand, strongly objected to the arguments of the ld.AR and submitted that the assessee failed to prove the three main ingredients i.e. identity of the creditor, creditworthiness of the creditor and genuineness of transactions and in the present case the transactions are full of doubt and manipulations done by the assessee as huge cash was deposited in the kind of loan creditor before one or two days in favour of assessee and therefore the cash credit required to be added in the hands of the assessee under section 68 of the Act and finally submitted that the addition was rightly made by the AO and upheld by the ld.CIT(A) and prayed before the Bench the appeal of the assessee should be dismissed.

We have heard the rival submissions and perused the material placed before us including the orders of authorities below on the issue. We find that in the case of Meena Singh and Dhirendra Singh, the assessee has produced loan confirmations and copy of bank statements along with returns of income and sources of source were duly explained. Moreover, the returns were accepted by the department. In view of this facts, we are not in agreement with the finding of the ld.CIT(A) that the three main ingredients i.e. identity of the creditor, creditworthiness of the creditor and genuineness of transaction were not proved. However, in respect of Savitri Thakur who has lent a sum of Rs.17 lakhs to the assessee out of gifts from Rajendra Bahadur Singh brother of lender and Ms.Sarojini Thakur sister of Savitri Thakur . In the case of Rajendra Bahadur Singh huge cash was deposited i.e Rs.5,00,000/- on 20.7.2009 which was stated to be kept in the house of the assessee out of tuition receipts whereas in the case of Sarojini Thakur Rs.9,00,000/- on 18.7.2009 which was stated to be out of agricultural income kept in the house. We also find that in these cases the assessees were not government employees and not filing any return of income for the reasons that they are eiher deriving income which was below the taxable income or from agriculture which we find is not convincing and satisfactory. In case of remaining Rs.3,00,000/-, we find that the assessee has proved genuineness of the transactions, creditworthiness and identity of the creditor. In our opinion, the order of the ld.CIT(A) in sustaining the entire addition of Rs.17 lakhs is not correct as the assessee has produced the necessary documentary evidences regarding Rs.3 lakhs. Whereas the source of Rs.14 lakhs is full of doubts and cannot be accepted. In view of this facts, we are inclined to uphold the addition to the extent of Rs.14 lakhs only by deleting the remaining the addition of Rs.3 lakhs. In the result, the appellant gets relief of Rs.12,35,000/- and the addition of Rs.14 lakhs is sustained. This ground is partly allowed.

Grounds of appeal no.2 and 3 are interconnected and against the confirmation of disallowance of Rs.7,27,607/- being disallowance of commission expenses and Rs.82,725/- being disallowance of audit fees both u/s 40(a)(ia) of the Act. The AO disallowed and added back a sum of Rs.7,27,607/- citing the reasons that commission was paid to two persons and no TDS was deducted from the payments so made and accordingly the assessee was called upon to submit the details of TDS which was replied by the assessee by filing a copy of challan dated 18.10.2010 in respect of payment made. The AO rejected the submissions of the assessee and added the same to the income of the assessee by holding that the said payment was made after due date of filing of return u/s 139(1) of the Act. Similar is the case in respect of Rs.82,725/-. The ld.CIT(A) also confirmed the action of the AO.

After hearing the rival contentions and on perusal of the material placed before us, we find merit in the submissions of the ld.AR that the TDS was deducted from the commission payment and audit fee and duly paid in the government treasury before the due date of filing the income tax return u/s 139(1) of the Act as is evidenced by the receipt placed at pages 45 and 46 of the paper book. In our view, the matter is requires verification at the end of the AO and therefore it would be reasonable and fair if the matter is restored back to the file of the AO for verification of claim of the assessee. Accordingly the AO is directed to allow the claim of the assessee if found correct as per law. Grounds of appeal no.2 and 3 are allowed for statistical purposes.

10.

Ground no.4 is without prejudice to the ground of appeal

no.2 and 3. In our opinion, the payments as shown in grounds of appeal no.2 and 3 if not allowed in the current year then it should be allowed in the year of payment of TDS. In the present case, the TDS was deposited before 31.10.2010 and therefore in view of our decision with respect to ground no.2 and 3 above this ground becomes infructuous and accordingly dismissed.

11. Ground no.5 is against the confirmation of addition of 25% of the labour charges of Rs.10,70,749/- paid to Dhirendra T Singh, brother of the assessee treating the said disallowance as very nominal as made by the AO u/s 40A(2)(b) of the Act.

12.

During the course of assessment proceedings, the AO noticed that a sum of Rs.10,70,749/- was paid to Dhirendra T Sing towards labour charges which as per the AO covered under section 40(2)(b) of the Act. Therefore, the AO issued notice to the assessee as to why the same should not be disallowed and added back to the total income of the assessee. In response the assessee filed a copies of bills of Dhiren T Singh giving explanation or justification for the such payments. But the AO not finding the same to be satisfactory for the reasons that the assessee has offered no explanation and disallowed 25% of Rs.10,70,749/- i.e. Rs.2,67,685/- on adhoc basis. In the appellate proceedings, the ld.CIT(A) also dismissed the appeal of the assessee on this issue by holding that the assessee paid total labour expenses of Rs.25,15,305/- during the year and the turnover of the assessee at Rs.1.80 crores and the disallowance of Rs.2,67,687/- was very nominal.

13.

After hearing both the parties and on perusal of the record and orders of authorities below, we find that the authorities below have failed to point out any unreasonability or excessiveness viz-a-viz all the labour charges paid to Dhirendre T Singh vis-à-vis prevalent market rate in order to make disallowance under section 40(2)(b) of the Act. In is necessary that the AO must record satisfaction regarding the payments made to the related persons that the same is unreasonable or excessive having regard to the prevailing market rate for the said services rendered by the later party. In our opinion, the disallowance made by the AO on adhoc basis and confirmed by the FAA by just stating that the total labour charges are nominal in relation to the turnover of the assessee and was disallowed for want of evidence and reasonability. In our opinion, this cannot be the ground for making disallowance u/s 40(2)(b). Therefore, we are not in agreement with the findings of the ld.CIT(A) and therefore set aside his order and direct the AO to delete the same. The ground no.5 is allowed.

14.

The issue raised in the grounds of appeal No.6 is regarding confirming the disallowance of Rs.1,55,918/- by the ld.CIT(A) as made by the AO on adhoc basis in respect of various expenses to the tune of Rs.1,67,738/-.

15. On perusal of the orders of lower authorities we find that the AO disallowed the expenses pertaining to car expenses, credit chares, hotel expenses, petrol, telephone expenses and travelling expenses and has disallowed 20% of the same without assigning any reason on the ground that the assessee could not justify these expenses. Similarly, in the appellate proceedings, the FAA reduced the same to 15%. We find that the expenses disallowed by the ld.CIT(A) is excessive and is on higher side. In our opinion, it would be reasonable if the disallowance is restricted to 7.5% of the total expenses as against 15% confirmed by the FAA. Accordingly, the AO is directed to make disallowance to 7.5% of the total expenses. This ground is partly allowed.

16.

The issue raised in the grounds of appeal no.7 is against the enhancement of the income by Rs.11,38,798/- u/s 41(1) of the Act on account of cessation of liability in respect of 10 parties outstanding as on 31.3.2010. During the course of appellate proceedings, the ld. CIT(A) observed that the turnover of the assessee is Rs.1.80 crores and purchases were to the tune of Rs.79,94,817/-. The ld. CIT(A) also observed that the assessee was carrying substantial amount of liabilities in as form of sundry creditors of Rs.43,17,014/- and advance from debtors Rs.15,97,053/-. Vide order sheet entry dated 15.2.2016, the assessee called upon to explain as to why these liabilities were not discharged. Accordingly, the assessee filed copies of ledger accounts and also payment made in some cases. Finally, the ld. CIT(A) vide order sheet entry dated 13.4.2016 issued a show cause notice to the assessee as to why the assessment should not be enhanced by the amount of sundry creditors and advanced from the debtors, which was replied by the assessee vide letter dated 12.5.2016 submitting therein that the assessee has already declared a sum of Rs.7,04,240/- as other income in the assessment year 2011-12 on account of writing back of certain sundry creditors which are no more payable. The ld. CIT(A), not finding the submissions and contentions of the assessee as convincing and satisfying, disallowed the following amount aggregating to Rs.11,38,798/- for the reasons that the assessee could not produce any confirmation or documentary proof that the liability to its sundry creditors existed as on 31.3.2010 as under: S. Name of the Amount Remarks No. Sundry Creditor outstanding (in Rs.) 1 Mls Asean Steel 540 The assessee has not been able to prove that this 910 liability exists through any correspondence or confirmation. The assessee has also not declared any transaction with this party till date and no payment has also been made so far. 2 M/s Jitendra Steel 38341 The assessee has not been able to prove that this liability existed as on 31.03.2010 through any correspondence or confirmation. The assessee has also not declared any transaction with this party and has claimed to have written back the amount on 02.04.2010. The assessee has given no explanation as to how the liability ceased on 02.04.2010. The assessee has given no explanation as to how the liability ceased on 2.4.2010. However this has no impact on the finding of cessation of liability on 31.03.2010 as per the case law discussed below: 3 M/s Nandi Tuff Same as above. 260 00 4 M/s Rupal Glass 788 Same as above 5 M/s Sigma Punch 121259 Same as above 6 M/s Vardhman Ply 7082 Same as above 7 M/s Venkatesh 7944 Same as above 8 M/s Wonder Decor 35757 Same as above 9 M/s Novelty 43001 The assessee has not been able to prove that this Computech liability exists through any correspondence or confirmation. The assessee has not been able to file the relevant ledger account of the party though it is claimed to have been filed with the letter dated 12.05.2016. Thus the assessee apparently not declared any transaction with this party till date and no payment has been made so far. 10 M/s Lake Plaza, 317716 The assessee has not been able to prove that this Hyderabad (advance is a genuine advance received from the party and from sundry debtors) not some unbilled amount. The assessee has not proved that the liability exists on 31.03.2010 through any correspondence or confirmation. The assessee has not declared any transaction with this party thereafter and no payment has been returned also. The assessee has claimed to have written back the amount in his books on 02.04.2010 but the assessee has given no explanation as to how the liabilities ceased on 02.04.2010 only. Further this has no impact on the finding of cessation of liability on 31.3.2010 as per the case law discussed below. Total 1138798

17.

The ld.AR vehemently submitted that in the assessment year 2011- 12, the assessee suomotu written back a sum of Rs.7,04,240/- towards cessation of liability which was duly shown as income in the profit and loss account. The ld. AR further submitted that the action of the appellate authority was totally wrong and against the spirit of law as provided under section 41(1) of the Act. Whereas, in fact these were not ceased to exist but continued to exist and outstanding at the year end. The ld. AR finally requested that the addition so made by the ld.CIT(A) deserved to be deleted. On the contrary, the ld. DR strongly opposed the submissions of the ld.AR and heavily relied on the orders of the authorities below.

18.

We have heard both the parties and perused the material available before us including orders of authorities below on the issue. We find that the assessee has shown sundry creditors and advances from sundry debtors in the balance sheet on liability side. We further find that the assessee has suomotu written back an amount of Rs. Rs.7,04,240/- in the assessment year 2011-12 which ceased to exist for which the trading liability has extinguished. In our opinion, the action of the ld.CIT(A) in making enhancement u/s 41(1) of the Act is contrary to the provisions of law in view of the fact when the assessee himself was showing the liability as existing on the balance sheet date and the ld. FAA has no locus standi to assess the income of the assessee under section 41(1) of the Act. The case of the assessee finds supports from the decision of the Jurisdictional High Court in the case of CIT V/s Enam Securities Ltd reported in 345 ITR 64 (Bom), wherein an identical issue has been decided by the Hon’ble High Court in favour of the assessee. We, therefore, respectfully following the ratio laid down in the said judgment set aside the order of the ld.CIT(A) and direct the AO to delete the addition.

19.

The issue raised in the grounds of appeal no.8 is without prejudice to the ground no.7 of this appeal and hence requires no adjudication, therefore dismissed as infructuous.

20.

In the result, the appeal of the assessee is partly allowed.

GAURAV TRIYUGI SINGH,MUMBAI vs. ITO - 24(3)(1), MUMBAI