M/S KGN ELECTRICALS,TUMKUR vs. ACIT, TUMKUR

This appeal is directed against the order dated 24.06.2013 of the CIT(Appeals)-II, Bangalore arising from the assessment order passed u/s. 143(3) r.w.s. 263 of the Income-tax Act, 1961 ["the Act"] for the assessment year 2007-08.

The assessee has raised the following grounds:- “

The learned CIT(A), erred in confirming the addition of Rs 17,60,000/- as unconfirmed creditors despite the fact that all the creditors had been summoned during the time of original assessment and balance confirmations from the same were obtained independently and the same were available on record during the course of original assessment. Having, taken the confirmation independently, the Assistant Commissioner is precluded from making any further addition on this account.

The learned CIT(A), erred in confirming a sum of Rs.73,937 /- being interest paid on various loans borrowed by the company. The A.O. failed to appreciate that the interest paid is on account of borrowing for the purpose of business and warrants full allowance in terms of section 36(1) (iii) of the Income-tax Act, 1961.

The Hon'ble CIT (Appeals) contended that the merits of the case cannot be considered by her in an appeal, against the compliance by the AO with the directions of his higher authority and advised the appellant to approach the ITAT for relief, ignoring the fact that the appellant had a case both on facts and in law.

The assessee challenged the action of the AO in making the additions in pursuance of the revision order before the CIT(Appeals), but could not succeed. As regards the addition of Rs.17,60,000 as unconfirmed creditors, the ld. AR of the assessee has submitted that though the assessee offered this amount in the original assessment proceedings, however, the AO did not accept the said offer of the assessee and proceeded to conduct an independent enquiry. The AO after verification of the confirmations from the creditors found that the claim of the assessee is genuine and therefore did not make any addition on account of sundry creditors. However, the AO proposed to make an addition of 5% of the total expenditure on the ground that some of the explanations are not supported by proper vouchers, rather the assessee has produced only self-made vouchers. Therefore, the AO proposed to make an addition of Rs.17,20,000 being 5% of the expenditure which was accepted by the assessee.

The ld. AR has pointed out that during the revision proceedings before the CIT, the assessee pointed out that the addition of Rs.17,60,000 was not made by the AO, when on an independent enquiry the AO was satisfied with the genuineness of the creditors and therefore there is no error in the assessment order. Alternatively, the assessee accepted the addition proposed by the AO 5% of Rs.17,20,000. Therefore, there was no question of making total addition of Rs.17,60,000 on account of unconfirmed creditors. The ld. AR thus contended that after considering this explanation of the assessee, the CIT has directed the AO to redo the assessment afresh and thus the AO was required to conduct a fresh enquiry in the proceedings pursuant to the revision order. The ld. AR has submitted that the AO did not conduct any enquiry in the proceedings pursuant to the revision order and has just made the addition of the said amount of Rs.17,60,000. He has contended that even the explanation and submission made by the assessee has not been reconsidered by the AO while making the addition. The ld. AR has ;pointed out that even the CIT(Appeals) has not gone into the merits of the issue and confirmed the addition on the reason that once an addition was subject matter of the revision order which has not been challenged by the assessee, then he has no jurisdiction to decide the said issue.

Hence the ld. AR of the assessee has submitted that when the assessee has pointed out to the AO that a proper enquiry was conducted by the AO in the original assessment proceedings and AO was satisfied with the claim of creditors, then no addition can be made on this account.

On the other hand, the ld. DR has submitted that the CIT has proposed to revise the assessment by recording the reason that the AO has not made addition of Rs.17,60,000 which was originally offered by the assessee and therefore the order of AO was found to be erroneous and prejudicial to the interests of revenue. He has thus contended that the CIT has given a finding on this issue and therefore in the absence of any challenge to the revision order, the findings of the CIT has reached finality and cannot be challenged in the subsequent proceedings. He has relied upon the orders of the authorities below.

We have considered the rival submissions as well as relevant material on record. Vide its letter dated 27.4.2009, the assessee offered a sum of Rs.17,60,000 towards unconfirmed balances of creditors and accordingly agreed to pay tax. It appears that the AO did not accept the said income offered by the assessee on account of unconfirmed balances of creditors and proceeded to conduct an enquiry by calling the necessary record from the creditors.

It is brought to our notice that a note is appended at the bottom of assessment order in response to the internal audit. A copy of the said note along with the assessment order has been filed by the assessee at pages 38 & 39 of the paper book. For ready reference, we reproduce the note made by the AO as under:- “ The assessee was asked to furnish the name and addresses of sundry creditors shown in the Balance Sheet. He has furnished the name and addresses of sundry creditors alongwith the confirmations which are placed on record. There are no variations in confirmations furnished. My predecessor has examined some of the creditors on oath and found no discrepancies. The creditors shown in the balance sheet are treated as genuine. The expenses disallowed on estimated basis on the self made vouchers. There is no concealment of income by the assessee and penalty proceedings u/s. 271(1)(c) is not initiated.”

From the above note of the AO, it is clear that the AO found that the assessee furnished addresses along with the confirmations of the creditors and there was no variation in the confirmations furnished. The AO who completed the original assessment examined some of the creditors on oath and found no discrepancies. There is no denial that the AO conducted the enquiry to verify the genuineness of the claim of creditors and therefore the claim was allowed by treating the same as genuine. This explanation was furnished by the assessee before the CIT during the revision proceedings and after considering this explanation, the CIT finally set aside the assessment order on three issues as under:- “In the light of the above discussion, I hold that the order u/s. 143(3), DTD: 15/10/2009, passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interest of revenue. Accordingly, invoking the provisions of section 263 of the Act, the assessment is set aside with a direction to the Assessing Officer to re-do the same afresh on the above lines and after affording an opportunity of being heard to the assessee.”

The concluding part of the revision order leaves no doubt about a fresh assessment on these three issues which were subject matter of the revision to be done by the AO after conducting a proper enquiry after affording opportunity of hearing to the assessee. Thus, the revision order does not give a conclusive finding on any of the issues. But the AO was to redo the assessment on these three issues and therefore a discretion was available with the AO in the assessment completed in pursuance of the revision order passed u/s. 263, which was done by the AO by accepting the claim of disallowance u/s. 40(a)(ia), when the AO found on verification of the record that the payments were not exceeding Rs.20,000 in each case. Accordingly, even if the assessee did not challenge the revision order, it does not affect the subsequent proceeding when all the three issues were left open for further verification and decision by the AO.

We find that neither the AO conducted any enquiry while completing the assessment pursuant to the revision order nor the CIT(Appeals) has gone into the merits of the issue of Rs.17,60,000. Therefore, there is no compliance of the directions of the CIT passed in the revision order u/s. 263 of the Act. In the facts and circumstances of the case, we set aside this issue to the record of CIT(Appeals) to decide it afresh on merits as there was no concluding finding of the CIT in the revision order, which has been wrongly perceived by the CIT(Appeals) in the impugned order.

The next issue is addition on account of difference in the interest income received as per Form 16A as well as the amount credited in the profit & loss account.

We have heard the ld. AR as well as the ld. DR and considered the relevant material on record. The ld. AR of assessee has referred to the explanation furnished before the AO in the proceedings in pursuance of the revision order and submitted that the difference of interest income credited to the profit & loss account is only due to the reason that the assessee carried the interest income being net, after reducing the interest expenditure from the gross interest received during the year. He has referred to the details at page 28 of paper book and submitted that the CIT noted that assessee received interest of Rs.9,18,957, whereas the assessee has receive gross interest income of Rs.9,55,158 and an amount of Rs.1,10,138 has been paid towards interest on loan, interest on car loan, interest on current account and interest on cash credit. Therefore, all four items comes to a total amount of interest payment of Rs.1,10,138 which was been reduced from the gross amount and the net amount of Rs.8,45,020 has been credited to the profit & loss account. Thus, the ld. AR has submitted that there is no discrepancy in the interest income credited to the profit & loss account.

On the other hand, the ld. DR has relied on the orders of the authorities below.

Having considered the rival submissions as well as the relevant material on record, we find that as per Schedule VI of balance sheet, the assessee has shown the loan amount of Rs.4,69,595 as car loan and deposit loan of Rs.1,20,000 from Vysya Co-op. Bank. Therefore, it is apparent from the record that the assessee has paid interest on the loan amount apart from the interest claimed to have been paid on the current account and cash credit facility availed by the assessee. The details of gross receipts of interest and payment of interest during the year has been given by the assessee to the AO which has been placed at page 28 of the paper book as under:-

Thus, prima facie it appears that discrepancy in the amount interest income credited in the profit & loss account is only due to the reason that assessee has carried the interest income net of the interest paid during the year. However, this fact has not been examined by the authorities below. Only for the limited purpose of verifying the details explained by the assessee, this issue is remitted to the record of the CIT(Appeals).

In the result, the appeal is allowed for statistical purposes.