SIVAKUMAR & CO., REP. BY S.MOHANRAJ,CHENNAI vs. ITO, ERODE

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

This is an appeal filed by the assessee against the Order dated 17.12.2015 of Commissioner of Income Tax (Appeals)-3, Chennai, in for the AY 2011-12 and raised the following grounds:

ITA No.706/Mds/2016 :- 2 -:

2.0 Ground Nos.1, 7-9 are general in nature which does not require specific adjudication.

3.0 Ground No.2 is related to the addition of Rs.2,95,760/- in respect of credit balances in the following accounts:

Sl.No. Name of the party Amount 1 M/s.Shyami Oil Industries 1,20,500 2 M/s.Sri Andavar Agency 98,760 3 M/s.Sabastian oil mills 76,500 Total 2,95,760

During the assessment proceedings, the AO found the above outstanding balances is as on 31.03.2011. The AO issued summons u/s.131 which were returned un-served. Therefore, the AO has called for the explanation as to why the balances should not be added back to the income. The assessee explained that the said credit balances were offered to income during the previous year ending 31.03.2013. Not being impressed with the explanation of the assessee, the AO held that the assessee has not discharged the burden of proof with regard to the genuineness of outstanding balances and therefore added back the outstanding balances to the returned income.

3.1 Aggrieved by the Order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) confirmed the addition as per the discussion made in the Ld.CIT(A) order in Page No.10 Para No.6.5 as under:

ITA No.706/Mds/2016 :- 3 -:

6.5 Unproven liability - Rs.2,95,760/-: The assessing officer has held that the amount of Rs.2,95,760/- is unproved liability in the case of M/s.Shyami Oil Industries, M/s.Sri Andavar Agency and M/s.Sebastian Oil Mills. The amount on the cases of M/s.Shyami Oil Industries and M/s.Sri Andavar Agency are shown as opening balances for the Financial year 2010-11 relevant for Assessment year 2011-12. The unproven credit, if any will have to be treated as income in the year of introduction. The appellant states that these are offered as income for Financial Year 2012-13 relevant for the financial year 2013-14. If Assessing Officer’s action is not correct, the offer by the appellant is also not correct. The appellant cannot dispute the addition by stating that the credits are offered for AY 2013-14. It is not appellants option to do so. In the absence of cogent rebuttal, the addition of Rs.2,95,760/- is confirmed.

3.2 During the appeal the Ld.AR argued that the outstanding balances were opening balances and not related to the AY under consideration.

According to the Ld.AR, the AO is not permitted to make the addition u/s.68 of IT Act in respect of the opening balances. The Ld.AR further submitted that since the assessee himself has offered the outstanding balances to the income for the year ending 31.03.2013, the same may be rightly taken as admission of income towards surrender of creditors u/s.41(1) for the AY 2013-14 and no interference is called for. On the other hand, the Ld.DR relied on the Assessment Order.

3.3 We heard the rival submissions and perused the material placed before us.

It is not in dispute that the creditors related to the opening balances as at the end of the year. No doubt, the assessee has to prove the genuineness of the outstanding as on 31.03.2013 failing which the outstanding creditors deemed to be bogus and could be brought to tax, as bogus/unproven liabilities since it results into excess of assets over

ITA No.706/Mds/2016 :- 4 -: liabilities for which the source was not explained. However, the assessee has admitted the income for the AY 2013-14 u/s.41(1) of IT Act which shows the fair attitude of the assessee. Since the opening balances were relating to the sundry creditors the assessee is having liberty to decide when it should be surrendered and when it becomes not repayable.

However, the AO has not given any finding regarding the admission of income relating to the outstanding creditors for the AY 2013-14. The assessee also not brought any evidence on record to prove that the above creditors were offered to income in the Assessment Year 2013-14.

Therefore, we remit the matter back to the file of the AO and direct the AO to verify the assessment records for the AY 2013-14 and delete the addition, if the assessee has admitted the sundry creditors for the AY 2013-14 and in case of non admission addition made by the AO stands confirmed. Accordingly, this ground of appeal is allowed for statistical purpose.

4.0 Ground No.3 is related to the addition of Rs.54,788/- relating to the outstanding credit balances in the name of Mr.P.R.Nagarajan. During the assessment proceedings, the AO found that the assessee has shown a liability of Rs.54,788/- at the end of FY 31.03.2011. The AO issued summons u/s.131 and the summons were served to the concerned creditor but not responded to with the summons. The AO has called for the explanation as to why the same should not be added back to the income. The assessee has submitted the purchase bills and bank

ITA No.706/Mds/2016 :- 5 -: statement for funds transfer. The AO found that the amount was actually paid to Mr.N.Nadhan instead of Mr.Nagarajan on 19.11.2011 and disbelieved the outstanding balance as on 31.03.2011 and added back to the income.

4.1 Aggrieved by the order of the AO, the assessee went on appeal before CIT(A) and the Ld.CIT(A) confirmed the order of the AO as per Para No.6.8 of the Ld.CIT(A) Order:

The AO has added this amount as unproved liability. The appellant’s claim is that the amount was paid in the subsequent year, but the name in the bank statement is N.Nathan. Appellant’s AR states that, it might have been mis-spelled by the banker. This is an assumption. No confirmation from Shri P.R.Nagarajan has been produced. Hence, the addition is not rebutted with evidence. The addition made by the Assessing Officer is sustainable and is confirmed.

4.2 Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before us.

Appearing for the assessee, the Ld.AR argued that both Mr.Nagarajan & Mr.Nathan is the same person and the amount was paid to Mr.Nagarajan, hence the addition needs to be deleted. The Ld DR relied on the orders of the Lower authorities.

4.3 We heard the rival submissions and perused the material placed before us.

There was an amount outstanding of Rs.54,788/- in the name of Mr.P.R.Nagarajan in the books of the assessee and the AO had issued the ITA No.706/Mds/2016 :- 6 -: summons to the creditor which was served on the Creditor. But the creditor did not respond to the summons issued u/s.131 of IT Act.

Therefore, the AO called for the explanation as to why the outstanding amount should not be added back to the income which appears to be shifting the responsibility on the assessee instead of enforcing the attendance of the Creditor and conducting the enquiries and taking the transaction to logical end. Powers are vested with the AO u/s.131, 133A & 133(6) to call for the information and to verify the transaction. In case, the Creditor has not appeared before the AO for the summons issued, legal remedies are available to the AO to verify the genuineness of the transaction and give his finding instead of washing the hands by issuing summons and shifting the responsibility to the assessee. The assessee has filed his reply enclosing the statement in respect of the transaction and according to which the payment was made to Mr.N.Nadhan and the assessee also not furnished any evidence to establish that the payment was made to Nagarajan. The Ld.AR argued that the amount represents opening balance and the same cannot be treated as income. Even though it is an opening balance, it is the responsibility of the assessee to prove the genuineness of the outstanding balance as at the end of the year. If the assessee fails to prove the outstanding as genuine normal inference is either the outstanding amount was paid outside the books of accounts from undisclosed sources or the outstanding is bogus which results into excess of assets over liabilities and the same can be held as income, since the outstanding amount was brought in to the books. In this case, neither

ITA No.706/Mds/2016 :- 7 -: the AO has conducted the proper enquiries nor the assessee has furnished the proof to establish that either the outstanding liability is genuine or it was paid to the correct party. Therefore we are of the considered opinion that the issue should go back to the file of the AO to conduct further inquiries. Accordingly, we set-aside the issue to the file of the AO to conduct further enquiries and decided the issue on merits. This ground of the appeal of the assessee is allowed for statistical purpose.

5.0 Ground No.4 is related to the addition of Rs.85,563/- difference in bought note purchases. The AO found that there was a difference of Rs.85,563/- in bought note purchases which was added back to the income. According to the AO, in the month of May 2010 the assessee has admitted purchases of Rs.13,43,840/- in the Sales Tax returns whereas in the assessee’s books, the assessee has admitted only Rs.12,58,277/- and there was difference of Rs.85,563/-which was added back to the income as suppression of stock. The Ld.CIT(A) confirmed the order as per the Page No.11, Para No.6.10 which is extracted as under:

The appellant agrees that this is a bought note purchase. No supporting evidence has been furnished. The addition is confirmed in the absence of appellant adducing evidence to prove the payment made by way of confirmation letter.

5.1 During the appeal, the Ld.AR argued that the assessee has made the bought note purchases and stocks were returned to the supplier due to the sub-standard quality of stock. The assessee furnished a copy of letter dated 26.07.2010 from Shri S. Devaraj supplier of the goods stating

ITA No.706/Mds/2016 :- 8 -: that due to sub-standard quality of the goods the amount of Rs. 85,563/- was reduced from the payment.

5.2 We heard the rival submissions and perused the material placed before us.

The assessee has reported excess purchases to the sales tax returns and less amount was accounted in the books of the assessee. There was no dispute regarding the fact that the assessee has not recorded any excess expenditure or bogus expenditure resulting into inflation of expenditure. The supplier has given a letter stating that the goods supplied were sub-standard and the amount was reduced from his payment. When the payment was reduced, the goods were sub-standard and the assessee has not booked any excess expenditure, there is no case for making addition relating to suppression of stock. Accordingly, the addition made by the AO is deleted and the assessee’s appeal on this ground is allowed.

6.0 Ground No.5 is related to the charging of interest to the extent of Rs.2,08,938/- on the debit balance of partners capital accounts. During the assessment proceedings, the AO found that the assessee has charged interest as per the Partnership Deed on the credit balances of the partners capital account and claimed a sum of Rs.6,85,000/- as deduction ignoring the debit balances in fluctuating capital accounts. The assessee is ITA No.706/Mds/2016 :- 9 -: maintaining two types of accounts i.e. one is capital account (fixed) and the second is current account. Current account is flexible account and the assessee makes the drawings and deposits in the current account. While the fixed capital accounts show the credit balances whereas the fluctuating capital accounts were showing the debit balance (i.e. over drawl from the accounts). The assessee ignored the debit balances in current accounts and charged the interest on credit balance of the Fixed capital accounts and claimed it as deduction. The AO arrived at the net balances of the capital accounts by clubbing both the accounts and allowed the interest @12% on net balances and disallowed the excess amount of interest claimed by the partners stating that borrowed amount has not been used for the purpose of business. The Ld.CIT(A) confirmed the addition made by the AO.

6.1 Appearing for the assessee, the Ld.AR argued that the assessee is maintaining two types of accounts one is fixed capital account where there is no change in the balances and the second is fluctuating capital account where the partners are making withdrawals and deposits. The partnership deed permits the assessee to charge interest @12% of the credit balances. The partnership deed allows the assessee to charge interest on fixed capital whereas there is no provision to disallow the interest on the negative balances of the partners capital. The Ld.AR argued that the system is followed by the assessee consistently and there is no reason to disturb the consistent system followed by the assessee. On the other

ITA No.706/Mds/2016 :- 10 -: hand, the Ld.DR argued that the interest of partners capital account is to be charged on the net balances after reducing the overdrawals made by the assessee. The assessee is not allowed to overdraw the current account and claim the interest on fixed capital accounts ignoring the debit balances in the current accounts. The AO has rightly allowed the interest on net balances i.e. after reducing the debit balance from the fixed capital accounts and there is no reason to interfere with orders of the CIT(A).

6.2 We heard the rival submissions and perused the material placed before us.

It is an undisputed fact that the partners of the firm are having two types of capital accounts i.e. fixed capital account and the fluctuating capital account. The drawings are made from the fluctuating capital account keeping the fixed capital account intact. The partners have also overdrawn from the fluctuating capital account and the fluctuating capital accounts are showing the debit balances. Though the partnership deed permits to charge interest on partners capital balances, the negative balance in the fluctuating capital account cannot be ignored. The net capital account balance would be the fixed capital account ‘minus’ the debit balance in fluctuating capital account. The interest allowable on capital accounts as per the partnership deed would be net balances of both the accounts. In the instant case the AO has allowed the interest on net credit balance of both the accounts as per the table given below:

ITA No.706/Mds/2016 :- 11 -:

Actual Excess Fluctuating Net Interest Partners salary Capital interest at claim of capital capital Claim 12% interest M. Jaganathan 2100000 395608 1704392 204527 252000 47472.96 M. Venkatachalam 1500000 1000053 499947 59993.64 180000 120006.4 S. Mohanraj 1200000 217995 982005 117840.6 144000 26159.4 S. Govindaraj 900000 127501 772499 92699.88 108000 15300.12 475061.12 684000 208938.8

The Ld.AR did not show any mistake in net capital account arrived at by the AO. The AO arrived at net capital balance correctly. Accordingly, the AO has computed the actual interest on net capital balances which worked out to Rs.4,75,061/- against the claim of Rs.6,84,000/-. The assessee also did not bring any mistake in computation of the interest to our notice. The AO has rightly allowed the interest on net balances which was confirmed by the Ld.CIT(A). Therefore, we do not find any mistake in the order of the Ld.CIT(A) and the same is upheld. This ground of the appeal of the assessee is dismissed.

7.0 Ground No.6 is related to the addition of Rs.37,30,211/- towards the excess closing stock. The AO called for the closing stock statement from Indian Overseas Bank, Sarampatti Branch and as per the stock statement received from the bank, the closing stock was valued at Rs.81,05,720/-. The AO found stock difference in the Gingelly Oil Seeds and Gingelly oil cakes to the extent of 1500 bags and 58,125 respectively and arrived the value of Rs.37,30,211/- and brought to tax. The Ld.CIT(A) confirmed the addition made by the AO in Para No.6.1 as under:

ITA No.706/Mds/2016 :- 12 -:

6.1 Difference in the party ledger Chunnilala Babeti & Co. Rs.5,10,801/- The Assessing Officer has made this addition as unproved purchases from Chunnilala Babeti & Co. of Rs.5,10,801/-. The Assessing Officer has stated that there is difference between the account copy of the assessee and the other party. It has been contended by the appellant’s AR that the account copy which the Assessing Officer has relied on to make the addition has not been given to the appellant for rebuttal. During the course of assessment and appellate proceedings the details of the transactions with Chunnilal Babeti & Co., including the invoice and mode of payment by cheque from Indian Overseas Bank have been furnished. The entries have been reconciled as per the assessee’s books of accounts. If there is a difference with other parties, it could be due to pending reconciliation at the other end. Since evidence has been adduced in support of entries of assessee’s books of account, addition for unaccounted purchases will is not sustainable. Principles of natural justice has been violated. The Assessing Officer should have taken the course of action of referring the matter to the Assessing Officer of Chunnilala Baheti & Co. pointing out the discrepancy as there is no ground for making the addition in the case of the appellant whose entries substantiated by invoices and cheque payments.

7.1 Appearing for the assessee, the Ld.AR argued that the assessee is maintain regular stock books and the bank stock statement should not be taken as sacrosanct to arrive at the stock, since the inflated stocks figures were given to the bank for the purpose of bank loan without having the actual stocks. The actual stocks are according to the stock book maintained and submitted before the AO. Therefore, the Ld.AR contended that the stock position given by the assessee at the time of assessment is actual physical inventory which should be reckoned as a correct stock for the purpose of Income Tax and the stocks valued and given to the banks should be ignored. The assessee also relied on the decision of the Hon’ble jurisdictional High Court in the case of –

• CIT vs. N.Swamy 2000 241 ITR 363 (Mad) • CIT Ahmedabad-III v. Riddhi Steel and Tubes Pvt. Ltd. [2013] 40 taxman.com 177 (Gujarat).

ITA No.706/Mds/2016 :- 13 -:

7.2 On the other hand, the Ld.DR argued that the assessee has furnished the details of stocks held as on 31.03.2011 at Rs.85,05,720/- to the bank with various quantitative details after duly certifying that the stock as per the stock statement is fully insured and the position of the stock as per the bank stock statement was true and correct. On the basis of the stock position given by the assessee to the bank, it has allowed the drawing power. Though it is hypothecation loan, the stock statement given to the bank cannot be ignored since it was certified by the assessee as true and correct and the stocks were duly insured as per the stock statement given to the bank. The Ld.DR also relied on the decision of 286 ITR 637 and 328 ITR 471.

7.3 We heard the rival submissions and perused the material placed before us.

As per the Assessment Order, the stock valuation as on 21.04.2014 was Rs.62,52,774/-. The AY involved is 2011-12, hence, there must be a typographical error in the date of the stock. Against the stock of Rs.62,52,774/-, as per Balance Sheet, the stock statement given to the bank was valued at Rs.81,05,720/- and the AO has arrived at the difference of Rs.37,37,211/- which appears to be patently wrong. Both the values of the stocks statements are compared and the difference works out to Rs.18,54,946/- (i.e. Rs.81,05,720 – 62,50,774).

ITA No.706/Mds/2016 :- 14 -:

From the above, it appears that the AO has not worked the difference correctly. From the Assessment Order and from the submissions of the assessee, it was not clear whether the assessee has maintained the regular stock book or not. The basis of taking the stock as on 21.04.2014 and the basis of arriving at the stock as on 31.03.2011 were not furnished. It is unethical practice to submit the false statements to the banks with the purpose of taking the loan and for the same reason public sector banks are suffering with huge NPAs. In assessee’s case, the assessee has not only given an undertaking that the stock as per the bank statement was true and correct and the same was insured for the whole amount. In this case, it was not only statement given for the purpose of loan but also made insurance for the whole of the stock of Rs.81,05,720/-.

Therefore, it is the burden of the assessee to prove that the stocks provided to bank are false with a tangible evidence. Since the assessee did not produce stock book and the AO did not give any finding with regard to maintenance of Stock Registers and the stock valuation was as on 21.04.2014 which was not the relevant date for the assessment year under consideration, we are of the considered opinion that the factual position regarding the physical stock as on 31.03.2011 relevant to closing date for the AY 2011-12 and the actual stock as on 31.03.2011 require further verification to arrive at the correct closing stock. Though the assessee contended that the stock statement was given only for the purpose of bank loan, on receipt of the stock statement the bank authorities makes the physical verification of the stocks hypothecated to ITA No.706/Mds/2016 :- 15 -: bank subsequent to 31.03.2011 from which the stock position can be worked out for the relevant date i.e 31.03.2011. The AO is directed to verify the correct physical stock as on 31.03.2011 and decide the issue afresh on merits. The assessee is directed to submit the necessary details to the AO. The appeal of the assessee is allowed for statistical purpose.

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

Order pronounced in the Open Court on 7th June, 2017, at Chennai.