J.C.I.T RANGE - 56,KOLKATA, KOLKATA vs. M/S ARTI BRIGHT COMPANY., KOLKATA

These cross-appeals by the Revenue and assessee are against the different orders of Commissioner of Income Tax (Appeals)-XXXVI, Kolkata dated 29.10.2012 & 31.07.2013. Assessment was framed by JCIT, Range-56, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 30.12.2010 for assessment year 2007-08. Penalty levied by ACIT, Circle-56, Kolkata u/s 154/271(1)© of the Act vide his order dated 12.07.2012.

Both appeals are heard together and are being disposed of by way of consolidated order for the sake of convenience. First we take up Revenue’s appeal in ITA No.1933/Kol/2012.

Balance of ₹22,37,355.70 for other state lottery. 2.

Before us Ld. DR for the Revenue has filed written submission, which is reproduced below:- &2446/Kol/2013 A.Y. 2008-09 JCIT Rng-56 Kol. Vs. M/s Arti Bright Co. Page 4 1. The AO made an addition of Rs.6,75,99,577/- on account of difference in the opening balance as on 01.04.2007 with that of its principal, Tiger Associates. The figures as reported by M/s. Tiger Associates as opening balance at Rs.80,051.50(Cr.) for WB State and RS.22,37,355.50 (Dr) for other state and as per the records of the assessee the corresponding figures are RS.80,051.50 (Dr) for WB state and Rs.6,99, 16,984/- for other states. It is also to bring on record that Tiger Associates has confirmed such figure vide their reply dated 15.12.2010. Thus there is no difference in amount for the WB state and the sole difference of Rs.6,75,99,577/- is attributable for other state only which was added as bogus cash credit.

In this regard, it is pertinent to refer to the remand report of the AO which speaks for itself. There were issues raised regarding the veracity of such claim made by the assessee which are as under:

It was hence concluded in the remand report that since both the parties namely M/s. Best & Company and M/s Tiger & Associates have not shown any debit entry on account of the alleged liability as on 01.04.2007 in their respective ledger account of assessee there is no reason to accept the assessee's claim that any liability to M/s. Best & Company or M/s. Tiger Associates to the &2446/Kol/2013 A.Y. 2008-09 JCIT Rng-56 Kol. Vs. M/s Arti Bright Co. Page 6 tune of Rs. 6,99,16,984/- as on 31.03.2007 did actually exist and that its liability to M/s Best & Company as on 01.04.2007 was transferred to M/s. Tiger & Associates. There is no such bill or other dealings shown by M/s. Best & Company during the year with M/s. Arti Bright Company. How can the assessee book the amount in the name of M/s. Tiger Associates, if the stock was received from M/s. Best & Company. The stock always comes with a bill which may have been received and entered in the name of sender. Since, the material was not sent by M/s. Best & Company, the assessee has rightfully not entered a credit entry in the name of M/s. Best & Company in the books of accounts and even the Auditor did not point out any such defect although the amount was so big and it could have got the attention of the Auditor. It shows that the entries now being shown and explained are an afterthought explanation. These are self serving documents of the assessee. The assessee never produced its books of accounts before the Assessing Officer for verification of these afterthought explanations. The remand report of the assessing Officer to CIT(A)-XXXVI, Kolkata in page 1 clearly and elaborately mentions as follows:- "The Ld. AR could not produce the books of accounts of the assessee firm. He admitted vide order sheet dated 07-02-2012 that no such entries were passed in the ledger of M/s. Best & Company and M/s. Tiger Associates in the books of accounts of the assessee firm. He also could not explain the reasons as to why the assessee firm extinguished its liability to M/s. Best & Company only to create another liability of Rs. 7,20, 74,288/- on 01.04.2007 in the account of M/s. Tiger Associates. "

We have heard rival contentions and perused the materials available on record. From the foregoing discussion, we find that the addition was made by AO on account of difference in the amount of sundry creditors as on 01.04.2007 for ₹6,75,99,577/-. At the outset, we find that the impugned sundry creditor is arising out of purchase of lottery tickets which were purchased in the immediate preceding year. We find that the balance of sundry creditor was brought forward in the year under consideration from the previous financial year. As such, we find that the corresponding purchase in relation to impugned sundry creditor was booked by the assessee in the immediate preceding year which has been allowed in the earlier year. Therefore, in our considered view, the issue of sundry creditor does not pertain to the year under consideration before us. As the issue is not arising for the sundry creditor in the year under consideration, therefore, no disallowance can be made. However on merit as well we find that the MBC has confirmed the value of the tickets sold to the assessee which is exactly matching as shown in the books of account of the assessee. To the contrary, Ld. DR has not brought any defect in the confirmation received from MBC. Simply assessee has booked the sundry creditor liability with MTA out of ignorance cannot form the basis for the addition of such sundry creditor. Similarly what policy is being adopted by MBC for recognizing the sales Revenue has no bearing to the facts of the case. On perusal of the ledger of MTA, we find that the accounts were settled in the year under consideration. In view of the above, we find no reason to interfere in the order of Ld. CIT(A). We hold accordingly. Hence, this ground of Revenue is dismissed. &2446/Kol/2013 A.Y. 2008-09 JCIT Rng-56 Kol. Vs. M/s Arti Bright Co. Page 9 8. Next issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by AO for ₹21,23,616/- on account of non disclosure of income from interest. The assessee has shown net profit for ₹51,04,328/- in its audited profit and loss 9. account. However, AO observed from the computation of income filed by assessee that net profit of ₹29,80,712/- was shown by assessee. Accordingly the difference between amount of profit shown in profit and loss account and profit shown in the computation of income arose for ₹21,23,616/- which was added by AO to the total income of assessee.

Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that the difference has arisen on account of partner’s remuneration which was not shown in the profit and loss account. But same was shown in profit and loss a/c appropriation account and the figure of profit was taken in the computation of income after deducting the amount of remuneration from the net profit shown by the assessee. The remuneration was added to the total income of the assessee and subsequently reduced from the total income as per the provision of Sec. 40(b) of the Act. After considering the submissions of assessee, Ld. CIT(A) deleted the addition made by AO by observing as under:- “I have examined all the documents and found them in order. One thing I must say that after apprehending all these short comings, the remand report was asked for but it is found from the remand report that no such effort was taken by the Assessing Officer. He simply tried to endorse the order but without sound argument. Why the depreciation as per IT Rules was not allowed has not been mentioned in remand report. On the other hand the Assessing Officer argued that the partners’ remuneration was debited in the appropriation part of the profit & loss account but did not mention that in the return of income the remuneration was disclosed. Such partial disclosure of facts is contrary to natural justice. I have gone through the order, the remand report and submission of the appellant carefully and direct the Assessing Officer to delete the addition of Rs.21,23,616.00. This ground is allowed.”

Before us Ld. DR submitted that the issue of remuneration is to be verified therefore same should be restored to the file of AO. The ld. DR vehemently supported &2446/Kol/2013 A.Y. 2008-09 JCIT Rng-56 Kol. Vs. M/s Arti Bright Co. Page 10 the order of the AO. The Ld. AR for the assessee, on the other hand, relied on the order of Ld. CIT(A). The Ld. AR further drew our attention on page 4 of the paper book where profit and loss account was placed and also further drew our attention on page 25 of the paper book where the computation of income was placed. The ld. AR supported the order of the ld. CIT(A).

We have heard the rival contentions of both the parties and perused the materials available on record. From the aforesaid discussion, we find that AO made the addition on account of difference in the net profit shown by assessee in its profit and loss account and profit shown in the computation of income. However on perusal of audited profit and loss a/c of assessee along with computation of income, we find that assessee in its profit and loss a/c has not shown any remuneration to the partners but same was shown in the profit and loss account appropriation. However the amount shown in the computation of income was after deduction of partner’s remuneration. Therefore, mismatch in figure was observed. Therefore after considering the submission of the assessee, we find no difference between amount of profit shown in the profit and loss account and in the computation of income. As such, we find no infirmity in the order of Ld. CIT(A). We hold accordingly. This ground of Revenue is dismissed.

Next issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by AO for ₹14,18,161/- on account of diversification of interest bearing fund to interest free loan. The assessee in its balance-sheet has shown sundry debtors for ₹1,59,91,359/-.

On question for the details of sundry debtors as well as sundry creditor assessee failed to submit the same. Accordingly, AO treated the same as diversion of fund and disallowed the interest claimed by assessee for ₹14,18,161/- by adding to the total income of assessee.

Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that the amount of sundry debtors is only 3.34% of the net sale shown by assessee. In earlier year no interest was charged from the debtor and the charging of interest from the debtor is a business policy. Accordingly, AO cannot direct the assessee to charge the interest on the amount of sundry debtor. After considering the &2446/Kol/2013 A.Y. 2008-09 JCIT Rng-56 Kol. Vs. M/s Arti Bright Co. Page 11 submissions and facts of the case, Ld. CIT(A) deleted the addition made by AO by observing as under:- “Addition was made on two reasons – in the order it is mentioned that interest free loan was given to realties and sister concerns and in the computation part of the order the reason mentioned as no interest charged from debtors. The remand report also failed to remove this confusion. The Authorized Representative of the appellant denied both the facts of interest free loan to relatives and interest to be charged from debtors which is 3.34% of the total sales. No interest free loan was given to relatives and appellant is under no obligation to charge interest from debtors.

Before us Ld. DR submitted that the AO had made an addition of Rs.14,18,161/- on the ground that the assessee has paid interest of Rs.14,18,161/- to the Bank but has not charged interest @12% per annum on loans and advances totaling to Rs.1,59,91 ,359/- given to 20 persons that works out to Rs.19,18,963/-. The interest bearing funds of the assessee instead of being deployed in the business for the purpose of earning profit has been diverted to its sister concerns and close relatives without any commercial consideration of charging of interest. Two main issues which arise are as follows:- i) Whether the loans given by the assessee to its sister concerns and relatives can be said to be out of the funds of the assessee which are borrowed from the Bank and such borrowed funds have been utilized in non-interest bearing loans and advances? ii) Whether there was any commercial expediency for grant of the loan to such parties and such loans were given for purpose other than business purpose?

The Hon'ble High Court of Delhi in the case of Elmer Havell Electrics v. Commissioner of Income-tax reported in [2005] 277 ITR 549 (Delhi)/[2005] 197 CTR 316 (Delhi) [2005] 148 TAXMAN 57 (Delhi) has held that where assessee had borrowed interest bearing loans from market and at same time it advanced interest-free loan to its sister concern, Assessing Officer was justified in making an addition to extent of proportionate interest chargeable from sister concern. It observed as under:- "5 .... it has been clearly established on record that the assessee itself had taken loans with interest and had advanced funds by diversion or otherwise to its sister concern free of interest. In these circumstances, we are of the considered view that the order of the Income-tax Appellate Tribunal calls for no interference by this Court and in any case no substantial question of law arises for consideration in the present appeal."

Therefore, it is requested that the order of Ld. CIT (A) may be set aside and t at of the Assessing Officer be restored.

We have heard rival contentions of both the parties and perused the materials available on record. From the foregoing discussion, we find that AO observed that interest bearing fund has been diverted by assessee to interest free loan. Therefore, interest expense claimed by assessee was disallowed. At this juncture, we find important to reproduce the observation of AO in his order as under:- “ … … During the year under consideration, the Sundry Debtors in the Balance Sheet shows Rs.159,91,359/- from 20 (twenty) parties. The assessee was asked to give why the interest should not be charged from the said parties. Neither the assessee has filed the details of parties, nor was any interest from such parties shown in the P & L A/c. Neither the copies of the creditors, nor the Debtors were filed. Therefore, 12% interest is liable to charged from the &2446/Kol/2013 A.Y. 2008-09 JCIT Rng-56 Kol. Vs. M/s Arti Bright Co. Page 13 Debtors which comes to Rs.19,18,963/-. As the assessee has paid the bank interest of rs.14,18,161/- to the bank [in the immediately preceding year, an interest of Rs.6,30,510/- was debited to the P & L A/c in the AY 2007-08 and in the AY 2006-07 a sum of Rs.63,922/- was paid to the bank]. Thus disallowance on this account for not charging interest from relatives and associates of the partners is added to the extent of Rs.14,18,161/-.”

Last issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by AO for ₹4,84,456/- on account of difference in gross profit.

During the course of assessment proceedings, AO observed that the amount of gross profit shown by the assessee in comparison to earlier year is less and therefore the AO made the addition of ₹4,84,456/- to the total income of assessee.

Aggrieved, assessee preferred an appeal before Ld. CIT(A) who deleted the addition made by AO by observing as under:- “The Assessing Officer considered the figure of Rs.4,84,456.00 on the basis of 0.41% on turnover of Rs.1,11,16,48,144.00 which is Rs.45,57,757.00 against a disclosed gross profit of Rs.40,73,301.00. So, the difference of (45,57,757.00 – 40,73,301.00) = Rs.4,84,456.00 was added back.

At the outset, we find that it is important to reproduce the remand report of AO as under:- “The Ld. AO has made an addition of Rs.4,4,456/- under the head gross profit difference by rejecting the book result U/s 45 of the Income Tax Act, 1961. In the process he has adopted a Gross Profit rate of 0.41% on gross turnover of Rs.111,16,48,144/- determining GP at Rs.45,57,757/- as against GP of Rs.40,73,301/-. IT appears that the Ld. AO has not brought out any material for rejection of the Books of account and cogent reasons for adoption of GP rte at 0.41% have not been given the issue of addition ma9y kindly be considered on merit.”

Assessing Officer in his assessment order observed that the credit entry in the name of M/s Veera Enterprise (MVE for short) was found in the books of account but no details was submitted by assessee in support of it. Therefore, same was disallowed but omitted to add in the computation of income inadvertently. Therefore AO rectified &2446/Kol/2013 A.Y. 2008-09 JCIT Rng-56 Kol. Vs. M/s Arti Bright Co. Page 15 its mistake u/s. 154 of the Act by disallowing a sum of ₹19,22,662/- and added to the total income of assessee.

Aggrieved, assessee preferred an appeal before Ld. CIT(A) who upheld the order of AO by observing as under:- “4.4 The appellant has further challenged that since the order was passed by JCIT, the rectification cannot be done by an ACIT. The above objection of the appellant is not sustainable. It is not necessary that the rectification order has to be made by the same officer who had earlier passed the order to be rectified. What is necessary is that the order has to be made by the authority who is having jurisdiction over the assessee at the time of the rectification order is to be passed, subject to fulfillment of the other requisite conditions prescribed in section 154. 5. In the result, the appeal is dismissed.”

Before us Ld. AR for the assessee filed paper book running from pages 1 to 33 and submitted that credit amount shown in the name of MVE is representing the purchase made from the said party. The ld. AR in support of its claim has submitted the ledger copy MVE which is placed on pages 24 to 33 of the paper book. The Ld. DR on the other hand, vehemently relied on the order of Authorities Below. He stated that the assessee was given sufficient opportunities but had not availed the same. Even before Ld. CIT(A) assessee has not submitted the details in respect of credit entries found in the name of MVE in its books of account. Ld. DR vehemently opposed to restore the matter before AO and vehemently relied in the order of authorities below.

We have heard rival contentions and perused the materials available on record. From the foregoing discussion, we find that the addition was made by AO on account of non-submission of supporting documents by assessee in respect of credit entries found in the books of account of assessee. Now, before us Ld. AR for the assessee first time submitted that the ledger copy of MVE which constitute the additional documents but the same has not been verified by Authorities Below. Needless to mention that the additional document was not submitted before Authorities Below but it does not mean that he should be deprived of justice. In this view of the matter and in &2446/Kol/2013 A.Y. 2008-09 JCIT Rng-56 Kol. Vs. M/s Arti Bright Co. Page 16 the interest natural justice and fair play we are inclined to restore the matter to the file of AO for fresh adjudication as per law after providing reasonable opportunity of being heard to assessee. This ground of assessee’s appeal is allowed for statistical purpose in terms of above.

In the result, assessee’s appeal is allowed for statistical purpose.