SMT. SUCHARITA KAR,KOLKATA vs. ITO, WARD-55(1), KOLKATA, KOLKATA

In this appeal, the Assessee has raised the following grounds of appeal:-

The assessee is an Individual and is in the business of manufacturing of medicines and conducting her business in the name and style as M/s Eskaar Pharmaceuticals which is a proprietary concern, besides the income from business the Assessee derives income from other sources. The Assessee filed her return of income on 31.07.2010 disclosing a total income of Rs.6,50,835/- and again filed a revised return on 28.08.2010 showing total income of Rs. 6,46,900/-. Under scrutiny notices u/s. 143(2) and 142(1) were issued.During the course of assessment proceedings, the AR of the assessee appeared and produced books of account, and various documents etc.

Ground no’s 1&2 are general in nature and needs no order and hence dismissed.

Ground no-3 is relating to disallowance made on account of non existence of liability u/section 41(1) of the Act. In response to the statutory notices, the assessee filed detail of sundry creditors in five (5) categories. (i) having transactions above Rs.50,000/- Rs.5,01,303/- (ii) exempted purchase above Rs.50,000/- Rs.48,800/- (iii) unregistered purchase below Rs.50,000/- NIL (iv) purchase below Rs.50,000/- Rs. 37,71,492/- (v) Purchase of fixed assets -NIL. According to AO the Assessee filed the detail party wise break up of category and did not file any details regarding category of (iv) and the Assessee filed her

In challenge before the CIT-A, the assessee submitted as under: 1. That your petitioner is a small manufacturer in the line of medicine holding SSI registration no. trying to comply with all the formalities of the respective acts and laws as far as possible.

The assessee further submitted as under:

The CIT-A was of the opinion that the Assessee could not furnish full details of the some of the parties in spite of availing the many opportunities and agreed with finding of the AO that the credit amount was brought forward and confirmed the addition made on account of non existence of liability. The relevant portion of which reproduced herein below:

Before us the ld.AR reiterated the submissions as made before the lower authorities and relied on the decision in the case of Nitin S.Garg of Hon’ble High Court of Gujarat reported in (2012) 22 taxmann.com 59(Guj.) and referred to para nos. 15 and 16 of above said decisions and argued that the assessee did not write off the liabilities in the books of account thereby addition u/s. 41(1) of the Act not maintainable. He also relied on in the case of Alvares & Thomas of Hon’ble High Court of Karnataka reported in (2016) 69 taxmann.com 257(Kar) and drew our attention to para no. 9 and argued that if the creditor not traced at the time of enquiry and same cannot be ground to attract the provisions of Section 41(1) of the Act. He further took us to a decision in the case of ITO Vs. Shri Ramashis Shaw of Co-ordinate Bench of Kolkata Tribunal and drew our attention to para no.3 of the said order and argued that there cannot be addition on the alleged ground of non existence of parties and ITA No. 2239/Kol/14 Smt. Sucharita Kar 5

On the contrary, the ld.DR submits that it is not the onus on the revenue to prove the existence of liability and sundry creditors and argued that the assessee could not produce any such details of sundry creditors inspite of having sufficient opportunities. He also drew our attention to the decision in the case of CIT Vs. Smt. Arati Jana of Hon’ble High Court of Calcutta reported in (2013) 216 taxman 109 (Cal) and argued that if the assessee fails to offer any explanation or relevant evidence about the transaction the addition u/s. 41(1) is invited. He further drew our attention to the decision of ITAT, Mumbai in the case of Shailesh D. Shah Vs. ITO in ITA No. 7012/M/10 and argued if the assessee fails to prove that liability is still existing, an addition u/s. 41(1) of the Act is maintainable. Likewise, he invited our attention to pages 16 and 17 of the impugned order of the CIT-A and argued if the liability not proved at the end of year it is open to the AO to add the same u/s. 41(1) of the Act and accordingly relied on the orders of the authorities below.

Heard rival submissions and perused the material available on record. It is observed that the assessee filed all the details in respect of sundry creditors, but the AO doubted the veracity of such transaction that the assessee has not submitted the same in proper manner. The AO also doubted in respect of opening and closing balance of few creditors and concluded that there was no transaction during the year under consideration. But, however, the assessee submitted that there was difference of opinion regarding price and quality of the ITA No. 2239/Kol/14 Smt. Sucharita Kar 6

In this regard, we may refer to the decision in the case of Nitin S.Garg of Hon’ble High Court of Gujarat reported in (2012) 22 taxmann.com 59(Guj). The relevant paras are reproduced herein below for better understanding: 15. In the case before us. it is not been established mat the assessee has written off the outstanding books of account, The Appellate Tribunal is justified in taking the view that as assessee had continued to show the admitted amounts as liabilities in its balance sheet the same cannot be treated as assessment of liabilities. Merely because the liabilities are outstanding for last many years, it cannot be inferred that the said liabilities have seized to exist. The Appellate Tribunal has rightly observed that the Assessing Officer shall have to prove that the assessee has obtained the benefits in respect of such trading liabilities by way of remission or cessation thereof which is not the case before us. Merely because the assessee obtained benefit of reduction in the earlier years and balance is carried forward in the subsequent year, it would not prove that the trading liabilities of the assessee have become non-existent. 16 Moreover, as pointed out in the case of Sugauli Sugar Works (P) Ltd (supra), vide the last five lines f the paragraph-6 of the judgement, the question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee's case alone but has to be decided only if the creditor is before the concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act."

In the aforesaid decision the Hon’ble High Court of Gujarat was pleased to hold that if the assessee continues to show the admitted amounts as liabilities in its balance sheet and the same cannot be treated as seized to exist. In the present case also the assessee has shown the liabilities to be paid as there difference of opinion regarding the quality and price between assessee and suppliers. Therefore, we are of the view the facts of the Hon’ble High Court of Gujarat in the case of supra is also applicable to the present facts of the case.

As relied on by the ld.AR in the case of CIT Vs. Alvares & Thomas Jayant Patel & Mrs. B.V Nagarithna reported in [ 2016] ITA No. 2239/Kol/14 Smt. Sucharita Kar 7

In the present case according to the AO the assessee could not produce full details of sundry creditors and added the said amount u/s. 41(1) of the Act by observing that the transactions could not be verified during the course of assessment proceedings. Therefore, in our view that the facts and circumstances of the above case are applicable to the present case and thereby the addition requires to be deleted.

In the case of ITO, Kolkata Vs. Shri Ramashis Shaw in ITA No. 672/Kol/2012 held that non existence of sundry creditors addition u/s. 41(1) of the Act is not maintainable. Relevant portion is reproduced herein below:- “3. We have heard the rival submissions and carefully considered the same. In our opinion, no illegality and infirmity has been committed by the CIT(A) in deleting the addition of sundry creditors, which did not arise during the impugned assessment order in their opening balance from the earlier assessment year 2005-06. As per the provisions of section 68, any amount found credited in the books of assessee can be added in the previous year relevant to the assessment year, in case, the assessee fails to prove the nature and source of such credit, in which these amounts arose are credited. Since the amounts were not credited in the impugned A.Y., therefore, in view of the decision of the Hon'ble Karnataka High Court in the case of CIT v. Sridev Enterprises 192 ITR 165 we confirm the order of the CIT (A) deleting the said addition.

Respectfully following the law laid down by the Hon’ble High Courts of Gujarat and Karnataka and the order of the Co- ordinate Bench of Kolkata Tribunal in the cases of supra, we delete the impugned addition as made by the AO.

Ground no-4 relating to addition made on account of capitalisation of Rs. 1,50,000/- U/Section 68 of the Act.

The AO found that the assessee received cash gifts to the tune of Rs. 1,50,000/- from her relatives on the occasion of her 50th year celebrations as there was no details and receipts produced, the AO was of the opinion that the assessee capitalized such amount. When asked for the detail,. As no detail was filed, the assessee was asked to explain why the said sum would not added back to her income u/s. 56(2)(vii) of the Act.

In response, Sri Subal Sakha Mukherjee, an employee of the assessee appeared along with the A.R. of the assessee submitted that the employees of the assessee's firm out of their respect, gratitude and regard organized a celebration on the occasion of 50 years of the assessee on 24.02.2010 and same was attended by the family members, his colleagues, the sale and purchase parties, friends etc and cash gifts to the tune of Rs. 1,50,000/- was collected as many of the participants including his colleagues donated generously as a gesture of gratitude was handed over to the assessee as a gift. According to AO that the assessee received the same from the persons not connected by blood relation and no list of the names of the contributors or corresponding amount had been prepared or maintained and the occasion was other than marriage and ITA No. 2239/Kol/14 Smt. Sucharita Kar 9

Before the CIT-A submitted as under: "That your petitioner celebrated her 50 years birth anniversary which was conducted by her office staff and well wishers who had given away presentation on the occasion of birth day anniversary where food and beverage were supplied to the invitees. This is not a gift as discussed in the assessment order but it should be considered as a token of presentation Hence, the addition of Rs.1,50,000/- to the trading result may be deleted. "

The CIT-A opined the amount received from persons other than relatives as gifts during 50th birth year celebrations exceeded Rs.50,000/- in aggregate attracts and also failed to discharge the onus in identifying the such persons, accordingly confirmed the addition as made by AO u/section 68 of the Act. The relevant portion of which is reproduced hereunder:

The ld.AR submits that gifts were received by the assessee during her 50th birth day cerebration as orginised by staff of her firm. The AO added such amount for not giving the details of the persons, who have given cash gifts to the assessee. He submits that it is very difficult to provide such details as the function was participated by 150 guests consisting of family members, staff and other persons relating to her business.

The ld.DR submits that the assessee failed to give at least the name, status and other details of such persons to prove that it is a cash gifts received on her 50th birth day celebration.

Heard rival submissions and perused the material available on record. We find that in many occasions the invitees would offer cash gifts and other gifts in kind and in such situation having a reasonably large gathering of 150 guests, it is very difficult to gather the information regarding the status and full address of such persons. In this regard we may refer to the provision u/section 56(2)(vii) of the Act relevant to the year under consideration:

A bare reading of the above provision explains that any money received after 01-10-2009 by an Individual or HUF exceeding Rs.50,000/- during previous year the whole of the aggregate value of such money is chargeable to tax. Admittedly the Assessee received such cash gifts on the occasion of her 50th birthday on 24-02-2010 and therefore the onus is on the Assessee to prove the identity, creditworthiness and financial capacity of donor failing which the AO is empowered to treat such amount received towards gift as income of the Assessee and add the same u/section 68 of the Act. But what is noticed in this issue was that the cash gift donated by many guests consisting of relatives, staff and others relating to her business. In such circumstances, we find that the assessee has not

Ground no-5 involving addition of Rs.88,245/- being 50% expenses under the sales promotion.

The AO assessee found that promotional expenses i.e. gifts to doctors and other is accounted for Rs. 1,74,690/-. On perusals the details of sale promotion expenses as filed by the Assessee, the AO was of the opinion the expenses on gifts or freebies to doctors is not allowable business expenditure in terms of the CBDT's circular No.5/2012 dated 01.08.2012 r/w explanation to Section 37(1) of the Act. In response the assessee clarified that the field sales representative would incur the said expenditure. According to AO the assessee didn't disclose the list of beneficiaries and finding it be allowable expenditure the gifts or freebies given to the distributor or retailers, but, however, in absence of any details, 50% of the expenditure Rs. 88,245/- against 1,74,690/- was added to the income of the assessee u/s 37(1) of the Act.

The assessee challenged the addition made by the AO disallowing expenses incurred towards sales promotion. The assessee submitted as under: "That your petitioner deals in medicines of human consumption and it is open to all that medicines could not be sold without the help of the medical representative. Your petitioner appointed sales representative on certain terms and conditions and they procured order from the market by giving some charming offers to the buyers and medical practitioners over which your petitioner has no control over additional benefits. That the sales representative had given some writing pads, literatures, visual-aid, leaf-lets, dot pens, diaries, table calendars etc to the dealers and medical practitioners for pushing back the sales of the commodities. Such expenses had been expended wholly or exclusively for the purpose of the business. Hence the addition is Rs. 88,245/- may kindly be deleted. ITA No. 2239/Kol/14 Smt. Sucharita Kar 12

According to CIT-A the assessee did not furnish the details of persons on whom the sales promotion expenses were incurred and the issue of providing freebies to medical practitioners has been dealt by Board in circular No. 5/2012, dated 01.08.2012 and providing freebies in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 and are inadmissible under section 37(1) of the Act and confirmed the order of AO observing as under:

The ld.AR submits that without any basis the ld.AO added 50% of sales promotional expenses and reiterated the submissions as made before the authorities below.

The ld.DR argued that no where before the authorities it was contended that the expenses incurred towards sales and promotion scheme and relied on the orders of authorities below.

Heard rival submissions and perused the material available on record. It is seen from the record that the assessee supplies machines for human consumption and promotes sales through medical representatives. It is observed from the submissions of the assessee before the CIT-A that the said expenses incurred towards purchase of writing pads, literatures, visual aid, leaf lets, dot pens, diaries and table calendars and are supplied to medical practitioners. We find that it is a general practice that anyone in pharmaceutical business would incur said expenditure in connection with their business and we hold that it is a business expenditure and is allowable u/sec 37(1) of the Act. Therefore, ground no-5 is allowed and accordingly the addition made thereunder is deleted.

Ground no-5 relating to disallowance as u/section 40(a) (ia) of the Act for violation of non deduction of TDS u/section 194C of the Act.

The AO found expenses to the tune of Rs.43,100/- and Rs. 49,150/- under the heads 'Biswakarma Puja' and 'Birthday ITA No. 2239/Kol/14 Smt. Sucharita Kar 14

Basing on the photocopies of money receipts issued by the said firm in its own letterhead, the AO found the discrepancies as under: For Biswakarma Puja: Received a sum of Rs. 21,000/- for 135 plates of lunch including mutton, fish, fish fry, fried rice, sweet on the occasion of Biswakarma Puja from M/S Eskaar Pharmaceuticals (dated 17.09.2009.) For Birthday Celebration: Received a sum of Rs. 46,500/- towards the cost of food, flower & cakes for arrange the birthday party & refreshes 150 guests with breakfast and lunch including mutton, fish, fishfry, fried rice, sweet on the occasion of birthday of Mrs. Sucharita Kar, proprietor of M/S Eskaar Pharmaceuticals (dated 24,02.2010.)

Taking into consideration the money receipts, the AO formed an opinion that the Assessee paid such amounts to the said firm at a time and filed vouchers of different dates as the amount exceeded the prescribed limit of Rs.50,000/- and for violation of section 194C of the Act and added the same to the income of the Assessee and the relevant portion of which is reproduced herein below:

Before the CIT-A, the Assessee submitted as under:

The finding of the CIT-A was that the whole amount for the both the occasions paid to one contractor in one year which exceeded Rs.50,000/- and confirmed the addition made by the AO as under:

The Ld.AR submits that it is an entertainment expenses and there was no contract between the Assessee and M/s. Decorators & Caterer and Ld.DR relied on the orders of lower authorities.

Heard both parties and perused the material available on record. We find that the AO found that the payment totalling to Rs.67,500/- was made to one contractor and discrepancies on comparing the submissions of the Assessee with that of receipts as issued by said M/s. Decorators & Caterer. The contention of the AO was that said M/s. Decorators & Caterer issued one receipt for both the occasions exceeding the monetary limit as prescribed and violated provision u/sec 194C of the Act. The contention of the Assessee was that the said payments were made on different occasions. The Ld.AR contends that there was no contract between the parties and thereby no addition attracts u/sec 40(a)(ia) of the Act. We find that the Tribunal in the case of Raja Transport supra held that for violation of section 194C and addition by invoking the provision of section 40(a)(ia) of the Act is not maintainable in the absence of either verbal or written contract. We also find that the Tribunal in the case of supra derived support from the decision of the Hon’ble Jurisdictional High Court of Calcutta in the case of CIT Vs. Stumn India in arriving such conclusion as discussed above. The relevant discussion and finding of the Tribunal in the case of supra at para no. 2.4 and 2.5 are reproduced herein below:-

In the present case the contention of the Ld.AR as noticed from the orders of the authorities below that there was no contract in existence between the assessee nor the organisers of such ceremony, as the case may be, and the M/s. Decorators & Caterer. In such circumstances as rightly pointed out by the Ld. AR that the facts in the aforementioned case as decided by the Kolkata Tribunal in the case of supra are clearly applicable to the present facts of the case to the extent that the revenue could not produce anything on record to show the existence of any contract. We also find that the Tribunal supra while considering the case on hand derived support from the decision of Hon’ble Jurisdictional High Court of Calcutta in the case of supra. Respectfully following the same, we hold that the order of the CIT-A is unjustified and accordingly, we delete the impugned addition as made by the AO and as confirmed by CIT-A. Thus, the ground-6 raised in this regard is allowed.