VENUS DETECTIVE & SECURITY SERVICES P.LTD,MUMBAI vs. ITO 2(3)(4), MUMBAI

This appeal by the assessee is directed against the order of the CIT(Appeals)- 6, Mumbai dt. 29/10/2013 for Asst. year 2007-08.

2.1 The assessee company filed its return of income for Asst. year 2007-08 on 31/10/2007 declaring total income of Rs. 2,77,566/- The return was processed u/s 143(1) of the Income Tax Act, 1961 (in short ‘the Act’) and the case was subsequently taken up for scrutiny . The assessment was completed u/s 143(3) of the Act vide order dt. 30/12/2009, wherein the assessee’s income was determined at Rs. 60,05,730/- in view of the following additions/disallowances:-

(i) Disallowance u/s 40(a)(ia) - Rs. 5,27,067/- (ii) Addition u/s 41(1) - Rs. 50,33,230/- (iii) Disallowance of Business Promotion Expenses - Rs. 25,635/- (iv) Disallowance out of Misc. Expenses - Rs. 1,42,230/- 2.2 Aggrieved by the order of assessment for Asst. year 2007-08 dt. 31/12/2009, the assessee preferred an appeal before the CIT(Appeals)-6, Mumbai. The Ld. CIT(A) disposal off the assessee’s appeal vide the impugned order dt. 29/10/2013 allowing the assessee partial relief. In the impugned order, the Ld. CIT(A)- (i) deleted the disallowance u/s 40(a)(ia) of the Act amounting to Rs. 5,27,067/-; (ii) the addition u/s 41(1) of the Act was sustained to the extent of Rs. 10,38,403/- (iii) he upheld the disallowance of Rs. 25,635/-, being 10% of Business Promotion Expenses claimed; and (iv) upheld the disallowance of Rs. 1,42,230/-, being 10% of Misc. Expenditure claimed.

1. The CIT(A) erred in upholding the addition in respect of sundry creditors of Rs. 10,38,403/- which was made by the AO by invoking the provisions of section 41(1) of the Act.

2. The CIT(A) erred in upholding the adhoc disallowance as made by the AO of Rs. 25,635/- out of business promotion expenses and Rs. 1,42,230/- out of repairs & maintenance, security maintenance, computer and mobile expenses, petrol and telephone expenses.

3. The appellant craves leave to add, to amend or to alter any of the above grounds of appeal

4. The ground at Sr. No. 3 being general in nature, and not being urged before us is dismissed as infructuous.

5. Ground no. 2:- Disallowance out of Business Promotion and Misc. Expenses claimed.

5.1 In this ground, the assessee has assailed the impugned order of the Ld. CIT(A) as being erroneous in upholding disallowances of Rs. 25,635/- out of business promotion expenses and Rs. 1,42,230/- out of repairs and maintenance, security maintenance, computer and mobile expenses, petrol and telephone expenses.

5.2 We have heard the rival contentions of the Ld. AR for the assessee and the Ld. DR on behalf of revenue and perused and carefully considered the material on record. As observed by the Ld. CIT(A) in the impugned order, the assessee was not able to furnish the relevant details and supporting documents evidences in respect of the claim of the aforementioned expenses before the Assessing Officer (‘AO’) in the course of assessment proceedings. We find from the record that even in appellant proceedings, and also before us, except for raising the ground, the assessee was not able to bring on record any material evidence to establish the claim of the aforementioned expenses. In this view of the matter, we find that the disallowance made by the AO of 10% of the aforementioned expenses to be reasonable in the factual matrix of the case and consequently uphold, the aforesaid disallowances of Rs. 25,635/- out of business promotion expenses and Rs. 1,42,230/- out of the Misc. expenses mentioned above . Consequently, ground no. 2 of the assessee’s appeal is dismissed.

6.1.2 On appeal before the Ld. CIT(A), the assessee contended that the additions made u/s 41(1) of the Act were unjustified and furnished confirmation from some creditors. The Ld. CIT(A) then called for a remand report from the A.O in respect of the additional evidences filed by the assessee. In the remand report dt. 31/05/2013 filed by the A.O before the Ld. CIT(A), the Assessing Officer submitted that, since Sundry Creditors to the extent of Rs. 31,63,352/- disallowed by the A.O were confirmed by the Ld. CIT(A) in the assessee’s case for Asst. year 2003- 04, addition in respect of balance Sundry Creditors amounting to Rs. 25,36,874/- may be sustained by the Ld. CIT(A). In response to the AO’s remand report, the assessee contended that the AO’s proposal to confirm the disallowance in respect of the balance creditors at Rs. 25,36,874/- is incorrect since the A.O has neither verified the confirmations, from the creditors submitted by the assessee as additional evidence nor given his comments in this regard and accordingly sought deletion of the entire addition by the A.O u/s 41(1) of the Act.

6.1.3 The Ld. CIT(A) observed that the assessee’s contentions that the A.O has neither verified the confirmations of the creditors filed by the assessee nor given any comments thereon was correct. The Ld. CIT(A) on suo moto examination of those confirmation filed, directed the A.O to delete an amount of Rs. 14,98,471/- out of the addition of Rs. 25,36,874/- proposed by the A.O in the remand report, and consequently sustained the addition of Rs. 10,38,403/- which is before us for adjudication.

6.2.1 In this ground, the assessee has assailed that impugned order of the Ld. CIT(A) in sustaining the addition u/s 41(1) of the Act to the extent of Rs. 10,38,403/-. At the outset of the hearing, the Ld. AR informed the Bench, that subsequent to the passing of the impugned order, the Ld. CIT(A) vide letter dt. 07/03/2014 had proposed rectification of the same u/s 154(3) of the Act, in order to reduce the addition u/s 41(1) of the Act to Rs. 6,00,471/- (i.e. Rs. 25,36,874 less Rs. 19,36,403/-) and placed a copy of the same on record. The Ld. AR, however, submitted that the assessee is not aware whether the proposed rectification to the impugned order has been effected by the Ld. CIT(A).

6.2.2 The Ld. AR for the assessee submitted that the addition of Rs. 10,38,403/- or Rs. 6,00,471/- u/s 41(1) of the Act upheld by the Ld. CIT(A) could not be sustained since the outstanding balance of the parties/sundry creditors involved appear as outstanding in the assessee’s Balance Sheet as on 31/03/2007. This fact, the Ld. AR contends, clearly establishes /indicates that there is no cessation of liability on the part of the assessee or the creditors in those cases. Rather, it is acknowledgement by the assessee of an existing debt it owes to its creditors and therefore the additions made /confirmed u/s 41(1) of the Act by the authorities below is unsustainable. It is submitted that outstanding sundry credit balances of certain parties considered suspect by the authorities below like, Mayur Plywood of Rs. 2,75,263/-; Kumar Electronics of Rs. 2,70,014/-,Advance from customers of Rs. 25,000/- and Diners Club Ltd., have been paid up and settled by the assessee in the subsequent years. Copies of the ledger accounts of these parties in the assessee’s books in subsequent years has also been placed before the authorities below. It is contended by the Ld. AR that since the A.O has not brought on record any evidence or material, including any statement after examining the creditors that the debts had been extinguished and that the liability of the assessee to pay them has ceased, despite the fact that the assessee has acknowledged the Sundry Creditors debts in its Balance Sheet at the end of relevant year i.e. as on 31/03/2007, the provisions of Section 41(1) of the Act cannot be invoked. In support of this proposition the Ld. AR placed reliance on the decision of Hon’ble Delhi High Court in the case of CIT vs. Hotline Electronics Ltd. 6.3 Per contra, the Ld. DR for revenue supported and placed reliance on the impugned order of the Ld. CIT(A) on this issue.

6.4.1 We have heard the rival contentions and perused and carefully considered the material on record. In the case on hand it is seen the A.O noticed that the assessee had reflected sundry creditors of Rs. 44,88,000/- and creditors for advertising amounting to Rs. 5,45,230/- which were shown as outstanding in the Balance Sheet as on 31/03/2007. As the assessee failed to file required confirmations, the A.O came to the view that the entire creditor/sundry creditors balances were not genuine and has ceased to exist and proceeded to bring the amount of Rs. 50,33,230/- to tax in the assessee’s hands u/s 41(1) of the Act as cessation of liability. On appeal, the Ld. CIT(A) who called for remand report from the A.O on the additional evidences in the form of confirmation details filed by the assessee. The A.O in the remand report dt. 31/05/2013, inter alia, proposed the addition u/s 41(1) of the Act be sustained to the extent of Rs. 25,36,874/-. We find that the Ld. CIT(A) observed that the A.O in remand proceedings has not verified the confirmations filed by the assessee nor commented on them and therefore proceeded to examine the same. On examination thereof, we find that the Ld. CIT(A) held in the impugned order that the addition u/s 41(1) of the Act could be sustained to the extent of Rs. 10,38,403/-. On subsequent examination thereof, the Ld. CIT(A) vide letter dt. 07/03/2014 has further proposed to reduce the addition u/s 41(1) of the Act to Rs. 6,00,417/-.

6.4.2 According to the Ld AR for the assessee, even the additions u/s 41(1) of the Act to the extent of Rs. 10,38,403/- or Rs. 6,00,471 cannot be sustained since the outstanding balances of the creditors / parties involved appear as acknowledged outstanding creditors in the assessee’s balance sheet as on 31/03/2007. In the case of hand, as observed by the Ld. CIT(A) neither in assessment proceedings nor in remand proceedings has the A.O verified the confirmations, details, additional evidences filed by the assessee in support of the outstanding creditors balances. No enquiries were caused or notices issued by the A.O to the creditors to ascertain from them whether they had given up their dues from the assessee. The fact that the creditors /balances were not written back in the assessee’s accounts but stood reflected in the assessee’s Balance Sheet as on 31/03/2007, clearly establishes that there was no cessation or remission of liability. On the contrary, it is an acknowledgement by the assessee of existing debts it owes to its creditors. Except for the fact that the said creditors balances were outstanding, no material was brought on record by the A.O to show that there was remission or cessation of liability. When the A.O was of the view that there was remission or cessation of liability in the case on hand and invoked the provisions of Section 41(1) of the Act, it was incumbent upon him to cause necessary enquires to be made to bring on record material evidence to establish invocation of the provisions of Section 41(1) of the Act. The fact that the assessee reflects these amount as creditors in its Balance Sheet as on 31/03/2007, acknowledges its liability to its creditors and also extends the period of limitation u/s 18 of the limitation Act. Once the assessee acknowledges and claims that the debts to Sundry Creditors are outstanding in its Balance Sheet and it is liable to pay its creditors, revenue cannot conclude that the creditors have remitted their liability or that the liability has otherwise ceased without any material evidence to the contrary. In the case on hand, the creditors continue to be reflected in the assessee’s books of accounts and Balance Sheet as on 31/03/2007. In fact, in respect of some of the creditors balances considered suspect by the authorities below, like Diners Club Ltd., Mayur Plywood, Kumar Electronics, Advance from customer, the assessee has placed before the authorities below copies of respective ledger accounts showing repayments / settlement of account, outstanding balances in subsequent years which we find have not been disproved or found fault with by the authorities below.

6.4.3. In this factual matrix of the case as discussed above, we are of the opinion that the authorities below have not brought on record any evidence or material, including statements of creditors, etc. to show that the debts owed to them have been extinguished or that there was remission or cessation of liability, despite the extension of the period of limitation by acknowledgement of the creditors in the assessee’s balance sheet as on 31/03/2007. We, therefore, hold that the addition of Rs. 10,38,403/- upheld by the Ld. CIT(A) is not sustainable and direct the A.O to delete the same. In coming to this finding, we draw support from the judgment in the case of CIT vs. Sugauli Sugar Works (P) Ltd.(1999) 236 ITR 518 (SC) and of the Delhi High Court in the case of Hotline Electronics Ltd. (2012) 80 CCH 0156 (Del HC), which are clearly applicable in the case on hand. Ground No. 1 of assessee’s appeal is allowed.