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Income Tax Appellate Tribunal, KOLKATA BENCH “C” KOLKATA
Before: Shri Waseem Ahmed & Shri S.S.Viswanethra Ravi
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
This appeal by the Revenue is against the order of Commissioner of Income Tax (Appeals)-XII, Kolkata dated 13.08.2013. Assessment was framed by ITO Ward- 12(1), Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 14.03.2013 for assessment year 2010-11. The grounds raised by the Revenue per its appeal are as under:- “1. On the facts of the case and in law also Ld. CIT [Appeal] erred in deleting the disallowances of Rs.3,23,88,960/- u/s 40A(3) and 40A(3A). 2. On the facts and circumstances of the case as well as in law, the Ld. CIT(A) erred by deleting the bogus sundry credits of Rs.4,29,02,130/-.
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 2 Shri S.M. Surana, Ld. Authorized Representative appeared on behalf of assessee and Shri G. Mallikarjuna, Ld. Departmental Representative represented on behalf of Revenue. 2. First issue raised by Revenue in Ground No.1 is that Ld. CIT(A) erred in deleting the addition made by the AO disallowing a sum of Rs. 3,23,88,960 u/s. 40A(3) and 40A(3A) of the Act on account of cash payment exceeding the prescribed limit.
The facts in brief as have been brought on record are that the assessee, a Private Limited Company, engaged in the business of manufacturing of finished leather. During the course of assessment proceedings, the AO found that the assessee has made payments exceeding Rs.20,000/- in a single day through bearer cheques, totaling to Rs. 3,23,88,960/-, to suppliers of raw hide, in violation of the provisions of section 40A(3) of the Act. It was submitted before the AO that the payments were made to the producers of raw hide and, therefore, the provisions of Section 40A(3) of the Act are not applicable in view of Rule 6DD(e) of the IT Rule, 1962. The assessee also submitted that the purchase bills, transport bills and sales tax bills to prove the genuineness of the parties. However the AO from the perusal of the purchase bills observed that the suppliers were merchants. The assessee also failed to produce evidence before the AO to show that payments were made to producers. The AO also observed that the exemption under Rule 6DD(e) of the IT Rule, is available only for the purchase of raw hides from the producers in terms of Circular No. 8 dated 06/10/2006. The notices issued under section 133(6) of the Act were returned unserved. The AO, therefore, invoked the provisions of Section 40A(3) and made an addition of Rs.3,23,88,960/-.
Aggrieved assessee preferred an appeal to the Ld. CIT(A). The assessee before the ld. CIT(A) submitted that all the purchase bills contain the name of sellers as ‘Producers of hide and skin’ which was also supported with the way bill issued by VAT authorities. Simply the non services of notices issued under section 133(6) do not confirm that the goods were purchased from the non-producer. Accordingly the ld. CIT(A) deleted the addition made by AO by observing as under:-
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 3 “I have gone through the assessment order, submission of the AR, perused the facts of the case and other materials brought on record and I am of the view that for the following reasons Rs.3,23,88,960/- cannot be disallowed by applying the provision of section 40A(3) of the Act :- i) The appellant has purchased raw hides from the producers of these goods. There is also no dispute that the appellant produced bills of the suppliers of raw hides and skins. When asked for, the appellant produced the said bills before me. The bill shows that the suppliers were producers of hide and skins. The transport company’s documents shows that dispatcher of the goods were the same person who has raised the bills. The way bill issued by the VAT authority also contained the names of the same very suppliers who raised the bill. The AO has also accepted the fact that the assessee has been able to prove that raw hides and skins were purchased from outside West Bengal. The bills also shows that the goods were dispatched from different centers of UP. It is known fact that raw hides and skins are mainly produced in UP and supplies are made to all over India. Not only that, the appellant ahs from last so many years purchasing raw hides and skins from UP which was duly accepted in all earlier years. ii) As per the Rule 6DD(e)(ii) any payment made to the producers of animal husbandry (including livestock, meat, hides and skins) or diary or poultry farming is not covered by the provision of section 40A(3) of the Act. similarly Rule 6DD(f) provides that any payment made for purchase of the products manufactured or processed without the aid of power to the producer of such products is not covered by section 40A(3) of the Act. iii) That the Hon’ble Jurisdiction High Court in the case of CIT v CPL Tannery [2009] 318 ITR 179 (Cal) has held as under:- “BUSINESS EXPENDITURE DISALLOWANCE PAYMENTS IN CASH TO PRODUCERS OF HIDES AND SKINS GENUINENESS OF TRANSACTIONS NOT DOUBTED OR DISPUTED BY ASSESSING OFFICER DISSALLOW NOT JUSTIFIED INCOME TAX ACT, 1961, s.40A(3) INCOME TAX RULES, 1962, R.6DD(f)(ii).” iv) That the Hon’ble Kerala High Court in the case of CIT v Interseas (2010) 233 CTR (Ker) 77 has held that payment made for purchase of hides and skins is covered by Rule 6DD hence no disallowance can be made by applying provision of section 40A(3) of the Act. v) In ITO v. Kenaram N.Saha & Subhash Saha [2009] 116 ITD 1 (Kol- Trib.)(SB) it was held that the payment for purchase of hides and skins would be covered by sub-clause (ii) of clause (f) of rule 6DD [now rules 6DD(e)] being the producer of animal husbandry. However, as per clause (f), not only the payment should be made for purchase of produce of animal husbandry but payment is to be made to the producer of such produce. Merely because the sellers and the traders are the merchants of hides and skins, that does not mean that they cannot be producer
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 4 thereof. A person may produce the hides and skins and sell the same. Thus, he can have the twin capacities of producer as well as trader thereof. There can be another situation that a person purchases hides and skins produced by others and trades those items then he will be a trader of hides and skins and will not be covered within rule 6DD(f)(ii). From the sale bills itself it cannot be decided whether the sellers are producers or not. vi) Whereas assessee purchased raw hides/skins for purposes of manufacturing leather and leather products from local producers or through their agents, payment made in cash for purchases made by assessee directly from agents, payment made in cash for purchases made by assessee directly from producers would be covered by rule 6DD(f)(ii) [now rule 6DD(e)(ii)]; further payments made by assessee to agents for purchases would be covered by exception provided in rule 6DD(l)[now rule 6DD(k)]-Dy. CIT vs. Allied Leather Finishers (P)Ltd. [2009] 32 SOT 549 (Luck.Trib.). vii) From the facts and the legal propositions, it is amply clear that the case of appellant is fully covered by the circumstances mentioned in sub- clause (2) of clause (f) of Rule 6DD. It is not the case of the Assessing Officer that the purchases are not made from producers of the raw material for the manufacture of leather. The case of the Assessing Officer that notices u/s 133(6) of the Act issued to such producers of hides skins came back unserved and on being asked, the appellant did not give any new address and therefore, the AO applied the provisions of section 40A(3) of the Act. In the first place, the appellant has amply demonstrated by producing material evidence that the purchases supported with corresponding manufacture and sales are genuine. Secondly, merely because the notices under sec. 133(6) issued to the sellers/ producers of hides and skin render the purchases bogus, and if at all rendered bogus, provisions of section 40A(3) did not apply. viii) In the light of the above observation & findings and on the facts and circumstances of the case, I am of the view that the Assessing officer was not justified in making the addition of Rs.3,23,88,960/- under section 40A(3)/40A(3A) of the Act. ix) In view of above discussed legal and factual position, I am of the considered view that the payment of Rs.3,23,88,960/- made by the appellant is covered by Rule 6DD of the Income tax Rules 1962, and accordingly the disallowance of Rs.3,23,88,960/- made by the AO u/s 40A(3) of the Act is hereby deleted and these grounds of appeal of the appellant are allowed.” Being aggrieved by the order of ld. CIT(A), Revenue is in appeal before us. 5. Before us the ld. DR submitted that the assessee failed to bring the evidence to prove that the payment in cash exceeding Rs. 20,000.00 was made to the producers of
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 5 the raw hides and skin. As per the ld. DR the assessee has violated the provisions of section 40A(3), therefore the deduction is not available to the assessee. The Ld. DR also contended that the suppliers of skin and hides were are having good turn over in their business. Therefore, it cannot be said that they are not having their bank account and there is no justification for making payment in cash. He, therefore, urged before the bench to confirm the action of the AO.
On the contrary the Ld. Counsel for the assessee reiterated submissions as made before the Ld. CIT(A) and further that the assessee visits the production centers of raw hides and tentatively places the order to the producers of hide and skins subject to the quality to be delivered. Such producers bring such raw hides and skins by trucks/lorries to Kolkata for delivery to assessee at Kolkata. The assessee takes the delivery of the hides after counting the pcs for which the purchase rates were duly settled at the time of placing the orders. However, the payment for such goods is made much after that, some times even after the goods are manufactured. This is because the purchase is made from producers and not from or through any trader. Needless to mention that the assessee can catch hold or the trader even after the payment is made in case of any problem with the quality but cannot catch hold of a producers of raw, hide and skins every time. These producers frequently come to Kolkata as and when they need money. The assessee does not keep cash money in chest so that payment can be made then and there. Therefore to meet their cash needs the assessee gives them bearer cheque with whom some of the employee of the assessee accompanies and the money is withdrawn for these producers from the bank. In support of the fact of purchase of raw, hide and skins, the appellant filed the copies of the purchase bills wherein the name of the seller as producer of hide and skin was clearly mentioned. The good were carried from different production centers of UP which is confirmed from the way bill issued by the VAT authorities in the individual name of the sellers. The seller is the same person named in the way bill by VAT authorities who issued the bills wherein it was specifically mentioned that the seller was the producer of raw, hide and skin. The copies of the bills raised by the producers, the copies of way bills issued by the sales tax authority in the name of
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 6 producer were produced before the AO which have been listed by the AO in his assessment order at page 4-5 . The copy of one of the bills issued by each of the producer together with sales tax way bill issued in the name of the producer is enclosed herewith. It is clear from the same that the sales tax authorities have issued the way bill in the name of the producer and the bill also shows that the sellers were the producers whose bill accompanied the way bill. The said copies are enclosed herewith along with the ledger of the parties from where the facts stated above are corroborated. Thus there was prima facie evidence that the purchase was made from the producers of hide and skins. The AO has not brought on record to prove to the contrary except that the notices u/s 133(6) was not served on them. Simply because notices were not served it cannot be inferred that the purchase was not made from producers. The assessee also maintained day to day stock register of the raw, hide and skins and such purchase of raw hide and skins were duly entered in the stock register. There was no evidence to suggest that such purchase was not made from the producers of raw, hide and skins. The attention of the Ld. AO was drawn to the Tax Audit Report wherein it was specifically mentioned that the assessee was maintaining day to day stock register of the raw material and the same was also verifiable from the quantity details filed before the Ld. AO. The purchase of raw, hide and skins from the producers of the same was specifically exempt from the application of sec. 40A(3) vide rule 6DD of the LT. Act, 1961. In this connection the assessee filed a letter dated, 17.12.2012 before the Ld. AO explaining that such payment will not attract the provisions of sec.40A(3).
Having heard both the parties, perusing the material available on record and the case laws relied on by both the parties, we find that the AO made the disallowance u/s. 40A(3) of the Act as the assessee has made payments exceeding Rs.20,000/- through bearer cheques to suppliers of raw hide in violation of the provisions of section 40A(3) of the Act. He also stated that the assessee could produce no evidence before him to show that payments were made to producers. The AO, therefore, held that the transaction was not falling under any of the exception clause as specified under rule 6DD of Income Tax Rules. On appeal, the Ld. CIT(A) held that the AO disallowed the
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 7 same under section 40A(3) of the Act on account of non-service of notice under section 133(6) of the Act. Accordingly the AO reached to the conclusion that the supplier of raw hide and skin are not the producers. As per the ld. CIT(A) non-service of notice under section 133(6) of the Act does not attract the provisions of section 40A(3) of the Act. Accordingly the ld. CIT(A) allowed the relief to the assessee. Now the question before us arises so as to whether the assessee in the aforesaid facts & circumstances has violated the provisions of section 40A(3) of the Act and its transaction is outside the purview of the provisions of Rule 6DD(e) of Income Tax Rules. At the outset we find that genuineness of the parties has not been doubted in the instant case. The AO has made the disallowance on the basis of payments made in contravention of the provisions of section 40A(3) of the Act. The AO was of the view that the payment has been made to the non-producers of the raw hide and skins and therefore the same was not allowable. In our considered view the AO has not brought anything on record that the payment was made to non producers of raw hide and skin. Simply non-service of the notice under section 133(6) of the Act do not attract the provisions of section 40A(3) of the Act. Admittedly the genuineness of the parties has not been doubted from the raw hide and skin was purchased. In similar facts & circumstances the various Hon’ble Courts have decided this issue in favour of assessee by observing that the provision of Section 40A(3) was inserted by the Finance Act 1968 with the purpose mentioned in the explanatory note Para 73 which read as under : It will be pertinent to go into the intention behind introduction of provisions of section 40A(3) of the Act at this juncture. We find that the said provision was inserted by Finance Act 1968 with the object of curbing expenditure in cash and to counter tax evasion. The CBDT Circular No. 6P dated 06.07.1968 reiterates this view that “this provision is designed to counter evasion of a tax through claims for expenditure shown to have been incurred in cash with a view to frustrating proper investigation by the department as to the identity of the payee and reasonableness of the payment.”
In this regard, it is pertinent to get into the following decisions on the impugned subject:-
Attar Singh Gurmukh Singh vs ITO reported in (1991) 191 ITR 667 (SC)
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 8 “Section 40A(3) of the Income-tax Act, 1961, which provides that expenditure in excess of Rs.2,500 (Rs.10,000 after the 1987 amendment) would be allowed to be deducted only if made by a crossed cheque or crossed bank draft (except in specified cases) is not arbitrary and does not amount to a restriction on the fundamental right to carry on business. If read together with Rule 6DD of the Income-tax Rules, 1962, it will be clear that the provisions are not intended to restrict business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted upon to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. The terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions.”
CIT vs CPL Tannery reported in (2009) 318 ITR 179 (Cal) “The second contention of the assessee that owing to business expediency, obligation and exigency, the assessee had to make cash payment for purchase of goods so essential for carrying on of his business, was also not disputed by the AO. The genuinity of transactions, rate of gross profit or the fact that the bona fide of the assessee that payments are made to producers of hides and skin are also neither doubted nor disputed by the AO. On the basis of these facts it is not justified on the part of the AO to disallow 20% of the payments made u/s 40A(3) in the process of assessment. We, therefore, delete the addition of Rs. 17,90,571/- and ground no.1 is decided in favour of the assessee. “
CIT vs Crescent Export Syndicate in ITA No. 202 of 2008 dated 30.7.2008 – Jurisdictional High Court decision
“It also appears that the purchases have been held to be genuine by the learned CIT(Appeal) but the learned CIT(Appeal) has invoked Section 40A(3) for payment exceeding Rs.20,000/- since it is not made by crossed cheque or bank draft but by hearer cheques and has computed the payments falling under provisions to Section 40A(3) for Rs.78,45,580/- and disallowed @ 20% thereon Rs.15,69,116/-. It is also made clear that without the payment being made by bearer cheque these goods could not have been procured and it would have hampered the supply of goods
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 9 within the stipulated time. Therefore, the genuineness of the purchase has been accepted by the ld. CIT(Appeal) which has also not been disputed by the department as it appears from the order so passed by the learned Tribunal. It further appears from the assessment order that neither the Assessing Officer nor the CIT(Appeal) has disbelieved the genuineness of the transaction. There was no dispute that the purchases were genuine.”
Anupam Tele Services vs ITO in (2014) 43 taxmann.com 199 (Guj) “Section 40A(3) of the Income-tax Act, 1961, read with rule 6DD of the Income-tax Rules, 1962 – Business disallowance – Cash payment exceeding prescribed limits (Rule 6DD(j)-Assessment year 2006-07 – Assessee was working as an agent of Tata Tele Services Limited for distributing mobile cards and recharge vouchers – Principal company Tata insisted that cheque payment from assessee’s co-operative bank would not do, since realization took longer time and such payments should be made only in cash in their bank account – If assessee would not make cash payment and make cheque payments alone, it would have received recharge vouchers delayed by 4/5 days which would severely affect its business operation – Assessee, therefore, made cash payment – Whether in view of above, no disallowance under section 40A (3) was to be made in respect of payment made to principal - Held, yes [Paras 21 to 23] [in favour of the assessee]”
Sri Laxmi Satyanarayana Oil Mill vs CIT reported in (2014) 49 taxmann.com 363 (Andhra Pradesh High Court)
“Section 40A(3) of the Income-tax Act, 1961, read with Rule 6DD of the Income- tax Rules, 1962 – Business disallowance – Cash payment exceeding prescribed limit (Rule 6DD) – Assessee made certain payment of purchase of ground nut in cash exceeding prescribed limit – Assessee submitted that her made payment in cash because seller insisted on that and also gave incentives and discounts – Further, seller also issued certificate in support of this – Whether since assessee had placed proof of payment of consideration for its transaction to seller, and later admitted payment and there was no doubt about genuineness of payment, no disallowance could be made under section 40A(3) – Held, yes [Para 23] [In favour of the assessee]”
CIT vs Smt. Shelly Passi reported in (2013) 350 ITR 227 (P&H) In this case the court upheld the view of the tribunal in not applying section 40A(3) of the Act to the cash payments when ultimately, such amounts were deposited in the bank by the payee.
It is pertinent to note that the primary object of enacting section 40A(3) were two folds, firstly, putting a check on trading transactions with the object to evade the liability of
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 10 tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequence, which were to be fallen on account of non-observation of Section 40A(3) of the Act must have nexus to the failure of such object. Therefore, the genuineness of the transactions being free from vice of any device of evasion of tax is relevant consideration. With regard to the purpose of bringing the provisions of section there is no doubt about the identity of the party. The ld. AR has produced the sales bills along with the transport details and road permit issued by the Government to the company. So in the instant case, there is no evasion of tax by claiming the bogus expenditure in cash. We also find that the assessment was framed under section 143(3) of the Act for the assessments years 2012-13 and 2013-14 without making any disallowance under section 40A(3) of the Act. From this fact we find that the parties from whom the raw hide and skin purchased were accepted as producers. No such issue was raised by the AO in the assessment.
In view of above facts and circumstances of the case and relied on the various case laws cited above, in the background of the above discussions and precedent we do not find any infirmity in the order of Ld. CIT(A) and accordingly we uphold the same. This ground of Revenue’s appeal is dismissed.
The second issue raised by Revenue is that Ld. CIT(A) erred in deleting the bogus sundry creditors of Rs.4,29,02,130/-.
The assessee has shown sundry creditors in its books of account for Rs.6,24,70,343/- as on 31.03.2010. The AO during the course of assessment proceeding sent the notice at the addresses given by assessee u/s. 133(6) of the Act but all of them returned unserved. On question by the AO the assessee submitted that the sundry creditors relates to the purchases which is genuine, therefore, the creditors without rejecting the purchases cannot be treated as income of the assessee. However, the AO disregarded the claim of assessee by observing that the onus lies upon the assessee to prove identity, genuinety and creditworthiness. Accordingly, AO
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 11 disallowed the creditor for Rs.4,29,02,130/- on account of non-existent and added 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:-
“5.3.5 I have gone through the assessment order, submission of the AR, peruse the fact of the case and other materials brought on record and I am of the view that for the following reasons Rs.4,29,02,130/- cannot be added to the income of the appellant either by applying the provisions of section 41(1) or 68 of the Act.:- (i) That the purchase of the hides from the sundry creditors is evident from the purchase bills and books of accounts maintained by the appellant. As regards the treatment of the same as bogus creditors by the AO, I find that the AO has treated the creditors for purchase made during the year as bogus and not existing. The AO was of the view that the notices u/s 133(6) issued to the creditors came back unserved and therefore the creditors were bogus. It is however found that the AO has treated the purchase made during the year from the same very persons as genuine. The payment made to them was also treated as genuine and disallowance was made only by applying the provisions of section 40A(3). I also find that such sundry creditors for supply of raw hides and skins remained outstanding at the end of every year and were duly accepted in earlier years. Even while completing the assessment for the assessment year in question, sundry creditors of the earlier years have been accepted by the AO. I also find that there were sundry debtors of equal amount in the Balance sheet which shows that in this trade there remain outstanding sundry creditors and debtors. When purchase was accepted as genuine then the sundry creditors cannot be treated as bogus. vii) Regarding applicability of provisions of section 68, I find that the appellant has brought substantial material on record to show that these are sundry creditor for purchases paid in subsequent years and that part of the purchases from the very parties were already accepted by the Assessing Officer. Evidently, the creditors were held to be bogus on the ground that enquiry letters under sec. 133(6) of the Act were received back unserved with the remarks ‘not known’ leaving the Assessing Officer to conclude that the appellant has failed to discharge his onus of proving the capacity of the creditors and genuineness of the transactions. Apparently, in my opinion, the Assessing Officer has not appreciated the facts of the case in its entirety. This is a case, where the books are not outrightly rejected, there is no adverse inference drawn regarding quantum of purchases or sales and even the purchase accounts of the sundry creditors have not been disturbed. The act that the assessee maintained regular books of account including stock register is
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 12 also not negated. The Assessing Officer had not disallowed the purchases from those creditors nor the trading results were disturbed. In CIT vs. Ritu Anurag Aggarwal –IT Appeal No. 325 of 2008 dated 22/7/2009, dealing with section 68 of the IT Act in a similar case, the Hon'ble Delhi High Court observed
‘….Proceeding on this basis, the ITAT observed that the sales, purchases as well as gross profits as disclosed by the assessee have been accepted by the Assessing Officer.
Once this is accepted, we are of the opinion that the approach of the ITAT was correct inasmuch as the Assessing Officer did not consider this aspect while making additions of the sundry creditors under section 68 of the Income Tax Act. As there was no case for disallowance for responding purchases, no addition could be made under section 68 inasmuch as it is not in dispute that the creditors’ outstanding related to purchases and the trading results were accepted by the Assessing Officer.’
viii) As regards applicability of provisions of section 41(1), the facts clearly show that the appellant did not write back the sundry creditors to its profit and loss account. In CIT v. Vardhman Overseas Ltd. in ITA No. 774//2009 decided on 23.12.2011, (2012) 343 ITR 408 (Del), the Delhi High Court, referring to its judgment in the case of Jay Engineering Works Ltd. v. CIT (22009) 311 ITR 299 (Del) and applying the ratio laid down the case of CIT v. T.V. Sundaram Iyengar & Sons Ltd. (1996) 222 ITR 344 (SC) under sec. 28 of the IT Act, considered the applicability of clause (a) of sub-section (1) of section 41 as to what would constitute remissions or cessation of trading liability. The Hon'ble Court noted that in the reported case, the assessee has not unilaterally written back the accounts of the sundry creditors in its profit and loss account. Therefore, the High Court answered the substantial question of law in the negative and in favour of the assessee. The facts of the present case are similar those of the case of Vardhman Overseas Ltd. (supra). Therefore, it is abundantly clear that the provision of sec. 41(21) (a) are not applicable. No addition could be made for remission or cessation of trading liability as envisaged under section 41(1) of the Act for the assessment year under consideration.
ix) In view of above discussed legal and factual position, I am of the considered view that the sundry creditors of Rs.4,29,02,130/- cannot be treated as bogus sundry creditors and cannot be added to the income of the appellant. Accordingly, the impugned addition made by the AO is hereby directed to be deleted and thus, these grounds of the appeal of the appellant are allowed.” Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 13 12. Before us Ld. DR vehemently relied on the order of AO whereas Ld. AR submitted that the AO has made further addition of Rs. 4,29,02,130/- from Sundry Creditors. It is submitted that these creditors stood in the books of the company and the amount was never written off. The purchases of goods from these parties have been accepted to be genuine. There was no evidence to suggest that no liability to sundry creditors was payable. The details of these Sundry creditors were filed. The AO has also accepted that the payments to these parties were made by bearer cheques. However, as per the AO that payment by bearer cheques causes a serious doubt that sundry creditors did not exist. Simply because the AO doubted the said sundry creditors even though accepting that the payments were made by cheque, the doubt will not entitle the AO to treat the said sundry creditors as bogus creditors. It may be submitted that some of the purchases from these sundry creditors were made during the year itself and purchases from all of them have been accepted to be genuine, found recorded in the books of accounts such purchase of raw materials was also found to consumed, the disallowance for purchase was made only by applying section 40A(3) wherever the payment were in excess of Rs. 20,000/. Therefore sundry creditors cannot be said to be bogus and no addition can be made as bogus creditors. It is further submitted that even if it is presumed that there were unconfirmed creditors, then whether the provision of section 68 or section 41(1) can be invoked and whether such creditors can be treated as bogus warranting addition in the income of the assessee. It is again submitted that there is no dispute that the goods have been purchased and the genuinity of the purchase have not been disputed and it was because that the provisions of section 40A(3) have been applied. Moreover, the assessee maintained day-to-day stock register wherein the raw material purchased were entered into and the finished goods produced have been accepted. Therefore, in so far as the purchase during the year and the corresponding outstanding balance as creditors which relates the assessment year in question, addition u/s 68 cannot be made. In so far as the balances brought forward from earlier years are concerned addition cannot be made u/s 68 since as per section 68 credits in the books should appear during the assessment year relevant previous year for invoking provision of section 68 of the Act.
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 14 13. We have heard the rival parties and perused the materials available on record. From the aforesaid discussion we find that the addition was confirmed by the AO on account of non-service of notice issued under section 133(6) of the Act for the purpose of the confirmation of sundry creditors. However we find that the AO has confirmed the addition of the sundry creditors without disallowing the corresponding purchases. From the above it is clear that the purchases in the instant case have been admitted but the corresponding sundry creditors have been added as total income of the assessee. In our considered view the action of the AO for making the addition of the sundry creditors without disallowing the purchases is based on wrong interpretation of Income Tax Laws. The sundry creditors can be added as income under section 41(1) of the Act once it is written off in the books of accounts. In the instant case the same has not been written off and very much reflecting in the books of the assessee. Therefore in our considered view the sundry creditors reflecting in the books of accounts cannot be disallowed and added to the total income of the assessee. In the instant case, the balances of many of the sundry creditors were outstanding coming from earlier years. Payments were made to some or the creditors during the year. The said payments have been accepted by the AO which means genuinity of the payments to these creditors as well as the genuinity thereof till last year have not disputed by the AO. In the instant case the firstly the AO has not specifically invoked the provisions of section 41 (1). Further in any case no such addition can be made u/s 41. In this connection we are putting our reliance in the judgment in the case of DSA Engineers. In the case of DSA Engineers v. ITO 30 SOT 31 (Mum-Trib), the AO found that there were creditor balances which in many cases were 3 years or more than 3 years old. As per the assessee the balances represented amounts due to various parties and the liability was subsisting. The Tribunal held that in the absence of cessation of liabilities and on the mere fact that the amounts were outstanding for more than 3 years, the provisions of section 41 (1) could not be applied. In the case of Dhawan (M.R.) v. CIT 149 ITR 160 (Del), it was observed that the remission of the liability arises when the creditor voluntarily gives up the claim. The cessation of such liability arises only when it ceases to exist in the eyes of law for all intents and purposes. In the case of UOI v.J. K.. Synthetics Ltd. (1993) 199 ITR 14 (SC), the Hon’ble Court held that
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 15 cessation of liability for the purpose of section 41(1) means irrevocable cessation so that there is no possibility of the liability being revived in future. If there is such a possibility, then the cessation is not complete and section 41 (1) is not attracted. In the case of Shri Vardhman Overseas Ltd. vs. Asstt. CIT 24 SOT 393 (Del ‘H’-Trib), the facts of the case were that the AO asked the assessee to prove the genuineness of some sundry creditors. The assessee did not file confirmations of said sundry creditors, except one. Therefore, AO after giving various opportunities treated the balance amount as income of assessee on account of unexplained cash credits and added the same balance amount to the income of assessee. It was held that all the parties with regard to which the addition has been made, no new amount was found credited in its account during the year under consideration hence section 68 cannot be applied. It was also held that the balances were brought forward balances and if the same were added on account of their non-genuineness, then also these amounts could not be added to the income of the assessee for the year under consideration as the question of genuineness thereof can be examined only in the year in which they were credited in the account of the assessee. It was also held that the department could not prove that the debt cannot be said to be unenforceable. It was held that the onus had wrongly been shifted by the revenue on the assessee. It was held that the liability existed since tile assessee had shown the liabilities outstanding in its balance sheet. Therefore, there was no occasion to treat the said amount as taxable under section 41 (1) and if department intends to assess the same by applying the provisions of section 41 (1), then the onus will be on the revenue to show that the liability which is appearing in the balance sheet has ceased finally and there is no possibility of the revival of the liability. Hence, addition could not be sustained under section 41(1). The said judgment of the Tribunal was confirmed by Delhi High Court on 23-12-2011 In the case of National Insulated Cable Co. v. ITO ITA No. 421/Del/2011 dt. 8-7-2011 (Del 'E’-Trib) it was held that the fact that the creditors were old creditors brought forward from earlier years has not been disputed by the department. These creditors have not been introduced during the year under consideration. There is no evidence or material on record to establish that the assessee liability to pay the amount to the creditors have been ceased during the year under consideration. Further, the amount payable to these
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 16 creditors can be added to the assessee’s total income in the year in which the assessee’s liability to pay the amount ceased or extinguished and not in the year under consideration where assessee has admittedly shown the liability in the balance sheet. It has been held in the case of G P International Ltd. (P & H) reported in 325 ITR page 25 that provisions of section 41 cannot be applied if the assessee is still showing the liability. It has been held in the case of Bhavesh Prints reported in 142 TTJ page 128 that simply because some of the creditors were not traceable it cannot be held that the liability is not payable. In the case of Taminadu Ware Housing Corporation reported in 292 ITR 310, it was held that so long the assessee had shown the liability in the balance sheet it cannot be said that the liability has ceased to exist. In the case of Willson and Co. Ltd reported in 121 TTJ 258 (Chennai Tribunal), it was held that unless it was shown by the Department that the liability ceased to exist during the assessment year in question it cannot partake the character of income during the assessment year in question.
Similarly in the case of Dy. CIT v. Amod Petrochem (P) Ltd. (2008) 23 (I) ITCL 145 (Guj-HC) : (2008) 217 CTR (Guj) 401, it was held that as per section 68, there should be cash credits of previous year. The section provides for a deeming fiction of treating the sum found credited in the books of an assessee maintained for any previous year, being charged to income-tax as the income of the assessee of that previous year, provided (i) the assessee offers no explanation as to the nature and source of the credits, or (ii) the explanation offered by the assessee is not, in the opinion of the assessing officer, satisfactory. The crux of the issue, therefore is, there have to be credits of any sum in the books of an assessee maintained for any previous year, only then the sum so credited can be brought to tax as the income of the assessee of that previous year; in other words, first of all, there have to be credits in a previous year and only in the assessment relatable to that previous year, namely, year of credit, the sum can be brought to tax. In CIT v. Usha Stud Agricultural Farms Ltd. (2008) 301 ITR 384 (Del) : (2009) 183 Taxman 277 (Del), it was held that since it is a finding of fact recorded by the Commissioner (Appeals) that the credit balance appearing in the accounts of assessee, did not pertain to the year under consideration, under these
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 17 circumstances, the assessing officer was not justified in making the impugned addition u/s 68 and as such no fault could be found with the order of the Tribunal which had endorsed the decision of Commissioner (Appeals). In Mahabir Prasad Prem Chand Jain v. ITO (1988) 40 Taxman 35 (Del- Trib )(Tax Mag), it was held that amounts found in the books of assessee were in existence much prior to the beginning of the accounting period corresponding to the relevant assessment year and the same could not, therefore, be treated as the income of assessee earned during the relevant previous year. In Nuchem Ltd. v. Dy. CIT (2004) 87 TTJ (Del-Trib) 166, it was held that revenue had failed to prove that the amounts were credited to the books of account of the assessee in the year under consideration. These amounts were brought forward from earlier years and it is settled law that the addition under section 68 could be made only if the amount was credited in the accounts of the assessee in the relevant financial year. In Shri Vardhman Overseas Ltd. v. Asstt. CIT (Del-Trib): 24 SOT 393, it was held that no new amount had been credited by assessee in its account during the year under consideration. Therefore, applicability of section 68 of the Act is also ruled out and addition could not be made under section 68 of the Act. In view of above we find no reason to interfere in the order of ld. CIT(A). Hence this ground of Revenue is dismissed.
Last issue of Revenue’s appeal is general.
In the result, Revenue’s appeal stands dismissed.
Order pronounced in open court on 07 /09/2016
Sd/- Sd/- (S.S.Viswanethra Ravi) (Waseem Ahmed) Judicial Member Accountant Member *Dkp �दनांकः- 07 /09/2016 कोलकाता / Kolkata
ITA No.2620/Kol/2013 A.Y. 2010-11 ITO Wd-12(1), Kol. vs. M/s Standard Leather Pvt. Ltd. Page 18
आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-ITO Ward-12(1), Kolkata, Aayakar Bhawan, P-7, Chowringhee Squre, Kolkatp700 069 2. ��यथ�/Respondent-M/s StandardLeather Pvt. Ltd.,21G, AtalSur Rd, Tangra,Kol-15 3. संबं"धत आयकर आयु%त / Concerned CIT 4. आयकर आयु%त- अपील / CIT (A) 5. &वभागीय �)त)न"ध, आयकर अपील�य अ"धकरण कोलकाता / DR, ITAT, Kolkata 6. गाड+ फाइल / Guard file.
By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ"धकरण, कोलकाता