VITRAG PRINTS,SURAT vs. NFAC, DELHI

आदेश / O R D E R PER DR. A. L. SAINI, AM: Captioned appeal filed by the assessee, pertaining to Assessment Year (AY) 2015-16, is directed against the order passed by the Learned Commissioner of Income Tax (Appeals), [in short “the ld. CIT(A)”], National Faceless Appeal Centre (in short ‘the NFAC’), Delhi, dated 27.03.2023, which in turn arises out of an assessment order passed by Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), dated 22.12.2017.

338/SRT/2023/AY.2015-16 Vitrag Prints penalizing us without penalizing those parties who have not furnished their reply, even after we have furnished all bills along with proof of payment as bank statement for current year as well as next year which clearly shows that payment has been made to same parties and their names in coming in bank statement which itself proves that payment were genuine and AO has not found out any discrepancies in books of accounts other than.” 3. Facts which can be stated quite shortly are as follows: The assessee before us is a partnership firm and filed return of income on 30.09.2015, declaring the total income at Rs.8,90,330/-. The return of income was processed u/s 143(1) of the Income Tax Act, 1961. The assessee`s case has been selected for Limited scrutiny under CASS due to Mismatch in amount paid to related persons u/s 40A(2)(b) reported in Audit Report and ITR and Large other expenses claimed in the Profit & Loss account. Thereafter notice u/s 143(2) was issued on 10.08.2016 and duly served upon the assessee firm on 27/08/2016. Subsequently a notice u/s 142(1) cum- questionnaire was issued on 02.06.2017 and this was too duly served upon the assessee’s firm. In response to the above mentioned notices, the assessee-firm, attended the case from time to time and furnished the submission/explanation, as called for. During the year under consideration, the assessee- firm was engaged in the business of trading of finished cloth after job-work. During the assessment proceedings, the assessing officer issued notices u/s 133(6) of the Act, to the various sundry creditors shown in the books of accounts of the assessee. Out of them some notices returned back unserved, some notices served but no replies received. This fact brought to the knowledge of assessee, vide letter of AO dated 30/10/2017 and the assessee was requested to show cause as to why the book result should not be rejected and why the addition should not made in his total income. Relevant portion of the show -cause letter is reproduced as under:

338/SRT/2023/AY.2015-16 Vitrag Prints “In connection with assessment proceedings in your case for A.Y.2015-16 you are requested to comply with the following points with all the details/explanation/documents in addition to submission filed by you; In this connection the following discrepancies noticed, you are therefore requested to please comply urgently to dispose of your assessment proceedings at earliest. During the course of assessment proceedings you have submitted the details of other expenses, and given the name and address of the parties . For verification of the genuiness of transaction, letters u/s 133(6) asking information issued to the various person. On verification of record it is noticed that the following letters of the parties returned with remark "Left”, Incomplete address" and "Not known". A list of the parties in which letters unserved and not complied are as under: Sr. No Name of the Parties Remarks 1. Paris Creation Reply not received 2. Krishna Fabrics 3. Sitaramfab Reply not received 4. Sai Fabrics Reply not received 5. Pushya creation Reply not received 6. Pushya Narrow Fab Reply not received 7. Alkesh Ramkishan Ray Reply not received 8. Divya fashion Post returned 9. Nidhi Creation Do- 10. Honey 'fabrics'. Do- 11. Baba laxmi sarees Do- 12. Kajai fashion Do- 13. Rajkumar textile Do- 14. Mohd. Mukhtar shaikh Do- 15. A.D. Creation Do- 16. Shaikh Mo. Faijul Faijul Rehman M Do- 17. AUaudin Ahmed Husain Shaikh Do- 18. Khureshbhai M Shaikh Do-

In this regard, you have been asked during the course of hearing the case on 02.08.2017 to furnish the latest address and produced the above parties. However you have not produced any one or filed new latest address. In this regard, an opportunity is granted to submit your reply, explanation and produce the parties before 06.10.2017: On Failure, the transactions with above parties will be considered as non- genuine and requested to you to show cause as to why, your books result should not be rejected and addition should be made, in to the total income of the assessee. Please furnish the ledger copy of other expenses in each parties with seal and signed of you without fail. Non-compliance of this notice shall lead to finalization of your assessment u/s 143(3) of the Act on the basis of the records available with this office relating to your case which may be noted."

338/SRT/2023/AY.2015-16 Vitrag Prints 4. In response, the assessee furnished confirmations in respect of some of the parties. The assessing officer provided one more opportunity to the assessee, vide letter dated 18.12.2017 to furnish the confirmations in respect of remaining parties. This letter is also reproduced as under: “In connection with the showcause notice issued vide even No.: dated 30.10.2017, you have Informed that some of creditors has not filed reply of the notice u/s 133(6), and you have requested to produce before the undersigned or fife to confirmation. In response to this you ham .given new address in 4 cases and you shown inability to produce or to fife confirmation of the creditors as they are not your control. You have given your Bank account showing bank entries of your creditors, but it cannot prove the genuine of the transaction. I hereby given an once again opportunity of being heard on dtd. 22.12.2017 to you to file copy of Confirmation, and Copy of return of income of the creditors to prove identity, and creditworthiness in the following cases. Sr. No Name of the Parties Amount Out standing 1. Alkesh Ramkishan Ray 593621 2. Mohd. Mukhtar Shaikh 2513115 3. Shaikh Mo.Faijul Faijul Rehman M 1713774 4. AUaudin Ahmed Husain Shaikh 3287785 5. Khureshbhai M Shaikh 1619941 Total ……… 9728236

In this regard, you have been asked during the course of hearing the case on 02.08.2017 and notice dated 30.10.2017 to furnish the latest address and produced the above parties, However you have not produced any one or filed new latest address. In this regard, this is the final opportunity is granted to submit the copy of ROI and confirmation before 22.12.2017. On Failure, the transactions with above parties will be consider as non genuine and mere accommodation entries in your books and requested to you to show cause as to why your books result should not be rejected and addition should be made in to your total income. Non- compliance of this notice shall lead to finalization of your assessment U/s. 143(3) of the Act on the basis of the records available with this office relating to your case which may be noted.” 5. In response to the above notice, the assessee vide its letter dated 19/12/2017, stated that assessee has submitted all bills for which expenses were debited in its books of accounts, payment proof i.e. bank statement of assessee which shows that payment was made through account payee cheque and their names appears in maximum of

338/SRT/2023/AY.2015-16 Vitrag Prints cases in bank statement. Further the assessee also submitted party-wise facts as to why they have not submitted replies to the notices issued u/s 133(6) of the Act. In the party-wise details, the assessee has submitted that if party is not submitting reply to the department,, it is that party should be penalized and not the assessee. Secondly, where the notices are received back unserved in that case also assessee's say is that the assessee should not be penalized for the non-compliance of the party.

338/SRT/2023/AY.2015-16 Vitrag Prints made in the assessment at Rs.24,32,059/-out of expenses is agitated in this appeal. 4.i. It is seen that the AO issued notice under section 142(1) calling for details and information. The AO rejected the books of accounts and resorted to disallow a portion of expenses. The AO observed in the assessment order that: “In response to the above notice, the assessee vide its letter dated 19/12/2017 his reply stating that assessee has submitted all bills for which expenses were debited in its books of accounts, payment proof, bank statement of assessee which shows that payment was made through account payee cheque and their names appears in maximum of cases. Further the assessee also submitted party-wise facts as to why they have not submitted replies to the notices issued us.133(6). In the party-wise details, the assessee has submitted that if party is not submitting reply to the department, it is that party should be penalized and not the assessee. Secondly, where the notices are received back unserved in that case also assessee's say that the assessee should not be penalized for the non- compliance of the party. Such reply of the assessee is not acceptable as once the department issued letters to the creditors as per the names and addresses made available by the assessee and there has been no compliance from the parties, the onus automatically shifts on the assessee to prove the creditors as genuine. However, in this case assessee could not prove any of the above creditors as genuine....... looking to the discrepancies, it can overall be seen that the books result does not project the true statement of affairs of your business therefore books result is not acceptable and rejected for the aforesaid reasons and the income determined on estimated basis as provided us.145(3) of the IT. Act, 1961. Keeping reliance on the decision of High Court in the case of Vijay Proteins, it is justifiable disallowing 25% of the out the sundry creditors question. The aggregate of the sundry creditors whose case confirmations are not received amounts to Rs.97,28,236/-. Out of the same total disallowance i.e. 25% comes to Rs.24,32,059/- which is hereby added to the total income of the assessee. This addition is the subject matter of appeal.” 4.ii. The appellant had submitted written arguments and supporting legal judgments contending that the addition needs to be deleted. 4.iii. I have considered the submissions of the appellant very carefully. The fact of the matter is that the AO issued notices under sec.133(6) to the creditors and those notices could not be served. The AO observed that "once the department issued letters to the creditors as per the names and addresses made available by the assessee and there has been no compliance from the parties, the onus automatically shifts on the assessee to prove the creditors as genuine". Therefore, the fact that needs to be emphasized is that the onus to prove the genuineness of creditors got shifted on the appellant. This being the situation, all the decisions relied upon by the appellant to support the grounds of appeal will not come to its

338/SRT/2023/AY.2015-16 Vitrag Prints rescue. It is the appellant who has to discharge the responsibility to produce all the creditors before the AO when it came to know that the notices issued by the department under sec. 133(6) are unserved on the creditors. The books of accounts were rightly rejected under section 145 of the Act. 4.iv. As laid down by the Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 57, that the question whether an amount -claimed as expenditure was laid out or expended wholly or exclusively for the purpose of the assessee's business, profession or vocation has to be decided on the facts and in the light of the circumstances of the each case. The mere existence of an agreement between the assessee and the commission agent, assuming, there was such agreement and payment, does not bind the ITO to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although, there might be such an agreement in existence and the payment might have been made, it is still open to the ITO to consider the relevant facts and determine for himself, whether the commission paid has been paid and is deductible in computing the total income of the assessee. On the basis of the ratio of the Supreme Court judgment in the case of CIT v. Durga Prasad More [1971] 82 ITR 540, it has to be held that the documents to which a reference has been made by the Id. Counsel for the assessee are self-serving devices and brought in aid to support an action which is neither justified on facts nor in law. It is the duty of the AO to go behind the smoke screen and find out the truth of the matter and it is a well-settled law for which authority, if any, may be found in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 57 (SC). Mere existence of an agreement would not make either the payment genuine or eligible for deduction as having been made for commercial expediency. Reliance for this was placed on the judgment of the Supreme Court in the case of Lachminarayan Madan Lal vs. CIT [1972] 86 ITR 489. In fact it has to be stated that all these documents, viz., schedules of the balance sheet, are self-serving devices in furtherance of the cause of the assessee and it cannot be relied upon in view of the judgment of the Supreme Court in the case of Durga Prasad More (supra). 4.v. (A). In a case reported in [2014] 45 taxmann.com 257 (Karnataka)/[2014] 223 Taxman 491], HIGH COURT OF KARNATAKA, in the case of Commissioner of Income-tax, (Central Circle) v. Bellary Steels and Alloys Ltd., in IT APPEAL NOS.225 TO 227 OF 2010, DATED: JANUARY 29, 2014 , the issue before the Hon'ble High Court was:: "IT: Where assessee furnished some particulars, but details of parties as well as amount of alleged creditors under various heads were not furnished, 10 per cent of total advances be treated as unexplained cash credit". The Hon'ble High Court has held:: "Section 68 of the Income-tax Act, 1961 - Cash credits (Advances) - Assessment year 1998-99 - Assessing Officer found that there was substantial increase in amount of advances against sales and integrated plants as compared to previous year - Assessee was called upon to furnish list of parties with their postal addresses and

338/SRT/2023/AY.2015-16 Vitrag Prints confirmation so as to discharge onus under section 68 - Assessee furnished some particulars, but details of parties as well as amount of alleged creditors under various heads were not furnished - Whether in these circumstances, assessing authority had been very reasonable in treating only 10 per cent of total advances as unexplained cash credit - Held, yes [Para 11] [In favour of revenue]". (B). In another case, reported in [2018] 95 taxmann.com 130 (Ahmedabad -Trib.)/[2018] 171 ITD], IN THE ITAT AHMEDABAD BENCH ‘B’, in the case of Dattatray Poultry Breeding Farm (P.) Ltd., in IT APPEAL NO. 2193 (AHD.) OF 2014, [ASSESSMENT YEAR 2010-11] , DATED: JUNE 19, 2018 ,the issue before the Hon'ble ITAT was:: “IT: Where assessee had shown outstanding sundry creditors for several years but failed to produce such creditors and furnish correct address of all creditors, their PAN numbers and confirmations, Assessing Officer was justified in holding that there was cessation of liability and merely because liabilities were shown in books of account by assessee and not written back, such liabilities could not be held to be subsisting liability". The Hon'ble ITAT held:: "Section 41(1) of the Income-tax Act, 1961 - Remission and cessation of trading liability (Creditor's confirmation) - Assessment year 2010-11 -Whether liability cease to exist in terms of section 41(1) where it is outstanding for a long period without any payment, despite it being reflected in books of account -Held, yes - Assessee company, had shown sundry creditors outstanding for six to twenty years - Assessing Officer made inquiries under section 133(6) about said creditors in which it was found that certain creditors had categorically denied that they had not made any transaction with assessee - Notices in some cases had returned unserved - Assessee had failed to produce said creditors as directed -Assessee had not even furnished correct address of all creditors, their PAN numbers and confirmation - Whether, on facts, Assessing Officer was justified in holding that there was cessation of liability and making additions to income of assessee under section 41(1) - Held, yes - Whether merely because liabilities were shown in books of account by assessee as outstanding and not written back, would not, tie down revenue to hold such liabilities to be subsisting liability - Held, yes [Paras 9 and 10] [In favour of revenue]". (C). Yet, in another case reported in [2011] 128 ITD 74 (Bangalore)/[2011] 136 TTJ 247 (Bangalore), IN THE ITAT BANGALORE BENCH 'A1, in the case of Suresh Kumar T. Jain v. Income-tax Officer, Ward-2(1), in IT APPEAL NO. 667 (BANG.) OF 2009, [ASSESSMENT YEAR 2005-06] .DATED: JANUARY 8, 2010 , the issue considered was:: "Section 68 , read with section 41(1), of the Income-tax Act, 1961 -Cash credits - Assessment year 2005-06 - In course of assessment, Assessing Officer asked assessee to prove genuineness of sundry creditors shown in return of income - In reply, assessee merely filed confirmation letters issued by some of alleged creditors - Assessing Officer rejected those letters and made addition under two heads, i.e., 'brought forward creditors balances treated as cessation of trading liability under section 41(1)' and 'current creditors under section 68' - Commissioner (Appeals) confirmed

338/SRT/2023/AY.2015-16 Vitrag Prints addition - On instant appeal, it was seen that Assessing Officer went to root of issue; made inquiries and brought on record that brought forward alleged sundry creditors and current year's creditors were not genuine - Further, assessee never tried to reconcile difference of brought forward balances nor produced any bills of purchase, etc., for verification in spite of being provided with ample time to reconcile - Whether, on facts, assessee had failed to discharge onus cast on him to substantiate his claim and, therefore, impugned addition made by authorities below was to be upheld - Held, yes". This case is Affirmed in [2019] 101 taxmann.com 164 (Karnataka). 5. Considering the facts of the case and also keeping in view the aforesaid judgments, the disallowance made by the AO is confirmed; while rejecting the appellant's ground of appeal. In the result, the appeal is dismissed.” 8. Aggrieved by the order of ld. CIT(A), the assessee is in appeal before us. 9. Learned Counsel for the assessee argued that some of the creditors have been paid during the assessment year itself, however some of the creditors were paid in the next assessment year. Therefore, genuineness of the creditors cannot be doubted. Just because, some creditors did not file the reply and did not respond the notice of the Assessing Officer under section 133(6) of the Act, does not mean that the creditors of the assessee are bogus. The Ld. Counsel for the assessee took us through the submission made before the assessing officer and ld. CIT(A), which are reproduced below: “Para 6 - page 4 - assessee has submitted all bills for which expenses were debited in its books of accounts payment proof i.e. bank statement of assessee which shows that payment was made through account payee cheque and their names appears in maximum of cases. Further the assessee has also submitted party wise facts as to why they have not submitted reply to the notices issued under section 133(6). In party wise details, the assessee has submitted that if party is not submitting reply to department, it is party should be penalized and not assessee. Secondly where notices are received back unserved in that case also assessee's say that assessee should not be penalized for non-compliance of party. Sir assessee is traders and carried out job work activities from various parties. During assessment proceedings, AO asked various details about job work. Since this was limited scrutiny, expenses verification as done by AO. We have given books of accounts to office of AO along with accountant of firm and all bills were submitted to AO for verification and

338/SRT/2023/AY.2015-16 Vitrag Prints was duly verified by AO checking quantity, rate and amount of all bills. In short verification of following was done by AO: (1) Expenses register (2) Sundry Creditors Ledger (3) Bills of Expenses register (4) Quantity and rate of each and every item (5) Bank statement (6) Cheque number and amount (7) Bank books (8) PAN of each parties (9) Address of each parties (10) Phone number of each parties The verification by AO was through and he has verified each and every bills and found all in order. He has verified quantity, date, rate and amount of job work for each and every item. In fact AO has called the parties over phone by taking out phone number from what was mentioned in their bills. Those parties confirmed over phone of doing job work for assessee. The AO has further verified from bank statement of assessee that payment were made by account payee cheques by assessee and name of payee was duly "rationed in maximum number of cases in bank statement. The only observation of AO is that those parties have not replied to notices sent by AO under section 133 (6). Other than this AO has no observation by AO either in books of accounts of assessee or bills of assessee or bank statement of assessee or stock statement of assessee or over charging of price of job work or under charging of price of job work or not doing job work at all or payment not done to creditors. Further PAN of each parties were verified by AO which was mentioned and TDS had also been duly deducted by assessee and paid also. Sir when AO has sent notices under section 133 (6), following were results of notices: • Served • Unserved due to Left • Unserved due to incomplete address • Unserved due to Not Known For rejecting books of accounts of assessee, AO should be satisfied about either there is deficiencies in books of accounts of assessee or correctness or completeness of the accounts of the assessee or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee.” 10. Therefore, Ld. Counsel contended that during the appellate proceedings, the assessee submitted bills, invoices, bank statements, name and addresses of the creditors also and the same details were available before the Assessing Officer, therefore the addition should

338/SRT/2023/AY.2015-16 Vitrag Prints not be made. The Ld. Counsel also submitted that since the repayment has been made during the assessment year itself and some of the creditors paid in subsequent year, therefore genuineness of the creditors should not be doubted. 11. On the other hand, Learned Departmental Representative (ld. DR) for the revenue submitted that Assessing Officer has not made addition based on the plea that some of the creditors repaid in the assessment year itself or some of the creditors repaid in subsequent years. The Assessing Officer made addition solely on the issue that the assessee has failed to prove the genuineness of the creditors, therefore addition made by the Assessing Officer should be confirmed.

338/SRT/2023/AY.2015-16 Vitrag Prints Chandrashekhar Narsangji, 42 taxmann.com 251, wherein it was held that when outstanding amount has been paid in the subsequent year and when the Department has accepted the payment, the addition should not be made. The finding of the Hon'ble High Court is given below: “6. Having heard Shri Pranav Desai, learned Counsel appearing on behalf of the revenue and on perusal of the order passed by the CIT(A) confirmed by the ITAT, it appears that CIT(A) was satisfied with respect to the genuineness of the transaction and creditworthiness of Shri Ishwar Adwani and, therefore, deleted the addition of Rs.1,45,00,000/- made by the Assessing Officer. It is required to be noted that as such an amount of Rs.1,00,00,000/- vide cheque no. 102110 and an amount of Rs.60 lakh vide cheque no. 102111 was given to the assessee and out of the total loan of Rs.1.60 crore, Rs.15 lakh vide cheque no. 196107 was repaid and, therefore, an amount of Rs.1,45,00,000/- remained outstanding to be paid to Shri Ishwar Adwani. It has also come on record that the said loan amount s been repaid by the assessee to Shri Ishwar Adwani in the immediate next financial year and the Department has accepted the repayment of loan without probing into it. In the aforesaid facts and circumstances of the case, when the ITAT has held that the matter is not required to be remanded as no other view would be possible, we see no reason to interfere with the impugned order passed by the ITAT. No question of law, much less substantial question of law arises in the present Tax Appeal. Hence, the present Tax Appeal deserves to be dismissed and is accordingly dismissed.” 14. We note that rejection of books of accounts is not valid particularly when the assessee submitted during assessment proceedings, the details about job work. Since this was limited scrutiny case, expenses verification was done by AO. The assessee submitted books of accounts to the AO along with all bills for verification and these were duly verified by AO checking quantity, rate and amount of all bills. In short, verification of following documents were done by assessing officer: (1) Expenses register (2) Sundry Creditors Ledger (3) Bills of Expenses register (4) Quantity and rate of each and every item

338/SRT/2023/AY.2015-16 Vitrag Prints (5) Bank statement (6) Cheque number and amount (7) Bank books (8) PAN of each parties (9) Address of each parties (10) Phone number of each parties

The assessing officer has verified quantity, date, rate and amount of job work for each and every item. The AO has further verified from bank statement of assessee that payment were made by account payee cheques by assessee and name of payee was duly mentioned in maximum number of cases in bank statement. Hence, we are of the view that rejection of books of accounts are not valid.

338/SRT/2023/AY.2015-16 Vitrag Prints 16. In the result, appeal filed by the assessee is allowed for statistical purposes in above terms.

Order is pronounced on 14/12/2023 in the open court.

Sd/- Sd/- (PAWAN SINGH) (Dr. A.L. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER lwjr /Surat �दनांक/ Date: 14/12/2023 SAMANTA Copy of the Order forwarded to 1. The Assessee 2. The Respondent 3. The CIT(A) 4. CIT 5. DR/AR, ITAT, Surat 6. Guard File By Order

// TRUE COPY // Assistant Registrar/Sr. PS/PS ITAT, Surat