VITRAG PRINTS,SURAT vs. NFAC, DELHI

The grounds of appeal

raised by the assessee are as follows: “(1) That on fact and circumstances of case, learned NFAC erred in confirming rejection of book result of assessee under section 145(3) of the Act and thereby making addition of Rs.24,32,059/ - on account of 25% of sundry creditors of Rs.97,28,236/- out of total expenses of Rs.2,02,29,083/- in current year, thereby accepting expenses for which payment has been made in current financial year and not accepting expenses payment for which has been made in next financial year mainly on ground that sundry creditors were not complying with notices issued by him and thereby 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.”

However, assessing officer rejected the contention of the assessee and 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. However, in this case, assessee could not prove any of the above creditors as genuine. Therefore, the assessing officer rejected the books of accounts of the assessee and income of the assessee was determined on estimated basis as provided u/s l45(3) of the Income Tax Act, 1961. Keeping reliance on the decision of High Court, in the case of Vijay Proteins, it is justifiable disallowing 25% of the sundry creditors. The aggregate of the sundry creditors in whose case confirmations were not received amounts to Rs.97,28,236/-. Out of the same total disallowance i.e. 25% comes to Rs.24,32,059/- ( 25% of Rs. Rs.97,28,236), which was added by the assessing officer to the total income of the assessee.

Aggrieved by the order of Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A), who has confirmed the action of Assessing Officer, observing as follows: “DECISION: 4. I have carefully considered the facts of this case, grounds of appeal, written submissions filed during appeal proceedings. The only addition 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).

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

We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. CIT(A) and other material brought on record. We note that assessee has submitted party- wise details of creditors and the details of the creditors repaid in the assessment year itself and subsequent year.

Therefore, we note that some of the creditors have been paid in the assessment year itself, however some of the balance creditors paid in the subsequent assessment year. Therefore, genuineness of the creditors should not be doubted. We also note that when the creditors are repaid and the Department does not doubt about the repayment of the creditors and repayment of creditors have been accepted by the Department, therefore addition should not be sustained in the hands of the assessee, for that reliance is placed on the judgment of the Hon'ble jurisdictional High Court in the case of CIT vs. Ayachi 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.”

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.

Before us, the assessee submitted details of repayment of creditors in the assessment year itself or in subsequent assessment year, such detail has not been verified by the lower authorities. No doubt, the bank statement was submitted by the assessee before the assessing officer, however, the details to the effect that which creditor has been paid in the assessment year itself and which creditor has been paid in subsequent year, have not been submitted by the assessee before the assessing officer. Besides, the entire creditors were not repaid by the assessee. Therefore, we remit this issue back to the file of the assessing officer to examine the repayment to various creditors. On verification, if the assessing officer finds that creditor has been paid by the assessee in the assessment year itself or subsequent year, the addition should be deleted to that extent. Therefore, we allow the appeal of the assessee for statistical purpose in above terms.