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Income Tax Appellate Tribunal, DELHI BENCH: ‘H’ NEW DELHI
Before: SHRI G.C. GUPTA & SHRI J.SUDHAKAR REDDY
PER J. SUDHAKAR REDDY, ACCOUNTANT MEMBER This is an appeal filed by the assessee directed against the order of the Ld.CIT(A)-XXIII, New Delhi dated 11.3.2013 for the A.Y. 2005-06.
The brief facts of the case are narrated in para 2 of the Ld.CIT(A)’s order, which is extracted for ready reference. “2. The appellant filed return of income for the Assessment Year 2005-06 on 31.10.2005 declaring a loss of Rs. 18,73,988/-. The case was selected for scrutiny under CASS. During the scrutiny assessment proceedings, the Assessing Officer noticed that the ledger account of a creditor M/s Ganesh Overseas showed an opening balance of Rs. 19,67,729/- and credit entries during the year of Rs. 6,14,307/- and Rs. 5,11,744/-, however there were no transactions of sale during the year to justify the opening credit balance and further payments received. The Assessing Officer required the appellant to file
ITA 3720/Del/2013 AY 2005-06 Zanelini Leather Wear a confirmation of the party with address and assessment particulars, which was not produced. The Assessing Officer treated the creditor as bogus and added the closing balance of Rs.30,93,780/- to the income of the appellant. The Assessing Officer further noticed that the appellant firm had paid salary of Rs. 1,80,000/- to Smt.Bailu Khanna, wife of Sh. Anil Khanna, partner of the firm. As per the details furnished, Smt. Bailu Khanna was working as a senior merchandiser with the firm. After considering that the maximum salary paid to any employee was Rs.1,20,000/- which was paid to Smt. Achal Bhatia, General Manager, the Assessing Officer held that the salary payment to Smt. Bailu Khanna was excessive having regard to the fair market value of the services, and disallowed Rs. 60,000/- u/s 40A(2)(b). The Assessing Officer also required the appellant to file confirmations of all sundry creditors with whom there were no business transactions during the year. As the appellant failed to file confirmations as called for, the Assessing Officer held that the liabilities no longer existed, and added the total amount of such sundry creditors of Rs.10,77,844/- to the income. The Assessing Officer also disallowed a lumpsum amount of Rs. 50,000/- out of sales promotion expenses of Rs. 4,15,361/- for want of bills. The Assessing Officer disallowed 1/8th of expenses incurred on car maintenance, interest on car loan and car depreciation as log book was not maintained and the partners of the firm were not having any personal vehicles. The Assessing Officer also disallowed l/8th of the telephone expenses claimed, for personal use.”
On appeal the First Appellate Authority granted part relief. Aggrieved, the assessee is in appeal before us on the following grounds . “1. The learned CIT(A) has grossly erred on the facts of the case in upholding the addition of Rs. 30,93,780/- as income of assessee while treating the outstanding balance due to M/s Ganesh overseas u/s 41(1) of the Income Tax Act, 1961.
2. The learned CIT(A) has grossly erred on the facts of the case in upholding the addition of Rs. 438348/- out of Rs. 40,77,844/- the outstanding balance of sundry creditors as income of assessee u/s 41(1) of the Income Tax Act, 1961.
ITA 3720/Del/2013 AY 2005-06 Zanelini Leather Wear 3. The learned ClT(A) has grossly erred on the facts of the case in upholding the addition of Rs. 60,000/- salary paid to Smt. Bailu Khanna u/s 40A(2)(b) of the Income Tax Act, 1961. 4. The appellant seeks leave to add or to amend the foregoing grounds of appeal, if it becomes necessary to do so in the interest of justice.”
We have heard Smt. Ritu Sharma, Ld.Sr.D.R. on behalf of the Revenue and Shri Ashok Malik, the Ld.Counsel on behalf of the assessee.
After careful consideration of the facts and circumstances of the case, perusal of material placed on record and orders of the authorities below as well as case laws cited, we hold as under.
On ground no.1, we find that additional evidence was filed before the First Appellate Authority by the assessee in the form of confirmation from M/s Ganesh Overseas, with regard to credit balance to the tune of Rs.30,93,780/-. The Ld.CIT(A) called for the remand report. During the remand report, the letter addressed by the A.O. to M/s Ganesh Overseas was returned with the postal remark ‘not known’. The A.O. also noticed that there is a difference in the closing balance shown by the assessee on 31.3.2005 at Rs.30,93,780/- and the closing balance shown by M/s Ganesh Overseas on the same date i.e. 31.03.2005 at Rs.25,20,641/-. There is a difference of Rs.5,73,139/-. The AO submitted that addition of credit balance made in the assessment order, is required to be confirmed, for the reason that the creditor could not be found at the address provided. The remand report was made available to the assessee for its rejoinder. The assessee submitted that M/s Ganesh Overseas was a proprietary concern of Mrs. Anitha Sharma, her PAN number was given. It was submitted that the opening balance differences, may be on account of reconciliation differences. It was pointed out that the current year’s transactions were confirmed by M/s Ganesh Overseas.
ITA 3720/Del/2013 AY 2005-06 Zanelini Leather Wear 7. The assessee contended that merely because the letter addressed by the Ld.A.O. to M/s Ganesh Overseas, was returned by the postal authorities, no addition can be made of the credit balance by deeming the same as income. The Ld.Counsel argued that the assessee was having dealings with M/s Ganesh Overseas from the year 2002-03 and that it was selling its DEPB licenses and income from such sale was assessed year after year, and the payments were being received by account payee cheques. It was further submitted that the assessee used to receive money in advance from this party against the licenses to be sold to them.
7.1. The Ld.D.R. relied on the order of the First Appellate Authority and submitted that the genuineness of the transaction has not been demonstrated by the assessee. He argued that the address given by the assessee is wrong and that no attempt has been made to reconcile the differences in the accounts. The First Appellate Authority considered all these submissions and at para 4.2 observed as follows.
“4.2 Copies of account of the earlier Financial Years 2002-03 and 2003-04 indicate that the appellant was selling DEPB licenses to M/s Ganesh Overseas for which it received money in advance. The copies of account show that the advances were being invariably received in round figures and' only settlement of balances was made through cheques of odd sums, but of very small amounts, that is in hundreds or thousands of rupees. The amounts allegedly paid by cheque of Rs. 6,14,307/- and Rs. 5,11,744/- are not of the pattern of the earlier payments. If at all these amounts pertain to the value of DEPB licenses, such sale of licenses has not been disclosed by the appellant. It should also be noted that the appellant has not furnished copies of account of M/s Ganesh Overseas from its books of earlier years, but is relying on the copy of its accounts in the books of M/s Ganesh Overseas to state that the income from sale of DEPB licenses has been offered to tax in earlier years. It is further observed that the appellant claims that its sundry creditors were ITA 3720/Del/2013 AY 2005-06 Zanelini Leather Wear taken over by M/s Zanelini Apparels Pvt. Ltd. and some of the credit balances have been settled by that company in subsequent years. However for reasons best known to the appellant, the credit balance of Rs.30,93,780/- in the name of M/s Ganesh Overseas was not taken over with other sundry creditors by the sister company, continued to be carried forward in the books of the appellant, and supposedly remains payable till date. As admitted by the appellant, the business was discontinued 'sometime in September 2004', hence M/s Ganesh Overseas could not have been expecting to procure more licenses from the appellant - even in respect of the opening balance as on 01.04.2004. For all the above reasons, it is held that the appellant has failed to explain the nature of the credit balance of Rs. 30,93,780/-, and has failed to prove the genuineness or the source of the amounts received of Rs. 6,14,307/- and of Rs. 5,11,744/-. According to the copy of account of M/s Ganesh Overseas, the opening balance as on 01.04.2004 is of Rs. 13,94,590/- whereas the opening balance in the books of the appellant amounts to Rs. 19,67,729/-. The difference of Rs.5,73,139/- is accordingly treated as unexplained and added to the total income. The new credits of 11,26,051/- in the account of M/s Ganesh Overseas are also treated as unexplained as the creditor was not traceable, and the confirmation filed suffers from serious defects. Regarding the opening balance of Rs. 19,67,729/- as per the appellant, or of Rs.13,94,590/- as per M/s Ganesh Overseas, depending upon which set of accounts one is referring to, there can be no doubt that the liability no longer subsists. Accordingly, the addition made of Rs. 30,93,780/- is confirmed.”
7.2. On the recalled issue, the Ld.Counsel relied on the decision of Hon’ble Delhi High Court in the case of CIT vs. Auto Kashyap India Pvt.Ltd. reported in 330 ITR 435. In the above judgement the Hon’ble High Court dismissing the appeal, held that, Explanation 1 to section 41 had no applicability to the facts of the case, since there was no writing off of liability and only the sub head under which the liability was shown in the accounts books of the assessee was changed. No benefit accrued to the 5
ITA 3720/Del/2013 AY 2005-06 Zanelini Leather Wear assessee by changing the nomenclature and, therefore, the outstanding credit balance could not be deemed to be profits and gains of the business of the assessee company within the meaning of section 41 of the Act.”
7.3. Further the Ld.Counsel for the assessee contended that, “It is a pre requisite condition, before having a recourse to section 41 of the Income Tax Act 1961, that the assessee must have either obtained the benefits in respect of the loss, expenditure or trading liability, incurred earlier by it or it should have received any benefits in respect of such trading liability by way of remission or cession thereof”. He submitted that as the company acknowledged its liability to make payment of this liability and had actually discharged it later, no addition u/s 41(1) can be made.
7.4. The prime contention of the assessee is that there is no cessation of liability, during the year and hence the addition cannot be made. The contention of the Revenue is that the new credits of Rs.11,26,051/- have not been explain along with the differenc in opening balances. It is further contended by the revenue that the confirmation given by M/s Ganesh Overseas suffers from serious defects and the existence of the party itself is in doubt. Hence the Ld.D.R. prays that the order of the Ld.CIT(A) be upheld.
On a careful consideration of the facts of this case, we are of the considered opinion that the existence of M/s Ganesh Overseas cannot be doubted, as it has a PAN number and it has been dealing with the assessee in the earlier F.Ys 2002-03 and 2003-04. This fact has been recorded by the Ld.CIT(A) in para 4.2 of his order. The amounts are received through account payee cheques and the assessee has sold DEPB licenses to the above party. Under these circumstances the addition u/s 41(1) cannot be made to the amount of Rs.13,94,590/-. As regards the other amounts, confirmation letters have been filed by the assesee and the addition cannot 6
ITA 3720/Del/2013 AY 2005-06 Zanelini Leather Wear be made merely on the ground that a letter posted by the A.O. to the assessee, has been returned unserved. The PAN number of the proprietor M/s Ganesh Overseas, has been furnished by the assessee. The A.O. could have made enquiries on the existence of the party from the concerned A.O. In any event, the assessee has not explained the difference of Rs.5,73,139/-. The facts have not been brought out clearly by the assessee. The reconciliation statement of the difference in opening balances have not been furnished. The A.O. has also not properly brought out the facts on this issue. Hence we deem it fit to set aside the matter to the file of the Ld.A.O. for fresh adjudication in accordance with law.
Ground no.2 is on addition made u/s 41(1) of Rs.4,83,348/-. The Ld.CIT(A) sustained the addition on the ground that the assessee had not furnished any evidence to support the credit balances of Rs.4,38,348/-. Applying the propositions laid down by the Hon’ble Delhi High Court in CIT vs. Auto Kashyap India Pvt.Ltd. (supra), the disallowance has to be deleted, as there is no writing off of the liability by the creditors. In the result this ground of the assessee is allowed.
The next ground is on disallowance of Rs.60,000/- being salary paid to the wife of Shri Anil Khanna, partner of the firm. The disallowance was made u/s 40A(i)(a). The First Appellate Authority at page 19 para 1 held as follows. “The A.O. has stated that the salary paid to the General Manager was only Rs.1,20,000/-. Smt. Ballu Khanna was paid Rs.1,80,000/-, though she is only a graduate and this was her first employment. Hence, her qualifications and work experience to justify the payment of salary of Rs.1,80,000/- could not be brought on record by the appellant. Hence I am in agreement with the findings of the AO that the payment of salary is excessive having regard to the fair market value of the services for which the payment is made. Accordingly, the disallowance of Rs.60,000/- is upheld.” 7
ITA 3720/Del/2013 AY 2005-06 Zanelini Leather Wear 10.1. We see no reason to interfere with the same. Thus, this ground is dismissed.
In the result this appeal of the assessee is allowed in part.
The order is pronounced in the open court on 14th October, 2015.