TMI Blog2005 (4) TMI 532X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer has not established the fact that creditors have not given up their claim or the liability has ceased to exist by the operation of law at the time of assessment. 2.1 The facts leading to the dispute briefly are as under : The assessee is an Agent of Maruthi Vehicles, DCM Toyota, Birla-Yamaha Gen. Set, Bajaj Vehicles and Spares Accessories. While framing the assessment, the Assessing Officer noticed a list of sundry creditors totalling to Rs. 85,427 and other creditors totalling to Rs. 5,54,897 shown as outstanding for several years. It was further noticed that none of the sundry creditors or other creditors were paid subsequently. The sundry creditors represented the credits for expenses and other creditors represented deposits collected from customers to be adjusted against service charges depending upon whether such service charges are payable by the customer or such services are free depending upon acceptance of warranty claims by the principal. The Assessing Officer proposed to bring these amounts into tax. When questioned, the assessee stated that this amount was not offering under sundry creditors and other creditors as income, as according to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility ceased and in fact written back substantial amount, it was not correct on the part of the Assessing Officer to come to the conclusion that the entire amount shown in the sundry creditors and other creditors should be treated as assessee s income on the ground that these amounts were outstanding for a longer time. The assessee also relied on the decision in the case of CIT v. Punjab Tractors Co-op. Multipurpose Society Ltd. [1998] 234 ITR 105 (Punj. Har.). 2.3 The CIT(A) held that section 41(1) can be invoked only when it is established that the creditors have given up their claim or liability ceased to exist by the operation of law. He held merely showing that the amount is outstanding for a longer time, the liability ceased to exist on the assessee cannot be treated as a correct approach, which has been adopted by the Assessing Officer. He further noted that the assessee itself has offered the liabilities that ceased as income in the subsequent years as such he held that there was no reason in making this addition. Aggrieved by the above finding, the revenue is in appeal before the Tribunal. 3. The learned departmental representative submitted that this amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "On verification it is seen that the Gross profit for this year is only 7.07 per cent as against 8.62 per cent for the last year. Considering these facts it was proposed to add a sum of Rs. 5 lakhs on account of understatement of gross profit as per this office letter dated 18-3-1996. In the letter dated 25-3-1996, the assessee s representative has stated that the actual gross profit works out to 4.1 per cent as against the gross profit of 3.78 per cent for the last year and as such there is no reduction in gross profit. This is not correct. On verification it is seen that the assessee has worked out the gross profit without including the other income amounting to Rs. 1,10,23,525 and without considering the direct expenses. Various items included under other income are only commission, work charges, interest, warranty claims etc. received from the suppliers of goods and these are only trading receipts. On including the other income and after deducting the direct expenses the gross profit for this year works out 7.07 per cent only as against 8.62 per cent for the last year. As such there is reduction of gross profit. Further it is seen that inflation of purchases and suppression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the cash or credit sales but the appellant is not in a position to confirm as the concerned bills were destroyed. In respect of spares and accessories the appellant does not maintain any day-to-day stock register and it is virtually impracticable to do so considering the large number of spares involved. On the last day of the accounting year, an inventory is prepared on the basis of physical verification. During the year, the total turnover of the appellant was in excess of 31 crores and that of spares and accessories about 1.68 crores and the closing stock of spares and accessories alone came to about 68 lakhs. When physical inventory of such stock is taken on the last day of the year and the stock is constituted of hundreds of small items it is quite possible that some items could be omitted because of the human error. The total value of the items found to be not included as closing stock is less than 1 per cent of the closing stock of spares and accessories and totally insignificant in comparison with the total value of stock of more than 2 crores and the turnover of more than 31 crores. No unaccounted purchases or sales have been pointed out by the Assessing Officer. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this appeal, the revenue has taken the following effective grounds : "The learned Commissioner of Income-tax (Appeals) erred in deleting the addition of Rs. 6,74,261 being debts due from old customers as on 31-3-1990 by admitting the assessee s additional claim at the time of hearing that the amounts should have been allowed as trading loss under section 37 of the I.T. Act. The learned CIT(A) ought to have noticed that such a claim was not made by the assessee either at the time of assessment or even the grounds of appeal filed before the CIT (Appeals). By admitting the additional evidence without giving an opportunity to the Assessing Officer, the CIT (Appeals) has violated Rule 37A of the I.T. Rules. The learned CIT (Appeals) ought to have also noticed that the debits have taken place from 15-4-1989 to 31-3-1990, during the period relating to assessment year 1990-91 and hence in any case the assessee ought to have written off this amount if found as bad debt, latest by 31-3-1993. If it is a case of the assessee that it is a trading loss the same should have been claimed during the assessment year 1990-91. Hence CIT (Appeals) ought to have held that the claim cannot be allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case of the appellant. Therefore, I would hold that the appellant is entitled for deduction of the amount of Rs. 6,74,261 as trading loss under section 37 of the I.T. Act." 10. Contending parties reiterated their respective stands. 11. Considering rival submissions, we are of the view that the order of the CIT (Appeals) is to be confirmed. This amount remained as debit balance as on 31-3-1990 due to the disputes with the clients of the assessee for some reason or other. This is a business loss. The decision relied upon by the learned first appellate authority supports the case of the assessee. Order accordingly. 12. ITA No. 93/Coch./2002 - A.Y. 1995-96 : This appeal is filed by the assessee. The only effective ground raised by the assessee is directed against the order of the CIT(Appeals) in sustaining the disallowance of Rs. 50,000 towards club membership fee since the expenditure was capital in nature. 13. The assessee claimed the amount of Rs. 50,000 as deduction under section 37 of the Act, i.e. , revenue expenditure. The Assessing Officer found that this is a one time payment for membership in a club and as such he was of the view that this is capital ..... X X X X Extracts X X X X X X X X Extracts X X X X
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