TMI Blog2017 (5) TMI 902X X X X Extracts X X X X X X X X Extracts X X X X ..... 80,000/- shall be reasonable and sufficient. Addition u/s 41(1) - cessation of liability in form of sundry creditors - Held that:- The assessee has not written of the amount in its books of account. The assessee has also not denied the payment of these amounts to these creditors. The genuineness of these creditors were not in doubt. Notices issued U/s 133(6) of the Act were not served on some creditors and some of them did not respond. Only four person responded negatively. The assessee requested the Assessing Officer to issue the summons U/s 131 of the Act, which he has not done. Heavy onus is on the revenue to establish that the liability shown in the books of account has been extinguished. The sickness of the assessee as well as dispute regarding the quality variation is also not in doubt. Therefore, direct to delete the balance of the amount as the revenue has failed to establish the liability in respect of these creditors. Disallowance of interest - Held that:- Assessee is having sufficient capital balance of ₹ 57,63,821.14/- to give loan of ₹ 3,06,000/-. The assessee’s own non-interest bearing funds were far in excess of the interest free advances given. Ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss profit of ₹ 1374755/- on the turnover of ₹ 13230025/- giving GP rate of 10.39%. The gross profit comparatively better than immediate past two years wherein the gross profit was10.36% and 10.34% for the assessment year 2011-12 and 2010-11 respectively. The Assessing Officer noticed certain discrepancies and invoked the provisions of Section 145(3) of the Income Tax Act, 1961 (hereinafter referred as the Act). The Assessing Officer rejected the books of account and estimated the turnover at ₹ 13500000/- by applying GP rate @ 14%. 3. Firstly, I am deciding ground Nos. 2 and 3 of the appeal wherein books of account of the assessee has been rejected and the gross profit rate was sustained @ 12% instead of 10.39% declared by the assessee. 4. The ld. CIT(A) upheld the rejection of books of account. However, he found that the gross profit @ 12% will be reasonable at the turnover declared by the assessee at ₹ 1,32,30,025/-. The relevant portion of the order of the ld. CIT(A) is reproduced hereunder:- 4.3.1 I have perused the facts of the case, the assessment order and the submissions of the appellant. The Assessing Officer observed the following defect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.2 As regards estimation of gross profit the Assessing Officer has pointed out that the same is better than the previous year and estimated the same at 14% on a turnover of ₹ 1,35,00,000/- as against a turnover of ₹ 13,20,00,025/- returned by the assessee. While it is true that in the relevant year, the gross profit is better than the last two years but these years were not subjected to scrutiny of accounts. Further, the Assessing Officer has clearly found defects in the books and hence books results cannot be accepted. However, the enhancement of total turnover without any specific reason for doing so, is not accepted. It will be reasonable to takes the GP at 12% on the amount of turnover as returned by the assessee (Rs. 13,20,00,25) The ground of appeal is partly allowed. 5. I have heard both the sides on the issue of rejection of books of account for invoking the provisions of Section 145(3) of the Act and also on estimating the gross profit rate @ 12% sustained by the ld. CIT(A). It is noted that the assessee has not shown the opening stock of raw material work in progress and finished goods separately and similar facts were with regard to the closing stock. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount to profit loss account nor has the assessee at any time refused to the creditors that it is not willing to make payment. In the ongoing disputes, the creditor company has never agreed nor even hinted to the assessee about the waiver of the outstanding Amount. In such circumstances the undisputed facts that emerge are assessee purchased goods in previous financial years from the creditor's. The assessee has not made any payment to the creditor and the amount is outstanding till date due to disputes. The assessee has not received any communication regarding any write off by the creditor company nor has received any credit note regarding the same. As few creditors have in its books of accounts removed the outstanding towards the assessee, it is clearly a unilateral act of the creditor which might have been in some previous year (clearly not in F.Y. 2012-13). b) Out of 127 sundry creditors letters for confirmations of the sundry credits were sent in 15 cases where it was thought by the Ld. AO that the address might be complete and it was found that 8 letters were returned by postal authorities unserved In 4 cases the negative reply was received and in 3 cases no reply h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed complete name and addresses of all 127 creditors. Also there is genuine reason with the assessee regarding requesting that the assessee is suffering from severe cancer and is now not in position to pay much time to the business. Accountant of the assessee is also on part sick as he is more than 60 years old. Your honour after giving name and addresses the onus shifted to the revenue and the revenue failed to prove that the there is a cessation of trade liabilities. c) Derivation: - Your honour, the creditor has no dealing with the appellant company. The opening balance as well as closing balance were NIL for Financial Year 01.04.2011 to 31.03.2012. As the opening balance in creditor Books as on 01.04.2011 was nil it implies that there has been no remission or cessation of liability in Previous Year 2011-12, it can be reasonably inferred that the creditors might have suo-motto credited the account of the assessee (from it s own sources) and/or might have squared off/written off the balance due by the assessee in previous year itself. In such suo- motto action of creditor, section 41(1) does not apply as for no amounts remission has been obtain by the appellants in F.Y. 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving heard the submissions of both the sides, we are of the considered view that in the absence of any cogent evidence to believe that the liabilities in question have actually ceased to exist, it was unjustifiable on the part of the AO to assume on his own that the same have become barred by limitation being appearing in the books of accounts for more than three years. Rather, in the case of CIT vs. Silver Cotton Mills Company 125 Taxman 741(Guj.), the Hon'ble Court has held that the liabilities if appearing in the books of accounts should subsist although it might not be enforceable on account of some provisions of law of limitation unless and until it was legally held so. We therefore hold that unpaid liability cannot be added in the total income of the assessee by invoking section 41(1) of IT Act merely because the liability remained unpaid for few years unless and until there is an evidence to show that either by operation of law or the creditor had remitted the debt. Considering the facts of the case, we hereby approve the view taken by the ld.CIT(A) and dismiss this ground of the Revenue. g) The Ld. AO further placed reliance on the decision of Commissioner of Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst-mentioned person) and subsequently during any previous year (a) the first mentioned person has obtained, whether in cash or any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. l) Your honour the AR relied the decision held in Brothers Pharma P Ltd., Jaipur vs Assessee on 21 October, 2015 IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR reported in 54 TW 163 wherein it was held that it is undisputed fact that the assessee had not written off any liability on account of trade creditor during the year under consideration. Further the assessee had furnished required details before the Assessing Officer as well as ld CIT(A). In one of the case the inquiry letter U/s 133(6) has been returned ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of business and chargeable to tax as income of that previous year. What is therefore relevant is to determine the year of obtaining the benefit as the benefit can be brought to tax in that year itself and not in any other year. In the instant case, four sundry creditors has confirmed that there are no transactions during the previous year under consideration as well as the fact that there is no opening balance in the account of the creditors maintained in their books of accounts for the year under consideration. It is therefore clear that the unilateral action on the part of these creditors in remitting the subject amount has not happened in the previous year under consideration. In light of the same, even where the assessee has obtained the benefit by way of remission of its trade liability, the same cannot be brought to tax during the year under consideration as the event of remission has not happened during the year. Hence, the addition of ₹ 36,76,180/- under section 41(1)(a) is bad in law and facts. 7. On the other hand, the ld. Sr.DR has relied on the orders of the authorities below. 8. I have heard both the sides on this issue. The revenue has not doubted the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Brothers Pharma (P) Ltd. Vs ITO in ITA No. 635/JP/2012 wherein the ITAT has held as under:- 24. We have heard the rival contentions of both the parties and perused the material available on the record. It is undisputed fact that the assessee had not written off any liability on account of loan creditor, trade creditor or security creditor during the year under consideration. The assessee had furnished required details before the Assessing Officer as well as ld CIT(A). In one of the case the inquiry letter U/s 133(6) has been returned back to the Assessing Officer. It is fact that these amounts were very old, it is possible that the creditor has closed or shifted the business from the given address. The assessee had produced copy of balance sheet and it is claimed by the assessee that to the tune of ₹ 18,05,000/- are unsecured loan from earlier years, which has not been claimed as deduction or allowances in earlier year by the assessee. The lower authorities also had not able to establish their case that the assessee had deducted or allowed these advances as deduction in earlier years. As the case laws referred by the assessee including Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is however no evidence to support the proposition that there is a unilateral action on the part of the creditor in terms of remission of liability unlike the case of M/s Tirupati Balaji Minerals Pvt. ltd. Further, the assessee continues to show the liability in its books of accounts and has also not done any unilateral write off in its books of accounts. In such situation, merely because the amount is outstanding since 2003, it cannot be inferred that the liability has ceased to exist and the assessee has obtained any benefit by way of remission or cessation of its trading liability. There has to be some positive evidence or action on the part of the assessee or the creditor to support the theory of remission or cessation which is apparently not present in the instant case. Having said that, the necessity is not felt to examine the contention of the assessee that since the purchases are included in the closing stock, there has been no deduction that has been claimed by the appellant. We leave this contention open. Hence, in light of above, the position adopted by the Revenue is not agreed that it is case which falls within the four corners of section 41(1)(a) of the Act. Hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was paying interest at 12% on loans it had taken. A disallowance of excess interest paid was made of an amount of ₹ 1,50,216/- The Authorized Representative pointed out that a loan of ₹ 26,65,000/- related to Shantilal Bhandari (loan accounts). The AR stated that the assessee is maintaining two accounts of capital one is capital account as shown in liabilities in the balance sheet and another account under the head Shantilal Bhandari Loan account of ₹ 26,65,000/-. Further, pleaded that since both account belong to the assessee, interest cannot be charged to itself. This issue was forwarded to the Assessing Officer for verification and his comments. In the remand report, the Assessing Officer has stated that the purpose of advance and business expediency were not clear, hence the disallowance of interest was justified. However, as per the facts above, since interest on assessee s own account cannot be charged and disallowed on notional basis, this amount is excluded from the total amount on which the interest payment is to be disallowed. Thus, addition under this head shall come to ₹ 36,720/-. 11. The ld AR of the assessee has reiterated the arguments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, would be that if there are funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. Considering all these facts and circumstances of the case, I direct the Assessing Officer to delete the addition. This ground of the assessee s appeal is allowed. 13. The 5th ground of the appeal is against confirming the restricted disallowance @ 10% on depreciation of ₹ 98,480/-. The Assessing Officer has disallowed 20% of the expenses in respect of conveyance and depreciation. The ld CIT(A) has restricted the disallowance @ 10% by holding that the Assessing Officer has made a disallowance of 20% on the expenditure and depreciation for no production of complete vouchers and element of personal use. The addition made by the Assessing Officer is found to be excessive and restricted to 10%. 14. After considering both the sides on this issue, I hold that once the books of account have been rejected then no such ad hoc disallowance is called for. Further the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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