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Shanti Lal Bhandari Versus Income Tax Officer, Ward-6 (1) , Jaipur

G.P. determination - rejection of books of account - Held that:- The valuation of opening stock, closing stock is done on estimate by the assessee, which cannot be subjected to verification. In absence of production register, input output ratio can also not be worked out. The Assessing Officer has also noted that the assessee has not produced job work like printing, dyeing, washing, embroidery etc. The details of wastage were also not shown and was also not maintained and in view of these defect .....

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cts noted in the books of account, hold that estimating lump sum addition of ₹ 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 .....

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y 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. Deduction claimed U/s 36(1)(iii) in respect of interest on its borrowings could not be declined. The Hon’ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd.(2009 (1) TMI 4 - BOMBAY HIGH C .....

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veyance, therefore, the personal use is not established. In view thereof, the ad hoc addition @ 10% sustain by the ld. CIT(A) is hereby deleted and this ground of appeal is allowed. - ITA No. 73/JP/2016 - Dated:- 17-4-2017 - Shri Bhagchand, Accountant Member Assessee by : Shri B.P. Moondra (CA) Revenue by : Shri R.A. Verma (Addl.CIT) ORDER Per : Bhagchand, A.M. This is an appeal filed by the assessee emanates the order dated 26/11/2015 passed by the ld. CIT(A)-2, Jaipur for the A.Y. 2012-13, whe .....

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rcumstances of the case, the Ld. CIT (A) has erred by applying G.P. Rate @ 12% instead of G.P. rate 10.39% which was better than past history of the assessee. 4. Ld. CIT Appeal errors in confirming disallowance of interest of ₹ 36720/-which is bad in Law & facts. 5. Ld. CIT Appeal errors in confirming by restricted disallowance @ 10% on depreciation of ₹ 98480/-as the depreciation is statutory allowance and therefore bad in law & facts. 2. The assessee is engaged in the busin .....

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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 tha .....

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ods separately. Similar is the case of closing stock. 2. The assessee has not maintained day to day stock register of the raw material, consumption of raw material and production of garments. In the absence of the day to day stock register, it is not possible to verify the consumption of raw material shown by the assessee. 3. In absence of the stock register, the assessee does not have inventory of the opening stock and closing stock of raw material, finished goods and of work in progress. Hence .....

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so not produced the register or job card for the goods issued for job work like printing, dyeing, washing, embroidery etc. hence the veracity of the job work expenses cannot be verified. 6. The attendance register of the workers in the workshop had also not been produced, in absence of which the actual wages payment could not be verified. 7. For the expenses debited in the profit and loss account, under the head conveyance, office & general expenses, printing & stationery, repairs and ma .....

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stock had been submitted and that is as certified by the proprietor. In view of the defects as pointed out by the Assessing Officer, rejection of books of accounts u/s 145(3) is upheld. 4.3.2 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 yea .....

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rd 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. The assessee was not maintaining day to day stock register, consumption of raw material register and the production o .....

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A) had sustained the rejection of books of account. Therefore, I agree with the findings of the ld. CIT(A) in respect of rejection of books of account. As far as estimation of the gross profit rate is concerned, the ld. CIT(A) has reduced it from 14% to 12% and the gross turnover of the assessee was accepted. It is pertinent to note that the comparative G.P. for the year under consideration was better than the earlier year. However, to cover the leakage of revenue on account of various defects n .....

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has submitted as under:- a) Your honour amount payable in respect of above creditors, the assessee purchased Raw materials from the these creditors during preceding previous years on credit. Due to quality variations and later on severe cancer to the assessee the assessee could not paid to these creditors and therefore are appearing as outstanding due to the creditors in the assessee s successive Balance sheets. Ld. AO has verified and approved the credit appearing in assessee's book. The as .....

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t 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 outs .....

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er has been served. Your honour the Ld. AO had not given any explanation that how the Ld. AO thought that the address of 15 might be complete. The reply of 4 sundry creditors were given to the AR of the assessee. The assessee furnished the reply appearing at page no. 20 of the AO order. Your honour can see that in the case of first creditor Janki Lal Radheyshyam kindly see at the page no. 16 of the AO order. Your honour the CA of the Janki Lal Radheyshyam stated that there is no dealing for Ay 2 .....

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anki Lal Radheyshyam u/s 131/133(6) along with books so that so that proper checking may be possible and cross verification may be possible. Kindly note that in sub clause (c) of the same letter the assessee request that the Ld. AO issued Notice u/s 133(6) and generally parties is in fear with income tax notice and there is every chance that the party may refuse to avoid to appear before income Tax office. So the assessee requested to the Ld. AO to call M/s Jankilal Radheyshyam u/s 131 or 133(6 .....

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(The addition is made for 37 creditors kindly see the Ld. AO order page no. 7 and 8 wherein the table is appearing.) and out of them could got the confirmation from 4 creditors. Inspite of request to call all 15 sundry creditors u/s 131/133(6) along with books so that so that proper checking may be possible and cross verification may be possible. The assessee furnished complete name and addresses of all 127 creditors. Also there is genuine reason with the assessee regarding requesting that the a .....

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ar 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 a .....

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. Further in various judicial pronouncements, it has been repeatedly held that unless it is proved that an allowance or deduction has been made in the assessment in any previous year, it is not open to the Revenue to invoke section 41(1). Reliance is placed on the decision in case of Tirunelveli Motor Bus Service Co. Pvt. Ltd. vs. CIT (1970) 78 ITR 55 (SC). Further, in steel and General Mills Co. Ltd vs. CIT (1974) 96 ITR 438 (Delhi) it has been held that burden lies upon the department to prove .....

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81/- to the profit and loss account of the company during the accounting period ended on 31st March, 1982 (assessment year 1982-83), and an amount of ₹ 38,975/- (assessment year 1983-84), But these amounts were not included in the total income of the assessee. Our case is entirely different. In the case of the assessee the Sundry creditors are appearing as liabilities and had not been transferred to Profit & Loss A/c. f) Further reliance was placed on the decision of the Honorable Bomb .....

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ides, 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 accou .....

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rove 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 Income Tax v/s General Industrial Society Ltd (207 ITR, 169(col)) where it has been held that assessee s intention to disown obligation to pay such liabilities thus being clear from these facts, amount are taxable u/s 4l(1). In the case the amount has been written back by the company and yet not offered to taxation, here in case of assessee t .....

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tands in books, and that lapse of time bars the remedy but does not efface the liability, is an abstract and theoretical one which does not ground itself in reality. The interpretation of law, particularly fiscal and commercial legislation, is to be based on pragmatic realities. It would be indeed paradoxical, if not illogical, to allow the assessee-debtor to, while avoiding a liability on the basis that it is no longer enforceable in law, yet claim his status as a debtor, so that he was indeed .....

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ase laws referred by the ld. Assessing Officer and ld CIT(A) are distinguishable fully as in all these cases. Your honour, principle laid down in case of TV Sundaram Iyengar & Sons Ltd. is not applicable in the case of the assessee. k) Your honour, the provisions of Section 41(1)(a) which states as under: Sec. 41 Profits chargeable to tax: (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the asse .....

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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 .....

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77; 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 Supreme Court and Hon'ble Jurisdictional High Court held that burden is on the revenue to prove that the assessee has taken deduction in e .....

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upon by the assessee are squarely applicable particular Hon'ble Supreme Court decision in the case of Chief CIT Vs. Kesaria Tea Co. Ltd. (supra) and the case laws referred by the ld CIT(A) are squarely distinguishable on the ground that there was a written off either by the assessee or bilaterally. And therefore the Hon'ble ITAT held that after careful consideration of all the facts and circumstances of the case and written submissions made by the ld AR on Section 41(1) of the Act, the .....

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ility by way of remission or cessation thereof, the value of benefit accruing to him shall be deemed to be profits and gains 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 .....

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s 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 purchase of raw material from these creditors. The genuineness of creditors is not in doubt. Now the onus to establish that provisions of Section 41(1) of the Act are applicable and con .....

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ssessee at any time refused to pay the amount back to the creditors and not willing to make the payments. It is also clear from the facts that the assessee had never received any communication regarding writing off these balances by the creditors. In the books of account there were 127 sundry creditors, however, Assessing Officer sent letters to only 15 persons. Eight letters were not served by the postal authorities. No reply was received in three cases. Only four creditors replied. It is perti .....

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hes in the case of Shree Padmavati Marbles Pvt. Ltd. Vs ITO (supra) wherein the ITAT has held that unless it is proved that an allowance or deduction has been made in the assessment in any previous year, it is not open to the revenue to invoke Section 41(1) of the Act. In this case, the Assessing Officer has failed to establish the fact that the amount outstanding against creditors have been claimed by the assessee as deduction or allowances. The ld AR also distinguished the facts of CIT Vs. M/s .....

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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 b .....

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t the assessee has taken deduction in earlier year and there is a write-off bilateral. In assessee s case, even unilateral written off has not been claimed by the company. The other creditors were advance received from the customer to the tune of ₹ 9,41,354/-, which was paid of in later years. The AR of the assessee filed relevant evidences for repayment in subsequent year, which proved that the assessee s liability was in existence. The revenue has not brought on record any adversary evid .....

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t liability is not inexistence. The case laws relied upon by the assessee are squarely applicable particular Hon'ble Supreme Court decision in the case of Chief CIT Vs. Kesaria Tea Co. Ltd. (supra). The case laws referred by the ld CIT(A) are squarely distinguishable on the ground that there was a written off either by the assessee or bilaterally. After careful consideration of all the facts and circumstances of the case and written submissions made by the ld AR on Section 41(1) of the Act, .....

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very old relating to the year 2003, there has been no correspondence for recovery and also there has been no response from M/s Kay Jay Marbles Ceramics u/s 133(6) of the Act. All these facts lead the Assessing officer to treat the amount as taxable under section 41(1)(a) of the Act. There 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. Furt .....

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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, the addition .....

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s 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. Considering all these aspects, I direct to sustain the addition only in respect of four creditors, t .....

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fficer has disallowed ₹ 1,50,216/- and added in the income of the assessee on the ground that the assessee had been paying interest and on the other hand had forwarded interest free loans, the interest on ₹ 29,61,000/- @ 12% being more than the interest paid. 10. The ld. CIT(A) has restricted the addition of ₹ 36,720/- instead of ₹ 1,50,216/- by holding as under:- 5.3 I have perused the facts of the case, the assessment order and the submissions of the appellant. The Asse .....

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n 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 p .....

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erusal of the records, it transpires that the 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. Deduction claimed U/s 36(1)(iii) in respect of interest on its borrowings could not be declined. The Hon ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) has held that the presumption would aris .....

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e occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. [1982] 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argume .....

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