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TMI Blog2020 (12) TMI 598X X X X Extracts X X X X X X X X Extracts X X X X ..... ised in these grounds, the appellant stated that Ld. Assessing Officer has not done justice in assuming that no liability in the form of Sundry Creditors to the tune of Rs. 3,64,11,095/- as shown by the assessee in the books of account and in the audited Balance Sheet exist and erred in law by adding back the same to the total income of the assessee u/s 41(1) of the Act without rejecting the books of accounts. [6.3] Appellant has stated that on 02.12.2016, the A.R. of the assessee was asked to furnish the details w.r.t. the sundry creditors along with separate copies of ledger account in the books of the assessee, on 06.12.2016, i.e. after three days only. As the business firm of the assessee is situated at Delhi and Ghaziabad and there was short gap in time allowed, Ld. A.O. had verbally suggested filing the required details for seven creditors for test check. Accordingly, the required seven party's confirmation of ledger account with their postal address and PAN were filed on 06.12.2016. Most of the transactions were through account payee cheques and supported by purchase invoices. The fact was examined by the Ld. A.O. during hearing of the case. Ld. A.O. has mentioned in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of section 41 (1), the facts clearly show that the appellant did not write back the sundry creditors to its profit and loss account. In Gulf & Minerals Vs ITO (04.05.2018) ITA No.57/RAN/16 ITAT Ranchi referring the various judgments has concluded that without rejecting the purchases, the sundry creditors could not be treated as income of the assessee. Copy of relevant order of ITAT is filed herewith. In CIT v. Vardhman Overseas Ltd. (2012) 343 ITR 408 (Del), the Delhi High Court, referring to its judgment in the case of Jay Engineering Works Ltd. v. CIT (2009) 311 ITR 299 (Del) and applying the ratio laid down the case of CIT v. T. V. SundaramIyengar & Sons Ltd. (1996) 222 ITR 344 (SC) under section 28 of the Income Tax Act, considered the applicability of clause (a) of sub-section (1) of section 41 as to what would constitute remissions or cessation of trading liability. The Hon'ble Court noted that in the reported case, the assessee has not unilaterally written back the accounts of the sundry creditors in its profit and loss account. Therefore, the High Court answered the substantial question of law in the negative and in favour of the assessee. The facts of the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there is no dearth of supporting evidence on record except in the case of M/S AUTO CARS (INDIA), New Delhi having outstanding balance of Rs. 2,00,000/-, M/S AUTO CARS (INDIA) vide letter dated 13-12-16 has replied that they have not dealt with any person with the name "Mr. Sumit Ramsisaria, Purulia Road, Kantatolia, Ranchi, (PAN AGSPR 9835J) for the F.Y 2013-14". The business transactions was with M/S Nabco Batteries, Delhi and not with Mr. Sumit Ramsisaria, The PAN of the proprietor of the firm quoted in the notice "AGSPR 9835 J" was also not correct. Correct PAN is AGSPR 9853J. Due to these two errors of the notice issued u/s. 133(6) of the Act, M/s Auto Cars (India) was unable to locate the debtors account in their books of account and accordingly informed to A.O that they have not dealt with any person with the name "Mr. Sumit Ramsisaria, Ranchi". c) The AO has stated that it shall be reasonable, justifiable and in the interest of revenue to assume that no such liability existed in the form of sundry creditors to the tune of Rs. 3,64,11,095/- as shown by the assessee in its books of accounts and the same amount is added back to the total income of the assessee u/s 41(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the following: a. Doubt of the creditors and the genuity of creditors b. Satisfaction of AO regarding the genuineness and the source of sundry creditors c. Treating the trading liability as income of assessee from undisclosed sources Although the above are not envisaged in the deeming provisions of section 41(1) for the above issues which is not legally tenable. Section 41 (1) is a deeming section and deeming provision is a statutory fiction; as a rule it implicitly admits that a thing is not what it is deemed to be but decrees that for some particular purpose it shall be taken as if it were that thing. As per the statute, the provisions of section 41(1) is a deeming provision and should be interpreted strictly. There is no document available with the AO to establish that the trading liability has ceased/remitted and the AO could not have simply doubted and suspected the sundry creditors and added the same as income under this section. A deeming provision or a legal fiction as commonly called is one whose mandate does not exist but for such provision. Because of such provision alone, the given imaginary state of affairs is taken as reality despite it being at variance w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e liability has either ceased or remitted especially when the appellant has stated that the liabilities were outstanding as the Balance Sheet date. In the case under consideration, there is no documentary evidence brought on record by the AO to establish that the liability in the name of any of the person appearing under the head sundry creditors, have either ceased or remitted except in the case of M/s Auto Car. Moreover, during the appellate proceedings, the appellant furnished all the confirmations for the sundry creditors, which were also examined by the AO in the remand proceedings and found to be in order. Therefore, this also goes to establish that the liabilities very much existed as on the date of the Balance Sheet. Therefore, the provisions of section 41(1) are not attracted in the case under consideration. (iii) The AR stated that the appellant has incurred expenses on account of purchase of materials of Rs. 4,10,78,735/- and on account of business expenses of Rs. 26,98,782/-. Thereafter, the AR stated that, the AO has accepted the claim on account of purchase of material, business expenses etc. and rightly allowed the claim of these expenses. Having accepted the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort as well as net profit declared by the appellant and the Books of Accounts. Under these circumstances, the AO could not have presumed Suo moto that the sundry creditors are not genuine. When the materials purchased and Business expenses have been accepted by the AO, the AO could not have doubted the genuineness of the sundry creditors. As per the matching concept of income, there are expenses for earning any income and the assessing officer has rightly allowed the claim of expenses on account of labour charges and materials purchases claimed in the profit and loss account. However, AO has added the liability on account of such item which are payable as on 31.03.2014. In this case, the AO has accepted the gross receipt and expenditure incurred thereon and doubted the genuineness of the creditors without any basis whatsoever. (vi) The details of Creditors for the corresponding years are tabulated as under: Financial year Sundry creditors (1) (2) 2011-2012 5,16,90,154 2012-2013 4,75,36,565 2013-2014 3,64,11,096 As can be seen from the above table, the quantum of sundry creditors is reducing year to year and there is no unusual trend during the FY relevant to the AY un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion along with the requisite documentary evidence which satisfactorily explains the contention of the appellant. Further, the AR .has also relied upon various judicial decisions in support of the contention of the appellant. (xi) As stated in para 2.1 above as per page no. 3 of the assessment order, the appellant had already furnished the confirmation of all major parties totalling to Rs. 3,25,73,002/-. The confirmation with respect to M/s Balaji Automobile, M/s Battery Directory and Year Book and M/s Decent Link totalling to Rs. 1,19,406/- were not furnished. These were also furnished during the appellate proceedings which were also verified by the AO in the remand proceedings. (xii) During the appellate proceedings, the appellant had filed the confirmation for all the parties and thereafter, remand report was sought from the AO. The remand report is scanned and also printed above. In this regard, the AO in the remand report dated 30.03.2018 in para 2(viii) has stated as under: "During the assessment proceedings ledger account of creditors were certified to be not furnished. However, details furnished before the Ld. CIT(A) has been verified and it is found that ledger ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is held that the liability outstanding of Rs. 2,00,000/- in the name of M/s Auto Car and the part liability of Rs. 12,931/- in the name of M/s Balaji Batteries Storage have ceased / remitted. Therefore, addition to the extent of Rs. 2,12,931/- i hereby confirmed u/s 41(1) of the I.T. Act and remaining addition of Rs. 3,61,98,164/- is hereby deleted." 3. We have given our thoughtful consideration to rival pleadings. Learned CIT-DR vehemently contended during the course of hearing that the Assessing Officer had rightly made the impugned addition on account of assessee's failure in proving the sundry creditors' liability by necessary supportive evidence. Learned authorized representative representing assessee has strongly supported the CIT(A)'s above extracted detailed discussion (supra) deleting the impugned additions. 4. We observe in this backdrop of facts that there is no dispute about the assessee having recorded the sundry creditors liability in question as pertaining to material purchases in the regular course of business. There is no denial from the department side qua the clinching aspect the corresponding material purchases have already been accepted under the head re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sundry creditors reflecting in the books of accounts cannot be disallowed and added to the total income of the assessee. In the instant case, the balances of many of the sundry creditors were outstanding coming from earlier years. Payments were made to some or the creditors during the year. The said payments have been accepted by the AO which means genuinity of the payments to these creditors as well as the genuinity thereof till last year have not disputed by the AO. In the instant case the firstly the AO has not specifically invoked the provisions of section 41 (1). Further in any case no such addition can be made u/s 41. In this connection we are putting our reliance in the judgment in the case of DSA Engineers. In the case of DSA Engineers v. ITO 30 SOT 31 (Mum-Trib), the AO found that there were creditor balances which in many cases were 3 years or more than 3 years old. As per the assessee the balances represented amounts due to various parties and the liability was subsisting. The Tribunal held that in the absence of cessation of liabilities and on the mere fact that the amounts were outstanding for more than 3 years, the provisions of section 41 (1) could not be applie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 41(1). The said judgment of the Tribunal was confirmed by Delhi High Court on 23-12-2011 In the case of National Insulated Cable Co. v. ITO ITA No. 421/Del/2011 dt. 8-7-2011 (Del 'E'-Trib) it was held that the fact that the creditors were old creditors brought forward from earlier years has not been disputed by the department. These creditors have not been introduced during the year under consideration. There is no evidence or material on record to establish that the assessee liability to pay the amount to the creditors have been ceased during the year under consideration. Further, the amount payable to these creditors can be added to the assessee's total income in the year in which the assessee's liability to pay the amount ceased or extinguished and not in the year under consideration where assessee has admittedly shown the liability in the balance sheet. It has been held in the case of G P International Ltd. (P & H) reported in 325 ITR page 25 that provisions of section 41 cannot be applied if the assessee is still showing the liability. It has been held in the case of Bhavesh Prints reported in 142 TTJ page 128 that simply because some of the creditors were not trac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year and the same could not, therefore, be treated as the income of assessee earned during the relevant previous year. In Nuchem Ltd. v. Dy. CIT (2004) 87 TTJ (Del-Trib) 166, it was held that revenue had failed to prove that the amounts were credited to the books of account of the assessee in the year under consideration. These amounts were brought forward from earlier years and it is settled law that the addition under section 68 could be made only if the amount was credited in the accounts of the assessee in the relevant financial year. In Shri Vardhman Overseas Ltd. v. Asstt. CIT (Del-Trib): 24 SOT 393, it was held that no new amount had been credited by assessee in its account during the year under consideration. Therefore, applicability of section 68 of the Act is also ruled out and addition could not be made under section 68 of the Act. In view of above we find no reason to interfere in the order of ld. CIT(A). Hence this ground of Revenue is dismissed." We accordingly find no reason to accept Revenue's arguments seeking to revive the impugned sec. 41(1) addition. Its appeal ITA No.222/Ran/2019 fails therefore. 6. Learned counsel next invited our attention to assessee's c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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