Income Tax Appellate Tribunal - Cochin
Asstt. Cit, Central Circle 1, Ernakulam vs Popular Vehicles & Services Ltd. on 25 April, 2005
Equivalent citations: [2006]5SOT739(COCH)
ORDER
K.P.T. Thangal, V.P. Out of this set of three appeals, two are by the revenue and the last one is by the assessee. These appeals are directed against the orders of the Commissioner (Appeals)-I, Kochi, dated 1-3-2002. The relevant assessment years are 1993-94 and 1995-96. Since these appeals pertain to the same assessee, i.e., M/s. Popular Vehicles & Services Ltd., we have heard these appeals together and are being disposed of by this common order, for the sake of convenience.
2. ITA No. 194/Coch./2002-A.Y. 1993-94 : The first ground of objection by the revenue is directed against the order of the Commissioner (Appeals) in deleting the addition of Rs. 6,40,327, assessee under sundry creditors and other creditors, on the ground that the 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 assessee this was not liabilities that ceased to exist. It was submitted that the exercise envisaged involved contacting the creditors and interacting with the principals with regard to any pending warranty claims. Only after the receipt of clarifications and replies suitable adjustments would be made in the various accounts. It was further submitted that the exact liability was unknown to them and after enquiry the results will be intimated to the assessing officer for further action. However, the assessing officer rejected the claim of the assessee and added these amounts to the total income of the assessee. Aggrieved, the assessee approached the first appellate authority and submitted that the existence of this outstanding amount alone will not make this arnount taxable and the liabilities of the assessee cannot be treated as ceased to exist unless and until the creditors gven up their claims such liability do not exist and continue to exist. The universal treatment of such credit balances as income by the debtor would not constitute taxable income in the hands of such debtor. For the above proposition the assessee relied on the decision of the Hon'ble Supreme Court in the case of CIT v. Sugauli Sugar Works (P) Ltd. (1999) 236 ITR 518 (SC) and that of the Kerala High Court decision in the case of CIT v. V.T. Kuttappu & Sons (1974) 96 ITR 327 (Ker).
2.2 Coming to the amount of Rs. 5,54,897 it was submitted that the amount represents unadjusted advances received towards service charges and other items of work from customers in respect of their vehicles. The appropriation of the advances received towards charges of the assessee takes place only when the decision of the principals with regard to warranty claims of the customers are intimated to the assessee. In the case of Principals like Maruthi Udyog, there is always a delay and their responses with regard to the warranty claims are invariably received late. It was, therefore, submitted that in respect of other creditors also, subsequent to this assessment year did an exercise similar to that done in the case of sundry creditors and on that basis of such analysis a sum of'Rs. 2,44,276 has been identified as credit balances in respect of which the liabilities have ceased to exist. It was further submitted that when the assessee itself is making an attempt to identify the amount in respect of which the liability 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 (P&H).
2.3 The Commissioner (Appeals) 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 was continuing with the assessee quite a number of years and there was no claims or claimants as far as these amounts are concerned and as such the assessing officer was rightly treated this as assessee's income. On the other hand, the learned authorised representative of' the assessee submitted that the assessee as and when ceased the liability intimated the revenue and offered it to tax or repaid the amount to the parties concerned. The assessee's authorised representative submitted that in fact some of these items are collected by the assessee under peculiar circumstances. For example, assessee's representative submitted that the assessee while giving delivery of a vehicle may first direct to deliver at Ernakulam or for that matter some other station. Subsequently, they will intimate the assessee that the vehicle/spare parts should be delivered in a different station. The amounts are some times collected expecting such contingency or otherwise the assessee's representative submitted that there may be some dispute with regard to the warranty whether a particular item falls within the area of warranty or not. The assessee gets reply from its principals like Maruthi Udyog or DCM very late and till such time even the assessee is not certain as to whether the liability ceased to exist or not and as and when it is done, the assessee repays the amount or the assessee offers it for taxation.
4. Considering the rival submissions, we find any reason to disturb the order of the first appellate authority. We have already noted that the assessee had made the repayment some times after getting the clarification from the supplier of the vehicles regarding warranty items or for expenditure and as such we find no reason to interfere with the findings of the Commissioner (Appeals) on this point. The appeal of the assessee on this point fails.
5. The next ground of objection by the revenue is directed against the order of the Commissioner (Appeals) in deleting the addition of Rs. 5 lakhs on account of understatement of gross profit. This addition was made by the assessing officer as he found on verification that the assessee was not maintaining proper stock register even in respect of major items. There was a fall in profit margin compared to the last year. There was also inflation on purchases and suppression in closing stock. This addition was made by the assessing officer observing as under :
"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 of closing stock totalling to Rs. 57,234 (Rs. 5,168 + 52,066) has been detected on scrutiny of the bills relating to March only. If the bills for the remaining periods are also scrutinised the discrepancies may be more. Considering all the circumstances, a sum of Rs. 5 lakhs is added on account of understatement of gross profit as-proposed in this office letter dated 18-3-1996."
Being aggrieved, the assessee carried the matter in appeal before the CIT (Appeals).
6. The learned first appellate authority after hearing the authorised representative of the assessee in detail, which has been dealt at pages 6, 7 and 8 of his order, sustained an addition of Rs. 57,234 and granted relief to the assessee to the tune of Rs. 4,42,766 on the following lines :
"I have considered the facts of the case and the submissions of the learned representative. The assessing officer has found the books of account not reliable on the ground that there was fall in gross profit when compared to the earlier year and the appellant was found to have suppressed closing stock valued at Rs. 56,066 and accounted the purchase of an item costing Rs. 6,168 which was actually received by the appellant in the subsequent month. The assessee's representative has pointed out and in my view correctly, that there has been only an increase in gross profit from 3.78 per cent of last year to 4.1 per cent for this year and the method of computation of gross profit by the assessing officer was wrong. At any rate, the percentage of gross profit or whether it has gone up or down are not very relevant in deciding the question of the reliability of the accounts as has been held by the Tribunal in the decision relied on by the appellant. This also seems to be the view of the Kerala High Court as reflected in its decision in the case of M. Durai Rai v. CIT, Ernakulam (......) 83 ITR 485 (Ker). Nowthe question is whether the omission noted by the assessing officer in accounting certain items of spares as closing stock can be held to be an adverse factor impeaching the credibility of the accounts maintained by the appellant. In this connection, it is to be noted that the omission found is in respect of non-accounting of certain items of spares. In respect of certain items, the appellant has straightaway admitted the omission whereas in respect of certain others, the appellant says that they could have been included 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 I per cent of the closing stock of spares and accessories and totally insignificant in comparison with the total value of stock of mbre than 2 crores and the turn over of more than 31 crores. No unaccounted purchases or sales have been pointed out by the assessing officer. In the above circumstances, to conclude that the entire accounts of the appellant are totally unreliable merely based on certain omissions in respect of closing stock is unwarranted. The decision of the Cochin Bench of the ITAT in the case of sister concern of the appellant, M/s. Popular Automobiles referred to above support the above view. Therefore, I would hold that the materials brought on record by the assessing officer, do not justify the rejection of books of account and the gross profit addition made at Rs. 5 lakhs. Hence this addition is deleted. But the fact is that the spares and accessories for the value of Rs. 52,066 are neither reflected in the sales or stock inventory. The omission could be on account of a genuine mistake in preparing stock inventory. But the stock credited in the P & L account is less to the extent of the above amount. Therefore, the sum of Rs. 52,066 will be added by the assessing officer to the income returned while giving effect to this order. Similar is the position with regard to Rs. 5,168 representing the purchase debited in account, but goods received in April. This item also needs to be added as closing stock. Thus a total addition of Rs. 57,234 is confirmed. Net relief to the appellant in respect of this ground will be Rs. 4,42,766."
Against the above relief granted to the assessee, the revenue is in appeal before the Tribunal.
7. The learned Departmental Representative strongly relied on the order of the assessing officer and reiterated the grounds of appeal, as his submissions. The learned authorised representative vehemently supported the order of the learned first appellate authority and reiterated the same submissions, as has been made before him.
8. Having heard rival submissions and on going through the orders of the assessing officer as well as the first appellate authority, we are of the considered view that the learned first appellate authority was fully justified in granting relief to the assessee. The Commissioner (Appeals) has dealt with the issue at length, as reproduced above, and only after taking into account the facts and circumstances of the case and the submissions of the learned authorised representative of the assessee reached the aforesaid conclusion. Therefore, we see no reason to interfere with his findings, on this point. Accordingly, we uphold the same.
9. ITA No. 195/Coch./2002-A.Y. 1995-96 : In this appeal, the revenue has taken the following effective grounds :
"The learned Commissioner (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 Income Tax Act. The learned Commissioner (Appeals) 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 Income Tax 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 allowed as trading loss for the year under consideration."
The assessing officer on examination of accounts found that the assessee has debited a sum of Rs. 7,71,360 as bad debts. Out of this sum, a sum of Rs. 6,74,761 represented debts due from old customers. Since no details in support of the claim was filed before the assessing officer, he added it to the total income of the assessee. Aggrieved by the above action of the assessing officer, the assessee approached the first appellate authority. It was contended that there was no reason to make this addition. Write off of bad debt is the basic requirement for claiming the deduction under section 36(1)(vii) of the Act. The assessee has complied with it. However, before the CIT (Appeals), the assessee claimed the same as a trading loss under section 37 and eligible for deduction instead of bad debts which is eligible for deduction under section 36. It was stated that the assessee keeps an account of 'customers' account'. In this account, the expenses incurred on behalf of various customers are debited and as and when payments are received, credits are made in the account. But due to various reasons, often on account of disputes as to who should bear the expenses, the accounts are outstanding. The total amount of such figure comes to Rs. 7,34,251.26 as against which the total credits amounted to Rs. 60,260 leaving a debit balance of Rs. 6,74,261.26 as on 31-3-1990. The assessee claimed it as a business loss and relied the decision of the Madras High Court in the case of CIT v. Inden Biselers (1990) 181 ITR 691 (Mad). The claim of the assessee was allowed by the learned CIT (Appeals) by observing as under :
"I have considered the submissions of the learned representative. The circumstances that lead to the write off of the sum of Rs. 6,74,262.26 has been already explained earlier. As per the clarification now offered by the appellant, the various debit balances constituting the amount written off represented expenses incurred on behalf of several customers. These amounts were therefore debited to the customers' account. However, these customers failed to reimburse the expenses for certain reasons even after lapse of so many years. In the circumstances, the appellant chose to write off the debit balance. In my view, the ratio of the Madras High Court decision relied on by the appellant is applicable in the facts of 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 Income Tax 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 in nature. Aggrieved the assessee carried the matter in appeal before the first appellate authority and contended that there is no enduring benefit and as such the findings of the assessing officer is incorrect. However, the learned first appellate authority upheld the findings of the assessing officer holding that the assessee need not make any contribution towards annual membership fees which may undergo periodic increases and the assessee is entitled to enjoy the benefits of the membership of the club on a long-term basis. Thus, he held that the assessee has gained an advantage of enduring nature and sustained the addition made by the assessing officer. Aggrieved, the assessee is in second appeal before the Tribunal.,
14. We have heard the parties to the dispute. The fact that the amount of Rs. 50,000 represented one time membership fee in a club is not disputed. Therefore, we agree with the conclusion of the learned first appellate authority and uphold the same.
15. In the result, the appeals of the revenue and the appeal of the assessee are dismissed.