Income Tax Appellate Tribunal - Delhi
Haryana Sanitary Wares (P) Ltd, vs Assessee on 23 May, 2008
We/0': IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH 'C': NEW DELHI BEFORE SHRI D.R. SINGH, JM AND SHRI R.C. SHARMA, AM I.T.A. No.2028 / Del of 2008 Assessment Year: 2002-03 C-'1' 3'72, M/ s Haryana Sanitary Ware Inds. P. Ltd., Income-tax Officer, 0,?" D-10, Kamla Nagar, New Delhi. Vs Ward 12(3), New Delhi. AND M _ WVWJ "/0 I.'I'.A. No.2117/Del of 2008 My V?'*"?L Assessment Year: 2002-03 iyvn Income-tax Officer, M] s Haryana Sanitary Ware Inds. % Ward 1213), New Delhi. Vs P. Ltd., D-10, Kamla Nagar, ¢,\ New Delhi. Appellant Respondent Assessee by: Shri Y.K. Joneja Department by: Shri Surender Prasad ORDER PER D.R. SINGH, JM
The appeal filed by the assessee and the cross appeal filed by the revenue arising from the order of CI'l'(A) passed in appeal No.4/05-06 dated 23.5.2008 were heard together and are being disposed off vide this common order for the sake of convenience.
2. In its appeal, the effective grounds taken by the assessee are stated as under: --
"1. The worthy CIT{A) has erred in law and on facts in sustaining the framing of assessment u/ s 143(3) which was made on the basis of non--service of Notice u/ s 143(2) within the time allowed. It is prayed that the assessment order should be set-a-side.
2. Without prejudice to the ground no. I, the worthy ClT(A) erred in law and on facts in sustaining the disallowance of Rs. 9,85, 157/- under the head lnterest paid to the bank and the same should be allowed."
3. In the cross appeal, the revenue has taken the following effective grounds:--
"1.0n the facts and in the circumstances of the case, the 1d. CIT(A) has erred in deleting the addition of Rs.2,27,463/-- made on account of GP rate as books of accounts, vouchers etc were not produced before the A0 in spite of several opportunities afforded to the assessee.
2. "On the facts and in the circumstances of the case, the 1d. CI'I'(A) has erred in deleting the addition of Rs.11,25,000/- made u/s 69A of the IT Act, as the source of repayment was never explained or reply produced before the A0. in spite of several opportunities afforded to the assessee.
3. "On the facts and in the circumstances of the case, the 1d. CI'I'{A] has erred in deleting the addition of Rs.2,72,917/- u/s 68 of the IT Act as creditworthiness and genuineness of the transaction was not proved before the A0 in spit of several opportunities afforded to the assessee.
4. On the facts and in the circumstances of the case, the 1d. CIT(A) has erred in accepting and relying upon the evidence which were not produced before the A0 in violation of Rule 46-191 of the l.T. Rules."
4. First, we shall deal with ground No.1 of the appeal of the assessee involving the issue whether the notice u/s 143(2) dated 29/30.10.03 issued against the assessee, served by affixture on 30.10.2003, was not a valid service and, therefore, the assessment framed by the A0 being bad in law is liable to be cancelled / quashed.
5. In brief, the facts relating to the issue are that a return of income was filed by the assessee on 28.10.02 declaring a loss of Rs.2,87,9'78/-. The notice u/s 143(2) was required to be served within a period of 12 months as per the provisions of law i.e. upto 31.10.03. The instant case was selected for scrutiny and the AO issued the notice dated 29/30.10.03 u/s 143(2) to the assessee, one by speed post on 30.10.03 and the copy thereof was served upon the assessee on 31.10.03 by affixture on one of the two addresses given by the assessee in its return of income. The notice sent by speed -post was returned on 31.10.03 with postal remarks 'no such person'. The notice issued through the process server by the A0 was served upon the assessee by affixture at the Karnla Nagar address in the presence of one tenant in the building as well as in the presence of the owner of the building. (the copy of notices, remark of postal authorities and the report of process server are placed at Paper Book Page Nos. 14 to 16). According to the A0, in response to the notice issued u/s 143(2), two counsels for the assessee appeared before him and after discussion, the A0 asked them to file the required details and documents but the same were not filed by them on behalf of the assessee, as mentioned by the A0 in the order. The A0 again asked the assessee to file the details from 24.11.03 upto 28.2.2005 either by issuing fresh notices to the assessee u/s 142(1) and 143(2) or verbally asking the counsels of the assessee when they appeared before him to seek adjournments. The order of A0 reveals that the case was listed before him 14 times but the assessee did not file the details and the documents desired by him, therefore, ultimately on the basis of material available on record, the AO framed the assessment.
6. On appeal the assessee contended before the CIT(A) that the A0 failed to serve the notice u/s 143(2) upon the assessee within the prescribed period of limitation i.e. on or before 31.3.2004, hence the assessment was vitiated for want of assumption of jurisdiction to pass an order u/s 143(3) and the assessment was, therefore, liable to be cancelled.
7. assessee held that the assessment framed by the AO u/s 143(3) was in accordance with law, after proper service of the notice u/s 143(2) upon the assessee, by adopting a valid procedure for service of the notice upon the assessee i.e. by affixture, while passing a The ClT(A) after considering the detailed submissions of the detailed order.
8. perused the records and examined the various case laws cited by We have considered the rival contentions of both the parties, both the parties on the issue under consideration before us.
9.:
In order to appreciate the arguments of both the parties we would first like to examine the relevant case law on this issue.
10. In CIT Vs. Shankarlal Ved Parkasa 300 ITR 243 (Delhi) their lordships while dealing with the issue of service of notice issued u/ s 143(2) have also observed in their order as under :-
"In the present context we are of the view that the observations of their Lordships are not relevant since we are concerned with a presumption of service under s. 27 of the General Clauses Act, failure to serve a notice under s. 143 {2} would not render the assessment as null and void but only irregular, as held by the Supreme Court in CIT vs. Jai Prakash Singh (1996) 132 CTR (SC) 262 :
(1996) 219 ITR 73'? (SC). Their Lordships had enunciated this principle without reference to the decision of the Bench of the Rajasthan High Court in CIT vs. Gyan Prakash Gupta (1986) 54 CTR [Raj] 69 : (1987) 165 [TR 501 (Raj) where it had been opined that an assessment order completed without service of notice under s. 143 (2) is not void ab initio and cannot be annulled."
11. In CIT Vs. Jaiparkash 219 [TR 737 SC their lordships while observing that "an omission to serve or any defect in the service of notices provided by procedural provisions does not efface or erase the liability to pay tax where such liability is created by distinct substantive provisions (charging sections). Any such omission or defect may render the order irregular -- depending upon the nature of the provision not complied with-- but certainly not void or illegal." Held that the Tribunal was correct in holding that non-service of notice under section 143(2) of the Income-tax Act, 1961, to nine out of the ten legal representatives of the deceased did not invalidate the assessment orders of the Incorne--tax Officer relating to the assessment years 1965-66, 1967-68 and that it was at best an irregularity for which the Appellate Assistant Commissioner was justified in setting aside the assessments and it was not a case fit for cancellation of the assessments."
12. In CIT Vs. Gyan Prakash Gupta, 165 [TR 501 (Raj) their Lordships held that as assessment order passed without issuing notice under section 143(2) of the Income Tax Act, 1961, is invalid but the invalidity is not of such nature that it goes to the root of the proceedings. The Income--tax Officer gets jurisdiction as soon as a return is filed but failure to comply with section 143(2) of the Act, he cannot complete the assessment. An assessment order completed without service of notice under section 143(2) is not void ab initio and cannot be annulled.
13. In Chatturam 85 Ors. Vs. CIT (1947) 15 ITR 302 (FC) : TC 1OR.243, it has been held by the Federal Court that the liability to pay the tax arises by virtue of ss.3 and 4 of the Indian IT Act, 1922 (charging sections) and that s.22 and other sections of the said Act are merely machinery provisions to determine the quantum of tax. The following observations are apposite :
"The IT assessment proceedings commence with the issue of a notice. The issue or receipt of a notice is not, however, the foundation of the jurisdiction of the ITO to make the assessment or of the liability of the assessee to pay the tax. It may be urged that the issue and service of a notice under s. 22(1) or (2) may affect the liability under the penal clauses which provide for failure to act as required by the notice. The jurisdiction to assess and the liability to pay the tax, however, are not conditional on the validity of the notice. Suppose a person, even before a notice is published in the papers under s. 22(1), or before he receives a notice under s. 22(2) of the IT Act, gets a form of return from the IT Office and submits his return, it will be futile to contend that the ITO is not entitled to assess the party or that the party is not liable to pay any tax because a notice had not been issued to him. The liability to pay the tax is founded in ss. 3 and 4 of the IT Act, which are the charging sections. Sec. 22, _ etc., are the machinery sections to determine the amount to tax".
14. The Estate of Late Rangalal Jajodia vs. CIT (1971) 79 ITR 505 (SC), it was held by the Apex Court :
"The lack of a notice does not amount to the Revenue authority having had no jurisdiction to assess, but that the assessment was defective by reason of notice not having been given to her. An assessment proceeding does not cease to be a proceeding under the Act merely by reason of want of notice. It will be a proceeding liable to be challenged and corrected".
15. In the case of Sant Baba Mohan Singh vs. CIT (1973) 90 ITR 197 (All) their Lordships held that the failure of the ITO to issue a notice u/s 23(2) does not call for an order by AAC annulling the assessment and the AAC was right in merely setting aside the assessment while observing as under :-
"That in a power to be exercised where the assessment proceeding is a nullity in the sense that the ITO had not jurisdiction ab initio to take the proceeding. A proceeding is a nullity when the authority taking it has no jurisdiction either because of want of pecuniaiy jurisdiction or of territorial jurisdiction or of jurisdiction over the subject--matter of the proceeding. A proceeding is a nullity when the authority taking it has no power to have seisin over the case. The omission of the ITO to issue a notice under s. 23(2) does not affect the ab initio jurisdiction enjoyed by the ITO in respect of the proceeding."
16. The principle that emerges from the above mentioned decision (supra) is that an omission to serve or any defect in the services of the notices provided by the procedural provision does not evade or erase the liability to pay tax where such liability is treated by distinctive substantive provision (charging section). Any such omission or defect may render the order made irregular depending upon the nature of provision not complied with but certainly not void or illegal. Prior to amendment in provisions of section 143 no limitation was provided for issuing or serving notice u /s 143 (2) as it could be issued before the period of completion of assessment, but, after the amendment in the provisions of section 143 there can be gain saying that the notice u/ s 143 (2) is required to be issued and served upon the assessee before the expiry of one year from the end of the month in which the return had been furnished by the assessee which , in the present case, is 31.10.2003. There is no quarrel with the proposition of law that to issue a notice u/s 143 (2) is mandatory and, therefore, if the assessment is made without complying with section 143 (2), then the amendment is ordinarily, invalid. But as per ratio of the decision (supra) invalidity does not go to the root of the matter. It can simply be set aside for being redone de novo but the assessment certainly cannot be annulled 10 because failure to serve the notice or an irregularity in serving the notice u/s 143 (2) upon the assessee is merely an irregularity and, therefore, unless the ITO gets the notices served the assessment can not be completed. However, it cannot be said that the ITO has no jurisdiction in respect of the proceedings because as soon as the return is filed before him the ITO assumes jurisdiction over the case but failure to comply with section 143 (2), the only restriction is that the ITO cannot complete the assessment. Hence, in these circumstances the assessment order passed either without serving notice u/s 143 (2) or serving the notice improperly upon the assessee cannot be said to be void ab initio and the assessment order cannot be annulled on this ground.
17. In CIT Vs. Regency Express Builders (P) Ltd., 161 Taxman 1 (Del), their Lordships held as under:-
"Notice under section 143(2) had been received by one 'G' on 29-12-2000. It had nowhere been pleaded by the assessee either before the Assessing Officer, the Commissioner (Appeals) or the Tribunal that 'G' was not their employee or he was a fictitious person.
Even assuming for the sake of arguments that no notice under section 143(2) had been received by the assessee on 29-12-2000, there was no occasion for the assessee or his representative to appear before the Assessing Officer on 11-1-2001.
The fact that on 11-1-2001 the assessee's representative 'H', Chartered Accountant appeared before the Assessing Officer and filed his Power of Attorney and was asked to file details-/information and thereafter on 7-1-2001, one 'M', assistant along with_ Chartered Accountant appeared before the Assessing Officer and filed a letter seeking adjournment, went on to show that notice under section 143(2) had been duly served on the assessee through his representative on 2942-2000 and that was why the representatives of the assessee had appearing before the Assessing Officer in pursuance of the notice.
Accordingly, the Tribunal erred in observing that the notice under section 143(2) had not been served upon the assessee and the assessment stood vitiated."
18. In CIT vs. Premium Capital Market 8:; Investment Ltd., 151 Taxman 194 (MP) the plea of the assessee before their Lordships was that "on the basis of the material on record, i.e., report of process server, one could conclude that the service of notice under section 143(2) on the assessee was not in accordance with the requirement of section 282 read with Order V, rule 20 of the Code of Civil Procedure, was concerned it was not an issue which could be taken up for discussion de novo for the first time treating it to be a question of jurisdiction."
Their Lordships in Para 17 of theirjudgment held as under:--
"The question of service of notice on the assessee may assume some significance if the Assessing Officer proceeds to make an ex parte assessment by holding the alleged service to be good on the assessee. It is in such case, when the assessee suffers an ex parte assessment that he is entitled to question the manner of effecting service on him by the Assessing Officer which I2 had the effect of depriving him of an opportunity of participate in the assessment proceedings. But in a case where the assessee participates in the proceedings, contests the issue on the merits and does not raise any objection, the authorities have no jurisdiction to set aside the orders on the ground of irregularity in service of notice."
From the decisions [supra] of Delhi High Court and M.P. High Court it clearly emerges that even if no notice u /s 143(2) had been properly served upon the assessee on or before 31.10.2003 (in the instant case of the assessee) but the assessee appears before the ITO to represent his case during the assessment proceedings the assessment framed by the Assessing Officer does not stand vitiated.
19. We will now briefly consider the conduct of the assessee with regard to the service of the notice u/ s 143(2) on the assessee by affixture on 30.10.03. The notice conveyed to the assessee that a hearing had been fixed before the Assessing Officer on 6.11.2003. Thereafter notice dated 24.11.2003 fixing the case for 12.12.2003 and again a notice dated 31.8.04 fixing the case for 23.9.04 were issued. The assessee attended the hearings on 23.9.04 and 6.10.04 but the hearing was adjourned to 28.10.04 on the request of the assessee. On 28.10.2004 at the request of the assessee the hearing was adjourned for 16.11.04 for producing the books of 13 accounts and the details called for. Again, on 16.11.04 the assessee sought adjournment for 22.11.04 and again on the request of the assessee the case was adjourned to 24.11.04. On 24.11.04 none attended before the A.O. so he issued notice u/ s 143(1) 8:, 143(2) on that date for appearance of the assessee on 30.11.04, but, as none attended on 30.11.04 another notice was issued fixing the case for 15.12.04. On that date proceedings were attended by the assessee but as no compliance was made the case was again adjourned to 21.12.04. On 21.12.04 though the assessee attended the hearing the documents 85 details called by the Assessing Officer were not furnished and the case was adjourned to 24.12.04. As no details were filed even on 24.12.04, the case was adjourned to 31.112.04 on the request of the assessee. Even on 31.12.04 none attended the proceedings before the A.O. hence further notices u/s 142(1) 65 143(2) dated 11.1.2005 fixing the case for 19.1.2005 were issued. The assessee attended the proceedings on 21.1.2005 but again without complying with the requirements and on his request the case was adjourned to 28.1.2005. The AD. again vide letter dated 15.2.2005 along with notices u/ s 143(2) 85 142(1) afforded another opportunity to the assessee to explain its position on various issues and on 22.2.2005 I4 an adjournment was sought on the ground that the counsel of the assessee was confined to bed due to acute pain and accordingly the case was adjourned to 28.2.2005. According to the Assessing Officer even on 28.2.2005 neither any one appeared on behalf of the assessee nor filed any explanation. The important fact to be noticed from the conduct of the assessee is that upto 28"' Jan 'O5 he has not raised any objection before the AD. regarding non receipt of any notice u/s 143(2) upto 31.10.2003 and that, therefore, the Assessing Officer had no jurisdiction to complete the assessment u/ s 143(3). Upto this date the assessee has also not asked the Assessing Officer how and when the notice L1/s 143(2) was served upon the assessee. Before us the only letter in this regard referred to by the assessee is dated 28"' Jan '05 addressed to the Assessing Officer (placed -- Pg. 67 to 70 of the paper Book). On going through the typed letter of the assessee we find that even in the letter the assessee has not raised any such question or objection i.e. that the assessee had not received any notice purported to be issued by the Assessing Officer u/s 43(2) and why the learned AR for the assessee appeared before the A.O. and in response to which notice, and that why on appearing first time before the Assessing Officer the assessee did not demand from the I5 Assessing Officer on that very day the copy of the notice u/s 143(2) issued and served by the Assessing Officer upon the assessee. However, in this typed letter the assessee seems to have obliquely noted in hand on the left side on the first page of the letter "and also service of the first notice u/s 143(2)" which from the letter appears to be indicating that the assessee for the first time through this letter wanted the Assessing Officer to supply the copy of the first notice, though before the date on which this letter was written the assessee/or learned AR attended the proceedings before the Assessing Officer a number of times. The ratio of the decision of Delhi High Court in the case of Regency Express Builders (P) Ltd. (supra) and the decision of M.P. High Court in the case of Premium Capital Markets 85 Investments Ltd. (supra) are fully applicable, wherein their Lordships observed that even if no notice u/ s 143(2) had been received by the assessee before the due date of service but the assessee or its representatives appeared before the Assessing Officer to file details/ information, the assessment proceedings did not stand vitiated.
20. Hence, in our opinion the plea of the assessee, that notice u / s 143(2) served upon the assessee by affixture on 30.10.2003 was I6 not in accordance with Rules 17, 19 8:, 20 of Order 5 of CPC and therefore the service of the notice was invalid and the assessment framed by the Assessing Officer was required to be quashed, is liable to be rejected, more so, when in the already discussed case law (supra) of the Apex Court 85 Other High Court it is clearly laid down that an omission to serve or any defect in the service of notice provided by procedural provisions does not efface or erase the liability to pay tax which is created by distinct and substantial provisions and any such omission or defect may render the order made irregular but certainly not void or illegal.
21. In the light of the finding of the Apex Court in the case of Jai Prakash Singh (supra) it would not be possible for us to follow and rely upon the decision in the case of Jaggannath Prasad 85 Others vs. CIT, 110 [TR 27 (Alldl wherein a notice of demand served upon the assessee through process server by affixture was struck down by their Lordships on the reason that the conditions requisite for application of order 5 Rule 20 were not complied with by the Assessing Officer. The citation (supra) also cannot be relied upon because it does not apply to the facts of the instant case of the assessee, where the service of notice u /s 143(2) is involved and not the service of demand notice is involved.
I7
22. Similarly, the decision of ITAT (supra) in the case of Worldwide Exports (P) Ltd. Vs. ITO, 91 ITD 519 (Del), relied upon by the assessee, where in the Tribunal analyzing Rule 17, 19 81, 20 of Order 5 of CPC held that since the procedure laid down under Order 5 Rule 17, 19, 82. 20 had not been adhered to by the Assessing Officer before serving the notice upon the assessee by affixture beyond the period of limitation on 29.11.95 was not in accordance with relevant rules nor the notice by such mode was done as per the rules, hence, such service of notice under section 143(2)-could be accepted to be legally valid and therefore, the assessment made by the Assessing Officer on the basis of such invalid notice was declared null and void and quashed by the Tribunal, is also of no help, first, because it does not apply to the facts of the instant case of the assessee as in the case (supra) even the notice by afiixture was served beyond the period of limitation and, second, because in the case (supra) the assessee denied service of any notice u/ s 143(2) before the prescribed date of period of limitation of service of notice u /s 143(2), whereas, in the instant case the notice was not denied by the assessee to have been served before the due date of service and because of notice in the instant case was served through affixture within the period of limitation i.e. 18 30.10.2003 and lastly the order of the Tribunal (supra) quashing the assessment holding the service of notice as invalid cannot be followed for the reasons mentioned in the order of Apex Court 85 other High Courts (supra) wherein it was specifically laid down that the assessment can only be set aside and not annulled or quashed because of irregularity in the service of the notice or because of non service of the notice.
23. For the very reasons stated above the other case law relied upon by learned AR for the assessee, i.e. Rarneshwar Sirkar vs. ITO, 88 ITR 374 (Cal); CIT vs. Thayavalli Mullah Jeewaji Kapsi, 47 [TR 184 {Kerala); Patina Lal Ramesh Kurnar vs. ASTO, 16 Sales Tax Cases 149 (AIL); C. Maharaj 8:. Sons _vs. sTO, 15 ST Cases 879 (All.); and the case of Dr. K.C. Verma vs. ACIT, 84 ITD 33 (Del) (SMC), are of no assistance to the assessee in resolving the issue under consideration before us.
24. Lastly, we would also like to deal with the plea of the assessee that even the service of the notice u/s 143(2) by affixture on 30.10.2003 at Karnla Nagar address cannot be called a proper service in the eyes of law because the assessee vide letter dated 2.1.2003, received in the office of ITO on 8.1.2003 placed at Pg 125 I9 of the Paper Book, specifically informed the ITO that the assessee did not permanently station its employee at Kamla Nagar address given in the return along with the other address of Faridabad and that the person only looked after other activities and was usually available at registered office Kamla Nagar only for two hours in the morning so all the letters and notices be sent to at works address at Faridabad and not at the registered office address at Kamla Nagar even then the notice was affixed at Kamla Nagar office address.
24.1 In the instant case undisputedly in the return of its income the assessee has given the registered office address of Kamla Nagar and works office address of Faridabad. The procedure adopted by the process server by affixture of the notice in the presence of two independent witnesses i.e. one the owner of the building and the other the tenant of the building on 30.10.2003 has not been found faulted by learned AR for the assessee before us. Existence of both the addresses has also not been denied by the 1ea.rned AR for the assessee before us. It is also undisputed that for two hours in a day the employee of the assessee was available at the registered office at Kamla Nagar. Hence, it is not understandable how the 20 notice served through affixture on 30.10.2003 escaped the notice of the employee of the assessee who visited the registered office daily. In case no such facts or evidence is brought to our notice by the assessee it is presumed 8:. held that the notice served through affixture on 30.10.2003 would have definitely come to the notice of the assessee on the next day i.e. 31.10.2003 and now by raising this frivolous plea the assessee wants get out of the clutches of a valid assessment order passed by the Assessing Officer, as from the facts discussed hereinabove it is held that in the instant case the Assessing Officer served the notice u/s 143(2) upon the assessee by affixture on 30. 10.2003 i.e. well within the period of limitation of 12 months as prescribed under provision of section 143(2) and, therefore, the assessment framed was a valid assessment. For the detailed reasons given herein above the legal plea taken by the assessee on the issue of invalid assessment is rejected and it is held that the assessment framed by the Assessing Officer is a valid assessment framed in accordance with relevant provision of law.
The ground No. 1 of the appeal taken by the assessee is rejected.
2!
25. Now we proceed to deal with ground No.2 of the appeal of the assessee and the grounds of the cross appeal filed by the revenue.
26. The ground No. 2 of the assessee relates to disallowance of interest of Rs. 9,85,157/- payable to the bank on account of one time settlement of the loan. In brief the facts are that assessee had got the working capital sanctioned by the bank long back in the year 1994. Since the assessee was not performing well, the bank recalled the working capital limits and demanded return of principle together with interest from 12.1.1994 till payment. After detailed negotiation and filing of petition by the bank in the Debts Recovery Tribunal, a compromise settlement was entered into on 9.12.2000. Accordingly, the assessee paid the amount of principle and interest.
27. The assessee claimed interest payment of Rs.9,85,157/-- to S.Bl., Ballabhgarh and Rs.12,419/- to O.B.C., NITT Faridabad. On an enquiry by the AD. the bank submitted that it appropriated an amount of Rs.8,7'1,7,64/-- towards interest and not as stated by the assessee and that, interest was towards cash credit working capital limits sanctioned to the assessee in the earlier years. Accordingly, the AD. required the assessee to explain as to how the claim of interest is maintainable for the year under consideration and in the 22 context that the loans against which interest has been charged are not term loans. According to the AD. the assessee did not furnish any reply or details to show that the interest accruing during the preceding years have not been claimed in those years. The A0. held that interest on working capital limits is to be claimed and allowed on accrual basis and since the claim of interest did not pertain to the year under assessment, the claim stood rejected.
28. By the impugned order C['I'(A) confirmed the addition by just observing that terms of combromise settlement being dt. 09.12.00 , the claim of interest under the compromise settlement did not fall for consideration during relevant assessment year under appeal.
29. We have considered the rival contentions and gone through the orders of the tax authorities below and found from the record that in terms of the audited accounts of the assessee for the A.Y. 1995-96 and subsequent years , year wise interest / bank charges debited to the P 8:. L account for the A.Y. 1995-96 are as under:-
A.Y. 1995-96- Rs. 310/-, A.'(. 97-98 -- Rs.960/-, A.Y. 98-99 ~ Rs.l685/--, A.Y. 99-2000 -- Rs.2714/-, AY. 00-01 Rs.11519/-, A.Y. 01-02 -- Rs.11450/- Rs.02--03 Rs.9,97,647/-. The facts above would fairly suggest that no interest has been provided in the 23 accounts against the cash credit working capital limits obtained from S.B.l. Ballabhgarh. The assessee stopped providing for interest on receipt of the bank's letter dated 12.01.94, whereby the bank decided to call up the advances granted to the assessee in the year/ years for reasons of non payment of the loans obtained from the bank. Undisputedly, on the basis of the compromise settlement agreed to by the assessee and so conveyed by the bank in its letter dated 09.12.00, the bank issued a certificate dated 21.09.04 that the assessee has liquidated an amount of Rs.35.00 lakhs being the full and final settled amount, of which Rs.26,28,238/- is the principle and Rs.8,71,761/- is the interest. There is no dispute to the well-settled legal proposition that where liability for any expenditure is disputed, the claim of its deduction can be allowed only during the year when the same is crystallized and payment is made. In the instant case, before us, no interest was paid by the assessee from 1993 onwards nor any claim of expenditure was made in the profit 8; loss account during these years. As per the settlement deed, the assessee has paid the amount during the AY 2001-02, 2002-03 85 2003-04. Therefore during the relevant year in which payment of interest is being made, after crystalisation, the assessee is entitled for deduction in view of the decision of Hon'ble 24 Supreme Court in the case of Swadeshi Cotton Mills -- 53 ITR 134, and I-Ion'b1e Allahabad High Court in the case of Cold Storage 85 Ice Factory -- 119 ITR 709. In the interest of justice and fairplay, we restore this ground to the file of the A0 with a direction to allow claim of deduction on account of interest payment in the relevant year in which actual payment has been made by the assessee after crystalisation. We direct accordingly.
30. In ground No. 1, the revenue disputes deletion of addition on account of gross profit rate. It was stated that the GP declared by the assessee is 31.05 %. According to the assessee the A0 has erred in coming to the conclusion that job work receipts were not part of the trading receipt while not accepting the GP rate declared by the assessee and in making addition of Rs. 2,27,463/ -. Further according to AR, as per A0 the computation of GP at 31.5 % for A/Y. 02-03 (As against 26.23 % for A.Y. 01-02 and 24.08 % for A.Y. 00-01) as made out by the assessee was not correct, in so far as there was no job work income in the last year. Had there been no job work receipt for this year, there would have been a negative gross profit.
2531. By the impugned order CIT (A) deleted the addition by observing as under:-
"1 have considered the submissions of the assessee, the findings of the A0. and the facts on record. One argument of the assessee is that it has resorted to distress selling in order to comply to the payment conditions of the bank from whom it had availed of loans. That there was no production and the sales made by the assessee are from the old inventory in so far as there was pressure from the bank, the inventory was sold at prices tower than what those could have fetched at a time when the market would not have known about the financial conditions of the assessee. The fact that there was been a call up notice recalling the advance granted by S.B.1. as early as on 12.1.1994 and subsequent to that the bank through compromise settlement dated 9.12.2000 proceeded to ask from the assessee a, total due of Rs.35,00,000/- towards full and final settlement of the banks dues suggest that the dead line of one year from 9.12.2000 given in the Bank's letter dated. 9.12.2000 for giving effect to the compromise settlement was the factor responsible for sale of products from out of the old inventory at whatever prices those could yield at the given time.
One other reason for accepting the gross profit rate for the year under appeal is that the assessee had earned a better GP over the earlier years and that there is no technical sanctity for ignoring the job work receipts for determining gross profit. According to the assessee its gross profit for the year under appeal is 31.51% as against 26.23 % during A.Y. 01-02 and 24.08 % during A.Y. 00-01. The trading results as shown by the assessee for determining GP of 31.51 % includes job work receipts of Rs.5,25, 905/ -. In order that the assessee earns receipts by way of job work from others at a charge, it has allowed its premises plant 26 and machinery and services of staff for earning from such activity. There is obviously supervisory control over the goods manufactured. Engagement in manufacture of processing of the goods can take, according to commercial experiences, diflerent forms. For one, the assessee can engage itself in direct manufacturing. In other cases, y' it can be commercially expedient and economical to offer the assessee facilities for production of goods for parties who are otherwise interest in such production, the assessee as well can allow its premises, plant and machinery services of staff at a fee. That way the assessee earns job work charges job work charges cannot be said to be divorced from all expenses and it cannot be said that job work receipts do not entail any expenditure. in fact there are fixed and variable costs attached to job work business such as consumption of electricity and fuel, purchases for job work business, stores, packing material, wages and these expenses as in the case of the assessee are directly co--relatable to the job work business. I agree that job work receipts cannot be ignored for arriving at comparable gross profit of the current year vis--a--vis gross profit of earlier years. Job work receipts by their very nature entail expenditure and the gross trading results covering both sales and job work receipts would determine whether the trading results of the current year is comparable to the previous years. This is more so when all the expenses in the trading account for the year under appeal relate to job work, in as much the assessee did not manufacture anything in the current year and the sales as per accounts pertain to its old inventory carried forward from the earlier year."
32. We have considered the rival contentions and found from the record that during the year under consideration, the assessee had shown a gross profit of 31.05% as against GP of 26.23% during the 2?
immediately preceding year. The A0 has declined GP rate declared by the assessee merely on the plea that receipt of job work is not part of trading receipt. We found that during the year, the assessee had shown job work receipts of Rs.5,25,905/-, which is actually in the nature of trading receipt, there is no reason to exclude the same while computing the gross profit. Such job work receipts are part of the trading account, therefore while computing GP rate both the sales and job work receipts are to be taken into account. A detailed finding has been recorded by the CI'l'(A) at para 2.3 of his order for coming to the conclusion that the job work receipts cannot be ignored for arriving at the GP of the current year vis-a- vis GP of the earlier year. The job work receipts by their very nature entail the expenditure and the gross trading results covering both the sales and job work receipts would determine whether the trading results are comparable to the previous year. The finding so recorded by the CIT (A) has not been controverted. Keeping in View the higher GP rate shown during the year under consideration as compared to the immediately preceding year, we do not find any merit in the AO's action for making the trading addition by deducting the job work receipts from gross profit. Accordingly the 28 order of the CIT(A) in this regard is upheld and ground No.1 of the Revenue's appeal is rejected.
33. In the next ground, the Revenue is aggrieved for deletion of addition of Rs.11,25,000/- which was made by the A0 u/s 69A of the IT Act. Facts in brief are that for making repayment of the loan as per the settlement deed, the assessee issued cheque in favour of the bank, the source of which was asked by the A0. The AD. states that the assessee in order to comply to the terms of the compromise settlement has paid to the bank an amount of Rs. 11,25,000/-- in cash. The bank informed the A0 that the amount paid to the bank were in fact maturity proceeds of 2 FDRS, and that both the FDRs were taken by depositing Rs. 9,00,000/-- and Rs. 2,25,000/-- in cash. For want of explanation as regards source of deposit for making the FDRS, the A0 added the amount to the income of the assessee.
34. The CI'I'(A} while accepting the explanation given by the assessee regarding identity, genuineness and creditworthiness of the loan creditor, deleted the impugned addition, though the assessee had not furnished any documentary evidence to prove all these three ingredients of the loan transaction before the A0.
2935. We have considered the rival contentions and find that the assessee has tried to explain the source of deposit in the bank through sale proceeds and alleged loan from the directors etc. However, before the A6), the assessee had not furnished any evidence in support of the required cash balance in the cash book to indicate the source thereof. The assessee has stated for the first time before the CIT(A] that the cash balance in the books of account were through sale proceeds and loan from director and other family members. The assessee has also furnished affidavit before the CI'I'(A) from the alleged loan creditor in support of the contention that loans were taken from identified parties confirmed as such by the creditors and entries thereof were made in the books of account and therefore, the provisions of Section 68 were not applicable. As per our considered view, in case of cash credit u /s 68, the assessee is required to explain not only the identity but also the genuineness of the transaction as well as creditworthiness of the loan creditor. As the assessee wants to explain the sufficient balance in the cash book, he is required to produce the same before the A0 to explain the source of such cash receipt and the genuineness of such entry alongwith creditworthiness of the person giving the same. The ld. AR had produced certain documents 30 before the CIT (A) and by relying on those he deleted the addition without calling any comment from the A0 or remand report. This is in contravention of Rule 46-A. The Revenue has also taken a ground with regard to violation of provisions of Rule 46-A of the IT Rules. In the interest of justice and fair~play, we set aside the order of the Cl'I'(A] on this ground and restore the matter back to the file of the A0 for deciding the same afresh and the assessee is directed to explain the source of payment made to bank in liquidation of its loan, by producing books of account and other details of proving the identity, genuineness and creditworthiness of the loan creditor from whom loans were taken for repayment of the working capital liability to the bank. We direct accordingly.
36. Next grievance of the Revenue relates to deletion of addition of Rs.2,72,917/-.
37. According to the AD. the assessee obtained fresh unsecured loans of Rs.1,00,000/- from Directors, Rs.1,00,000/- from share holders, &. Rs.72,917/- from other. When called upon to submit details of bank statement, confirmation and income tax particulars of the persons from whom the loans have been taken, the assessee submitted before the A0 the income tax particulars of its Directors. The A0 that in the absence of necessary documents, the sources and genuineness of the loan transaction remaining unverifiable, the amounts are assessable u /s 68 of the Act.
38. By the impugned order, the CI'I'(A) deleted the addition by making the following observations:--
"l have considered the submission to the assessee, the findings of the A0 and the facts on record. Sh. T.SDagar, Director of the assessee company bears PAN -- AAJPD3627N and has confirmed to have advanced loan of Rs. 75,000/-- to the assessee on various dates in October dc. November, 2001. Smt.-
Kamlesh Dager, Director of the assessee company bears PAN -- AAJPD3389M and has confirmed to have advanced loan of Rs. 25,000/-- to the assessee in November, 2001. Smt. Anita Paul Singh, share holder of the assessee company bears PAN -- ANBDSl2l8O and has confirmed to have given loan of Rs. 25,000/- to the assessee during November, 2001. Sh. Surender Singh, resident of Village kheri, Distt Faridabad and an employee with Ms Elite Steels Pvt. Ltd., has confried as per affidavit dated 16.02.05 that he has given loan of Rs. 32,917/- to the assessee during November, 2001. The source of loan given by Sh. Ranvir Singh is said to be from out of salary and agricultural income. Sh. Gain Prakash resident of Sec.--55, Faridabad bearing PAN -- AMCPS6l58F has confirmed to have advanced loan of Rs. 20, 000/ - to the assessee during November, 2001. The assessee in its submissions has enclosed affidavits from Sh. Surinder Singh, Sh. Ranvir Singh & Sh. Gain Prakash in support of its contention that the loans from identifiable parties, confirmed as such 32 by the creditors and entries thereof being made in the assessee's books of account, provisions of section 68 are in applicable."
39. From the record we found that in the compilation submitted by the assessee towards establishing receipt of loan from Directors, share holders and others, it is seen that Sh. T.S.Dagar, Smt. Kamlesh Dager, Sh. Manvir Dagar, Smt. Anita Paul Singh and Sh. Gain Prakash are all income tax assesses and they in turn confirmed to have advanced loan of Rs. 75,000/-, and Rs. 25,000/-- , Rs. 25,000/-, Rs. 25,000/-, 8:. Rs. 20,000/-respectively. In respect of Sh. Surinder Singh as an employee with M.s Elite Steels Pvt. Ltd., Faridabad, the confirmation shows that from out of a salary of Rs. 69,060/- for 00-01 and Rs. 85,200/-- for 01-02 that Sh. Surinder Singh as per his confirmation gave a loan of Rs. 32,917/-- to the assessee. Sh. Rarwir Singh an employee with the assessee as a General Assistant drawing wages of Rs. 24,000/-- during 00-01 and Rs. 20,500/-- during 01-02 has explained the loan of Rs. 20,000/- to the assessee from out of the saving from salary and also from out of agricultural income earned by him. Documents in form of land records have also been submitted in support of agricultural income in the hands of Sh. Ranvir Singh.
40. On the basis of evidences as discussed above, the ClT(A] held that the assessee has established the identity of the creditors, and the genuineness of the transactions resulting in the receipt of loans from those creditors. The creditworthiness in the context of the individual creditors has been established with reference to identified sources of income in each case and thereafter deleted the addition u/s 68 of the amounts obtajned as loans from Directors-
share holders and others. The finding recorded by CIT[A) remained t uncontroverted, we therefore do not find any reason to interfere in the order of ClT[A) deleting the addition of Rs.2,72,917/~ and the ground of appeal taken by the revenue is rejected.
41. In the result, both the appeals of the assessee and revenue are allowed in part, in terms indicated hereinabove.
"1" he order was pronounced in the open court on 10"' July, 2009 (12.0. SHARMA) ACCOUNTANT MEMBER Dated: 101" July, 2009 NB Copy of the Order forwarded to:
1.Appellant
2.Respondent
3.C1T
4.ClT{A]
5.DR
6.(3uard File (13.12. SINGH) JUDICIAL MEMBER By Order Dy. Registrar