Income Tax Appellate Tribunal - Delhi
Ram Kishan Bhagria,, vs Department Of Income Tax on 31 March, 2005
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'F' : NEW DELHI)
BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER
and
SHRI C.M. GARG, JUDICIAL MEMBER
ITA No.2976/Del./2005
(ASSESSMENT YEAR : 2001-02)
ACIT, Circle 19 (1), vs. Shri Ram Kishan Bhageria,
New Delhi. Prop. M/s. Raj Laxmi Knitting Co.,
A - 12, Wazirpur Industrial Area,
Delhi.
(PAN : AFDPB4242H)
CO No.376/Del/2007
(in ITA No.2976/Del./2005)
(ASSESSMENT YEAR : 2001-02)
Shri Ram Kishan Bhageria, vs. ACIT, Circle 19 (1),
Prop. M/s. Raj Laxmi Knitting Co., New Delhi.
A - 12, Wazirpur Industrial Area,
Delhi.
(PAN : AFDPB4242H)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Ashwani Taneja, Advocate
REVENUE BY : Shri Bhim Singh, Senior DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
The appeal filed by the revenue and cross objection filed by the assessee emanate from the order of the CIT (Appeals)-XXII, New Delhi dated 31.03.2005.
2 ITA No.2976/Del./2005CO No.376/Del/2007
2. The assessee is running a proprietorship concern, M/s. Raj Laxmi Knitting Company engaged in the business of manufacturing of socks. A survey u/s 133A was carried out at the premises of the assessee on 20.02.2001 and during the survey, the assessee has surrendered the additional income of Rs.29 lacs on account of excess stock found over and above the stock reflected in the regular books of accounts and Rs.6 lacs on account of unexplained investment in plant and machinery and factory building. The AO made various additions against which the assessee filed appeal before the CIT (A) and on the issues, the CIT (A) granted relief. The revenue is before us by taking the following grounds of appeal :-
"1. On the facts and in the circumstances of the case, the Ld CIT(A) has erred in deleting the addition of Rs.5,44,752/- made by the AO on account of low G.P.
2. On the facts and in the circumstances of the case, the Ld CIT(A) has erred in deleting addition of Rs.29,00,000/- on account of excess unexplained stock found on the date of survey on 20.2.2001 on a faulty logic that the excess stock is included in the closing stock as on 31.3.2001, as such inclusion in the closing stock as on 31.3.2001 does not explain the excess stock as on 20.2.2001.
3. On the facts and in the circumstances of the case, the Ld CIT(A) has erred in deleting the addition of Rs.6,00,000/- on account of unexplained investment in Plant & Machinery and factory building.
4. On the facts and in the circumstances of the case, the Ld CIT(A) has erred in deleting the addition of Rs.14,78,431/- on account of unexplained purchases / investments.3 ITA No.2976/Del./2005 CO No.376/Del/2007
5. On the facts and in the circumstances of the case, the Ld CIT(A) has erred in deleting the addition of Rs.8,20,908/- on account of bogus expenses,
6. On the facts and in the circumstances of the case, the Ld CIT(A) has erred in deleting Rs.9,68,086/- out of total addition of Rs.15,36,786/- made by the AO on account of bad debts written off.
7. On the facts and in the circumstances of the case, the Ld CIT(A) has erred in deleting Rs.27,14,102/- out of total addition of Rs.29,89,673/- made by the AO on account of discrepancies in several parties' accounts."
The assessee has taken the following grounds in the cross objections :-
"1. That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in sustaining the addition of Rs.5,68,700/- on account of bad debts written off.
2. That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in sustaining the addition of Rs.2,75,571/- on account of alleged discrepancies found in parties accounts.
3. That in any view of the matter and in any case, additions of Rs.5,68,700/- and Rs.2,75,571/- are bad in law and against the facts and circumstances of the case.
4. That the cross objector craves the leave to add, amend, modify, delete any of the ground(s) of cross objection before or at the time of hearing.
ITA No.2976/Del./2005
3. In the ground no.1, the issue relates to deletion of addition of Rs.5,44,752/- made on account of low gross profit. The issue has been discussed by AO in his order at pages 6 to 8 and the CIT (A) has discussed the issue at pages 2 to 11 of his order. The ld. DR relied on the order of the 4 ITA No.2976/Del./2005 CO No.376/Del/2007 AO and ld. AR relied on the order of CIT (A). The CIT (A) has deleted this addition by holding as under :-
"5.12 The A.O. has further pointed out that the appellant had declared G.P. rate of 11.82% in the year under consideration which hovered around 12.5% in other years. However, the appellant had shown a G.P. rate of 18.09% as per the recast 'Manufacturing A/c' including the effect of 'excess stock' surrendered during survey. Even, excluding the effect of 'excess stock', although the G.P. rate has declined from 12.60% to 11.82% compared to last year, this reason by itself cannot be sufficient ground for rejection of books of accounts by invoking the provision of sec. 145 of I.T. Act, 1961 unless the A.O. brings on record some other material facts like 'suppression of sales' or 'inflation of expenses', 'debiting expenses not supported by proper bills & vouchers', 'adoption of irregular method of accounting from which true profit cannot be deducted' etc. The A.O. did not record any finding to the above effects apart from mentioning that the G.P. rate has declined from 12.5% to 11.82% compared to other years. So, I cannot uphold the action of the A.O. in rejecting the books of accounts on this ground alone.
5.13 The A.O. has also mentioned that the appellant failed to produce documentary evidence for excess purchases and expenses shown in the new trading account drawn by him as on the date of survey i.e. 19.02.2001. I have perused the assessment records and looked into the appellant's submissions before the A.O. wherein the invoices for purchases and the purchase account for the period from 01.04.2000 to 31.03.2001 have been duly produced before the A.O. The A.O. has not recorded any specific finding to the effect that any of the purchases or expenses shown by the appellant are bogus in nature by conducting any enquiries in regard to the same. The appellant has reconciled the purchase account drawn as per audited accounts till the date of survey vis-à-vis the purchases reflected in the trading account prepared at the time of survey. Since the appellant did not receive all the purchase invoices on the date of survey on account of purchases made till the date of survey, it is quite possible that the purchase account prepared on the date of survey did not reveal the actual state of affairs and 5 ITA No.2976/Del./2005 CO No.376/Del/2007 the appellant subsequently during assessment proceeding produced the necessary accounts along with invoices to support its contention before the A.O. So, I cannot accept the finding of the A.O. that the appellant failed to produce necessary documentary evidences for excess purchases and expenses shown in the new trading account.
5.14 The A.O. has also noted that the appellant failed to furnish the complete addresses of some debtors, creditors and unsecured loan creditors, without pointing out specific instances for the same. On the other hand, the A/R of the appellant argued before me that the details regarding the alleged debtors, creditor have been duly filed before the A.O. and in fact, he had carried out necessary enquiries for the same and no adverse finding could be recorded against such transactions as a result of enquiries launched by the A.O. In absence of any material facts about the observation made by the A.O. I cannot accept this as a ground for rejection of books of accounts. The A.O. has also pointed out certain discrepancies noted in the ledger accounts of some persons as per the books of the appellant vis-à-vis the appellant's accounts in the books of accounts of such persons. The appellant was given opportunity by the A.O. to explain such discrepancies and the appellant had provided necessary explanations as regards each such account during the assessment proceedings. The A.O. had not recorded any specific finding against the explanations submitted before him by the appellant in regard to such accounts. As a result, I am unable to sustain the rejection of books of accounts on this score also. The A.O. has also mentioned that the appellant did not maintain any quantitative details of different items of stock. It is observed that the appellant was carrying out business of manufacturing of socks as in earlier years. The A/R of the appellant argued before me that the appellant was manufacturing different items of stocks in large nos. and it was not possible to maintain quantitative tally of stock on a day-to-day basis. According to the regular system of accounting adopted by the appellant from year to year, the closing inventory of stock is drawn at the end of the accounting year after physical verification which is subject to audit also. This stock has been correctly reflected in the manufacturing account and is duly supported by purchase of raw materials, cost of goods sold and actual turnover. So no adverse inference can be drawn in this respect which may result in 6 ITA No.2976/Del./2005 CO No.376/Del/2007 rejection of books of accounts. I find considerable force in the arguments of the appellant. It is also noted that the A.O. has not brought any material facts to establish that the production of goods or turnover as reported by the appellant suffered from any defects and as a result, the closing stock inventory as declared by the appellant cannot be challenged in absence of any adverse finding supported by cogent reason. So this reason adopted by the A.O. to reject the books of accounts also cannot be sustained. I have also considered the judicial authorities quoted by the A.O. and the A/R of the appellant in support of their contentions.
5.15 The case of Action Electricals vs. DCIT (2002), 258 ITR 188 (Del) relied upon by the A.O. is different from the facts of the case of the appellant because in this case search action was conducted and as a result of the same, suppression of sales were detected which were not recorded in the regular books of accounts and this fact itself was sufficient to reject the books of accounts of the assessee. However, in the case of the appellant, no such detection of suppressed sales or unaccounted purchases were made as a result of survey. So, this judicial ruling cannot be adopted in the case of the appellant.
5.16 Similarly, the decisions in the cases of (i) Awadesh Pratap Singh Abdul Rehman and Bros vs. CIT 76 Taxman 10b (Allahabad and (ii) S.N. Namasivayam Chettiar vs. CIT 38 ITR 579 (SC) also cannot be applied in the case of the appellant because the facts are quite different. Non-maintenance of stock register coupled with other defects like vouchers were not forthcoming in respect of expenses, sales were suppressed, bogus expenses were claimed etc. could lead to a legitimate inference that all were not well with the books of accounts maintained by the 'assessee' and accordingly books of accounts deserved to be rejected. However, in the case of the appellant drawing support from the decision of Hon'ble Patna High Court in the case of Md Umer vs. CIT 1975, 101 ITR 525 (Pat), it is observed that the appellant regularly followed the same system of account, the accounts were correctly maintained as per audit report, and the accounts were complete in the sense that no omission was noted towards the maintenance of such accounts and true profit was deducible from such accounts and so I am unable to uphold the action of the A.O. in rejecting the books of 7 ITA No.2976/Del./2005 CO No.376/Del/2007 accounts. In consequence thereof, the adoption of higher G.P. rate of 13% instead of 11.82% shown by the appellant is also held to be without any basis and accordingly the G.P. addition of (Rs.60,11,820 - Rs.54,67,068) i.e. Rs.5,44,752/- is deleted.
Hence, Ground Nos. (i) & (ii) are allowed."
4. After hearing both the sides, we find that after reducing the excess stock found during the survey, gross profit rate comes to around 11.82% in comparison to last year gross profit of 12.5%. There was no material with the AO with regard to suppression of sales or inflation of expenses. Further the assessee has also submitted an explanation that the fall in the gross profit is primarily due to increase in the cost of production and decrease in the sale prices of certain articles due to fierce market competition and also that in the year under consideration, 8% deduction of M/s Bata India Ltd. has been taken as direct expenses as in the previous year the same has been taken as indirect expenses. In our considered view, this explanation of assessee explains the minor fall in the gross profit rate, therefore, we uphold the order of the CIT (A). This ground is dismissed.
5. In the ground nos.2 and 3, the issue involved is deleting the addition of Rs.29 lacs made on account of excess unexplained stock found at the time of survey and deleting the addition of Rs.6 lacs on account of unexplained investment in the plant and machinery and factory building. The ld. DR relied on the order of the AO and ld. AR relied on the order of CIT (A). The CIT (A) has deleted these issues as under :-
8 ITA No.2976/Del./2005CO No.376/Del/2007
"5.10 I have considered the above submissions of the learned A/R of the appellant and the facts brought out in the assessment order by the A.O. It is observed that as a result of survey u/s 133A conducted at the business premises of the appellant, excess stock of Rs.29,00,000/- was found over and above the stock reflected in the regular books of accounts and unexplained investments in Plant & Machinery and factory building to the tune of Rs.6,00,000/- were noted. The appellant during the course of survey surrendered Rs.35,00,000/- as its unaccounted income represented by way of excess stock of Rs.29,00,000/- and unexplained investments in Plant & Machinery and factory building of Rs.6,00,000/-. The appellant filed the return of income for A.Y. 2001-02 deducing an income of Rs.4,75,310/-. The return was accompanied with audited P&L A/c and Balance Sheet and audit report in from No.3CB. On examination of the P&L A/c, it was observed by the A.O. that although 'excess stock' of Rs.29,00,000/- was shown in 'other income' schedule of P&L A/c, on the expenditure side the appellant had debited Rs.29,00,000/- as 'goods declared under survey' thereby nullifying the effect of surrender of excess stock of Rs.29;60,000/-. In this regard, the appellant explained before the A.O. that excess stock of Rs.29,00,000/- was included in the closing stock as on 31-03-2001 increasing the book stock from Rs.1,47,88,741.90 to Rs.1,76,88,741.90 which was duly reflected in the manufacturing account. The appellant further passed a journal entry debiting the manufacturing a/c with the 'goods declared under survey' of Rs.29,00,000/- and crediting the P&L A/c with the same figure which is reflected in schedule of 'other income'. This entry was passed basically to pass on the impact of income arising on account or surrender of 'excess stock' during survey from Manufacturing account to P&L A/c. The A/R of the appellant argued before me that the learned A.O. failed to appreciate that the closing stock as shown in the manufacturing account duly incorporated the 'excess stock' of Rs.29,00,000/- surrendered during the course of survey which has ultimately increased the income of the appellant by Rs.29,00,000/-. The A/R of the appellant submitted recast Manufacturing and P&L A/c (enclosed as per Annexure 'A' to this order) by deleting the effect of journal entry passed in regard to the P&L A/c which revealed that the G.P. rate as per the recast manufacturing account is 18.09% which is much high compared to those of earlier years. The A.O. made a addition of 9 ITA No.2976/Del./2005 CO No.376/Del/2007 Rs.29,00,000/- in the total income of the appellant with a finding that although this was shown as income in the P&L A/c, the same has been also debited as expenditure in the P&L A/c. Thus, the A.O. totally missed the point of explanation before him that the 'excess stock' was already included in 'closing stock' as on 31-03-2001 which had the effect of increasing the G.P. by the same amount of Rs.29,00,000/-.
5.11 As regards the 'unexplained investment' in 'plant & machinery and 'office building' of Rs.6,00,000/- surrendered during survey, the appellant explained before the A.O. that the same was included in the P&L A/c under the schedule 'other income' and the following journal entry was passed in the account :
Factory Building : Dr. Rs.5,00,000/-
Plant & Machinery: Dr. Rs.1,00,000/-
To Indirect Income: Cr. Rs.6,00,000/-
Thus, the surrender of 'unexplained investment' of Rs.6,00,000/- duly stands credited in the P&L A/c against which no expenditure has been debited in the P&L A/c. The A.O. failed to appreciate this point also and wrongly made an addition of Rs.6,00,000/- to the total income of the appellant as 'unexplained investment' u/s 69 of I.T. Act, 1961."
"6. In this ground, the appellant has objection of Rs.29,00,000/- on account of alleged unexplained investment in stock. 6.1 While adjudicating in ground no.(i) & (ii), it has been already held that the excess stock of Rs.29,00,000/- has already been included in the closing stock as on 31.03.2001 as per the accounts submitted by the appellant along with the return of income and so the addition of Rs.29,00,000/- made by the A.O. again in the total income of the appellant amounted to double addition of the same amount. Accordingly, I delete the addition of Rs.29,00,000/-.
10 ITA No.2976/Del./2005CO No.376/Del/2007
7. In this ground, the appellant has objected to addition of Rs.6,00,000/- on account of alleged unexplained investment in Plant & Machinery and factory building u/s 69 of I.T. Act, 1961. 7.1 While adjudicating in ground No.(i) & (ii), it has been already held that the appellant had shown Rs.6,00,000/- as 'other income' in P&L account against 'unexplained investment' in Plant & Machinery of Rs.5,00,000/- and 'Unexplained investment' in factory building of Rs.1,00,000/- So, the addition of Rs.6,00,000/- made by the A.O. again in the assessment, amounted to double addition of the same amount. Accordingly, I delete the addition of Rs.6,00,000/- made by the A.O. on account of unexplained investment in Plant & Machinery and factory building."
6. After hearing both the sides, we find that the assessee has explained the treatment given by assessee to the excess stock in its books of account. The excess stock was credited to the stock and debited in the profit and loss account which has nullified effect, passed a journal entry debiting the manufacturing account with the goods declared under survey of Rs.29,00,000/- and credited P&L account in schedule of 'other income'. Thus, the assessee has shown this income separately. Similarly, the income declared on account of unexplained investment in plant and machinery and office building has been also included as unexplained investment in the total income of the assessee. The assessee has shown increase in the closing stock by Rs.29 lacs and has also shown Rs.29 lacs as other income and it has debited the profit and loss account by Rs.29 lacs. Thus, the effect of all three entries is that on two occasions, the amount has been credited in the profit and 11 ITA No.2976/Del./2005 CO No.376/Del/2007 loss account and it has been debited only once, therefore, we find no fault in accepting the explanation of the assessee otherwise it will lead to double addition. Similarly, in the case of unexplained investment in the plant and machinery in the factory building, we find that the income surrendered is included in the profit and loss account and the action of AO has led to double addition which has been rightly deleted by the CIT (A). Keeping these facts in view, we find no merits in the ground nos.2 and 3 of revenue's appeal.
7. In the ground no.4, the issue involved is deleting the addition of Rs.14,78,431/- on account of unexplained purchases/investment made by the AO. The CIT (A) has dealt the issue as under :-
"8.3 I have considered the above submissions of the learned account of the appellant and the facts revealed in the assessment order passed by the A.O. It is observed that the purchase was wrongly taken at Rs.3,49,64,390/- as arrived at by the A/R of the appellant in the trading account prepared by the survey party as on the date of survey i.e. 19.02.2001, because the purchase returns were incorrectly added to the purchase figure. The appellant submitted the purchase account as reflected in the audited accounts along with necessary evidences before the A.O. and this revealed that he purchase account drawn by taking into account purchases upto 25.01.2001 worked out as under :
Purchase of Raw Materials : Rs.3,37,12,481.80 Purchase of Packing materials : Rs. 10,51,908.10 Rs.3,47,64,389.90 8.4 This figure being rounded of amounted to Rs.3,47,64,390/- which tallied with the corrected purchase account drawn on the date of survey. The A/R of the appellant submitted that the purchase account on the date of survey was drawn on the basis of purchase invoices available with the appellant till 25.01.2001. Subsequently, the purchase invoices 12 ITA No.2976/Del./2005 CO No.376/Del/2007 upto the date of survey i..e 19.02.2001 were received which were duly accounted for and the audited purchase account prepared as on the date of survey i.e. 19.02.2001 revealed the following:-
Purchase of raw materials : Rs.3,51,50,661.90 Purchase of Packing material : Rs. 12,66,659.10 Rs.3,64,17,321.00 8.5 The figure on this purchase was wrongly taken to be Rs.3,64,17,471/- due to oversight while submitting the same before the A.O. during assessment proceeding. The purchase invoices in respect of purchase of raw materials and packing materials for the period from 25.01.2001 to 19.02.2001 were duly submitted before the A.O. for necessary examination along with names and addresses of the parties. The copies of these invoices were also produced before me. On examination of the same, the purchase account drawn till 19.02.2001 on the basis of audited accounts is found to be in order and the purchases aggregate to Rs.3,64,17,321/- as shown by the A/R of the appellant in his submissions. The A.O. has not brought any material facts, as a result of enquires to establish that the purchases shown till 19.02.2001 were incorrect or include some bogus entries against which the relevant parties were non-
existent. The A.O. has recorded a finding while making disallowance of purchase of Rs.14,78,431/- that the appellant failed to furnish any evidence against the additional quantum of purchases reflected in the new trading account drawn as on 19.02.2001. But this is not based on correct appreciation of facts because the appellant, during the course of assessment proceeding itself, furnished the relevant purchase invoices and names and addresses of the parties for necessary verification. 8.6 In view of the above facts and after the consideration of the appellant's submissions before me, I am unable to uphold the addition of Rs.14,78,431/- on account of unexplained purchases/investments u/s 69 of I.T. Act, 1961 and the same is deleted."
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8. After hearing both the sides, we hold that the revenue is not able to controvert the finding given by the CIT (A) that the copies of the purchase invoices of raw material and packaging material was produced before the AO and even before the CIT (A). The AO has failed to establish that purchases shown till 19.02.2001 were having any discrepancy or included any bogus entries, therefore, the AO has wrongly recorded that assessee has failed to furnish the evidences with regard to the additional quantum of purchases reflected in the new trading account as on 19.02.2001. In view of these facts, we find no fault in the order of CIT (A) and we sustain the same on this issue. This ground is dismissed.
9. In the ground no.5, the issue is regarding the deletion of addition of Rs.8,20,908/- on account of bogus expenses. The CIT (A) has deleted this issue by holding as under :-
"9.4 I have considered the above submissions of the learned A/R of the appellant and the facts mentioned in the assessment order by the A.O. It is noticed that the appellant incurred the expenses at Sl. Ns. 5 to 9 as noted in para 91 of this order in the normal course of business and the details of such expenses along with relevant accounts were furnished before the A.O. for examination as revealed from the assessment records. However, it appears that the A.O. has not caused any inquiries to check the genuineness of such expenses even though the details of such expenses were made available to the A.O. by the appellant during assessment proceedings. The A.O. has disallowed such expenses only on the ground that necessary documentary evidences in support of such expenses could not be produced without recording any specific finding about the non-acceptance of such expenses based on any result of enquiry. Under the circumstances, I am inclined to accept the contention of the 14 ITA No.2976/Del./2005 CO No.376/Del/2007 appellant that while preparing the manufacturing account on 19.02.2001, just because these expenses were not considered, these expenses could not be treated as bogus. More so, because these expenses have been reflected in the audited accounts after due scrutiny and examination.
9.5 Regarding generator running expenses and repairs and maintenance (P&M it is noticed that there were certain payments made upto 19.02.2001 which were debited to the party's a/c instead of the expense account which were rectified in the accounts subsequently after discovering such accounting errors. The copies of such accounts along with other supporting evidences were made available during the assessment proceeding. Here also, the A.O. had not recorded any specific finding as regards the genuineness of such expenses as a result of any enquiry carried out for the same. Under the circumstances, the claim of these expenses in the audited accounts till the date of survey appear to be in order and as a result, I am unable to sustain the additions made by the A.O. on account of generator running expenses of Rs.1,59,660/- and repairs & maintenance of P&M of Rs.56,623/-.
9.6 As regards the payment of Rs.17,964/- on account of ESIC Employer's contribution, the same is supported by challans for payments and being a payment to Govt. cannot be treated as bogus.
9.7 Similarly, in respect of payment in regard to 8% STD cost (BATA), the A/R of the appellant explained before me that the debit notes pertaining to such expenses for the period from 01-
11-2000 to 19-02-2001 were received late and accordingly the same were accounted for after receipt of such debit notes. This explanation was advanced before the A.O. also along with necessary evidences as revealed in the assessment records. The A.O. has not recorded any specific reason for making disallowance of such expenses apart from saying that the documentary evidences in support of such expenses were not furnished. As a result, I am unable to sustain the disallowance of Rs.17,428/- on account of 8% STD cost (BATA)."
15 ITA No.2976/Del./2005CO No.376/Del/2007
10. After hearing both the sides, we find that the assessee has submitted details of the expenses before the AO. The AO has not made any enquiry to check the genuineness of these expenses. The AO disallowed only on the ground that necessary document evidences in support of such expenses could not be produced. However, there was no specific finding about non-accepting of such expenses. Since there is no specific finding of the AO with regard to any of the expenses to be bogus, we find no merits in this ground of revenue's appeal on this issue and we sustain the order of CIT (A) on this issue. This ground is dismissed.
11. In the ground no.6, the issue involved is deleting part addition made on account of bad debt written off. In the ground no.1 in cross objection, the sustenance of part addition is challenged. The CIT (A) has dealt this issue in paras 10 & 11 which read as under :-
"10.5 I have considered the above submissions of the ld. A/R of the appellant and the facts narrated by the A.O. in the assessment order. It is observed that the debts under consideration are long outstanding debts, barring the case of M/s Dees Marketing, for which the sales were made in earlier years which were taken into account in computing the income of the relevant years. According to the provisions of section 36(1)(vii) read with section 36(2) of I.T. Act, 1961. The debts or part thereof which have been written off in the accounts as irrecoverable in a previous year relevant to an asstt. Year, have to be allowed in the said asstt. Year provided such debt or part thereof has been taken into account in computing the income of an assessee in the relevant previous year or in an earlier previous year. The earlier restriction that the debt or part thereof which has to be established to have become bad is withdrawn w.e.f. 01.04.1989 as per Direct Tax Law Amendment Act, 1987. The 16 ITA No.2976/Del./2005 CO No.376/Del/2007 appellant submitted necessary evidences like copies of accounts, Balance-sheet & P&L account for earlier years wherein the debts were taken into consideration for computation of income in the relevant previous years. The A.O. had not recorded any adverse findings to the same effect. I have also checked the relevant accounts and notice that such debts have been offered for taxation in earlier years.
10.6 As regards, the A.O.'s observations that the debtors were not available at the declared addresses, the A/R of the appellant submitted before me that it helps the case of the appellant because the appellant, inspite of best efforts could not succeed in tracing the debtors and to make recovery of the outstanding dues from them. The debts pertained to the periods 1995, 1996 and 1997 and the appellant communicated to them earlier for payments of the debts which were of ....avail. However, since for the allowability of the claim of bad debts, it is only to be proved that the relevant debts were taken into consideration for computing the income of the respective years, which already stands satisfied, no disallowance can be made u/s 36(1)(vii) read with section 36(2) because the debts have been already written off as irrecoverable during the year under consideration. I am inclined to agree with the contention of the appellant in this regard because of the amended provision of Section 36(1) (vii) read with Section 36(2) of I. T. Act. As a result, I direct the A.O. to allow the claim of bad debts written off in respect of the following debts:-
a) M/s Seema Agencies : Rs.1,26,860/-
b) M/s Dynasty International : Rs.1,55,556/-
c) M/s Priyanshu Industries : Rs.3,42,893/-
d) M/s Choti Hatti : Rs.3,42,,777/-
Rs.9,68,086/-
10.7 As regards, the debt of Rs.2,00,000/- outstanding
against M/s Dees Marketing, it has been submitted that the appellant paid Rs.2,00,000/- to this party for advertising on media of the appellant's products. But, unfortunately this party is absconding and the company is not able to recover this amount. Therefore, this expense is a business loss and the deductions should be allowed u/s 28 of I.T. Act for computing the business profit.17 ITA No.2976/Del./2005 CO No.376/Del/2007
10.8 However, I am not convinced with the submission of the A/R of the appellant in this regard because this debt cannot be written off within the meaning of Section 36(1)(vi) read with Section 36(2) of I.T. Act on the ground that this debt was not taken into account for computation of income of any previous year.
10.9 The deduction u/s 28 also cannot be allowed treating the same as business loss unless the appellant could establish that all efforts have been exhausted to recover such debt during the year under consideration. The same does not stand satisfied as per the evidences filed before me. As a result, I confirm the disallowance of Rs.2,00,000/- made by the A.O. in respect of M/s Deep Marketing.
10.10 As regards, the other debts written off in the accounts, the A/R of the appellant could not furnish the details in respect of such debts either before the A.O. or before me. Accordingly I am unable to entertain the claim of the appellant for such balance debts written off in the accounts.
10.11 To sum up, the claim of bad debts written off amounting to Rs.9,68,086/- is allowed and the balance addition of (Rs.15,36,786/- - Rs.9,68,086/-) i.e. Rs.5,68,700/- is confirmed.
Hence, ground No.(iii)(e) is partly allowed."
12. We have heard both the sides on the issue. The AO has made an addition of Rs.15,36,786/-. The AO has discussed this issue at pages 10 to 12 of his order and the CIT (A) has discussed the issue in paras 10 to 10.11 of his order at pages 17 to 21. The debits were quite old and were taken as an income in the earlier years. As per the law, once a debt is written off in the books then there was no requirement to establish that bad has become bad 18 ITA No.2976/Del./2005 CO No.376/Del/2007 beyond reasonable doubt. After the amendment to section 36(1)(vii) of the Act w.e.f 01.04.1999 all that is necessary is to write off the debts in the books of account and on doing so, the deduction is admissible as held in the various decisions including the following :-
(i) CIT vs. Vallabh Leasing & Finance Co. Pvt. Ltd. - 265 ITR 1 (MP);
(ii) ITO vs. Anil H. Rastogi - 80 TTJ 696 (Mum)(TM)86 ITD 193 (Mum) (TM);
(iii) CIT vs. Ahmedabad Electricity Co. Ltd. - 129 Taxman 190 (Guj.);
(iv) South Eastern Cold Fields Ltd. Vs. Jt.CIT - 77 TTJ 401 (Nag)
(v) New Deal Finance & Investment Ltd. Vs. DCIT - 69 TTJ 410 (Chennai) / 74 ITD 469 (Chennai) Considering the factual and legal position relating to bad debts, we find no merits in the revenue's appeal and we allow the cross objection of assessee on this issue.
13. In the ground no.7, the issue involved is deleting the addition of Rs.27,14,102/- made out of the total addition of Rs.29,89,673/- on account of discrepancies in several parties' accounts. Ground No.2 of cross objection of assessee is against sustaining the addition of Rs.2,75,571/-. This issue has been discussed by the AO at pages 12 to 15 of his order and CIT (A) has discussed this issue in para 11 at pages 21 to 28 of his order. The assessee has submitted copies of account of the parties. The explanation was also 19 ITA No.2976/Del./2005 CO No.376/Del/2007 provided with reference to the difference in the account of Bata India. The copies of account were also submitted and the detailed explanation was also submitted before the AO which is placed at pages 171 to 173 of the paper book. In this explanation, the assessee has explained difference in all the 13 persons. The CIT (A) has deleted this addition by holding as under :-
"11.4 I have considered the above submissions of the Ld. A/R of the appellant and the facts brought out in the assessment order by the A.O. It is observed that the A.O. noted certain discrepancies in the opening and closing balances of some parties (as highlighted in the assessment order) according to the books of accounts of the appellant vis-à-vis the books of accounts of such parties. During the course of assessment proceedings. The appellant furnished the necessary explanations against each such party by producing the respective ledger account and confirmation of accounts in most of the cases. The differences in opening balances were noted in the cases of the following parties :-
Name of the party Difference in
opening balance
(in Rs.)
(a) M/s. Bata India Ltd. 24,49,431 (Dr)
(Trading transaction)
(b) M/s. S.C. Sethi (Loan 2,07,000 (Cr)
transaction)
(c) M/s. B.D. Trading Co. 5,461 (Cr)
(Trading transaction)
(d) M/s. Sushma Dhawan 49,445 (Cr)
(Loan transaction)
(e) M/s. Benlon India Ltd. 2,765 (Dr)
(Trading transaction)
27,14,102
11.5 The Differences in balances cannot be inferred to
have arisen because of the loan or trading transactions carried out in the year under consideration. Further, in the case of M/s Bata India Ltd., the appellant had shown opening Dr. balance of Rs.38,54,645.60 against which M/s Bata India Ltd. Has indicated an opening Cr. Balance of Rs.14,05,214.33 in favour of the 20 ITA No.2976/Del./2005 CO No.376/Del/2007 appellant. Thus the appellant had shown excess debit balance of Rs.24,49,431/- and to that extent the appellant had already credited income in the F.Y. 1999-2000 and so even if there is a difference, it cannot be treated as income of the Asstt. Year under consideration. I have also looked into the submissions of the appellant before the A.O., wherein it was explained that three months credit i.e. (90 days) was allowed to Bata India Ltd. For payment of the bills and till the time of maturity of the bills, the amount of bills was shown as outstanding against the account of M/s Bata India Ltd. On the other hand M/s Bata India Ltd. Cleared the bills after 10/15 days and showed the account of the appellant as squared off instead of waiting for 3months. The appellant discounted such bills from the bank and credited cash account to meet its working capital requirements. Finally, on maturity of the bills, the bills are presented to Bata India Ltd. By the banker for payments and on receipt of such payments by the bankers the appellant credited the account of M/s Bata India Ltd. By passing corresponding debit entry in cash account. Thus, there was every reason that the account of the appellant in the books of Bata India Ltd. Would not tally with the account of Bata India Ltd. In the books of accounts of the appellant. The appellant produced the UBI (UBD) account before the A.O. evidencing the credit of Rs.38,26,352/- an UBI (UBD) account pending maturity of hundis received from Bata India Ltd. Before 31.03.2000 which Bata India Ltd. Might have debited in the accounts of the appellant before 31.03.2000. However, the appellant credited the account of M/s Bata India Ltd. With the same amount on maturity of these hudis which was after 31.03.2000. This explained the discrepancy in the account balances of Bata India Ltd. & the appellant to a large extent. 11.6 Before me, the A/R of the appellant submitted the reconciliation of accounts of Bata India Ltd. As per the books of the appellant as incorporated in the submissions which clearly indicate that there is only a minor unreconciled difference of Rs.74,204/- which was shown as less recoverable from Bata India Ltd. However, the A.O. is at liberty to examine this point and take appropriate action in accordance with law to tax any undisclosed income for the relevant A.Y. relating to F.Y. 1999- 2000 in which the transactions actually arose. 11.7 Similarly there are difference of old opening Dr. Balance of Rs.2,765/- outstanding against M/s Benlon India Ltd.21 ITA No.2976/Del./2005 CO No.376/Del/2007
And of Rs.5,461/- Cr balance, in the case of M/s B.D. Trading Co. for trading transactions carried out in earlier year. I find no reason to tax such differences in old opening Dr./Cr. Balance which arose out of transactions in earlier years. 11.8 Further, there were differences in opening Cr. Balance of Rs.2,07,000/- in the case of S.C. Sethi, and of Rs.49,445/- in respect of Sushma Dhawan who were loan creditors. The A/R of the appellant submitted in this regard that the differences cropped up because the appellant had provided interest against these persons on mercantile basis while these creditors had accounted for interest on cash basis. However, since these differences in balances arose out of transactions in earlier year, the A.O. is at liberty to examine these facts and take appropriate action as per law in the relevant assessment years. 11.9 To sum up, in view of the above discussions, I am unable to sustain the addition of Rs.27,14,102/- on account of differences in opening Dr/Cr balances noted against the parties mentioned as above and the appellant would get a relief of Rs.27,14,102/- on this score.
11.10 The difference in closing balances were noted against the following parties :-
Name of the party Difference in
closing balance
(Amount in Rs.)
(a) Duke Fabric 3409.38
(b) Madhusudan Elastic 4074
(c) Sohan Devi Family 99000
Trust
(d) Sushma Dhawan 126000
(e) Abhishekh Industries 209
(f) Sudarsan Kaur Sehgal 168
(g) Sonal Intertrend Ltd. 5685.00
(diff.in balance on diff.
dates)
TOTAL Rs.2,38,545.38
11.11 Although, the appellant produced the copies of
accounts of the above parties and confirmation of account in such cases before the A.O., all the transaction details as per the claim of the appellant could not be furnished during 22 ITA No.2976/Del./2005 CO No.376/Del/2007 assessment proceedings. Even though such evidences were produced before me, these amount to additional evidences within the meaning of Rule-46A which cannot be admitted at this stage. As a result, I confirm the balance addition of (Rs.29,89,673/- - Rs.27,14,102/-) i.e. 2,75,571/- made by the A.O. on account of discrepancies noted in the books of accounts of the appellant in respect of account balances of some parties.
Hence, ground No.(iii)(f) is partly allowed."
14. After hearing both the sides and considering the facts and legal position, we find no merits in the ground of revenue's appeal and cross objection of the assessee. We sustain the order of the CIT (A).
15. Ground No.4 of the cross objection is general in nature and the issue raised in Ground No.3 is already decided while deciding ground nos.1 & 2 of cross objection, therefore, both these grounds do not require any adjudication, hence dismissed.
16. In the result, the appeal of the revenue is dismissed and cross objection filed by the assessee is partly allowed.
Order pronounced in open court on this 15th day of January, 2014.
Sd/- sd/-
(C.M. GARG) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 15th day of January, 2014
TS
23 ITA No.2976/Del./2005
CO No.376/Del/2007
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.