IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH `A' : NEW DELHI)
BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER
and
SHRI A.T. VARKEY, JUDICIAL MEMBER
ITA No.3805/Del./2013
(ASSESSMENT YEAR : 2007-08)
ACIT, Circle -33(1) vs. Shri Anil Nath,
New Delhi. 302, Satyam Cinema Building,
Ranjit Nagar,
New Delhi 110 008.
(PAN : AAAPN0881A)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Ms. Y. Kakkar, DR
REVENUE BY : Shri P N Monga, Advocate and
Shri Manu Monga
Date of Hearing : 06.05.2015
Date of Pronouncement : 31.07.2015
ORDER
PER A.T. VARKEY, JUDICIAL MEMBER :
This appeal filed by the Revenue is directed against the Order dated
05.3.2013 passed by the Ld. CIT(A)-XXVI, New Delhi pertaining to assessment
year 2009-10.
2. The Revenue has raised the following grounds in its Appeal:-
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"1. The CIT(A) has erred in deleting the addition of
Rs.6,04,805/- made by the Assessing Officer on account of
disallowances of bad debts.
2 The CIT(A) has erred in deleting the addition of
Rs.2,44,850/- made on account of sundry creditors without
appreciating that in absence of proper confirmation, genuineness
of the creditor is not established.
3 The CIT(A) has erred in deleting addition of Rs.18,36,524/-
made by the AO on account of proportionate disallowance of
commission expenses.
4. The CIT(A) has erred in deleting addition of Rs.41,600/-
made by the AO on account of contravention of provisions of
section 40A(3).
5. The CIT(A) has erred in deleting addition of Rs.11,10,028/-
made by the AO out of salary expenses.
6. The Ld. CIT(A) has erred in deleting the addition of
Rs.51,707/- made by the AO on account of negative cash balance.
7. The appellant craves leave to add, alter or amend any / all of
the grounds of appeal before or during the course of the appeal."
3. The brief facts of the case are that the assessee, an individual, is the
proprietor of two concerns namely M/s. Overseas Associates and M/s. Dyechem
Sales Corporation. M/s. Overseas Associates is engaged in the business of
trading in surgical instruments, whereas M/s. Dyechem Sales Corporation is
engaged in the activities of procuring orders on behalf of manufactures of
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chemicals on commission basis. The assessee filed his return of income on
29.9.2009 declaring a total income of Rs.1,66,60,730/-. The case was selected
for scrutiny under CASS. In compliance to the statutory notices served on the
assessee, books of accounts were called for and were verified on test check
basis and the assessment was completed in terms of order u/s 143(3) of the Act
1961 (hereinafter `the Act') at an income of Rs.2,02,33,088/- as against the
returned income of Rs.1,66,60,730/- and made various additions vide order
dated 28.12.2011.
4. Against the aforesaid order of the Assessing Officer, assessee appealed
before the Ld. CIT(A), who vide his impugned order dated 5.3.2013 has partly
allowed the appeal of the assessee.
5. Now the Revenue is in appeal before us.
6. Ld. DR relied upon the order of the AO.
7. On the contrary, Ld. Counsel of the assessee has relied upon the order of
the Ld. CIT(A) and defended the same and does not want us to interfere in the
same.
8. We have heard both the parties and perused the records. With regard to
ground no. 1 regarding deletion of addition of Rs. 6,04,805/- made by the AO
on account of disallowances of bad debts is concerned, we find that in the
course of assessment proceedings, the Assessing Officer noticed that the
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assessee had debited a sum of Rs.9.23 lakhs as bad debts. The Assessing Officer
asked the assessee to show whether all the conditions for allowability of bad
debts as per the provisions of section 36(2) and 36(1)(vii) of the Act were
fulfilled. Pursuant to the said query of the AO, the assessee vide letter dated
19.12.2011 filed the details of the parties in whose accounts the amounts were
written off. On perusal of the details, the Assessing Officer noticed that in the
case of the three parties given below, the assessee could not demonstrate as to
how and where the following amounts claimed as bad debts were taken bill-
wise into account in computing assessable income :-
S.No. Name of the party Amount
1. Ajit Hospital Rs. 9,083/-
2. Aesculap Rs. 1,27,722/-
3. Gopal Surgical Rs. 4,68,000/-
Rs. 6,04,805/-
Accordingly, the Assessing Officer disallowed an amount of Rs.6,04,805/- the
aggregate of the three aforesaid amounts u/s 36(2) of the Act and added to the
income of the assessee. During the appellate proceeding, the Ld. CIT(A) on
perusal of the material on record, noticed that in response to the query relating
to bad debts amounting to Rs.9,23,393/- appearing in the P&L account, the
assessee had filed all the details of parties and also his explanations vide letters
dated 8.12.2011 and 15.12.2011. It was observed by the Ld. CIT(A) that after
taking on record the details and explanation filed by the assessee, the Assessing
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Officer did not raise any further clarification or enquiry regarding these three
parties whose accounts were squared up by writing off the amounts outstanding
against their names. From the facts on record, Ld. CIT(A) observed that the
assessee had a long business relations with these parties and they were not only
old but valuable customers/suppliers of the assessee who given significant
business to the assessee. The Ld. CIT (A) takes note that the amounts written
off in the case of Ajit Hospital and Gopal Surgical were in respect of sales made
by the assessee to these parties. Whereas, in the case of Aesculap the amount
represented the excess payment made by the assessee to foreign supplier. The
assessee had filed details of bad debts written off with copies of accounts of
debtors of the amounts written off stating that they were business transactions
and we have perused the same which is placed in pages 1 to 19 of the paper
book and finds that the explanation of the assessee is corroborated by the
documents placed on record. Having considered all the facts of the case, we
find that the Assessing Officer was not justified in making the impugned
disallowance as the amounts in question were written off by the assessee in
accordance to section 36(2) and 36(1)(vii) of the Act. Accordingly, the addition
of Rs.6,04,805/- made by the Assessing Officer was rightly deleted by the Ld.
CIT(A), which does not need any interference from our part, hence, we uphold
the same by dismissing the Ground no.1 raised by the Revenue.
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8.1 Apropos Ground 2 regarding the deletion of addition of Rs.2,44,850/-
made on account of sundry creditors. During the course of assessment
proceedings, the Assessing Officer asked the assessee to file confirmation
pertaining loan amount of Rs.2,44,850/- appearing as sundry creditor in the
name of Sh. Amitabh Mendiratta. The Assessing Officer observed that the
assessee merely stated that the amount in question does not pertain to the year
under consideration but did not furnish the confirmation of the creditor.
Therefore, the Assessing Officer treated this sundry creditor as not genuine and
accordingly added this amount to the income of the assessee by holding it as
bogus. During the appellate proceedings, the Ld. CIT(A) has observed that the
Assessing Officer referred to only a part of the reply filed by the assessee dated
15.12.2011 in the course of the assessment proceedings. The contents of the
letter of the assessee dated 15.12.2011 is reproduced :-
"Your show cause notice in regard to submission of confirmation
of amount due to Mr. Amitabh Mendirata amounting to
Rs.2,44,850/- shown under the head Expenses payable.
It is submitted that the amount pertains to the period 2007-08 and
not pertain to the year under reference, Mr. Amitabh Mendiratta
who was associated as retainer up to the period March 2008 and
left w.e.f 01st April 2008 without getting the final dues which were
subjected to reconciliation by the proprietor. The due TDS on the
amount was deposited after deduction. The amount is still payable
and will be paid immediately the moment the claim is made. Mr.
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Amitabh Mendiratta who at present is settled abroad and hence the
confirmation in regard to the amount could not be obtained."
We find that the copy of the account of Amitabh Mendiratta for the period from
01.04.2005 to 31.03.2008 (page 22 of paper book) clearly reflects Rs.2,44,850/-
as due for payment to Amitabh Mendiratta (closing balance). Page 23 of the
paper book is the ledger account of Amitabh Mendiratta for the period
01.04.2008 to 01.03.2009 and it shows the same amount as opening balance.
And page 24 of paper book shows ledger account of Amitabh Mendiratta which
reflects opening balance as Rs.2,44,850/-. We also note that from a perusal of
page 20 reveals that Shri Amitabh Mendiratta had been paid an amount of
Rs.5,93,633/- for retainership in the FY 2005-06 and Rs.6,14,700/- for FY
2006-07; and for FY 2007-08 he was paid Rs.3,91,780/- and Rs.2,44,850/- was
due for him (page 22 of paper book). Thus, the AO's finding that this amount
due to Amitabh Mendiratta is bogus have to fail in the light of the aforesaid
evidences on record. A perusal of the above letter of assessee shows that
Amitabh Mendiratta was a retainer of the assessee who left the institution on
31.03.2008 and went abroad. The amount shown as sundry creditor by the
assessee is the amount due to said Amitabh Mendiratta. Just because the
assessee could not give the confirmation about the said amount which is due for
Amitabh Mendiratta does not mean that it is a bogus entry made by the assessee.
We find that the AO mis-directed himself by not going through the entire
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explanation given by the assessee in respect to his explanation in respect to the
sundry creditor as observed by the ld. CIT (A). Therefore, considering the facts
of the case, ld CIT(A) has concluded that that there is no justification for the
Assessing Officer to make the impugned addition. Accordingly, he deleted the
addition of Rs. 2,44,850/-, which does not need any interference on our part,
hence, we uphold the same and dismiss the ground no. 2 raised by the
Revenue.
8.2 Apropos Ground 3 is regarding the deletion of addition of
Rs.18,36,524/- made by the AO on account of proportionate disallowance of
commission expenses is concerned, we find that in the course of assessment
proceedings, on perusal of the audit report the Assessing Officer noticed that
though the assessee maintained his accounts on mercantile basis, income from
commission was partly accounted for on receipt basis which was, according to
AO, evident from the commission earned in the account of M/s. Overseas
Associates which clearly showed credit entries of Rs.25,33,952/- dated
05.0.2008, Rs.40,48,271/- dated 27.01.2009, aggregating to Rs.65,82,239/-. The
Assessing Officer observed that this kind of accounting treatment had the effect
of suppressing taxable income while corresponding commission expenses paid
to the sub dealers were claimed on mercantile basis. Accordingly, the Assessing
Officer vide order sheet entry dated 19.11.2011 asked the assessee to show
cause as to why the corresponding commission expenses be not proportionally
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disallowed because commission income was partly accounted for on receipt
basis, when accounts were maintained on mercantile basis. According to the
Assessing Officer, vide reply dated 8.12.2011, the assessee had accepted that
the said amounts were accounted for on receipt basis and stated that the same
were from overseas parties and that no commission was due from the overseas
parties as on 31.3.2009. The Assessing Officer observed that this reply of the
appellant was immaterial. The Assessing Officer observed that the commission
earned in the account of M/s. Overseas Associates clearly showed that the said
amounts of commission income were credited on receipt basis and not when
due. Accordingly, the Assessing Officer worked out proportionate commission
expenses and disallowed an amount of Rs.18,36,524/- out of commission
expenses and added the same to the income of the assessee. We find that the
Ld. CIT(A) has perused the reply of the assessee dated 8.12.2011 which has
been referred by the Assessing Officer in his order. On perusal of the said reply
of the assessee, she finds that the books of accounts were maintained on
mercantile basis in respect of incomes and expenditure; and any commission
due from the parties and any commission due to sub-dealers have been
accounted for on accrual basis. The ld. CIT (A) took note of the fact that the
assessee had fully explained the accounting of the impugned commission
income. According to the ld. CIT (A), the Assessing Officer had failed to
appreciate the correct factual position. The ld. CIT (A) has taken note that the
assessee had accounted for these two amounts in his books of account since
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these had been actually received during the relevant year. The ld. CIT (A) has
observed in respect to commission expenses were concerned, they had been
paid to the assessee's agents in India who had rendered services to the assessee.
The ld. CIT (A) has made a finding that the payments of commissions were
made after deducting corresponding TDS as per law. In the said facts and
circumstances, ld. CIT (A) held that there was no justification for making any
proportionate disallowance out of commission expenses. We have gone through
the bank statement of the assessee i.e. of M/s. Overseas Associates with
Corporation Bank for the period from 01.04.2008 to 26.08.2008 and 24.01.2008
to 03.02.2009 which is placed at page 25 26 PB, and copy of commission
earned account in the books of the assessee (M/s. Overseas Associates) for the
period 01.04.2008 to 31.03.2009 PB page 27 & 28 and copy of the letter dated
05.12.2011 from Soring, Germany for payment of commission at page 29 PB
and copy of commission paid account for the period 01.04.2008 to 31.03.2009
at page 30 -31 PB and finds no infirmity in the findings of the ld. CIT (A).
Therefore, she has rightly deleted the addition of Rs.18,36,524/- made by the
Assessing Officer out of commission expenses. In the light of the evidence on
record, we do not see any reason to interfere with it; hence, we uphold the same
and dismiss the ground no. 3 raised by the Revenue.
8.3 Apropos ground 4 is relating to deletion of addition of Rs.41,600/- made
by the AO on account of contravention of provisions of section 40A(3) of the
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Act is concerned, we find that in the assessment proceedings, on examination
of the cash book of M/s Overseas Associates, the AO noticed that the assessee
had made payment of Rs.41,600/- in cash without deducting TDS which was so
liable to be disallowed u/s. 40A(3) of the Act. Therefore, the AO asked the
assessee to show cause to why this payment be not disallowed u/s. 40A(3) of the
Act. The AO observed that the assessee had made only submissions in respect
of payment of Rs. 41,600/- for purchase of gifts for business promotion, so it
was not acceptable. The AO observes that since the assessee failed to furnish
any evidence to prove that these payments did not fall within any of the
exceptions of Rule 6DD, there was a contravention to the provisions laid down
in section 40A(3) of the Act. Therefore, he disallowed the amount of Rs.
41,600/-. However, we find that Ld. CIT(A) found fault with the AO for not
giving any reason as to how this payment contravened section 40A (3) for
purchase of gifts; and not a single payment, and has deleted the addition of
Rs.41,600/- relying upon the assessee's letter dated 8.12.2011 in respect of this
payment stating that the payment was made to an unknown local shop keeper
and it was for purchase of gifts for overseas business associates, as there was no
other alternative but to pay in cash. Ld. CIT(A), considering the practical
problem with the local and small time shopkeepers, justified the cash payment
for purchase of gift and she deleted the addition. In our opinion, the view
adopted by the Ld. CIT(A) is not correct because she was doubting whether the
gift purchase by assessee was for a single transaction on a given day. We find
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on perusal of page 95 of PB, sale bill of gift for RS.41,600/- dated 08.08.2008,
which was paid in cash, so is in contravention of section 40A(3) of the Act.
Therefore, we find that the AO has disallowed the amount of Rs. 41,600/- on
valid ground. In our view, the AO rightly held that since the assessee failed to
furnish any evidence to prove that these payments did not fall within any of the
exceptions of Rule 6DD, there was a contravention to the provisions laid down
in section 40A(3) as stated before. Therefore, in our opinion, the addition made
by the AO amounting to Rs. 41,600/- needs to be upheld, accordingly, we
uphold the action of the AO on this account and allow the Ground No. 4 raised
by the Revenue.
8.4 Apropos ground 5 relating to deletion of addition of Rs. 11,10,028/- made
by the AO out of salary expenses is concerned, we find that in the course of
assessment proceedings, vide order sheet entry dated 29.11.2011, the Assessing
Officer asked the assessee to file the details in respect of salary expenses
amounting to Rs.18,88,656/- with necessary evidence. Since, the appellant did
furnish evidence in respect of salary expenses, vide order sheet entry dated
12.12.2011, the Assessing Officer issued a show cause to the appellant as to
why the salary expenses be not disallowed in the absence of evidence. The
appellant in his reply dated 15.12.2011 filed before the Assessing Officer had
submitted as under:
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" It is submitted that the salary register which was being
maintained on monthly basis for payment of salaries for the year
under reference is not traceable at present. In support of which we
are submitting herewith the copies of the appointment letters along
with the details of payments made to employees on monthly basis
giving the complete details of the cheque no. dates and bank and
also salaries paid in cash to few of junior employees as well as
payment on account of bonus and ex-gratia. That most of the
payments towards salaries paid are through payees account cheques
which can be verified with the Bank statement submitted.
We hope the enclosed details will satisfy you in regard to be
payment made on account of salaries/ex-gratia/bonus in the year
under reference."
On perusal of the assessee's reply, the Assessing Officer noted that the
aggregate salary issued by the assessee through cheques worked out to
Rs.15,16,256/- as against Rs.18,88,656/- debited to the P&L account. Therefore,
vide order sheet entry dated 16.12.2011, the Assessing Officer again asked the
assessee to show cause as to why the salary not paid through cheques in respect
of which no evidence in the form of salary register/voucher is filed be not
disallowed. On perusal of the details filed, the Assessing Officer found that
salary aggregating to Rs. 7,82,628/- was paid in cash, which according to him
was liable to be disallowed. Therefore, the Assessing Officer disallowed an
amount of Rs.11,10,020/- (i.e. Rs.7,82,628/- paid in cash and the difference that
worked out amounting to RS.3,27,400/- (i.e. 18,88,656 - 15,61,256) was added
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to the income of the assessee. We find that the Ld. CIT(A) has observed that
Assessing Officer had not made out of case for making the impugned
disallowance and that the Assessing Officer had made vague observation to
disallow a major part of the salary debited to the P&L A/c. According to the Ld
CIT(A) the Assessing Officer had also wrongly worked out the difference of
Rs.3,27,400/-. The Ld CIT(A) notes that the Assessing Officer had not taken
into account the names of all the employees while reproducing the names in
para 9 of his order. According to Ld CIT(A) the Assessing Officer did not give
any clear finding or reasons for making such a disallowance nor brought any
adverse material on record. In the absence of any such adverse material, Ld.
CIT(A) observed that there is no justification for the Assessing Officer to make
such an impugned addition. In the instant case, we find that the AO has
reproduced a chart presented by the assessee in page 5 & 6 of his order. From a
perusal of the said chart, we find that out of 14 employees to whom the assessee
claims to have paid the salary, only 3 were not given salary by cheque. Other 11
employees were paid by account pay cheque and cash. The assessee had
produced the appointment letters of the said employees and confirmation from
them that they have received the said salary as claimed by the assessee. We
were taken through page 37-94 (PB) were the month wise chart showing details
of salary paid to employees of the assessee for the period from 1.04.2008 to
31.03.2009 along with confirmation and appointment letter of the employee are
on record. In the light of the said evidences, merely because few employees
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have been paid salary as cash cannot justify disallowance unless the AO is able
to bring any adverse material to suggest that the claim of salary incurred by the
assessee is bogus. So the Ld CIT(A) righty deleted the addition of Rs.
RS.11,10,028/-, which does not need any interference on our part, hence, we
uphold the same by dismissing the ground no. 5 raised by the Revenue.
8.5 Apropos ground No. 6 relating to deletion of the addition of Rs. 51,707/-
made by the AO on account of negative cash balance is concerned, we find that
in the course of the assessment proceedings, on examination of the cash book
vis-a-vis bank account statements, the Assessing Officer noticed that the
assessee had shown a withdrawal from Corporation Bank amounting to
Rs.67,000/- dated 28.2.2009, when actually as per the bank statement, the
withdrawal was on 2.3.2009. Therefore, the Assessing Officer observed that the
assessee was trying to mask his negative cash balance with false entries. The
Assessing Officer also noted that the assessee had shown a withdrawal from
Corporation Bank on 2.3.2009 amounting to RS.25,000/-, whereas actually as
per bank statement the withdrawal was on 3.3.2009. Accordingly, the assessee
was asked to show cause as to why the negative cash balance due to cash
withdrawal shown in cash book earlier than the actual withdrawals made from
the banks, as per bank statement be not added to his income. Vide reply dated
8.12.2011, the assessee submitted that entries were made when cheques were
issued. This was observed by the Assessing Officer as the assessee's attempt to
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misguide and in his opinion, the cash was to be debited when actually it came in
to cash book and the ensuing negative cash balances due to falsification of
entries were liable to be added to the income of the appellant. Therefore, the
Assessing Officer worked out the ensuing negative balances as under:
Date Opening Cash Book Cash book Resultant daily balance
Balance debited on the credited on
day by the day by
28.2.2009 Debit NIL Rs. 46,600/- Negative balance Rs.
balance Rs. (Salary and 41,707/-
4293/- imprest
expenses)
1.3.2009 NIL NIL Rs. 10000/- Negative Balance Rs.
(Imprest 10,000+41,707=51,707/-
expenses)
2.3.2009 Nil Actual bank Nil Debit balance Rs. 67,200/-
withdrawal Rs.
67,200/-
3.3.2009 Actual bank Rs. 20/- Debit Balance Rs. 92,200/-
withdrawal Rs.
25,000
Hence, the Assessing Officer worked out the negative balance as aggregating to
(Rs.41,707 + Rs.10,000) Rs.51,707/- and added to the income of the assessee.
Ld. CIT(A) deleted the addition of Rs.51,707/- by relying on a letter of assessee
dated 8.12.2011 wherein she observed that AO did not appreciate the contents
of letter properly and failed to comprehend that what was done was only a
book entry for both credits and debits. According to Ld CIT(A) the
disbursement of Rs.46,600/- was only made on 2.3.2009 when the cheque was
encashed. Regarding the amount of Rs.10,000/- the Ld CIT(A) was of the
opinion that it was explained by the assessee that since 1.3.2009, being Sunday
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and since the cash was urgently required for expense, the same was provided by
the assessee from his own pocket, therefore, ld. CIT(A) has deleted the addition
of Rs. 51,707/- on this account. Having considered the above factual matrix we
are of the opinion that the finding of CIT(A) cannot be countenanced. The
undisputed position is that there was negative cash balance on 01 November
2009 of Rs. 51,707/-. The basis of CIT (A) that expenditure incurred as per cash
book of Rs. 4,600/- was not actually expended on 28/Feb/2009 is unsupported
by any material. It is an afterthought of the assessee, as cash book has been
maintained and produced in the course of the proceedings. As regards the
explanation of Rs. 10,000/- that the same was incurred out of own sources does
not deserve any merit as it is a more self serving explanation without any basis.
We therefore reverse the conclusion of CIT(A) and uphold the action of AO in
bringing to tax a sum of Rs. 57,707/- as unexplained income of the assessee.
Hence, we confirm the action of the AO on this addition and allow ground no.
6 filed by the Revenue.
9. In the result, the Revenue's Appeal is partly allowed.
Order pronounced in the Open Court on 31/07/2015.
Sd/-
(R.S. SYAL) (A.T. VARKEY)
ACCOUTNANT MEMBER ACCOUNTANT MEMBER
Dated the 31 day of July, 2015
TS
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Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)-XXVI, New Delhi.
5.CIT(ITAT), New Delhi.
AR, ITAT
NEW DELHI.
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