The order of the Bench was delivered by
DEEPAK R. SHAH (Accountant Member).-This appeal by the assessee is directed against the order of the learned Commissioner of Income-tax (Appeals)-l1, Surat dated November 27, 2006 in an appeal against assessment framed under section 143(3) of the .Income-tax Act, 1961 (in short the Act).
The assessee is carrying on the business of trading in M.S. steel and allied products, as Proprietor of M/s. Standard Steel and Sales. The assessee declared the gross profit of 3.68 per cent. on total sales of Rs. 6,28,85,200 as against the gross profit at 3.69 per cent. on sales of Rs. 4,41,12,995 in the immediately preceding year.
The Assessing Officer noted that the assessee shown outstanding liability in the name of M/s. Gayatri Enterprises and M/s. Om Steel Traders amounting to Rs. 12,93,013 and Rs. 8,47,930. The purchases from M/s. Gayatri Enterprises were made during the financial year 1999-2000. The Assessing Officer conducted inquiry at the address mentioned in the bill. M/s. Gayatri Enterprises was not found at the stated premises. The Assessing Officer also noted that the bill number is different than that mentioned in the octroi receipt. The payment of octroi by the account payee cheque is irrelevant. The Assessing Officer held that the assessee failed to adduce any reason as to why the payment was not made since five years. Therefore, the liability is deemed to have been ceased. Similarly, the inquiry with M/s. Om Sales Corporation also failed. The assessee explained that the payment is made in the subsequent years. This contention was negatived following the reasons mentioned in the case of M/s. Gayatri Enterprises, that since the payment is not made for about 4 years, the liability has become barred by limitation and hence to be added as income under section 41(1) of the Act. The same was confirmed by the learned Commissioner of Income-tax (Appeals). The assessee is in further appeal before us challenging the addition in ground No.3 raised before us.
4 The learned authorised representative for the assessee submitted that the assessee has acknowledged the liability. On the basis of finding for this year, the assessment for the assessment year 2000-01 was reopened to hold that purchases in the said year is bogus. However, in the reassessment order dated December 12, 2007 the Assessing Officer has found that the party M/s. Gayatri Enterprises was found to be genuine and the evidences produced by the assessee were verified and accepted. This proves that in reassessment proceedings M/s. Gayatri Enterprises was found to existing and to be a genuine party. The finding in the original assessment for this year conducted much prior is of little consequence. As regards M/s. Om Steel Traders, the learned authorised representative submitted that the account was settled in subsequent years and the payment was made by account payee cheque. At all points of time the assessee has acknowledged the liability and hence the provisions of section 41(1) cannot be invoked. In support of his submissions, the learned authorised representative relied on the decision of Ahmedabad Tribunal in the case of New Commercial Mills Co. Ltd. v. Deputy CIT reported in [2001] 73 TIJ (Ahd) 893 and the decision of the Mumbai Tribunal in the case of DSA Engineers (Bombay) v. ITO reported in [2009] 30 SOT 31 (Mumbai).
5 The learned Departmental representative, on the other hand, strongly relied upon the impugned order. It was submitted that the Assessing Officer conducted inquiry, but party was not found to be existing. When the assessee is claiming that the liability is outstanding, it is for the assessee to prove that the liability has not ceased. Since the assessee failed to prove the existence of liability the addition was rightly was made under section 41(1) of the Act.
6 We have carefully considered the relevant facts, arguments advanced and decisions cited. It is a matter of record that subsequent to the assessment framed in this case, reassessment proceedings were initiated to find out whether M/s. Gayatri Enterprises is a genuine concern or not and as per the reassessment order dated December 12, 2007, the genuineness of M/s. Gayatri Enterprises was established and the Assessing Officer was satisfied with the same. Therefore, it cannot be said that M/s. Gayatri Enterprises is a bogus concern. After the purchases were made by the assessee, there is nothing on record to show that the assessee has made the payments but has not recorded the same. The assessee has shown the liability as outstanding in its books of account. Thus, the assessee is acknowledging the liability. Even under the Limitation Act, though the creditors may not be able to enforce the claim for recovery of the sum, still if the assessee acknowledges the liability, the liability cannot be said to have ceased. If the provisions of section 41(1) are to be applied, it is for the Assessing Officer to prove that the allowance or deduction has been made in the assessment for any year in effect of loss or trading liability incurred by the assessee and such liability has ceased or the assessee has obtained whether m cash .or m any other manner some benefit in respect of such liability. Explanation 1 inserted to section 41(1) by the Finance (No.2) Act, 1996 with effect from April 1, 1997 will also not apply. For such Explanation to apply, there should be at least unilateral act on the part of the assessee to write off such liability in its account. Since the assessee has acknowledged the liability throughout and such liability in subsequent years was either settled by returning the goods or by making payment by account payee cheque is sufficient evidence to hold that the liability has not ceased and hence addition under section 41(1) is not warranted. We therefore, delete the addition made of Rs. 12,93,013 and Rs. 8,47,930 on account of alleged cessation of trading liability for the purchases of goods from M/s. Gayatri Enterprises and M/s. Om Steel Traders respectively ..
Ground No.4 is against the addition of Rs. 15,980 and Rs. 20,000 being unexplained cash credits in the name of M/s. Mahesh Textiles and M/s. Jaideep Synthetics respectively.
We have perused the orders of the authorities below and the submissions. We find that the impugned amount in both cases were received by the assessee on account of sales of goods. The assessee received advance payment for sale of goods in cash which was accounted as such. Thus, this is not a case of simple cash credit as envisaged under section 68 of the Act. Rather the amount is by way of sale proceeds of the goods sold and hence addition under section 68 is not warranted. We, therefore, delete the addition of Rs. 15,980 and Rs. 20,000 in the name of M/s. Mahesh Textiles and M/s. Jaideep Synthetics respectively.
Ground No.5 is against disallowance of Rs. 86,604 out of interest expenses.
We have perused the orders of the authorities below and the submissions of the learned authorised representative for the parties. We find that the assessee has borrowed the sum on which interest has been paid. The assessee is also found to have given interest-free loansladvances to M/s. Mehta Steel Corporation and Shreeji Steels, associate concern of the assessee. The assessee failed to show that the amount advanced was out of interestfree funds. The assessee has not disputed the facts that the amount paid was 0 It of borrowed funds. Accordingly, since facts remained that the interest-bearing funds have been diverted for giving advances without charging any interest and without demonstrating that the advances was in the course of business, the disallowance of interest is to be upheld.
Ground No.6 relates to disallowance out of car and scooter expenses of Rs. 10,000 was not pressed at the time of hearing. This ground dismissed for want of prosecution.
Ground No. 7 is regarding disallowance of Rs. 7,500 out of telephone expenses was also not pressed at the time of hearing. This ground is therefore dismissed for want of prosecution.
In the result, the appeal is partly allowed.
The order is pronounced in the open court on January 8, 2010.