Additional evidences cannot be accepted by CIT(A) without following mandate in terms of rule 46A

IN THE ITAT DELHI BENCH ‘E’

Assistant Commissioner of Income-tax

versus

Nirula Handicrafts Bazar (P.) Ltd.

IT APPEAL NO. 3886 (DELHI) OF 2012

[ASSESSMENT YEAR 2008-09]

Date of pronouncement – 12.10.2012

ORDER

A.N. Pahuja, Accountant Member  

This appeal filed on 27.07.2012 by the Revenue against an order dated 30.03.2012 of the ld. CIT(A)-XVI, New Delhi, raises following grounds :

“1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the amount of Rs. 45,76,244/- on account of disallowance of creditors made by the A.O. due to non submitting of confirmation, which was surrendered by the assessee during the assessment proceedings.

 2.  Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in ignoring the fact that the assessee filed additional evidence under Rules 46A regarding confirmation of 23 creditors of Rs. 45,76,244/- during appellate proceedings but A.O. in its remand report has submitted that the assessee company has shown inability to furnish further confirmations during the assessment proceedings and case was decided on merits and material available on record.

 3.  The appellant craves to be allowed to add any fresh grounds of appeal and/or delete or amend any of the grounds of appeal.”

2. Facts, in brief, as per relevant orders are that e-return declaring income of Rs. 51,71,338/- filed on 28.09.2008 by the assessee, engaged in exports of carpets, handicrafts etc., was revised on 28.3.2009,declaing income of Rs. 1,81,76,221/-.Thereafter, the return selected for scrutiny with the service of a notice u/s 143(2) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) issued on 18.08.2009. During the course of assessment proceedings, the Assessing Officer [AO in short] asked the assessee to submit complete details, name and address of sundry creditors exceeding Rs. 80,000/- each along with their confirmations as also the amount outstanding on 31.03.2008. On the basis of details obtained from the assessee, the AO issued a notice u/s 133(6) of the Act to 32 parties, of which 5 notices were returned back unserved with the remarks ‘incomplete’ address or ‘left without address’. In 22 cases, confirmations were received while in 5 cases, no reply was received. To a further query by the AO, seeking remaining confirmations with the request to produce the relevant persons, the assessee replied vide letter dated 24.12.2010 as under :-

“Your Honour vide order sheet entry dated 13.12.2010 has asked the assessee to file confirmation in respect of sundry creditors balances outstanding in the books of accounts exceeding Rs. 80,000/-. As required, the assessee has tried to obtain the confirmation from such parties, but due to shortage of time, non availability of concerned persons, distance and climatic condition in the case of UP, Punjab, Kashmir etc., small weavers, small artisan, small time traders belongs to cottage industries could not be contacted. Your Honour will appreciate that from the list of sundry creditors, most of the parties are small weavers based at Srinagar, Kashmir also and they visit our shop two to three times in a year or so. Due to bad weather at Kashmir now, they could not be contacted, and in other cases non-availability of concerned persons etc. Notwithstanding above difficulty, the assessee could manage to file confirmation in respect of 122 parties exceeding Rs. 80,000/- where the balances outstanding worked out to Rs. 1,68,19,565/-. As per list enclosed, confirmation in respect of 23 parties could not be filed owning to time constraint, non availability of concerned persons etc. The amount of balances outstanding in respect of 23 parties where confirmations could not be filed works out to Rs. 45,76,244/-.

To buy peace, to avoid undue hardships, litigations and due to non-filing of confirmation in respect of enclosed parties, we hereby offer for taxation Rs. 45,76,244/- in respect of 23 parties subject to the condition that no penalty proceedings u/s 271(1)(c) of Act or prosecution proceedings or any adverse view should be taken against the assessee company.”

2.1 Since the assessee expressed its inability to furnish further confirmations nor produced the creditors for cross-examinations and ultimately offered the amount to tax to the extent of Rs. 45,76,244/-,the AO while relying upon the decision in Sumati Dayal v. CIT [1995] 214 ITR 801  accepted the offer of the assessee and added the amount of Rs. 45,76,244/- to tax.

3. Despite surrender of amount before the AO, the assessee preferred appeal before the ld. CIT(A) and submitted additional evidence in the form of confirmations of the 23 persons, in terms of Rule 46A of the Income Tax Rules, 1962 on the ground that the confirmations could not be filed due to shortage of time and non allowability of opportunity by the AO against the principles of natural justice. The ld. CIT(A) admitted additional evidence under rule 46A(1)(b) of the IT Rules 1962 while mentioning that the assessee was prevented by sufficient cause from filing the confirmations of all the sundry creditors exceeding Rs. 80,000/- each and deleted the addition, after having a remand report of the AO and comments of the assessee thereon, holding as under :-

“As discussed above, the Assessing Officer made an addition of Rs. 45,76,244/- to the income of the appellant on account of 23 sundry creditors exceeding Rs. 80,000, outstanding as on 31.03.2008, for non-production of their confirmations by the appellant before the finalization of the assessment proceedings. On going through the submissions of the appellant as well as the copies of correspondence between the appellant and the AO, submitted before me, it is observed that initially the Assessing Officer asked the appellant to furnish confirmations of sundry creditors ‘above practical limits’. It has been submitted that in view of the large number of sundry creditors (approximately 550), the Assessing Officer was requested by the appellant to raise the cut-off limit of sundry creditors whose confirmations were to be filed. The Assessing Officer enhanced the limit to Rs. 50,000/- and then to Rs. 80,000/-. The appellant furnished before the AO. confirmations of as many as 302 parties, including sundry creditors as on 31.03.2008 below the limit of Rs. 80,000/- prescribed by the AO confirmations of 122 sundry creditors above Rs. 80,000/- were filed and confirmations of 23 parties to whom amounts payable exceeded Rs. 80,000/-remained to be filed on 24.12.2010 by the appellant for the reason that most the these parties were from outside Delhi, mainly from Jammu & Kashmir,, being small traders belonging to the unorganized sector. It has been submitted that owing to the shortage of time provided by the Assessing Officer to file the confirmations of so many parties (many of them located outside Delhi in Jammu & Kashmir) and also because of the extreme cold conditions in Jammu & Kashmir at that time of the year, confirmations of all the creditors above Rs. 80,000/- could not be obtained by the appellant for filing before the AO. Accordingly, I am of the view that the appellant was prevented by sufficient cause from filing the confirmations of all the sundry creditors exceeding Rs. 80,000/- in the time provided by the AO and that the case of the appellant is covered by Rule 46(1)(b). The additional evidence filed before me by way of confirmation of these 23 sundry creditors is being, therefore, admitted. Since confirmations of 23 sundry creditors totaling to Rs. 45,76,244/- were filed during the course of appellate proceedings for the first time, the matter was remanded to the AO who vide letter dated 14.07.2011 has sent his report. The appellant has submitted rejoinder to the same as follows :-

As stated in out earlier reply filed vide letter dated 06.06.2011, total creditors for amounting to Rs. 4.7 Crores consisting of 550 parties, amount ranging between mere Rs. 1000/- to Rs. 29.85 Lacs were required by the A.O.

As per question at S. No. 5 vide questionnaire dated 19.10.2010 (copy filed vide out letter dated 06.06.2011 at S. No. 9) mentioned to file confirmations “ABOVE PRACTICAL LIMITS”. Later on Ld. A.O. ordered to file addresses and confirmations of creditors exceeding Rs. 50,000/-. Appellant filed addresses as desired. And requested to enhance the limit to file confirmations for creditors of Rs. 80,000/- and above, and accepted the same vide order sheet dated 13.12.2010. Income tax order passed on dated 24.12.2010 in 9 working days excluding 2 weekly off. 5 letters were filed dated 15.12.2010, 16.12.2010, 20.12.2010, 23.12.2010 & 24.1222.2010.

Appellant company filed total confirmation 302 which includes 122 creditors exceeding Rs. 80,000/- and above (out of one 145 creditors of Rs. 80,000/-and above). Confirmations only for 23 creditors could not be filed. Regarding filing of confirmations, reply filed in out letters-Details mentioned below:-

(A)  “Your honor is requested to kindly grant us one week time to enable us to file the remaining confirmations. It will not be out of place to mention that creditors belong to the weaver community, small time traders, belong to the cottage industries sector and from unorganized sector. Belongs to Kashmir (J & K) and this is the winter weather, temperature is very low and usually in those days used to go for business purposes outside of Kashmir, their families also shift to other convenient areas. Hence, requested to waive the requirement of filing the remaining confirmations of accounts. Otherwise they are bona fide creditors.” Para 1 of letter dated 23.12.2010 Copy enclosed vide annexure no. “M” page no.128 to 129.

(B)  “On the last date of hearing further asked to furnish addresses of the all creditors and filing of confirmations of all the Sundry Creditors exceeding Rs. 80,000/-. Most of the creditors are from the weaver community, small time traders belonging to the cottage industries sector and from unorganized sector of mini suppliers of trading goods. The creditors are ranging from mere Rs. 2,000.00 or even below the same. Total Creditors consist of approximately 550 creditors. Your honours have reduced the figure to Rs. 80,000.00. In such a short span of time confirmation of 302 creditors have been filed. Inclusive of less than the limits prescribed.” Photocopy of the letter dated 24.12.2010 have been filed vide our reply filed before your honor vide letter dated 06.06.2011 Copy enclosed vide annexure no. “K” page 122 to 125.

Confirmations of 23 creditors (surrender):- Which could not be filed have already been filed vide our letter dated 06.06.2011 before your honor along with the copy of their accounts for the next financial year 2008-09 vide annexure no. “1” Page 87 to 118, from the same it may be observed that against the opening balance amount were also paid, purchases made and the same cannot be treated as bogus and ingenuine, the same were the regular suppliers.

    *  *   *

Find enclosed herewith a statement giving the names of the creditors surrendered along with amounts outstanding as on 31.03.2007, 31.03.2008 and 31.03.2009 vide annexure no. “N” page no.130 from the same it may be seen that most of the cases as on 31.03.2008 have been paid off in the next year and creditors are admitting the same. Hence, the amount outstanding as on 31.03.2008 cannot be treated as bogus which is against the natural law of justice, unlawful, against the facts and circumstances of the case.

Ld. A.O have not given any adverse comments against the evidences/confirmations filed as part of additional evidence.

There were the reasons which prevented to submit the confirmations. Respected Madam, reasons were beyond the control. Hence, confirmations could not be filed.

There was no reason to treat the unconfirmed as bogus. Hence, no addition can be made.

Copy of account in the books of the appellant of the 23 parties:- Find enclosed herewith of the copy of account in the books of the appellant of the 23 parties. Vide annexure no. “O” page no.1 to 27 From the same, it may be observed that they were regular suppliers, in most of the cases amount paid against the opening balance, purchases made and amount paid also against the same. Confirmations of account have already been filed vide out letter dated 06.06.2011 vide annexure no. “H” page 63 to 86.

(1) Real Opportunity of being heard

The amount was surrendered due to want of confirmation and the same could not be filed due to shortage of time. Hence, no real opportunity of heard was given. Addition cannot be made.

(2) No order can be passed against the principle of the natural law of justice:- ld. A.O. have relied the case of “Sumati Dayal v. CIT(SC) 214 ITR 801″. The ratio given in the above case, are mentioned below:-

“The word ‘may” has been used in all of the sections, thereby given the discretion to the Assessing Officer to treated a particular sum as income or not. Therefore, even if the assessee does not provide an explanation, or provides one i.e. unsatisfactory, it is not necessary in all cases for the amount to be treated as the assessee’s taxable income”. Kanga Palkhiwala and Vyas, 9th Edition, Page no-1266.

In view of the above, your honor is requested o kindly accept the additional evidence and delete the addition made & oblige.”

4.3 After careful consideration of the discussion in the assessment order, the submission of the appellant along with the additional evidences, the remand report of the A.O and the rejoinder of the appellant to the same, I am of the view that the appellant was prevented by sufficient cause from producing the confirmations of the 23 sundry creditors above Rs. 80,000/- before the Assessing Officer. For the reasons discussed in para 4.2 above, the additional evidence has been admitted by me. In his remand report on the additional evidence so filed, the Assessing Officer has objected to the admission of the additional evidence. Besides, he has stated that in some cases the payments have been made in cash, in some cases only payments to the outstanding sundry creditors have been made during the year without there being any purchases and that in case of 2 parties, namely, M/s Chirag Enterprises, Jaipur and M/s Libas Impex, New Delhi, the notices could not be served. The appellant has submitted that these queries were raised by the A.O and replied to by the appellant during assessment proceedings. As regards payments made to certain parties in cash, it is seen that such parties are few in number and appear to be small traders belonging to the unorganized sector of cottage industries. Regarding the contention of the A.O that no further purchases were effected during the year from certain sundry creditors, it has been pointed out by the appellant that if amounts were outstanding to certain parties from whom purchases were made in earlier years, payments had to be made to them even if no further purchases from them were made during the year. The complete addresses of the 2 parties, M/s Chirag Enterprises, Jaipur and M/s Libas Impex, New Delhi, from whom notices issued by the A.O came back unserved, were provided by the appellant to the A.O during assessment proceedings and no adverse inference in respect of these parties has been drawn by the Assessing Officer in the assessment order. Assessments of the appellant for assessment years 2005-06 and 2007-08 were completed u/s 143(3) on the returned incomes. Most of the parties who were appearing as sundry creditors as on 31.03.2008 were stated to be regular suppliers of the appellant. When the purchases of the appellant have been accepted in the earlier years as well as in the year under appeal and subsequent year, the sundry creditors as on 31.03.2008 cannot be treated as income of the appellant, as done by the A.O. The addition made to the income on this score is, therefore, deleted. This ground of appeal is allowed.”

4. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. DR was while carrying us through the finding of the AO submitted that the assessee having surrendered the amount to tax, could not be said to be aggrieved with the order of the AO and, therefore, the ld. CIT(A) was not justified in admitting the additional evidence without allowing any opportunity to the AO, even when sufficient opportunity had been allowed during the assessment proceedings to file the confirmations. In any case, since the AO did not have occasion to examine the genuineness of the confirmations, the matter should be restored back.

5. On the other hand, the ld. AR on behalf of the assessee relied upon the findings of the ld. CIT(A).To a query by the Bench as to what prompted the assessee to file appeal when the assessee itself surrendered the amount to tax and how could the assessee be aggrieved, the ld. AR did not reply. The ld. AR merely added that the AO did not provide sufficient opportunity to submit the confirmations. After much discussion, to a further query by the Bench, the ld. AR replied that the assessee has no objection if the matter is restored back, as contended by the ld. DR.

6. We have heard both the parties and gone through the facts of the case. Indisputably, the assessee surrendered an amount of Rs. 45,76,244/- in relation to 23 creditors, when the AO asked the assessee to furnish the confirmations of all the creditors exceeding Rs. 80,000/- each. There is nothing in the letter dated 24.12.2010 of the assessee, as extracted in the assessment order, that it desired further time to submit the confirmations of remaining 23 creditors and instead, the assessee suo motu offered the amount to tax. Though the ld. AR relied upon a decision dated 22.9.1971 of the Hon’ble Apex Court in Pullangode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18 where it was observed that an admission is an extremely important piece of evidence but it can not be said that it is conclusive and that It is open to the person who made the admission to show that it is incorrect, there is no such dispute with this proposition of law. In the instant case, neither before the ld. CIT(A) nor even before us, the ld. AR attempted to show as to how the surrender was incorrect and what prompted the assessee to file appeal without even retracting the surrender. Even after surrender of the amount, the assessee approached the ld. CIT(A) and furnished additional evidence in terms of rule 46A of the IT Rules, 1962. There is nothing in the impugned order as to why the assessee offered the amount to tax suo motu and then preferred the appeal. The ld. CIT(A) did not care to ascertain as to how the assessee is aggrieved with the findings of the AO when it itself offered the amount to tax. The AO in his remand report dated 14.07.2011 succinctly pointed out that since the assessee itself expressed its inability to furnish further confirmations and produce the persons for cross-examination and offered the amount of Rs. 45,76,244/- to tax. There is nothing on record to suggest that the AO did not allow sufficient opportunity to the assessee to submit confirmations. When the assessee expressed its inability to furnish further confirmations or to produce the persons, it offered the amount to tax; and the AO accepted the said offer and completed the assessment. In these circumstances, how conditions stipulated in clause (b) of rule 46A(1) of the IT Rules, 1962 could be said to have been fulfilled, is not evident from the impugned order. Even otherwise there is nothing to suggest as to whether or not the ld. CIT(A) examined the genuineness of additional evidence submitted by the assessee nor the AO seems to have been asked to verify its genuineness. In these circumstances, we are of the opinion that the ld. CIT(A) admitted additional evidence submitted by the assessee in its application under rule 46A of the IT Rules, 1962, without following the procedure prescribed therein. As is apparent from the findings in the assessment order, the assessee was given sufficient opportunity by the AO to submit the confirmations. The ld. CIT(A) without taking cognizance of the fact that the assessee itself surrendered the amount to tax, proceeded to admit additional evidence, without allowing any opportunity to the AO.. In this situation, how the assessee could be said to be aggrieved with the findings of the AO, is not evident from the impugned order. The assessee in its application submitted that the AO refused to grant time to enable it to submit the balance confirmations. The ld. CIT(A) without ascertaining the veracity of this statement admitted additional evidence. Before admitting the additional evidence, the ld. CIT(A) did not allow any opportunity to the AO or confronted him with this statement of the assessee. In nutshell, the ld. CIT(A) deleted the addition without following the procedure laid down under Rule 46A of the IT Rules,1962 . The ld. CIT(A) arrived at his conclusions without ascertaining as to whether or not the assessee was prevented by sufficient cause from submitting the aforesaid additional documents/information before the AO as per provisions of Rule 46A of the IT Rules, 1962 . Here we may have a look at the relevant provisions of Rule 46A of the IT Rules 1962, which read as under:

“(1) The appellant shall not be entitled to produce before the Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals), any evidence, whether oral or documentary, other than the evidence produced by him during the course of proceedings before the Assessing Officer, except in the following circumstances, namely:–

 (a)  where the Assessing Officer has refused to admit evidence which ought to have been admitted; or

 (b)  where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the Assessing Officer; or

 (c)  where the appellant was prevented by sufficient cause from producing before the Assessing Officer any evidence which is relevant to any ground of appeal; or

 (d)  where the Assessing Officer has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal.

(2) No evidence shall be admitted under sub-rule (1) unless the Deputy Commissioner (Appeals) or as the case may be, the Commissioner (Appeals) records in writing the reasons for its admission.

(3) The Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals) shall not take into account any evidence produced under sub-rule (1) unless the Income-tax Officer has been allowed a reasonable opportunity (a) to examine the evidence or document or to cross-examine the witness produced by the appellant, or

(b) to produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant

(4) Nothing contained in this rule shall affect the power of the Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals) to direct the production of any document, or the examination of any witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of the assessment or penalty (whether on his own motion or on the request of the Assessing Officer) under clause (a) of sub section (1) of section 251 or the imposition of penalty under section 271..”

6.1 It is evident from the aforesaid provisions that the ld. CIT(A) can take into account any evidence produced under sub-r. (1)(b) & (c) of Rule 46A of the IT Rules, 1962 if the assessee was prevented by sufficient cause . In Haji Lal Mohd. Biri Works v. CIT [2005] 275 ITR 496 , by making an elaborate discussion on rule 46A of the Rules in paragraph 10 at page 500 and 501, it was held that under rule 46A the authority is not permitted to act whimsically while exercising the jurisdiction under it .In the case under consideration, the assessee placed before the ld. CIT(A), certain additional evidence and admittedly, the said documents were not submitted before the AO. The powers of the CIT(A) in terms of rule 46A to admit fresh evidence, entail an element of discretion which is required to be exercised in a judicious manner. The powers of the CIT(A) to admit additional evidence are not only in situations where the evidence could not be produced before lower authorities owing to lack of adequate opportunity but also in situations where the fresh evidence would enable the CIT(A) to dispose of the appeal or for any other substantial cause. Of course, the power is to be exercised judiciously and for reasons to be recorded. Here we may point out that the Hon’ble jurisdictional High Court in CIT v. Manish Build Well (P.) Ltd. [2012] 204 Taxman 106 held that that the conditions prescribed in Rule 46A must be shown to exist before additional evidence is admitted and every procedural requirement mentioned in the Rule has to be strictly complied with so that the Rule is meaningfully exercised . Once the assessee invokes Rule 46A and prays for admission of additional evidence before the CIT(A), then the procedure prescribed in the said rule has to be scrupulously followed. A distinction should be recognized and maintained between a case where the assessee invokes Rule 46A to adduce additional evidence before the CIT(A) and a case where the CIT(A), without being prompted by the assessee, while dealing with the appeal, considers it fit to cause or make a further enquiry by virtue of the powers vested in him under sub-Section (4) of Section 250. It is only when he exercises his statutory power suo motu under the above sub-section that the requirements of Rule 46A need not be followed. On the other hand, whenever the assessee who is in appeal before him invokes Rule 46A, it is incumbent upon the CIT(A) to comply with the requirements of the Rule strictly so that the Rule is meaningfully exercised and not exercised in a routine or cursory manner. The Hon’ble High Court held that sub-rule (3) of Rule 46A interdicts the CIT(A) from taking into account any evidence produced for the first time before him unless the AO has had a reasonable opportunity of examining the evidence and rebut the same. In the instant case, there is nothing in the impugned order of the ld. CIT(A) to show that after the objections were raised by the AO in his remand report dated 14.7.2011 against admission of additional evidence, the ld. CIT(A) asked the AO to examine the genuineness of the additional evidence. Thus, the end result has been that additional evidence was admitted and accepted as genuine without the AO furnishing his comments and without verification. Since in the case under consideration, the ld. CIT(A) did not follow the procedure laid down in Rule 46A of the IT Rules,1962, we find merit in the contentions of the ld. DR and therefore, in the interest of justice and fair play, vacate the findings of the ld. CIT(A) and restore the issues raised in various grounds of appeal before us to his file, with the directions to follow the mandate in terms of Rule 46A of the IT Rules, 1962 as also principles of natural justice and thereafter, dispose of the matter in accordance with law after allowing sufficient opportunity to both the parties, bringing out clearly as to how the assessee is aggrieved with the findings of the AO after suo motu surrender of the amount and how the conditions stipulated in rule 46A of the IT Rules,1962 are fulfilled. With these directions, ground no. 2 in the appeal is disposed of, as indicated hereinbefore. As a corollary, ground no.1 raised in the appeal does not survive for our adjudication at this stage.

7. No additional ground has been raised before us in terms of residuary ground no.3 in the appeal, accordingly, this ground is dismissed.

8. No other plea or arguments was made before us.

9. In the result, appeal is allowed but for statistical purposes.