IN THE ITAT LUCKNOW BENCH ‘A’
Deputy Commissioner of Income-tax
IT Appeal No. 265 (LkW.) of 2011
[Assessment year 2003-04]
Date of pronouncement – July 23, 2012
Sanjay Arora, Accountant Member
This is an Appeal by the Revenue arising out of the order of Commissioner of Income Tax (Appeals)-I, Kanpur (‘CIT(A)’ for short) dated 02/02/2011, allowing the assessee’s appeal contesting its assessment u/s 143(3) of the I.T. Act, 1961 (‘the Act’ hereinafter) dated 29/03/2006 for the assessment year (AY) 2003-2004.
2. The principal issue arising in the instant appeal is as raised per its Ground Nos. 2 and 3 by the Revenue, i.e., against deletion of the addition for an aggregate sum of Rs. 58,88,667/-, being Rs. 50,34,314/- and Rs. 8,54,353/- in respect of lorry hire charges payable and sundry creditors respectively, made by the assessing authority on account of the said credits being unexplained; the assessee having failed to furnish confirmations in their respect, by the learned CIT(A). While the non-furnishing of the confirmations before the Assessing Officer (AO) is not denied, the basis of relief allowed by the ld. CIT(A) is that, firstly, the said credits stood discharged by the assessee by payment in the following year and, secondly, that the provision of section 68 could not be applied to trade credits, quoting some decisions cited by the assessee before him, as in the case of CIT v. Pancham Dass Jain  156 Taxman 507 (All.) CIT v. M.K. Bros.  163 ITR 249.
3.1 Like submissions were raised before us by either side. The learned D.R. would, in addition, rely on the decision in the case of T.P. Abdullah v. Asstt. CIT  207 Taxman 24 to impress that no qualification as to the credit being in ‘cash’ is necessarily required for the same to attract the invocation of section 68, and which is applicable to a trade credit as well. Further, there is no bar for addition u/s 68 and a trading addition for the same year, relying on the decisions in the case of CIT v. Devi Prasad Vishwanath Prasad  72 ITR 194 (SC) and Grover Fabrics (India) (P.) Ltd. v. CIT  332 ITR 312.
3.2 The learned A.R., on the other hand, would take us through the ledger account of the lorry hire charges payable for the current as well as the subsequent year/s to show that these were properly documented, so that no adverse inference under the circumstances could possibly be drawn.
4. We have heard the parties and perused the material on record.
4.1 We shall take up the legal contention, which forms the basis of the impugned deletion by the first appellate authority, first. We find little merit in the same. A credit in the assessee’s books of account, signifying a receipt, or a liability, has to be satisfactorily explained, to keep section 68 at bay. Even if the said section, or its requirements, i.e., with regard to proving the same on the parameters of identity, capacity and genuineness, may not be said to be strictly applicable to each and every credit appearing in the assessee’s books, the corresponding liability has to be shown to be genuine, in the absence of which the same is liable to be treated as income. In fact, this position obtained even prior to the statutory incorporation of section 68 in the Act, with an unexplained credit being considered as income under the earlier (1922) Act. Rather, in such a case the limitation of section 68 would not strictly apply, and a non-genuine trade credit can be added as income of the year in which it is found to be so, i.e., as being not genuine, as happened in the assessee’s own case, where the accumulated unexplained credits appearing under the account head ‘lorry hire charges payable’ (Rs. 335.33 lakhs), though relating to earlier period/s, stood added as its income for the assessment year 2001-2002. The law in the matter is trite, and the issue is in fact primarily and essentially factual, i.e., whether the assessee has been able to satisfactorily explain the credits appearing in its books of account before the AO or not. It is to be appreciated that any credit, trade or non-trade, is essentially a ‘receipt’, when construed or considered broadly, i.e., in terms of ‘funds’, and not narrowly in terms of ‘cash’, so that it represents the source of funds. It is for this reason that the balance-sheet, i.e., the statement of assets and liabilities as at a particular date, is also variously termed as ‘statement of affairs’ or ‘statement of sources and application of ‘funds’, with the credit side thereof signifying the source of funds. As explained by the Hon’ble High Court of Kerala in the case of T.P. Abdulla (supra), a receipt has to be satisfactorily explained as to its nature and source, else it is liable to be considered as income. Apart from the decisions cited at the bar by the learned D.R., the other decisions, clarifying the legal position which found favour with the learned CIT(A), that came readily to mind, are: V.I.S.P. (P.) Ltd. v. CIT  265 ITR 202 and Indian Woollen Carpet Factory v. ITAT  260 ITR 658, though case law in the matter is legion. The stated legal basis for the deletion of the impugned addition, i.e., being trade credits are not liable to be shown as representing genuine credits or a genuine liability, thus, cannot be countenanced, and is not tenable in law. The degree of proof required to prove the genuineness, though, may vary from depending on the facts and circumstances of each case, and which is the purport of the decisions relied upon by the assessee.
4.2 Coming to the facts of the case, the assessee was afforded sufficient opportunities to furnish confirmations in respect of the impugned credits by the Assessing Officer (refer page 2 of the assessment order). A final show-cause notice was issued by him on 22/03/2006, stating the said fact, and by way of allowing a last opportunity to the assessee to substantiate its case, for 24/03/2006, and which (notice) again remained un-responded, even up to the date of passing of the assessment order, i.e., 29/03/2006 (refer page 3 of the assessment order). These facts are not disputed, and neither do we observe any grievance by the assessee qua lack of opportunity before the Assessing Officer being assumed before the learned CIT(A). How, then, we wonder, is the Assessing Officer to be faulted for the proceedings in the manner he does, and whose action stands cancelled/vacated by the ld. CIT(A), leading to the present appeal by the Revenue? The ld. CIT(A), as afore-stated, deleted the addition on the legal ground, and which has not found our favour on the basis of the settled law, even as the assessee also made out a case on facts before him. In fact, the case law cited before him is also toward the same, i.e., where the liability in respect of an expenditure incurred in the normal course of business outstands, the mere fact that the liability has not been discharged, would not be relevant or material for its deduction, and on which, again, there could possibly be no quarrel; the same, rather, only operates to underline what has been sought to be clarified by us, i.e., that the matter is essentially factual, with the onus to prove its claims being without doubt on the assessee.
4.3 We have already emphasized that the matter is one of the fact, and has to be looked into in its entirety, and that no hard and fast rule could be laid down for the purpose. If the liability outstands, say, in variance with the norms and practices of the trade, or in inconsistence with the normal human behaviour, the same could constitute a reason for doubting the genuineness of the underlying expenditure, or at least to that extent. In fact, as it appears, the accumulated hire charges payable for Rs. 3.35 crores were treated as income in the assessee’s case for that reason, i.e., was not found to represent a genuine trade liability, though stood booked and allowed as expenditure for the relevant year/s. Again, the ‘fact’ that the payments stand made in the following year, as stated before the learned CIT(A), and also pressed before us, and that the profit for the year is in line with the profit rate obtaining for the immediately preceding years, are relevant factors, though without doubt not conclusive of the matter. In fact, the creditors being regular business associates, to whom the payments stand made, so that both the expenditure as well as payment would stand to be adequately vouched and evidenced, we wonder why it is not so, and even as much as the confirmations were not forthcoming. The onus to prove the veracity of its claims is on the assesse, and it cannot shift the same to the Revenue by requiring it to issue summons u/s 131, as was conveniently sought to be done in respect of sundry creditors for Rs. 8.54 lakhs. At the same time, even the Revenue cannot insist on a particular mode, unless it shows reasons to doubt the claims made or materials furnished by the assessee, which would only be those arising in the normal course of business, so that a case for further probe or verification is made out. Without doubt, it is the satisfaction of the Assessing Officer that the law envisages, and which is paramount; his powers in the matter being plenary, and the only purpose in discussing this aspect is to emphasize the need for reasonability as regards the standard of proof by both the sides.
4.4 The matter, as we discern, is factually indeterminate, and requires proper verification and examination at the end of the assessing authority. We only consider it fit and proper to restore the same back to the file of the Assessing Officer for the purpose. The onus to establish its case is on the assessee, who shall, even as indicated during the course of hearing, co-operate fully in the matter. The action of the ld. CIT(A) in deleting the impugned addition is reversed. We decide accordingly.
5.1 The second issue in the present appeal is the deletion of addition on account of net profit rate, and disallowances in respect of expenditure on telephone, travelling, general expenses, oil and fuel expenses and car depreciation, effected at minor amounts, for the reason of their being, again, not adequately evidenced. With regard to the addition qua the net profit rate, which has been disclosed at 1.46% (of the gross receipts), we find no basis whatsoever for the same. True, the identical rate as disclosed from year to year, does indicate that the accounts may be not true and correct, and manipulated. So, however, no addition on that score would by itself arise, i.e., without bringing some adverse material on record, and stands rightly deleted by the learned CIT(A). We decide accordingly.
5.2 Similarly, with regard to the other disallowances, we are in agreement, in principle, with the learned CIT(A) that a mere cryptic statement as to the expenditure being not properly evidenced or fully supported, without pointing out any specific defects, including their nature, and which could easily be done by subjecting the same to a test check, would be of no moment. And, thus, no disallowance would arise in consequence. So, however, with regard to expenditure on telephone, fuel expenses on car (only) and depreciation thereon, even as indicated during the hearing, we find that the minor disallowances, as affected, are sustainable in law, as the personal user by the partners cannot and, rather, has not been denied. Though the learned A.R. would press for a relief on quantum, we find that the disallowance effected, i.e., at Rs. 20,000/- in the case of telephone expenses (at Rs. 13.29 lacs), and @ 1/10th in respect of car expenses and depreciation thereon, is quite reasonable, requiring no interference. The disallowances to this extent would thus stand to be sustained, and the balance stand rightly deleted by the ld. CIT(A). We decide accordingly.
6. In the result, the Revenue’s appeal is partly allowed and partly allowed for statistical purposes.