Vildirect: IncomeTax-caselaws-1970-VIL-334-GUJ-DT

1970-VIL-334-GUJ-DT

GUJARAT HIGH COURT

R/TAX APPEAL NO. 727 of 2019

Date: 01.01.1970

THE PRINCIPAL COMMISSIONER OF INCOME TAX 2

GOPALA POLYPLAST LTD.

JUDGMENT

(PER: MS.JUSTICE HARSHA DEVANI)

1. By this appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), the appellant – revenue has challenged the order dated 27th May, 2019 made by the Income Tax Appellate Tribunal, Ahmedabad Bench 'C', Ahmedabad (hereinafter referred to as “the Tribunal”) in ITA No.1193/Ad/2014, by proposing the following three questions, stated to be substantial questions of law:

“[A] Whether the Appellate Tribunal had erred in law and on facts in upholding the order of the CIT (A) deleting the addition of Rs. 1,16,65,245/- made on account of suppression of closing stock without properly appreciating the facts of the case and the material available on record?

[B] Whether the Appellate Tribunal had erred in law and on facts by upholding the decision of the CIT (A) on deletion of addition of Rs. 4,14,60,245/- made on account of inflated current liability in the books of account?

[C] Whether the Appellate Tribunal had erred in law and on facts by upholding the decision of the CIT (A) on deletion of addition of Rs. 3,08,000/- made on account of cessation of liability u/s.41(1) of the I.T. Act, 1961?”

2. The assessment year is 2009-2010 and the corresponding accounting period is the previous year 2008- 2009.

3. The assessee is engaged in the business of manufacturing of HDPE/PP Woven Sacks & Jacquard Woven Labels, trading of Fabrics & Labels. The assessee filed its return of income on 27th September, 2009 declaring total loss of Rs. 6,46,33,478/-. The assessment proceedings under section 143(3) of the Act came to be completed on 16th December, 2011, determining assessed loss at Rs. 1,09,64,913/- making the following disallowances:

(i) Rs. 1,16,65,245/- on account of suppression of stock,

(ii) Rs. 4,14,60,245/- on account of inflated current liability,

(iii) Rs. 3,08,000/- under section 41(1) of the Act, and

(iv) Rs. 2,35,075/- on account of expenditure not incurred for business purposes.

4. Insofar as proposed Question [A] which relates to disallowance of Rs. 1,16,65,245/- on account of alleged suppression of closing stock is concerned, during the course of assessment proceedings, the Assessing Officer noticed that the assessee had taken cash credit loan against the inventory. On verification of bank details, it was noticed that the assesses had shown stock on hand at Rs. 10,34,45,277/- as on 31st March, 2011. On verification of the balance-sheet, it was seen that the assesses had shown inventory of Rs. 9,49,65,860/-.

The Assessing Officer was accordingly of the view that the assesses had suppressed its closing stock by an amount of Rs. 84,79,417/- . The Assessing Officer during the course of assessment proceedings found that stock lying with outside parties was not included in the statement and, therefore, there was difference in the stock statement amounting to Rs. 31,85,824/- and the stock shown to the bank came to Rs. 10,66,31,101/- and accordingly held that the assessee had suppressed its closing stock by an amount of Rs. 1,16,65,245/- and added it to the total income of the assessee.

5. Being aggrieved, the assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals), who deleted the addition by placing reliance on a decision of this High Court in the case of CIT v. Arrow Exim Pvt. Ltd. (2010) 230 CTR (Guj.) 293.

6. The revenue carried the matter in appeal before the Tribunal, but did not succeed.

7. Ms. Mauna Bhatt, learned senior standing counsel for the appellant, submitted that the decision of the Tribunal is erroneous inasmuch as, the assessee had not truly disclosed the value of closing stock in its books of accounts and thus, suppressed the closing stock of Rs. 1,16,65,245/-.

8. A perusal of the order passed by the Commissioner (Appeals), reveals before the Commissioner (Appeals) the assessee had submitted that the addition of Rs. 39,85,824/- cannot be made as the stock was reflected in the books of accounts and that it was not material whether the stock was informed to the bank or not. Once the stock is shown in the books of accounts, no addition can be made. The Commissioner (Appeals) found the submission made by the assessee to be justifiable and held that the assessee was right when it submitted that once the stock is shown in the books of accounts, no addition on account of unexplained investment can be made as there was no suppression of income by not disclosing the stock to the bank. The Commissioner (Appeals) further noted that there was no finding to the effect that the stock was not available with the assessee and held that the Assessing Officer was not justified in making the addition on this account and directed him to delete such addition. The Commissioner (Appeals) further recorded that the other component of addition was on account of difference in valuation of stock. After considering the submissions made on this issue, the Commissioner (Appeals) noted that the stock statement furnished to the bank was in connection with hypothecation of goods which has been given by the assessee as it had taken some loan from the bank. The stock was not pledged with the bank authorities and bank authorities had not physically verified the stock mentioned in the statement filed before them. The Commissioner (Appeals) further noted that the books of accounts maintained by the assessee were regularly audited and the Assessing Officer had not found any defect with reference to the books of account or details of production. The assessee had also explained that the difference in valuation in the statement submitted to the bank was on account of valuation which was made on the basis of last purchase bill in the statement submitted to the bank; whereas, in the books of accounts the valuation was made as per the accounting standards. The Assessing Officer had not pointed out any specific defect in the explanation given before him by the assessee. The Commissioner (Appeals) held that the assessee had rightly placed reliance on the decision of this court in the case of Commissioner of Income Tax v. Arrow Exim Pvt. Ltd., 230 CTR 293, and found that the addition was not justified and, accordingly, ordered deletion of Rs. 1,14,65,245/- made on account of difference in valuation of stock and understatement of stock submitted to the bank.

9. The Tribunal, in the impugned order has concurred with the findings recorded by the Commissioner (Appeals), and has found that the facts of the present case are identical to the facts in the case of Commissioner of Income Tax v. Arrow Exim Pvt. Ltd., (supra) and has upheld the order passed by the Commissioner (Appeals). The Tribunal has also noted as a matter of fact that the Assessing Officer has not pointed out any defect/infirmity in the books of accounts of the assessee.

10. Thus, the Tribunal has recorded concurrent findings of fact to the effect that there was no defect or infirmity in the books of accounts maintained by the assessee and has applied the decision of this court in the case of Commissioner of Income Tax vs. Arrow Exim Pvt. Ltd. (supra) to the facts of the present case. Under the circumstances, the Tribunal merely having applied the decision of the jurisdictional High Court to the facts of the case, the said ground of appeal does not give rise to any question of law, much less, a substantial question of law, warranting interference.

11. Insofar as proposed Question [B] which relates to deletion of addition of Rs. 4,14,60,245/- made on account of inflated current liability in the books of accounts is concerned, during the course of assessment proceedings, the Assessing Officer has found that the assessee had shown sundry creditors in bank of Rs. 38,60,000/-; whereas, on verification of its balance-sheet it was noticed that the assessee had shown sundry creditors at shown as Rs. 5,54,56,040/-. The Assessing Officer therefore, presumed that the assessee had shown excessive sundry creditors of Rs. 4,88,49,006/- and called upon the assessee to show cause as to why such amount should not be added to the income.

12. During the course of assessment proceedings, on verification of Schedule 11 of current liabilities and provisions, it was noticed by the Assessing Officer that sundry creditors are shown at Rs. 2,44,11,803/- and other liabilities of Rs. 2,09,08,451/- and thus, total liability is shown at Rs. 4,53,20,254/- whereas in its books of accounts the assessee had shown Rs. 38,60,000/-. The Assessing Officer therefore, found that in the books of account the assessee had shown excess liability of Rs. 4,14,60,254/- and during the assessment proceedings, the assessee had not furnished any reason for the difference of liability between the bank and books of accounts and thus, added an amount of Rs. 4,14,60,254/- to the total income of the assessee.

13. Being aggrieved, the assessee carried the matter in appeal before the Commissioner (Appeals) who deleted the addition. The revenue carried the matter in the appeal before the Tribunal, but did not succeed.

14. As can be seen from the order passed by the Commissioner (Appeals), before the Commissioner (Appeals), the assessee had submitted that the books of accounts of the assessee were audited and no difference or defect in the books of accounts had been pointed out by the Assessing Officer. It was further pointed out that the Assessing Officer made inquiry under section 133(6) of the Act from the creditors and no discrepancy was noticed. There was no difference in any of the balances in the sundry creditors shown in the books of accounts. The assessee had shown the sundry creditors at a lesser amount to the bank as it had taken working capital loan from the bank and in case the creditors are shown at a higher figure, the bank gives credit for lesser amount. The assessee had shown the figures in the statement submitted to the bank in a round figure and on estimated basis and no names of the creditors or individual outstanding amount was mentioned in the statement.

15. The Commissioner (Appeals) found that the statement furnished to the bank was only for securing the credit and was only on estimated basis. Further the figures given to the bank were much less than those appearing in the books of accounts. The Commissioner (Appeals) was of the view that the profit and the tax payable had been calculated on the basis of the entry made in the books of accounts and was further of the view that the fact that the assessee has disclosed less creditors to the bank would not make difference as the inquiry had also revealed that the creditors were still existing. She, accordingly, found that the finding of the Assessing Officer that the assessee had inflated its books of accounts by current liability was without any basis and deleted the addition.

16. The Tribunal, in the impugned order, has concurred with the findings recorded by the Commissioner (Appeals). The Tribunal has recorded that the credits shown by the assessee in its books of account are arising out of purchases made during the year under consideration and was of the view that the amount of sundry creditors cannot be disturbed without pointing out any defect in purchases. The Tribunal noted that the assessee has shown current liabilities and provisions amounting to Rs. 5,54,56,040.00 in its balance sheet as on 31st March, 2009. The relevant details of the current liabilities and the provisions are extracted in paragraph 12.2 of the order of the Tribunal. The Tribunal noted that in respect of the said items of current liabilities, the Assessing Officer has not pointed out any defect during the assessment proceedings and was of the view that before placing reliance on the statement furnished to the bank, the Assessing Officer ought to have pointed out the defects/infirmities in the current liabilities and the provisions shown by the assessee in its balance sheet. The Tribunal took note of the fact that the Commissioner (Appeal) has given a finding that the creditors shown by the assessee in its books of account exist in the books of account and that the learned DR for the revenue had not disputed this finding of fact. The Tribunal, accordingly, did not find any reason to disturb the findings recorded by the Commissioner (Appeal) and dismissed the ground of appeal.

17. Thus, the Tribunal upon perusal of the material on record has found as a matter of fact that there were no defects in the items of current liabilities shown by the assessee in its balance sheet. In the light of the fact that the conclusion arrived at by the Tribunal is based upon concurrent findings of fact recorded by it upon appreciation of the material on record, no question of law can be said to arise out of the said ground of appeal.

18. Proposed Question [C] relates to deletion of addition of Rs. 3,08,000/- made on account of suppression of liability under section 41(1) of the Income Tax Act, 1961. During the course of assessment proceedings it was noticed by the Assessing Officer that the assessee had not entered into any transaction with certain sundry debtors viz. Shivani Travels (Rs. 1,58,000/-) and Desai Tejabhai (Rs. 1,50,000/-) in the last three years. The Assessing Officer observed that this liability only exists in the books of the assessee but the assessee is not required to pay such amount. He, therefore, added an amount of Rs. 3,08,000/- to the total income of the assessee under section 41(1) of the Act. The assessee went in appeal before the Commissioner (Appeals) who deleted the addition. Revenue went in appeal before the Tribunal, but failed.

19. Mrs. Mauna Bhatt, learned senior standing counsel for the appellant, submitted that the decision of the Tribunal is erroneous as in fact the creditors had not contacted the assessee for making payment and the time limit for filing the appeal for recovery also has expired. Therefore, it is evident that the liability has ceased to exist. It was further submitted that the Tribunal, in the impugned order, has held that there is no dispute to the fact that the liability as discussed were not written off in the books of account and hence, cannot be treated as income under the provisions of section 41(1) of the Act on account of cessation of liability.

20. A perusal of the order passed by the Commissioner (Appeals) reveals that the Commissioner (Appeals) has found force in the submissions of the assessee that as per section 41(1) of the Act, an amount can be gained as profit and gain of business and profession in case a person has obtained in any manner some benefit in respect of trading liability by way of remission or cessation of liability in respect of the creditor. The Commissioner (Appeals) has found that in the assessment order the Assessing Officer has not given any finding regarding cessation of liability and has simply stated that the liabilities were old. She further noted that the assessee had not passed any accounting entry regarding the remission of liability and that there is no provision in the Income Tax Act which provides limitation of certain years for liabilities. Moreover, the Assessing Officer had also not established that the liabilities had ceased to exist with no chance of revival of the claim by the creditors in future. Placing reliance upon the decision of this court in the case of Commissioner of Income Tax v. Nitin S. Garg, (2012) 71 DTR (Guj.) 73 as well as in the case of Commissioner of Income Tax v. Silver Cotton Mills Company Limited, (2002) 254 ITR 728 (Guj.), the Commissioner (Appeals) set aside the addition made by the Assessing Officer.

21. The Tribunal, in the impugned order, has observed that there is no dispute as regards the fact that the liabilities in question were not written off in the books of accounts of the assessee and was of the view that the same cannot be treated as income under the provisions of section 41(1) of the Act on account of cessation of liabilities.

22. Sub-section (1) of section 41 of the Act provides that where any allowance or deduction had been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently during any previous year the assessee has obtained whether in cash or other manner whatsoever any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person of the value of benefit accruing to him shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income tax of the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. Thus, under sub-section (1) of section 41 of the Act, any amount obtained by an assessee whether by way of remission or cessation thereof, is required to be added to his income in the year of such remission or cessation. In the facts of the present case, the Assessing Officer has made addition of liabilities in respect of two sundry creditors which according to him, the assessee was not required to pay. The assessee, however, had not written off his liabilities. Thus, there was nothing on record to show that there was any remission or cessation of such liability. Under the circumstances, in the absence of remission or cessation of such liabilities, the question of invoking subsection (1) of section 41 of the Act did not arise. The Tribunal, therefore, did not commit any error in upholding the order passed by the Commissioner (Appeals). No question of law can therefore be stated to arise out of this ground of appeal also.

23. In the light of the above discussion, the impugned order passed by the Tribunal does not give rise to any question of law, much less, a substantial question of law, warranting interference. The appeal therefore fails and is accordingly summarily dismissed.

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.