Rajesh Kumar Agarwal, Cuttack V. ITO, Cuttack

ITA 375/CTK/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 0791 (ITAT-CUTTACK)
• Duration Of Justice: 3 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2011
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Assessment Year: 2007-2008
• Appeal Filed On: 25-10-2010
• Court: TRIBUNAL
• Department Lawyers: J KHANRA
• Assessee Lawyers: D K SETH
• Keywords: Bad and doubtful debts; Notional interest

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK ( ) BEFORE . . , , HONBLE SHRI K.K.GUPTA, ACCOUNTANT MEMBER. /AND . . . , S HRI K.S.S.PRASAD RAO , JUDICIAL MEMBER / I.T.A.NO. 375/CTK/2010 / ASSESSMENT YEAR 2007 - 08 RAJESH KUMAR AGARWAL, PROP. M/S.RAJESH TEXTILES, JHOLA SAHI, CUTTACK 753 001 PAN: ABRPA 6998 H - - - VERSUS - INCOME - TAX OFFICER, WAR D 2(3), CUTTACK. ( /APPELLANT ) ( / RESPONDENT ) / FOR THE APPELLANT : / SHRI D.K.SETH, AR / FOR THE RESPONDENT: / SHRI J.KHANRA, DR / ORDER . . , , SHRI K.K.GUPTA, ACCOUNTANT MEMBER. IN THIS APPEAL, THE ASSESSEE HAS RAISED VARIOUS GROUNDS RELATING TO CONFIRMATION OF EXPENSES TO BE DISALLOWED AND CERTAIN ADDITIONS ON ACCOUNT OF SAME NOT HAVING BEEN DISCLOSED IN THE RETURN. 2. THE ASSESSEE BEING IN CLOTH BUSINESS , WH OLESALE AND RETAIL HAD FURNISHED RETURN OF INCOME AT 2,92,740 WHICH WAS SUBJECTED TO SCRUTINY UNDER THE PROVISIONS OF SECTION 143(3). THE ASSESSING OFFICER VERIFIED THE PURCHASES FROM THE REGISTERS AND OTHER MATERIAL AVAILABLE ON RECORD TO DETERMINE THAT GOODS HAVE BEEN RETURNED WHICH WERE NOT SUPPORTED BY ANY DOCUMENTARY EVIDENCE AMOUNTING TO 15,30,502.THE SAME WERE TO BE TAXED AS UNACCOUNTED SALES. ON THE BASIS OF CLAIM OF DISCOUNT IN THE PROFIT & LOSS ACCOUNT, THE ASSESSING OFFICER KEEPING IN VIEW UNACCOUNTED SALES NOT ACCOUNTED SOUGHT TO TAX THE ASSESSE HAVING MADE INTEREST FREE ADVANCE TO THE PARTIES WHO HAD NOT PAID THE SAME BUT HAD BEEN WRITTEN OFF AS I.T.A.NO. 375/CTK/2010 2 ADJUSTMENT OF DISCOUNT OVER AND ABOVE THE TRADE DISCOUNT AVAILABLE TO OTHER SUPPLIERS. THE INTEREST DISALLOWED WAS NOTIONAL INTEREST ON TRADE FREE ADVAN CES AMOUNTING TO 2,08,474. THE ASSESSING OFFICER HAD ALSO DETERMINED UNDISCLOSED INCOME IN THE FORM OF VERIFYING THE ACTUAL PURCHASE AND SALE BILLS FOR THE MONTH OF MARCH,2007. ON SPECIFIC QUERIES AND AS THE RELEVANT VOUCHERS WERE NOT PRODUCED DETERMINED UNDISCLOSED INCOM E FINDING SHORTAGE IN STOCK ON THE CLOSING DAY OF THE YEAR. AGGRIEVED, THE ASSESSEE APPEALED BEFORE THE FIRST APPELLATE AUTHORITY WHEN THE LEARNED CIT(A) CONFIRMED THE ADDITION ON ACCOUNT OF UNACCOUNTED SALES ON THE BASIS OF GOODS RETURNED AMOUNTING TO 1, 01,319. HE ALSO CONFIRMED THE CLAIM OF DISCOUNT FROM REGULAR PARTIES WHOSE EARLIER BALANCES STOOD UN - DISCHARGED AMOUNTING TO 1,88,401. HE GAVE PART RELIEF BY CONFIRMING THE NOTIONAL INTEREST INCOME OF 2,08,474 NOT ON ACCOUNT OF REMISSION AND ALSO CONFI RMED THE SHORTAGES OF STOCK FOUND ON VERIFICATION OF THE PURCHASES AND SALES FOR THE MONTH OF MARCH,2007 AMOUNTING TO 1,06,223. 3. THE LEARNED COUNSEL FOR THE ASSESSEE INITIATING HIS ARGUMENT S SUBMITTED THAT THE GROUND RELATING TO THE ADDITION OF 1,01, 319 IS NOT BEING PRESSED IN VIEW OF THE CIRCUMSTANCES THAT THE GROUND RELATING TO SHORTAGE IN STOCK SOUGHT TO BE TAXED AMOUNTING TO 1,06,223 WOULD BALANCE THE ISSUE OF UNACCOUNTED SALES WHEN ONLY THE GROSS MARGIN THERE IN IS TO BE BROUGHT TO TAX IN ACC ORDANCE WITH THE PROVISIONS OF THE I.T.ACT. 4. THE NEXT GROUND RELATING TO DISALLOWANCE OF CLAIM OF DISCOUNT OVER AND ABOVE WHAT WAS AVAILABLE TO REGULAR PARTIES, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THERE IS NO HARD AND FIRST RULE TO GRA NT DISCOUNT TO EITHER THE PURCHASERS OR THE SELLERS WHEN THE ACCOUNT FOR TRADE DISCOUNTS I.T.A.NO. 375/CTK/2010 3 AVAILABLE ON PURCHASES AND THE SALES WHICH ARE MADE PARTLY ON CREDIT BECOMES A NECESSITY FOR GRANTING DISCOUNT WHEN THE ACCOUNT OF PHYSICAL DELIVERY OF GOODS IS NOT PA ID FOR. AS CAN BE VIEWED IN THE ASSESSMENT ORDER, THE LEARNED ASSESSING OFFICER HAS LABORIOUSLY CONSIDERED THE ENTIRE TRADING ACCOUNT S OF THE ASSESSEE BY VERIFYING THE PURCHASES AND SALES INCLUDING QUANTITY DETAILS MAINTAINED BY THE ASSESSEE THEREFORE , WAS RIGHTLY APPRISED THAT THE REGULAR PARTIES COULD NOT BE HELD AS BAD DEBTS TO BE WRITTEN OFF WHEN THE AMOUNT ACTUALLY WRITTEN OFF AS DISCOUNT WAS AVAILABLE TO THE CUSTOMERS ON ACCOUNT OF SETTLEMENT OF THEIR ACCOUNTS FROM TIME TO TIME. THE LEARNED CIT(A) , ON THE OTHER HAND, CONSIDERED THE GRANT OF REMISSION AS A DISCOUNT WHICH SHOULD HAVE BEEN SUPPORTED BY SALES BILLS / PURCHASE BILLS AND PURCHASE REGISTER AND SALE REGISTER TO CORROBORATE THE ACTION TAKEN BY THE ASSESSEE TO WRITE IT OFF AS EXPENSE . THE LEARNE D COUNSEL FOR THE ASSESSEE ARGUED THAT THE VERY FACT THAT THE AMOUNT COULD NOT BE RECONCILED AND THE BALANCE STOOD OWED BY THE BUYERS WAS TO BE EXPLAINE D AGAINST THE PARTICULAR BILLS C OULD NOT REACH IS A FINALITY WAS THEREFORE CHARGED TO THE PROFIT & LOSS ACCOUNT IN VIEW OF THE INCOME HAVING BEEN SHOWN IN THE BOOKS OF ACCOUNT. THE ASSESSEE COULD NOT TERM THE SAME AS BAD DEBT IN VIEW OF THE PARTIES STILL CONTINUING TO PURCHASE GOODS ON CREDIT THEREFORE WAS THE SETTLEMENT OF ACCOUNT BY GIVING SPECIAL DISCOUNT WHICH CANNOT BE RELATED TO THE NORMAL PRACTICE OF GIVING DISCOUNT. 5. SIMILARLY ON THE NEXT GROUND THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED THAT THE INTEREST INCOME WHICH HAS BEEN NOTIONALLY DISALLOWED HAS BEEN FOUND FACTUALLY INCORRECT INSOFAR AS IN CASE OF M/S. BINAYAK TRADING CO., THE AMOUNT OF 1,49,753 WAS RECEIVED IN THE SUBSEQUENT YEAR WHICH WAS OBSERVED BY THE ASSESSING OFFICER TO COMPLY WITH UNDER THE MERCANTILE I.T.A.NO. 375/CTK/2010 4 SYSTEM OF ACCOUNTING AND RENDERED TO TAX AS INCOME IN THE IMPUGNED ASSESSMENT YEAR . HE SUBMITTED THAT AS THE SAME HAD BEEN RENDERED ON RECEIPT BASIS IN THE SUBSEQUENT YEAR A SUITABLE DIRECTION MAY KINDLY BE GIVEN FOR CONSIDERATION OF ITS TAXABILITY IN THE IMPUGNED ASSESSMENT YEAR BY DELETING THE SAME IN THE SUBSEQUENT YEAR WHICH ASSESSM ENT HAS BEEN CONFIRMED UNDER THE PROVISIONS OF SECTION 143(1). ON THE SUM OF 58,721 WHICH THE LEARNED CIT(A) HAS CONFIRMED, IT WAS SUBMITTED THAT THE AMOUNT ADVANCED TO THE ASSESSEES BROTHER NAMELY SHRI VINOD KUMAR AGARWAL WHO INDULGED IN THE SAME BUSINESS AND HELPED THE ASSESSEE WAS PURELY ON COMMERCIAL BASIS. THE SAID ASSESSEE HAD FILED HIS RETURN OF INCOME AND THE AMOUNT OWED BY THE BROTHER THEREFORE CANNOT BE SAID TO HAVE BEEN ADVANCED FOR NON - BUSINESS PURPOSES. THE CLOTH BUSINESS BEING CONDUCTED IN THE MOFUSSIL TOWN S THEREFORE REQUIRE THE ADVANCE BY THE BROTHER ON WHICH THE ASSESSING OFFICER @12% DISALLOWED INTEREST AND HAS BEEN CONFIRMED BY THE LEARNED CIT(A) CITING CERTAIN CASE - LAWS. HE POINTED OUT THAT THE CASE - LAWS DO NOT BEAR ANY SIMILARITY TO THE FACTS ON RECORD INSOFAR AS THE ASSESSEE HAD ALSO FURNISHED CASE - LAWS NAME LY, COMMISSIONER OF INCOME - TAX V. RELIANCE UTILITIES AND POWER LTD. [2009] 313 ITR 340 (BOM) WHICH CLEARLY INDICATE THAT THE INTEREST FREE ADV ANCE SHOULD BE IDENTIFIED WITH FUND S THAT BEAR INTEREST TO THE ASSESSE AND IS CLAIMED AS EXPENSE. HE POINTED OUT T HAT THE ASSESSEES OWN CAPITAL WAS 11,69,883 WHICH IS MUCH MORE THAN THE CAPITAL OR AMOUNT BORROWED BY THE ASSESSEES BROTHER NAMELY SHRI VINOD KUMAR AGARWAL. HE PRAYED THAT THIS NOTIONAL INTEREST DISALLOWED MAY KINDLY BE DELETED. 6. ON THE LAST GROUND, IN THE MONTH OF MARCH,2007 ON THE BASIS OF STOCK AVAILABLE THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT AS THE ASSESSEE COULD NOT SUBMIT THE VOUCHERS RELATING TO THE SALES WHICH HAD BEEN I.T.A.NO. 375/CTK/2010 5 VERIFIED AGAINST PURCHASES IN THE BOOKS OF ACCOUNT , THE ASSESSING OFFICER IN HIS ORDER COULD ON LY TAX THE GROSS MARGIN THEREIN . THE ASSESSEE HAD DECLARED 6.62% AS PROFIT MARGIN IN THE SAID SALES WHICH MAY BE DIRECTED TO BE CONSIDERED FOR TAXATION. HE SUBMITTED HIS JUSTIFICATION FOR NOT PRESSING GROUND RELATING TO UNACCOUNTED SALES AMOUNT ING TO 1,01,319 EARLIER WHICH ON COMBINED EFFECT OF SHORTAGE OF STOCK WOULD LEAD TO SOME FINDING THAT THE PURCHASES THAT HAVE BEEN CLAIMED IN THE BOOKS OF ACCOUNT WERE ONLY AVAILABLE FOR THE STOCK THAT HAD BEEN SOLD WITHOUT BILLS. 7. THE LEARNED DR SUPPO RTED THE ORDERS OF THE AUTHORITIES BELOW. HE POINTED OUT THAT IN HIS ELABORATE ORDER, THE ASSESSING OFFICER HAS CONSIDERED THE VARIOUS BOOKS OF ACCOUNT AND REGISTERS ETC., MAINTAINED BY THE ASSESSEE TO VERIFY THE PURCHASES AND SALES AND HAD DOCUMENTED THE SHORT COMING BY DETERMINING UNDISCLOSED INCOME IN THE FORM OF UNACCOUNTED STOCK AND ON THE BASIS OF CLAIM IN THE PROFIT & LOSS ACCOUNT WHEN THE ASSESSING OFFICER HAD INTER ALIA DISALLOWED EXPENSES CLAIMED UNDER TRAVELLING, VEHICLES AND OTHER EXPENSES WHIC H HAVE BEEN DELETED BY THE LEARNED CIT(A). HE POINTED OUT THAT THE LEARNED CIT(A) HAS TAKEN NOTE OF ALL THE OBSERVATIONS AS MADE IN THE ASSESSMENT ORDER AND WAS PLEASED TO GIVE PART RELIEF TO THE ASSESSEE CITING CERTAIN JUDICIAL PRONOUNCEMENT AGAINST WHICH THE LEARNED COUNSEL HAS NOT BEEN ABLE TO DISTINGUISH. HE PRAYED THAT THE ORDER OF THE LEARNED CIT(A) BE CONFIRMED. 8. WE HAVE HEARD THE RIVAL CONTENTION AND PERUSED THE MATERIAL AVAILABLE ON RECORD. GROUND NO.1 WAS NOT PRESSED BY THE LEARNED COUNSEL FOR THE ASSESSEE FOR THE SIMPLE REASON THAT GROUND NO.1 RELATING TO ADDITION OF 1,01,319 AS DETERMINED BY THE ASSESSING OFFICER AS UNACCOUNTED SALES HAS I.T.A.NO. 375/CTK/2010 6 GOT A BEARING TO THE FACT THAT IN GROUND NO.4 THE EXPLAINED SALES BEING SHORTAGE IN STOCK BY A SUM OF 1 ,06,223 HAS BEEN SUBMITTED BY THE LEARNED COUNSEL FOR THE TAXATION IN THE INCOME PORTION ONLY. IT WAS ON THE BASIS OF THE LEARNED DR OBJECTING TO THE FACT THAT THE UNACCOUNTED SALES AMOUNTING TO 1,06,223 WAS NOT FORMING PART OF THE PURCHASES CLAIMED THEREFORE CANNOT BE TAXED FOR THE ELEMENT OF PROFIT THEREIN. BY ACCEPTING THE GROUNDNO.1, GROUNDNO.4 AUTOMATICALLY HAS TO BE ALLOWED PARTLY TO THE EXTENT ONLY 6.62% OF THE SAME IS TO BE BROUGHT TO TAX AS INCOME OF THE ASSESSEE IN THE SHORTAGE OF STOCK NOT FOUND PHYSICALLY ON VERIFICATION OF PURCHASES WHICH THE ASSESSI NG OFFICER HAD DETERMINED BEING THE COST OF SALES H A D NOT PRESSED FOR THE REMAINING AMOUNT OF 1,01,319. 9. NEXT ON THE REMISSION GIVEN TO THE REGULAR CUSTOMERS OF THE ASSESSEE WHO REQUIRED THE VARIOUS DOCUMENTS TO ESTABLISH THAT THEY OWED THE SAID SUM TO THE ASSESSEE WERE ALSO VERIFIED BY THE ASSESSING OFFICER WHEN THE ULTIMATE FINDING OF THE ASSESSING OFFICER WAS TELESCOPED BY THE LEARNED CIT(A) THAT THE VERY FACT THE ASSESSEE COULD NOT FURNISH THE DOCUMENTARY EVIDENCE OF THE SAID CUSTOMERS OWING MONEY O N ACCOUNT OF PHYSICAL SALES OF GOODS QUANTITY WISE HAD TO WRITE THEM OFF AS AMOUNT OUTSTANDING AND PAYABLE BY THE CUSTOMERS WHO HAD REFUSED TO PAY BUT CONTINUED OF PURCHASE OF GOODS THEREAFTER . BY WHATEVER NAME BE CALL ED THE AMOUNT WAS IRRECOVERABLE WHICH THE ASSESSING OFFICER HAS CLEARLY INDICATED IN HIS ELABORATE ORDER. HOWEVER, ON THE BASIS OF VARIOUS DEBIT AND CREDIT NOTES THIS SPECIAL DISCOUNT COULD NOT BE GIVEN ANY NAME IN VIEW OF THE PRACTICE ADOPTED BY THEM IN THIS LINE OF BUSINESS OF GRANTING DISCO UNT WHEN THE SOURCE OF DISCOUNT IS AVAILABLE FROM THE MANUFACTURERS THEMSELVES. THE LEARNED CIT(A) HAS GIVEN NO REASON TO CONFIRM THE SAID CLAIM EXCEPT THAT THE VERY REASON THAT THE ASSESSEE COULD I.T.A.NO. 375/CTK/2010 7 NOT CLAIM THIS AMOUNT FOR WANT OF DOCUMENTARY EVIDENCE OF GOODS DELIVERED. THIS WAS THE VERY NEED TO SUBSTANTIATE THE CLAIM OF HAVING INSCRIBED THE VALUE IN THE BOOKS OF ACCOUNT IN THE LEDGER ACCOUNT OF THE CUSTOMERS THE SAME WAS TO BE WRITTEN OFF. I FIND FORCE IN THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASS ESSEE THAT THE INCOME THERE IN HAD ALREADY BEEN RENDERED TO TAX THEREFORE WAS TO BE WRITTEN OFF NOT AS A BAD DEBT BUT AS A REMISSION ALLOWED TO THE CUSTOMERS WHO CONTINUED TO ENJOY THE CREDIT FACILITY FROM THE ASSESSEE. WE DIRECT THE DELETION OF 1,88,462 IN ACCORDANCE WITH THE PROVISIONS OF I.T.ACT. 10. ON THE NEXT GROUND RELATING TO THE ADDITION OF 2,0 8,474 , AS HAS RIGHTLY BEEN SUBMITTED BY THE LEARNED COUNSEL THAT A SUITABLE DIRECTION MAY BE GIVEN FOR TAXING 1,49,753 IN THE IMPUGNED ASSESSMENT YEAR SO THAT THE AMOUNT WHICH HAS ALREADY BEEN RENDERED TO TAX IN THE SUBSEQUENT ASSESSMENT YEAR MAY BE DELETED FOR TAXATION. IN VIEW OF THIS SUBMISSION AGAINST WHICH THE LEARNED DR HAS NO OBJECTION, THE AMOUNT OF INTEREST UNDER THE MERCANTILE SYSTEM OF ACCOUNTIN G PERTAINING TO THE YEAR UNDER APPEAL HAS RIGHTLY BEEN TAXED BY THE ASSESSING OFFICER WHO MAY TAKE NECESSARY STEPS IN DELETING THE SAID SUM IN THE SUBSEQUENT ASSESSMENT YEAR WHEN IT WAS RECEIVED AND ACCOUNTED FOR BY THE ASSESSEE ON RECEIPT BASIS. HOWEVER, ON THE NOTINAL INTEREST ADDITION CONFIRMED BY THE LEARNED CIT(A) DISALLOWED AMOUNTING TO 58,721 , WE ARE INCLIN ED TO HOLD THAT THE ASSESSEE HAD NOT ADVANCED THE SUM TO HIS BROTHER FROM INTEREST BEARING FUNDS. THE LEARNED CIT(A) CITING DECISIONS ON THE BAS IS OF FACTUAL POSITION THERE IN HAS NOT BEEN ABLE TO LINK THE SAME TO THE ASSESSEES FACTS AND SUBMISSIONS . THE AMOUNT OF INTEREST BEARING FUNDS STOOD INVESTED IN BUSINESS ASSETS IN THE FIRM NAMELY STOCK AND DEBTORS WHICH LEFT SUFFICIENT BALANCE AVAILABLE TO BE EARMARKED AS BEING I.T.A.NO. 375/CTK/2010 8 ADVANCED FROM THE ASSESSEES CAPITAL ACCOUNT WHICH IS MORE THAN THE ADVANCE. THEREFORE, THIS NOTIONAL INTEREST IS DIRECTED TO BE DELETED. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. THIS ORDER IS PRONOUNCED IN OPEN COURT ON DT. 15 TH FEBRUARY, 2011 S D/ - S D/ - ( . . . ) , ( K.S.S.PRASAD RAO), JUDICIAL MEMBER ( . . ) , , (K.K.GUPTA), ACCOUNTANT MEMBER. ( ) DATE: 15.02.2011 - COPY OF THE ORDER FORWARDED TO: 1 . / THE APPELLANT : RAJESH KUMAR AGARWAL, PROP. M/S.RAJESH TEXTILES, JHOLA SAHI, CUTTACK 753 0 01 2 / THE RESPONDENT: INCOME - TAX OFFICER, WARD 2(3), CUTTACK. 3 . / THE CIT, 4 . ( )/ THE CIT(A), 5 . / DR, CUTTACK BENCH 6 . GUARD FILE . / TRUE COPY, / BY ORDER, [ ] SENIOR PRIVATE SECRETARY ( ), ( H.K.PADHEE ), SENIOR.PRIVATE SECRETARY.