2008 (3) TMI 703 - AT - Income Tax

Additions u/s 68 - unexplained cash credits - royalty payment - prior period expenses u/s 36(1)(vii) . Additions u/s 68 - unexplained cash credits - credit balances as were appearing in the accounts of these parties were in the form of opening balances coming from earlier years - HELD THAT - The five amounts in question represented the purchases made by the assessee on credit. There is no dispute that the assessing officer had accepted the purchases sales as also the trading results disclosed by the assessee. Thus in view of the decision of Hon ble Allahabad High Court in the case of CIT v. Pancham Dass Jain (supra) we hold that provisions of Section 68 are not attracted to amounts representing purchases made on credit. We therefore hold that the Commissioner (Appeal) was fully justified in deleting the addition. In the instant case the assessee had filed confirmation letter of M/s Awadh Wood Products R.K. Perfumers and Tanu Enterprises before the CIT(A). There is no material on record to controvert the contents of these confirmation letters which are available on the assessee s paper book. In the instant case we have already observed that the provisions of s. 68 are not attracted to amounts representing purchases made on credit. Therefore we do not find any infirmity in the findings of CIT(A) on this issue and accordingly we uphold her view. Consequently we dismiss ground No. 1 of Revenue s appeal. Addition on royalty payment - From the observations of the AO in the case of Shri K.N. Singh Patel it is clear that he has duly shown this royalty payment in his IT return on which he is duly assessed to tax. Learned counsel for the assessee stated that Shri K.N. Singh Patel has closed his business activities and allowed the use of his brand name Har Singar to the assessee for which royalty was payable to him. In our view the AO was not justified in stating that the payment made to Shri K.N. Singh Patel was unjustified and totally unreasonable. Thus considering the entire facts of the case and also the material available on record we hold that the CIT(A) has rightly deleted the addition made by the AO. We therefore dismiss this ground of appeal also. Addition on prior period expenses - HELD THAT - We do not find any infirmity in the findings of CIT(A) on this issue. The amount in question allegedly treated as prior period expenditure was actually a write off of the bad debt and therefore could not be treated as prior period expenditure in view of the provisions of s. 36(1)(vii) of the IT Act 1961. There is no dispute that the amount in question has been written off during the period relevant to assessment year under consideration and therefore we hold that the learned CIT(A) was justified in allowing a relief to the assessee. In the result both the appeals are dismissed.

Summary

Issues Involved:
1. Deletion of addition of unexplained cash credits.
2. Deletion of addition of royalty payment.
3. Deletion of addition of prior period expenses.

Issue-Wise Detailed Analysis:

1. Deletion of Addition of Unexplained Cash Credits:
The first issue pertains to the deletion of an addition of Rs. 27,25,939 made by the assessing officer under Section 68 of the Income Tax Act, 1961, which was claimed as unexplained cash credits in the names of various entities. The Commissioner (Appeal) deleted this addition, which the Revenue contested.

The assessee, a private limited company engaged in manufacturing and trading Pan Masala, had various credit balances in the accounts of sundry creditors. The assessing officer made additions totaling Rs. 30,14,164, including amounts for M/s R.K. Perfumers, Sharda Kashyap, M/s Sakshi Advertisers, M/s Tanu Enterprises, and M/s Avadh Wood Products, among others. The Commissioner (Appeal) deleted Rs. 27,25,959 of these additions, stating they were liabilities from earlier years, not unexplained cash credits.

The Department argued that the assessee failed to provide evidence supporting its contention that these amounts were liabilities from earlier years. The Departmental Representative emphasized that the onus of proving the source of money lies with the assessee, who failed to discharge this onus. The assessee countered that these amounts were credit balances from previous years representing unpaid liabilities to suppliers, not cash credits. The transactions were settled in subsequent years mostly through account payee cheques/drafts.

The Tribunal noted that the amounts in question were indeed credit balances from earlier years and represented unpaid liabilities to suppliers. The Tribunal found no justification for treating these as unexplained cash credits. The Tribunal upheld the Commissioner (Appeal)'s decision, citing the Allahabad High Court's ruling in CIT v. Pancham Dass Jain, which held that Section 68 does not apply to amounts representing purchases made on credit.

2. Deletion of Addition of Royalty Payment:
The second issue involved the deletion of an addition of Rs. 1,80,000, which was disallowed by the assessing officer as an unreasonable royalty payment. The Commissioner (Appeal) allowed the relief, stating that the payment was not excessive or unreasonable considering business expediency.

The assessee argued that the royalty was paid to Shri K.N. Singh Patel for using the brand name "Har Singar," which the assessee had taken over from Patel Products. The royalty payment was supported by an agreement and was shown in the income tax return of Shri K.N. Singh Patel, who was assessed to tax on this income.

The Tribunal found that the royalty payment was justified and reasonable, given the business context and the agreement for using the brand name. The Tribunal upheld the Commissioner (Appeal)'s decision to delete the addition.

3. Deletion of Addition of Prior Period Expenses:
The third issue was the deletion of an addition of Rs. 1,00,000, which was claimed as prior period expenses by the assessing officer. The Commissioner (Appeal) allowed the deletion, stating that the amount was written off during the current year and should be allowed as such.

The assessee had claimed the amount as a write-off of a payment made to Har Singar Spices in earlier years. The Tribunal agreed with the Commissioner (Appeal) that the amount was a write-off of bad debt and not a prior period expense. The Tribunal upheld the Commissioner (Appeal)'s decision to allow the write-off.

Conclusion:
The Tribunal dismissed both appeals by the Revenue, upholding the Commissioner (Appeal)'s decisions on all issues. The Tribunal found that the additions made by the assessing officer were not justified and that the Commissioner (Appeal) had correctly deleted these additions based on the evidence and applicable legal principles.