2011 (7) TMI 1327 - AT - Income Tax

Unconfimed Creditors u/s 69 - Assessee firm was having two old creditors - Notice send by AO to them were returned unserved - AO treated them as unconfirmed creditors, therefore made addition - CIT (A) deleted such additon on the ground that the creditors were old and did not pertain to the year under scrutiny - HELD THAT - The fact that the creditors were old creditors brought forward from earlier years has not been disputed by the department. These creditors have not been introduced during the year under consideration. There is no evidence or material on record to establish that the asessee s liability to pay the amount to the creditors have been ceased during the year under consideration. We, therefore, hold that the ld. CIT(A) is justified in deleting the addition. The amount payable to these creditors can be added to the assessee s total income in the year in which the assessee s liability to pay the amount ceases or extinguished and not in the year under consideration where assessee has admittedly shown the liability in the balance sheet. Thus, the ground raised by the revenue is rejected - Revenue Appeal Dismissed. Disallowance of salary and interest paid to partners - AO disallowed the assessee's claim by stating that in partnership deed there was no clause of quantum of salary paid and rate of interest payable to partners - CIT(A) upheld such disallowance - HELD THAT - It is the assessee s case that there was a stipulation in the supplementary deed of partnership regarding payment of salary and interest to the partners as so provided u/s 40(b)(v) applicable from the A.Y. 1993-94. which was not examined by CIT(A). We, therefore, restore this matter back to the file of AO for his fresh consideration after ascertaining as to whether a supplementary deed of partnership was submitted by the assessee in A.Y. 1994-95 and whether the situation had remained the same till this assessment year. The AO shall also ascertain whether identical claim of payment and salary and interest has been allowed in earlier assessment years - Matter restored back. Admission of Additional Grounds as CIT(A) didn't comment on such ground - AO s action in disallowing 5% of the total expenses in the absence of books of account or bills or vouchers - HELD THAT - Assessee should be allowed to raise this ground. We accordingly admit this ground and restore the same to the file of AO for his fresh adjudication after examining the books of account and after providing reasonable opportunity of being heard to the assessee - Decision in favour of Assessee.

Summary

Issues Involved:
1. Addition of unconfirmed creditors under section 69 of the Income Tax Act.
2. Disallowance of salary and interest paid to partners.
3. Disallowance of expenses debited to trading/profit and loss account.

Issue 1: Addition of Unconfirmed Creditors under Section 69:
The appeal by the revenue challenged the deletion of the addition of Rs. 12,05,268/- disallowed as unconfirmed creditors under section 69 of the Income Tax Act. The Assessing Officer (AO) added the amount to the assessee's total income as the creditors were unverifiable and no explanation was provided by the assessee. However, the CIT(A) deleted the addition, stating that the creditors were old and did not pertain to the year under scrutiny. The Tribunal upheld the CIT(A)'s decision, emphasizing that the creditors were old creditors from previous years, and there was no evidence to show the cessation of liability during the assessment year. The Tribunal rejected the revenue's appeal, concluding that the amount could be added to income when the liability ceases, not in the current year.

Issue 2: Disallowance of Salary and Interest Paid to Partners:
The assessee appealed against the disallowance of salary and interest paid to partners. The AO disallowed these payments based on the partnership deed, noting the absence of specific clauses regarding salary and interest. The CIT(A) upheld the disallowance, stating it was in line with the partnership deed. The assessee argued that a supplementary deed of partnership was executed in 1993, specifying the payment of salary and interest to partners as per section 40(b)(v) applicable from A.Y. 1993-94. The Tribunal observed that the relevant clauses of the supplementary deed were not examined by the AO or CIT(A). The matter was remanded to the AO to ascertain the submission of the supplementary deed and previous allowance of such claims.

Issue 3: Disallowance of Expenses Debited to Trading/Profit and Loss Account:
The assessee sought to challenge the disallowance of 5% of total expenses debited to the trading/profit and loss account. The AO disallowed the amount due to the absence of books, bills, or vouchers. The CIT(A) did not address this issue, leading the Tribunal to admit the additional ground raised by the assessee. The Tribunal remanded the matter to the AO for fresh adjudication after examining the books of account and supporting documents provided by the assessee. The AO was directed to decide the matter in accordance with the law after providing a reasonable opportunity for the assessee to be heard.

In conclusion, the Tribunal dismissed the revenue's appeal while treating the assessee's appeal as allowed for statistical purposes. The judgments on each issue were detailed and involved a thorough analysis of the facts and legal provisions, ensuring a fair consideration of the parties' contentions.