2012 (7) TMI 613 - AT - Income Tax

Addition made by AO on the ground of cessation of liability of sundry creditors Held that - Once the liability exists in the books of assessee and the creditor has right to claim over the same as per law, AO could not make addition on account of cessation of liability by invoking provision of section 41(1) of the Act addition deleted Disallowance of salary by invoking the provision of section 40A(2) of the Act - salaries paid on account of employment of Shri Siddhartha Jalan who is doing consultancy work, accounts and used to visit customers for marketing of assessee Held that - No doubt the employee Shri Siddhartha Jalan is related to one of the directors but it is an admitted fact that Shri Siddhartha Jalan has actually worked for the assessee company - no disallowance can be made by invoking the provision of section 40A(2) of the Act Addition by applying net profit rate @8% on contract receipts - assessee company claimed receipt as Annual Maintenance Charge from one Tata Libert Limited - assessee paid the entire receipt received from Tata Libert Ltd. to OMPCL as the entire job work was assigned to OMCPL - assessee has not earned any penny from this sub-contract and the entire payment was debited to OMCPL Held that - Lower authorities erred in estimating the profit rate on the receipt which has never given any profit to assessee - addition deleted Depreciation allowance - assessee has purchased a new car on 22.03.2002 and it was used for six months, the admissible depreciation was only 50% of the WDV as on 31.03.2002 - According to AO the assessee s calculations are not correct but he has not given any basis for the matter remanded to AO - assessee is allowed for statistical purposes. Addition of profit on sale of old car Held that - Assessee has purchased a new car and also sold this car and the excess of WDV has been invested in purchase of new car - no gain will be charged to tax as Short Term Capital gain or profit of the business Addition of advances received from customers - assessee could not compute interest on the above advances from customers and could not obtain confirmations, the AO disallowed the liability holding the same as bogus Held that - Assessee has filed complete details before AO as well as before CIT(A) and this liability pertains to Assessment year 1998-99 and these advances received from customers are almost paid by account payee cheque in subsequent years - Once the payment is made by cheque and there is no outstanding liability standing as on the date of assessment, the sundry creditors are not in the control of the assessee but it is the duty of AO to issue notice u/s 133(6) and call for information and AO has miserably failed in doing his duty addition deleted - appeal of assessee is allowed in part for statistical purposes.

Summary

Issues Involved:

1. Confirmation of returned income.
2. Addition on account of cessation of liability for sundry creditors.
3. Addition on account of cessation of liability for M/s. ARC Infotech (P) Ltd.
4. Addition on account of cessation of liability for Shri Narendra Kumar Duggar.
5. Disallowance of salary paid to Shri Siddhartha Jalan under section 40A(2).
6. Addition by applying net profit rate on contract receipts.
7. Restriction of depreciation allowance.
8. Addition of profit on sale of old car.
9. Addition of advances received from customers.

Issue-wise Detailed Analysis:

1. Confirmation of Returned Income:
The first issue raised by the assessee was regarding the CIT(A) confirming the action of the AO, even though the returned income was accepted under section 143(1) of the Act. The assessee's counsel conceded that this issue was not being pressed, and hence, it was dismissed as not pressed.

2. Addition on Account of Cessation of Liability for Sundry Creditors:
The AO added Rs. 2,78,261 as bogus liability on account of cessation of liability for sundry creditors, as the assessee could not prove the liability. The CIT(A) confirmed this addition. However, the Tribunal found that the liability existed in the books of accounts and had not been written off. Citing the Supreme Court judgment in CCIT Vs. Kesaria Tea Co. Ltd., it was held that the unilateral act of writing off the liability does not mean the liability ceased in the eye of law. Thus, the addition was deleted.

3. Addition on Account of Cessation of Liability for M/s. ARC Infotech (P) Ltd.:
Similar to the second issue, the AO added Rs. 95,610 for M/s. ARC Infotech (P) Ltd. as the assessee could not substantiate the liability. The Tribunal, following the same reasoning as in the second issue, deleted this addition as the liability was not written off in the books of accounts.

4. Addition on Account of Cessation of Liability for Shri Narendra Kumar Duggar:
The AO added Rs. 54,918 as cessation of liability for commission payable to Shri Narendra Kumar Duggar. The Tribunal found that this liability pertained to the financial year 1997-98 and was carried forward. Following the same reasoning as in the previous issues, the addition was deleted.

5. Disallowance of Salary Paid to Shri Siddhartha Jalan under Section 40A(2):
The AO disallowed Rs. 36,000 out of the total salary of Rs. 96,000 paid to Shri Siddhartha Jalan, invoking section 40A(2). The Tribunal found that Shri Siddhartha Jalan was engaged in consultancy, accounting, and marketing work for the assessee company. Thus, the disallowance was not justified, and the addition was deleted.

6. Addition by Applying Net Profit Rate on Contract Receipts:
The AO applied a net profit rate of 8% on contract receipts of Rs. 10,57,350, resulting in an addition of Rs. 84,588. The Tribunal found that the assessee had transferred the contract to Opto Marketing Co. Pvt. Ltd. and had not earned any profit from it. Therefore, the addition was deleted.

7. Restriction of Depreciation Allowance:
The AO restricted the depreciation allowance to Rs. 63,565 against the claim of Rs. 69,527. The Tribunal found that the AO had not provided a basis for the restriction and set aside the issue to the AO for verification of facts, allowing the issue for statistical purposes.

8. Addition of Profit on Sale of Old Car:
The AO added Rs. 45,506 as profit on the sale of an old car. The Tribunal, referring to CBDT Circular No. 469, found that the sale proceeds should be adjusted against the written down value of the block of assets, and no gain should be charged to tax. Thus, the addition was deleted.

9. Addition of Advances Received from Customers:
The AO added Rs. 8,02,061 as bogus advances received from customers. The Tribunal found that the assessee had provided complete details and that the advances were paid by account payee cheques in subsequent years. The AO had failed to issue notices under section 133(6) to verify the liabilities. Thus, the addition was deleted.

Conclusion:
The appeal of the assessee was allowed in part for statistical purposes, with several additions deleted and one issue remanded for verification. The Tribunal's decision emphasized the importance of proper verification and adherence to legal principles in assessing liabilities and expenses.