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TMI Blog2019 (2) TMI 1463X X X X Extracts X X X X X X X X Extracts X X X X ..... f the paper book - tax the trade creditors balances u/s 41(1), the cessation or remission of the liability has to be allowed by the trade creditor but not by the beneficiary assessee and the entries made in the books of accounts are immaterial. There must be consent form the creditor to waive the liability. This view is upheld by the Hon’ble Apex court in the case of Commissioner of Income tax Vs Sugauli Sugar Works (P.) Ltd [1999 (2) TMI 5 - SUPREME COURT]. In the instant case, the assessee has transferred the trade credit balances to the capital accounts without any confirmation from the trade creditor for cessation or remission of liability, hence, it is incorrect to hold that the said sum required to be brought to tax u/s 41(1) of the Act. As per the material placed before us by the assessee and discussed in the preceding paragraphs clearly establish that the AO has made reasonable and sufficient enquiries during the course of assessment proceedings. Thus, there is no error in the order passed by the AO and the Ld.Pr.CIT has incorrectly invoked the jurisdiction u/s 263 of the Act. Suspicion- Mismatch of signatures of the trade creditors in the confirmation letters for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee collects the human hair domestically as well as from the temples and grades the same according to the quality. The assessee submitted before the AO, the closing stock and its valuation, grade wise. The price of the human hair ranges from ₹ 14 to ₹ 4640/- per kg. The price of each grade is different depending on the quality. The assessee has valued the closing stock at ₹ 4,854/- per kg and the waste was valued at ₹ 14 per kg and the average price came to ₹ 553/- per kg. Except making observation that the AO has not verified the closing stock, the Pr.CIT did not make out a case that there is an error in the assessment order which caused prejudice to the department. Since the issue has been examined by the AO and satisfied regarding the valuation closing stock at the time of assessment we find no error in the assessment order which calls for revision u/s 263 of the Act. - Assessee appeal allowed. - I.T.A.No.194/Viz/2018 - - - Dated:- 3-1-2019 - Shri V. Durga Rao, Judicial Member And Shri D.S. Sunder Singh, Accountant Member For the Appellant : Shri G.V.N.Hari, AR For the Respondent : Shri D.K.Sonowal, CIT DR ORDER PER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Similarly, under the head sundry debtors the assessee had shown an amount of ₹ 3.23 crores towards joint construction account of partners at Koppal, Karnataka on which depreciation was not claimed, which indicates that the asset has not been put to use, hence, viewed that interest pertaining to the funds borrowed and invested during the pre-construction period needs to be disallowed as per the provisions of section 36(1)(iii) of the Act. (iv) Ld.Pr. CIT also found that the assessee has shown M/s Madhulatha Entertainment as debtor for an amount of ₹ 2.68 crores and an amount of ₹ 10.63 lakhs was collected as interest receipt and observed that the interest collected by the assessee was very less compared to bank lending rate. Therefore, the interest attributable to the advances given to Madhulatha Entertainment required to be disallowed. (v) The assessee owns residential apartments valued at ₹ 90.65 lakhs in M/s Vaibhav Fort, Eluru and claimed depreciation of 4.65 lakhs on the same. The AO did not verify whether the cost of apartment includes the land value or not and depreciation required to be restricted to the cost of the building excluding the lan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the original documents were produced before the AO which was verified and allowed the depreciation, hence, there is no case of excess claim of depreciation. 7. In respect of closing stock, the assessee explained that the it collects varieties of human hair and segregates the same into different grades and the average price of closing stock depends on the grade which is ranging from ₹ 14 to ₹ 4,854/- per Kg.The assessee further submitted that it has valued the closing stock correctly grade wise and declared the same in the financial statements. It was also stated that the complete details were placed before the AO at the time of assessment which was verified by the AO and accepted the trading results, thus, there is no case for revision u/s 263. 8. The Ld.Pr.CIT considered the explanation offered by the assessee and not being convinced with the explanation held that the assessment made u/s 143(3) was erroneous and prejudicial to the interest of the revenue and accordingly set aside the assessment and directed the AO to make the addition of ₹ 6,52,39,273/- relating to trade creditors which was transferred to partners capital account u/s 41(1) of the Act and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made by cheque. Relevant account copies of the trade creditors accounts were enclosed in page No.47 to 53 of paper book and argued that entire the information was furnished before the AO at the time of assessment which was verified and completed the assessment without making any addition. It is incorrect to say that the AO did not verify the issue at the time of assessment. Since the AO has verified the issue and taken a conscious decision not to make any addition, the Ld.AR argued that there is no error in the assessment order which caused prejudice to the assessment, thus requested to quash the revision order passed u/s 263. 10. In respect of disallowance of interest u/s 36(1)(iii) relating to the construction of building at Vijayarai Village and Koppal, Karnataka the Ld.AR referring to balance sheet filed by the assessee, submitted that the assessee is having interest free funds of ₹ 45,81,65,230 consisting of reserves and surpluses and trade creditors. The investment for construction of building was made out of interest free funds available to the assessee, therefore, the question of disallowance does not arise. Similarly in the case of Koppal Village also no interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o case for revision u/s 263. 12. In respect of depreciation of apartment, the assessee submitted that during the assessment proceedings, the AO has called for the additions to assets and the assessee had submitted the original purchase deed which was examined by the AO. In the original purchase deed, there is no separate allocation cost for land and the super structure thus there is no case for disallowing the depreciation on building. The AO after verification of the sale deed allowed the depreciation, therefore, there is no error in the assessment made by the AO, and argued that there is no case for revision u/s 263 of the Act. 13. In respect of closing stock, the assessee invited our attention to questionnaire issued by the AO in page No.28 of the paper book in question No.3 wherein the details were called for with regard to valuation of closing stock and loss of stock due to obsolete / damaged vide questionnaire dated 26.02.2015. The assessee submitted complete details of the valuation of closing stock as per page no.53 of the paper book. It was stated by the AR that the valuation of closing stock was furnished before the AO with opening stock purchases, losses and the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paper book. In the case of Md.Mahasin Ali Khan, Bhagwanpur, the assessee has retransferred the sum of ₹ 3,15,08,585/- to the traders account and subsequently made purchases and as well as payments through bank cheque and there was no cash payment. Similarly in the case of Habibulla Mallick, Bhagwanpur, the amount was transferred to one of the partners capital account of Sri Kanigolla Srinivasa Gupta and the said sum of ₹ 1,32,19,285/- was transferred back to the trade creditors account on April 13. The credit in the case of Md.Mahasin Ali Khan Bhanwanpur was transferred back to the creditors account on 10.04.2013 a sum of ₹ 90,38,030/-. Similarly credit in the name of Tikka Khan, Bhagwanpur was also transferred back to the creditors account on 10.04.2013. After retransfer of the credits to the trade creditors accounts, the assessee has made purchases and paid the entire sums through cheque including the retransferred amounts. The AO examined the purchases and sales and accepted the purchases and sales. From the scrutiny of the partners capital accounts, trade creditors account, we understand that the assessee has unilaterally transferred the sums to the partners c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e trade creditor for cessation or remission of liability, hence, it is incorrect to hold that the said sum required to be brought to tax u/s 41(1) of the Act. As per the material placed before us by the assessee and discussed in the preceding paragraphs clearly establish that the AO has made reasonable and sufficient enquiries during the course of assessment proceedings. Thus, there is no error in the order passed by the AO and the Ld.Pr.CIT has incorrectly invoked the jurisdiction u/s 263 of the Act. Therefore, we cancel the order of the Pr.CIT u/s 263 on this issue and allow the appeal of the assessee. 16. The second issue for consideration is mismatch of signatures of the trade creditors in the confirmation letters for the impugned A.Y. as well as in the subsequent A.Y. The AO has called for the details of sundry creditors outstanding as at the end of the year as per the questionnaire issued on 26.02.2015 (as per question No.8) page No.28 of the paper book. The assessee furnished the details of the creditors and the confirmations vide letter dated 09.04.2015 which shows that the AO has caused necessary enquiries before completing the assessment. The assessee furnished copi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire interest is related to the various credit limits granted to the assessee for the purpose of the business. Apart from the above, the assessee is having interest free funds to the extent of ₹ 45,81,65,230/- consisting of partners capital account, reserves and surpluses and trade creditors. The investment for construction of the factory building at Vijayarai Village and Koppal was only ₹ 6,60,42,440/- which is less than non-interest bearing funds which were at the disposal of the assessee. Though it is a common account, the assessee is at liberty to use the non-interest bearing funds for construction. There is no dispute that the factory building at Vijayarai Village and Koppal Karnataka are business assets and the assessee is free to spend from the business funds. The revenue has not established the fact that the assessee has used the interest bearing funds for construction of the buildings. For disallowance of the interest, there must be nexus for investment of interest bearing funds for non-business purposes. Since in the instant case the assessee has used non-interest bearing funds, there is no case for disallowance of interest u/s 36(1)(iii) of the Act. Apa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , there is no error in the assessment order made by the AO, thus, the case is beyond jurisdiction u/s 263 of the Act. 20. The next issue for revision u/s 263 is valuation of the closing stock. With regard to the valuation of the closing stock, the AO has called for the details of the closing stock vide questionnaire dated 26.02.2015 and the assessee submitted the details of the closing stock and its valuation item wise. During the assessment proceedings, as well as before the Pr.CIT, the assessee submitted that the value of the closing stock depends on the quality and grade of the human hair. The assessee collects the human hair domestically as well as from the temples and grades the same according to the quality. The assessee submitted before the AO, the closing stock and its valuation, grade wise. The price of the human hair ranges from ₹ 14 to ₹ 4640/- per kg. The price of each grade is different depending on the quality. The assessee has valued the closing stock at ₹ 4,854/- per kg and the waste was valued at ₹ 14 per kg and the average price came to ₹ 553/- per kg. Except making observation that the AO has not verified the closing stock, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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