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Liability appearing in BS not attract section 41(1) and expenses on business promotion without supporting is disallowed subject to limit

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Court :
INCOME TAX APPELLATE TRIBUNAL

Brief :
The Learned CIT(A) has erred in law, on facts and circumstances of the case in assuming jurisdiction for giving direction for disallowing expenditure in the year which was not before him such directions are beyond the scope of statutory powers of CIT(A). That the CIT(A) has grossly erred in law and on facts of the appellant’s case in holding that the amounts of outstanding creditors are taxable in the years in which the appellant had incurred these expenses. The learned CIT(A) has grossly erred in giving directions for re-opening the assessments u/s 150 of the Act, which are illegal and beyond the scope of his powers. That the CIT(A) had no material or reasons to allege that the credits represented `Bogus’ credits.”

Citation :
Eros City Developers Pvt. Ltd., S-1, American Plaza, International Trade Tower, Nehru Place, New Delhi. PAN: AAACB0929N (Appellant) Vs. Dy Commissioner of Income-tax, Central Circle 6, New Delhi.(Respondent)

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH ‘B’: NEW DELHI

  BEFORE SHRI B.R. MITTAL, JUDICIAL MEMBER AND

 SHRI B.R. JAIN, ACCOUNTANT MEMBER

I.T.A.No.4152/Del/2011

Assessment Year :  2008-09

Eros City Developers Pvt. Ltd., S-1,

American Plaza, International Trade Tower,

Nehru Place, New Delhi.

PAN: AAACB0929N (Appellant)

Vs.

Dy Commissioner of Income-tax,

Central Circle 6, New Delhi.

(Respondent)

                 Appellant   by  : Shri Deepak Sehgal, Sr. DR.

                 Respondent by : Shri R.K. Kapoor, CA.

O R D E R

PER B.R. MITTAL, JUDICIAL MEMBER

This Assessee has filed this appeal for A.Y. 2008-09 against the order of the learned Commissioner of Income-tax (Appeals) dated 19th July, 2011.

The first ground of appeal reads as under:-

“1a) The Learned CIT(A) has erred in law, on facts and circumstances of the case in assuming jurisdiction for giving direction for disallowing expenditure in the year which was not before him such directions are beyond the scope of statutory powers of CIT(A).

1b) That the CIT(A) has grossly erred in law and on facts of the appellant’s case in holding that the amounts of outstanding creditors are taxable in the years in which the appellant had incurred these expenses.

1c) The learned CIT(A) has grossly erred in giving directions for re-opening the assessments u/s 150 of the Act, which are illegal and beyond the scope of his powers.

1d) That the CIT(A) had no material or reasons to allege that the credits represented `Bogus’ credits.”

2.       The relevant facts are that the assessee is in the business of real estate developers and filed the return for the assessment year under consideration declaring income of Rs.4,89,12,516/-.

3.       During the course of hearing the Assessing Officer observed that an amount of Rs.3,08,865/-  was outstanding towards creditors for more than three years and is being carried on as liability from year to year.  The AO has stated that there has been no transaction in these accounts for the last three years.  The AO has stated that the assessee was asked to furnish the details of creditors outstanding for more than three years and to justify why the same should not be treated as remission of liability under sec.41(1) of the Act.  The assessee filed its reply stating that the outstanding amount pertains to the creditors whose amounts are outstanding due to the fact that these amounts are not finally settled by the creditors.  The AO has stated that the assessee has already claimed deduction on account of this amount in the earlier years.  Since the assessee has not to pay these parties any longer, the liability towards this has ceased to exist.  The AO added the said amount of Rs.3,08,865/- to the income of the assessee under sec. 41(1) of the Act.  Being aggrieved the assessee filed appeal before the first appellate authority.

The learned CIT(A) has stated that the addition under sec. 41(1) could not be made as the assessee has not written off these amounts in its books of accounts.  However, the learned CIT(A) has stated that the assessee has failed to furnish the confirmations from the alleged creditors.  Thus a presumption arises that these are bogus credits standing in the books of the assessee.  The learned CIT(A) has directed the AO to reopen the case under sec. 150 and to add the credits standing in the names of the alleged creditors in the respective years.   Hence this appeal by the assessee.

4.       During the course of hearing the learned AR filed an application under Rule 29 of the Income-tax Appellate Tribunal Rules seeking permission to place on record the bills of creditors in view of the directions given by the learned CIT(A) that these creditors in respect of which liability were outstanding as on 31st March, 2008, are bogus parties.  He submitted that these documents are necessary to establish the genuineness of the creditors that these are trade creditors and the balance outstanding amount is brought forward from the assessment years 2002-03 to 2004-05.  The learned AR also filed a chart giving the details of the parties, amount outstanding, date of transaction and further submitted that even the assessment could not be reopened relevant to the assessment years in which the transactions had taken place as it is barred by limitation even after considering the maximum time period as per sec. 153 of the Income-tax Act.  The learned AR further submitted that the purchases in the relevant assessment years have not been disputed by the Department and the same were accepted.  Therefore, direction of the learned CIT(A) that the brought forward creditors are bogus is not justified.  On the other hand, the learned Sr. DR placed reliance on the order of the learned CIT(A).

5.       We have carefully considered the orders of the authorities below, the submissions of the learned representatives of the parties and also the relevant details of the outstanding credits.  It is observed that the said creditors are brought forward from the assessment year 2002-03/2003-04/2004-05 as trade creditors for the balance outstanding amount.  The learned AR has not disputed the fact that the said credits are for the purchases made by the assessee in the earlier years and purchases had been accepted by the department in the relevant assessment years.  Merely because the assessee has not filed the confirmation of the outstanding amount from the creditors, it cannot be said that the creditors are not genuine.  During the course of hearing it was also submitted by the learned AR that in the preceding assessment years the assessments were also made under sec. 143(3) of the Act when the liability for the outstanding credits were accepted by the Department.  The learned Sr. DR also did not dispute the said fact during the course of hearing.  Considering the facts of the case we are of the considered view that the action of the Assessing Officer to presume that the liability has ceased to exist even though the same is appearing in the balance-sheet of the assessee as on 31st March, 2008, is not based on cogent material and therefore, the provisions of sec. 41(1) of the Act are not attracted.  Further the said credits are brought forward from earlier assessment years, the direction of the learned CIT(A) to hold that the said creditors are bogus, is also not based on any cogent material and the same is not justified.  Hence we confirm the action of the learned CIT(A) to the extent that the said addition made by the AO under sec. 41(1) of the Act is not justified.  We also expunge the observation of the learned CIT(A) that the said outstanding creditors are bogus and accordingly, the direction of the learned CIT(A) given to the Assessing Officer to reopen the case under sec. 150 of the Act and add the credits standing in the name of the creditors in the respective years, is deleted.  Hence, ground No.1 of the appeal taken by the assessee is allowed.     

6.       In ground No.2 of the appeal the assessee has disputed the order of the learned CIT(A) in upholding the addition of Rs.2,17,558/- being 50% disallowance on business promotion expenses made by the Assessing Officer.

7.       The relevant facts are that the assessee claimed the expenses of Rs.4,93,580/- on account of business promotion expenses.  The Assessing Officer has stated that on verification of the expenses, only Rs.58,463/- has been incurred on business promotion activities and the rest expenses of Rs.4,35,117/- have been mainly incurred by the directors for entertainment of guests in the hotels/restaurants and gifts to various high profile people for business purposes.  The AO has stated that the assessee could not furnish the names of the persons who were entertained and could not furnish the names of the persons to whom the gifts were given for business purpose.  The AO has treated the balance amount of Rs.4,35,117/- out of Rs.4,93,580/- claimed by the assessee for business purpose and disallowed 50% of Rs.4,35,117/- which works out to Rs.2,17,558/-.  Being aggrieved the assessee filed appeal before the first appellate authority.

8.       The learned CIT(A) has confirmed the action of the AO.  Hence this appeal by the assessee.

9.       During the course of hearing the learned AR submitted that the similar issue came up before the Tribunal in the assessee’s group case in ITA No.4153/Del./2011 for A.Y. 2008-09 in the case of R.C. Sood & CO. Development (P) Ltd. vs. DCIT and the Tribunal on similar facts by its order dated 28th September, 2012 restricted the disallowance to 20% of the claimed expenses as reasonable.  The learned AR also filed copy of the said order just to substantiate his submission.  He submitted that the disallowance be restricted to 20% of the claimed expenses.  The learned Sr. DR relied on the order of the learned CIT(A).

10.     We have carefully considered the orders of the authorities below and submissions of the learned representatives of the parties.  On perusal of the order of the Tribunal dated 28th September, 2012 (supra), we do agree that on similar facts the AO disallowed 50% of the expenses on the ground that the expenses were incurred by the directors for entertainment of guests in the hotel/restaurant and gifts to various high profile people for business purpose.  The assessee also could not furnish the names of persons who were entertained and the names of persons to whom the gifts were given for the business purpose.  The learned CIT(A) confirmed the action of the AO.  In further appeal, the Tribunal vide Para 9 of its order dated 28th September, 2012, restricted the disallowance to 20% of the claimed expenses which reads as under:-

“9.    Considering the above submissions, we fully agree with the Ld. DR that onus always lies on the claimant to establish the genuineness of his claim.  In the present case, the assessee despite opportunity could not furnish evidence to support its claim that expenditure was incurred for the purpose of business nor any material was furnished to show that gifting as Mont Blanc Pens to its customers on booking of the property, was part of its scheme.  We however, keeping in mind the totality of the facts on issue, are of the view that restriction of the disallowance by 20% of the claimed expenses will be reasonable to meet the end of the justice.  We order accordingly.  The grounds involving the issue thus partly allowed.”

11.     In view of the above submissions of the learned representatives of the parties and considering the facts of the case in the assessee’s group concern (supra), we hold that it will be reasonable to restrict the disallowance by 20% of the claimed expenses as against 50% made by the authorities below.  Further it has also not been disputed by the learned Sr. DR that the assessee itself considered 20% of the expenses for the purpose of fringe benefit tax.  Hence, ground No.2 of the appeal taken by the assessee is allowed in part by restricting the disallowance to 20% of the expenses claimed by the assessee.

In the result, the appeal of the assessee is allowed in part.

12.     Order pronounced in the Open Court on 30th October, 2012.

                 Sd/-                                                               Sd/-  

(B.R. JAIN)                                                   (B.R. MITTAL)

   ACCOUNTANT MEMER                                 JUDICIAL MEMBER

Dated: 30th October, 2012.

 

Copy of the order forwarded to:-

1.     Appellant

2.     Respondent

3.     CIT

4.     CIT(A)

5.     DR                                                   

By Order

*mg                                                   Deputy Registrar, ITAT.

 

CS Bijoy
on 22 November 2012
Published in Income Tax
Views : 1927
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