Sheikh Abdul Farid,, Kanpur vs Assessee

These are cross appeals filed by the assessee and Revenue, which are directed against the order of CIT(A)-II, Kanpur dated 11/03/2013 for assessment year 2009-10.

2. Since the grounds involved in these appeals are inter-connected, we decide the issues raised by both the sides simultaneously. In fact an addition of Rs.16,90,811/- was made by Assessing Officer in respect of deposits in savings bank account of the assessee and against this addition, CIT(A) confirmed addition of Rs.10 lac and allowed relief of the balance 2

amount of Rs.6,90,811/-. The Assessing Officer has also made an addition of Rs.21,60,421/- in respect of sundry creditors from three parties. When the assessee carried the matter in appeal before the CIT(A), he deleted an addition of Rs.7,52,415/- pertaining to M/s Raj Kumar & Company but confirmed two additions of Rs.8,22,415/- and Rs.5,85,571/- pertaining to M/s Fashion Traders and M/s Thakurji Textiles respectively. Now the assessee is in further appeal before us for two additions upheld by CIT(A) whereas the Revenue is in appeal for the part additions deleted by CIT(A).

3. It was submitted by Learned A.R. of the assessee that a clear finding has been given by CIT(A) in Para 6 of his order that the arguments of the Learned A.R. of the assessee is acceptable that the gross profit of the business is to be taken as concealed income of the assessee. He further submitted that in addition to this, it is stated by CIT(A) that it is also to be seen that what is the capital employed for this business. He submitted that it has to be accepted that the addition sustained by CIT(A) is on account of gross profit of the turnover in the bank account and for capital employed for doing this business outside books. He submitted that the gross profit in the regular business of the assessee is 5.5%, as has been noted by the Assessing Officer in Para 3 of the assessment order. Regarding the capital employed in this business, he submitted that the summary of bank account is available on page No. 30 of the paper book as per which, there was opening balance of Rs.3,18,872/- and therefore, no addition is called for on account of initial funds for doing this business. Regarding the addition made by the Assessing Officer in respect of creditors and partly confirmed by CIT(A), he drawn our attention to Para 7 of the assessment order whereas it is noted by the Assessing Officer that the creditors were having opening balance and there is no purchase during the present year. He 3

submitted that under these facts, no addition can be made in the present year.

4. As against this, Learned D.R. of the Revenue supported the orders of the Assessing Officer.

5. We have considered the rival submissions. Regarding the first addition made by the Assessing Officer of Rs.16,90,811/- against which addition was upheld to the extent of Rs.10 lac, we find that the Assessing Officer made the addition of entire amount of cash deposit in the bank. We find that it is noted by the Assessing Officer in Para 5 of the assessment order that this deposit includes an amount of Rs.2 lac transferred from M/s Star Tex through cheque No.800244 and also noted that Star Tex is a concern from which the assessee is regularly purchasing cloth as raw material to be consumed in his proprietorship concern M/s Hoor Creators, which is engaged in manufacturing of garments. In the light of these facts, it has to be accepted that the deposit in this bank account is business transaction and business receipts and therefore, in respect of such deposit in bank account, the addition should be made to the extent of gross profit on such undisclosed business turnover and not the entire deposit in bank account.

5.1 Regarding the gross profit rate, we find that it was the claim of the assessee before the Assessing Officer that 5.5% gross profit addition should be made in respect of this deposit in bank account but in Para 2 of the assessment order, it is noted by the Assessing Officer that in the proprietorship concern of the assessee M/s Hoor Creators, the turnover was Rs.49,02,310/- and gross profit was Rs.5,30,419/-. Hence, it is seen that the gross profit rate in Hoor Creators is 10.82% and not 5.5%. Hence, in our considered opinion, the addition to the extent of accepted gross profit 4

rate of 10.82% of the turnover of Rs.16,90,811/- should be confirmed. We order accordingly.

5.2 Regarding the addition on account of initial capital for doing this business outside the books, we find force in the submissions of Learned A.R. of the assessee that the assessee was having opening balance of Rs.3,18,872/- in this bank account and in our considered opinion, for doing an annual turnover of Rs.16.90lac for which the addition has been made by the Assessing Officer, this much fund is sufficient as initial capital. Hence, in our considered opinion, in the facts of the present case, no addition is called for on account of initial capital for doing this business outside the books. We confirm the addition to the extent of Rs.1,82,945/- being 10.82% of Rs.`16,90,811/- and delete the balance addition. Hence, the ground raised by the Revenue in this regard is rejected whereas the ground raised by the assessee is partly allowed.

5.3 Regarding the addition made by the Assessing Officer of Rs.21,60,421/- with regard to credit balance of three creditors, M/s Fashion Traders Rs.8,22,415/-, M/s Raj Kumar & Company Rs.7,52,435/- and M/s Thakurji Textiles Rs.5,85,571/-, total Rs.21,60,421/-, it is noted by Assessing Officer in Para 7 of the assessment order that these creditors were having opening balances and there is no purchase during the present year. The addition appears to have been made by the Assessing Officer u/s 41(1) although the Assessing Officer has not mentioned any section in the assessment order because the Assessing Officer has stated that this liability is not existing at present. Regarding the addition to be made u/s 41(1), it is essential that the liability should cease to exist as per the judgment of Hon'ble Apex Court rendered in the case of Chief Commissioner of Income Tax vs. Kesaria Tea Co. Ltd. [2002] 254 ITR 434 (SC). In this case, it was also held that it is essential that a benefit is obtained in respect of such 5

trading liability by way of remission or cessation thereof during the year. In the present case, it is seen that the assessee is still showing these creditors as liability. Now we examine the provisions of section 41(1) of the Act. We find that as per Explanation 1 to section 41(1), if the assessee has written back the liability in his accounts then it will be considered that even by unilateral act of the assessee, there is remission or cessation of the liability. But in the present case, the assessee has not written back the liability in his accounts. In the light of these provisions of section 41(1) and the judgment of Hon'ble Apex Court in the case of Kesaria Tea Co. (supra) and another judgment of Hon'ble Apex Court rendered in the case of CIT vs. Sugauli Sugar 236 ITR 518, we hold that the addition made by the Assessing Officer in this regard is not sustainable and therefore, on this issue, we do not find any reason to interfere in the order of CIT(A). Accordingly, ground raised by the Revenue is rejected and the ground raised by the assessee in this regard is allowed.

6. In the result, the appeal of the Revenue is dismissed whereas appeal of the assessee is partly allowed.

(Order was pronounced in the open court on the date mentioned on the caption page)

Sd/. Sd/.

(SUNIL KUMAR YADAV) ( A. K. GARODIA ) Judicial Member Accountant Member

Dated:16/04/2015 *C.L.Singh

Copy of the order forwarded to : 1. The Appellant 2. The Respondent. 3. Concerned CIT 4. The CIT(A) 5. D.R., I.T.A.T., Lucknow Asstt. Registrar