Out of this set of three appeals, two are by Revenue and last one is by assessee. These appeals are directed against orders of CIT(A)-I, Kochi, dt. 1st March, 2002, relevant assessment years are 1993-94 and 1995-96. Since these appeals pertain to same assessee, i.e., M/s Popular Vehicles & Services Ltd., we have heard these appeals together and (they) are being disposed of by this common order for sake of convenience. ITA No. 194/Coch/2002 Asst. yr. 1993-94 first ground of objection b y Revenue is directed against order of CIT(A) in deleting addition of Rs. 6,40,327, assessed under sundry creditors and other creditors, on ground that AO has not established fact that creditors have not given up their claim or liability has ceased to exist by operation of law at time of assessment. facts leading to dispute briefly are as under: assessee is agent of Maruthi vehicles, DCM Toyota, Birla-Yamaha generator set, Bajaj vehicles and spares and accessories. While framing assessment, AO noticed list of sundry creditors totalling to Rs. 85,427 and other creditors totalling to Rs. 5,54,897 shown as outstanding for several years. It was further noticed that none of sundry creditors or other creditors was paid subsequently. sundry creditors represented credits for expenses and other creditors represented deposits collected from customers to be adjusted against service charges depending upon whether such service charges are payable by customer or such services are free depending upon acceptance of warranty claims by principal. AO proposed to bring these amounts to tax. When questioned, assessee stated that this amount was not offered under sundry creditors and other creditors as income, as according to assessee this was not liability that ceased to exist. It was submitted that exercise envisaged involved contacting creditors and interacting with principals with regard to any pending warranty claims. Only after receipt of clarifications and replies, suitable adjustments would be made in various accounts. It was further submitted that exact liability was unknown to them and after enquiry results will be intimated to AO for further action. However, AO rejected claim of assessee and added these amounts to total income of assessee. Aggrieved, assessee approached first appellate authority and submitted that existence of this outstanding amount alone will not make this amount taxable and liabilities of assessee cannot be treated as ceased to exist. Unless and until creditors have given up their claims such liabilities do not exist and continue to exist. universal treatment of such credit balances as income by debtor would not constitute taxable income in hands of such debtor. For above proposition assessee relied on decision of Hon ble Supreme Court in case of CIT vs. Sugauli Sugar Works (P) Ltd. (1999) 152 CTR (SC) 46: (1999) 236 ITR 518 (SC) and that of Kerala High Court decision in case of CIT vs. V.T. Kuttappu & Sons (1974) 96 ITR 327 (Ker). Coming to amount of Rs. 5,54,897 it was submitted that amount represents unadjusted advances received towards service charges and other items of work from customers in respect of their vehicles. appropriation of advances received towards charges of assessee takes place only when decisions of principals with regard to warranty claims of customers are intimated to assessee. In case of principals like Maruthi Udyog, there is always delay and their responses with regard to warranty claims are invariably received late. It was, therefore, submitted that in respect of other creditors also, subsequent to this assessment year did exercise similar to that done in case of sundry creditors and on that basis of such analysis, sum of Rs. 2,44,276 has been identified as credit balances in respect of which liabilities have ceased to exist. It was further submitted that when assessee itself is making attempt to identify amount in respect of which liability ceased and in fact written back substantial amount, it was not correct on part of AO to come to conclusion that entire amount shown in sundry creditors and other creditors should be treated as assessee s income on ground that these amounts were outstanding for longer time. assessee also relied on decision in case of CIT vs. Punjab Tractors Co-op. Multipurpose Society Ltd. (1997) 142 CTR (P&H) 20: (1998) 234 ITR 105 (P&H). CIT(A) held that s. 41(1) can be invoked only when it is established that creditors have given up their claim or liability ceased to exist by operation of law. He held merely showing that amount is outstanding for longer time, liability ceased to exist on assessee cannot be treated as correct approach, which has been adopted by AO. He further noted that assessee itself has offered liabilities that ceased as income in subsequent years, as such he held that there was no reason in making this addition. Aggrieved by above finding, Revenue is in appeal before Tribunal. learned Departmental Representative submitted that this amount was continuing with assessee for quite number of years and there were no claims or claimants as far as these amounts are concerned and as such AO was rightly treated this as assessee s income. On other hand, learned Authorised Representative of assessee submitted that assessee as and when ceased liability intimated Revenue and offered it to tax or repaid amount to parties concerned. assessee s Authorised Representative submitted that in fact some of these items are collected by assessee under peculiar circumstances. For example, assessee s representative submitted that assessee while giving delivery of vehicle may first direct to deliver at Ernakulam or for that matter some other station. Subsequently, they will intimate assessee that vehicle/spare-parts should be delivered in different station. amounts are sometimes collected expecting such contingency or otherwise assessee s representative submitted that there may be some dispute with regard to warranty whether particular item falls within area of warranty or not. assessee gets reply from its principals like Maruthi Udyog or DCM very late and till such time even assessee is not certain as to whether liability ceased to exist or not and as and when it is done, assessee repays amount or assessee offers it for taxation. Considering rival submissions, we find any reason to disturb order o f first appellate authority. We have already noted that assessee had made repayment sometimes after getting clarification from supplier of vehicles regarding warranty items or for expenditure and as such we find no reason to interfere with findings of CIT(A) on this point. appeal of assessee on this point fails. next ground of objection by Revenue is directed against order o f CIT(A) in deleting addition of Rs. 5 lakhs on account of understatement of GP. This addition was made by AO as he found on verification that assessee was not maintaining proper stock register even in respect of major items. There was fall in profit margin compared to last year. There was also inflation on purchases and suppression in closing stock. This addition was made by AO observing as under: "On verification it is seen that GP for this year is only 7.07 per cent as against 8.62 per cent for last year. Considering these facts it was proposed to add sum of Rs. 5 lakhs on account of understatement of GP as per this office letter dt. 18th March, 1996. In letter dt. 25th March, 1996, assessee s representative has stated that actual GP works out to 4.1 per cent as against GP of 3.78 per cent for last year and as such there is no reduction in GP. This is not correct. On verification it is seen that assessee has worked out GP without including other income amounting to Rs. 1,10,23,525 and without considering direct expenses. Various items included under other income are only commission, work charges, interest, warranty claims etc. received from suppliers of goods and these are only trading receipts. On including other income and after deducting direct expenses GP for this year works out to 7.07 per cent only as against 8.62 per cent for last year. As such there is reduction of GP. Further it is seen that inflation of purchases and suppression of closing stock totalling to Rs. 57,234 (Rs. 5,168 + 52,066) has been detected on scrutiny of bills relating to March only. If bills for remaining periods are also scrutinised discrepancies may be more. Considering all circumstances, sum of Rs. 5 lakhs is added on account of understatement of GP as proposed in this office letter dt. 18th March, 1996." Being aggrieved, assessee carried matter in appeal before CIT(A). learned first appellate authority after hearing Authorised Representative of assessee in detail, which has been dealt at pp. 6, 7 and 8 of his order, sustained addition of Rs. 57,234 and granted relief to assessee to tune of Rs. 4,42,766 on following lines: "I have considered facts of case and submissions of learned representative. AO has found books of account not reliable on ground that there was fall in GP when compared to earlier year and appellant was found to have suppressed closing stock valued at Rs. 56,066 and accounted purchase of item costing Rs. 6,168 which was actually received by appellant in subsequent month. assessee s representative has pointed out and in my view correctly, that there has been only increase in GP from 3.78 per cent of last year to 4.1 per cent for this year and method of computation of GP by AO was wrong. At any rate, percentage of GP or whether it has gone up or down are not very relevant in deciding question of reliability of accounts as has been held by Tribunal in decision relied on by appellant. This also seems to be view of Kerala High Court as reflected in its decision in case of M. Durai Raj vs. CIT (1972) 83 ITR 484 (Ker). Now question is whether omission noted by AO in accounting certain items of spares as closing stock can be held to be adverse factor impeaching credibility of accounts maintained by appellant. In this connection, it is to be noted that omission found is in respect of non-accounting of certain items of spares. In respect of certain items, appellant has straightaway admitted omission whereas in respect of certain others, appellant says that they could have been included in cash or credit sales but appellant is not in position to confirm as concerned bills were destroyed. In respect of spares and accessories appellant does not maintain any day-to-day stock register and it is virtually impracticable to do so considering large number of spares involved. On last day of accounting year, inventory is prepared on basis of physical verification. During year, total turnover of appellant was in excess of 31 crores and that of spares and accessories about 1.68 crores and closing stock of spares and accessories alone came to about 68 lakhs. When physical inventory of such stock is taken on last day of year and stock is constituted of hundreds of small items it is quite possible that some items could be omitted because of human error. total value of items found to be not included as closing stock is less than 1 per cent of closing stock of spares and accessories and totally insignificant in comparison with total value of stock of more than 2 crores and turnover of more than 31 crores. No unaccounted purchases or sales have been pointed out by AO. In above circumstances, to conclude that entire accounts of appellant are totally unreliable merely based on certain omissions in respect of closing stock is unwarranted. decision of Cochin Bench of Tribunal in case of sister-concern of appellant, M/s Popular Automobiles referred to above supports above view. Therefore, I would hold that materials brought on record by AO do not justify rejection of books of account and GP addition made at Rs. 5 lakhs. Hence this addition is deleted. But fact is that spares and accessories for value of Rs. 52,066 are neither reflected in sales or stock inventory. omission could be on account of genuine mistake in preparing stock inventory. But stock credited in P&L a/c is less to extent of above amount. Therefore, sum of Rs. 52,066 will be added by AO to income returned while giving effect to this order. Similar is position with regard to Rs. 5,168 representing purchase debited in account, but goods received in April. This item also needs to be added as closing stock. Thus total addition of Rs. 57,234 is confirmed. Net relief to appellant in respect of this ground will be Rs. 4,42,766." Against above relief granted to assessee, Revenue is in appeal before Tribunal. learned Departmental Representative kly relied on order of AO and reiterated grounds of appeal as his submissions. learned Authorised Representative vehemently supported order of learned first appellate authority and reiterated same submissions, as has been made before him. Having heard rival submissions and on going through orders of AO s well as first appellate authority, we are of considered view that learned first appellate authority was fully justified in granting relief to assessee. CIT(A) has dealt with issue at length, as reproduced above, and only after taking into account facts and circumstances of case and submissions of learned Authorised Representative of assessee reached aforesaid conclusion. Therefore, we see no reason to interfere with his findings on this point. Accordingly, we uphold same. ITA No. 195/Coch/2002 Asst. yr. 1995-96 In this appeal, Revenue has taken following effective grounds: "The learned CIT(A) erred in deleting addition of Rs. 6,74,261 being debts due from old customers as on 31st March, 1990 by admitting assessee s additional claim at time of hearing that amounts should have been allowed as trading loss under s. 37 of IT Act. learned CIT(A) ought to have noticed that such claim was not made by assessee either at time of assessment or even grounds of appeal filed before CIT(A). By admitting additional evidence without giving opportunity to AO, CIT(A) has violated r. 37A of IT Rules. learned CIT(A) ought to have also noticed that debits have taken place from 15th April, 1989 to 31st March, 1990, during period relating to asst. yr. 1990-91 and hence in any case assessee ought to have written off this amount if found as bad debt, latest by 31st March, 1993. If it is case of assessee that it is trading loss same should have been claimed during asst. yr. 1990-91. Hence CIT(A) ought to have held that claim cannot be allowed as trading loss for year under consideration." AO on examination of accounts found that assessee has debited sum of Rs. 7,71,360 as bad debts. Out of this sum, sum of Rs. 6,74,761 represented debts due from old customers. Since no details in support of claim were filed before AO, he added it to total income of assessee. Aggrieved by above action of AO, assessee approached first appellate authority. It was contended that there was no reason to make this addition. Write off of bad debt is basic requirement for claiming deduction under s. 36(1)(vii) of Act. assessee has complied with it. However, before CIT(A), assessee claimed same as trading loss under s. 37 and eligible for deduction instead of bad debts which is eligible for deduction under s. 36. It was stated that assessee keeps account of customers account . In this account, expenses incurred on behalf of various customers are debited and as and when payments are received, credits are made in account. But due to various reasons, often on account of disputes as to who should bear expenses, accounts are outstanding. total amount of such figure comes to Rs. 7,34,251.26 as against which total credits amounted to Rs. 60,260 leaving debit balance of Rs. 6,74,261.26 as on 31st March, 1990. assessee claimed it as business loss and relied on decision of Madras High Court in case of CIT vs. Inden Biselers (1990) 81 CTR (Mad) 185: (1990) 181 ITR 69 (Mad). claim of assessee was allowed by learned CIT(A) by observing as under: "I have considered submissions of learned representative. circumstances that lead to write off of sum of Rs. 6,74,262.26 has been already explained earlier. As per clarification now offered by appellant, various debit balances constituting amount written off represented expenses incurred on behalf of several customers. These amounts were therefore debited to customers account. However, these customers failed to reimburse expenses for certain reasons even after lapse of so many years. In circumstances, appellant chose to write off debit balance. In my view, ratio of Madras High Court decision relied on by appellant is applicable in facts of case of appellant. Therefore, I would hold that appellant is entitled for deduction of amount of Rs. 6,74,261 as trading loss under s. 37 of IT Act." Contending parties reiterated their respective stands. Considering rival submissions, we are of view that order of CIT(A) is to be confirmed. This amount remained as debit balance as on 31st March, 1990 due to disputes with clients of assessee for some reason or other. This is business loss. decision relied upon by learned first appellate authority supports case of assessee. Order accordingly. ITA No. 93/Coch/2002 Asst. yr. 1995-96 This appeal is filed by assessee. only effective ground raised by assessee is directed against order of CIT(A) in sustaining disallowance of Rs. 50,000 towards club membership fee since expenditure was capital in nature. assessee claimed amount of Rs. 50,000 as deduction under s. 37 of Act, i.e., revenue expenditure. AO found that this is one time payment for membership in club and as such he was of view that this is capital in nature. Aggrieved assessee carried matter in appeal before first appellate authority and contended that there is no enduring benefit and as such findings of AO are incorrect. However, learned first appellate authority upheld findings of AO holding that assessee need not make any contribution towards annual membership fees which may undergo periodic increases and assessee is entitled to enjoy benefits of membership of club on long-term basis. Thus, he held that assessee has gained advantage of enduring nature and sustained addition made by AO. Aggrieved, assessee is in second appeal before Tribunal. We have heard parties to dispute. fact that amount of Rs. 50,000 represented one time membership fee in club is not disputed Therefore, we agree with conclusion of learned first appellate authority and uphold same. In result, appeals of Revenue and appeal of assessee are dismissed. *** ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE I, ERNAKULAM v. POPULAR VEHICLES & SERVICES LTD.