IN INCOME TAX APPELLATE TRIBUNAL PUNE BENCH , PUNE BEFORE MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM ITA No.650 /PN/2013 Assessment Years : 2007-08 Shri Satish Dagdu Darekar, S.No.51, Laxmitara Nagar, Appellant Hotel Satish Executive, Hinjewadi Road, Pune 411 033 PAN No.AARPD2744F v/s DCIT, Circle-9, Pune Respondent ITA No.651 /PN/2013 Assessment Years : 2008-09 Shri Satish Dagdu Darekar, S.No.51, Laxmitara Nagar, Appellant Hotel Satish Executive, Hinjewadi Road, Pune 411 033 PAN No.AARPD2744F v/s ACIT, Circle-9, Pune Respondent Appellant by : Shri Kishor Phadke Respondent by : Shri Suhas Kulkarni, JCIT Date of Hearing :26.07.2016 Date of Pronouncement:16.09.2016 2 ITA Nos.650 and 651/PN/2013 ORDER PER R.K. PANDA, AM : above two appeals filed by assessee are directed against separate orders dated 21-12-2012 and 26-12-2012 of CIT(A)-V, Pune relating to Assessment Years 2007-08 and 2008-09 respectively. For sake of convenience both appeals were heard together and are being disposed of by this common order. ITA No.650/PN/2013 (A.Y. 2007-08) : 2. Facts of case, in brief, are that assessee is individual and is engaged in construction activity through proprietary concern named as M/s. S. D. Darekar. He filed his return of income on 29-09-2007 declaring total income of Rs.18,30,560/-. survey action u/s. 133A of Income-tax Act was conducted in case of assessee on 17-03-2009. During course of survey action, incriminating documents indicating on money receipts were found. assessee offered additional income of Rs.98,28,403/- for A.Y. 2009-10. Meanwhile, assessment proceedings for A.Y. 2007-08 was in progress. AO noticed that assessee has shown net profit of 4.08% excluding interest and other items on sales/turnover of Rs.2,33,65,579/- which was substantially low compared to net profit of 17.50% shown in A.Y. 2008-09. AO, therefore, confronted assessee on this issue. It was contended before AO that assessee has offered entire income over period of time. AO treated this as 3 ITA Nos.650 and 651/PN/2013 admission of lower profit margin. Further, he analysed various sale deeds as per page 3 of assessment order and noted that certain properties, particularly in case of Dr. Dipika Patil, profit margin was quite less. AO observed that during course of survey records found indicated that assessee used to take on-money on account of sale of flats/row houses. assessee even admitted that investment in hotel is not properly shown and to cover up discrepancies assessee had declared additional income of Rs.1.00 crore. Rejecting various explanations given by assessee AO adopted net profit of 11.08% and enhanced profit by 7% which was calculated at Rs.16,35,590/-. Accordingly, AO made addition of Rs.16,35,590/- to total income of assessee. 3. Before CIT(A) it was submitted that survey action conducted in case of assessee for A.Y. 2009-10 is totally irrelevant for assessing total income of assessee for A.Y. 2007-08. It was submitted that no incriminating documents indicating receipt of on-money were found during survey. No addition has been made on account of receipt of any on-money. It was submitted that admitting income by assessee for A.Y. 2009-10 could be for various reasons including buying of peace. It was submitted that since assessee was incurring losses and wanted to focus more on his business he ceded to declaration sought by Surveying Officer rather than to litigate and hence consented to declaration. Therefore, there is no reason whatsoever to infer anything from these facts and bring it to year ended 31-03-2007 to tax. It was further submitted that in 4 ITA Nos.650 and 651/PN/2013 order to determine ability of business to yield profits what is seen normally is Gross Margin and not Net Profit. margins shall be function of location, amenities provided and scale of scheme, market in that area, commercial content and wide variety of other variants. AO has failed to appreciate simple fact that same flat that was sold for x amount during year ended 31-03-2007 will definitely be sold for x+ amount in subsequent year ending on 31-03-2008. net profit for year ended 31-03-2008 shall definitely be higher than Net profit for year ended 31- 03-2007. AO has gone by his fancy understanding and stated that considering average profit of year under assessment and following year, assessee does not have to file his return upon completion of following year, for previous year. AO should have pointed out inaccuracies in accounts and should have based his reasoning on such inaccuracies pointed out rather than his feelings. mere statement that there is possibility of taking on-money from Dr. Patil is not sufficient to make huge addition. AO has failed to point out any inaccuracies or mistakes in accounts and has not rejected books of account and has directly proceeded to estimate profit and that too net profit. addition made based only on estimate which is neither supported by any supporting corroborative evidence nor based on any fallacies or inaccuracies pointed out by AO in books of account maintained and audited is neither sustainable on facts nor on legal grounds. It was submitted that addition cannot be made without even rejecting results of books of account 5 ITA Nos.650 and 651/PN/2013 and only based on survey done in 2 years posterior to previous year under assessment. Nothing has been brought on record as corroborative evidence to show that assessee had collected on-money. Relying on various decisions it was submitted that addition made by AO should be deleted. 4. However, Ld.CIT(A) was not satisfied with explanations given by assessee and upheld addition made by AO by observing as under : 7. I have carefully considered facts of case as well as reply of appellant. In this case, claim of appellant that addition was made on basis of findings of survey conducted on 17.03.2009 which pertains to A.Y. 2009-10 is not correct in sense that Assessing Officer has simply highlighted findings of survey in assessment order. Thereafter, Assessing Officer has proceeded to examine low net profit ratio offered by appellant. On contrary when confronted by Assessing Officer regarding low net profit ratio, appellant's counsel submitted that over period of time entire income of project has been offered for taxation. This contention of learned counsel of appellant has been treated as admission of low profit by Assessing Officer. Further, appellant has contended that Assessing Officer should have compared Gross Profit and not Net Profit. In this connection, it is seen that Gross Profit for March 2007 is 20.51 % compared to 29.66 as per para 5 of reply. Therefore, there is shortfall in Gross Profit ration for A.Y. 2007-08. In any case appellant has not been able to justify low net profit with plausible reasons except stating before Assessing Officer that entire profit has been offered for taxation over period of time. 8. appellant has submitted that price of row house sold to Dr.Patil cannot be yardstick for determining low Net Profit as done by Assessing Officer as it was unauthorised construction. In this regard, appellant submitted copy of plan of row house in project stating that same was not sanctioned. However, when learned counsel of appellant was questioned as to whether purchaser was made aware about this fact, reply was in negative. This being so, it cannot be said that price of row house sold to Dr. Patil was low because it was unauthorised. Therefore, I do not find any merit in submissions of appellant that price of row house sold to Dr. Patil was low because it was unauthorised, and therefore same cannot be used as yardstick as done by Assessing Officer. 6 ITA Nos.650 and 651/PN/2013 9. Next contention of appellant rests on point that Assessing Officer has estimated profit at higher side without finding any defect in books of account and rejecting books of account. 10. In this regard, it is noticed that Assessing Officer has highlighted low Gross Profit ratio as well as discrepancy in sale deeds as far as rate of agreement is concerned. Further, it is noticed that closing stock valuation has not been done on any scientific basis. Auditors have adopted value of closing stock as per certificate of proprietor which is reproduced as under: Certificate of Value of Stock I, Satish D. Dereker, Proprietor S.D. Darekar Developers & Builders and M/s. Satish Bricks & Potteries do hereby certify that, we have physically verified stock in hand during F. Y. 2006-07at different intervals. value of stock as on 31/03/2007 Work in progress, Finished Goods, etc. In case of S.D. Darekar, Developers & builders amounts to Rs.1,97,18,500/- (One Crore ninety seven eighteen thousand five hundred only) and in case of M/s. Satish Bricks & Potteries amounts to Rs.9,00,000/- (Nine Lakh only). above statements are true & correct. 11. Accordingly, learned counsel of appellant was asked to file breakup of closing stock valuation. appellant submitted same vide letter dated 18.10.2012 which is as under: Project Name Amount (Rs.) Shrirang Vihar-Flats 500,000.00 Shrirang Vihar-Shops 1,011,000.00 . Satish Commercial 5,267,000.00 Abhijeet Apartments 2,250,000.00 Shweta Park 9,510,500.00 Vacant Plots 1,180,000.00 19,718,500,00 12. When learned counsel of appellant was asked to provide breakup of this costing with rate applied, it could not: be submitted. This shows that closing stock too has been shown at estimated basis without supporting evidence. It is also true that Assessing Officer has not rejected books of account and has proceeded to estimate profit at higher side. Ideally Assessing Officer should have rejected books of accounts before 7 ITA Nos.650 and 651/PN/2013 estimating profit but not doing so, will not be fatal so long as estimation is justified. In case of Pragati Engineering Corporation vs. ITO Raibareli, Hon'ble Lucknow Bench 'B' Third member in IT Appeal No. 304(LKW) of 2011 dated 14.05.2012 it has been held that Limited view in respect of specific items can be taken without rejecting books of accounts. Therefore, in my view addition of Net Profit on basis of above facts without rejecting books can be' done by Assessing Officer. appellant has relied upon many case laws. But all of them relate to rejection of books of accounts. Therefore, facts being distinguishable same cannot be applied. Accordingly, action of Assessing Officer in making addition of Rs.16,35,590/- is upheld and ground No.2 to 5 are dismissed. 5. Aggrieved with such order of CIT(A) assessee is in appeal before us with following grounds : 1. learned CIT (Appeals)-V, Pune erred in law and on facts in sustaining addition of Rs. 16,35,590/- made by DCIT, Circle 9, Pune to income as per Return filed u/s. 139(1) of I.T. Act, 1961 alleging lower net profit I income offered to tax. 2. learned CIT (Appeals)-V, Pune further erred in law and on facts in confirming addition of Rs. 16,35,590/- merely on basis of estimates I conjectures and purely based on suspicions. 3. learned CIT (Appeals)-V, Pune failed to appreciate working provided to show that based on percentage completion method profit offered for tax was in line with Gross Revenue accrued to assessee for said year and reasoning for lower margins in relevant year. Based only on surmises drawn by AO, which were not supported by any evidence, confirmed addition purely based on Lower Net Profit. comparable margins considered for purpose was net profit of ensuing year i.e. A.Y. 2008-2009 which had different project undertaken and obviously would have different project cost and revenue matrix. 4. appellant craves to add/ modify/ alter/ delete all/ any of grounds of appeal. 6. Ld. Counsel for assessee strongly opposed order of CIT(A) upholding addition made by AO. He submitted that during course of survey on 17-03-2009 assessee had surrendered additional income of Rs.98,28,403/- for A.Y. 2009-10 on account of discrepancies on account of investment in hotel property. However, for impugned 8 ITA Nos.650 and 651/PN/2013 assessment year no evidence whatsoever was found on account of receipt of on-money during course of survey. Therefore, there was no justification on part of AO to make such huge addition. Further, AO had not rejected books of account and accepted book results. Therefore, in absence of rejection of books of account and in absence of any incriminating evidence showing collection of on-money found during course of survey AO could not have made huge addition by estimating profit. Further, row house sold to Dr. Dipika Patil at lower rate was due to various reasons such as locational disadvantage, amenities given, payment terms, capacity of negotiation etc. Therefore, reduction in sale rate to Dr. Dipika Patil could not have been ground for estimating profit especially in absence of any incriminating material found during course of survey. 7. Ld. Departmental Representative on other hand heavily relied on order of CIT(A). He submitted that Ld.CIT(A) has given justifiable reasons for upholding action of AO in rejecting book results and estimating profit. He accordingly submitted that order of CIT(A) be upheld and grounds raised by assessee should be dismissed. 8. We have considered rival arguments made by both sides, perused orders of AO and CIT(A) and paper book filed on behalf of assessee. We have also considered various decisions cited before us. We find assessee in instant case is Developer and Builder. He filed his return of income for impugned assessment year declaring income of Rs.18,30,536/-. survey was conducted in case of 9 ITA Nos.650 and 651/PN/2013 assessee on 17-03-2009, i.e. A.Y. 2009-10 during which certain incriminating materials were found showing receipt of on-money for which assessee had surrendered additional income of Rs.98,28,403/-. AO therefore concluded that assessee was indulging in receipt of on-money. He further noted that row house has been sold to one Dr. Dipika Patil at average rate of Rs.657/- per sq.ft. whereas other row-house were sold to different persons at higher price. Since assessee was unable to explain reasons for rate variation to satisfaction of AO and since according to AO net profit margin rate of 4.08% shown by assessee on account of construction activity is very low as compared to subsequent years, AO rejected book results and estimated net profit at 11.08% of turnover. 9. It is case of Ld. Counsel for assessee that in absence of any evidence found showing receipt of on-money for this year AO cannot make addition to total income of assessee on basis of outcome of survey for subsequent year. It is also submission of Ld. Counsel for assessee that assessee had given justifiable reasons for selling row house to Dr. Dipika Patil at price lower than rate charged from other persons since row house sold to Dr. Dipika Patil was not authorized. Apart from this, it was also submitted that rate variation was also on account of various factors such as locational disadvantage, amenities given, payment terms and capacity to negotiate etc. 10 ITA Nos.650 and 651/PN/2013 10. We find merit in above submission of Ld. Counsel for assessee. It is admitted fact that assessee before CIT(A) had made categorical statement that row house sold to Dr. Dipika Patil was not sanctioned. However, he rejected above submission on ground that assessee could not say as to whether Dr. Dipika Patil was made aware of this fact or not. Further, it is also admitted fact that during course of survey no incriminating material showing receipt of on-money for this assessment year was found. As mentioned earlier, survey took place on 17-03-2009 which relates to A.Y. 2009-10 and evidences showing receipt of on-money for that year was found. However, assessee had declared undisclosed income for said assessment year on account of discrepancy in investment in hotel property and not on account of receipt of on-money. Since for impugned assessment year no evidence whatsoever was found showing receipt of on-money and assessee has given justifiable reasons for selling row house to Dr.Dipika Patil at lesser rate than row houses sold to other persons and considering fact that AO has not rejected books of account, therefore, we are of considered opinion that estimating profit at 11.08% is not justified. We accordingly set aside order of CIT(A) and grounds raised by assessee are allowed. ITA No.651/PN/2013 (A.Y. 2008-09) : 11. Grounds of appeal No.1 to 3 by assessee read as under : 1. learned CIT (Appeals)-V, Pune erred in law and on facts in upholding action of learned AO in making addition of Rs.41,10,736/- to taxable income of appellant. learned CIT (Appeals)-V also erred in upholding AO view of mandating assessee to follow AS-7 issued by ICAI despite this Accounting 11 ITA Nos.650 and 651/PN/2013 Standard not legally mandated U/s 145(2) of Income Tax Act 1961 and failing to appreciate that Income had to be computed based on provisions of Income Tax Act 1961. 2. Learned CIT (Appeals)-V erred in law and on facts in not appreciating facts and circumstance provided and explained with respect to Project 'Patil Plaza' and also fact that assessee had consistently followed accounting method of offering amount of profits on this project on Completion basis and upon completion profit was duly offered for tax in A.Y. 2010-2011. 3. Learned CIT (Appeals)-V failed to appreciate fact that when at completion of project, which was termination of contract, profits on entire project amounted to Rs. 49.32 Lakhs and offered for tax in A.Y. 2010-2011 whereas AO brought to tax Rs. 41,10,736/- mandating AS-7 and only on 50% of Project Completion Stage. Learned CIT (A) further erred in not appreciating fact that when estimating and taxing amount of profits anterior to their accrual, assessee could not offer 'negative' profits in later years when it is finally realized that actual profits earned were lower than profits taxed in earlier years. 12. Facts of case, in brief, are that assessee filed original return of income on 29-09-2008 declaring total income of Rs.35,01,390/-. Subsequently, assessee filed revised return of income on 31-03-2010 declaring total income of Rs.51,85,540/-. 13. During course of assessment proceeding AO noted that assessee along with Shri. Siddharth Kantilal Khinwasara, signed MOU Shri. Narsing Gopalrao Patil for construction of two buildings comprising of 36 flats and 9 Shops on 19-04-2007 for fixed price of Rs. 2.10 crores and time frame for completion of construction was stipulated at 11 months. During course of assessment proceedings, AO noticed that assessee was following completed contract method while as contractor assessee was supposed to follow percentage completion method as per revised AS-7 applicable w.e.f. 01-04-2003 as period of 12 ITA Nos.650 and 651/PN/2013 construction contract was increased by more than one year as against stipulated 11 months stated in MOU signed on 19-04- 2007. Accordingly, AO confronted assessee and asked assessee to clarify as to why revenue accruing as per percentage completion method should not be treated as taxable income of assessee for year under consideration. 14. assessee in its reply submitted that he has choice to choose any one method for recognizing revenue on account of contract viz., 'Percentage Completion' or 'Completed Contract Method'. assessee submitted that accounting standard AS-7 was not mandatory and in many cases Income-tax Departmental itself was not following same. assessee also submitted that due to uncertainties in project, it was not practical to offer income on Percentage Completion Method. Reliance was placed on decision of Pune Bench of Tribunal in case Shri B. K. Pate Enterprises Vs. DCIT (2009) 125 TTJ (Pune) 974 and various other decisions. 15. However, AO was not satisfied with explanation given by assessee and held that AS-7 was applicable in respect of "Patil Plaza" Project as assessee was merely contractor. He accordingly arrived at profit of Rs. 41,10,736/- by computing profit as under : Actual expenses incurred upto 31-03-2008 Rs.81,65,161/- Estimated total contract expenses Rs.1,45,00,000/- Contract value Rs.2,18,00,000/- Thus, estimated profit of contract =(Contract Value) - (Estimated expenses) = (2,18,00,000) (1,45,00,000) = Rs.73,00,000 Accordingly, profit of assessee for year under consideration, out of said construction contract is worked out as under : 13 ITA Nos.650 and 651/PN/2013 Profit for year = 81,65,161 x 73,00,000 1,45,00,000 = 41,10,736/- Accordingly, AO made addition of Rs.41,10,736/- to total income of assessee. 16. Before CIT(A) assessee reiterated same submissions as made before AO. It was argued that assessee is consistently following project completion method and offering profits for tax on project Patil Plaza . project was finally terminated with bitter taste amongst parties to MOU, albeit with conclusion being reached at year ended 31-03-2010. During previous year ended 31-03-2010, assessee has duly offered to tax Rs.49.32 lakhs as profit for entire project, executed over 3 years which was left without obtaining completion certificate due to legal complexities involved and has also paid income tax due thereon. It was argued that for 50% of contract value AO has computed profit to extent of Rs.41.10 lakhs which is absurd and shows that profits at that point of time could not have been visualized, estimated and fairly computed and considered for purpose of recognition in books of account. information in respect of expected costs etc. were not even available with assessee at time of finalization of accounts and filing of return for year ended 31-03-2008. Relying on various decisions it was argued that since income earned on this project has already been offered to tax in A.Y. 2010-11, therefore, there is no justification in making addition of Rs.41,10,736/- to total income of assessee in A.Y. 2008-09. 14 ITA Nos.650 and 651/PN/2013 17. However, Ld.CIT(A) was not satisfied with above arguments of assessee and upheld addition made by AO by observing as under : 6. I have carefully considered facts of case as well as reply of appellant. In this case, it is undisputed fact that appellant is contractor in respect of "Patil Plaza" Project, which was signed on 19.04.2007 for fixed price of Rs. 2.10 crores for time frame of 11 months. Had time frame of 11 months been followed, income was required to be offered for taxation in A.Y. 2008-09 itself. However, since time frame of 11 months could not be followed best method applicable in this case is AS-7 as stipulated by Institute of Chartered Accountants of India which was applicable from 01.04.2003. Accounting Standards are issued by Institute of Chartered Accountants of India from time to time. As-7 was revised by ICAI in its June 2002 publication of journal. Revised AS-7 was made effective for all contracts entered into during Accounting periods 0l.04.2003. While previous AS-7 recognized 2 methods for accounting of contracts i.e. percentage completion method and completed contract method, revised AS-7 recognizes only percentage completion method. It is true that AS-7 is not mandatory in sense that it is not binding upon Income-tax Department as it is not notified by Government of India. However, since accounting standards are issued by Institute of Chartered Accountants of India, same needs to be followed so long as it is not in conflict with provisions of Income-tax Act. It is seen that Income-tax Act does not contain any provision dealing with contract accounting. Therefore, there is no question of AS-7 being in conflict with provisions of Income-tax Act. Since, there is no conflict in AS-7 vis-a-vis provisions of Income-tax Act, AS-7 which deals with contract accounting needs to be followed. appellant has relied upon various decisions in his reply. However, it is seen that above decisions are in case of Builders and Developers while in present case, appellant is contractor and therefore above decisions are distinguishable on facts of case. Therefore, on facts and circumstances of case, action of AO in adding Rs. 41,10,736/- adopting AS-7, is upheld and Ground No.1 to 6 are dismissed. 18. Aggrieved with such order of CIT(A) assessee is in appeal before us. 19. Ld. Counsel for assessee strongly challenged order of CIT(A). He submitted that during previous year ended 31-03-2008 assessee along with Mr. Siddharth Kantilal 15 ITA Nos.650 and 651/PN/2013 Khinwasara had signed Memorandum of Understanding with another individual Shri Narsing Gopalrao Patil and two others for construction of 2 buildings comprising of 36 flats and 9 shops. memorandum was signed on 19-04-2007. price fixed for above was fixed price of Rs.2.10 crores with no escalation clause or savings clause etc and time frame for completion of assessment was stipulated at 11 months. Till end of 31-03- 2008, i.e. 11 months after signing of MOU quantum of construction completed was approximately 50%. assessee had incurred and funded all expenditure that was required for purpose of project Patil Plaza . Since there was lot of complexities and misunderstanding involved amongst parties to MOU project could not be completed in time and project was completed finally during year ended 31-03-2010. assessee had offered profit in A.Y. 2010-11 and paid tax. However, according to AO, assessee should have disclosed profit in A.Y. 2008-09 itself on basis of percentage completion method. He submitted that assessee is following project completion method consistently and profit has been disclosed in A.Y. 2010-11. Further assessee being individual Accounting Standards of ICAI is not binding on him. He accordingly submitted that order of CIT(A) be set aside on this issue and grounds raised by assessee should be allowed. 20. Ld. Departmental Representative on other hand heavily relied on order of CIT(A). 16 ITA Nos.650 and 651/PN/2013 21. We have considered rival arguments made by both sides, perused orders of AO and CIT(A) and paper book filed on behalf of assessee. We have also considered various decisions cited before us. only dispute arising in above grounds are regarding disclosure of profit for project Patil Plaza in A.Y. 2008-09. According to assessee it is following project completion method and it has offered entire income during A.Y. 2010-11. assessee is following this method consistently. For impugned assessment year assessee has hardly completed 50% of project. It is also submission of Ld. Counsel for assessee that Accounting Standards-7 issued by ICAI is not applicable to assessee being individual. 22. We find some force in above arguments of Ld. Counsel for assessee. It is admitted fact that project was supposed to be completed within 11 months from date of MOU. It is also fact that assessee due to various reasons could not complete project in time at close of accounting year, i.e. upto 31-03-2008. assessee could complete only about 50% of project. submission of Ld. Counsel for assessee that it is following project completion method consistently could not be controverted by Ld. Departmental Representative. It is also fact that assessee had offered entire income during A.Y. 2010-11 after project was completed. action of AO in bringing to tax income of Rs.41,10,736/- during A.Y. 2008-09 itself on ground that assessee should have shown profit during year on basis of percentage completion method in our 17 ITA Nos.650 and 651/PN/2013 opinion under facts and circumstances of case is not justified. It has been held in various decisions cited before CIT(A) that since AS-7 has not been mandated u/s.145(2), therefore, revenue cannot force assessee to follow same. However, we find Ld.CIT(A) is completely silent on these decisions. He has also acknowledged that AS-7 is not mandatory since it is not notified by Government of India. Since assessee in instant case could not complete project within stipulated period of 11 months and since there was no escalation cost and no agreement for cost plus and project was completed in A.Y. 2010-11 and assessee has offered entire profit to tax in A.Y. 2010-11 after completion of project, therefore, we find merit in argument of Ld. Counsel for assessee that no addition should have been made for impugned assessment year. We accordingly set aside order of CIT(A) and direct AO to delete addition. grounds raised by assessee are accordingly allowed. 23. Grounds of appeal No.4 to 6 by assessee read as under : 4. learned CIT (A) erred in law and on facts in upholding action of learned AO in making addition of Rs. 11,28,223/- applying provisions of Sec. 41 (1) disregarding fact that Outstanding was out of Bill of vendor dated 31st March 2008. 5. learned CIT (A) further erred in law and on facts in not appreciating fact that outstanding amount was out of Bill that was not claimed as Revenue Expenditure by assessee, either in relevant year nor any of earlier years, but was relating Capital Asset namely Construction of Hotel Premises used by assessee for his business and Sec. 41 (1) was not applicable to said outstanding. 6. learned CIT(A) further erred in nof appreciating fact that assessee had duly furnished copies of Ledger Accounts, produced books of account and bills/vouchers etc for verification during scrutiny assessment, details of Tax Deducted at Source ant its payment with respect to this vendor and also 18 ITA Nos.650 and 651/PN/2013 'Confirmation Letter' of outstanding balance along with his self certified PAN Card. He further failed to appreciate fact and law that Legal Liability of assessee would not cease even if assessee were to unilaterally reverse liability in his books, which was not so in this case. In fact in case of assessee, books duly acknowledged liability to vendor and which was even confirmed as outstanding and payable by vendor. 24. Facts of case, in brief, are that AO during course of assessment proceedings noticed that amount of Rs.11,28,223/- was outstanding till date of hearing. Accordingly, AO confronted assessee on issue and asked assessee to furnish details of transactions, Ledger extracts as well as details of subsequent payment done. In reply, assessee furnished confirmation from Shri. Dattu Atanure but did not furnish bills and vouchers for same. AO therefore disallowed amount of expenses of Rs. 11,28,223/-. While doing so, AO also observed that even otherwise amount was liable to be taxed u/s. 41(1) Income-tax Act as cessation of trading liability. 25. Before CIT(A) assessee submitted that amount of Rs. 11,28,223/- was outstanding and payable to Mr. Datta Atanure as of March 31, 2008. amount is part of Bill submitted for work of construction of hotel premises dated 31st March 2008. Mr. Datta Atanure had submitted his bill for Rs.14,00,000/- towards "the contracted charges for part Construction of Hotel Premises. During assessment proceedings, assessee obtained 'confirmation of balances' letter and Mr. Datta Atanure confirmed Ledger Account balances as payable to him and provided his Income Tax Permanent Account Number also which has been placed on 19 ITA Nos.650 and 651/PN/2013 records of assessment. It was argued that AO at time of assessment traversed to years March 2009 and March 2010 and in view of non-payment, determined that amount was not payable as of March 31, 2008' itself and resorted to Sec. 41(1) to tax this amount. 26. It was submitted that as of March 31, 2008 amount was due and outstanding. amount is part of Bill of Rs. 14 Lakhs recorded on 31st March 2008 itself. In his anxiety to tax this amount, AO failed to appreciate that 'liability does not cease' as of March 31, 2008 when bill itself is dated 31st March 2008. AO has not rejected bill but has resorted to Sec. 41 (1) which is not applicable since liability is out of Bill dated 31st March 2008 itself and it cannot cease to exist on same date in order to press Sec. 41 (1) provision for this. It was argued that wording of section makes it clear that obtaining of refund or other benefit by way of cessation or remission of 'trading liability' should be in 'subsequent year'. Where amount is allowed as remission in year of incurring of liability itself, Sec. 41 (1) was not attracted and other sections should be examined to decide whether remission resulted into taxable income. assessee submitted that creditor has confirmed balance and provided his Income Tax Permanent Account Number. TDS has been made on this amount and also deposited with Income Tax Department. assessee submitted that amount is not trading liability. Further, assessee has not written off amount. It was also argued that Section 41(1) would not be attracted unless deduction has been made in assessment of earlier year. 20 ITA Nos.650 and 651/PN/2013 For above proposition, assessee relied on decision in case of CIT Vs. Nathubhai Desabhai (1981) 130 ITR 238(MP) 27. assessee also submitted that it has not written back and credited its profit and loss account with this amount. This 'Unilateral' write-back has been considered by AO without 'adducing' any evidence that amount is not payable and liability has 'ceased' and has ceased as of March 31, 2008. It was argued that in order to attract Sec. 41 (1), there should be evidence on record that particular expenditure had in fact been' allowed in earlier years. Finding regarding this fact cannot be based on mere conjectures and surmises. Relying on various decisions, assessee argued that addition of Rs.11,28,223/- is uncalled for and unjustified. 28. However, CIT(A) was not satisfied with arguments of assessee and upheld addition made by AO by observing as under : 13. I have carefully considered facts of case as well as reply of appellant. appellant claims that amount is part of bill submitted for work of construction of Hotel premises dated 31.03.2008 and Shri. Dattu Atruve has submitted his bill of Rs.14 lacs towards contract charges for part construction of hotel premises. It was also submitted that confirmation of balance was also filed. In this regard, it is seen that appellant has not submitted crucial details like bills as well as Ledger Account of party before Assessing Officer. It is also not explained as to why amount in question was still payable after 2 years of end of previous year. Therefore, Assessing Officer's action of disallowance of Rs.11,28,223/- is quite justified. 14. As far as Assessing Officer's claim that same is taxable u/s. 41 of Income-tax Act on account of cession of liability, I find that is not justified in sense that liability pertains to previous year itself and Assessing Officer cannot interfere u/s. 41 of Income-tax Act unless it is proved that liability has ceased to exist. However, since addition has been made on account of 21 ITA Nos.650 and 651/PN/2013 disallowance of expenses there is no need to interfere as far as addition is concerned and therefore, action of Assessing Officer in disallowing Rs.11,28,223/- is upheld as appellant could not produce bills before Assessing Officer besides explaining why amount was still outstanding. Therefore ground No. 11 to 16 are dismissed. 29. Aggrieved with such order of CIT(A) assessee is in appeal before us. 30. Ld. Counsel for assessee strongly opposed order of CIT(A) in confirming addition made by AO u/s.41(1). He submitted that bill towards construction work of hotel premises was received from Mr. Datta Atanure for Rs. 14 lakhs on 31-03-2008. Referring to Para 39 of paper book he drew attention of Bench to bill dated 31-03- 2008 for Rs.14,00,000/-. He however submitted that this bill could not be produced before lower authorities and therefore requested for admission of same as additional evidence. He however submitted that AO was informed of same at time of assessment proceedings about bill dated 31-03-2008 for Rs.14,00,000/-. He submitted that balance confirmation certificate obtained from above party was also filed before AO. Since amount was outstanding as on 31-03-2008 AO could not have disallowed same u/s.41(1) of Act by holding that amount was not payable as on 31-03-2010. He submitted that since assessee was incurring huge losses he could not pay to creditor. That does not mean that creditor has written off amount and amount will be added to total income of assessee u/s.41(1) of I.T. Act. He submitted that Ld.CIT(A) while holding that addition is not justified u/s.41(1) of Act, however, he upheld addition 22 ITA Nos.650 and 651/PN/2013 made by AO on ground that expenses has been disallowed by AO. He submitted that bill amount was Rs.14 lakhs whereas amount outstanding was Rs.11,28,223/-. Therefore, finding of CIT(A) itself is erroneous. 31. Ld. Departmental Representative on other hand heavily relied on order of CIT(A). 32. We have considered rival arguments made by both sides, perused orders of AO and CIT(A) and paper book filed on behalf of assessee. We have also considered various decisions cited before us. We find AO in order passed u/s.143(3) at para 3.3 of order has made disallowance of Rs.11,28,223/- on account of sundry creditor outstanding as on 31-03-2008 in name of Mr. Datta Atanure on ground that assessee did not produce bill and vouchers of above party and since amount is outstanding till date of order, it is also liable to tax u/s.41(1) of I.T. Act, 1961. We find Ld.CIT(A) held that amount cannot be added u/s.41(1) of Act for which Revenue is not in appeal. However, he sustained addition on ground that AO has made addition by disallowing expenses. We find above finding of CIT(A) is not correct. bill raised by Mr. Datta Atanure was for Rs.14 lakhs and amount outstanding was Rs.11,28,223/-. AO had made disallowance of Rs.11,28,223/- u/s.41(1). Had AO made disallowance of expenditure, we would have disallowed Rs.14 lakhs. However, he had disallowed expenses of Rs.11,28,223/- shown as payable 23 ITA Nos.650 and 651/PN/2013 to Shri Datta Atanure. Therefore, it cannot be said that AO has disallowed expenditure and not invoked provisions of section 41(1). Since AO has not made any disallowance of expenditure and CIT(A) sustained addition on ground that AO has made addition by disallowing expenditure, therefore order of CIT(A) in our opinion is erroneous on this issue. Since AO has made addition u/s.41(1) of Act and CIT(A) has held that provisions of section 41(1) are not attracted on this issue, therefore, order of CIT(A) being erroneous on facts is set aside. Grounds raised by assessee are allowed. 33. In result, both appeals filed by assessee are allowed. Order pronounced in open court on 16-09-2016. Sd/- Sd/- (SUSHMA CHOWLA) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER iq.ks Pune; Dated : 16th September , 2016. lrh'k Copy of Order forwarded to : 1. Appellant 2. Respondent 3. CIT(A)-V, Pune 4. CIT-V, Pune 5. DR, ITAT, Pune; 6. Guard file. BY ORDER, // //True Copy// Sr. Private Secretary ITAT, Pune Satish Dagdu Darekar v. DCIT, Circle-9, Pune