DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1, COIMBATORE, RACE COURSE ROAD, COIMBATORE vs. M/S ARUMUGA COTTSPIN PVT LTD, COIMBATORE

आयकर अपीलीय अिधकरण “बी” �ायपीठ चे�ई म�। IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, CHENNAI माननीय �ी वी. दुगा� राव, �ाियक सद! एवं माननीय �ी मनोज कुमार अ&वाल ,लेखा सद! के सम)। BEFORE HON’BLE SHRI V. DURGA RAO, JM AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकरअपील सं./ (िनधा�रण वष� / Assessment Year: 2015-16) DCIT M/s. Sri Arumuga Cottspin Pvt.Ltd., बनाम Central Circle-(1) No.95/13, Vyshnav Building, Coimbatore. Opp. KG Cinemas, Race Course Road / Vs. Coimbatore-641 018. �थायीलेखासं./जीआइआरसं./PAN/GIR No. AAJCS-5065-M (अपीलाथ�/Appellant) : (!"थ� / Respondent) & Cross Objection No.20/Chny/2023 (In (िनधा�रण वष� / Assessment Year: 2015-16) बनाम/ M/s.Sri Arumuga Cottspin Pvt.Ltd., DCIT No.95/13, Vyshnav Building, Vs. Central Circle-(1) Opp. KG Cinemas,Race Course Road, Coimbatore. Coimbatore-641 018.. �थायीलेखासं./जीआइआरसं./PAN/GIR No. AAJCS-5065-M (अपीलाथ�/Cross Objector) : (!"थ� / Respondent) अपीलाथ�कीओरसे/ Revenue by : Shri D. Hema Bhupal (JCIT)- Ld. DR !"थ�कीओरसे/ Assessee by : Shri R. Venkata Raman (CA)-Ld. AR सुनवाईकीतारीख/Date of Hearing : 12-10-2023 घोषणाकीतारीख /Date of Pronouncement : 01-11-2023 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member)

1.1 Aforesaid appeal by Revenue for Assessment Year (AY) 2015-16 arises out of the order of learned Commissioner of Income Tax (Appeals)-16, Chennai [CIT(A)] dated 17-01-2023 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 31-12-2017. The grounds taken by the Revenue read as under:

1.

3. The Ld.CIT(A) erred in directing the assessing officer to telescope the addition made toward suppression of sales amounting to Rs.1,76,65,652/- against the addition of Rs.3,23,67,993/- made towards unexplained cash credits. 3.1 The Ld.CIT(A) failed to appreciate that the assessee has not substantiated the sources of cash credits were the amount generated by suppression of sales and there is no correlation· drawn between the quantity, date and amount of sales suppressed. 3.2 The Ld.CIT(A) failed to appreciate that the assessee claimed during the assessment proceedings that the cash credits were made out of Cash sales. But on verification of the claim, only 5 parties out of 22 parties replied, categorically denying the cash transactions with the assessee. The assessee had not furnished confirmation from the remaining parties. Thus, the assessee failed to prove that cash credits were made out of cash sales. 3.3 The Ld.CIT(A) erred in allowing telescoping by observing that the sales suppression quantified by the assessing officer to the extent of Rs.1,76,65,652/- should have flown somewhere and sitting somewhere, without any evidence furnished by the assessee that the cash generated out of sales suppression was reintroduced in the form of cash credits.

4. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of learned CIT(Appeals) may be set aside and that of the Assessing Officer be restored.

1.2 The assessee has filed cross-objection wherein the grounds raised by the assessee read as under: -

1. That the Ld.CIT(A) is justified in deleting the addition of Rs.49,44,000/- made towards disallowance of interest on borrowed capital u/s.36(1)(iii) of the Act proportionate to amount advanced to sister concerns.

2. That the Ld.CIT(A) is not justified in sustaining the addition of Rs.1,76,65,652/- made by the Assessing Officer towards alleged suppression of sales.

1.3 The Registry has noted delay of 5 days in revenue’s appeal. Similar delay of 21 days has been noted in assessee’s cross-objections. Considering the period of delay, both delays are condoned and we proceed with adjudication on merits. 1.4 As is evident, three issues fall for our consideration i.e. (i) Interest disallowance u/s 36(1)(iii); (ii) Addition on account of alleged suppression of sales; (iii) Addition of unexplained cash credit u/s 68. 1.5 Having heard rival submissions and upon perusal of case records, our adjudication would be as under. The assessee being resident corporate assessee is stated to be engaged in manufacturing of cotton yarns.

2.2 During appellate proceedings, the assessee summarized the CC Bank account and Term Loan Bank accounts and demonstrated that closing balance in these accounts was much less than the opening balances which would show that there was, in fact, reduction in interest bearing secured loans during this year. The Ld. CIT(A) concurred that where there are no fresh interest-bearing loans taken during this year and therefore, there could be no diversion of interest bearing funds for non-business purposes as alleged by Ld. AO. Accordingly, the impugned disallowance was deleted. Aggrieved, the revenue is in further appeal before us. 2.3 From the tabulation made by Ld. CIT(A) in para-5.3 of the impugned order, it could be seen that there is overall reduction in the unsecured loans during this year since opening loans stood at Rs.20.18 Crores as against closing loans of Rs.17.41 Crores. Upon perusal of assessee’s financial statements as placed on record, it could be seen that the assessee uses mixed funds to conduct its business. In such a case, the presumption would arise in assessee’s favor that the interest- free funds were utilized to make interest-free investments / advances and the onus would be on Ld. AO to establish that interest bearing funds were utilized to make the advances. Unless this exercise is carried out by revenue, no such disallowance could have been made. Upon perusal of financial statements, we also find that the interest-free funds as available with the assessee are much more than the net interest free advances made by the assessee to its sister concerns. Therefore, the impugned disallowance has rightly been deleted by Ld. CIT(A). The corresponding grounds raised by the revenue, in this regard, stand dismissed.

3. Addition on account of alleged suppression of sales. 3.1 Upon perusal of stock valuation as submitted by the assessee, Ld. AO observed that sales were made at Rs.150/- per Kg as against the fact that opening and closing stock was valued at Rs.195/- per Kg and Rs.214/- per Kg respectively. The same was tabulated as under: - Type of inventory Item Value of yarn/kg Opening stock Finished goods Rs.195 Sales Finished goods Rs.150 Closing stock Finished goods Rs.214 3.2 The Ld. AO held that the value of the finished goods was valued very less in sales. The assessee justified the same on the ground that some portion of the finished good contained Hank Yarn which is priced at a lower rate. However, no such proof could be adduced. The Ld. AO further observed that in one of the sale bill, the yarn was sold for Rs.195/- per kg. However, the price of cotton yarn (both hank and cones) as obtained from the Ministry of Textiles for the FY 2014-15, would show the following data: - Items April May June July Aug Sept Oct Nov Dec Jan Feb Mar Cotton 249 250 250 250 250 248 241 237 229 225 222 224 Yarn (Hanks) Cotton 207 210 209 206 200 192 189 188 188 184 184 184 Yarn (Cones) I 3.3 The Ld. AO further observed that the price ranges from Rs.250 to Rs.222 per Kg for Hank Yarn and Rs.210 to Rs.184 per Kg for Cones and therefore, the sales were undervalued. Finally, Ld. AO adopted average rate of Rs.184/- per Kg and applying the same to the quantity of finished goods sold, Ld. AO computed alleged suppression of sales for Rs.176.65 Lacs and added the same to the income of the assessee. The Ld. CIT(A) confirmed the stand of Ld. AO against which the assessee is in further appeal before us. 3.4 From the facts, it emerges that the assessee is a corporate entity and maintaining its books of accounts. The accounts are subjected to audit. No single instance of suppression of sales has been brought on record by Ld. AO and no discrepancies in the stock statement have been pointed out. There is no allegation that assessee’s gross profits are not commensurate with earlier years or there is substantial change in the same. In our considered opinion, no such addition could have been made merely be relying upon abstract data as issued by Ministry of Textiles. The allegation of Ld. AO is not backed by any material evidence. The sale price would depend upon multiple factors viz. quality as well as quantity. The average price computed by Ld. AO at Rs.150/- is completely erroneous. Therefore, this addition has no legs to stand. By deleting the same, we allow the corresponding grounds raised by the assessee.

4. Addition of unexplained cash credit u/s 68 4.1 The Ld. AO observed that the assessee received cash from 22 parties which are tabulated in para 6.1 of the assessment order as under: - No. Name of Parties Cash received (in Rs.) 1 Arunkumar Mills 37,31,931 2 Foundation One Infrastructure 5,75,000 Glassy Knitting 3 2,90,140

4 lshwarva Knit Tex 23,997 5 Jayasree Hoseries 96,660 6 M.P. Textile 34,94,139 7 Nandhini Textiles 1,74,795 8 Network Clothing Company 7,67,820 9 Noble Clothing Company 1,90,422 10 NSK Garments 1,36,220 11 NSP Tex 2,28,000 12 Rajadhani Knitters 2,08,845 13 S Fashion 4,25,880 14 Sharadhalakshmi Enterprises 78,61,060 15 Shree Ajav Garments 7,48,727 Shree Knit Impex 16 4,35,812 17 Sri Balaji Fabric 38,260 18 Sri Ganapaty Murugan Textile 42,34,985 19 Sri Mahshakti Mills ltd 22,00,000 20 Sri Valli Murugan textiles 62,04,400 21 Welcome Knitters 1,97,700 22 Westrock Clothing Co. 1,03,200 Total 3,23,67,993 In order to verify the genuineness of these parties, confirmatory letters were sent. However, the assessee could not provide address of 3 parties. The letters sent to 6 parties were returned un-served. Few of the parties denied having made any cash payment or having any transaction with the assessee. Considering the same, Ld. AO held that cash so received was unexplained cash credit u/s 68 and the same was added to the income of the assessee. 4.2 During appellate proceedings, the assessee assailed the addition on the ground that the business is conducted mainly through the brokers and it is the broker who plays a vital role in conducting sales as well as ensuring collection from the customers. The same was evident by the fact that a survey was conducted in the case of the assessee on 23.03.2017 wherein summon were issued to the broker Shri Senthil Kumar and his statement was recorded. Shri Senthil Kumar explained clearly his role as a broker to conduct the sales. The assessee submitted that these amounts were, in fact, realization from debtors. The business was conducted through brokers and Ld. AO did not appreciate the business model of the assessee. The assessee, in the alternative, sought telescoping of addition of suppression of sales. 4.3 The Ld. CIT(A), while confirming this addition, accepted alternative argument of the assessee and allowed telescoping of addition of Rs.176.65 Lacs made on account of alleged suppression of sales against unexplained cash credits and restricted the impugned addition to the extent of Rs.147.02 Lacs. Aggrieved, the assessee as well as revenue is in further appeal before us. 4.4 From the facts, it emerges that the impugned listed parties are sundry debtors of the assessee. The ledger extract of all these parties have been placed on page nos. 52 to 111 of the paper book. Upon perusal of the same, it could be seen that all these are running accounts. The assessee has made sales to these parties and realized the payment through banking channels as well as through cash. In few cases, opening balances have been realized during this year. Most of the parties are having opening and closing ledger balances. In such a case, merely on the basis of outcome of confirmatory letters, the said receipts could not be treated as the income of the assessee. The sales are not in doubt. We find that all the ledgers are running ledgers which are duly reflected in the audited financial statements. The outcome of the confirmatory letter was to be understood in the background of the business model of the assessee. Undisputedly, assessee’s business was being conducted through the brokers who play vital role in concluding sales and ensuring realization from the debtors. The same would explain the fact the few of the debtors would not have direct dealing with the assessee. Therefore, we are of the considered opinion that this addition is not sustainable in law. Hence, we delete the impugned addition in its entirety i.e., to the extent of Rs.323.67 Lacs. The corresponding grounds raised by the assessee stand allowed. The revenue has assailed the telescoping as granted by Ld. CIT(A) and accordingly, this ground has been rendered infructuous. Conclusion

5. The assessee’s cross-objections stand partly allowed whereas the revenue’s appeal stand dismissed.

Order pronounced on 1st November, 2023