DCIT,, GORAKHPUR vs. M/S MAHABIR JITE MILLS, LTD., GORAKHPUR

IN THE INCOME TAX APPELLATE TRIBUNAL VARANASI BENCH, VARANASI Before Shri B.R. Baskaran (AM) & Shri Amit Shukla (JM) I.T.A. No. 351/ALLD/2014 (A.Y. 2009-10)

The Mahabir Jute Mills Ltd., Vs. Jt. Commissioner of Income Sahjanwah, Gorakhpur 271 122. Tax (OSD), Circle-1, Gorakhpur PAN : AAACT8708R (Appellant) (Respondent)

I.T.A. No. 13/VNS/2023 (A.Y. 2020-21)

The Mahabir Jute Mills Ltd., Vs. Asst. Director of Income Tax, Sahjanwah, Gorakhpur 273 209. CPC, Bengaluru PAN : AAACT8708R (Appellant) (Respondent)

I.T.A. No. 448/ALLD/2014 (A.Y. 2009-10) I.T.A. No. 217/ALLD/2017 (A.Y. 2014-15)

Dy. Commissioner of Income Tax, Vs. The Mahabir Jute Mills Ltd., Range-1, Gorakhpur/ Sahjanwah, Asst. Commissioner of Income Gorakhpur 273 209. Tax, Circle-2, Gorakhpur PAN : AAACT8708R (Appellant) (Respondent)

C.O. NO. 39/ALLD/2014 (A.Y. 2009-10) in I.T.A. NO. 448/ALLD/2014 & C.O. NO. 14/ALLD/2018 (A.Y. 2014-15) in I.T.A. NO. 217/ALLD/2017

The Mahabir Jute Mills Ltd., Vs. Dy. Commissioner of Income Sahjanwah, Gorakhpur 273 209. Tax, Range-1, Gorakhpur/ Asst. Commissioner of Income PAN : AAACT8708R Tax, Circle-2, Gorakhpur (Cross Objector) (Respondent)

2 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 Assessee by Shri S.K. Garg Department by Shri Robin Chaudhary, CIT Date of Hearing 27.09.2023 Date of Pronouncement 16.11.2023

O R D E R Per B.R.Baskaran (AM) :-

The assessee has filed appeals for AY 2009-10 and 2020-21. The revenue has filed appeals for AY 2009-10 and 2014-15. The assessee has also filed cross objection for AY 2009-10 and 2014-15. All these appeals were heard together and are being disposed of by this common order. 2. The assessee company is engaged in the business of manufacture and sale of Jute bags, hessian, sutli and other jute products. 3. We shall first take up cross appeals and the cross objection pertaining to AY 2009-10. The revenue carried out survey operation u/s 133A of the Act on 03-02-2009. Consequent thereto, the assessment was completed by the AO u/s 143(3) of the Act by making various additions. The Ld CIT(A) allowed the appeal in part and hence both the parties are in appeal before us challenging the decision rendered on the issues decided against each of them. 4. In the cross objection, the assessee has raised certain legal contentions. (I) ASSESSMENT YEAR 2009-10 – ASSESSEE’S APPEAL:- 5. We shall first take up the appeal filed by the assessee for AY 2009- 10, wherein following issues are contested:- (a) Addition made u/s 40A(3) of the Act (b) Addition made u/s 14A of the Act. 5. The first issue relates to the addition made u/s 40A(3) of the Act. The revenue has also challenged the decision rendered by Ld CIT(A) on this

3 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 issue. Since the Ld CIT(A) granted partial relief on this issue, both the parties are in appeal. 5.1 The facts relating to this issue are that during the course of assessment proceedings, the AO noticed that the assessee has made major purchases from a person named Shri Krishna Kumar Maskara. On verification payments made to the above said person, the AO noticed that a sum of Rs.22,02,400/- has been paid in cash, which in violation of provisions of sec. 40A(3) of the Act. Accordingly, the AO disallowed the above said amount u/s 40A(3) of the Act. 5.2 Before ld CIT(A), the assessee submitted that it has made payments towards freight charges on behalf of Shri Krishna Kumar Maskara and further the said payments have been debited to the account of the above said supplier. It was submitted that the above said freight payments have not been claimed as deduction in the profit and loss account. Accordingly, it was contended that the disallowance u/s 40A(3) is not called for. The Ld CIT(A) called for details of payments made by way of cash. The Ld CIT(A) also confronted those details and explanations with the AO and obtained remand report. The assessee also furnished its comments over the remand report. After examining the remand report and replies given by the assessee, the Ld CIT(A) found that the payments aggregating to Rs.9,95,800/- were less than the prescribed limit of Rs.20,000/- mentioned in sec.40A(3) and hence disallowance is not called for. The remaining payments aggregating to Rs.12,06,600/- were hit by the provisions of sec.40A(3) of the Act. Accordingly, the Ld CIT(A) directed the AO to grant relief to the extent of Rs.9,95,800/- and sustained balance amount of addition of Rs.12,06,600/-. 5.3 We heard the parties on this issue and perused the record. We notice that the main contention of the assessee is that the impugned payments have been made towards freight charges and the said freight charges are to be borne by the supplier. Hence the said payments have been debited to the supplier’s account only, i.e., they have not been claimed as expenditure of the assessee. Accordingly, it was contended that the provisions of sec.

4 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 40A(3) will not get attracted to these payments, since the relevant expenditure has not been claimed as expenditure in the Profit and Loss account. 5.4 In our view, there is fallacy in the above said argument of the assessee. The fact remains that the freight charges have been paid by the assessee on behalf of the supplier and the said payments have been adjusted against the purchase consideration of raw material by debiting the supplier’s account, meaning thereby the payment towards purchases have been made to the supplier by way of cash. When the assessee is making part of purchase consideration by way of cash (as freight payments made on behalf of suppliers), then the provisions of sec.40A(3) would get attracted. 5.5 We notice that the Ld CIT(A) has held that the provisions of sec.40A(3) would be attracted only if the individual payment made by way of cash exceeds Rs.20,000/-. In our view, the Ld CIT(A) is correct on this aspect. Accordingly, the provisions of sec.40A(3) would get attracted only if the individual payments exceed the threshold limit of Rs.20,000/-. We notice that the details of payments exceeding payment of Rs.20,000/- have been tabulated by Ld CIT(A) in pages 86 – 87 of the paper book. The aggregate amount of such kinds of payments works out to Rs.12,06,600/-. These payments have been debited to the account of suppliers and the same would mean that the part of purchase consideration of jute products has been paid by way of cash. Before Ld CIT(A), the assessee has contended that the individual payments made to each of the lorry owners on a particular day may not exceed Rs.20,000/-. However, we notice that the assessee has not substantiated the said claim with any evidence. Further, the assessee seems to have debited the account of the supplier with amounts exceeding Rs.20,000/-. Hence the above said argument of the assessee, in our view, is liable to be rejected. 5.6 With regard to the amounts aggregating to Rs.9,95,800/-, we notice that the ld CIT(A) has given his finding that each of the payments included in the above said amount was less than the threshold limit of Rs.20,000/-.

5 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 The revenue did not bring any material to show that the above said finding given by Ld CIT(A) was not correct. 5.7 Accordingly, we are of the view that the Ld CIT(A) was justified in confirming the addition made u/s 40A(3) of the Act to the extent of Rs.12,06,600/- and granting relief of balance amount of Rs.9,95,800/-. 6. The next issue contested by the assessee relates to the disallowance made u/s 14A of the Act. 6.1 The AO noticed that the assessee has made investments to the tune of Rs.2.00 crores on 26-03-2009. Accordingly, the AO took the view that a portion of expenses should be disallowed u/s 14A of the Act. The AO further noticed that the assessee has borrowed funds and has incurred interest expenditure. The AO took the view that the assessee has used the borrowed funds for making investments and hence a portion of interest expenditure should be disallowed u/s 14A of the Act. The AO made his own computation and worked out interest disallowance at Rs.6,67,249/- and added the same to the total income. 6.2 Before ld CIT(A), the assessee contended that the investments have not been made out of borrowed funds. It was submitted that the own funds available with the assessee have exceeded the value of investments and hence no disallowance out of interest expenditure is called for. Hence the Ld CIT(A) restored this issue to the file of AO with the direction to work out disallowance in accordance with Rule 8D by considering assessee’s submissions. 6.3 We heard the parties on this issue and perused the record. We notice that the assessee has made investment at the fag end of year and it is also submitted that the assessee has not earned any exempt income. Further, the own funds available with the assessee was mentioned as Rs.8.62 crores, while the investment amount was only Rs.2.00 crores, i.e., lesser than the amount of own funds. It is well settled proposition now that the disallowance u/s 14A is not called for when there is no exempt income. It is also well settled proposition that the disallowance out of interest

6 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 expenditure is not called for, when the own funds available with the assessee exceeds the value of investments, because the presumption in that case is that the investments have been made out of own funds only. Accordingly, on both the counts discussed above, the disallowance made by the AO u/s 14A is not called for and accordingly, the same is liable to be deleted. 6.4 Accordingly, we modify the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance made u/s 14A of the Act. (II) ASSESSMENT YEAR 2009-10 – REVENUE’S APPEAL:- 7. We shall now take up the appeal filed by the revenue for AY 2009-10. Following issues are contested in this appeal by the revenue:- (a) Addition u/s 68 of the Act – Rs.92,72,104/- (b) Disallowance of Repairs & Maintenance expenses – Rs.26,92,287/- (c) Addition of unexplained investment in factory building – Rs.12,92,000/- (d) Disallowance of loss from Syntax Division (e) Addition made u/s 40A(3) of the Act. 8. The first issue contested by the revenue relates to the addition made u/s 68 of the Act. The facts relating to thereto are that the assessee has maintained a godown at a place called Farbesganj, which was used as procurement centre of raw materials required for the assessee. The revenue carried out survey operations at that place. During the course of survey operations, certain books of accounts were impounded. It was noticed that the assessee is carrying on purchase operations of raw materials from Farbesganj. The assessee has maintained certain subsidiary books at that place, viz., Purchase memos, Satti Bahi (Purchase register), Cash book, consolidated ledger. The assessee explained the modus operandi adopted in recording transactions of purchases in the above said registers. The sum

7 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 and substance of the said explanation is that the aggregate amounts of purchases made in a day is finally recorded in a “ledger” by crediting “Customers Account” with the total value of purchases of raw materials with corresponding debit to “Shri Paat” account (Raw materials purchase a/c). Part payments made to the suppliers are debited to Customers account. When these details are sent to head office, they pass due accounting entries in the regular books of accounts. 8.1 On verification of the above said subsidiary registers, the AO noticed that the farmers account is credited with round sum figures in the range of Rs.10,000/- to Rs.19,000/-. The AO took the view that the assessee has introduced funds in the guise of purchase of jute, whenever there are fund requirements. The amount so credited is returned back, when cash is available with the assessee. He also noticed that the amount so credited is always less than Rs.20,000/-. He also took the view that the small farmers would not be in a position to sell goods on credit. The AO further noticed that the aggregate amount of credit introduced during the year was Rs.92,72,104/-. Hence the AO called for explanations on this credit. 8.2 The assessee explained the modus operandi adopted in purchasing raw materials. It was submitted that the purchases are generally made from farmers and they are paid part amount. The unpaid amount is credited to their respective account under the head “Customers Account”, who are paid subsequently. Accordingly, it was submitted that the ‘customers account’ represents trade creditors. The assessee also produced four farmers before the AO, who examined them. However, the AO found fault with them, i.e., those persons did not prove their land holdings; that there was slight change in the name of farmer etc. Accordingly, the AO took the view that the assessee has failed to prove cash credits in terms of sec. 68 of the Act. Accordingly, he assessed the above said sum of Rs.92,72,104/- as unexplained income of the assessee u/s 68 of the Act. The Ld CIT(A) deleted the same and hence the revenue is contesting the decision of Ld CIT(A).

8 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 8.3 We heard the parties and perused the record. From the nature of transactions explained above, we notice that, for every credit of the amount against a farmer’s name, there is corresponding debit for purchase of raw material. This shows that the amount credited in the name of farmer is a trade credit towards purchase of raw materials. We notice that the AO has presumed that the assessee has introduced funds in the name of farmers ranging from Rs.10,000/- to Rs.19,000/-, whenever there is requirement of funds. It appears that the AO has misdirected himself in presuming so, because he has failed to disprove the claim of assessee that the credit available in the name of the farmer is supported by the corresponding debit of purchase of raw materials. 8.4 The provisions of sec.68 relating to Cash credit, in our view, would get attracted when there is receipt of money. It will not be attracted when the trade credit is supported by corresponding purchases/expenses. When the purchases/expenses incurred on credit basis are accepted as genuine, there is no reason to disbelieve the trade credits without bringing any material on record to show that the concerned payments have been made outside books of accounts. Of course, the addition would be warranted, if the assessing officer brings on record any material to prove that the amount shown as ‘trade creditor’ has actually been paid outside the books of accounts, but the said addition would not be u/s 68 of the Act, but under some other section of the Act. 8.5 The question whether unpaid trade creditors could be added u/s 68 of the Act has been examined by various courts. The Five member special bench of ITAT has held in the case of Manoj Agarwal vs. DCIT (113 ITD 377) as under on this issue:- “The argument that section 68 is not applicable where an asset is sold and the sale proceeds are credited in the books of account cannot be accepted having regard to the settled legal position that it is always for the assessee to explain the nature and source of the sums credited in his books of account. The section does not recognize any distinction between amounts credited in the books as gifts or loans

9 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 or pure receipts, on the one hand, and amounts credited as sale proceeds. In either case, when called upon, the assessee is bound to explain the nature and source of the amounts credited. There may be a few exceptions to this general rule. For example, in the case of credit purchases, the account of the supplier is credited with the amount payable. In such a case, where the purchase is allowed as expenditure, it may not be possible for the Assessing Officer to again call upon the assessee to prove the nature and source of the credit, for the reason that the purchase itself was allowed as expenditure only on being satisfied that it was a genuine purchase on credit. Implicitly, the nature and source of the amount credited has also to be taken as having been explained satisfactorily. Another possible argument can be that in such a case, the amount credited is not a cash credit in the sense that some monies have been received by the assessee, but the credit represents a mere liability payable by the assessee in future. Under accounting principles, a liability can only be brought into account by making a credit entry in the books of account in favour of the person to whom the money is payable. Thus, there is marked difference between a credit representing a liability payable by the assessee and a credit representing monies received from another person. It is because of this distinction, a liability for purchase which has been credited in the account of the supplier cannot be added under section 68 of the Act, more so when the purchase has been accepted as genuine and a deduction there for has been allowed. In all other cases including the case of a credit representing the sale proceeds of an asset, the provisions of section 68 are applicable and it is for the assessee to prove satisfactorily the nature and source of the monies……. ” 8.6 Similar view has been expressed by Hon’ble Delhi High Court in the case of CIT vs. Ritu Anurag Agarwal reported in 2009 (7) TMI 1247 as under:-

10 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 “This finding of AO remained undisturbed before the CIT(A) as well and has been accepted by the ITAT. Proceeding on this basis, the ITAT observed that the soles, purchases as well as gross profits as disclosed by the assessee have been accepted by the Assessing Officer. Once this is accepted, we are of the opinion that the approach of the ITAT was correct inasmuch as the Assessing Officer did not consider this aspect while making additions of sundry creditors under Section 68 of the Income Tax Act. As there was no case for disallowance for corresponding purchase, no addition could be made under Section 68 inasmuch as it is not in dispute that the creditors outstanding related to purchases and the trading results were accepted by the AO. We are, therefore, of the opinion that no substantial question of law arises for consideration in this case. The appeal is accordingly dismissed.” 8.7 Since the assessing officer, in the instant case, has assessed trade creditors as unexplained cash credit u/s 68 of the Act, while accepting the purchases, the said addition is liable to the deleted in accordance with the decisions cited above. Accordingly, we are of the view that the Ld CIT(A) was justified in deleting this addition and accordingly uphold the same. 9. The next issue contested by the revenue relates to disallowance of Rs.26,92,287/- out of repairs and maintenance expenses. 9.1 During the course of assessment proceedings, the AO examined the Repairs and maintenance (R & M) expenses claimed by the assessee. He noticed that the R & M expenses claimed towards building was Rs.29,91,430/-. The assessee furnished details of materials purchased and the AO took the view that the assessee has not furnished specific details of R & M expenses. He also noticed that the assessee has purchased iron rods. He took the view these expenses are capital in nature. Accordingly, the AO disallowed the above said expenses of Rs.29,91,430/- and allowed depreciation @ 10%. Hence the net disallowance made by the AO worked out to Rs.26,92,287/-.

11 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 9.2 Before Ld CIT(A), it was submitted that the factory building is 75 years old and hence it requires regular repairs and maintenance. It was further submitted that the assessee had incurred about Rs.22 lakhs in the earlier years and the same has been allowed as revenue expenditure. In the remand report, the AO reiterated his stand taken at the time of completion of assessment. 9.3 The Ld CIT(A) took the view that, if the expenditure does not result in creation of new asset, then the same cannot be considered as capital in nature. In this regard, he placed reliance on the decision rendered by Mumbai ITAT in the case of Gujrat Reclaim and Rubber Products Ltd vs. Addl CIT (60 SOT 22). Accordingly, he deleted the disallowance made by the AO. The revenue is aggrieved. 9.4 We heard the parties and perused the record. Since the assessee had incurred expenditure on purchase of iron rods, the AO has taken the view that the same constitutes Capital expenditure. However, the Ld CIT(A) has observed that “the litmus test for saying any expenditure is Capital or Revenue is that some new asset should come into existence. In this case, no finding of fact is given by the AO that any new asset has come into existence. The AO has treated the expenditure as capital in nature, since the expenditure consisted of purchase of materials like iron rod etc. The submission of the assessee is that they have been used to strengthen the existing structures only and this submission has not been proved to be false. Under these set of facts, we are of the view that the AO has not shown that the impugned expenditure of Rs.29,91,430/- has brought any new asset in existence. Accordingly, we are of the view that the ld CIT(A) was justified in deleting this disallowance and accordingly uphold his decision rendered on this issue. 10. The next issue contested by the revenue is addition of Rs.12,92,000/- made towards unexplained investment in construction of Factory Shed. During the year under consideration, the assessee has constructed a factory shed for a sum of Rs.79,70,000/-. The assessee also furnished a valuation report obtained from a Registered Valuer. During the course of assessment

12 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 proceedings, the AO referred the matter of valuation to Departmental Valuation Officer (DVO), who estimated the cost of construction of factory shed at Rs.92,62,000/-. The AO added the difference of Rs.12,92,000/- (Rs.92.62 (-) Rs.79.70) as unexplained investment in the hands of the assessee. 10.1 The Ld CIT(A) noticed that the assessee has maintained regular books of account and the above said construction of new factory shed has been duly accounted for in the books of account. He further noticed that the AO has referred the matter of valuation to the DVO without rejecting books of accounts. He noticed that the Hon’ble Supreme Court has held in the case of Sargam Cinema vs. CIT (2011)(197 Taxman 203)(SC) has held that the AO cannot refer any matter to DVO without rejecting books of accounts. He noticed that the above said decision has been followed by jurisdictional High Court in the case of CIT vs. Lucknow Public Educational Society (2011)(339 ITR 588)(Alld). Accordingly, the Ld CIT(A) held that the AO could not have referred the matter to DVO without rejecting books of accounts. He further held that the valuation given by DVO is only an estimate and the DVO has not stated there is any extra investment made by the assessee over and above the declared amount. Accordingly, the Ld CIT(A) held that the addition cannot be made on the basis of estimation. Accordingly, he deleted the addition of Rs.12,92,000/-. The revenue is aggrieved. 10.2 We heard the parties on this issue and perused the record. Since the AO has referred the matter of valuation to the DVO without rejecting the books of accounts, the said reference is not valid as held by Hon’ble Supreme Court and the Hon’ble jurisdictional High Court in the cases referred supra. Accordingly, the impugned addition is liable to be deleted. Further, it is noticed that the addition has been made on the basis of estimate given by DVO. The Ld A.R submitted that the said report of DVO was not confronted with the assessee by the AO. It was also submitted that the deficiencies in the valuation report given by the Registered valuer, which was submitted by the assessee, were not also brought on record. It is well settled proposition of law that the AO cannot place reliance on the

13 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 documents, which were not confronted with the assessee. Hence the AO could not have relied upon the report of DVO for making impugned addition. Accordingly, we are of the view that the Ld CIT(A) was justified in deleting this addition and accordingly uphold the same. 11. The next issue urged by the revenue relates to the disallowance of loss of Rs.61,84,000/- arising in Syntax division. 11.1 The AO noticed that the assessee had declared total income of Rs.243.64 lakhs for the year relevant to AY 2008-09, while it has declared total income of Rs.38.19 lakhs only in the current year. The assessee explained that the main reason for the reduction in income is due to loss suffered in its Syntax Division to the tune of Rs.61.48 lakhs. It was explained that the price of raw material has increased by Rs.3,414/-, while the average sales realisation has fallen by Rs.3,205/- when compared with the immediately preceding year. The AO examined the Profit and loss account and noticed that there is slight increase in sales turnover. He also observed that the assessee was requested to furnish details of various expenses with supporting documents, but the assessee has furnished ledger accounts with routine explanations. Accordingly, the AO held that the onus to prove expenses has not been discharged. Accordingly he took the view that the loss incurred in Syntax division is not acceptable and accordingly disallowed the same. 11.2 Before Ld CIT(A), the assessee submitted that it has got two separate units, viz., Mahabir Jute Mills (which manufactures jute goods) and Syntax division (which manufactures synthetic yarn). It was submitted that the Jute mills division has earned profit of Rs.159.69 lakhs, but the Syntax division has incurred loss of Rs.61.48 lakhs. It was submitted that the loss in Syntax division has increased due to increase in raw material prices and fall in sales value. It was also submitted that the term loan has increased from Rs.2.77 crores to Rs.7.14 crores resulting in increase of interest burden. It was also submitted that the depreciation claim was also more. Accordingly, it was submitted that all the above said reasons have cumulatively caused loss in Syntax division.

14 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 11.3 In the remand report, the AO opined that he had pointed out defects in the books of account which would tantamount to rejection of book results u/s 145(3) of the Act. 11.4 The Ld CIT(A) noticed that the AO has not found any defect in the books of account and the books have not also been rejected. Further, the AO has not adversely comment on the correctness of purchases and sales reported by the assessee. The fact that the assessee had purchased machinery under Term loan cannot be disputed. Accordingly, the Ld CIT(A) allowed the loss of Rs.61,84,000/- incurred in Syntax division to be set off against the business income. The revenue is aggrieved. 11.5 We heard the parties and perused the record. We notice that the assessee has furnished various reasons for the loss incurred in Syntax division, viz., increase in raw material cost; decrease in sales realisation; increase in interest expenditure and increase in depreciation claim. We notice that the AO did not find the said explanations to be incorrect. In our view, the AO could not have rejected the reasons given by the assessee without finding fault therein, i.e., if the AO could not find fault, the reasons given by the assessee should have been accepted. We also notice that the assessee is a limited company and its accounts are audited both under the Companies Act and Income tax Act. There is no allegation that the auditors have not accepted the accounts of the assessee, which would mean that the expenses and revenue booked by the assessee have been audited and accepted by the auditors. As pointed out by Ld CIT(A), the AO has also accepted the purchases and sales figures reported by the assessee. Even though the AO has reported in the remand report that he has rejected the books of accounts on account of deficiencies, yet, on a perusal of the assessment order, we do not find any such observation made by the AO. Accordingly, we do not find any merit in the action of the AO in disallowing the loss declared in the Syntax division. Accordingly, we are of the view that the Ld CIT(A) was justified in directing the AO to allow the set off loss against other business income of the assessee. Accordingly, we uphold the decision rendered by Ld CIT(A) on this issue.

15 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 12. The last issue urged by the revenue relates to the relief granted in respect of addition made u/s 40A(3) of the Act. We have adjudicated this issue while dealing with the appeal of the assessee and have noticed that the relief granted by Ld CIT(A) was in respect of payments made less than the threshold limit of Rs.20,000/-. The revenue could not furnish any evidence to show that the said decision of Ld CIT(A) was not correct. Accordingly, we uphold the relief granted by Ld CIT(A) in respect of addition made u/s 40A(3) of the Act. (III) ASSESSMENT YEAR 2009-10 – ASSESSEE’S CROSS OBJECTION:- 13. In the Cross Objection, the assessee has raised certain legal contentions. The first legal contention is that the intimation issued u/s 143(1) is amounted to assessment and hence the subsequent assessment order is illegal as being void ab-initio. This legal contention is liable to be rejected, as it is settled principle that the intimation is not considered as an assessment. 14. The next legal contention is that the selection of return of income of the assessee for scrutiny under Computer Aided Scrutiny Scheme (CASS) is bad in law, since it is contrary to the provisions of sec.143(2)(ii) of the Act. However, before us, the assessee could not substantiate the above said legal contention. Accordingly, we reject this ground. (IV) DEPARTMENT’S APPEAL – ASSESSMENT YEAR : 2014-15:- 15. The grounds urged by the assessee give rise to following issues:- (a) Addition made u/s 40A(3) of the Act –Rs.25,48,011/- (b) Addition relating to unverified consignment sales expenses – Rs.7,20,834/- (c) Addition relating to undisclosed profit - Rs.3,64,60,658/- 16. The first issue contested by the revenue relates to the addition made u/s 40A(3) of the Act. The AO noticed that the assessee has incurred expenses by paying cash exceeding Rs.20,000/-, which was in violation of

16 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 provisions of sec.40A(3) of the Act. The cash expenses were incurred under various heads, viz., Labour welfare, Medical & Sanitation, Repair & Maintenance – others, Power Gen Equip. Maintenance, Mess Expenses and Travelling Expenses. The aggregate amount of expenses so incurred was Rs.25,29,905/-. Even though the assessee submitted that no individual payment has exceeded the threshold limit of Rs.20,000/-, yet the assessee did not furnish supporting vouchers/bills for verification before the AO. Hence, the AO disallowed above said amount u/s 40A(3) of the Act. 16.1 Before Ld CIT(A), the assessee submitted that the various payments noted down by the assessing officer is aggregate amount paid to several persons, i.e., individual payment made to each of the persons did not exceed the threshold limit of Rs.20,000/-. It was submitted that the assessee had produced original vouchers before the AO, which is evidenced by the Paragraphs 12 and 13 of the written submissions dated 23.11.2016 furnished before the AO. The said paragraphs read as under:- “12. Books of accounts as mentioned under Form 3CD of the tax audit report are produced herewith for your verification. 13. No payment in cash in excess of Rs.20,000/- or more has been made. Vouchers in original are produced herewith for your verification.” The assessee also furnished the explanation with regard to each of the payments made under various heads in order to substantiate that the payments made to any individual did not exceed Rs.20,000/-. The said details are incorporated by Ld CIT(A) at pages 20 -23 of his order. For example, the expenditure of Rs.22,500/- booked on 04-05-2013 under the head “Medical & Sanitation” has been paid to five persons. Similarly, the expenditure of Rs.23,650/- booked on 04-05-2013 under the head “Repairs & Maintenance (Others)” has been paid to 24 persons. The assessee also submitted that the books of accounts have been audited u/s 44AB of the Act. In the Tax auditor, there is a specific column to report the instances of violation of provisions of sec.40A(3) of the Act. It was submitted that the tax auditor has verified the books and accordingly did not report any

17 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 violation of provisions of sec.40A(3) of the Act. It was submitted that the tax audit report was placed before the AO on 27.10.2016. 16.2 The Ld CIT(A) examined the above said explanations furnished by the assessee. He noticed that the assessee has made payments exceeding Rs.20,000/- in respect of two items, viz., Rs.20,091/- on 20-09-2013 under the head mess expenses and Rs.27,803/- paid on 30-08-2013 under the head “travelling expenses – directors”. Accordingly, the Ld CIT(A) confirmed addition to the extent of Rs.47,894/- and deleted the remaining addition of Rs.25,48,011/-. The revenue is aggrieved. 16.3 We heard the parties on this issue and perused the record. In the grounds of appeal, the revenue has stated that the Ld CIT(A) has granted relief to the assessee without granting opportunity to the AO. We noticed earlier that the AO has observed that the assessee did not furnish bills/vouchers to substantiate its claim that the individual payments did not exceed Rs.20,000/-. However, the assessee has demonstrated before the AO that the original vouchers were produced before the AO along with the submissions dated 23-11-2016. Further, the assessee has furnished tax audit report also before the AO and in the tax audit report, the tax auditor did not mention that there was violation of provisions of sec.40A(3) of the Act. Accordingly, we are of the view that there was no laxity on the part of the assessee in substantiating its explanations that the individual payments made were less than Rs.20,000/-. Further, the assessee has furnished relevant details and the same has also been extracted by Ld /CIT(A) in his order. A perusal of the same would show that the payments mentioned by the AO are the aggregate amounts and they have been paid to several persons, meaning thereby, the individual payments did not exceed Rs.20,000/-. In view of the clear finding given by Ld CIT(A), we are of the view that the decision rendered by Ld CIT(A) on this issue does not call for any interference. Accordingly, we uphold the same. 17. The next issue contested by the revenue relates to the addition relating to unverified consignment sales expenses.

18 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 17.1 The AO noticed that the assessee has claimed expenses relating to consignment sales to the tune of Rs.72,08,335/-. Since the assessee did not furnish bills/vouchers and also the details of TDS deducted, the AO disallowed 10% of expenses, i.e., Rs.7,20,834/- on adhoc basis. However, we notice that the AO did not add the above said disallowance while computing total income. 17.2 The Ld CIT(A) agreed with the submissions of the assessee that adhoc disallowance was not permitted under law. He also expressed the view that the failure to deduct TDS should have been pointed out by the AO. 17.3 We heard the parties on this issue and perused the record. We have noticed earlier that the AO did not add this amount while computing total income, even though he has discussed about this disallowance in the body of the order. It was also not shown to us that the AO had rectified the assessment order by making this addition. Nevertheless, it is the submission of the assessee that the expenses incurred by consignor are deducted by him from consignment sales and the said consignment notes constitute evidences for expenses. However, it is the case of the AO that the assessee did not produce relevant documents to substantiate the claim of expenses. Further, the assessee also did not furnish the details of TDS liability on such payments. If the assessee had not furnished relevant details that were called for by the AO, in our view, there is laxity on the part of the assessee and hence the AO cannot be found fault with in making adhoc addition. Accordingly, we do not agree with the view expressed by Ld CIT(A) on this issue. However, since the AO did not make any specific addition of Rs.7,20,834/-, the above said discussions are rendered academic in nature. 18. The last issue relates to the addition of undisclosed profit. 18.1 The AO noticed that there has been decline in the net profit rate from 1.90% in AY 2012-13 to (-)1.12% in the current year, i.e., AY 2014-15. The assessee explained that the fall in profit is mainly on account of increase in cost of raw material and power & fuel expenses. The assessee quantified the

19 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 fall in gross profit on account of increase in both these expenses at Rs.3,40,76,514/-. The AO asked the assessee to produce purchase bills and Power & Fuel expenses. According to AO, the assessee did not produce purchase bills. In respect of power & fuel expenses, the assessee produced vouchers for Rs.10.39 crores as against the claim of Rs.11.20 crores. Accordingly, the AO proceeded to apply average gross profit rate of 9.96% realised in the last three years to the current year’s turnover. On application of the above said average rate of gross profit, the AO worked out the gross profit as Rs.11,65,08,583/-. Since the assessee has declared gross profit of Rs.8,00,48,015/- , the AO added the difference amount of Rs.3,64,60,568/- as extra profit of the assessee. 18.2 The Ld CIT(A) deleted this addition with the following observations:- “41. I have carefully considered the submissions made on behalf of the appellant assailing the extra profit addition of Rs.3,64,60,658/-. The appellant is a public limited company which had maintained books of account as per the provisions contained in section 129 of the Companies Act 2014 (corresponding to section 209 of the Companies Act 1956). The accounts so maintained by the company were subjected to twin audits one statutory audit under the Companies Act and another tax audit under the Income Tax Act. Both the audit reports are on record and there is no qualification raised in any of audit reports. Section 145 provides for rejection of accounts only where accounting standard to be followed by any class of assessee have not been followed and/or the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee. So far as first condition is concerned, there is no violation, atleast nothing has been specified either in the twin audit reports or even by the Assessing Officer. Thus, the issue is confined to correctness and completeness of the books. 42. In his order, the Assessing Officer has pointed out two factors which, according to him are the short comings, affecting the correctness of the books. This issue has been discussed by the Assessing Officer on pages 6 & 7 of the assessment order, sum and substance of which is that a) "assessee failed to produce purchase bills of raw material for verification", owing to which raw material consumed and debited at Rs.79,79,70,972/- (correct figures are Rs.75,79,70,972/-) could not be subjected to verification, further, payments exceeding Rs.20,000/- made in cash cannot be denied; and b) expenses debited under the head power and fuel aggregating Rs.11,20,48,774/- were not supported fully by the bills of Uttar Pradesh Power Corporation.

20 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 43. So far as discrepancy in power and fuel account is concerned, it did not exist at all. On the basis of bills of UPPCL, the Assessing Officer held that the bills were for Rs.10,39,15,564/- whereas expenses charged under this head in the Profit and Loss Account are Rs.11,20,48,774/-. In the course of assessment proceedings the appellant had placed a copy of ledger account under the head power and fuel which contain monthly summary. As per such summary there is stores consumption aggregating Rs.84,51,804/- and after adjusting the figure of stores consumption with the recoveries, that had been shown in the said ledger account itself, there remains no difference or discrepancy on this account. So far as stores consumption is concerned, there is no adverse findings by the Assessing Officer. Therefore, this ground for rejection of books of account and application of section 145(3) fails. 44. So far as other ground for invoking the provisions of section 145(3) is concerned, it is seen that the Assessing Officer had made a bald assertion that purchase bills for raw material consumed shown at Rs.79,79,70,972/- had not been produced for Verification. Such a general and vague observation does not justify rejection and this is more so in the instant case where there is an apparent error committed by the Assessing Officer in taking the figure of raw material consumed at Rs.79,79,70,972/- whereas it worked out to Rs.75,79,70,972/-, as per working as extracted from the audited statement of account as given hereunder:- Sl. Particulars Jute Division Synthetic Total (Rs.) No. Division (i) Purchases 19,51,56,253 53,42,35,965 72,93,92,218 (ii) Opening Stock 3,11,49,464 1,77,86,299 4,89,35,763 (iii) Closing Stock (80,58,029) (1,22,98,980) (2,03,57,009) Raw Materials Consumed 75,79,70,972 45. Moreover, it was a case of scrutiny assessment and the assessment had been made after examination of books of account. During the course of assessment proceedings copy of jute purchase account and raw material purchase account (pertaining to syntax division) had been placed before the Assessing Officer, for which there was a requisition. List of sundry creditors alongwith their address, PAN etc. as required by the Assessing Officer had also been placed. So much so in the case of syntax division, copies of accounts of the appellant in the books of suppliers had also been filed and placed on record. The transactions in said bank accounts were verified from the bank statements, as payments had been made through banking channel. Copies of all the bank accounts maintained by the appellant had duly been placed before the Assessing Officer but no defect or discrepancy was found. On these set of circumstances, the ground of alleged unverifiability of purchase of raw material also fails. 46. In due discharge of my appellate function I myself and called for analysis of cost of inputs (which include raw material purchased, power and fuel charges). Such an analysis was duly submitted by the appellant, which has been reproduced in para 38 hereinfore. From the said analysis/breakup, it is seen that there has been increase in all three inputs but there was no matching recovery in terms of increased sale price per MT. It is very significant to mention here that the Assessing

21 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 Officer had not disputed the sale as disclosed by the appellant. In view of such an examination, I do not find that there remains any cause or justification to interfere with the book result of the appellant, what to say of making addition on account of extra profit. So much so even the basis for computing extra profit is fallacious. The appellant has been running two separate divisions, one jute division and other syntax division. In both the units G.P./N.P. rates vary, very widely. More so for the reason that no defect or discrepancy had been found by the Assessing Officer in the books of account maintained by the appellant and the regularity with such books of account had been kept and maintained, rejection of books of account was not at all called for. 47. On consideration of totality of facts and circumstances of the case, I do not find any justification for rejection of accounts by invoking section 145 of the Act and making impugned addition. Rs.3,64,60,658/-.”

18.3 We heard the parties on this issue and perused the record. We notice that the Ld CIT(A) has taken cognizance of the fact that the accounts of the assessee were audited both under the Companies Act and Income tax Act and the auditors have not qualified their report on the deficiencies, if any, in the accounts. The Ld CIT(A) has also observed that the AO has pointed out only two deficiencies, viz., non-production of purchase bills and the variation in Power & Fuel claim. With regard to the Power & Fuel claim, the Ld CIT(A) has examined the said expenditure and noticed that the assessee has used certain stores items relating to Power and the value of those items have been booked under Power & Fuel expenses. Thus, the Ld CIT(A) has given a finding that there is no variation in the above said claim. With regard to non-furnishing of purchase bills, the Ld CIT(A) has taken the view that the AO has made bald, vague and general assertion, which would not justify rejection of books of accounts. The Ld CIT(A) has also pointed out fallacy on the part of AO in adopting the correct purchase value. The Ld CIT(A) has also observed that the assessee has placed accounts relating to jute purchase and raw material purchase. It has also furnished copies of bank accounts, sundry creditors accounts. He has also noticed that there is increase in raw material cost as claimed by the assessee. He has also given categorical finding that the AO did not point of any defect or discrepancy in the books of accounts maintained by the assessee. Accordingly, the Ld CIT(A) has held that the rejection of book results and

22 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 consequent estimation of profit is not called for. Accordingly, the Ld CIT(A) has deleted the addition of Rs.3,64,60,658/- made by the AO towards extra profit. 18.4 On a perusal of the order so passed by Ld CIT(A), we are of the view that the first appellate authority has passed a reasoned order dealing with the points raised by the AO. Further, the Ld CIT(A) has also demonstrated that the rejection of book results is not called for in the facts and circumstances of the case. Before us, the revenue could not contradict various findings given by Ld CIT(A). Accordingly, we do not find any reason to interfere with his order passed on this issue. Accordingly, we uphold the same. (V) CROSS OBJECTION FILED BY ASSESSEE – ASSESSMENT YEAR 2014-15 19. The assessee has filed cross objection raising certain legal issues. However, we notice that the assessee did not press those grounds as per the endorsement made on 09-05-2019 in the cross objection. Accordingly, we dismiss the cross objection of the assessee. (VI) ASSESSEE’S APPEAL – ASSESSMENT YEAR : 2020-21:- 20. The only issue urged in this appeal of the assessee relates to the disallowance of employees’ contribution to PF/ESI made by CPC u/s 36(1)(va) of the Act while processing the return of income of the assessee. 21. The CPC disallowed a sum of Rs.31,09,929/- u/s 36(1)(va) of the Act for belated payment of Employees’ contribution to PF/ESI. In the appeal filed before Ld CIT(A), the first appellate authority noticed that the due date for payment of ESI contribution amounting to Rs.84,865/- pertaining to March, 2020 has been extended to 15.5.2020 due to Covid pandemic situation. The Ld CIT(A) also noticed that the above said amount of Rs.84,865/- has been paid on 15.5.2020. Accordingly, the Ld CIT(A) granted relief to the extent of RS.84,865/- and confirmed the addition of balance amount of Rs.30,25,064/-.

23 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 21.1 It is the submission of the assessee that the due date for payment of above said amount of Rs.30,25,064/- has fallen on 15-08-2019 (National Holiday), and 15.09.2019 (Sunday). It was submitted that the above payments have been made on the next working day, i.e., on 16-08-2019 and 16-09-2019. Accordingly, relying upon General Clauses Act, the Ld A.R submitted that the payments should be considered to have been paid within due dates and hence no addition u/s 36(1)(va) is called for. 22. We heard Ld D.R and perused the record. We find merit in the contentions of Ld A.R. We notice that the Ld CIT(A) has not applied the provisions of General clauses Act for determining the due date, where it is stated that the due date falls on a holiday, then the due date shall be extended to next working day. Since the claim of the assessee relates to factual aspects, we are of the view that the same requires verification at the end of AO. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine the claim of the assessee by applying provisions of General Clauses Act. The assessee should be provided with adequate opportunity of being heard. 23. In the result, (i) the appeal of the assessee for AY 2009-10 is partly allowed and for AY 2020-21 is treated as allowed. (ii) the cross objection filed by the assessee for AY 2009-10 and 2014-15 are dismissed. (iii) the appeal of the revenue for AY 2009-10 and 2014-15 are dismissed. Pronounced in the open court on 16/11/2023.

Sd/- Sd/- (AMIT SHUKLA) (B.R. BASKARAN) Judicial Member Accountant Member Mumbai; Dated : 16/11/2023

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24 The Mahabir Jute Mills Ltd A.Ys 2009-10, 2014-15 & 2020-21 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(Judicial) 4. PCIT 5. DR, ITAT, Varanasi 6. Guard File. BY ORDER, //True Copy// (Assistant Registrar) ITAT, Mumbai