DCIT, NEW DELHI vs. M/S. MAGNUM STEEL LTD., NEW DELHI

The Cross appeals have been filed by the assessee and the Revenue against the orders of the ld. CIT(A)-XXXII, New Delhi, dated 20.06.2014.

Brief facts of the case are that a search and seizure operation u/s 132 of the Income Tax Act, 1961 was conducted by the Income Tax Department at the business premises of the & 5050/Del/2014 2 Magnum Steel Ltd. assessee on 26.03.2010. The assessee company is engaged in the business of manufacturing of iron bars, rods and flats.

During the course of assessment proceedings, the Assessing Officer noted that the word “saman” was written on entries in the seized document marked as Annexure A-3, A-4, A- 7, A-9, A-10 and A-11. Based on the statement recorded of one of the employees namely, Sh. Satpal Sharma who accepted that the word “saman” refers to cash transactions, the AO noticed the assessee to explain the nature of entries and also show cause as to why not these amounts be treated as undisclosed income. The assessee replied stating that, “The word saman is used for cash received or paid to avoid any mishappening because registered office of the company is located near Turkman gate which is not a very safe area. Regarding cash transactions as given in your Annexure represents cash given and received back from out scrap suppliers as earnest money on temporary basis till the transaction is matured through cheque or demand draft. Our group is engaged in steel manufacturing and scrap is our necessary raw material. Cash is given to scrap suppliers on temporary basis and is taken back after the deal is completed. This amount works as earnest money. Cash is used for given advance to new suppliers on temporary basis. All the group companies maintained sufficient cash balance to accommodate & 5050/Del/2014 3 Magnum Steel Ltd. such transactions and the same are verifiable from the books of account produced before your honour.”

The Assessing Officer however having not satisfied with the reply held that there was no documentary proof given as mentioned in the reply. The AO relied on the statement of Sh. Satpal Sharma recorded during the course of search on 26.03.2010 who stated that the word “saman” is the code language for cash transactions done with various parties and these transactions are not reflected in the books of accounts, hence computed the total amount reflected in Annexures A-3, A- 4, A-7, A-9, A-10 and A-11 and treated an amount of Rs.8,71,32,000/- as undisclosed income. The AO further fortified the addition based on the statement of Sh. I.C. Jindal, Director of the Company recorded during the course of search wherein he surrendered an amount of Rs.48.20 crores as income from operations of the group companies including the assessee company.

There is no material basis to come to a conclusion that the seized papers represent sales made outside the books of accounts.

The seized papers relate to the amounts given to scrap dealers and part of the regular record of the assessee’s business which has been fully supported by the books of accounts.

The company has got sufficient cash balances to give advances to the scrap dealers, hence no unaccounted transactions could be alleged.

The seized material nowhere represents the sales made out of books of accounts.

He relied on a number of judgments wherein it was held that loose sheets are required to be supported by other evidences and failure to do so leads to unwarranted derivations.

The second part of the addition of Rs.3,88,50,000/- out of Rs.8,71,32,000/- has been confirmed by the ld. CIT(A). Aggrieved the assessee filed appeal before us.

During the hearing, the assessee reiterated the arguments taken up before the authorities below and pleaded that the same may be considered taking into account the facts on record. He argued that the addition has been made based on the statement of the employee Sh. Satpal Sharma who was not at all involved in the maintenance of account. Hence, his statement on veracity of the accounts is highly an impermissible. The ld. AR argued that the notings in the seized material pertains to the amount given to the scrap dealers which has been duly reflected in the regular books of accounts, the fact of which was unknown to Sh. Satpal Sharma. The ld. DR supported the orders of the authorities below and argued that the systematic maintenance of the entries in the seized material reflect that the assessee is resorting to unaccounted sale of the finished products which is reinforced by the statement of Sh. & 5050/Del/2014 6 Magnum Steel Ltd. Satpal Sharma as well as the statement of Sh. I.C. Jindal, Director of the assessee company.

Heard the arguments of both the parties and perused the material available on record.

We find that the addition has been made based on the statement of the employee and the Director which certainly do not belong to the seized material in hand. The Director has given a statement of surrender of Rs.48.20 crores in various companies and there was no specific surrender on account of this document. While the statement of Sh. Satpal Sharma specify that the word “saman” indicates cash transaction which the assessee has also not disputed and explained that these amounts reflect the advances given to the scrap dealers. At the same time, Sh. Satpal Sharma who is not connected to maintenance of accounts cannot be aware of the accountability or otherwise of this amount in the regular books of accounts. Further, the cash amount mentioned in the seized material went tallied with the cash in hand available in the books of accounts, no discrepancies could be found out. There is no tangible evidence to prove that the entries otherwise reflect the sale of finished material which is undisclosed to the department. While making the addition on account of suppression of sales, the books of accounts are also simultaneously treated as reliable, which is contradictory in nature. No differences in the production ratio have also been brought out by the Assessing Officer. The rationale of the ld. CIT(A) holding that balance sheet has been perused and there is no classification to show that the appellant has provided any earnest money or advance & 5050/Del/2014 7 Magnum Steel Ltd. to the scrap dealers is also not based on the facts on record as the advances given to the dealers were set off against the goods received. Hence, we are unable to accept with the contention of the ld. CIT(A). Non-reflection of the earnest monies in the balance sheet cannot be a reason to sustain the addition without brining any tangible material to prove suppression of sales/unaccounted sales. Hence, we are unable to sustain the order of the ld. CIT(A) on this issue.

During the year, the assessee has received dividend income of Rs.25,93,286/-. The assessee has not attributed any expenditure to the income which doesn’t form the part of total income and no expenditure is disallowed by the assessee in the computation of income. The Assessing Officer has disallowed an amount of Rs.3,27,697/- u/s 14A r.w. Rule 8D of the Income Tax Rules, 1962. Before us, the ld. AR raised the issue of satisfaction not being recorded by the AO as per the provisions of Section 14A(2). Alternatively, it was argued that a reasonable amount may be disallowed u/s 14A on the amount of Rs.25,93,286/- which is exempt from taxable income. It was also argued that not much efforts were required to earn this income as dividends are only a passive income not the regular business of the assessee. The ld. DR relied on the provisions of Rule 8D(2)(iii) of the Income Tax Rules. Keeping in view, the entire facts and circumstances, we hold that an amount of Rs. 1,00,000/- as agreed by the assessee be justifiably considered as disallowance u/s 14A. The appeal of the assessee on this ground is partly allowed. & 5050/Del/2014 8 Magnum Steel Ltd.

In the result, the appeal of the assessee is partly allowed and that of the Revenue is dismissed. Order Pronounced in the Open Court on 25/11/2021.