DY. CIT, CIRCLE-1, JALGAON vs. TULSI EXTRUSIONS LTD., JALGAON

PER R.S.SYAL, VP : These two cross appeals – one by the assessee and the other by the Revenue arise out of the order passed by the Commissioner

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of Income-tax (Appeals) on 08-02-2013 in relation to the

assessment year 2009-10.

confirmation of disallowance amounting to Rs.28,18,584/- made

by the Assessing Officer (AO) u/s.40A(3) of the Income-tax Act,

1961 (hereinafter called ‘the Act’).

engaged in the manufacturing of various types of PVC pipes and

fittings. During the course of assessment proceedings, the AO

observed that the assessee made payments to transporters in

violation of the provisions of section 40A(3) of the Act. On being

called upon to explain the reasons, the assessee submitted that his

case was covered under Rule 6DD(k) of Income-tax Rules, 1962

(hereinafter also called `the Rules’). The AO found that the

prescription of Rule 6DD(k) applies only where the payment is

made by any person to his agent who, in turn, is required to pay in

cash for goods or services on behalf of such principal. Since the

relationship between the assessee and the transporters was not that

of principal and agent, the AO made disallowance u/s.40A(3) of

the Act at Rs.28,18,584/-. The ld. CIT(A) confirmed the

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disallowance, against which the assessee has approached the

Tribunal.

relevant material on record. The assessee admittedly made

payments of Rs.28,18,584/- in violation of section 40A(3) of the

Act. The only case of the assessee is that it is covered under rule

6DD(k) of the Rules and hence no disallowance is warranted.

Here it is relevant to note that rule 6DD considers certain cases

and circumstances in which a payment or aggregate payments

exceeding Rs.20,000/- may be made to a person in a day

otherwise than by an account payee cheque or an account payee

draft. This rule provides that no disallowance u/s.40A(3) shall be

made if the case is covered under any of the clauses (a) to (l) of

Rule 6DD. As the assessee has otherwise accepted the

application of section 40A(3) of the Act, but harped on it being

covered under rule 6DD(k) for non-disallowance, we reproduce

clause (k) of Rule 6DD, which provides: “where a payment is

made by any person to his agent who is required to make payment

in cash for goods or services on behalf of such person”. On going

through the mandate of this clause, it clearly emerges that if a

principal pays certain amount to his agent who, in turn, is required

to pay in cash for goods or services on behalf of the principal,

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then such payment made by the principal to the agent would not

be hit by section 40A(3) of the Act.

assessee has made payments in violation of section 40A(3) to

certain transporters who are not his agents. The ld. AR canvassed

a view that since the transporters were representing the assessee

in supplying the goods, they assumed the character of agents. In

our considered opinion, such a contention is a farfetched

proposition. Delivering goods by a transporter on behalf of the

assessee to customers is one thing, which is entirely different

from paying freight by the assessee to such transporter. Further,

exception carved out in the Rule applies where the payment is

made by the assessee to his agent for making further payment in

cash and not for the self consumption by the agent. Since no

principal-agent relation exists between the assessee and

transporters to whom the assessee made payments in violation of

section 40A(3) of the Act, it is held that the assessee cannot get

shelter of clause (k) of Rule 6DD. We, therefore, uphold the

impugned order on this score.

in its appeal is against the confirmation of disallowance of

Rs.12,71,000/- made by the AO u/s.14A read with Rule 8D.

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investment in shares. The AO observed that no disallowance was

offered u/s.14A of the Act. Invoking the provisions of Rule

8D(2)(iii), the AO computed disallowance amounting to

Rs.12,71,000/- at ½% of investments. The ld. CIT(A) sustained

the disallowance.

material on record, we find it as an admitted position that the

assessee did not earn any exempt income during the year. The ld.

AR took us through the annual report of the assessee and it was

shown that no exempt dividend income was reflected. The ld. DR

also could not controvert this factual position.

(2015) 378 ITR 33 (Del) has held that if there is no exempt

income, there can be no question of making any disallowance u/s

14A of the Act. Similar view has been taken by the Hon'ble Delhi

High Court in CIT vs. Holcim India P. Ltd. (2014) 90CCH 081-

Del-HC. No contrary decision has been brought to our notice by

the ld. DR. In view of the fact that the assessee did not earn any

exempt dividend income during the year, we hold that no

disallowance can be sustained u/s 14A of the Act. We, therefore,

6 ITA No.556 & 823/PUN/2013 Tulsi Extrusions Ltd.

overturn the impugned order to this extent. This ground is, thus,

allowed.

against not accepting the rejection of books of account by the ld.

CIT(A) in addition to the deletion of addition of

Rs.11,31,54,083/- on account of extra profit on sale of goods

manufactured outside the books of account; and Rs.2,49,96,455/-

towards unexplained investment in such outside production.

perusal of stock statements given by the assessee to bank from

time to time, observed that there was a difference in stocks

declared. A chart has been made at page 10 of the order depicting

such variations. On being called upon to explain the reasons for

such a difference, the assessee submitted that there was difference

only in valuation whereas the quantity was same as per books and

that given to the bank from time to time. The AO further

observed that the power consumption by the assessee varied

throughout the year. He rejected the books of account. The

assessee was required to inform about the standard consumption

ratio of output with chemicals and calcium, which was given as

3.37 kg of chemicals and 8 kg of calcium for every 100 kg.

7 ITA No.556 & 823/PUN/2013 Tulsi Extrusions Ltd.

Considering this as a benchmark, the AO worked out the

production as should have been through Annexures A to E. In

this way, he held that the production should have been

1,99,14,73,541 whereas the assessee company had shown it at

99,61,635. The differential production at 99,53,106 was held to

have been made outside the books of account. He converted it

into sale value at Rs.72,14,01,130/-. After allowing deduction

towards the Resin value and Chemical value, the AO calculated

extra profit from manufacturing of such sale outside the books of

account at Rs.11,31,54,083/-. In addition, it was further opined

that the assessee made unexplained investment in such undeclared

production at Rs.2,49,96,544/-. These two amounts of Rs.11.31

crore and odd and Rs.2.49 crore and odd were added by the AO.

The ld. CIT(A) concurred with the submissions advanced on

behalf of the assessee and overturned the action of the AO in

rejecting the books of account and as the sequitur, deleted both

the additions. The Revenue is aggrieved by such deletion of

additions.

material on record, it is seen that the AO rejected books of

account mainly on the ground that value of stock submitted to

bank was higher than that reflected in the books of account; and

8 ITA No.556 & 823/PUN/2013 Tulsi Extrusions Ltd.

consumption of more electricity justified carrying out

manufacturing activity outside books of account on the basis of

certain standards given by the assessee.

concerned, we first want to clarify that the assessee enjoyed the

credit facilities under hypothecation of stock and not on pledge.

The assessee is a manufacturing unit and is subjected to excise

duty. The ld. CIT(A) has recorded a categorical finding that all

the requisite quantitative records have been maintained by the

assessee, which has not been controverted by the ld. DR. It is

further seen as an admitted position that the assessee also

maintained stock registers and it is not the case of the AO that

quantitative figures as per such stock registers do not tally with

the quantity of stock declared by the assessee in the annual

accounts at the end of the year. The difference in the value of

stock as given to the banks and as per annual accounts is mainly

on account of valuation and not on account of quantity.

controverted that the valuation of stock given by the assessee in

its balance sheet is as per the regular method of stock valuation

followed by the assessee. It, therefore, transpires that the

difference in the amounts of stocks as per bank and annual

9 ITA No.556 & 823/PUN/2013 Tulsi Extrusions Ltd.

accounts has arisen because of valuation and not quantitative

details and further the value declared in the annual accounts is not

fallacious and is as per the regular method of valuation. Once the

value reflected by the assessee in its annual accounts has been

accepted by the AO, in our considered opinion, no addition can be

made simply on the ground that the assessee declared higher

value to the banks. Our view is fortified by the judgment of the

Hon’ble jurisdictional High Court in CIT Vs. Acrow India Ltd.

(2008) 298 ITR 448 (Bom.). Reliance of the ld. DR on V. Rajan

vs. CIT (1974) 96 ITR 64 (Mad) is inconsequential in as much as

in that case the explanation of the assessee was that stock in hand

was actually inflated for the purpose of getting a higher loan from

bank. Contrariwise, the case under consideration is that of

estimation of stock value by the assessee at the time of furnishing

statements to bank and not that of intentional inflation.

the books of account on the basis of certain ratio given by the

assessee of some raw materials to final product, it is seen that the

assessee submitted that it was just a standard in a particular

situation which varied from situation to situation. We also concur

with the contention of the assessee that there cannot be any

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yardstick of ratio of raw material to output. Variation arises in

such standard ratio because of several reasons, such as, quality of

products required, normal wastage, abnormal wastage, disruption

in manufacturing process, seasonal reasons, at al. The thing

which is pertinent to note is that if the AO was coming to the

conclusion of the assessee having manufactured goods outside the

books of accounts, there should have been some material to

substantiate the same. The assessee has maintained proper stock

registers and is subjected to excise duty. There is nothing on

record that the Excise Department or Sales-tax Department, for

that purpose, did not accept the figures of manufacturing or sales

as tendered by the assessee. In case of Excise duty levy,

movement of goods is strictly monitored. No manufacturer can

remove the manufactured goods without paying excise duty, for

which entries in necessary registers are made. Here is a case in

which the assessee has maintained all the requisite registers.

Simply because consumption of electricity varied from month to

month or did not match with the manufacturing shown by the

assessee, cannot be a reason to infer that the assessee was

engaged in carrying out manufacturing activity outside books of

account.

11 ITA No.556 & 823/PUN/2013 Tulsi Extrusions Ltd.

Company Vs. ITO 2000 72 ITD 139 (Amritsar)(SB) considered

almost similar situation in which addition was made by the AO on

the presumption of suppressed manufacturing. The Special Bench

of the Tribunal reversed the action of the AO in rejecting the

books of account on the ground that such books of account were

audited and the statutory registers were maintained which were

accepted by the Excise and Taxation Department etc. The facts of

the instant case are almost similar to those as considered by the

Special Bench of the Tribunal in Shanker Rice Company (supra).

India Ltd. VS. DCIT (2012) 21 taxmann.com 260 (Pune) is again

misplaced. That was a case in which the default was quantified at

Rs.1.24 crore, which is not the position as instantly prevailing.

Similar is the position regarding the judgment in the case of

National Plastics Industries VS. ITO (2009) 177 Taxman 139

(Bom). That was a case in which instances of various leakages of

revenue in books of account were found, which is not the case

under consideration.

considered opinion that the ld. CIT(A) was justified in

overturning the view point of the AO in rejecting the books of

12 ITA No.556 & 823/PUN/2013 Tulsi Extrusions Ltd.

account. Once the books of accounts are held to be properly

maintained, there cannot be any question of making addition on

the basis of suppressed production or undisclosed investment.

We, therefore, affirm the opinion of the ld. first appellate

authority in deleting both the additions amounting to Rs.11.31

and odd and Rs.2.49 crore and odd.

the assessee is partly allowed.

Order pronounced in the Open Court on 19th July, 2019.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 19th July, 2019 सतीश आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-II, Nashik 4. The CIT-II, Nashik िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “सी” / DR ‘C’, ITAT, Pune; 6. गाड� फाईल / Guard file. आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

ITA No.556 & 823/PUN/2013 Tulsi Extrusions Ltd.

Date 1. Draft dictated on 18-07-2019 Sr.PS 2. Draft placed before author 18-07-2019 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *