SUJALA PIPES PRIVATE LIMITED,NANDYAL vs. ACIT, CIRCLE-1, KURNOOL

Succinctly stated, the assessee company which is engaged in the business of manufacturing and distribution of PVC Pipes had not filed its return of income for the subject year. The A.O., observing that the assessee company had carried out substantial financial transactions viz., (i) cash deposits in its bank accounts: Rs. 8,40,61,989/-; (ii) payment to contractors: Rs. 4,52,14,069/-; (iii) receipt of interest income: Rs. 14,79,810/-; and (iv) import of raw materials: Rs. 6,86,58,443/-, initiated the proceedings under Section 147 of the Act. Notice under Section 148 of the Act dated 30/03/2021 was issued to the assessee company.

Ostensibly, the assessee company failed to comply with the notice issued by the A.O. under Section 148 of the Act dated 30/03/2021. Also, the assessee company had though initially failed to respond to the notices that were issued by the A.O under Section 142(1) of the Act, but, had thereafter at the fag end of the proceedings filed its written submissions regarding the multi-facet issues based on which proceedings under Section 147 of the Act were initiated in its case.

Apropos the cash deposits of Rs. 8,40,61,989/- made in the bank account of the assessee company, it was the assessee’s claim that the same were the sale proceeds which in the normal course of its business were deposited by its dealers and distributors in its bank accounts. Also, the assessee company to fortify its aforesaid claim had drawn support from its financial statement for the subject year which revealed that it had generated revenue of Rs. 73.46 Crores (approx.) during the year under consideration. Apart from that, the assessee company had filed before the A.O. its VAT and GST returns for the subject year, wherein the purchases and sales were disclosed. Also, the assessee company to dispel all doubts regarding its aforesaid explanation, had placed on record the copy of its annual accounts and the computation of income. However, the A.O. did not find favor with the explanation of the assessee company regarding the source of the cash deposits made during the subject year in its bank accounts of Rs. 8.40 crores (supra). The A.O., being of the view that the assessee company had failed to place on record the complete details of the dealers and distributors who were stated to have made the cash deposits in its bank accounts, thus, finding no substance in its claim, rejected the same.

Apropos, the amount that was paid by the assessee company to the contractor amounting to Rs. 4.52 crores (approx.), it was claimed by the assessee company that it had not made any such payment during the subject year. Alternatively, the assessee company had claimed that all the expenditure that it had incurred during the year was accounted for in its audited books of account. However, the A.O. holding a firm conviction that the assessee company had failed to place on record the details of the persons who had performed the contract work along with the source of the payments to them, made an addition of Rs. 4,52,14,069/- under Section 69A of the Act.

Apropos the interest income of Rs. 14,79,810/-, it was the claim of the assessee company that it had credited the same in its “Profit & Loss Account” for the subject year. However, the A.O. was of the view that as the assessee company had failed to submit any details of the bank accounts and other evidence to justify the actual amount of interest that was received by it, therefore, made an addition of Rs. 14.79 lacs (approx.) in its hands.

Accordingly, the A.O. after making the aforesaid additions vide its order passed under Section 147 r.w.s 144 r.w.s 144B of the Act, determined the income of the assessee company at Rs.13,07,55,868/-.

Aggrieved, the assessee company carried the matter in appeal before the CIT(A) but without success. For the sake of clarity, the observations of the CIT(A) are culled out as under:

We have heard the Learned Authorized Representatives of both sides, perused the orders of the Lower Authorities and the material available on record. Sri T. Rajendra Prasad, learned Counsel for the assessee company (“ld. AR”) at the threshold of hearing of the appeal, submitted, that the present appeal involves a delay of 175 days. Elaborating on the reasons leading to the delay, the ld.AR had drawn our attention to the application dated 14/02/2025 filed by the assessee company seeking condonation of the same along with an “affidavit” filed in support thereof. The ld.AR submitted that the notices intimating the fixation of the appeal were dropped by the office of the CIT(A)/NFAC in the different email Ids belonging to its erstwhile accountant and tax consultants viz., svenkat1@nandipipes.com and anjaneyuluco @gmail.com. The ld.AR submitted that as Sri S. Venkat (Accounts Officer) to whom the email id svenkat1@nandipipes.com belonged and was looking after the income tax matters had left the assessee company and recently expired in February, 2024, while for the assessee company had remained oblivion of the notices that were served upon him. Also, the ld.AR submitted that the assessee company had remained unaware of the notices intimating the fixation of the appeal by the CIT(A) that were dropped in the email id anjaneyuluco@gmail.com which belonged to its earlier tax consultant. The ld.AR submitted that the assessee company for the aforesaid bona fide reasons had gathered information about the disposal of its appeal by the CIT(A) only after it’s bank account was attached by the Department in January, 2025. The ld.AR submitted that the assessee company on learning about the dismissal of its appeal by the CIT(A), had immediately approached its Counsel and filed the present appeal. The ld.AR submitted that as the delay in filing of the present appeal had crept in for bona fide reasons and not on account of any lackadaisical approach or malafide intention, therefore, the same in all fairness be condoned.

Per contra, the Learned Departmental Representative (“Ld. DR”) objected to the seeking of condonation of the delay involved in filing of the present appeal.

We have thoughtfully considered the reasons leading to the delay in filing of the present appeal. After giving our thoughtful consideration, we are of the view that as the delay involved in filing the present appeal had crept in on account of bona fide reasons i.e., unawareness of the assessee company about the dismissal of its appeal by the CIT(A) as the notices/order were dropped in the email id of it’s accountant/tax consultants, therefore, there is merit in its explanation based on which it has sought for condonation of the delay involved in filing the present appeal. Although the assessee company ought to have remained vigilant as regards the timely filing of the appeal, but considering the totality of the facts involved in the present case, we herein condone the delay therein involved. Our aforesaid view that a liberal approach is to be adopted while considering the application filed by an appellant seeking condonation of delay is supported by the judgment of the Hon'ble Supreme Court in the case of Vidya Shankar Jaiswal vs. The Income Tax Officer, Ward-2, Ambikapur in Specia Leave Petition

The assessee company has filed before us an application seeking admission of certain documents as additional evidence, as under: a. Cash sales details for Rs. 1.39 Crs. b. Summary of cash deposits [Rs. 8.65 Crs] and withdrawals from various banks [Rs. 12.59] c. Bank statements related to 8 Banks [for one day / one month] d. Ledger extract for ‘income from contract works’ e. Ledger extract for interest income f. Form 26AS g. From 3CA and 3CD

As the aforesaid documents filed by the assessee appellant will have a strong bearing on the adjudication of the issues involved in the present appeal before us, therefore, considering the fact that the assessee company had justifiable reason for not participating in the proceedings before the CIT(A), and placing the same on record, we admit the same.

Apropos merits of the case, we find that the A.O. had held the cash deposits of Rs. 8.40 Crores (supra) made in the bank accounts held by the assessee with Andhra Bank, Branch Nandyal in A/c. Nos. 037911011001551 and 037911100001820 as being sourced from its unexplained money U/s. 69A of the Act. Ostensibly, the A.O. had rejected the claim of the assessee company that the cash deposits of Rs. 8.40 Crores (supra) were sourced out of the sale proceeds of its business of manufacturing and distribution of PVC Pipes which were mainly used in the irrigation, and the said amounts that were deposited by the dealers and distributors in the normal course of its business in its bank accounts. Although, the assessee company to buttress its aforesaid claim had drawn support from the fact that it had in the subject year generated revenue of Rs. 73.46 Crores (supra) from its business operations, but, the A.O. was of the view that as the assessee company had failed to furnish the complete details of its dealers and distributors who had deposited the cash in its bank accounts therefore, its explanation that the cash deposits of Rs. 8.40 Crores (supra) was sourced out of the sales proceeds of its business did not merit acceptance. On appeal, the CIT(A) had approved the view taken by the A.O. and sustained the addition made by him.

We have thoughtfully considered the observations of the lower authorities. The ld.AR during the course of the proceedings before us, had drawn our attention to the financial statements of the assessee company for the year under consideration, which revealed that it had generated revenue of Rs. 73.46 Crores (supra) during the subject year, Page 74 of the APB. Apart from that, the ld.AR had taken us through the cash book and consolidated contra transactions in the bank accounts of the assessee company for the subject year, which revealed that there were aggregate of cash withdrawals of Rs. 12.59 Crores (approx.) and cash deposits of Rs. 8.65 Crores (approx.) in the said bank accounts during the subject year, Page 159 of the APB. Apart from that, we find that the copy of the VAT/CST returns filed by the assessee company further evidences its sales during the subject year, Page 83 to 121 of the APB.

Considering the aforesaid facts, we find substance in the ld. A.R’s claim, that the cash deposits of Rs. 8.65 Crores (supra) made in the bank accounts of the assessee company during the subject year were sourced out of its cash sales/collections that were deposited by the dealers and distributors in its bank accounts. We are of the firm conviction that the aforesaid explanation of the assessee company could not have been summarily discarded by the lower authorities. We thus, are of the view that the claim of the assessee company i.e., the cash deposits of Rs. 8.40 Crores (supra) were sourced out of its duly accounted business transactions requires to be verified. Accordingly, we herein restore the issue to the file of the A.O. with a direction to re- adjudicate the same after affording a reasonable opportunity of being heard to the assessee company. The Ground of Appeal No.2 is allowed for statistical purposes.

We have thoughtfully considered the aforesaid issue and concur with the ld. A.R that the aggregate of the contract receipts of Rs. 4.52 Crores (supra) as disclosed in the Form-26AS of the assessee company, is the same amount which had been held by the A.O. as payment made by the assessee company to a contractor out of its unexplained money. Ostensibly, as the aforesaid explanation of the assessee company regarding the impugned addition of Rs. 4.52 Crores (supra) made by the A.O. U/s. 69A of the Act carries substance and could not have been outrightly scrapped, therefore, we herein restore the issue to the file of the A.O. with a direction to re-adjudicate the same after affording a reasonable opportunity of being heard to the assessee company. Before parting, we herein direct the A.O. to also verify the veracity of the claim of the assessee company that the contract receipts of Rs. 4.52 Crores (supra) as disclosed in its “Form-26AS” forms part of its income/ receipts from contract works of Rs. 5.53 Crores (supra) that have been accounted for in its audited financial statement for the year under consideration. The Grounds of appeal No. 3 to 5 are allowed for statistical purposes in terms of our aforesaid observations.

Apropos the addition of interest income of Rs. 14,79,810/-, we find that the A.O. was of the view that the assessee company had failed to offer the said interest income for tax. On the contrary, the assessee company had claimed that the interest income of Rs. 14.79 lacs (approx) formed part of the interest income of Rs. 17.62 lacs (approx.) that it had disclosed under the head “Other income” in its Profit & Loss Account for the subject year, Page 74 of the APB. As the aforesaid claim of the assessee company would require necessary verification and cannot be accepted on the very face of it, therefore, in all fairness, we restore the issue to the file of the A.O. for fresh adjudication. Needless to say, the A.O. shall in the course of the set-aside proceedings afford a reasonable opportunity of being heard to the assessee company on the aforesaid issue. The Ground of appeal No.6 is allowed for statistical purposes.

The Grounds of Appeal Nos. 1 and 8 being general in nature are dismissed as not pressed.

In the result, the appeal filed by the assessee is allowed for statistical purposes.

We shall now take up the appeal filed by the assessee company for A.Y 2017-18, wherein the impugned order has been assailed on the following grounds of appeal before us:

As the assessee company neither complied to the notice issued by the A.O. U/s. 142(1) of the Act dated 01/12/2017 and failed to file its return of income in compliance thereto, and also despite sufficient opportunity failed to place on record the relevant information as was called for by the A.O, therefore, the latter was constrained to frame the assessment to the best of his judgment U/s. 144 of the Act, dated 29/12/2019.

During the course of the assessment proceedings, A.O. observed that the assessee had deposited an amount of Rs. 1,23,34,579/- during the demonetization period. On being queried, it was the assessee’s claim that the subject deposits were made by the buyers of its products who would remit the sale proceeds directly in its bank accounts. Ostensibly, as the assessee company could not submit any valid explanation for the cash deposits amounting to Rs. 94.86 lacs, therefore, the A.O. held the same as having been sourced out of its unexplained money U/s. 69A of the Act. Also, the A.O. observed that the assessee company had failed to deduct tax at source on certain expenses aggregating to Rs. 1.62 Crores. Accordingly, the A.O. worked out the disallowance U/s. 40(a)(ia) of the Act of Rs. 48,68,756/- i.e., @30% of Rs. 1.62 Crs.

Apart from that, the A.O. observed that as the assessee company had failed to substantiate the veracity of its claim of expenses aggregating to Rs.2,00,81,253/- and thus, disallowed on an ad hoc basis 10% of the same i.e Rs. 20,08,126/-. Accordingly, the A.O. after, inter alia, making the aforesaid additions/disallowance vide his order U/s. 144 of the Act dated 29/12/2019 scaled down the loss disclosed by the assessee company to (Rs.3,17,14,504/-). The addition made by the A.O. U/s. 69A of the Act of Rs. 94.86 lacs (supra) was separately brought to tax.

Aggrieved, the assessee company carried the matter in appeal before the CIT(A), but, without success. For the sake of clarity, the observations of the CIT(A) are culled out as under :

We have heard the Learned Authorized Representatives of both parties, perused the orders of both the lower authorities and the material available on record.

Apropos the addition made by the A.O. of Rs. 94.86 lacs U/s. 69A of the Act, we find that it has been the claim of the assessee company that the subject cash deposits were sourced out of its sale proceeds/collections generated in the regular course of its business, i.e., the sale of PVC Pipes which were mainly used for irrigation through a distribution network across the state of Andhra Pradesh with the farmers being the end users. However, the aforesaid explanation of the assessee company was rejected by the A.O., which thereafter had been upheld by the CIT(A).

As under the identical facts, we have restored the addition of cash deposits of Rs. 8.42 Crores (supra) made by the A.O. in the case of the assessee company for the immediately preceding year i.e., A.Y 2016-17 in Rs. 94.86 lacs made by the A.O. during the subject year is restored to the file of the A.O. with a direction to re-adjudicate the issue after affording a reasonable opportunity of being heard to the assessee company. The Ground of appeal No. 3 is allowed for statistical purposes in terms of our aforesaid observations.

Apropos the disallowance made by the A.O. U/s. 40(a)(ia) of the Act “Interest overdue” of Rs. 28,42,719/-, the ld.AR after arguing for some time sought not to contest the same. Accordingly, the Ground of appeal no.4 is dismissed as not pressed.

Apropos the ld. AR’s contention that the A.O. had grossly erred in law and fact of the case by most arbitrarily disallowing on an ad hoc basis 10% of its expenses of Rs. 2,00,81,253/- that were incurred in the normal course of its business, we find that, the A.O. had observed that an examination of the “books of accounts” of the assessee company revealed that it had not vouched and supported its claim for deduction of expenses based on third party bills, and had only supported the same by self-made vouchers, which, thus had rendered the same as not verifiable. However, there is no whisper in the assessment order that as to which all expenses/vouchers were not found to be verifiable. As the A.O. had failed to justify the disallowance on an ad-hoc basis 10%of the subject expenses, resulting to a disallowance of Rs. 20 lacs (approx..), therefore, we herein restore the issue to the file of the A.O. with a direction to re-adjudicate the same. The A.O. shall in the set-aside proceedings verify the assessee’s claim for deduction of the subject expenses in question and disallow only those which are not in conformity with the statutory conditions for allowability of the same as set out in Section 37(1) of the Act. The Ground of appeal No. 5 is allowed for statistical purposes.

As we have restored the issues to the file of the A.O. for fresh adjudication, therefore, he is directed to re-work out the interest liability U/s. 234A and 234B of the Act while framing the de novo assessment. The Ground of appeal No. 6 is disposed of in terms of our aforesaid observations.

Resultantly, the appeal filed by the assessee company is allowed for statistical purposes in terms our aforesaid observations.

In the result, both the appeals of the assessee company are allowed for statistical purposes.