MODGILL HOSIERY EXPORTS PRIVATE LIMITED,LUDHIANA vs. ACIT, LUDHIANA

Addition of out-of-books sales for Rs.32.11 Lacs 4.1 The assessee purchased yarn from its sister concern M/s OTPL. Though the value of 6 bills tallied, there was variation in quantity and rate as recorded by the assessee. The assessee failed to produce copies of bills and VAT return of the supplier. The Ld. AO alleged that the assessee sold excess yarn of 16056.61 Kg out of books whereas it claimed full purchase expenditure. By adopting average sale rate of Rs.200/- per Kg, the addition of Rs.32.11 Lacs was made in the hands of the assessee. The Ld. CIT(A) confirmed the same against which the assessee is in further appeal before us. 4.2 We find that there is nothing on record to demonstrate that the assessee has carried out any out-of-books sales. The value of the purchases as recorded tallies with the sales figures of the supplier. This addition is not supported by any concrete evidence on record and hence, deleted.

Disallowance of interest u/s 36(1)(iii) 5.1 The assessee claimed interest expenditure of Rs.47.66 Lacs. The assessee had withdrawn cash from its banks on different dates which were alleged to be diverted for personal use. On the date of survey, physical cash was Rs.1.07 Lacs as against book cash of Rs.12.16 Lacs. Accordingly, Ld. AO disallowed 25% of interest expenditure which was confirmed by Ld. CIT(A).

5.2 We find that this addition is also on mere allegation. Nothing has been shown as to how the funds were diverted by the assessee for non-business use. As per the mandate of Sec.36(1)(iii), the interest expenditure could not be disallowed in the absence of such findings. Therefore, this addition is not sustainable considering the provisions of Sec.36(1)(iii). We order so.

Addition of transactions not forming part of books 6.1 This addition is an estimated addition of 60% of certain entries aggregating to Rs.139.39 Lacs as found noted in various documents as found during survey. The Ld. AO alleged that number of transactions was not accounted for by the assessee in its books of accounts and the assessee was not able to explain the nature of these transactions. The Ld. CIT(A) confirmed the same against which the assessee is in further appeal before us. 6.2 Upon perusal of case records, we find that this is only an estimated addition. There is no finding that the transactions as noted in the impounded document were not recorded in assessee’s books of accounts. Pertinently, these notings were made in a consolidated manner for various entities of assessee’s group. Considering the facts of the case and to plug any possible leakage of revenue, we direct Ld. AO to restrict the impugned addition to the extent of 10% of Rs.139.39 Lacs. The corresponding grounds stand partly allowed.

Addition of stock 7.1 The special auditor valued the closing stock on the date of survey at Rs.14.93 Lacs. The stock was found lying at the premises of assessee’s sister concern M/s Modgill Fashion Exports. The assessee stated that the stock belonged to it and accordingly, the same was added to the income of the assessee on substantive basis whereas it was added protectively in the case of M/s Modgill Fashion Exports. The action of Ld. AO was confirmed by Ld. CIT(A) against which the assessee is in further appeal before us. 7.2 We find that the impugned stock was owned up by the assessee and accordingly, it was added on substantive basis. During assessment proceeding also, the assessee could not substantiate this claim. Therefore, no interference is required on this issue. The corresponding grounds stand dismissed.

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