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Income Tax Appellate Tribunal, LUCKNOW BENCH “A”, LUCKNOW
Before: SHRI KUL BHARAT & SHRI NIKHIL CHOUDHARY
PER KUL BHARAT, VICE PRESIDENT.:
1. This appeal, by the assessee is directed against the order of the Learned Commissioner of Income-tax (Appeals)-I, Kanpur dated 21.09.2016 pertaining to the assessment year 2012-13. The assessee has raised the following grounds of appeal: -
1. Because the CIT(A) has erred on facts and in law in upholding the disallowance of Rs.70,64,782/- on account of deemed dividend under section 2(22)(e) of the I.T. Act, 1961, which addition is contrary to facts, bad in law and be deleted.
2. Because the CIT(A) has filed to appreciate, that all transaction taken place between the assessee and M/s. R.K. Agro Pvt. Ltd. are all commercial/business transactions carried on in the normal and ordinary course of business and do not fall within the provisions of section 2(22)(e) of the Act, the addition made is contrary to facts, bad in law and be deleted.
3. Because the CIT(A) has erred on facts and in law in passing an order under section 153(3)(ii) read with section 150(1) directing the AO to make similar additions on account of deemed dividend in A.Y. 2011-12 & A.Y. 2012-13 without giving the assessee any opportunity to elaborate his submissions and to further clarify his stand, the direction so given, be deleted.
4. Because the CIT(A) has erred on facts and in law in giving directions u/s.150 of the Act, 1961 for addition to be made under section 2(22)(e) of the Act, which amounts to enhancement of income and such enhancement of income is impermissible in view of the specific provisions of section 251(2) of the Income Tax Act, 1961.
5. Because the CIT(A) has erred on facts and in law in upholding the disallowance of Rs.13,26,600/- under section 41(1) of the Act, payment outstanding be made to M/s. Scrap Tin Enterprises without appreciating the facts and circumstances of the case and without giving the assessee an opportunity to explain the same.
6. Because the CIT(A) has failed to appreciate the fact, that the liability being outstanding and payable, cannot cease to exist by any unilateral act of the creditor. The provision of section 41(1) have been wrongly applied the addition made be deleted.
7. Because the CIT(A) has failed to appreciate the explanation as well as the confirmation filed from Scrap T in Enterprises and has also not given any opportunity to rebut the allegation that the said amount of Rs.13,26,600/- is not payable.
8. Because the CIT(A) has erred on facts and in law in upholding the disallowance of Rs.10,00,000/- out of sacking material consumed of Rs.19,94,410/- being purchases made, treading e same to unverifiable, the addition upheld is contrary to facts be deleted.
Because the CIT(A) has failed to appreciate that purchase tax @ 5% has been -aid, that the said expenses have been incurred, without which the goods cannot be packed and sold, being fully verifiable, the amounts have been tax audited the disallowance made on adhoc basis and upheld by the CIT(A) is arbitrary and be deleted.
Because the CIT(A) has erred on facts and in law, in as much as, he has enhanced ‘the income by making further disallowance of Rs.8,94,690/- under the head packing expenses without giving the assessee any opportunity as provided under section 251(2) of the Act, the : enhancement of income is contrary to the provisions of law and be deleted.
Because the CIT(A) has erred on facts and in law in upholding the additions of Rs.10,00,000/- made by the AO on account of freight expenses not included in valuation of closing stock and further enhancing the same to Rs.23,37,000/- by adding a sum of Rs.1 3,37,000/-, without giving the assessee any opportunity as provided u/s.251(2) of the Act, the addition sustained and enhanced be deleted.
Because there being no change in the method of accounting regularly lowed by the assessee the authorities were not justified in unsettling e settled position of account and thereby making and upholding the addition of Rs.23,37,000/-, which addition be bad in law be deleted.
Because without prejudice, if the disallowance/enhancement is to be sustained, then the same would go into increase the value of the closing to and in like fashion, the value of opening stock for the year should ought to have been adjusted. Such exercise having not been done, the addition made is contrary to the provisions of law and be deleted.
Because without prejudice, if the addition is to be sustained, then the figure of closing stock for the year under consideration should ought to have been adopted as figure of opening stock of the subsequent year.
Page 3 of 17 15. Because the CIT(A) has erred on facts and in law in upholding the disallowance of Rs.2,23,561/- by invoking the provisions of section 14A, there being no tax free income, addition is contrary to facts, bad in law and be deleted. 16 Because there being no expenditure incurred for the purpose of earning tax free income nor there being any satisfaction recorded by the authorities below the disallowance made is bad in law and be deleted.”
At the time of hearing, no one attended the proceedings on behalf of the assessee. It is seen from the records that vide order- sheet entry dated 18.02.2025, this Tribunal had noted that the Ld. Counsel for the assessee Shri Rakesh Garg, Adv informed that the assessee is not in his contact and requested for withdrawal of his ‘Vakalatnama’. Thereafter, a notice was issued to the assessee for fixing the date of hearing on 26.03.2025. On that date, no one attended the proceeding on behalf of the assessee. Again notice was issued to the assessee for hearing on 24.04.2025 but on that also there is no representation on behalf of the assessee. Today again, there is no representation on behalf of the assessee. Under these facts, we have no option but to proceed exparte against the assessee and decide the appeal on the basis of material available on record.
The factual matrix of the case is that in this case the assessee had filed his return of income declaring total income at Rs.13,20,260/- through electronic mode on 28.09.2012. The said return was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter for short referred as “the Act”). Thereafter, the case was selected for scrutiny through Computer-Assisted Scrutiny System (CASS). A notice u/s 143(2) of the Act was issued by the assessing authority. In response to the statutory notices, Shri Mool Chand Pandey, Adv, Ld. Authorized Representative of the assessee attended the assessment proceedings and furnished the details as called for. While framing the assessment, the Assessing Officer made various additions viz., a sum of Rs.70,64,782/- treating the same as deemed dividend u/s 2(22e) of the Act, the Page 4 of 17 outstanding liability claimed in respect of M/s. Scraptin Enterprises amounting to Rs.13,26,00/- treated as bogus was added to the income of the assessee. Further, the Assessing Officer made disallowance of Rs.10,00,000/- claimed as expenses towards packing material consumed, the Assessing Officer on adhoc basis made disallowance of Rs.10,00,000/- out of freight expenses of Rs.25,63,403/- in the absence of any supporting evidences. The Assessing Officer further, made addition by invoking provisions u/s 14A of the Act an amount of Rs.2,23,561/- was added back to the income of the assessee. Thus, the Assessing Officer computed and assessed the total income of assessee at Rs.1,19,35,200/- against the returned income in sum of Rs.13,20,260/-. Aggrieved against this, the assessee preferred an appeal before the Ld. CIT(A) who in effect further enhanced addition and dismissed the appeal of the assessee. Aggrieved against this, the assessee is in appeal before this Tribunal.
Apropos to the grounds of appeal, Ld. Departmental Representative (DR) Shri Sanjeev Krishna Sharma strongly supported the orders of the lower authorities. He also contended that the Ld. CIT(A) on all the issues has thoroughly examined and deliberated after having given sufficient opportunity to the assessee. He submitted that in the absence of plausible explanation along with supporting evidences the lower authorities are justified in making and sustaining the additions. It is seen that the assessee through his Ld. AR has placed on record written submissions filed before Ld. CIT(A). For the sake of clarity, the written submissions of the assessee are reproduced as under:-
“The present appeal has been filed against the order of the ACIT-I, Kanpur passed u/s 143(3) of the Act dated 27.03.2015.
Return was filed declaring income of Rs. 13,20,260/- on 28.09.2012. Assessment has been framed under sec. 143(3) of the Income Tax Act on total income of Rs. 1,19,35,200/-. The assessee is carrying on business of edible oil. Besides business income, he draws salary from M/s R.K. Agro Oil (P) Ltd., and from M/s Ganpati Edible Oil (P) Ltd., income from house property and other sources. Return declaring total income of Rs. 13,20,260/- was e-filed on through acknowledgement no.499539771280912. The said return was processed under section 143(1) of the Income tax Act, 1961 (herein after for .short referred as ‘the Act’). Thereafter, the case was selected for scrutiny through CASS and accordingly, notice under section 143(2) of the Act dated 08.08.2013 was issued and served upon the assessee within the time and manner as prescribed under the Act. Further, notice under section 142(1) of the Act dated 05.05.2014 alongwith a detailed questionnaire was also issued In response to the statutory notices, Shri Mool Chand Pandey, Advocate, duly authorized by the assessee, appeared from time to time and furnished required details/explanations. Tax Auditor’s report, Bank statements were furnished. Books of account were also produced and put to test check. The case was discussed with him. The assessee is an individual. It was reported that during the relevant accounting period, assessee was engaged in the business of Trading of edible Oil. Apart from it, assessee also earned income from Salary from M/s. R.K.Agro Oil (P) Ltd. and from M/s. Ganpati Edible Oil (P) Ltd., Income from House Property and other source income. The business activities carried out by the assessee remained identical as to those in several preceding year and were operated and controlled from the following places; (a) 74/02, Collectorganj. (Office) (b) J-9, Site-3, Panki Industrial Area, Kanpur (Godown) Following grounds have been raised:-
1. That the assessment famed u/s. 143(3) of the Income Tax Act, 1961 is bad in law and on facts.
2. That the Id. Dy. Commissioner of Income Tax, while framing the assessment u/s. 143(3) of the Income Tax Act, 1961 has erred in law in invoking the provisions of section 2(22) (e) of the Income Tax Act, 1961.
3. That without appreciating the facts that the assessee has regular business transactions with M/s. R.K. Agro Pvt. Ltd., in making purchases and sales from and to it, therefore, invoking provisions of section 2(22)(e) of the Income Tax Act, 1961 are contrary to law arbitrary. The Id. Dy. Commissioner of Income Tax has mis-conceived the fact and has held the advances given by M/s. R.K. Agro Pvt. Ltd. are loans, while the assesssee has supplied the goods subsequently against the advances, and thus applying the provisions of section 2 (22) (e) of the Income Tax Act, 1961 are unjust, illegal and arbitrary.
4. That the additions made amounting to Rs. 13,26,600/- u/s. 41(1) of the Income Tax Act, 1961 are unjust and on the facts illegal and arbitrary.
5. The disallowances of Rs. 10,00,000/- made out of packing expenses without proper verification that the entire expenses claimed are certified by U.P. Government by charging tax @ 5% as per law.
6. That disallowances of Rs. 10,00,000/- out of packing expenses are unjust, illegal, arbitrary and in any case highly excessive.
That addition of Rs. 10,00,000/- out of freight expenses have been made without proper verification of the facts that the closing stock has been valued on the basis followed in earlier also i.e. at cost.
That without appreciating the facts that closing stock has been valued at cost without adding the freight as was done in the past and disallowed a sum of Rs. 10,00,000/- arbitrarily and is any case it is highly excessive. 10. That disallowances of Rs. 2,23,000/- made by invoking provisions of Sec. 14A of the Income tax Act, 1961 are contrary to law, unjust & arbitrary. 11. That the Id. Dy. Commissioner of Income Tax, while framing the assessment has wrongly worked out Rs. 2,23,561/- invoking provisions of section 14-A, is without any basis and without proper consideration of the explanation given by the assessee. Ground no. 1 to 3 relate to addition of Rs. 70,64,782/- on account of deemed dividend: The AO while dealing with the issue has held as under: 4. From the Balance sheet , it was seen that during the relevant accounting period assessee had made investment in shares of M/s Ganapati Edibles Pvt. Ltd. Rs.3,59,80,000/-. Accordingly, assessee was required to explain source of aforesaid investment with supporting documentary evidence. In response, the assessee vide para 6 of his written submissions dated 05.11.2014 submitted his explanation of source of investment. The same is reproduced as under: - “ From the capital account your goodself will find that a sum of Rs. 2,69,80,000/- has been credited on 08.09.2011 by journal entry is represent the shares of M/s. Ganpati Edibles Pvt. Ltd., purchased by the assessee @ Rs. 9/per share. The total shares of Rs. 14,20,000/-. This amount has been capitalized by debiting to shares account and appearing in the assets of the Balance Sheet. Meaning thereby that the share of M/s. Ganpati Edible Pvt. Ltd. deposited in the assesses proprietary firm styled M/s. R.K.Agro Pvt. Ltd. The above amount of Rs. 2,69,80,000/- was arranged by getting a cheque No. 521879 for Rs. 75,00,000/- from M/s. R.K. Agro Enterprises and again a cheque No. 521904 for Rs. 1,70,00,000/- was received from M/s. R.K.Agro enterprises on 08.09.09.2011. lt would not be out of place to mention that the assessee is a proprietor of M/s. R.K. Agro Enterprises in which a sum of Rs. 2,50,00,000/- was receipt from M/s. R.K.Agro Oils Pvt. Ltd. on 08.09.2011. The Bank Account of M/s. R.K.Agro Enterprises will make clear the position that out of this sum of Rs. 2,50,00,000/- the above amount of Rs. 1,70,00,000/- was remitted to the assessee. Thus the total position sum rise is that the proprietor ship concern M/s. R.K.Agro Enterprises got the loan of Rs. 2,50,00,000/- from M/s. R.K.Agro Oils (P) Ltd., and gave out of it Rs. 75,00,000/- and Rs. 1,70,00,000/- to Shyam Sunder Gupta who deposited these cheques in his personal saving Bank A/c. and thereafter purchased shares of M/s. Ganpati Edibles P Ltd. alongwith other shares of this company for Rs. 75,00,000/- aggregating to Rs. 2,45,00,000/- and also another shares of this company for Rs. 24,80,000/- were purchased from his credit balance in his personal account with Punjab National Bank, Birhana Road, Kanpur, Account No. being 1882000102444741.” 4.1 The aforesaid submissions of the assessee was carefully examined and it was found that the Company M/s. R.K.Agro Pvt. Ltd. from which he had taken loan of Rs. 2,50,00,000/- is a company in which the assessee is a Director and deriving Salary income from there. Accordingly, assessee vide order sheet entry dated 31.12.2014 was called upon to furnish Tax audit report of M/s. R.K.Agro Pvt. Ltd alongwith shareholding pattern of the company. In compliance thereto, assessee through his written submissions dated 13.01.2015 furnished the share holding pattern of the company. A perusal of which revealed that assessee’s share was 80.30% of total shares of the company as on 31.03.2011 and 31.03.2012. Meaning thereby, the assessee is substantial share holder in the company M/s. R.K.Agro Pvt Ltd. 4.2 Therefore, Keeping in view the provisions contained in Section 2(22)(e) of the I.T.Act, 1961, assessee vide order sheet entry dated 04.03.2015 was specifically required to show cause why provisions of section 2(22)(e) of the Act be not applied in respect of transactions from M/s. R.K.Agro Pvt. Ltd.. In compliance to aforesaid show cause, assessee could not come out with any kind of substance. So the applicability of Section 2(22)(e) was examined in the background of the facts available on record and in the light of provisions contained in Section 2(22) (e) of the Act. For the sake of clarity provisions of section 2(22)(e) of the Act are extracted below; “any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to Mr. Shyam Sunder Gupta AY 2012-13 a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; But "dividend" does not include - (i) A distribution made in accordance with sub-clause ¢) or sub-clause (d) in respect of any share issued for full cash consideration, where the holde3r of the share is not entitled in the event of liquidation to participate in the surplus assets; (ia) a distribution made in accordance with sub-clause or sub-clause (d) in so far as such distribution is attributable to the capitalized profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, [ and before the 1st day of April, 1965 ];] (ii) Any advance or loan made to a shareholder [or the said concern] by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company; (iii) Any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub clause(e), to the extent to which it is so set off, (iv) Any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956); (v) Any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company)] Explanation 1.The expression “accumulated profits" wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 32st day of March 1948, and before the 1st day of April, 1956. Explanation 2, - The expression “accumulated profits" in sub- clause (a), (b), {d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company upto the date of liquidation, [but shall not, where the liquidation is cons3quent on the compulsory acquisition of its undertaking by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place]. Explanation 3, - for the purposes of this clause,(a) “concern” means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company; A person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern;] 4.3 In the case of the assessee. it was also found during the year he had made sales and purchases from M/s. R.K. Agro Pvt. Lid. The copy of account of the company in the books of assessee was filed during the course proceedings. From careful analysis of the same, it was found that, actually it was not only sale purchase account of the said Company but it was a current account in which besides sales purchases made during the year, there were many other transactions which were not any way connected with assesse’s regular course of his business and such transactions were many in numbers. Therefore, the transactions of Rs. 2,50,00,000/- have undoubtedly found transaction other than ordinary course of business and assessee admittedly stated as discussed in forgoing paras that he had taken loan of Rs. 2,50,00,000/- for purchase of shares. So the nature & purpose of transaction has already been proved and admitted by the assessee. Therefore, by applying provisions of section 2(22) (e) of the Act, the said amount of loan would be treated as Income of the assessee for the year as deemed dividend. 4.4 Further, to ascertain the actual amount of deemed dividend which is to be taxed in the hands of the assessee, i have gone through the details of accumulated profits maintained by M/s. R.K. Agro Pvt. Ltd. As on 31.03.2011, the accumulated profits were at Rs.62,31,452/- and during the FY 2011-12, the company has added profits of Rs. 19,88,402/- in reserve and surplus. Therefore, to compute correct deemed dividend in the hands of assessee, the profits earned by M/s R.K. Agro Pvt. Ltd. upto the month of Sept 2011 would also be taken into account. Further, it was gathered from till 1 5h Sept 2011, the assessee had paid advance tax of Rs.3,75,000,/-. As per rules, corporate assessee has to pay advance tax on 45°o of total income for the year. Therefore by taking Rs.3,75,000/- as tax paid by the company on income of Rs. 8,33,300/-, the total accumulated profits with the company upto the month of September 2011 were at Rs.70,64,782/- (Rs.62,31,452/- + Rs. 8 33,330). Since the amount of loan received by the assessee is higher than that of accumulated profits so the loan amount to the extent of accumulated: profits would be taxed as deemed dividend in the hands of the assessee. Therefore, a sum of Rs.70,64,782/- is treated as Income of the assessee for the year as income from other sources. (Addition : Rs.70,64,782/-) The assessee’s submission as under: The assessee is a Director of the company M/s. R.K. Agro Oils Pvt. Ltd.. The AO has applied the provisions of section 2(22)(e) of the I.T. Act, 1961. The assessee runs his separate business under the name and style of M/s. R.K. Agro Enterprises as sole proprietor. The regular business transactions have been carried on between M/s. R.K. Agro Enterprises and M/s. R.K. Agro Oils Pvt. Ltd.. The same would be visible from the copy of account of both the concerns appearing in the books of each other. The assessee had made investment in shares of M/s Ganpati Edibles P. Ltd., amounting to Rs. 3,59,80,000/-. The aforesaid investment was made by him out of his internal accruals. The AO on examining the details of the investments made by the assessee noticed that the assessee had received funds from Messrs R.K. Agro Pvt. Ltd., a company in which the assessee was a substantial shareholder. The AO applying the provisions of section 2(22)(e) held that the amounts received from M/s R.K. Agro Pvt. Ltd., by the assessee were all loans which fall under section 2(22)(e) of the Act and, as such, are deemed dividend. The AO while applying the said provision has made the addition of Rs. 70,64,782/- being proportionate to the accumulated profit. The facts of the case are that the assessee has regular business transactions with M/s R.K. Agro Pvt. Ltd. regular transactions of purchase and sales have been carried on between the assessee and M/s R.K. Agro Pvt. Ltd. As per the copy of the accounts filed before the AO,, it would be found that the assessee has + been both purchasing as well as selling agro products to M/s R.K. Agro Pvt. Ltd. It has been repeatedly held by several Hon’ble High Courts that the provisions of section 2(22)(e) are not applicable to regular business transactions. Moreover the opening balance of Rs.39,48,810/- cannot be considered to be the transaction relating to the year under consideration. The AO has not disbelieved these ‘transactions; but, on the contrary, has held that the advances given by the said Company are all loans which, as per provisions of Section 2(22)(e) of the Act, are to be treated as deemed dividend. The explanation furnished by the assessee has not been considered at all. The excess amount, if any, received is towards supply of goods and goods have been supplied against the same. It is a continuous running account. The summery of the account is as under: SUMMARY
PARTICULARS DEBIT CREDIT OPENING 39488410.71 PAYMENT 228166482.00 RECEIVED 132506141.00 PURCHASE 171352081.00 SALES 76903751.00 TOTAL 305070233.00 343346632.70 it may not be out of place to mention that there was an opening balance of Rs.3,94,88,410/- and thereafter regular transactions of purchase and sale on day to day basis had been carried on. The total goods purchased by the assessee i.e. M/s. R.K. Agro Enterprises is Rs.17,13,52,081/- against which payment of Rs.22,81,66,482/- has been made. Further sales to the tune of Rs.7,69,03,751/- has also been made. Thus, there has been regular purchase and sale between the assessee’s proprietorship concern M/s. R.K. Agro Enterprises and M/s. R.K. Agro Oils Pvt. Ltd.. There is no cash payment. The over all position at the end of the year is that of debit of Rs.3,82,76,399/-. It has been held by the several courts, that where regular transactions had been carried on between the assessee and the company, then the provisions of section 2(22)(e) of the Act could not be applicable. The AO does not dispute that regular trading transactions have been carried on between the assessee’s proprietorship concern M/s. R.K. Agro Enterprises and M/s. R.K. Agro Oils Pvt. Ltd. Reference in this connection may be made to the following decisions: Sachidanand Pandit vs. ACIT 19 SOT 213. ITO vs. Larka Brothers 162 Taxmann 170 (Chd.) ACIT vs. Nigam Chawla 28 SOT 503 (Del.) Ashwani Enterprises vs. ACIT 121 TTJ 408 (Chennai) Copies of these decisions are attached. It is, therefore, prayed, that since the provisions of section 2(22)(e) are not applicable to the facts of the case, the addition made be deleted.
Ground no. 4 relates to addition of Rs. 13 26 600/- u/s 41 1 of the Income Tax Act, 1961 The AO while dealing with the issue has held as under: 5. Further, from Schedule “A” of balance sheet relating to sundry creditors, it was seen that assessee has shown total creditors of Rs. 21,18 87,949/-. Accordingly, assessee vide notice u/s 142(1) dated 05.05.2014 was required to furnish details and date wise confirmed copy of account of said sundry creditors. In response, the assessee furnished required details which were examined and it was found that for a creditor namely M/s. Scrap tin enterprises, against which a sum of Rs. 13,26,600/- was shown payable, no confirmation was filed by the assessee. Accordingly, assessee vide order sheet entry dated 31.12.2014 was specifically required to explain nature & business transaction with said company in the past. In compliance, assessee through his written submissions dated 13.01.2015 enter alia submitted his explanation which, is reproduced as under, “that copy of account of scrap tin enterprises is being filed. The amount appearing as credit is an old balance brought forward from the preceding year. This amount is against the purchases made comply tons for filling oils for the said party in 2007-08 and not in any case is related to the cash credit. The copy of the account in which purchase were made is also being enclosed herewith.” Accept above submission, he could not furnish any confirmation, purchase bills of tins etc. Therefore, upon the submissions/explanation, the undersigned has made an enquiry in this regard through Shri Vikas Chand Gupta, Inspector of this office. The Inspector of Income tax visited the premises of M/s. Scraptin Enterprises and met the owner of said Firm and enquired about any business transaction with M/s. R.K. Agro Enterprises. The firm was required to confirm the said outstanding amount shown by the assessee M/s R.K.Agro Enterprises or Mr. Shyam Sundar Gupta. In response, the said firm categorically denied to have any transaction with the assessee firm in the year under consideration and in past also. M/s Scrap tin Enterprises also stated that no such amount is due from assessee to it. In this regard a certificate was also obtained from Mss. Scraptin Enterprises and has been placed on record. 5.1 Further, during the course of hearing on 24.03.2015, attention of A.R. s drawn towards the facts & certificate given by the said firm and was required fo show cause why liability against M/s Scraptin which is no longer existing be not treated as income u/s 41(1) of the Act. In response, assessee vide written submissions dated 25.03.2015 admitted that the said liability may be treated as income for the year by giving following submission; “Regarding to show cause as to why the liabilities of Rs. 13,26,600/-, appearing in the Balance Sheet to be paid to M/s. Scraptin Enterprises, Kanpur, it is submitted that no doubt the cessation of liability is liable to be taxed u/s 41(1) of the I.T. Act, 1961, but the matter is still remains for proper consideration that the assessee is bound morally and following the social admasphier for carrying out the business, to carry such liabi8lity which are acceptable in future on moral ground. Though the liability of the assessee ceases after denial of the person concern become taxable yet the assessee is not in default on moral ground. In spite of all this above the matter may be decided on merit and in accordance with law.” Therefore, after discussion as above, nothing remained to explain that the liability shown by the assessee in respect of M/s. Scraptin Enterprises amounting to Rs. 13,26,600/- is found bogus liability which is not payable by him. Hence, the same would be added to the total income of the assessee u/s 41(1) of the Act as cessation of liability. Since, the assessee has furnished inaccurate particulars of his income and concealed his income, penalty proceedings u/s 271(1)(C ) of the Act are being initiated separately. (Addition: Rs. 13,26,600/-) The assessee’s submission as under: The AO has held that the balance of Rs. 13,26,600/- being amount brought forward from earlier years in the name M/s Scraptin Enterprises, Kanpur has ceased to be payable as per the confirmation obtained by the AO from the said party. However, the assessee has claimed the same as payable, thus as far as the assessee is concerned, the liability has not ceased to exist. The liability being brought forward from earlier years is payable, cannot be treated to have ceased for year under consideration. The AO has made the addition on the sole premise that the person to whom the amount of Rs.13,26,600/- is to be paid, has denied the payment and has also intimated to the AO that there is no outstanding payment. Be it may, as far as the assessee is concerned, the said amount is payable by the assessee to the said concern, it has not ceased to be a liability. It is immaterial as to what treatment has been given by the third party in its books of account. The liability is enforceable and is payable. Of late, it has been held by the Gujarat High Court; that if the identity of the party is available and transactions have taken place, then the liability would not cease to exist. The addition made be deleted. Copy of the decision of Gujarat High Court is attached. Ground no. 5 & 6 relate to disallowance of Rs 10,00,000/- packing expenses: The AO while dealing with the issue has held as under: 6. It was further seen from the profit & loss account, that a sum of Rs. 53,58,979/- had been debited under the head ‘packing material consumed’. Accordingly, assessee vide notice u/s 142(1) dated 05.05.2014 was required to furnish details of aforesaid claimed expenditure. The required details were filed which were examined. From the details, it was found that out of aforesaid expenditure, purchase to the extent of Rs. 19,27,800/- being ‘unregistered Tin purchases’ were made in cash. Therefore, assessee was asked to furnish details of said cash purchases and details of parties also. In response, assessee submitted as follows; “That in so for as the cash purchases of packing material is concerned, it is submitted that on exceptional circumstances the business man is bound to purchase the old material from the open market on cash basis. The purchases have been made from open market and not from any manufacturing concern or established firm or company. So the matter under consideration may be considered keeping in mew the above circumstances and decide the issue on merit.” Further, during the course of examination of books of account, bills & vouchers, assessee could not furnish any evidence of making cash purchases of said packing material in the shape of cash vouchers etc. and same was pointed out to the A.R. as well as accountant of the assessee Shri Prakash Gupta. But they could not come out with the reason why said purchases have not been backed with any kind of supporting evidence. Therefore, keeping in view the above, and also the discussion made in para 5 above where it has been evidently established that the assessee had inflated bogus purchases by way of debiting cash amount in Packing expenses in earlier year also. | am of the view that genuineness of said cash expenditure is not open for verification. So, the claim cannot be accepted as such. Hence, in totality of facts and looking to the nature of business, a sum of Rs. 10,00,000/- would be disallowed and added to the total income of the assessee which will cover possible leakage in the claim.
(Addition : Rs. 10,00,000/-) The assessee’s submission as under: The assessee has claimed Rs. 53,58,979/- under the head “packing material consumed”. The details were furnished. No defects were found in the details filed. The AO has not pointed out any specific defects also. The expenditure has been incurred both in cash and by cheque. That the assessee has purchased packing material from different parties in cash out of which Rs. 10,00,000/- have been disallowed without proper verification that the assessee has paid purchase tax to the U.P. Government @ 5% as per law. The following purchases in cash were made: a) Tikli for Rs. 66,910/- b) Old empty tins Rs. 19.27.800/- Total Rs. 19.94.410/- On this purchases tax @ 5% has been deposited with the U.P. Government. Therefore the purchases are certified and no addition on this account should have been made. The AO noticed that certain purchases were made in cash. The AO disallowed a sum of Rs. 10,00,000/- on presumptive to ad hoc basis to cover up possible leakages if any in the expenses claimed. The above addition has been made on adhoc basis simply for the reason that some purchases have been made in cash. It is submitted, that complete details of the purchases were furnished. The AO has not pointed out any defect in the same. There is no bar in making cash purchases. The AO has disallowed Rs.10,00,000/- to cover up the possible leakages. The books of account have been tax audited, and it has been held, that when the books of account are tax audited, details are furnished, no disallowance can be made on adhoc basis. Reference in this connection may be made to the following decisions: J.J: Enterprises vs Commissioner Of Income-Tax on 14 September, 2001 Equivalent citations: 2002 254 ITR 216 SC Bench: S Bharucha, y Sabharwal ORDER
1. Leave granted. The Tribunal had declined to make a reference, at the instance of the Revenue, of the following question: "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was legally correct in upholding the deletion of Rs. 19, 66, 550/instead of setting aside the same to the file of the Assessing Officer for the re-examination and opportunity to the assessee?" In its principal order, the Tribunal had concluded that the addition was unsustainable because it had been made ‘on the basis of pure guess work" The Revenue moved the High Court under Section 256(2) of the Income-tax Act 1961, and the High Court called for a reference on the basis that the question was a question of law. We are unable to agree with the High Court. In the first place, the Tribunal has held that the addition had been made on the basis of pure guess work and this is a matter of fact in respect of which the Tribunal’s conclusion is final. In the second place, there was no question of remanding the matter to the Assessing Officer for re-examination of the same question.
It is not often that we interfere when the High Court calls for a reference under Section 256(2) but when, as here, the question is a pure question of fact, our interference is called for. The appeal is allowed. The order under challenge is set aside. No order as to costs.” Reference in this connection may kindly be made to the decision of Paradise Holidays (Delhi High Court) order dated 28.04.2010 where in it has been held as under: ‘The Assessing Officer has not pointed out any specific defect or discrepancy in the Account Books maintained by the assessee. Admittedly, the assessee had been maintaining regular Books of Accounts, which were duly audited by an independent Chartered Accountant. As noted by CIT(A), the financial results were fully supported by the assessee with vouchers and the Books of Account were complete and correct in all respects. The accounts which are regularly maintained in the course of business and are duly audited, free from any qualification by the auditors, should normally be of business and are duly audited, free from any qualification by the auditors, should normally be taken as correct unless there are adequate reasons to indicate that they are incorrect or unreliable. The onus is upon the Revenue to show that either the books of Accounts maintained by the assessee were incorrect or incomplete or method of accounting adopted by him was such that true profits of the assessee cannot be deduced therefrom. “The question as to whether the accounts produced by the assessee were defective/ incomplete not is a question of fact. The Commissioner of Income tax( Appeals) as well as Income Tax Appellate Tribunal have found that the Accounts maintained by the respondent were neither defective not incomplete. Even the Assessing Officer has not found any fault as such with the system of accounting being followed by the assessee. The Tribunal which is the final fact finding authority has held that considering the nature of the business of the assessee, it was not obligatory to enter into formal agreement with the foreign principal. Hence, non-production of formal agreements with the foreign principals would not render the accounts of the assessee incomplete and would not give justification to the Assessing Officer to reject them under section 145(3) of the Act. Similarly, the explanation give by the Commissioner of Income Tax (Appeals) as well as by the Tribunal, the accounts of the assessee cannot be said to be defective on this ground and, therefore, could not have been rejected. If any particular expense claimed by the assessee remained unverified, the Assessing Officer could have disallowed that particular expense. But, that by itself cannot be a ground for rejection of accounts as a whole under Section 145(3) of the Act. The finding off acts recorded by the IT AT has not been shown to be perverse, and hence cannot be interfered with by this Court. ” In view of the above, the addition made be deleted. Ground no. 7 and 8 relate to addition of Rs. 10,00,000/- on account of freight expenses and valuation of closing stock: The AO while dealing with the issue has held as under: 7. It was also seen from the profit & loss account, that closing stock of Edible Oil had been disclosed at Rs. 4,84,31,121/-. Further, during the course of proceedings, it was found that the closing stock shown by the assessee was valued only by taking purchase rate of commodity. The assessee has not taken overhead expenses such as freight while valuing said commodities. Accordingly, assessee vide order sheet entry dated 04.03.2015 was specifically required to furnish valuation of closing stock with supporting documentary evidence. In response, assessee vide his written submissions dated 25.03.2015 furnished reworking of closing stock valuation by including freight expenses. For the convenience details are depicted in tabulation form; SI Name of Commodity Name of Party Value (Rs.) Freight which should be No included as per assessee. (Rs.) 1 Mustard Oil Ex. UP Purchase 1,85,76,099/- 2,26,546/- 2 Refined R.B. Oil R.K Agro Pvt Ltd and M/s. 2,67,48,563/- No freight Ganpati Edibiles Ltd 3 Refined Palm Oil R.K Agro Pvt Ltd and M/s. 10,94,139/- No freight Ganpati Edibiles Ltd 4 Refind Soyabin Oil R.K Agro Pvt Ltd and M/s. 10,58,320/- No freight Ganpati Edibiles Ltd 5 Glycerin M/s. Kailash Chand Agarwal 9,54,000/- No freight From the analysis of above, it was noticed that on the purchases from M/s. R.K. Agro Pvt Ltd and M/s. Ganpati Edibles Ltd no freight has been paid by the assessee. During the course of hearing, it was pointed out to the AR to explain why assessee has not added freight expenses in said purchases. In response, it was the submission of A.R. that said purchases are on delivery basis and no freight has been paid to them. Further, assessee was required to show the basis of rates applied for freight component but at this score he could not show any evidence that how he reached to such calculation/valuation. It would also be appropriate to mention here that he has applied rate of freight in the range of Rs. 1.20 to Rs. 1.40 per litre in aforesaid valuation. Therefore, the assessee was required to furnish freight bills of said purchases. Here, an amazing fact emerged that no rates were mentioned in bills of delivery. At most of the instances, items were delivered through challans. The said discrepancy was pointed out to the A.R. but he could not explain the reason for the same. Further, it was also seen that during the year under consideration most of purchases of the assessee were from his sister concerns M/s. R.K.Agro Pvt. Ltd. and M/s. Ganpati _Edible Ltd. on which he had admittedly not paid any freight. So the freight expenses at Rs.25,63,403/- debited in the profit & loss account have been found very excessive and not open for verification and there is certainly heavy leakage in the claim. Therefore, keeping in view all facts together, a sum of Rs. 10,00,000/- is disallowed and added to the total income of the assessee for want of vital and genuine supporting documentary evidence.
(Disallowance: Rs. 10,00,000/-)
The assessee’s submission as under:
The AO has held that the closing stock should ought to have been valued on the basis of cost plus expenses, whereas the assessee has valued the closing stock on purchase price only.. It was explained that there had been no change in the method of accounting regularly followed by the assessee year after year and the stocks have been valued as it was valued in the earlier years. The AO also noted that in purchases made from sister concern, no freight has been paid. It was explained during the assessment proceedings that the stock of both was in the same premises hence for paying freight from sister concern does not question arise. The AO concluded that the claim of freight expenses of Rs. 25,63,403/- debited under the head “freight expenses” was excessive and the closing stock should have been valued with freight. The AO has made an addition of Rs. 10,00,000/- on ad hoc basis to cover up leakages.
The AO has failed to appreciate that the godown of both the concerns is in the same premise i.e. to say different godown in a large premises. On purchases made from sister concerns no freight has been made because the goods have been transferred from one godown to other godown. Since the assessee has not paid any freight on the purchases made from its sister concerns, question of adding freight in closing stock does not arise. Moreover, the AO without verifying the fact has made the aforesaid amount on adhoc basis to cover the possible leakages. In any case, the credit for Rs.10,00,000/- if sustained, the same is to be allowed in subsequent year. Likewise, the opening stock for the year under consideration should also be adjusted to give a correct picture. The addition made may kindly be deleted. Ground no. 10 & 11 relates to addition of Rs. 2 23 561/under section 14A of the Act 1961: The AO while dealing with the issue has held as under: 8. Further, it was found that the assessee has made investments in quoted and unquoted shares of different companies amounting to Rs.3,66,30,000/- and from the income from business, he had deducted an amount of Rs.6,10,762/- as interest on borrowed capital funds. Accordingly, assessee through notice u/s 142(1) of the Act, was called upon to justify why disallowances u/s 14A be not made in the case, in response there to, assessee submitted that the assessee had not debited any expense in relation to income which does not formed part of total income under the income tax act, 1961 as per the provisions of section 14A of the Act. The submissions of assessee were examined the facts available on record and it was found that the assessee had paid interest on borrowed funds and this interest was not for the earning any particular income or receipt. Further, to separate the borrowed funds only for the sake of nomenclature does not amount that the investment had been made from the funds other than that business and there is no mixed fund flow. Therefore, the contention of the assessee is not acceptable as it is difficult to accept the hypothesis that interest paid during the year was not attributable investments in share and no expenditure was incurred in connection with the management of investment portfolio which does not formed part of taxable income. It is also pertinent to mention here that assessee himself has admitted for none maintenance of personal financial affairs and he has not been able to substantiate that the funds claimed to be utilized for none business/investment purposes were actually incurred for the same. Now the question arises whether disallowances can be made in the case of assessee as she has not earned any exempt income during the year. To examine the issue I have carefully gone through the previsions of the section 14A of the Act and also Rule 8D of Income tax Rules and other specific provisions regarding allowability of expenses. From the analysis, it was found that the expenditure which is relatable to earning of income is to be only allowed as expenditure and it therefore follows that the expenses which are relatable to the earning of exempt income have to be considered for disallowance irrespective of the fact whether any such income has been earned during the financial year or not. Further, Central Board of Direct taxes, in exercise of its power under section 119 of the Act has also clarified the matter vide circular no.5/2014 dated 11.02.2014 that Rule 8D read with 14A of the Act provides for disallowance of the expenditure even were tax payer in a particular year has not earned any income. The issue of exempt income for the year has been also clarified by the above mention circular as under, “... the above position is further clarified by the usage of term ‘includible’ in the heading to section 14A of the Act and also the heading of Rule-8D of I. T.Rules 1962 which indicated that it is not necessary that exempt income should necessarily be included in a particular year’s income, for disallowance to be triggered. Also, section 14A of the Act does not use the word ‘income of the year’ but “Income under the Act.” This also indicated that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. In the circumstances as discussed above, it is held that there was a mixed fund flow in the case of the assessee during the year under consideration and as long as there is mixed fund flow, application of rule 8D is mandatory and disallowance has to be made in accordance with the said rule. With regard to the interest on such investments, the amount would be computed as per provisions of Section 14A read with Rule 8D (2) (ii), the details of which are as under.
The amount of expenditure by way of interest other than the amount of interest included in the amount of expenditure directly relating to income which does not form part of total income ;A-Rs.6,10,764/-.
2. The average of value of investment, income from which does not form part of the total income as appearing in the Balance Sheet of the assessee on the first day and the last day of the previous year-B(Rs.65,00,000/+ Rs.3,66, 30,000/- 12)= Rs.2,48,15,000/- 3. The average of total assets as appearing in the Balance Sheet of the assessee on the first Day and the last day of the previous year; (Rs.90563657+Rs.214124609/2)C-Rs. 15, 23, 44, 133/-. The total amount of expenditure by way of interest during the previous year, which is not directly attributable to any particular income or receipt as per Rule 8D(2)(ii) would be as under: Ax B = 6.10.764x 2,48, 15,000 = Rs.99,486/C 15, 23, 44,133 Further, taking % % of investments as per Rule 8D(2)(iii), the expenditure on average investment comes to Rs. 1,24,075/which would be disallowed also. Hence, the total disallowance as per provisions of Section 14-A would be Rs. 99, 486/-+l,24,075/-=Rs, 2,23,561/- which is added to the total income of the assessee. (Disallowance (Rs.2,23,561/-) The assessee’s submission as under: Rs. 2,23,561/- has been disallowed by applying the provisions of Section 14-A. The disallowance as well as computation made are both erroneous and misconceived. In para-8 of the assessment order the AO has dealt with the amount of Rs.6,10,762/being interest paid on borrowed funds. The AO has wrongly invoked the section 14A of the I.T. Act, 1961 without proper considering the facts. The assessee took loan in earlier years and invested it in the books of the proprietorship business named M/s. R.K. Enterprises. The entries of the relevant year were explained by filing copies of account duly confirmed but not properly discussed in para-8 of the assessment order. “Sec.14-A” deals with the expenditure incurred by the assessee and relation to the income which is not formed part of the total income. Here in the instant case the loan taken in earlier year was invested in business activities in that year and could not repaid, on which the assessee has paid interest. On this fact it can not be said that the assessee has claimed any expenditure in relation to the amount not formed part of the business activities. Thus the AO has arbitrarily invoked the provisions. What has been calculated and working made in para-8 of the assessment order has not been supplied to the assessee for rebuttal. Therefore the disallowance to the extent of Rs.2,23,561/- is unjust, illegal and arbitrary. While making the disallowance, the AO has not recorded his satisfaction as contemplated in section 14A of the Act. The AO has to record first his satisfaction regarding the claim of the assessee that the assessee has not incurred any expenditure to earn tax free income. Once if he records his satisfaction, then only he can proceed further and compute the disallowance under section 14A. In absence of satisfaction being recorded, no disallowance under section 14A cannot be made. Reference in this connection be made to the decision of Delhi High Court in the case of Taikisha Engineering India Ltd. Copy of the decision is attached. Of late, the Income-tax Appellate Tribunal, Lucknow has also followed the said decision. In view of the above, the disallowance made under section 14A of the Act may kindly be deleted.
Page 17 of 17 In view of the above submission, the additions / disallowances made by the AO be deleted and the appeal filed by the assessee may kindly be allowed.”
We have considered the submissions of the parties. We are in agreement with the Ld. Sr. Dr. that the Ld. CIT(A) has considered the submissions of the assessee. Ld. CIT(A) has recorded findings on fact on each issue. The assessee was required to rebut the same. But the assessee chose not to make any rebuttal and remained absent from the proceedings. In the absence of specific rebuttal by the assessee by way of supporting evidences, we do not see any reason to disturb the finding of Ld. CIT(A). Moreover, despite having given multiple opportunities, the assessee failed to attend the proceedings, that goes to demonstrate that the assessee is not interested for prosecuting the present appeal. We, therefore, dismiss the grounds of appeal of the assessee.
In the result, the appeal of the assessee is dismissed.
Order pronounced in the open Court on 06/05/2025.