UP GOVERNMENT EMPLOYEES WELFARE,LUCKNOW vs. ACIT, NFAC, DELHI, DELHI

or raise any new ground of appeal during the pendency of appeal.” A.Y. 2017-18

1. The Ld. Commissioner of Income-tax (Appeal) has erred in law and on facts in passing the order, which is unlawful, unjustified and against the principles of natural justice. The Ld. Commissioner of Income-tax (Appeal) has erred in law and on facts in passing the order without giving adequate opportunity of being heard The Ld. Commissioner of Income-tax (Appeal) has erred in law and on facts and Confirm the penalty u/s 270A of Rs 2,31,28,015/- The Ld. Commissioner of Income-tax (Appeals) has erred in law and on facts in passing assessment order which is contrary to the facts and law.”

2. Since, the two penalty orders emanate out of the assessment order, the appeal in is being taken up first for disposal. The facts of the case are that the case was selected for scrutiny to verify the quantitative details of principle items of goods traded or raw material as well as finished goods and to verify the cash deposit during demonetization period. The assessee is a society registered under the Societies Registration Act through its Secretaries with the main ITA Nos.143 & 746/LKW/2024 A.Y. 2017-18 U.P. Government Employees Welfare object of carrying out, “welfare of employees of State Government” and any other charitable and benevolent object which in the opinion of the Corporation was useful to the employees. It derived income from 161 depots operated by UPGEWC staff and 20 family bazars operated by private partnership in different districts of Uttar Pradesh to sell FMCG and other goods of daily usage to State Government employees on VAT exempted price/discounted price with the object of welfare. Apart from this, as per instructions / orders of the assessee purchases wheat and paddy directly from farmers to provide Minimum Support Price (MSP). It also supplies wheat and rice to different jails in Uttar Pradesh for prisoners. UPGEWC also purchases different goods on behalf of the U.P. State Government Departments and supplies it them. Every depot is an individual cost centre and maintains its own books of accounts and operates its own bank account. They make purchases and sales of goods from the money provided by the head office with specified rules and regulations, which are defined by the head office from time to time and provide trade account summary on monthly basis to the head office, on the basis of which head office maintains its financials.

3. The ld. AO records that, as per the data available with the Department in F.Y. 2016-17, a total amount of Rs. 50,33,97,046/- was deposited by the assessee during the demonetization period, in 70 bank accounts spread across Uttar Pradesh. The assessee was asked to explain these deposits and furnish details. However, due to the volume of the organization and its way of functioning, the assessee was unable to make proper compliance to explain the cash deposits that were made during the demonetization period. It explained its difficulties by pointing out that it had sent follow up letter to all the depots and family bazars but not received replies and therefore, was unable to furnish the details. It furnished copies of purchase ledgers, discount, salary, allowance benefits and wages paid during the year, VAT paid, mandi & 746/LKW/2024 A.Y. 2017-18 U.P. Government Employees Welfare tax paid, handling charges and verification charges. For verification its books of accounts were called for but it was unable to produce its complete set of books before the ld. AO making it difficult for him to verify all the expenses and purchases. It repeatedly requested for adjournments in view of the size of its organization and complexity of organizational structure. In view of the above, the matter was referred for special audit under section 142(2)(A) of the Income Tax Act, 1961 and a special audit report was received by the ld. AO on 23.02.2021. In the special audit report, the following points were highlighted; i. The assessee had received Rs. 10,94,58,479/- as unsecured loans from various parties, but no details regarding loan disbursement letters from the parties were provided to the assessee. Therefore, it could not be ascertained whether interest was payable to the above parties or not and what was the periodicity of repayment of loan. Since, the assessee had not furnished the evidences relating to unsecured loans from the U.P. Government and UPSFECC, it could not be ascertained as to whether any interest was payable to the above parties. Hence, an interest amount of Rs. 70,18,853/- were disallowed on this account. ii. The special audit pointed out that other liabilities amounting to Rs. 1,29,22,758/-, vehicle advances of Rs. 1,50,31,864/- and security payable of Rs. 2,55,85,053/- had been outstanding for over ten years. During the said period, nobody had claimed the amount nor had anything been paid by the corporation. Therefore, the ld. AO asked the assessee to show cause why these liabilities should not be added back to its total income and in the absence of reply, he made an addition of Rs. 5,35,39,675/- on this account. iii. As per the special audit, the Corporation at its various depots received cash which is deposited in the bank, amounting to Rs. 49,46,18,046/- during the demonetization period. This included old currency which was received in the depots, on the basis of letter dated 15.11.2016 issued by Sh. Prakash Gupta, Executive Director on the basis ITA Nos.143 & 746/LKW/2024 A.Y. 2017-18 U.P. Government Employees Welfare of Government Notification No. S.O 3408 (E), dated 8.11.2016 issued by Department of Economic Affairs, Ministry of Finance. By virtue of this letter, the depots and family bazars had been permitted to accept old currency notes of rupees five hundred and one thousand. The ld. AO opined that the said notification was applicable to consumer cooperative stores operated under the authorization of State or Central Governments but the assessee corporation was not a consumer cooperative store operated under the authorization of the State Government on account of the fact that it was neither open to general public nor registered under Cooperative Societies Act, 1912. As the quantum of old currency notes received and deposited by the depots of the corporation in various banks could not be ascertained during special audit, the ld. AO opined that the receipt of cash in old currency during the demonetization period was violative of the provisions of Notification No. S.O. 3408(E) as family bazars were separated entities not coming under the umbrella of the Corporation and therefore, the assessee was asked to explain as to why the above receipt of cash should not be added as unexplained cash credit under section 68 of the Act and to justify the same with supportive documents. However, no response was received and therefore, the ld. AO added 30 % of the amount of Rs. 49,46,18,046/- i.e. Rs.14,83,85,414/- on estimate basis, as unexplained cash credit under section 68 of the Act, 1961. He also brought the same to tax under section 115BBE. iv. The ld. AO noted from the audit report that sundry creditors amounting to Rs. 37,21,75,184/-, including opening credit balances of suppliers that were continuing for past many years and no transactions had occurred in the ledger of such suppliers during the year under audit. Since, the assessee was not able to provide the details with regard to these creditors such as postal addresses account statements, etc., the ld. AO made an estimated disallowance of 10% of the outstanding creditor balance and added the same back to the income of the assessee. & 746/LKW/2024 A.Y. 2017-18 U.P. Government Employees Welfare v. The special audit pointed out that an amount of Rs. 19,50,250/- was claimed as expenses on parties named as M.M. advertising and Adore advertising private limited. However, no statement of account was furnished to the audit team. Since the assessee failed to produce the ledger copies of the above and statement of accounts from the said parties, the ld. AO added the same back to the income of the assessee. vi. The special audit pointed out that the assessee had a TAN for its head office for which TDS returns were filed from time to time. However, TDS compliances at the depots were done by the depots separately on their own TANs. The details of TAN wise reconciliation were not provided to special audit and therefore, the special audit was unable to comment about the deductibility of TDS at the depots and timely compliance thereon. In view of this, the assessee was asked to furnish the relevant details of amounts paid and tax deducted at source and produce copies of challans / evidence of deposits of tax deducted at source into Central Government accounts. However, the assessee failed to comply and therefore, the ld. AO estimated that tax had not been deducted on atleast Rs.5,50,63,460/- rupees worth of payments. Therefore, he made a disallowance of 30% of the same accordingly added back a sum of Rs. 1,65,19,038/-. vii. The ld. AO also observed that there was delayed payment of Employees contribution to Provident Fund amounting to Rs. 1,62,63,564/- as per the provisions of section 2(24)(x) r.w.s. 36(1)(va). Accordingly, he made an addition of Rs. 1,62,63,564/- on this account. Before making such additions, the ld. AO issued show cause notice to the assessee and the assessee requested for a video conference but despite seeking adjournment on the first occasion, the assessee failed to comply even during the video conference and therefore, the ld. AO made the additions as above and computed the loss of the asssessee at Rs. 4,58,29,335/-. The total income to be taxed as per section 115BBE was determined at Rs.14,83,85,414/-. & 746/LKW/2024 A.Y. 2017-18 U.P. Government Employees Welfare 4. Aggrieved by these additions, the assessee went in appeal to the NFAC. The assessee submitted a statement of facts alongwith its grounds of appeal s which have been reproduced by the ld. CIT(A) in his appeal order. However, the ld. CIT(A) observed that during the appeal proceedings, the assessee had been given three opportunities of replying and on one occasion had even sought an adjournment but had not actually made any compliance. Therefore, he decided to pass the appeal order ex parte. Going through and reproducing portions of the assessment order in his appeal, the ld. CIT(A) pointed out that during the course of appellate proceedings, the assessee had not responded to his notices and had not furnished any evidence to prove anything to the contrary to the finding of the ld. AO. Since, the assessee had not responded to the appeal notices, it had not discharged its onus to substantiate its claim and therefore, merely making claims in grounds of appeal were not sufficient. The genuineness of the claims had to be proved by providing supporting documentary evidences for substantiation. Since, they were not provided, the ld. CIT (A) dismissed the appeal of the assessee.

5. Shortly after the passing of the assessment order, the assesee was also issued a show cause notice for the levy of penalty under section 271AAC(1) of the Income Tax Act, 1961, in respect to the addition of Rs. 14,83,85,414/- added to the income of the assessee on estimate basis as unexplained cash credit under section 68 of the Act. The ld. AO records that despite issue of notices, the assessee did not respond to the notices and was non-responsive. Therefore, quoting from the provisions of section 271AAC(1), the ld. AO on 15.03.2022, levied a penalty of Rs.1,14,62,773/- @ 10% of the unexplained cash credit under section 68 of the Act.

6. The assessee went in appeal against this levy of penalty also but hereto the ld. CIT(A) records that it did not make any compliance before him. Accordingly, since he had already confirmed the addition of Rs. 14,83,85,414/- under section 68 of the & 746/LKW/2024 A.Y. 2017-18 U.P. Government Employees Welfare Act, in the absence of any explanation or evidence, he also confirmed the levy of penalty under section 271AAC(1) amounting to Rs.1,14,62,773/-.

7. Following the passing of the order under section 143(3), the ld. AO also initiated penalty proceedings under section 270A of the Income Tax Act on account of misc. expenses and other provisions mentioned in his order amounting to Rs.13,07,53,673/- and a show cause notice under section 274 r.w.s. 270A of the Act was issued for under reporting of income. However, the assessee did not make a response to the ld. AO and therefore, after service of notice through speed post and registered email ID, the ld. AO to save the limitation, decided to levy a penalty of Rs.2,31,28,015/- being 50% of the tax on the under reported income.

8. Aggrieved with the same, the assessee filed an appeal with the ld. CIT(A), NFAC. The appeal order of the ld. CIT(A) is silent on whether he issued notices to the assessee or not during the hearing of this appeal but he records the fact that he had already decided the quantum appeal against the appellant with regard to the aforesaid additions and therefore, he confirmed the penalty @ 2,31,28,015/-.

9. Aggrieved with all these dismissals of its appeals in a summary manner by the ld. CIT(A), the assessee has come in appeal before us. When the appeal was called out for hearing, there was no one present on behalf of the assesee. The Department was represented by Sh. Manu Chaurasia, CIT DR, who assisted us during the course of appeal. It is seen that during the course of filing the appeal, the assessee had submitted a detailed statement of facts before the ld. CIT(A)in which it had been pointed out as below:- i. The ld. AO had made an addition of an outstanding amount shown in the balance- sheet of Rs. 13,07,53,673/- when these balance-sheet items had already been assessed by the ld. AOs in preceding previous years.

& 746/LKW/2024 A.Y. 2017-18 U.P. Government Employees Welfare ii. The ld. AO had added 30% of Rs.49,46,18,046/- as unexplained cash credit when these amounts represented cash sales which had duly been declared in the profit and loss account and in the ITR. iii. The ld. AO had made an addition to liabilities outstanding of Rs. 5,35,39,675/- without there being any change in the status of liabilities. When these figures were lying in the balance-sheet, it could not be presumed by the ld. AO that the same were not returnable. iv. That the ld. AO erred in disallowing total sundry creditors when the demanded data had been provided to him and he had ignored that data and pasted the observations of the special auditor in the assessment order. It was submitted in the said statement of fact that the interpretation of the Gazette of India Notification 2653 dated 8.11.2016 is different from the interpretation and explanation given in para no. 4.3 of the assessment order. v. It was submitted that since the cash that was deposited in the bank account were the actual cash sales, therefore, there could no additions under section 68 in respect of those matters. It was further submitted that the ld. AO had erred in not calling for third party confirmation from the banks relating to deposit of old and new currency and the ld. AO could only make the addition under section 68 if he had a reason to believe that the entries were not genuine. However, the ld. AO had not made any such enquiry and therefore, section 68 could not apply to the facts of the case. vi. It was further submitted that there was no TDS non-compliance. All TDS have been deposited within the due date and the TDS returns had been filed. vii. The addition of Rs. 1,62,63,564/- on account of delay in depositing employees contribution to ESI / Provident Fund were also questioned stating that the assessee had made the deposits before the due date of filing the return and therefore, should get the benefit of section 43B of the Income Tax Act. & 746/LKW/2024 A.Y. 2017-18 U.P. Government Employees Welfare 10. We have duly considered the facts and circumstances of the case. It is fairly evident that the assessee has not made proper compliance before the ld. AO so as to satisfy the ld. AO that the amounts that had been deposited in its bank accounts were as a result of sales made in cash and therefore explained deposits in the bank account. We observe that the assessee was given permission by its controlling authorities to accept specified bank notes, in view of the Government notification allowing consumer cooperative stores to accept such notes. We further observe that a mis-interpretation of entitlements as to whether specified bank notes could be accepted or not by the assessee, may invite penal action of a different nature, but would not fundamentally change the nature of the cash deposits, if the deposits were made on account of sales. We notice that a special audit was conducted of the assessee and its units. The ld. AO has not brought any adverse communication on record from the special auditor to the extent that the sales made by the assessee were not made or that the assessee did not have the stocks which it claimed to have sold. In these circumstances, in the absence of sale being disproved, the cash deposits made in the bank account on account of such sale may not attract the provisions of section 68. Furthermore, violation of the GOI guidelines for acceptance of SBNs would not convert the receipts into unexplained credits u/s 68, unless they were in fact, unexplained.