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Income Tax Appellate Tribunal, MUMBAI BENCHES “B”, MUMBAI
Before: Shri Rajesh Kumar & Shri Ram Lal Negi
O R D E R Per Rajesh Kumar, Accountant Member
The aforesaid appeals have been filed by the assessee against a common order of the CIT(A)-37, Mumbai, dated 24.02.2014, which in turn arises out of the assessment order passed u/s 143(3) r.w.s 153A of the I.T.
Act, 1961 for A.Ys. 2008-09 and 2009-10.
The issue raised in Grounds of appeal nos 1 & 2 is against the order of the CIT(A) in confirming the addition of ` 11,31,000/- made by the Assessing Officer on account of unexplained cash credits being refund in cash, of advance paid by cheques to two farmers for purchase of agricultural land on non-materialization of purchase deal.
The facts in brief are that a search action u/s. 132 of the Act was carried out on Sopariwala group on 29.04.2008, of which assessee was one of the group companies and, accordingly, notice u/s. 153A of the Act was issued on the assessee for A.Ys. 2003-04 to 2009-10 on 29.01.2010. The assessee complied with the notice while filing return of income for the current year on 04.03.2010, declaring income of ` 1,15,45,250/- During the course of assessment proceedings, the Assessing Officer asked the assessee to furnish information about receipt of cash exceeding ` 20,000/- specifically with regard to the refund of advance payment made for purchase of land.
The assessee could not furnish any details/evidence to prove the receipt of cash refund and, accordingly, the cash received from Shri Mehmudbeg Umergeb Mirza of ` 5,51,000 and Shri Amirbeg Umergeb Mirza of ` 5,80,000/- was held to be unexplained cash credit u/s. 68 and added to the income of the assessee.
In the appellate proceedings, the learned CIT(A) also dismissed the appeal of the assessee after calling for a remand report from the Assessing Officer on various evidences filed by the assessee during the appellate proceedings in the form of confirmation letters from the parties who refunded the advance, their affidavits, etc. The Assessing Officer filed a remand report & 2942/Mum/2014 Borsad Tobacco Co. Pvt. Ltd.
before the CIT(A) by stating that the said refund of advances were not genuine and, thus, the CIT(A) dismissed the appeal of the assessee by observing as under:
5.9.2. I have examined the submission of the appellant carefully. The AO made an addition of Rs. 11,31,000/- in respect of cash receipts received by the appellant during the current year. The appellant explained that the cash was. received from Umerbeg Mirza of Rs. 5,51,000/- and Shri Amirbeg Umerbegi Mirza, of Rs. 5,80,000/-it was explained that the same were refund of advance given by-way of cheque in respect of proposed purchase of land. This deal did not materialize and hence the cash was refunded by these two persons. Affidavits in reply of these two parties have been filed as evidence that these were the persons who had refunded the advance received. The AO has merely rejected the submission by holding that the copies of the agreement in Gujarati did not indicate that these amounts were refunded to the appellant. It is apparent that the AO has misunderstood the submission of the appellant. The appellant has explained that these agreements are in respect of land deal that fructified with these two persons. The other advance was refunded since the corresponding land deal did not fructify. There was no bar on appellant producing the two persons before the AO in the assessment proceedings or remand proceedings. Similarly, there was no bar on the assessing officer in making inquiries with Bank of Baroda as he deemed fit. However, I do find it strange that cash deposits were made on 14 dates between a short period of 26-06-07 to 17-7-07 of amounts each less than Rs 50,000/-. It is also strange that both the parties chose the same 14 dates to pay cash of less than Rs 50,000/- on each occasion. The agreements entered in to and the land deal that did not materialize refer to same land survey no. During the course of search Shri Parvez Modi, General Manager at Borsad furnished the ledger accounts in the appellant's books of the parties from whom cash was received. He however stated that the transaction in respect of these two parties may be known to the directors. Shri Faisal Younus Fazlani , in his statement recorded on 22-5-2008 reiterated that these cash deposits are in respect of cancellation of the land deals, and have been duly recorded in the books of the appellant company. I do not find the explanation of appellant satisfactory. The land in respect of which it is claimed that refund is received has the same survey no. as the land which was purchased as per appellant's submission. Since the appellant paid the two parties by cheque, it is clear that they had bank accounts. Why did not they return the amount by way of cheque? Why was cash deposited on 14 dates each of amount less than Rs.50,000/- which is the limit for which insist on PAN? After carefully considering the documents on record and the by assessing officer and also keeping in view the explanation furnished by the appellant, the amount of Rs. 11,31,000/- deposited in cash is treated as unexplained cash credit u/s. 68 of the I.T.Act. This addition is upheld and the ground of appeal no.8 is dismissed."
After hearing both the parties and perusal of the material on record, we observe that in this case, assessee has entered into purchase agreements for which the assessee has paid advance to two persons viz. Shri Mehmudbeg Umergeb Mirza of ` 5,51,000 and Shri Amirbeg Umergeb Mirza of ` 5,80,000/- As per the facts on record, we observe that the land deal did not materialize and the said money was refunded on various dates by depositing amounts in cash of less than ` 50,000/- in the assessee’s bank account. The case of the Revenue is based upon the fact that the assessee has paid advance for the purchase of land, which beard the same survey number from two parties from whom advances were received. The case of the Revenue is simply on the basis that refund of advance was made in cash on various date and deposited by the parties in the bank account of the assessee. We have also perused the balance sheet of the assessee as on 31.03.2008 and observe that the advances given to Shri Mehmudbeg Umergeb Mirza of ` 5,51,000/- and Shri Amirbeg Umergeb Mirza of ` 5,80,000/- were outstanding as on 31.03.2007 and were nil on the corresponding date in the current previous year i.e. 31.03.2008. We also observe from the ledger account of these two parties as appearing in the books of the assessee that the advances were refunded on various dates due to cancellation of the purchase agreements.
Thus, the case of the Revenue is totally based upon suspicion and presumptions whereas the assessee has proved by way of evidence in the form of copy of balance sheet, ledger account, confirmations/affidavits from the parties who made the refunds. We are, therefore, not inclined to accept the conclusion of the learned CIT(A) and, accordingly, the order of the CIT(A) is set aside and Assessing Officer is directed to delete the addition.
The issue raised in Grounds of appeal no.3 is against the confirmation of addition of ` 2,86,686/- as made by the Assessing Officer for providing food to the employees during the office hours in the Ramzan month, which was claimed as Staff Welfare Expenses.
The facts in brief are that it was found during the course of search that assessee has incurred Ramzan expenses amounting to ` 12,50,000/- out of which ` 2,86,686/- has been booked as expenses under the head staff welfare. According to the Assessing Officer hosting Ramzan party cannot be business expense and, hence, added the same to the income of the assessee by treating the same as personal expenses of the Directors. In the appellate proceedings, the learned CIT(A) dismissed the appeal of the assessee by observing and holding as under:
“5.10.1. It is seen that the assessee group had incurred an expenditure of Rs. 12,50,000/- on Ramzan celebrations out of which an amount of Rs. 2,86,686/- was expenses to the appellant company. There is nothing to indicate that this incurred specifically on the employees of the appellant company. The allocation of expenditure does not necessarily prove that the expenditure is incurred for the business of the appellant company. Each company may have contributed to reimburse and expenditure incurred for the same does not mean that the expenditure is for the purpose of appellant's business. There are no details available as to the number of employees of the appellant company, the number of employees who are Muslims and the reasonableness of the claim of the expenses. From the copy of audited accounts, it is noted that in AY 2008- 09 the total expenses on employees is shown as Rs 73 lakhs. Out of this, salary is Rs 27 lakhs, bonus Rs 5 lakhs and gratuity Rs 1.5 lakhs. As against this, the staff welfare expenses claimed is Rs 18.32 lakhs and staff welfare educational benefit Rs 15.31 lakhs. Under the head festival expenses Nil is shown. In the following assessment year 2009-10, the staff welfare expenses is only Rs 2.84 lakhs. The expenses are clearly way out of proportion of overall expenses and are not reasonable. These expenses are therefore treated as not been incurred for the business of the appellant. Therefore, this ground of appeal no 9 is dismissed.”
8. After hearing both the sides and on perusal of the record, we observe that during the course of search a document was seized which contained details of expenditure incurred under the head Ramzan expenses amounting to ` 12,50,000/- out of which ` 2,86,686/- was booked for staff welfare expenses being in the nature of providing food to the employees, who observe Roza in the Ramzan month and take only one meal in a day. Thus, the assessee being a follower of Muslim religion has to incur these expenses in order to motivate the work force. We further observe that the assessment order and the appellate order were passed in a cryptic manner without bringing any facts on record to prove that these were personal expenses of the Directors. The addition was made purely on the basis of grey work of the Assessing Officer. The learned CIT(A) also upheld the same observing that expenses were incurred in a disproportionate ration and not reasonable.
Even if for a moment, if we go by the theory of the Revenue authorities that the expenses are not reasonable, even then the total disallowance is not justified. Under these circumstances, we are of the view that the addition made by the Assessing Officer is not correct and needs to be reversed.
Accordingly, the order of the CIT(A) is set aside and the Assessing Officer is directed to delete the addition.
As a result, assessee’s appeal for A.Y. 2008-09 is allowed.
ITA No.2942/Mum/2014 for A.Y. 2009-10:
The issue raised in ground No.1 is against the upholding the addition amounting to Rs.13,01,053/- by Ld. CIT(A) as made by the AO towards excess physical stock over the book stock of the assessee. Whereas the issue raised in 2nd ground of appeal is against the confirmation of addition by Ld. CIT(A) at Rs.8,61,545/- being 15.45% of the excess book stock over physical stock to Rs.55,76,347/-.
The facts in brief are that a search action was conducted on the assessee on 29.04.2008. A notice under section 153A of the Act was issued to the assessee for block assessment years for A.Y. 2003-04 to 2009-10 including the search year and assessment was completed for all the years under section 153A read with section 143(3) of the Act. In this case, the assessment was completed at Rs.1,26,61,978/- as against the return of income of Rs.1,04,99,380/- by making an addition of Rs.21,62,598/- on account of alleged discrepancies in stock in trade. During search, the search party has undertaken a physical verification of stocks in trade as on the date of search and according to the search party there was difference between & 2942/Mum/2014 Borsad Tobacco Co. Pvt. Ltd.
book stock and physical stock. Accordingly, the AO called upon the assessee to give reconciliation of its stock in trade which was submitted by the assessee vide letter dated 18.11.2010 and 14.12.2010. The reconciliation as filed by the assessee is reproduced as under:
LOCATION EXCESS PHYSICAL STOCK EXCESS BOOK STOCK AMOUNT (Rs.) AMOUNT (Rs.) BORSAD 4,97,920/- 19,11,742/- KHANPUR 1,94,855/- NIL KASARI 6,03,913/- 36,64,605/- VISHNOLI 4,365/- NIL TOTAL 13,01,053/- 55,76,347/- The AO made additions in respect of excess physical stocks. 11. In the appellate proceedings, the Ld. CIT(A) affirmed the order of AO by observing and holding as under:
“6.3.3.1. The appellant has argued that there were errors in computing the physical \ stock during the course of search, the stock of Sopariwala Exports Pvt. Ltd and Borsad \ Tobacco Co. Ltd. are kept at Borsad and the stock may have been interchanged while computing the physical stock. The appellant has argued that the stock should not be analyzed item wise instead it should be considered in totality. 6.3.3.2. It is seen that the appellant has made general arguments without pinpointing any error that has taken place in physical stock taking. Even otherwise the AO has considered the discrepancy item wise between the physical stock and book stock as prepared by the appellant during the assessment proceedings. Moreover, this reconciliation was prepared by the appellant itself and furnished to the AO vide its letter dated 24/12/10. Thus, no grievance can arise in this regard. I also do not find any merit in the contention of the appellant that comparison of physical stock and book stock should not be done on item wise basis. The very essence of stock taking is to elaborately identify the different items and to determine its quantity. In fact item wise analysis is more accurate way to notice the discrepancy. The AO has correctly added the excess physical stock as compared with the book stock in respect of specific items to the total income of appellant. He has also correctly made addition in respect of gross profit on stock sold but not reflected in the books of accounts. This is the case where the book stock is more than physical stock. Naturally if such stock has already been sold, it is reasonable to expect the gross profit to be earned which has not been reflected in books of accounts. In view of the above it is held that there is no infirmity in thecjjon of the AO. This ground of appeal no 8 is accordingly dismissed. In the result, for statistical purposes, appeal for A.Y. 2008-09 & AY 2009-10 is 7.0 dismissed.”
12. The Ld. A.R. vehemently submitted before us that the order of Ld. CIT(A) is wrongly appreciated the facts of the case. The Ld. A.R. submitted that assessee carries on its operation from four locations namely Borsad, Khanpur, Kasari and Vishnoli. The assessee has a system of preparing Management Information System (MIS) Reports whereby regularly the physical stock verification at different locations is undertaken and MIS reports are prepared. The procedure for such physical verification of stock generally takes about a week or so. However, the search party completed the physical verification at all four locations within a span of 12 - 14 hours. Because of this reason, there is every likelihood that there may be mistakes on the part of search party. Further, no incriminating documents were found during search and addition has been made solely of account the difference in stock as worked out by the search party and as per the Appellant. The difference in stock as worked out by the search party and as per the Appellant is mainly because of the following reasons : a. After the Tobacco is purchased, the same is checked at the factories and process report is prepared. The stock is taken in books only after the process report is prepared. In Annexure - 1 to Appellant's letter dated 24th December, 2010 given in Page Nos. 37 to 43 of the Appellant's Supplementary Paperbook, various instances are shown where the search party has included Tobacco stock in final summary where process reports were pending as a result of which physical stock as per search party is shown at a higher value. b. The Appellant Group has other sister concerns operating from the same locations. There are instances where search party has included the stock pertaining to another concern in the stock of the Appellant. In Annexure - 1 to Appellant's letter dated 24th December, 2010 which is on Page Nos. 37 to 43 of the Appellant's Supplementary Paperbook, various instances are shown where the search party has included stock of another concern in stock of the Appellant. c. The search party has made mistakes in noting the stock. In Annexure - 1 to Appellant's letter dated 24th December, 2010 which is on Page Nos. 37 to 43 of the Appellant's Supplementary Paperbook, various instances are shown where the search party has not noted stock properly.
The ratio of total excess of physical stock over book stock and the excess of book stock over physical stock compared with turnover and total inventory is minimal as explained below :
Excess Physical Stock Rs. 13,01,053/- Excess Book Stock Rs. 55,76,347/- Total Excess Stock Rs. 68,77,400/-
Ratio of above excess stock compared with turnover of Rs.30,74,57,182/- is as under :
= 68,77,400/- = 2.23%
30,74,57,182/- Ratio of above excess stock compared to inventory of Rs.15,87,97,904/- is as under :
= 68,77,400/- = 4.33%
15,87,97,904/-
It is submitted that such minor differences in the stock figures be ignored as the such party has completed physical verification of stock in a span of 12 - 14 hours compared with a week when stock is physically verified by the Appellant.
As per the Management Information System (MIS) Report in force, after the quality checking of Tobacco, Goods Received Notes (GRNs) are prepared and thereafter this stock is recorded in the books of accounts. There is a time lag between the preparation of GRNs and entry in the books of accounts. This is also one of the reasons for the variation between the book stock and the physical stock.
The Ld. A.R. relied on the following decisions in defense of his arguments:
CIT vs. Balaji Wire Pvt. Ltd. (Delhi High Court) (304 ITR 693) 2. CIT vs. Utkal Alloys Ltd. (Orissa High Court) (319 ITR 339) 3. Radhey Shyam Tanwar vs. ACIT (Jodhpur ITAT) (77 TTJ 505) 4. Lakshmi Energy & Food Ltd. vs. ACIT (Chandigargh ITAT) (2014) 44 taxmann.com 248 5. Mehra Art Palace vs. DCIT (Delhi ITAT) (2001) 114 Taxman 201 (Delhi Mag.)
The Ld. D.R., on the other hand, relied heavily on the order of Ld. CIT(A) and AO and submitted that there existed factual discrepancies in the inventories of the assessee physically as well as, as per the records maintained by the assessee and therefore the addition has rightly been made by the AO and affirmed by the Ld. CIT(A).
We have heard the rival submissions of both the parties and perused the material on record. In this case, we find that the assessee is operating from four locations as mentioned hereinabove and has the system of Management Information System in place for accounting of its inventories. The assessee has filed reconciliation explaining the discrepancies in the stocks as noted by the search party. The assessee has also filed before us the various documents and reconciliation explaining the said discrepancies. Moreover, the assessee has explained why the & 2942/Mum/2014 Borsad Tobacco Co. Pvt. Ltd.
said discrepancies have arisen which are very minor and within norms. The case of the assessee is covered by the decision referred to by the Ld. A.R. during the course of hearing. In the case of CIT vs. Balaji Wire Pvt. Ltd. (Delhi High Court) (304 ITR 693) the Hon’ble Delhi High Court has affirmed the order of the Tribunal deleting the addition on account of excess stock calculated by the Revenue and the Hon’ble Court has held as under:
“18. The Tribunal came to the conclusion, with which we agree, that it would have been appropriate if the number of bundles and the average weight was worked out on some empirical basis rather than through mere guess-work. It appears that during the search, the number of bundles and weight estimate in respect of half a dozen business concerns were made within a few hours. The search party either did not have the necessary time or did not have the necessary expertise to correctly assess the stock position. A short-cut appears to have been taken by the search party which came to a certain conclusion on an estimate basis. In law, as in life, a short cut is often a wrong-cut.
The mere fact that some employees of the assessee signed the Panchnama does not mean that they certified the correctness of the number of bundles or the average weight of each bundle. They only certified that they were witnesses to the proceedings. What conclusions have to be drawn from the Panchnama is of no concern to those employees.
Of course, the best method of determining the number of bundles and their average weight would be to actually count the bundles and use machines/cranes for weighing each bundle. This is no doubt a tedious exercise but where a liability is sought to be foisted upon an assessee, the Revenue has to be a little more serious while exercising powers conferred upon it under the Act. Mere guess-work or an estimate cannot be an adequate substitute for a scientific investigation or carrying out some empirical study. The officers who conducted the search did not want to take the necessary trouble which, of course, would have been time consuming, but the impact of making a guesstimate can be quite damaging insofar as the assessee is concerned. The assessee cannot be made to suffer the consequences of lethargy on the part of the officers of the Revenue.
Under these circumstances, we are of the opinion that the Tribunal rightly came to the conclusion that the alleged excess stock calculated by the Revenue needs to be deleted. It is, of course, not possible today to redetermine the stock so the question of any remand does not arise.” Similarly the Orissa High Court in the case CIT Vs Utkal Alloys Ltd (supra0 by following the Delhi High court in the case CIT Vs Balaji Wire Pvt Ltd 304 ITR 393 has deleted the addition by holding that assessee can not be made to suffer from the lethargy of the officers of the revenue when the search party did not find any incriminating evidences.
Under these facts and circumstances we are inclined to set aside the order of CIT(A) in view of the ratio laid down by the various High Courts and direct the AO to delete the additions of Rs. 13,01,053 on account of excess stock and Rs. 8,61,545/- on account of GP margin on excess of book stocks over physical stocks. The appeal of the assessee is allowed.
Resultantly both the appeals of the assessee are allowed. Order pronounced in the open court on 03.09.2019