S.P.MANI AND MOHAN DAIRY,ERODE vs. ACIT CIRCLE 1, ERODE

आदेश / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER:

These cross appeals filed by assessee and Revenue are directed

against appellate order dated 14.02.2018 passed by learned

Commissioner of Income Tax(Appeals)-3, Coimbatore, (Hereinafter called

“the CIT (A)”) in Appeal No. 293/16-17 for assessment year(ay) 2014-15,

the appellate proceedings had arisen before learned CIT(A) from

assessment order dated 30.12.2016 passed by learned Assessing Officer

(hereinafter called “ the AO”) u/s. 143(3) of the Income-tax Act, 1961

(hereinafter called “ the Act”) for ay: 2014-15. Both these appeals were

heard together and are disposed off by this common order.

with the Income-Tax Appellate Tribunal, Chennai (hereinafter called “the

tribunal”) in ITA No. 1321/Chny/2018 for ay: 2014-15, read as under:-

“01. The order of the Commissioner of Income Tax (Appeals) is against law, facts, and equity. 02. The order of the Commissioner of Income Tax (Appeals) in upholding the additions made on creditors, in respect of the details found at the time of survey to arrive at a conclusion that, the payments has to be made within 7 days as per his calculations and the creditors standing beyond 7 days were to be considered as the liability ceased. As the cessation of liability is the matter of the Assessee's policy and prudence and they are the better judges to take a decision on cessation of Liabilities, the addition made U/s 41(1)(a) on this account needs to be deleted. 03. The Commissioner of Income Tax (Appeals) ought to have appreciated the fact in respect of the all the additions made U/s 41(1) it is relied on the decision of the Honorable Delhi High court in the case of " CIT Vs. Hotline Electronics ltd" (2012) 205 Taxmann 245 (Delhi), where in it is held that unpaid liabilities cannot be added as the Assessee's income under Section 41(1) merely because they remained unpaid for a sufficiently long time and that it is required of the revenue authorities to show that the liability to pay the creditors has ceased or has been remitted by the creditors". In fact, without confirming from the creditors, the cessation of liability will not be possible.

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2.2 The grounds of appeal raised by Revenue in memo of appeal filed with

the tribunal in ITA No. 1403/Chny/2018 for ay: 2014-15, read as under:-

“1. On the facts and in the circumstances of the case the learned C1T(A) erred by granting relief of Rs.2.63 crores without appreciating the fact that the addition under section 41(1)(a) was made after properly analysing the milk creditor accounts.

business of Milk Dairy. A survey action u/s.133A of the 1961 Act was

carried out by Revenue in the premises of assessee on 06.11.2013.

During the course of survey operations conducted by Revenue u/s 133A of

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the 1961 Act, the assessee had declared additional income of

Rs.2,05,98,000/- on account of waiver of milk creditors. The assessee in

its return of income filed with Revenue, however, declared an additional

income of Rs.2 Crores. The case was selected by Revenue for framing of

scrutiny assessment u/s 143(3) of the 1961 Act and statutory notices u/s

143(2) and 142(1) of the 1961 Act were issued to the assessee by the AO.

The AO during the course of assessment proceedings observed that

sundry creditors on account of milk supplies were claimed by assessee to

be Rs.13,71,68,433/- as on 31.03.2014, as against opening balance of

Rs.10,05,12,485/- at the beginning of the year. The AO observed that

despite surrender of Rs.2 Crores on account of waiver of milk creditors,

there was an increase in the closing balance. During the course of survey

operations, it was noticed by Revenue that the assessee was not reporting

actual state of its financial affairs. The AO observed that purchase figures

were inflated and since these inflated purchases were not paid by the

assessee, it led to accumulation into large outstanding under the head

‘sundry creditors’ for milk purchases. The AO observed that despite huge

opening balance of sundry creditors for milk purchases to the tune of `

10,05,12,485/- , the assessee had declared Rs.2 Crores as income from

waiver of the milk creditors. On being asked as to how this figure of ` 2

crores is arrived at, the assessee came out with an explanation , as under:

“The waiver of sundry creditors to the extent of Rs.2,00,00,000/- during the year and declared as income. The said creditors list are enclosed herewith. The waiver of creditors are considered only on the basis of transaction with the assesses; for the past period and current year. We cannot waiver all the creditors in this dairy business. Sometimes like seasonal business at that time no. of suppliers are more sometimes (summer season) they are reducing number because milk input may reduce. So it is varying every year. There is no regular contract. Sometimes later date waiver customer may come to supply the milk

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voluntarily. This is nature prevailing this dairy industry so we cannot predict all the persons do not turn for the supply the milk. So selectively depending on the supplier, the assessee waived their payment. It is totally depends on the customer to customer."

3.2 The AO was not satisfied with the aforesaid generalized reply

submitted by assessee and was of the view that assessee could not

explain as to how it has arrived at a figure of ` 2 crores for write off

despite other creditors which were outstanding for payment for a long

time and thus, the AO was of the view that this write off of ` 2 crores

towards sundry creditors is not a correct/reasonable amount. The AO

observed that the assessee has around 1000 milk center creditors. The AO

examined ledger accounts of these milk creditors and observed that in

many cases, the sundry creditors outstanding for payment represent

opening balance and continues to remain outstanding for payment

throughout the year and the same were not written back as waived by

creditors, by the assessee. The AO observed that total of such creditors

are to the tune of ` 32,70,589/- for which list was annexed by the AO

along with the assessment order. The AO observed that the assessee has

not given proper explanation for non inclusion of these sundry creditors

for waiver/declaration of income. The AO observed that these milk

suppliers were poor villagers who cannot wait for more than a year to

receive their payments and hence AO was of the view that it is difficult to

accept version of the assessee and AO was of the view that either the

assessee had paid these sundry creditors out of unaccounted funds or else

the liability has extinguished which attracts provisions of Section 41(1)(a)

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of the 1961 Act. This led AO to make additions to the tune of

Rs.32,70,589/- as income of the assessee by invoking provisions of

Sec.41(1)(a) of the 1961 Act, vide assessment order dated 30.12.2016

passed by the AO u/s. 143(3) of the 1961 Act.

3.3 Similarly, the AO also observed from list of outstanding milk creditors,

wherein last purchases were more than a month old or payments for last

few purchases were made back to back , that there is no previous

balances of sundry creditors are still outstanding to be paid. The AO made

additions to the tune of Rs.1,04,62,889/- as income of the assessee for

this category which was detailed vide annexure enclosed by the AO along

with assessment order. The employee of the assessee Shri Ramaswamy

in his statement recorded during the course of survey proceedings

conducted by Revenue u/s 133A of the 1961 Act , on 20.11.2013 stated in

reply to question number 6 and 7 that payment for milk purchases are

made within a week’s time by the assessee to the suppliers. The AO

observed that in view of above, there is no possibility that payments for

milk will remain outstanding for a long period and in the opinion of the AO,

these payments remaining outstanding to be paid are either inflated

purchase cost’s or the assessee had cleared these payments out of

unaccounted funds which is not reflected in books of accounts. The AO

observed that no reasons are furnished by the assessee for amounts

remaining outstanding for a long period of time . The AO also observed

that if these accounts are carefully analyzed , then it could be observed

that the assessee has made back to back payments for last few purchases

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within a week time , while the old balances of milk suppliers are still

outstanding for payments, implying that the previous balances have been

cleared off out of undisclosed sources of income, which led AO to make

addition to the income of the assessee to the tune of Rs.1,04,62,889/- by

invoking provisions of Section 41(1)(1) of the 1961 Act , vide assessment

order dated 30.12.2016 passed by the AO u/s. 143(3) of the 1961 Act. .

3.4 The AO observed that third category of milk creditors are those who

still have regular transactions with assessee and each of these purchases

were regularly paid by assessee within a week’s time and hence except for

last purchases remaining unpaid , old balances of sundry creditors shown

to be outstanding for payment are incorrect and non-existing. . The AO

extracted ledger account for the month of March 2014 of top thirty

creditors from whom assessee had purchased milk , in its assessment

order dated 30.12.2016 passed u/s 143(3) of the 1961 Act and added to

the income of the assessee a sum of ` 9,61,80,915/-in the hands of the

assessee by invoking provisions of Section 41(1)(a) of the 1961 Act.

3.5 The AO also observed that department has already made an addition

to the income of the assessee for ay:2013-14 to the tune of

Rs.5,06,56,197/- u/s. 68 of the Act in respect of unexplained sundry

creditors outstanding as on 31.03.2013. It was observed by AO that

Ld.CIT(A) has already deleted the aforesaid addition for ay: 2013-14 vide

appellate order dated 30.08.2016 and matter is now pending for disposal

before tribunal at the behest of Revenue . The AO observed that since

matter for ay: 2013-14 has not reached finality, out of additions to the

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tune of ` 10,99,14,393/- now being made on account of waiver of sundry

creditors, an amount of ` 5,06,56,197/- is being added on protective basis

and if additions for ay:2013-14 are not sustained by appellate authorities ,

then in that situation, the entire additions to the tune of ` 10,99,14,393/-

will stood confirmed as income in the hands of the assessee on

substantive basis for impugned ay under consideration.

assets in respect of two new Chilling Plants set up at Aayilpatti and Karur,

it was observed by AO that as per information submitted by assessee

dated 14.10.2016, these two plants were commissioned for commercial

production in the previous year 2014-15 which mentions the conditions

under which these plants will be operated. The AO was of the view that it

proves that the assets were not put to use during the previous year under

consideration. The AO observed that the assessee has claimed

depreciation as detailed below w.r.t. assets connected with these two new

chilling units as under:

Depreciation on Aayilpatty CC Building Rs. 22,79,755/- Depreciation on Karuu CC Building Rs. 19,41,701/- Plant & Machinery Aayilpatty Rs. 26,23,623/- Plant & Machiner Karuu Rs. 23,52,815/- -------------- Rs. 91,97,894/- -------------- The AO observed that since these two units have not commenced

operations during the previous year under consideration , the assessee is

not eligible to claim depreciation to the tune of ` 91,97,894/- on these two

chilling plants located at Aayilpatti and Karur , which stood disallowed by

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AO, vide assessment order dated 30.12.2016 passed by AO u/s 143(3) of

the 1961 Act.

of Rs.66,35,246/- on Plant and Machinery installed in these two Chilling

Plants newly set up , which as per AO has not commenced operations

during the previous year under consideration,, the AO observed that

assessee is only collecting milk and processing and packing it for sale and

there is no manufacturing or production of any article or thing carried on

by the assessee . Thus, the AO observed that the assessee is not entitled

to claim additional depreciation . The AO further observed that since these

2 chilling units located at Aayilpati and Karur have not commenced

operations during the previous year under consideration, therefore even

otherwise depreciation is not allowable during the year under

consideration, and hence claim of the assessee for additional depreciation

to the tune of ` 66,35,246/- u/s 32(1)(iia) of the 1961 Act stood

disallowed by AO and added to the income of the assessee, vide

assessment order dated 30.12.2016 passed by AO u/s 143(3) of the 1961

Act

up these two new chilling plants at Aayilpatty and Karur and interest on

term loans to the tune of ` 60,82,257/- was incurred by assessee for the

year under consideration and since these two units have not commenced

operations till the end of previous year relevant to impugned ay , which

led AO to refer to provisions of Section 36(1)(iii) of the 1961 Act to

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disallow these interest expenses which stood added to the income of the

asssseee by the AO, vide assessment order dated 30.12.2016 passed by

the AO u/s 143(3) of the 1961 Act.

conducted by Revenue against the assessee on 06.11.2013 u/s 133A of

the 1961 Act, the cash to the tune of Rs.26,35,769/- was physically

found but however cash balance as per auditor’s statement now filed with

department as on the date of the survey was Rs.56,33,311/-, which led to

excess cash to the tune of Rs.29,97,542/- reflected in books of accounts

of the assessee, which led AO to conclude that assessee has introduced its

unaccounted funds to the tune of ` 29,97,542/- in its books of accounts

and since assessee has not explained sources of cash , the said cash

differential to the tune of Rs.29,97,542/- was added by the AO as income

of the assessee u/s 68 of the 1961 Act , vide assessment order dated

30.12.2016 passed by the AO u/s 143(3) of the 1961 Act .

dated 30.12.2016 u/s 143(3) of the 1961 Act , the assessee filed first

appeal with Ld.CIT(A) and made detailed contentions before Ld.CIT(A).

Regarding first issue of waiver of sundry creditors u/s 41(1) , the

Ld.CIT(A) observed that assessee was surveyed u/s.133A of the Act on

06.11.2013 which indicated inflation of purchases and corresponding

accumulation in sundry creditors for milk purchases. The learned CIT(A)

observed that assessee has surrendered additional income by waiving

certain sundry creditors and for impugned year under consideration , the

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assessee surrendered additional income of Rs.2 Crores by way of waiver

of certain sundry creditors . The ld CIT(A) observed that this disclosure by

the assessee of additional income of ` 2 crores was an adhoc one without

having any basis. The Ld.CIT(A) observed that AO has brought out in his

assessment order, the reasoning for making additions in respect of each

category of sundry creditors. The learned CIT(A) observed that first

category of the creditors is those where balance outstanding is more than

one year old and such balance were not declared by assessee as its

income of its own on account of waiver of Creditors. The ld CIT(A)

observed that second category of sundry creditor is those where last

purchase is more than one month old and payment for last purchases

were made back to back, the learned CIT(A) observed that last category is

of the creditors where the assessee had purchased till the last date of the

financial year , but payments were made back to back implying no actual

outstanding. The Ld.CIT(A) observed that assessee made statement

during course of survey operations u/s.133A wherein assessee made

admission and disclosed its modus operandi which led to surrender of

additional income of ` 2 crores by the assessee for impugned ay under

consideration which is not retracted by the assessee. The learned CIT(A)

observed that assessee has admitted to have inflated purchases and

overstated sundry creditors in its books of accounts. The learned CIT(A)

observed that genuineness of sundry creditors balances is also in

question. The assessee relied on judgment in the case of CIT v. Hotline

Electronics Limited(2012) 205 taxman 245(Delhi) , while Ld.CIT(A)

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distinguished the aforesaid decision relied upon by the assessee and held

that the assessee cannot take benefit of the said judgment which is

distinguishable on facts and not applicable to the case of the assessee.

8.2 The Ld.CIT(A) also observed that assessee is in the business of

collection, processing and distribution of milk . The learned CIT(A)

observed that assessee procured milk from farmers through its collection

centers/agents. The Ld.CIT(A) observed that on perusal of ledger

accounts of milk collection centers/agents will reveal that the payments

for milk purchases were made at weekly intervals which follows a

particular pattern of back to back settlement leaving no credit balances.

The Ld.CIT(A) also observed that these farmers/procuring agents cannot

afford to extend credit period of more than one or two weeks. The learned

CIT(A) also observed that assessee has also not brought on record any

differences in payments made to these farmers/procuring agents owing to

spoilage, quality , quantity etc.. The Ld.CIT(A) observed that total milk

purchased during the year under consideration was Rs.137 Crs. wherein

average weekly purchase comes to Rs.2.63 Crs., the milk supply creditor

balance of ` 13,71,68,433/- translates to 5.21 weeks purchases not

settled. The learned CIT(A) observed that this defies the pattern of

settlement in assessee’s case and shows huge abnormality of sundry

creditors carried in the Balance Sheet. The Ld.CIT(A) observed that AO

has given allowance for one week purchases of milk amounting to Rs.2.54

Crs. while balance amount was added to the income of the assessee

u/s.41(1)(a) of the Act , to the tune of Rs.10,99,14,393/-. The Ld.CIT(A)

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after considering totality of facts , creditor settlement trend in the

business and also to cover other price variations and settlement disputes

which are common in business gave further allowance for one week

average purchases to the tune of Rs.2.63 Crs. ,while the balance amount

was ordered to be added on account of cessation of liability i.e. the sundry

creditors for milk purchase u/s.41(1)(a) of the Act, vide appellate order

dated 14.02.2018 passed by learned CIT(A).

8.3 With respect to next issue relating to the disallowance of depreciation

on Buildings and Plant & Machinery as well additional depreciation on the

two new chilling plants claimed by the assessee to be commissioned at

Aayilpatti and Karur. The Ld.CIT(A) observed that AO did not allowed

depreciation as well as additional depreciation in the absence of evidence

of the commissioning of Plant & Machinery and there were no evidence on

record to prove that these assets were put to use during the previous year

relevant to impugned assessment year. The learned CIT(A) observed that

assessee had filed before Ld.CIT(A) copies of certificate from Department

of Commerce & Industries, Tamil Nadu, Certificate from Pollution Control

Board and EB Bill etc. in respect of the chilling plant at Navalpatty village,

Namakkal District, which showed that the said chilling plants was

commissioned on 12.07.2013 . The learned CIT(A) observed that ,

however, no evidence is furnished by assessee in support of

commissioning of Karur Unit. The Ld.CIT(A) directed AO to allow

depreciation on unit located at Navalpatty village. The Ld.CIT(A) also

observed that AO vide letter dated 09.06.2017 stated that the assessee

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had received Rs.50 lakhs as capital subsidy for set up of the new chilling

plants which was not reduced from ‘actual cost’ of the chilling plants while

working out depreciation. The learned CIT(A) held that since depreciation

has been allowed by him with respect to chilling plant located at

Navalpatty village, the capital subsidy received in respect of that plant

shall be considered in arriving the depreciation.

8.4 With respect to additional depreciation of Rs.66,35,246/- disallowed

by AO u/s.32(1)(iia) of the 1961 Act with respect to both the chilling

plants claimed to be newly commissioned during the impugned ay under

consideration , the Ld.CIT(A) observed that the assessee is only collecting

milk and processing & packaging it for sale and there is no manufacturing

or production activity of any article or thing carried on by assessee to

become eligible for additional depreciation within the provisions of Section

32(1)(iia) of the 1961 Act. The Ld.CIT(A) observed that chilling plant is

used for pasteurization and standardization of milk for consumption which

do not change the character of milk processed and there is no activity of

production or manufacturing carried out by assessee and the assessee is

not entitled for additional depreciation. The Ld.CIT(A) relied on the

decision of the Hyderabad-tribunal in the case of Creamline Dairy Products

Ltd. v. DCIT (2012) 27 taxmann.com 237(Hyd-trib.) and also decision of

Special Bench –Pune tribunal in the case of BG Chitale v. DCIT reported in

(2008) 115 ITD 97(Pune-SB) to hold that the assessee is not entitled for

additional depreciation u/s 32(1)(iia) of the 1961 Act, vide appellate order

dated 14.02.2018 passed by learned CIT(A).

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8.5 The learned CIT(A) directed AO to allow interest expenses claimed by

the assessee with respect to term loans borrowed for chilling plant located

at Navalpatty Village in accordance with provisions of Section 36(1)(iii) of

the 1961 Act, as the learned CIT(A) had already accepted that new chilling

plant at Navalpatty Village has commenced operations during the previous

year relevant to impugned assessment year, based on certificate issued by

Department of Industries & Commerce. However, the learned CIT(A)

confirmed disallowance of interest expenses claimed by assessee on term

loans borrowed for setting up of chilling plant located at Karur on the

ground that there is no evidence on record to prove that this chilling plant

located at Karur has commenced operations during the year under

consideration, vide appellate order dated 14.02.2018 passed by learned

CIT(A).

8.6 With respect to the next issue of Rs.29,97,542/- as unexplained cash

which was added by AO u/s. 68 of the 1961 Act owing to difference

between physical cash found during the course of survey proceedings and

the cash in hand as is recorded in audited books of accounts maintained

by the assessee as produced before the AO during the course of

assessment proceedings ,the Ld.CIT(A) observed that there appears to be

shortage of cash in hand on the date of survey conducted by Revenue on

06.11.2013 u/s 133A of the 1961 Act which could be for various reasons

but sources of cash in its books stood explained by assessee in his audited

books of accounts maintained in regular course of business and nothing

incriminating is brought on record by the AO , thus the learned CIT(A)

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accepted the contentions of the assessee and held that this shortfall of

cash cannot be brought to tax as unexplained in the hands of the

assessee. Thus, this addition stood deleted by Ld.CIT(A), vide appellate

order dated 14.02.2018 passed by learned CIT(A).

CIT(A), both assessee and Revenue has come in appeal before the

tribunal. The Revenue is aggrieved by deletion of addition to the tune of

Rs.2.63 Crs. by allowing further allowance of credit of one week for milk

purchases by Ld.CIT(A), wherein, the earlier additions were made by AO

towards waiver of sundry creditors u/s 41(1)(1) of the 1961 Act for period

of outstanding for milk purchases beyond one week. Secondly , the

Revenue is aggrieved by deletion of addition by learned CIT(A) of

Rs.29,97,542/- which was added earlier by the AO as the income of the

assessee as an unexplained cash u/s.68 of the Act. The assessee on the

other hand is aggrieved by confirmation by learned CIT(A) of the additions

made by AO u/s.41(1)(a) of the Act towards waiver of sundry creditors

except relief of Rs.2.63 Crs. granted by learned CIT(A) being credit of one

more week of average purchases of milk. The assessee is also aggrieved

by disallowance of depreciation on chilling plant located at Karur by

Ld.CIT(A). The assessee is also aggrieved by confirmation of disallowance

of interest expenses by Ld.CIT(A) on the ground that new chilling plant at

Karur has not commenced its operations during the previous year relevant

to impugned ay, which was earlier disallowed by the AO while framing

assessment u/s 143(3) of the 1961 Act .

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9.2 The Ld.Counsel for the assessee opened arguments before us and

submitted that assessee is trader in milk . It was submitted that the

assessee has given credit for purchase of milk to the suppliers , which

stood added to the income of the assessee to the tune of Rs.10.99 Crs.

by AO on account of waiver of liability by invoking provisions of Section

41(1)(a) of the Act. Our attention was drawn to Para No.8 of assessment

order and it was submitted that additions were made in ay: 2013-14 to

the tune of Rs.5,06,56,197/- by invoking provisions of Sec.68 of the Act

which was mainly due to difference in figures of sundry creditors in the

hard disc found at the time of survey wherein there was a differential of

the aforesaid amount of ` 5,06,56,197/- in balance recorded in hard disk

as at 31.03.2013 and 01.04.2013 of the amounts payable to milk

suppliers/creditors. It was submitted by learned counsel for the assessee

that additions are again made by AO which is duplication to this extent.

However, it is fairly submitted that the additions to the tune of `

5,06,56,197/- was added by the AO on protective basis, as the same was

earlier added as income of the assessee for ay: 2013-14. It was also

brought to our notice that now tribunal has confirmed additions for ay:

2013-14 by estimating income by applying average GP ratio for three

years. Our attention was drawn to tribunal order in assessee’s own case

in ITA No.1810/Mds/2016 for ay:2012-13, order dated 05.08.2016 and

also in ITA No.3053/Mds/2016 for ay:2013-14 , order dated 26.07.2017.

It was submitted that tribunal in assesee’s own case for ay: 2012-13 and

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2013-14 has confirmed additions by estimating income of the assessee by

considering average G.P. rate of three years, thus the aforesaid additions

made by the AO to the income of the assessee for ay: 2013-14 due to

differential in figures of milk creditors as aon 31.03.2013 and 01.04.2013

has become irrelevant.

9.3 The learned DR on the other hand submitted that it is a case where

there is admittedly an inflation of purchases by the assessee. It was

submitted by learned DR that survey was conducted by Revenue in the

case of the assessee u/s.133A on 06.11.2013 and it was found that

assessee is inflating its purchases of milk. It was submitted that there

was a decline in GP ratio over the year’s. Our attention was drawn to

ITAT order for ay: 2012-13 and 2013-14 in assessee’s own case, wherein

the GP ratio for last several years is stated. Thus, learned DR prayed that

assessment order passed by AO be confirmed/upheld on this issue of

additions being made on account of waiver of sundry creditors. The

learned DR submitted that there was a statement recorded of Partner

during the course of survey operations on 06.11.2013 conducted by

Revenue and in reply to question number 32 , the partner has admitted

that there is an inflation of purchases. It was submitted by learned DR

that Ld.CIT(A) erred in granting relief of Rs.2.63 Crs. to assessee on

account of waiver of sundry creditors by way of extended credit period of

one week.

9.4 The Ld.Counsel for the assessee in rejoinder relied upon decision of

Hon’ble Allahabad High Court in the case of Debi Prasad Malviya v. CIT

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reported in (1952)22 ITR 539(All HC) and submitted that now it is not

open for authorities to take any other view in this year and only additions

can be made by estimating income by taking average of GP of last three

years.

9.5 The learned counsel for assessee submitted that assessee has been

denied depreciation on new chilling plant at Karur on the grounds that the

said unit has not commenced commercial operations as it was not put to

use during the previous year relevant to impugned assessment year. The

learned counsel for assessee submitted that it is bringing on record

Certificate from Department of Town and Country Planning , dated

22.05.2012 and Certificate dated 21.08.2015 from Directorate of

Industrial Safety and Health to prove that Karur chilling plant commenced

its business operations during the year under consideration . These are

admittedly an additional evidences filed by assessee for the first time

before the tribunal. It was submitted by learned counsel for the assessee

that additional depreciation claimed by assessee for both the new chilling

plants has been denied to the assessee on the ground that assessee is

undertaking pasteurization and standardization of milk . It is submitted

that the assessee is engaged in the business of processing and

manufacturing of cow milk. The learned counsel for the assessee relied on

decision of the tribunal in assessee’s own case in ITA No.1810/Mds/2016

for ay: 2012-13 and also in ITA No.3053/Mds/2016 for ay: 2013-14 . Our

attention was drawn by learned counsel for the asssssee to orders of

authorities below. The learned counsel for the assessee submitted that

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standardization and pasteurization of milk is infact manufacturing and

hence assessee is entitled for additional depreciation u/s 32(1)(ia) of the

1961 Act.

9.6 The Ld.DR, on the other hand, submitted that assessee has not raised

this issue of denial of deduction on account of additional depreciation u/s

32(1)(iia) in grounds of appeal filed with the tribunal and in the absence

there of , now at this stage it is not open for the assessee to argue this

issue before the Bench.

9.7 The learned counsel for the assessee fairly admitted that assessee did

not raise ground of appeal with respect to disallowance of additional

depreciation u/s 32(1)(iia) but it was submitted that general ground of

appeal is raised by assessee in memo of appeal filed with the tribunal with

respect to disallowance of depreciation.

9.8 The Ld.DR submitted that there is a difference of Rs.29,97,542/- in

the audited cash book which was produced by assessee during the course

of assessment proceedings and the physical cash found during the course

of survey, the Ld.CIT(A) had deleted this addition without any basis as

cash was found short during the course of survey while higher amount of

cash is reflected on the date of survey in the audited books of accounts

produced by assessee before the authorities during the course of

assessment proceedings . It was submitted by learned DR that Ld.CIT(A)

wrongly granted benefit of Rs.2.63 Crs. to assessee u/s.41(1)(a) of the

Act by extending period of credit by further 7 days without any basis. The

learned DR would submit that assessee has not provided list of sundry

ITA Nos.1321 & 1403/Chny/2018 :- 21 -:

creditors. It was submitted by learned DR that detailed assessment order

is passed by AO, our attention was drawn to Page Nos. 2 & 3 of the

assessment order and it was submitted that sundry creditors were

outstanding for more than one year . Reliance was placed by learned DR

on the decision of Hon’ble Supreme Court in the case of Shri Pradeep

Kumar Biyani v. ITO reported in (2019) 260 Taxman 298(SC). It was

submitted that statement of Shri S.P. Loganathan , partner in assessee

firm was recorded on 24.01.2014. It was submitted that statement

recorded during the course of survey operations u/s.133A is admissible

and liability to tax can be fastened based on the said statement.

10 We have considered rival contentions and perused the material on

record including cited case laws. We have observed that assessee is in the

business of milk diary and is doing standardization and pasteurization of

milk. A survey action u/s. 133A of the 1961 Act was carried out by

Revenue in the premises of assessee on 06.11.2013. During course of

survey operations conducted by Revenue u/s 133A of the 1961 Act, the

assessee had voluntarily declared additional income of Rs.2,05,98,000/-

on account of waiver of milk creditors. The assessee in its return of

income filed with Revenue, however, declared an additional income of

Rs.2 Crores on account of waiver of milk creditors. The case was selected

by Revenue for framing of scrutiny assessment u/s 143(3) of the 1961 Act

, and statutory notices u/s 143(2) and 142(1) of the 1961 Act were issued

by AO to the assessee. It is observed that assessee has more than 1000

milk center creditors and total milk purchases made by the assessee were

ITA Nos.1321 & 1403/Chny/2018 :- 22 -:

to the tune of ` 137 crores during the year under consideration. The first

addition was made on account of waiver of sundry creditors by invoking

provisions of Section 41(1)(a) of the 1961 Act mainly on the allegation

that the assessee has inflated purchases in its books of accounts wherein

bogus purchases were introduced by assessee in its books of accounts or

else payments were made to creditors for milk supplies out of undisclosed

income of the assessee which did not get routed through books of

accounts and led to the existence of these large creditors / milk suppliers

in books of accounts , while infact these creditors in realty do not exist at

all . Both Revenue as well assessee are aggrieved by decision of learned

CIT(A), as part relief was granted by learned CIT(A). The AO had added all

milk supplier creditors which were existing in books of accounts of the

assessee as at the end of previous year which were outstanding for

payment for more than one week , while learned CIT(A) gave part relief

by accepting milk supplier creditors which were outstanding for payment

for one more week beyond that what was allowed by the AO. The

assessee was surveyed by Revenue u/s 133A on 06.11.2013. The partner

of the assessee Mr. S.P. Loganathan in his statement recorded during the

course of survey operations on 06.11.2013, in reply of question number

32 has itself admitted that the assessee is boosting its purchases in its

books of accounts and fictitious purchases are introduced in the books of

accounts of the assessee. The employee of the assessee Shri Ramaswamy

in his statement recorded during the course of survey proceedings

conducted by Revenue u/s 133A of the 1961 Act , on 20.11.2013 stated

ITA Nos.1321 & 1403/Chny/2018 :- 23 -:

in reply to question number 6 and 7 that payment for milk purchases are

made within a week’s time by assessee to milk suppliers. The assessee

had of his own voluntarily surrendered ` 2.06 crores during course of

survey operations u/s 133A on 06.11.2013, towards waiver of sundry

creditors on account of inflated purchases. While filing return of income

with Revenue , the assessee itself has voluntarily offered for taxation ` 2

crores on account of waiver of milk creditors in the return of income filed

with the Revenue. Incidentally , as is observed from material placed on

record, large number of payments against purchases for milk were made

by assessee to milk suppliers in cash and the same were not paid through

banking channels. These purchases for milk are made by assessee and

claimed as an expenditure/ deduction while computing income chargeable

to tax and hence onus is on the assessee to prove that these purchases

for milk are genuine. No doubt in earlier years viz. ay: 2012-13 and 2013-

14, the tribunal was pleased to estimate income of the assessee by

applying average GP rate of three years but that does not absolve

assessee from its liability dehors Section 41(1)(a) of the 1961 Act which

creates a deeming fiction to bring to tax income in the hands of tax-payer

in case of remission or cessation of liability as stipulated in said Section in

the statute. By estimating income by applying average GP rate of three

years, the tribunal has directed to bring to tax for ay: 2012-13 and 2013-

14, sale revenue in excess of the purchase price and other admissible

expenses but that does not absolve assessee from its liability u/s 41(1)(a)

of the 1961 Act in case of cessation or remission of trading liabilities.

ITA Nos.1321 & 1403/Chny/2018 :- 24 -:

These milk creditors are infact trading liabilities of the assessee for which

assessee has already claimed deduction as an business

expenditure/deduction while computing income chargeable to tax of the

assessee for impugned ay or earlier ay’s , and if now these trading

liabilities ceases or remitted as is contemplated u/s 41(1)(a) of the 1961

Act , then the assessee can be fastened with tax liability in accordance

with said provision. These amount are brought to tax by AO by invoking

deeming fiction u/s 41(1)(a) of the 1961 Act on account of cessation or

remission of liability of milk creditors as are existing in the books of

accounts of assessee as outstanding for payment and primary onus is on

Revenue to bring on record incriminating material to prove that these

liabilities shown to be outstanding in books of account to be payable by

the assessee are infact non-existent liabilities and the assessee is hit by

provisions of Section 41(1)(a) of the 1961 Act. The 1961 Act is a taxing

statute which is governed by preponderance of probabilities and strict rule

of evidence may not be applicable. The normal conduct of business in

regular course as is applicable to a particular business activities shall also

be having an important bearing for fastening of tax liabilities if proper

explanation for variations in normal conduct of business could not be

explained/forthcoming from the tax-payer. Coming back to appeal in

hand, the Revenue in order to discharge its primary burden as is cast u/s

41(1)(a) of the 1961 Act had brought on record following incriminating

evidences/material against assessee to discharge their onus while invoking

provisions of Section 41(1)(a) of the 1961 Act:-

ITA Nos.1321 & 1403/Chny/2018 :- 25 -:

a) Statement Recorded of Partner of the assessee firm , Mr.

S.P.Loganathan during the course of survey operations

admitting inflation of purchases.

b) Statement of employee Mr. Ramaswamy recorded during

course of survey wherein he stated that payments for milk are

made by assessee within a week’s time, while books of

accounts are showing large balances of old amounts purported

to be payable to milk creditors which defy the said statement of

employee of the assessee.

c) Surrender of ` 2.06 crores as income by the assessee during

the course of survey operations owing to waiver of milk

creditors /boosting of purchases.

d) Offer for taxation , aforesaid surrender of income to the tune of

` 2 crores , in return of income filed voluntarily by assessee

with Revenue.

e) The existent of large amounts of old creditors on account of

milk supplies in books of accounts of the assessee to be

payable as on the last dated of previous year, which defy

normal business transaction of the assessee as it is against its

own normal conduct of assessee of making payments to milk

creditors within a week time.

f) There was a difference in the balances of sundry creditors

outstanding to be payable for milk supplies as on 31.03.2013

and 01.04.2013 , to the tune of more than ` 5,06,56,197/-, in

ITA Nos.1321 & 1403/Chny/2018 :- 26 -:

the hard disk impounded by Revenue in the course of survey

operations conducted by Revenue u/s 133A on 06.11.2013 ,

which led to additions of the said amount as income of the

assessee for ay: 2013-14 by AO by invoking provisions of

Section 68 of the 1961 Act.

Thus, the Revenue has discharged its initial burden that lay on it u/s

41(1)(a) of the 1961 Act to prove that state of affairs presented by

assessee to Revenue as is reflected in its audited books of accounts for

the relevant period is not true and correct and the amounts of sundry

creditors are non-existent. The onus now get shifted to the assessee and

it is now open for the assessee to have rebutted the findings of Revenue

to prove that its sundry creditors as are existing in its books of accounts

to be payable as at the end of the previous year, are genuine and

assessee is liable to pay the said amount to milk creditors and the

assessee is not hit by the provisions of Section 41(1)(a) of the 1961 Act,

by bringing on record cogent material to rebut the incriminating material

brought on record by Revenue. In a recent decision rendered by Hon’ble

Supreme Court in the case of CIT v. S.Ajit Kumar reported in (2018) 404

ITR 526(SC) has in context of held that evidences found or collected

during survey simultaneously made at a premises of connected person can

be used for fastening liability against the tax-payer while framing its Block

Assessment, wherein Hon’ble Supreme Court held as under:

ITA Nos.1321 & 1403/Chny/2018 :- 27 -:

“15. The power of survey has been provided under Section 133A of the IT Act. Therefore, any material or evidence found/collected in a Survey which has been simultaneously made at the premises of a connected person can be utilized while making the Block Assessment in respect of an assessee under Section 158BB read with Section 158 BH of the IT Act. The same would fall under the words "and such other materials or information as are available with the Assessing Officer and relatable to such evidence" occurring in Section158 BB of the Act. In the present case, the Assessing Officer was justified in taking the adverse material collected or found during the survey or any other method while making the Block Assessment.”

It is not that the Revenue is solely relying on the statement recorded

during course of survey operations rather Revenue is also relying on the

difference in sundry creditors as on 31.03.2013 and 01.04.2013 as

recorded in the hard disk impounded during survey operations and also on

preponderance of probabilities to fasten tax liability on assessee on the

grounds of waiver of sundry creditors . As is seen from ledger accounts of

milk suppliers reproduced by the AO in his assessment order, that

assessee is making payments for current invoices/supplies of milk to the

vendors back to back against supplies of milk , while old payables for milk

supplies purported to be made earlier during the year or in the preceding

years are still pending/outstanding for payment in books of accounts of

the assessee which led authorities below to draw adverse inference

against assessee. The statement recorded during survey could be used to

corroborate the evidences/material found/collected during survey and also

for deviation against normal conduct of business in regular course of milk

diary. The onus has not only now shifted to the assessee but is also

heavy on assessee to properly explain all these deviation in the milk

creditors outstanding for payment at the year end. It is incomprehensible

and unbelievable that large number of milk suppliers will just supply milk

ITA Nos.1321 & 1403/Chny/2018 :- 28 -:

to the assessee and shall not come forward or remains silent when it

comes to claiming their payments against milk supplies made by them.

The AO has categorized these purchases into three categories and made

additions towards waiver of sundry creditors on the allegation that either

these are inflated bogus purchases introduced in books of accounts or

these purchases are paid in cash out of the undisclosed income of the

assessee which are not recorded in books of accounts of the assessee. The

AO had observed that in some cases old purchases are outstanding for

more than a year and there are no transactions by assessee with these

milk suppliers during the entire year under consideration . The AO has

also categorized wherein payments against current purchases are made

by assessee back to back, while old purchases for milk supplies remains

unpaid. These are against normal conduct of business in regular course of

business activities conducted by any tax-payer in the field of milk diary .

The learned AO has made additions for all milk purchases which are

outstanding for payment for more than one week , while learned CIT(A)

gave part relief by accepting the purchases which were outstanding for

payment for one more week and entire purchases outstanding for

payment more than two weeks stood added to the income of the assessee

by learned CIT(A). However, there could be some cases wherein genuinely

the assessee had not made payments to these milk suppliers creditors and

the assessee continued to be liable to these milk supplies vendor , albeit is

payment is pending for more than one/two weeks. This requires enquiry

and verifications of these milk supplies creditors . The authorities below

ITA Nos.1321 & 1403/Chny/2018 :- 29 -:

have however made no enquiry with milk supplies creditors. No summons

u/s 131 or notices u/s 133(6) were issued by AO/learned CIT(A) to these

milk supplies creditors to verify about their genuineness and bonafide

rather the entire sum wherein the payments were outstanding for more

than one week stood added by the AO while learned CIT(A) gave part

relief to the assessee by accepting creditors which were outstanding upto

two weeks. The assessee has also to rebut said presumption by bringing

on record complete details of each of these milk suppliers creditors such

as name, address, PAN, reasons for non payments, any dispute with

these milk suppliers, communication with these milk suppliers, claims

filed by these milk suppliers with any court etc. . In our considered view

based on facts and circumstances of the case and in the interest of

substantial justice to both the parties, the assessee deserves one more

opportunity and the matter needs to be set aside and restored to the file

of the AO for framing fresh assessment denovo on merits in accordance

with law. We have already explained the onus which lay on both the

parties. The assessee is directed to produce complete details of milk

suppliers to the AO in set aside proceedings for making necessary

enquiries and verifications, if deem fit by the AO in set aside proceedings .

The AO is directed to provide proper and adequate opportunity of being

heard to assessee in accordance with principles of natural justice in

accordance with law. The AO shall admit evidences/explanations filed by

the assessee in its defense in set aside denovo assessment proceedings in

the interest of justice and then adjudicater on merits in accordance with

ITA Nos.1321 & 1403/Chny/2018 :- 30 -:

law . Thus appeal filed by both the parties on this issue stand allowed for

statistical purposes. We order accordingly.

physical cash found during the course of survey operations conducted by

Revenue u/s 133A of the 1961 Act on 06.11.2013 which was physically

found to the tune of ` 26,35,769/-, but while filing its return of income

with Revenue, the assessee has shown cash in hand balance in its audited

cash book to be the tune of ` 56,33,311/- as on 06.11.2013. The AO did

not accepted this differential and made additions to the income of the

assessee to the tune of ` 29,97,542/- u/s 68 of the 1961 Act while

framing assessmen , while learned CIT(A) simply accepted the said

differential without brining on record reconciliation statements explaining

said differential in cash balance while adjudicating first appeal based on

the amount certified by the auditors . In our considered view, the cash in

hand was physically found to be ` 26,35,769/- during the course of survey

operations conducted by Revenue on 06.11.2013 u/s 133A of the 1961 Act

and it is the assessee’s Managing Partner Mr. S.P.Loganthan in his

statement recorded u/s 133A on 06.11.2013 in reply to question number

28 stated that cash book maintained by assessee is tallying with physical

cash found during the course of survey operations on 06.11.2013 , except

difference of ` 684/- which was explained to be difference in petty cash.

Now, the assessee is claiming cash balance in its books of accounts to be `

56,33,311/- as on 06.11.2013 as against physical cash found during

survey operations u/s 133A on 06.11.2013 of ` 26,35,769/- and hence

ITA Nos.1321 & 1403/Chny/2018 :- 31 -:

onus is on assessee to bring out reconciliation statement before the

authorities to reconcile justly the variation of ` 29,97,542/- and to explain

that income component , if any arising due to aforesaid variation under

the provisions of the 1961 Act has been offered to tax and due taxes paid

to Revenue. In our considered view based on facts and circumstances of

the case and in the interest of substantial justice to both the parties, the

matter needs to be set aside and restored to the file of the AO for framing

fresh assessment denovo on merits in accordance with law. The assessee

is directed to produce reconciliation statement reconciling aforesaid

differential in cash before the AO in set aside proceedings and justification

for said differential . The AO is directed to provide proper and adequate

opportunity of being heard to assessee in accordance with principles of

natural justice in accordance with law. The AO shall admit

evidences/explanations filed by the assessee in its defense in set aside

denovo assessment proceedings in the interest of justice and then

adjudicate on merits in accordance with law. Thus , appeal filed by

Revenue on this issue stand allowed for statistical purposes. We order

accordingly.

appeal being aggrieved by denial of depreciation on Buildings and Plant &

Machinery with respect to its Karur Chilling Plant. The depreciation was

disallowed by learned CIT(A) mainly on the grounds that Karur Chilling

Plant has not commenced commercial operations until the end of previous

year relevant to impugned assessment year as the assessee did not filed

ITA Nos.1321 & 1403/Chny/2018 :- 32 -:

any evidence to substantiate the same. The assessee in course of appeal

before tribunal has filed evidences by way of Certificate from Department

of Town and Country Planning , dated 22.05.012 and Certificate from

Directorate of Industrial Safety and Health , dated 21.08.2015. These are

additional evidences filed by the assessee for the first time before the

tribunal. We admit these additional evidences in the interest of justice .

The authorities below , however, did not get an opportunity to verify these

documents nor any enquiries could be made by authorities below in the

context of these additional evidences to arrive at conclusion whether the

new Karur Chilling Plant commenced operations until the end of previous

year or not and hence accordingly, whether the assessee would be entitled

to get depreciation on Building and Plant & Machinery for the year under

consideration In all fairness to both the parties and in the interest of

justice, we set aside and restore this matter to the file of the AO for

framing fresh assessment denovo on merits in accordance with law. The

assessee is directed to produce these additional evidences before the AO

in set aside proceedings for making necessary enquiries and verifications,

if deem fit by the AO in set aside proceedings . The AO is directed to

provide proper and adequate opportunity of being heard to assessee in

accordance with principles of natural justice in accordance with law. The

AO shall admit evidences/explanations filed by the assessee in its defense

in set aside denovo assessment proceedings in the interest of justice and

then adjudicate the same on merits in accordance with law . Thus appeal

ITA Nos.1321 & 1403/Chny/2018 :- 33 -:

filed by assessee on this issue stand allowed for statistical purposes. We

order accordingly.

with respect to Karur Chilling Plant as discussed by us in para 12 above in

this order , is the allowability of interest on term loans borrowed for

incurring capital expenditure for installing said Karur Chilling Plant . The

disallowance of interest on term loans borrowed for incurring capital

expenditure for installing Karur Chilling Plant was on the grounds that the

said Karur Chilling Plant had not commenced commercial operations and

the assets thereof were not put to use. The decision by the AO as to

whether the assessee did commence commercial production and put to

use assets before the end of previous year relevant to impugned ay or not

as per our decision in preceding para 12 was set aside to the AO and the

decision of the AO in set aside denovo proceedings shall have direct

bearing on the allowability of interest on term loans availed for incurring

capital expenditure for installing Karur Chilling Plat. Thus, this matter is

also remitted back to the file of the AO for framing denovo assessment

and our observations and directions in para 12 above of this order will also

equally apply as to allowability or disallowability of interest expenditure

incurred during the year on term loans borrowed for incurring capital

expenditure by way of Building, Plant & Machinery etc. for installing Karur

Chilling Plant. We order accordingly.

allowability of additional depreciation u/s 32(1)(iia) on both the new

ITA Nos.1321 & 1403/Chny/2018 :- 34 -:

plants at Aaiyilapatti and Karur. No grounds of appeal are raised by assessee in context thereof with respect to denial of claim of additional depreciation u/s 32(1)(iia) by learned CIT(A) and hence we are afraid that in the absence thereof, we cannot entertain this issue at this stage. We can only decide the issue which are specifically raised before us and we cannot venture into an unchartered territory to do fishing expeditions. This plea raised by assessee is not accepted and stand rejected. 15. In the result, both the appeals filed by assessee and revenue are allowed for statistical purposes.

Order pronounced on this 05th November, 2019, at Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन) (र"मत कोचर) (N.R.S. GANESAN) (RAMIT KOCHAR) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

चे�नई/Chennai, 1दनांक/Dated: 05th November, 2019. TLN

आदेश क/ ,�त"ल2प अ3े2षत/Copy to: 4. आयकर आयु4त/CIT 1. अपीलाथ+/Appellant 5. 2वभागीय ,�त�न�ध/DR 2. ,-यथ+/Respondent 6. गाड( फाईल/GF 3. आयकर आयु4त (अपील)/CIT(A)