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Facts
The assessee, engaged in the trading of Pan Masala and tobacco, filed its return for AY 2017-18 declaring a loss. During assessment, the AO noted huge cash deposits during the demonetization period, leading to an addition under Section 68 read with Section 115BBE. Additionally, salary expenses paid to related parties (Director's brother, sister-in-law, and wife) were disallowed under Section 37(1) due to lack of evidence of services rendered. The CIT(A) subsequently allowed the assessee's appeal on both issues.
Held
The Tribunal dismissed the Revenue's appeal regarding the cash deposits, affirming the CIT(A)'s finding that the assessee's books were proper, sales were supported by stock, and cash sales were a regular feature of the business, thus justifying the deposits. However, for the salary disallowance, the Tribunal upheld the salary paid to the Director's brother, acknowledging his role and tax compliance, but sustained the disallowance for salaries paid to the sister-in-law and wife due to the complete lack of evidence of their employment or services provided.
Key Issues
1. Whether cash deposits made during the demonetization period constitute unexplained cash credit under Section 68 read with Section 115BBE. 2. Whether salary expenses paid to related parties, including the Director's brother, sister-in-law, and wife, are admissible deductions under Section 37(1) of the Income Tax Act.
Sections Cited
143(2), 143(1), 68, 115BBE, 37(1), 133A, 133(6)
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Income Tax Appellate Tribunal, DELHI BENCH “G”, NEW DELHI
(ASSESSMENT YEAR: 2017-18) ACIT, Circle 22(2), vs. Samvardhan Marketing Pvt. Ltd. New Delhi 2366, Satya Chambers, Rajguru Road, Paharganj, New Delhi – 110 055 (PAN: AALCS8254L) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Rajkumar, CA Shri J.P. Sharma, Advocate REVENUE BY : Shri Sujit Kumar, CIT (DR) Date of Hearing : 05.08.2024 Date of Order : 16.10.2024 O R D E R PER S. RIFAUR RAHMAN, AM :
This appeal is filed by the Revenue against the order of ld. Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to ‘Ld. CIT (A)’) dated 04.06.2022 for Assessment Year 2017-18.
Brief facts of the case are, assessee filed its return of income for AY 2017-18 on 24.10.2017 declaring loss of Rs.81,620/-. The case was manually selected for scrutiny as survey was conducted by Director of Income-tax (Inv.), Delhi and accordingly, notices u/s 143(2) and 143 (1) of the Income-tax Act, 1961 (for short ‘the Act’) were issued and served on the assessee. All the abovesaid notices were issued through ITR portal and assessee complied with the abovesaid notices through online.
The assessee is engaged in the business of trading of Dilbagh Pan Masala and tobacco. During assessment proceedings, Assessing Officer observed that assessee has deposited huge cash during demonetization period and observed that assessee has deposited Rs.21,00,000/- in Central Bank of India, Rs.7,49,50,000/- in HDFC Bank and Rs.4,85,00,000/- in Axis Bank Ltd. The assessee was asked to submit details of source and details of cash deposited in SBN during the demonetization period with documentary evidences, total income of the assessee along with percentage of cash deposits to gross total income and also details of cash deposits month-wise during the period including specific period of cash deposits i.e. 01.11.2016 to 08.11.2016, 09.11.2016 to 30.11.2016, 01.12.2016 to 30.12.2016, for 31.12.2016 and 01.12.2016 to 31.12.2016. In response, assessee submitted detailed submissions during assessment proceedings. For the sake of clarity, the same is reproduced below :-
Table-1 Amount in Crore
CASH CASH CASH Cash sale in DEPOSITED Cash sale in DEPOSITED Cash sale in FY DEPOSITED IN Month FY 2017-18 IN BANK in FY FY 2016-17 IN BANK in FY 2015-16 BANK in FY 2017- 18 2016- 17 2015- 16 April 14.94 15.22 18.60 18.10 10.90 9.89 May 20.73 21.02 23.76 16.80 11.22 10.47 June 27.39 26.65 25.64 23.02 22.34 23.70 July 2.08' 3.60 15.10 24.05 14.91 14.10 August 9.74 9.55 21.60 23.49 9.93 9.90
7.97 September 7.80 11.74 12.30 12.63 11.94 October 7.15 6.95 13.88 11.65 9.94 11.16 1/11 to 8/11 2.32 2.30 8.02 3.75 6.97 5.30 9/11 to 30/11 5.88 5.75 6.56 11.35 13.98 15.25 1/12 to 31/12 . 8.99 8.17 5.39 5.96 17.82 17.76 Jan 12.02 11.82 12.42 13.08 12.43 12.78 Feb 8.50 9.45 7.39 6.50 19.89 18.55 March 8.42 7.85 11.23 10.64 34.61 35.13 Total 136.12 136.13 181.33 180.69 197.56 195.93
Cash sale % to Cash deposit % to Cash sale % to Cash deposit % to Cash sale % to Cash deposit % to total Month total cash sale total cash sale total cash sale total cash sale total cash sale cash sale April 11% 102% 10% 97% 6% 91% May 15% 101% 13% 71% 6% 93% June 20% 97% 14% 90% 11% 106% July 2% 173% 8% 159% 8% 95% August 7% 98% 12% 109% 5% 100%
6% September 98% 6% 105% 6% 95% October 5% 97% 8% 84% 5% 112% 1/11 to 8/11 2% 99% 4% 47% 4% 76% 9/11 to 4% 98% 4% 173% 7% 109% 30/11
7% 91% 3% 111% 9% 100% 1/12 to 31/12 Jan 9% 98% 7% 105% 6% 103% Feb 6% 111 % 4% 88% 10% 93% March 6% 93% 6% 95% 18% 102% Average 8% 100% 8% 100% 8% 100% 4. After considering the above tables, the Assessing Officer found it not to be acceptable to him and proceeded to make the addition u/s 68 of the Act read with section 115BBE of the Act by observing as under :-
“From the above Table-1, it is apparent that cash sale during demonetization period was increase from Rs. 5.88 cr. to Rs. 6.56 cr. during 09.11.2016 to 30.11.2016 however cash deposit was surged from Rs. 5.75 cr. to Rs. 11.35 cr. The total cash deposit out of total cash sale is 173% of total cash sale where as in the F.Y. 2015-16, there was 98% of total cash sale which raise suspicion about the genuineness of business transaction. Similarly from table-1, the cash sale during 01.12.2016 to • 31.12.2016 decrease from Rs. 8.99 Cr. to Rs. 5.39 cr. however cash deposit in bank account was escalated from 8.17 cr to 17.82 cr. The cash deposit in bank account is 111 % of total cash sale of the month. But, the assessee failed to substantiate the increased cash deposit in bank account. On further perusal of the Table-2, it has been noticed that • cash sale during the demonetized was decreased to the lowest level i.e. 3% to 4%. In contrast the cash sale was increased at the highest level during the F.Y. 2016-17. The assessee company failed to justify the cause / reason to • keep huge cash of Rs. 7,11,53,135/- in hand on 09.11.2016 whereas its average cash sale in one day was Rs. 50 lac (approx). It can be further construed that total cash in hand as on 09.11.2016 was of 14 day's cash sale which was not possible at all. A prudent businessman could not keep the huge cash in hand. Further during the demonetization period, there was scarcity • of cash flow in the market. The basic necessities were hard to meet out in paucity of cash flow during the period.
On 08.11.2016 the SBN was banned to use in general market • except for meet out some basic necessities. But the assessee failed to demonstrate the description of the Notes which was taken for cash sale of the products. It had violated the direction/notification of the Government of India to accept the Specified Bank Notes in the business transactions as stated before the undersigned.”
Further, Assessing Officer observed that assessee has claimed salary expenses for payment to the related parties which includes Director’s brother - Satya Prakash Sharma, sister-in-law – Sunita Sharma and Director’s Wife – Anita Sharam. The assessee was asked to justify the abovesaid transactions and salary paid to the abovesaid related parties also to furnish evidences of services rendered by them and how it is utilised for the business. The Assessing Officer observed that the assessee failed to submit how the services were rendered by the abovesaid related parties and how the services were actually benefited the business of the assessee. In absence of documentary evidences and nexus to the business of the assessee, the same was disallowed to the extent of Rs.1,06,80,000/-.
Aggrieved with the above order, assessee preferred an appeal before NFAC, Delhi and filed a detailed submissions before him which is reproduced by the ld. CIT(A) in his order. After considering the detailed submissions made by the assessee, ld. CIT (A) decided the issue in favour of the assessee based on the relevant issues raised by the Assessing Officer in his order and “ After going through the submissions of the assessee and the assessment order, I find that the Assessing Officer was not justified in making this addition of Rs. 12,55,50,000/- under section 68 due to following reasons:- (a) Survey was conducted at the premises of assessee on 02.03.2017(period after demonetization) in which the books of accounts and other records were examined in detail. However no discrepancy has been observed by the survey team which has been brought into record by the A.O in his order. This proves that the assessee had maintained his books of accounts in proper fashion and the entries were duly substantiated with evidence. No error was also found in the stock maintained at the premises of the assessee, which proves that the assessee maintained the proper stock records and the high sales during demonetization period was duly supported by the stock available with assessee. (b) The books of account have not been rejected by the A.O. This proves that the A.O. has relied on the entries given in the books of account. Without rejecting the books of account, it was wrong on the part of assessing officer to add an amount of Rs. 12,55,50,000/- which was already declared by the assessee as cash sales. Thus, it tantamounted to double addition.
(c) The A.O. failed to appreciate that the assessee is in the business of trading of Pan masala in which almost 100% turnover of the assessee is in cash. The same is reflected in the table given below:-
AY Cash sales Total Cash including Cash deposited VAT (In deposited 09.11. to Rs.) (In Rs.) 30.12. (In Rs.)
2016-17 197,56,44,419 195,92,79,350 32,50,74,400 2017-18 181,32,61,874 180,68,50,150 16,70,50,000 Further, Breakup of Cash sales and Credit Sales for A.Y.17-18 is as under:-
Particulars Cash sales Credit Sales Total Sales (In Cash (In Rs.) (In Rs.) Rs.) Sales % Taxable 157,11,45,185 75,24,232 157,86,69.417 Value 99.52 Tax/VAT 24,21,154,89 9,42,853 24,30,58,342 Round off 1,200 0 12 00 Total 181,32,61,874 84,67,085 182,17,28,959 (d) The A.O. did not appreciate that cash deposit in demonetization period is 16.70 Cr. against 32.50 Cr. in last year. Hence it is practically half of last year and comparable to subsequent year.
(e) As regards high cash sales during demonetization period it can be seen that:-
A.Y. Total cash sales (including Cash sales during VAT) during the year 09.11 to 30.12 2016-17 197,56,44,419 31,79,25,467 2017-18 181,32,61,874 11,20,81,344 2018-19 136,12,49,147 14,86,45,083 Thus the AO failed to appreciate that during demonetization period the cash sale is 11.20 Cr as against during the same period, in AY 2016-17 it is 31.79 Cr. and in AY 18-19 it is 14.86 Cr.
The cash sale during demonetization period is comparative lesser as compared to the year prior and the year subsequent to demonetization year.
(f) The A.O. also failed to note and appreciate that although total cash sales in A.Y.17-18 is 181.32 Cr. out of which in demonetization period cash sale is only 11.94 Cr. against substantially lesser cash sales in A.Y.18-19 i.e. Rs.136.12 Cr., however in A.Y.18-19, the cash sales during demonetization period is 14.86 Cr. i.e. much more than cash sales in demonetization period of relevant year i.e. A.Y.17-18.
(g) All these factual analysis as given above prove that huge cash sales are regular feature due to nature of business of assessee. Infact, the cash deposit during the demonetization period is virtually half of the amount deposited in previous year. All the sales have been duly entered in the books of accounts which have not been disturbed by the Assessing officer. The source of cash deposit of Rs. 16,70,50,000/- during the period of 09.11.2016 to 30.12.2016 has been explained by the assessee as under:-
Particulars Amount Opening cash in hand as on 08.11.2016- Delhi Branch 6,09,83,486 Opening cash in hand as on 08.11.2016- Gzb. Branch 2,97,777 Add:- Cash sales made on 08.11.16 - Combined 1,48,76,601 Cash Sales made during 09.11.16 to 30.12.2016 11,20,81,344 Add:- (Combined)
Less: Cash Expenses on 08.11.2016 4,790 Less: Cash Expenses During 09.11.16 to 30.12.16 3,46,900 Less:- 50,00,000
Cash Deposited on 08.11.16 (in Day time before announcement of Demonetization in evening
18,28,87,518 Net Cash Balance Available for Deposit During 09.11.16 to 30.12.16 These figures being taken from the audited books of account in which no discrepancy has been found either during course of survey under section 133A of the act or during the assessment proceedings, fully explain the source of cash deposit during the demonetization period. (h) The A.O. failed to appreciate that complete purchases are made by assessee through banking channels from one group who manufactures Dilbagh Gutka. No discrepancy has been pointed out in the purchases either at the time of survey or during assessment proceedings. When the purchases have been accepted by the A.O., there has to be corresponding sales for which the A.O. has remained silent and thus erred. (i) The stock maintained by the assessee have also not been disputed either at the time of survey or at the time of assessment proceedings. It is obvious that purchase, sales and stock are interlinked. The A.O. erred in not accepting sales on one hand while on another hand he accepted the purchase and stock disclosed by the assessee. (j) The assessing officer made the addition by comparing percentage of cash sales with percentage of cash deposited during demonetization period. This comparison by the A.O. is not of much significance since the cash deposits also depend on cash in hand available in the books of account. The A.O. failed to find any discrepancy in the books of account and also did not reject them. Hence the comparison becomes irrelevant. (k) The A.O. has also doubted the cash in hand of Rs.7,11,53,135/- as on 09.11.2016. Again the A.O. failed to appreciate that the cash in hand arises from the cash book in which no discrepancy has been noted or pointed out. Thus the cash available in hand being low or high, is not relevant. The A.O. has also observed that there was scarcity of cash flow in the market during demonetization period. It is a general observation of the A.O. but devoid of any evidence for making addition. As the sales of the assessee are mainly in cash and books of account has been accepted, there is no reason for A.O. to make addition based on this observation. The A.O. also failed to observe that lot of cash deposit by the assessee included non specified currency and newly introduces currency of Rs. 2000/- notes.
(v) Based on the reasons detailed above, I hold that the assessing officer was wrong in making addition of Rs. 12,55,50,000/- under section 68 of the Act. Therefore the grounds of appeal
No. 5 to 10 are allowed.”
7. With regard to disallowance of salary expenses claimed by the assessee of Rs.1,06,80,000/-, assessee submitted detailed submissions before the ld. CIT(A) and the same is reproduced by ld. CIT (A) in his order. After considering the detailed submissions of the assessee, ld. CIT (A) allowed the grounds raised by the assessee with the following observations :- “ Even otherwise, it is seen that justification of salary payments to Sh. Satya Prakash Sharma and Smt. Sunita Sharma was submitted to the Assessing officer on 19.09.2019 by the parties themselves in response to notice U/s. 133(6) issued by the A.O. Thus it is incorrect on the part of A.O. to say that he was not aware about the nature of services rendered by the related parties. Sh. S.P. Sharma, as submitted by the assessee, is the backbone of his business and has been getting high salary in previous years which was accepted by the department. Further, Sh. S. P. Sharma disclosed his income of Rs. 5.02 crores in A.Y. 2017-18, thus falling in highest possible tax bracket. Thus it cannot be a case of. diversion of income. The assessee is well within his right to pay salaries according to the benefit he gets in return. Smt. Sunita Sharma and Smt. Anita Sharma are both old employees of the company. Smt. Sunita Sharma is a post graduate and looks after account section. Sh. Anita Sharma is a graduate who looks after office and administrative works of the assessee. Considering all these factors and submission of assessee, I find that the AO, erred in making the addition of Rs. 1,06,80,000/- under section 37(1) of the Act. Therefore, the grounds of appeal No. 11 to 13 are allowed.”
Aggrieved with the above order, Revenue is in appeal before us by raising following grounds of appeal :-
1. Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the additions made by the Assessing Office of Rs.12,55,50,000/- u/s 68 r.w.s 115BBE of the Act on account of Unexplained Cash deposit during the period of demonetization and ignored the facts that the AO has made the addition as the assessee company failed to justify the same.
2. Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the disallowances made by the Assessing Office of Rs. 1,0680,000/- u/s 37(1) of the Act on account of salary payment to related parties as the assessee 'failed to submit the documentary evidences.
3. Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in allowing the appeal of the assessee only on the basis of submission of the assessee and did not ask any remand report from the Assessing Officer.”
9. At the time of hearing, ld. DR for the Revenue submitted that the assessee has deposited huge cash deposits during demonetization period and submitted that the assessee has not deposited the abovesaid cash sales immediately on such commencement of demonetization of currency. He submitted that assessee has first deposited on 17.11.2016 Rs.3 crores, on 18.11.2016 Rs.5 crores and 03.12.2016 Rs.3 crores. He submitted that the cash book submitted by the assessee is totally fictitious and prepared only to justify the cash deposits. He supported the detailed findings of the Assessing Officer.
10. With regard to second issue of disallowance of salary expenses, ld. DR submitted that the related parties who are close relatives of the Director, Shri Satya Prakash Sharma and the assessee has not brought on record the relevant services rendered by them and also no documentary evidences were submitted before the authorities below and strongly objected to the relief granted by the ld. CIT (A) merely relying on the submissions made by the assessee before him. He submitted that ld. CIT(A) could have called for remand report.
On the other hand, ld. AR for the assessee submitted that assessee has deposited cash during the period of demonetization. He submitted that assessee has a regular cash sales during the whole year and submitted that a detailed cash sales during the demonetization period i.e. 09.11.2016 to 30.12.2016 along with summary of cash sales during the same period in Delhi Branch and U.P. Branch. He further submitted that assessee also submitted detailed cash sales and deposits in the current year as well as past two years before the Assessing Officer. He submitted that assessee has regular cash sales to support the cash deposits and specifically mentioned that all the sales of the assessee are only in cash. He relied on the various decisions of Hon’ble Delhi High Court as under :- (i) PCIT vs. Agson Global (P.) Ltd. (2022) 134 taxmann.com 256 (Delhi HC); (ii) Hirapanna Jewellers vs. ACIT (2021) 128 taxmann.com 291 (Visakhapatnam – Trib.); (iii) Charu Aggarwal vs. DCIT (2022) 140 taxmann.com 58 (Chandigarh – Trib.); (iv) Narendra G. Goradia vs. CIT (1998) 234 ITR 571 (Bombay HC); (v) Lakshmi Rice Mills vs. CIT (1974) 97 ITR 258 (Pat.)(HC); (vi) Lakhmichand Baijnath vs. CIT (1959) 35 ITR 416 (SC); (vii) Gur Prasad Hari Das vs. CIT (1963) 47 ITR 634 (All.)(HC); (viii) Kanpur Steel Co. Ltd. vs. CIT (1957) 32 ITR 56 (All.)(HC); (ix) Sri Sri Nilkantha Narayan Singh vs. CIT (1951) 20 ITR 8 (Pat.)(HC); (x) Lalchand Bhagat Ambica Ram vs. CIT (1959) 37 ITR 288 (SC).
With regard to disallowance of salary expenses, ld. AR for the assessee submitted that assessee has submitted before the ld. CIT (A) that Satya Prakash Sharma is the key employee and backbone of the business and has been getting high salary in previous years which duly accepted by the Revenue. He brought to our notice page 35 of the paper book wherein assessee has given details of the related parties and their services in the notes to account. With regard to other related employees, he submitted that they all are graduate and looking after the accounts and administration in the business. And also they have got requisite qualification and rendered service in the company. Therefore, disallowance made by the Assessing Officer is not justified and he relied on the findings of the ld. CIT (A).
Considered the rival submissions and material placed on record. We observed that assessee has deposited cash during demonetization period and in support of the same, assessee has submitted detailed submissions before the Assessing Officer that the assessee has regular cash sales and deals only cash sales and regularly deposited the same in the bank and in support of the same, assessee has submitted month-wise cash sales and cash deposits in the bank. It also disclosed the cash sales during demonetization period and cash deposits. Assessee also submitted comparative chart of cash sales and cash deposits during the year in the form of chart before the Assessing Officer and demonstrated that all the cash deposits are only out of cash sales. The Assessing Officer rejected the same by making certain analysis in the assessment order and further observed that the SBN was banned from 09.11.2016 to use in general market except to meet out some basic necessities and proceeded to make the addition u/s 68 of the Act for total cash deposits made by the assessee during demonetization period. We observed that ld. CIT (A) considered the detailed submissions along with chart and all the issues raised by the Assessing Officer in his order and gave a detailed finding which is reproduced by us elsewhere in this order. Considering the detailed findings of the ld. CIT (A) and also we observed that Assessing Officer has rejected the cash sales during demonetization period and also observed that SBN was banned from 08.11.2016 and technically rejected the sales from 09.11.2016 with the observation that the assessee should not have accepted the SBN after 08.11.2016. The abovesaid observation of the Assessing Officer is not proper considering the fact that as per the Ordinance No.10/2016 dated 30.12.2016 the prohibition of holding SBN was after 31.12.2016 as per Section 5 of the Ordinance not 08.11.2016. This is supported by RBI Circular on demonetization 2016.
Therefore, considering the detailed and reasoned findings of the ld. CIT (A), we are inclined to dismiss ground no.1 raised by the Revenue.
Coming to the next issue, we observed that the Assessing Officer has disallowed the salary expenditure claimed by the assessee of Satya Prakash Sharma who is brother of the Director and received the salary of Rs.90,00,000/- during the year. It is a fact on record that assessee has not submitted any detail before the Assessing Officer. However, assessee has submitted before the ld. CIT (A) that Satya Prakash Sharma, respondent to the notices issued u/s 133 (6) of the Act by the Assessing Officer and ld. CIT (A) held that Satya Prakash Sharma is the key employee and backbone of the business of the assessee and he has regularly received the abovesaid salary and the same was accepted by the Department. It is also brought to our notice that Satya Prakash Sharma regularly declares his huge income and the same was accepted by the Revenue and also pays highest possible tax bracket. After considering the submissions of the parties and findings of the ld. CIT (A), we observed that Satya Prakash Sharma is a regular employee and key employee of the assessee and whatever salary received by him is properly disclosed in its return of income not only during this year but also in the past which was accepted by the Revenue. Therefore, the disallowance made by the Assessing Officer in the name of Satya Prakash Sharma is not justified and we are inclined to accept the findings of ld. CIT (A) by considering the fact that it is a family owned business.
Coming to the other salaries received by the sister-in-law of the Director and wife of the Director, no evidence was brought on record to show that they are employees of the company and no evidence was brought on record to show their rendering of the services in the company. During the hearing, we directed the ld. AR to bring on record appointment letter and qualification of these employees. Even before us, nothing was submitted till now. We are inclined to treat the salary paid to sister-in-law and wife of the Director as unsubstantiated and accordingly, salaries paid to them are sustained as disallowed. The grounds raised
by the Revenue are partly allowed.
16. In the result, the appeal filed by the Revenue is partly allowed. Order pronounced in the open court on this 16th day of October, 2024.