THIRUMALA PHARMACHEM PVT. LTD.,CHENNAI vs. ITO, CHENNAI

आदेश / O R D E R

1) The Learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs.19,19,548/- made on account of suppression of sales.

2) The Learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Audit fee u/s.40(a)(ia) of the Act amounting to Rs.28,090/-.

3) The Learned Commissioner of Income Tax (Appeals) erred in partially confirming the disallowance u/s.40A(3) of the Act for Rs.5,40,000/- being settlement made to employees on winding up.

During the course of scrutiny assessment, it was observed by the Ld.AO that for the relevant assessment year percentage of sale on cost of material consumed was only 62% while as for the financial year 2007-08 it was 153.72% and for the financial year 2006-07, 171.91%. When the Ld.AO queried, the assessee made the following submission:

“We were in to this business until 2009 and the unit was closed due to heavy losses. The building that belongs to the company was sold to meet out the debts and settlement. We made a loss of around Rs.6 lakhs in the year 2007-2008 and business scenario become worst in 2008-2009(F.Y). As a result we ended up with gross loss. We made the payments to vendors and employees only out to the source of building sale proceeds. The building sale proceeds were used to meet the expenses in the year 2008-2009. As the company financial position become worse we lost the cooperation from employees and there were a huge batch process loss, consequently ended up with gross loss in the year 2008-2009. In addition to this we also had settlement and closing down expenses. With batch process loss and faulty chemical reactions we ended up in huge loss. The applicability of general margin as disclosed in the earlier year is NOT APPLICABLE during this year of 2008-2009. All the purchases and sales were made through bank transactions only. We made good the loss only with the sale proceeds realization.”

However, the Ld.AO arrived at the conclusion that the assessee has suppressed sales in order to avoid tax on capital gains relating to sale of property. Thereafter the Ld.AO reworked the sale of the assessee adopting the percentage of sale on cost of material consumed at 153.72% for the relevant assessment year and thereby worked out the suppression of sale at Rs.19,19,548/- and added to the income of the assessee.

4.1 On appeal the Ld.CIT(A) confirmed the order of the Ld.AO by agreeing with his view.

4.2 Before us, the Ld.AR submitted that the assessee had discontinued the business during the relevant assessment year as it was incurring heavy losses. Further, the assessee could neither sell its closing finished stock nor the raw materials as they have become redundant. In this situation, it was argued that presumptions cannot be made that the assessee would have sold the finished stock and raw materials and thereby realized profit. The Ld. AR further submitted that the assessee has incurred loss during the year and therefore the addition made by the Ld.AO may be deleted. The Ld.DR on the other hand vehemently argued in support of the orders of the Revenue authorities.

4.3. I have heard the rival submissions and carefully perused the materials available on record. From the facts of the case, it is apparent that the assessee has suffered loss from its business and financially drained. The financial condition of the assessee company was going worst day by day which ultimately led to the closure of its business. Further, there is nothing on record to suggest that the assessee company would have sold its entire finished stock or raw materials and thereby realized profits. The Revenue has also not brought out anything on record to show that the assessee has suppressed sales other than mere arithmetic computation on certain ratios. Though ratio analysis relied by the Ld.AO may be an indicator, one cannot come to a conclusive conclusion only based on such ratios considering the facts and circumstances of the assessee’s case. Considering the entire facts of the case I am of the view that there are no constructive materials coming out to suggest that the assessee has suppressed its sales. Therefore, I do not find any merit in the order of both the Revenue authorities on this issue. Hence, I hereby direct the Ld.AO to delete the addition of Rs.19,19,548/- made in the hands of the assessee towards suppression of sales.

The Ld.AO disallowed the expenditure incurred towards payment of audit fees of Rs.28,090/- invoking the provisions of Section 40(a)(ia) of the Act, since the assessee had not complied with the provisions of Section 194J of the Act. On appeal, it appears that the Ld. CIT(A) has not addressed the issue. However, on examining the facts I do not find any infirmity in the order of the Ld.AO, because as per proviso (B)(iii) of Section 194J of the Act, the assessee is bound to deduct tax for payment made towards professional fees of Rs.20,000/- or above. In the case of the assessee, the assessee had made aggregate payment of Rs.28,090/- and therefore the provisions of Section 194J and 40(a)(ia) of the Act would be attracted. Therefore this ground raised by the assessee is dismissed.

6. Ground No.3: Disallowance of Rs.5,40,000/- U/s.40A(3) of the Act:-

It was observed by the Ld.AO that the assessee had made cash payments aggregating to Rs.7,05,000/- to its employees towards settlement. Since the assessee had violated the provisions of Section 40A(3) of the Act, as it had exceeded the aggregate cash payment of Rs.20,000/- to a single person in a day otherwise than by account payee cheque / demand draft amounting to Rs.6,85,000/-, the Ld.AO disallowed the same and added to the income of the assessee. On appeal, the Ld.CIT(A) held that in the case of the assessee Rule 6DD(h) would be applicable and therefore directed the Ld.AO to recomputed the disallowance U/s.40A(3) of the Act by observing as under:

“All these expenses are to be considered terminal benefit to the employees and such payments can be made upto Rs.50,000/- under rule 6DD(h) of the Act. The AO has also accepted the fact that the assessee has closed down business in the month of November 2008. Therefore, it is abundantly clear that the payments made to the employees are nothing but settlement payment. All these expenses are to be considered terminal benefit to the employees and such payments can be made upto Rs.50,000 under rule 6DD(h) of the Act. Accordingly

8 the contention of the appellant is found to be acceptable and the AO to recomputed disallowance u/s 40A(3) of the Act based on the above finding. In the result, the ground of appeal is partly allowed.”

I do not find any infirmity in the order of the Ld.CIT(A), because the Ld.CIT(A) has only followed the provisions of the Rule 6DD(h) of the Rules while deciding the issue. Therefore, I do not find it necessary to interfere with his order on this issue.

Order pronounced in the court on the 5th April, 2017.