SRI MAHASAKTHI MILLS LIMITED,COIMBATORE vs. THE ACIT, CC-I,, COIMBATORE

, two issues fall for our consideration viz. (i) addition of cash deposits; (ii) Disallowance of knitting charges u/s 40A(3).

2. The Ld. AR advanced arguments and relied on the earlier decision of Tribunal in assessee’s own case for AY 2015-16 in dated 29-11-2023. The copy of the same has been placed on record along with various submissions. The Ld. CIT-DR also advanced arguments supporting the additions made by lower authorities. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under. Assessment Proceedings 3.1 The assessee being resident corporate assessee is stated to be running a textile mill. It is manufacturing cotton / synthetic yarn and clothes. For this year, the assessee declared loss of Rs.174.55 Lacs. A survey was conducted u/s 133A at the business premises of the assessee group on 23-03-2017. It transpired that the assessee deposited cash of Rs.800.05 Lacs during demonetization period. The assessee also made cash advances of Rs.1267.55 Lacs to its sister concerns viz. M/s Imperial Spirits Ltd., M/s Overseas Beverages Ltd. and M/s Arumuga Cottspin Ltd. In recorded statement, Shri G. Ganesh, Assistant General Manager, explained that the source of cash deposits and the said advances was out of cash sales of yarn and clothes. 3.2 Shri T. Rajkumar was one of the directors of assessee-company and he was subjected to search on same date. He stated that the cash was sourced from cash sale of cloth manufactured and yarn produced by the mill. On 23-08-2017, another statement was recorded from him wherein he furnished the cash flows. To verify the same, summons was issued to the three buyers who denied having any business connection with the assessee. The assessee furnished a list of 418 parties to whom cash sales were purportedly made. Out of the same, sample of 25 cases with cash sales exceeding Rs.2 Lacs was selected and letters were issued u/s 133(6) to confirm the transactions. One party confirmed the purchases which were also held to be not reliable. The Ld. AO also noted that the assessee revised VAT returns for the month of July to October, 2016 increasing its sales turnover. Shri T. Rajkumar stated that VAT returns were filed only for yarn sales and to include the cloth sales, VAT returns were revised. Finally, Ld. AO held that cash sales as stated by the assessee were not acceptable though the cash deposits of Rs.800.05 Lacs were utilized by the assessee to settle early borrowings as taken from related concerns. 3.3 The assessee advanced Rs.1267.55 Lacs to sister concerns which was stated to be sourced out of realization of debtors for Rs.1099.61 Lacs as shown in the books of account. However, the assessee could not file the requisite verifiable details. Finally, rejecting assessee’s submissions, the cash deposits of Rs.800.05 Lacs as well as advances for Rs.1267.55 Lacs was added on substantive basis u/s 69A in the hands of the assessee. The same was added protectively in the hand of Shri T. Rajkumar. The assessee advanced sum to its sister concerns which was deposited by them in their bank accounts and therefore, these advances were also added protectively in their respective hands. 3.4 Another disallowance was of knitting charges. It was noted that the assessee gave job work to M/s Knit Tex Fabs and paid knitting charges for Rs.42.70 Lacs. Since no tax was deducted against the same, 30% thereof was disallowed u/s 40(a)(ia). The assessee allegedly made payment in cash and therefore, the amount of Rs.42.70 Lacs was separately added u/s 40A(3). Finally, the assessment was framed determining business loss of Rs.119.04 Lacs. The income from other sources was assessed u/s 69A at Rs.2067.60 Lacs. Aggrieved, the assessee assailed the same before first appellate authority. Appellate Proceedings 4.1 The assessee assailed the impugned additions by way of elaborate written submissions which have been extracted in the impugned order. The assessee, inter-alia, stated that the cash were deposited out of sale proceeds which were duly reflected in VAT returns. The revision of VAT returns was within the ambit of law. The provisions of Sec.69A could be invoked only where the assessee is found to be the owner of money, bullion etc. which is not recorded in the books of accounts. This is the primary condition for invoking the provisions of Sec.69A. When cash was sourced out of recorded sales, these provisions could not be applied. The assessee submitted that no such findings have been rendered by Ld. AO. The assessee has maintained regular books of accounts which are duly audited as required under the Companies Act. The assessee further submitted that during the course of survey proceedings, summons u/s 131(1A) were issued to one Shri Senthil Kumar. In the recorded statement, he clearly explained his role as a broker for sale of yarn as well as cloth to various customers. The mode of carrying out the business was also stated. At the time of survey, box files containing copies of sales invoices were found which was duly verified by the survey team. It was business practice to carry out trade through broker who played a vital role in collection from the customers also. All these facts were not appreciated by Ld. AO. The broker would ensure collections from debtors and the assessee may not have direct link with the debtors. Further, Ld. AO has accepted the stock position, production and expenses etc. Having accepted the purchases as well as sales, the cash generated out of sales proceeds could not be taxed separately. The assessee, during the course of assessment proceedings, duly submitted the purchase and sales invoices which were duly verified. The books of accounts were also produced during the course of assessment proceedings. The assessee also furnished stock details of cloth and yarn. The stock abstract as furnished by the assessee contain day-wise stock of the yarn and cloth which were duly verified by Ld. AO during the course of assessment proceedings. During survey, the survey team did not find any discrepancy in the stock maintained by the assessee. The survey team as well AO had not raised any doubt over the purchases, production and sales. The sales are already offered to income in the Profit & Loss Account and taxing the realization proceeds would lead to double taxation which is against the principles of taxation. Reference was made to various judicial decisions to support its case. 4.2 On the issue to advances to sister concerns, the assessee submitted that such advances were sourced out of opening cash balance and collection from debtors as outstanding in the books of accounts.

These debtors arose on account of sales in earlier years which are already offered to tax. The debtors forms part of books of accounts well as return of income submitted for earlier years. The assessee also submitted that all the stock figures are available in the return of income and financials attached with Tax Audit Reports. The turnover in earlier years was stated to be substantial and quite similar to sales of this year. The sales turnover for this year was Rs.22.73 Crores. Pertinently, the returns of income for AYs 2015-16, 2016-17 and 2018-19 were scrutinized u/s 143(3) and the closing stock, year-end debtors’ balances for all the years were accepted by the department. The copies of the assessment orders were also attached in support of its claim. The closing stock as on 31-03-2016 was Rs.13.91 Crores. It was also stated that the sales tax returns for July, 2016 to September, 2016 were revised during February, 2017 which was much before the date of survey on 23- 03-2017. As per extant VAT rules, the assessee was allowed to revise the returns to rectify omissions and errors within stipulated period of six months. It was duly explained by the director that cloth sales turnover was omitted to be included in the VAT returns. The assessee also submitted that the cash deposits of Rs.800 Lacs were utilized by the assessee for settling long-Term borrowings. The omission to include cloth sale happened due to the fact that the assessee was engaged in the business of spinning yarn and manufacturing of fabric was additional allied activity. The sales turnover of this segment was inadvertently omitted to be included in the regular VAT return of the company which was noticed subsequently and rectified accordingly. 4.3 Regarding denial of transaction by the three parties, the assessee pointed out that the sales were mainly affected through brokers and the customers would generally be unaware of the key persons of the assessee. The brokers would affect sales and purchase and also collect cash from the customers and hand over the same to the assessee company. 4.4 The assessee also submitted that books of accounts were duly furnished during the course of assessment proceedings. The cash deposits were duly reflected in the cash book and the source of the same was sale of goods. The entire sales proceeds were credited to Profit and Loss account and offered for tax. The conclusion that the bank deposits were not out of the sale proceeds was against the facts of the case and the evidences impounded and verified during the course of assessment proceedings. If the bank deposits are not represented by the cash sales as presumed by Ld. AO then the onus would be on Ld. AO to prove in which form the money received on account of cash sales and the money received from Debtors are represented. 4.5 On disallowance of Knitting Charges, the assessee submitted that the total disallowance of Rs.55.51 Lacs was much more than the payments made / expenses claimed by the assessee. The assessee also submitted that due TDS was deducted against the same. The assessee also submitted that the payments were within the limits laid down u/s 40A(3). The Ld. CIT(A) concurred that disallowance of same expenditure could not be made under two different sections and disallowance could not exceed actual expenditure itself. The Ld. CIT(A) confirmed full disallowance u/s 40A(3) and directed Ld. AO to deleted the disallowance made u/s 40(a)(ia). 4.6 The cash deposits were claimed to be sourced out of opening cash of Rs.254 Lacs, cash sales for Rs.713 Lacs and debtors realization for Rs.1100 Lacs. The Ld. AO, upon enquiries, disbelieved the same and also doubted the realization from debtors. The assessee contended that the cash sales were primarily made out of opening stock as available with the assessee which was supported by invoices. The submissions were subjected to remand proceedings. In the remand report, it was stated by Ld. AO that a survey action u/s 133A was conducted at the business premises of the assessee on 23-03-2017. It was found that the assessee made cash deposits of Rs.800 Lacs and also advanced cash to its sister concerns for Rs.1267.55 Lacs. The same were stated to be sourced out of sales proceeds and debtors realization. A search operation was carried out in the case of the Chairman of assessee- company on 23-03-2017 and his statement was recorded. He stated that the amount was out of sales proceeds of cloth. He also stated that VAT returns were filed in the month February 2017 for the period from July 2016 to October 2016. However, in subsequent statement recorded u/s 131(IA), it was stated that deposits were sourced out of opening cash balance for Rs.128 Lacs, cash sales for Rs.713 Lacs and debtors’ realization for Rs.1100 Lacs. The survey team did not value the stock at the time of survey and did not endorse the stock position vis-à-vis the books of accounts. Even the stock register was not provided to the survey team to verify the balance with that of the books. Merely because the closing stock and trade receivables were available in the books at the end of the earlier previous year, it could not be blindly claimed by the assessee that all the sales reported are to be accepted by AO. The Ld. AO observed that though stock was more than 10 crores in all the earlier years from AYs 2013-14 to 2016-17, however, in this year the stock was drastically reduced to Rs.18.70 Lacs which was an abnormal trend. The invoices as impounded during survey proceedings were also examined and discrepancies were noted in the same. The same did not bear the particulars and signatures of buyers. The Ld. AO also tabulated that the cash deposits in AY 2016-17 were Rs.584.33 Lacs. In AY 2018-19, cash deposits were for Rs.74.50 Lacs whereas in this year, cash deposits were Rs.1118.57 Lacs which was abnormal trend. After analysis of cash sales and cash deposits data, Ld. AO concluded that the assessee claimed cash sales only during four months before demonetization period and there were no cash sales before and after that. Finally, Ld. AO stated that assessee introduced unaccounted money in the form of demonetized currency. Shri Senthil Kumar (broker) did not confirm the cash sales and realization from debtors. Accordingly, Ld. AO pleaded for confirmation of impugned additions. However, the assessee submitted detailed point wise reply to each of the observation of Ld. AO in support of its claim. 4.7 The Ld. CIT(A) noted that though one of the sources was debtors realization, however, the assessee failed to file complete details thereof. The opening debtors were shown at Rs.940.17 Lacs and the collection from debtors during the period 01-04-2016 to 07-11-2016 was Rs.1093.88 Lacs. The assessee filed running account of debtors without providing party-wise break-up thereof. Similarly, for cash sales, the assessee did not file evidences to prove the genuineness of the same. The assessee relied on the order of Tribunal for AY 2015-16 in its own case which was held to be distinguishable on the ground that in that year, the assessee was able to identify the debtors from whom the amount was recovered. However, in this year, the assessee did not provide separate list of debtors, ledger accounts of debtors and addresses of debtors. On the issue of case sales also, Ld. CIT(A) upheld the conclusion of Ld. AO that the assessee tried to create source for cash by introducing fictious cash sales of cloth in its books. The assessee failed to file confirmation letters from the buyers but merely relied on invoices and VAT returns to prove genuineness of cash sales. The arguments that the sales were conducted through broker and therefore, the buyers were not familiar with the assessee or its directors, could not be accepted. No expenditure towards brokerage was debited to Profit & Loss Account. It was the assessee who had dispatched the goods to the buyers and it was the assessee who fixed payments terms. Further, sales invoices lacked essential ingredients. The AO clearly stated in the remand report that stock was not verified during course of survey and stock register was not provided to survey team. The existence of opening stock would not prove cash sales unless sufficient evidence is placed in support of the same. The assessee failed to do so. The assessee tried to build up cash in its books by recording cash sales. Finally, Ld. CIT(A) concurred with the findings of Ld. AO and confirmed the impugned additions against which the assessee is in further appeal before us. Our findings and Adjudication 5. From the facts, it emerges that the assessee is engaged in manufacturing of cotton yarn and clothes. The assessee was subjected to survey proceedings u/s 133A at its business premises on 23-03-2017. It transpired that the assessee deposited cash in its bank account during demonetization period and also made cash advances to its siter concerns. In the recorded statements, it was stated by Shri G. Ganesh that the sources of the same was cash sales of yarn and clothes. This statement was confirmed by Shri T. Rajkumar, Director who was subjected to search action on the same date. Subsequently, the cash flows were furnished on 23-08-2017 in support of cash deposits and advances. The assessee also furnished list of 418 parties to whom cash sales were made during the year. However, Ld. AO chose small sample base of 25 parties and issued summons to them. On the basis of the outcome of the same, Ld. AO rejected the claim of the assessee and doubted the genuineness of cash sales made by the assessee. As against this, the assessee had reflected the sales made by it in the revised VAT returns which were filed much before the date of survey. The sales proceeds were deposited in the bank account and the funds were utilized to settle the borrowings of the assessee. The sales proceeds were duly credited to the Profit & Loss Account and offered to tax. The assessee also made advances to its sister concerns which were stated to be sourced out of realization of sundry debtors as standing in the books of accounts against sales made by the assessee in earlier years. The Ld. AO has rejected the aforesaid claims of the assessee and added the cash deposits as well as advances so made by the assessee as unexplained money u/s 69A.

We find that similar facts exist during this year and aforesaid findings would apply to this year also. Therefore, considering the entirety of facts and circumstances of the case, the impugned addition of cash deposits and realization of sunder debtors is liable to be deleted. We order so. The corresponding grounds as raised by the assessee stand allowed. 13. On the issue of disallowance u/s 40(a)(ia), it has been submitted by Ld. AR that due TDS has duly been deducted by the assessee against these payments. It has also been submitted that the payments so made, on each occasions, fall within the prescribed limit of Sec. 40A(3). In support, the copy of ledger extract has been placed on Page Nos.190 to 192 of the paper-book. The Ld. CIT(A) has already deleted disallowance u/s 40(a)(ia) but confirmed the disallowance as made u/s 40A(3). We concur that disallowance u/s 40(a)(ia) would not be sustainable. However, the actual cash payment to this party during the year is Rs.14,61,993/- only. The remaining payment is debit through journal voucher. Therefore, we direct Ld. AO to restrict the impugned addition u/s 40A(3) to the extent of Rs.14,61,993/- since the assessee could not establish with documentary evidences that the payment on each occasion was less than the prescribed limit of Sec.40A(3). The corresponding grounds stand partly allowed. No other ground has been urged in the appeal.