SRI ARUMUGA COTTSPIN PVT. LTD.,COIMBATORE vs. THE ACIT, CC-I,, COIMBATORE

1.1 Aforesaid appeal by assessee for Assessment Year (AY) 2017-18 arises out of the order of learned Commissioner of Income Tax (Appeals), Chennai-20, [CIT(A)] dated 23-02-2024 in the matter of an assessment framed by the Ld. AO u/s 143(3) of the Act on 20-12-2019. 1.2 The assessee has raised the following grounds of appeal: -

The Ld. AR advanced arguments and drew our attention to various documentary evidences as placed on record. 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 also engaged in selling clothes. For this year, the assessee filed return of income admitting ‘nil’ income. 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.1902 Lacs during demonetization period. The assessee also received advance of Rs.95.55 Lacs from its sister concern i.e., M/s Mahasakthi Mills Ltd. which was also deposited in the bank account of the assessee. In recorded statement, Shri G. Ganesh, Assistant General Manager, explained that the source of cash deposits was out of cash sale of cloth. 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. He confirmed the statement given by Shri G. Ganesh. To verify the cash sales, summons was issued to the three buyers who denied having any business connection with the assessee. The assessee furnished a list of 930 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 by Ld. AO 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 noted that the assessee made cash sale of Rs.2504.39 Lacs from sale of raw material and from sale of cloth which was also certified by the Tax Auditor. However, no sales were done during earlier years. The Ld. AO also noted that the assessee had 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. However, the aforesaid explanation was held to be not satisfactory. Finally, Ld. AO held that cash sales as stated by the assessee were not acceptable though the cash deposits of Rs.1902 Lacs were utilized by the assessee to settle bank borrowings. Accordingly, the sum of Rs.1902 Lacs was added as unexplained money u/s 69A. The assessee received advance of Rs.95.55 Lacs from M/s Mahasakthi Mills Ltd. which was also added protectively in the hands of the assessee in similar manner u/s 69A. However, upon further appeal, Ld. CIT(A) has deleted the protective addition of Rs.95.55 Lacs and the same is not the subject matter of dispute before us. 3.3 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.88.19 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.88.19 Lacs was separately added u/s 40A(3). Finally, the assessment was framed determining business income of Rs.115.15 Lacs. The income from other source was assessed u/s 69A at Rs.1997.55 Lacs including protective addition. 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 already 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. 4.2 The assessee further submitted that it 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 the yarn as well as for sale of clothes 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 ensuring collection from the customers. 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 were 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. 4.3 The assessee further submitted that it declared sales of Rs.25.04 Crores in this year which include the sale of yarn as well as clothes. The cash available with the assessee as on 08-11-2016 was Rs.19.19 Crores which was deposited in the banks during demonetization period. During survey, it was explained that the assessee made cash sale which justifies availability of adequate cash balances with the assessee- company. The sales proceeds were backed by adequate stock which was duly verified during assessment proceedings. During survey, the survey team did not bring out any difference in stock. The assessee also tabulated figures of closing stock and sales turnover for various earlier years as under: - FY Sales Turnover Closing Stock 2011-12 50.95 Crores 7.46 Crores 2012-13 54.68 Crores 7.31 Crores 2013-14 58.62 Crores 9.97 Crores 2014-15 9.07 Crores 14.49 Crores 2015-16 5.95 Crores 15.85 Crores 2016-17 25.04 Crores 0.33 Crores It was thus submitted that the assessee had been carrying the closing stock regularly which was used for further production and its subsequent sales. It was further submitted that the returns of income for AYs 2015- 16 and 2016-17 were duly scrutinized u/s 143(3) and the closing stock figures were accepted by the department for both the years. The copies of the assessment orders were also placed on record in support of its claim. The closing stock as on 31-03-2016 was Rs.15.85 Crores. It was also stated that the sales tax returns for July, 2016 to October, 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 returns. The assessee also submitted that the cash deposits were utilized by the assessee for settling bank 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. 4.4 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. Therefore, it was not uncommon that the customers were unaware of the assessee company or its owners. 4.5 The assessee further 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. 4.6 On disallowance of Knitting Charges, the assessee submitted that the total disallowance of Rs.115.15 Lacs was much more than the payments made / expenses claimed by the assessee for Rs.88.19 Lacs. The assessee also submitted that due TDS was deducted against the same. It was 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). 4.7 The cash deposits were claimed to be sourced substantially out of cash sales of Rs.17.87 Crores. The Ld. AO, upon enquiries, disbelieved the cash sales. 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.19.02 Crores which were stated to be sourced out of sales proceeds and advances received from sister concerns. A search operation was carried out in the case of the Chairman of assessee- company on 23-03-2017 and 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. The Ld. AO stated that 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 was 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 in earlier years, however, it reduced drastically in this year which was an abnormal trend. The Ld. AO also referred to the outcome of summons issued to the three parties. 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.330.59 Lacs. In AY 2018- 19, cash deposits were for Rs.70.65 Lacs whereas in this year, cash deposits were Rs.2046.29 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 and pleaded for confirmation of impugned addition. However, the assessee submitted detailed point wise reply to each of the observation of Ld. AO in support of its claim. Reference was made to the decision of Hon’ble High Court of Madras in the case of CIT vs. Anandha Metal Corp. (152 Taxman 300) wherein it was held that return accepted by commercial tax department is binding on Income Tax Authorities. The Ld. AO would not have any jurisdiction to go beyond the value of closing stock as declared by the assessee. 4.8 However, Ld. CIT(A) held that the assessee failed to prove the genuineness of cash sales. The assessee did not file confirmation from the buyers to prove the cash sales. The Ld. CIT(A) referred to the enquiries made by Ld. AO from sample buyers by issuing notices u/s 133(6). Though the assessee stated that the sales were carried out through brokers, no brokerage was paid against the same. Even otherwise, it was the assessee who had dispatched the goods to the buyers and it was the assessee who fixed payments terms. No cash sales were made in corresponding period of earlier year. The sales in this year were made during four months prior to demonetization period. The Tax Audit Report did not report any cloth sale whereas cash book reflected sale of cloth. The assessee did not explain the said discrepancy. It was clearly started by Ld. AO in the remand report that stock was not verified during the 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. There was abnormal increase in cash deposit in the bank during this year. Though the closing stock in earlier years was above Rs.5 Crores, however, in this year, the stock was reduced to Rs.25.05 Lacs which was no satisfactorily explained by the assessee. The decision of Tribunal in assessee’s own case for AY 2015-16 was held to be not applicable. Finally, Ld. CIT(A) concurred with the findings of Ld. AO and confirmed the impugned addition of Rs.19.02 Crores u/s 69A against which the assessee is in further appeal before us. Our findings and Adjudication 5. From the facts, it emerges that the assessee is running a mill and 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 which was stated to be sourced out of cash balance as available with the assessee as on 08-11-2016. In the recorded statements, it was stated by Shri G. Ganesh that the sources of the same was cash sales of clothes. This statement was confirmed by Shri T. Rajkumar, Director who was subjected to search action on the same date. The cash book was furnished in support of the same. The assessee also furnished list of 930 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 bank borrowings of the assessee. The sales proceeds were duly credited to the Profit & Loss Account and offered to tax. The Ld. AO has rejected the aforesaid claim of the assessee and added the cash deposits so made by the assessee as unexplained money u/s 69A.

The Ld. AR has explained that the cash deposit of Rs.17.87 Crores has been sourced out of cash sales made by the assessee during the period from July, 2016 to October, 2016 whereas the remaining cash was sourced out of existing cash balance as available with the assessee. The Ld. AR submitted that total sales made by the assessee were Rs.25.04 Crores which was offered to tax. Out of the same, cash sale was for Rs.17.87 Crores which is duly substantiated by the primary documents such as purchase ledger, sales ledger, production / stock details as furnished by the assessee during the course of assessment proceedings. All these documents have also been furnished before us in the paper book. The same include Audited financial statements, computation of total income, copy of income tax return (Page Nos.1 to 77), cash book (Page Nos.78 to 183), sales summary, sales ledger, cloth sales ledger (Page Nos. 184 to 275), party-wise purchase and sales details (Page Nos. 276 to 302) and Stock statements / registers (Page Nos. 303 to 326) for whole of the year. The details of cash sales as made by the assessee along with the name of the party and invoice break up have been placed on record. The perusal of Profit & Loss Account would show that the assessee has reflected gross sales of Rs.25.04 Crores and offered net profit of Rs.184.79 Lacs. The financial statements are duly audited as required under law. The assessee has maintained healthy closing stock in all the earlier years. The closing stock as on 31-03-2016 has been utilized to carry out business operations which have ultimately generated sales for the assessee. The assessee has sufficient cash balance in its cash book to make the aforesaid cash deposits into its bank accounts. The perusal of all these documents would show that the assessee had furnished various documentary evidences to substantiate its claim which could not be brushed aside lightly. After going through the same, it could be said that the assessee had discharged the initial onus of establishing the source of cash deposit and the onus was on revenue to controvert the same. However, this onus, in our considered opinion, has remained to be discharged by the revenue by bringing on record adverse evidences to disprove the claim of the assessee.

We find that the assessee had sufficient stock with it to make the impugned sales. On the date of survey, copies of invoices were found from the premises of the assessee and therefore, the same could not be termed as mere after-thought on the part of the assessee unless contrary was shown. The revision of VAT return is within the ambit of law and the regulations permit for revision of the return in case of mistake or omissions. Nothing has been brought on record that VAT authorities have rejected the sales claim made by the assessee in its VAT return. The Hon’ble High Court of Madras in the case of CIT vs. Anandha Metal Corp. (152 Taxman 300) has held that return accepted by commercial tax department is binding on Income Tax Authorities. The Hon’ble Court held as under: - 4. A closer reading of these three substantial questions of law boils down to the contention whether the finding arrived at by the Commercial Tax Department, which got concluded under the relevant Act is binding on the respondent/Revenue Department, and/or, notwithstanding the return submitted before the Commercial Tax Department as closing stock to the value of Rs.7,51,186 the appellant/Revenue would still take the difference of Rs.2,49,173 between the two books of account seized from the premises of the assessee for taxation.

It is trite law that the Assessing Officer, while computing the income-tax has only the power of examining whether the books of account are certified by the competent authority. In Apollo Tyres Ltd. v. CIT [2002] 255 ITR 2731 (SC) where a question came up for consideration to what extent the accounts scrutinized and certified by the authorities under the Companies Act with reference to the books of profit as well as net profit, particularly net profit in the profit and loss account prepared in accordance with Parts II and III of Schedule VI to the Companies Act is binding on the Assessing Officer under the Income-tax Act, the Apex Court held that the Assessing Officer has only the power of examining whether the books of account are certified by the authority under the Companies Act as having been properly maintained in accordance with the Companies Act.

That apart, any falsification in the books of account submitted before the authorities under the Companies Act would have penal consequences, and the position of law, in our considered opinion, is the same under the Tamil Nadu General Sales Tax Act (hereinafter referred to as ‘the TNGST Act’) in view of section 45(7) of the TNGST Act, which reads as follows: "Any person, who is in any way knowingly concerned in any fraudulent evasion or attempt at evasion or abetment of evasion on any tax, payable in respect of the sale or purchase of any goods under this Act, shall, on conviction, be liable to simple imprisonment, which may extend to six months or a fine which may extend to Rs. 2,000 or both."

If that be so, unless and until the competent authority under the Sales Tax Act differs or varies with the closing stock of the assessee, the return accepted by the Commercial Tax Department under the TNGST Act, is, in our opinion, binding on the income-tax authorities and the Assessing Officer, therefore, has no power to scrutinise the return submitted by the respondent/assessee to the Commercial Tax Department under the provisions of the TNGST Act and as accepted by the said authorities, unless otherwise it is varied or modified by the authorities under the TNGST Act. Therefore, the Assessing Officer does not have any jurisdiction to go beyond the value of the closing stock declared by the respondent-assessee and accepted by the Commercial Tax Department.

In that view of the matter, we are not inclined to appreciate any of the substantial question of law raised and the appeal is devoid of merit and legal contentions and the same is dismissed. Similar view has been expressed by Hon’ble Court in its subsequent decision titled as CIT vs. Smt. Shakuntala Devi Khetan (33 Taxmann.com 98). We find that the sales turnover has duly been recorded in the books of accounts. The books are subjected to audit under extant regulations and no defect has been pointed out by any of the lower authorities in the books of accounts in their respective orders. The assessee has maintained and furnished day-wise stock position of cloth and yarn. The Ld. AO could not point out any defect in the stock position, production figures etc. which are reflected in the books of accounts. Having accepted the purchase and sales, the cash generated out of sales proceeds could not be taxed separately. No discrepancy has been pointed out by survey team in the stock position though the survey was primarily aimed at verifying cash and stock position. The sales have already been offered by the assessee to tax and taxing the same again as income from other sources u/s 69A would amount to double taxation which is impermissible.

It could also be seen that the returns of income for AYs 2015-16 and 2016-17 were scrutinized by revenue u/s 143(3) and closing stock, and closing cash balance etc. for all the years have been accepted by the revenue. The copies of assessment orders were already furnished by the assessee before lower authorities. Therefore, no doubt could be raised on these balances.

The Ld. AO has rejected the claim on the basis of outcome of summons issued to the parties on sample basis. However, during the course of survey proceedings, summons was issued to Shri Senthil Kumar who acted as broker for the assessee. As per his statement, he sold clothes and yarn on behalf of the assessee to various customers. The business model of the assessee was such that it was carrying out its business through broker who played vital role in collection from customers. The broker would ensure collection from the customer and the assessee may not have direct link with the debtors. The same would explain non-confirmation by few debtors. Therefore, merely on the basis of outcome of summons, no adverse view could be formed against the assessee particularly when the assessee had furnished all the requisite details and documentary evidences before lower authorities.

We are also of the opinion that the provisions of Sec.69A could be invoked only where the assessee is found to be the owner of any money or bullion etc. which is not recorded in the books of accounts. The same is not the case here. The assessee has made cash sales which have duly been credited in the cash book. There is no unexplained money within the meaning of Sec.69A. When the cash is sourced out of recorded sales, the provisions of Sec.69A could not be invoked. 11. Finally, considering the entirety of facts and circumstances of the case, the impugned addition of cash deposits is liable to be deleted. We order so. The corresponding grounds as raised by the assessee stand allowed. 12. 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.337 to 340 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.23,05,700/- 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.23,05,700/- 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.

On the issue of set-off of brought forwards losses etc., it would suffice on our part to direct Ld. AO to grant the set-off in accordance with law after due verification. The corresponding grounds stand allowed for statistical purposes.

The appeal stands partly allowed in terms of our above order. Order pronounced on 10th December, 2024 Sd/- Sd/- (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा45 / VICE PRESIDENT लेखा सद7 / ACCOUNTANT MEMBER चे9ई Chennai; िदनांक Dated :10-12-2024 DS