ARABINDA KUNDU,HOOGHLY vs. ITO, WD-49(2), KOLKATA, KARNATAKA

FOR THAT the Ld. Commissioner of Income Tax (Appeals) XXXII, Kolkata acted unlawfully in upholding the addition in the sum of Rs. 2,41,530/- in respect of alleged payment of commission made on an illegal reference to the provisions of s. 40(a)(ia) of the Income Tax Act, 1961 by the Ld. Income Tax Officer, Ward 49(1), Kolkata and the adverse conclusion reached on that behalf without considering the proper factual matrix of the instant case and basing on subjective issues not amenable to reason is wholly erroneous, wrong and flawed in the circumstances of the case.”

As far as the aforesaid grounds are concerned, the AO disallowed a sum of Rs.2,41,530/- which was payment on account of commission on which the assessee Kundu A.Y.2009-10 failed to deduct tax at source as required u/s 194H of the Income Tax Act, 1961 (Act). In view of the provisions of Sec.40(a)(ia) of the Act which provides that where tax has not been deducted as required in law, the corresponding expenditure on which tax was not deducted will not be allowed as a deduction, the AO disallowed a sum of Rs.2,41,530/- and added the said sum to the total income of the Assessee. The order of AO was confirmed by the CIT(A) giving raise to Gr.No.1 & 2 by the Assessee before the Tribunal.

At the time of hearing of the appeal, the limited prayer of the ld. Counsel for the assessee was to set aside the order of CIT(A) on this issue and remand the issue of disallowance u/s 40(a)(ia) of the Act to the AO with the liberty to the assessee to establish before AO that the persons to whom the payments were made without deducting tax at source after filing their return of income and showed the amounts received from the assessee as total income. If the persons to whom the assessee made payments have included the receipts in their total income the addition u/s 40(a)(ia) of the Act should be deleted. In this regard our attention was made to the decision of this Bench rendered in the case of M/s. Abhoy Charan Bakshi vide order dated 06.04.2016 where in similar direction was given by ITAT.

I have given a careful consideration to the submissions made by the ld. Counsel for the assessee. This Tribunal in the case of M/s. Abhoy Charan bakshi (supra) has held as follows :- “15. We have given a very careful consideration to the rival submissions. The CIT(A) has held that the second proviso to Sec.40(a)(ia) of the Act will apply in the present case and that applicability of the second proviso to Sec.40(a)(ia) of the Act which was introduced by the Finance Act, 2012 w.e.f. 1.4.2013 was retrospective in operation and was to apply w.e.f. 1-4-2005, being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004. The Hon’ble Delhi High Court in the case of CIT Vs. Ansal Land Mark Township (I) Pvt.Ltd., in ITA No.160/2015 judgment dated 26.8.2015 has taken the view that the insertion of the second proviso to Sec.40(a)(ia) of the Act is retrospective and will apply from 1.4.2005. Once it is held that the Assessee is entitled to the benefit of 2nd proviso to Sec.40(a)(ia) of the Act, the CIT(A) ought to have directed the AO to verify whether the recipients have included the receipts paid by the assessee in their respective returns of income and also paid taxes on the same. To the extent the recipients from the Assessee have so included the sum in their returns of income and filed the same, no disallowance u/s.40(a)(ia) of the Act ITA No.847/Kol/2014-Arabinda Kundu A.Y.2009-10

I am of the view that similar directions as were made above should be given in the present case also. The issue is accordingly set aside to the AO for verification as done in the aforesaid decision. Ground nos.1 and 2 are allowed for statistical purposes.

Ground Nos. 3 and 4 raised by the assessee read as follows :- “3. FOR THAT the specious action of the Ld. Commissioner of Income Tax (Appeals) XXXII, Kolkata in upholding the estimated income in the sum of Rs. 15,56,820/- on account of alleged "sale of rice bran" as conceived by the Ld. Income Tax Officer, Ward 49(1), Kolkata indulging in speculation, surmise, suspicion and conjecture is wholly illegal, illegitimate and infirm in law. 4. FOR THAT the Ld. Commissioner of Income Tax (Appeals) XXXII, Kolkata was remiss in upholding the addition amounting to Rs. 15,56,820/- made by the Ld. Income Tax Officer, Ward 49(1), Kolkata invoking the provision of s. 69 of the Income Tax Act, 1961 without considering the factual matrix of the instant case in the correct perspective and the specious findings in that regard is wholly arbitrary, unwarranted and perverse. “

According to the assessee it is running only a husking mill whereas according to the AO the assessee is running a rice mill. The question whether there is a difference between a rice mill and a husking mill will have the some bearing on the decision on the issue raised by the assessee in ground nos. 3 and 4. The assessee is in the business of extracting rice from paddy. The Assessee purchased paddy for milling to the extent of 27116.57 Qntl. The opening stock of paddy was 4000 qntl. Thus in all the quantity of paddy available for milling was 31,116.57 Qtl. During the previous year the Kundu A.Y.2009-10 Assessee had shown sale of rice of 21175 Qntl. The prevailing percentage of yield of rice to per 100 quntl. of paddy was 68 qntl. of rice and incidentally 5 qntl. of bran would emanate as by product in the processing of milling of paddy. The Assessee did not show any closing stock of rice which according to the AO indicated that the entire quantity of paddy available (opening stock + Purchases) had been milled. According to the AO if 31,116.57 qntl. of paddy is milled the yield of bran as by product ought to have been 1556.82 quntl. The Assessee did not show any sale or bran or closing stock of bran. The AO was of the view that the bran produced had been sold by the Assessee outside the books of accounts. The AO was of the view that applying the minimum rate of Rs.1000 per quntl. of bran, an addition of 15,56,820/- should be made to the total income of the Assessee on account of sale of bran outside the books of accounts.

The AO Vide this office letter dt.21/12/2011 requested the Assessee to show cause why the aforesaid addition should not be made based on the allegations made by the AO as stated in the earlier paragraph. In response, assessee vide his written submission dt.26-12-2011 stated that “....I carry on a Mini Rice Mill that is called Husking Mill not Rice Mill.” He also stated that no bran was produced during the year under consideration.

The AO however rejected the contention of the Assessee and he held that the Assessee failed to substantiate that the Assessee was not owning "Mini Rice Mill" and that what he owned should only be treated as 'Husking Mill'. The AO held that the Assessee sold bran produced in the process of milling paddy outside the books of accounts and added a sum of Rs.15,56,820/- to the total income of the Assessee.

Before CIT(A) the assessee contended that findings of the AO in respect of Income from undisclosed sale of Bran for Rs. 15,56,820 cannot be sustained as it is based on conjectures and surmises. It was submitted that the AO failed and/or neglected to appreciate that the Assessee was carrying on Business of running a Mini Rice Mill commonly known as husking mill and whatever bran was available was consumed in the process of boiling paddy as a fuel element. Hence the wrongful addition of Rs.15,56,820.00 to the total income was unjustified and as such the same Kundu A.Y.2009-10 should be deleted. The Assessee pointed out that there were number of difference between Mini Rice Mill and a Rice Mill. It was argued that a Mini Rice Mill uses manuals as well as semi mechanized process of operations. It contains, soaking tank, steam parboiled drying floor, englaberg huller. But a Rice Mill fully mechanized processed of De-stoning parboiling husking husk aspiration, Paddy Separations, Whitening polishing length grading. It contains pre-cleaner, soaking tank, boiler, Steam pressure, Parboiled, dryer, rubber roller etc. In a mini rice mill or husking mill, the bran produced is of little quantity and is generally used only as fuel for carrying out the process of boiling paddy before drying. It was submitted that the addition was made only because of the misconception that the Assessee was a Rice Mill.

CIT(A) however did not agree with the submissions of the assessee and he held as follows :- “The AO has held that though the assessee has milled 27116.57 quintals of paddy, he has declared no sale or stock of bran, which is a by-product of milling of rice. The average production of rice bran per 100 quintals is taken by the AO at 5 quintals. The rice bran is a sought after commodity for its rice bran oil and the deoiled rice bran is again much sought after for poultry, cattle & fish feed. The state of West Bengal is the largest supplier of deoiled rice bran. The AO has estimated the yield of bran at only 5% (which is very low) and calculated that the assessee has not declared the income from sale of bran, which was estimated by him at Rs. 15,56,820/-. The yield of rice bran as per various experts is usually between 6-12% and such reports are available on the internet. Therefore, the figure of 5% used by the A.O. is a estimate. The assessee claims that he basically runs a husking mill and whatever bran was produced has been consumed as fuel. However, there is no evidence to this effect. Rice is a controlled commodity and the Rice Mills have to get government permission to operate. The assessee has not produced any government letter/authorization mentioning that he is only to operate a husking mill. In any case, the range of operations in a Mini Rice Mill are nearly the same as a regular Rice Mill and the difference is largely of the capacity. As the assessee has not been able to rebut the findings of the AO with any evidence, the ground of appeal No.3 is dismissed.”

The ld. Counsel for the assessee drew my attention to the balance sheet of the assessee which shows that the plant and machinery owned by the assessee was only Kundu A.Y.2009-10 of the value of Rs.24,894/-. It was submitted by him that it was unrealistic on the part of the revenue authorities to presume that the assessee was carrying on rice mill with sophisticated equipments and therefore the assessee ought to have obtained bran from rice mill and sold them outside the books of account. He pointed out that before the AO the assessee specifically submitted that the assessee was only carrying out husking of paddy whereby the paddy is first boiled and later dried and whatever is derived as bran in the process of husking is used as a fuel by the assessee for the purpose of boiling the paddy. The other submissions made before CIT(A) were reiterated. He also placed reliance on the decision of ITAT, Amritsar Bench in the case of Chattar Extraction (P)Ltd. Vs ITO 91 ITD 385 (ASR)(TM) wherein it was held that where the correctness and completeness of audited books of accounts had not been disputed by the revenue, addition on account of rice bran extraction was not justified. The ld. DR relied on the order of CIT(A). 15. I have given a careful consideration to the rival submissions. I am of the view that taking into consideration the process of husking carried out by the assessee of paddy, the assessee’s nature of activity ought not to have been compared with the rice mill which is a sophisticated mechanised process of operation. As I have already seen the plant and machinery owned by the assessee was negligible and it was only worth less than Rs.25,000/-. Therefore the basic assumption on which the impugned addition was made by the revenue authorities cannot be sustained. Besides the above the completeness and correctness of the books of account was also not disputed by the AO and in the circumstances as already laid down by Hon’ble Amritsar Bench in the case of Chattar Extraction (P)Ltd vs ITO (supra) no addition could be made on account of rice bran extraction. There is no evidence on record to show either availability of bran or its sale outside the books of accounts. In such circumstances, I am of the view that the addition made by the AO was purely on assumptions and conjectures. I therefore delete the addition made by the revenue authorities. 16. Ground No.5 raised by the assessee reads as follows :- 5. FOR THAT the Ld. Commissioner of Income Tax (Appeals) XXXII, Kolkata misled himself in upholding the action of the Ld. Income Tax Officer, Ward 49(1), Kolkata of denying the loss in the sum of Rs. 1,98,145/- suffered on handling charges on a wrong ITA No.847/Kol/2014-Arabinda Kundu A.Y.2009-10

On perusal of profit and loss A/c for the year under consideration, the AO noticed that the assessee claimed an expenditure of Rs.1,98,145/- in respect of shortage of rice in the process of loading and unloading. This has been referred to as shortage in handling in the order of assessment. Vide notice u/s 142(1) as well as order sheet noting, the AO called upon the assessee to submit details and basis on which such shortage in handling was arrived at by the Assessee. According to the AO, the Assessee failed to give proper explanation. The AO noticed that the Assessee had shown closing stock of paddy of Rs.1,41,100/- and following the FIFO method, quantity of stock comes to 156.77 qntl. (Rs.1,41,100/Rs.900)(Rs.900 – Purchase as on 28-02-09 of Rs.13,95,000/1550 qntl.). Hence, quantity of rice produced was calculated by the AO as under :- Opening stock of paddy (as shown) 4000.00 qntl. Add: Purchase of paddy 27116.57 qntl. 31116.57 qntl. Less : Closing stock calculated above 156.77 qntl. 30959.80 qntl. The AO further held that as per govt. norms, assessee could produce rice out of milling of paddy of 30959.80 qntl. @68% of 21052.66 qntl. But assessee sold 21175.00 qntl which indicate that assessee produced rice nearly 68.40% hence according to the AO the entire produced rice has been sold and stock of paddy is kept intact. In the light of the above, shortage of handling of Rs.1,98,145/- was concluded by the AO as bogus and without any basis. He therefore disallowed the same and added to the total income of the assessee.

Before CIT(A) the assessee submitted that shortage in handling of 3,116.57 Qntl. was on account of dust immature paddy, damaged gunny bag for packing, eaten by rabbits and at the time of dying eaten by birds. Hence the actual shortage arising out of above reasons should be allowed and the addition of Rs.1,98,145.00 should be Kundu A.Y.2009-10 deleted. The CIT(A) however confirmed the order of AO holding that the assessee failed to satisfactorily explain the nature of shortage in handling. Aggrieved by the order of CIT(A) the assessee has raised ground no.5 before the Tribunal. 19. I have heard the rival submissions. In my view that it is not possible to arrive at the conclusion that there would be no shortage of stock due to damage immature paddy damaged caused by rats etc. The basis on which the AO disallowed the claim of the assessee was that the assessee had sold the entire stock of paddy and there was no possibility of shortage and consequent loss in handling paddy. Such mathematical calculation in my view would not be sufficient to making the impugned disallowance. Since the impugned disallowance is made on assumptions and surmises the same is directed to be deleted. 20. In the result the appeal of the assessee is allowed. Order pronounced in the open Court on 02.09.2016.