M/S JALARAM TRADING COMPANY,BILASPUR(CG) vs. I.T.O. WARD 1(2), BILASPUR(CG)

The present appeal filed by the assessee firm is directed against the order passed by the Commissioner of Income-Tax (Appeals), Bilaspur, dated 18.06.2014, which in turn arises from the order passed by the A.O under Sec.143(3) of the Income-tax Act, 1961 (in short ‘the Act’) dated 17.12.2007 for the assessment year 2005-06. The assessee has assailed the impugned order on the following grounds of appeal:

Before proceeding any further, I may herein observe that the assessee appellant vide his letter dated 07.02.2023 had withdrawn the additional grounds of 3 M/s. Jalaram Trading Co. Vs. ITO, Ward-1(1), Bilaspur /RPR/2014 appeal that were raised by it. Accordingly, the additional grounds of appeal raised by the assessee are dismissed as withdrawn.

Succinctly stated, the assessee firm had filed its return of income for A.Y 2005-06 on 17.01.2006, declaring a net loss of Rs. (-) 62,370/-. The return of income filed by the assessee firm was processed as such u/s. 143(1) of the Act.

Survey u/s.133A of the Act was conducted on the assessee firm on 31.01.2005. Survey Officials, during the course of proceedings, came across certain discrepancies, viz. (i) short/deficit cash amounting to Rs.1,40,491/-; and (ii) short/deficit amounting to Rs.28,715/-. Thereafter, the case of the assessee firm was taken up for scrutiny u/s.143(2) of the Act. As the assessee's explanation regarding the aforesaid discrepancies, i.e., deficit cash and stock, did not favor the A.O., he added the same to the returned income of the assessee. Apart from that, the A.O. came across cash deposits over the year in the cash book of the assessee firm against the names of its partners, viz. S/shri Shashikant Sachdeo and Paresh Kumar against which “demand drafts” for an equivalent amount were drawn on the date of cash deposit itself, as under:

In so far, the cash deposit of Rs.1.10 lacs made by Shri Paresh Sachdeo (supra) in the bank account of the assessee firm on 26.06.2004 was concerned, the A.O observed that the same was sourced out of the withdrawal that was made from the assessee firm on the same day. Accordingly, no adverse inference as regards the cash deposit of Rs.1.10 lac (supra) was drawn by the A.O.

Thus, the A.O. on the basis of his aforesaid observations, vide his order passed u/s.143(3) of the Act dated 17.12.2007, determined the income of the assessee firm at Rs.13,68,700/-.

Aggrieved the assessee firm carried the matter in appeal before the CIT(Appeals). Apropos the deficit stock of Rs.28,715/- that was detected during the course of survey proceedings, it was the claim of the assessee that the said discrepancy had emanated for the reason that direct expenses were not allocated on a proportionate basis while carrying out valuation of the stock. However, the explanation of the assessee did not find favor with the CIT(Appeals), who, finding no infirmity in the valuation of the stock, upheld the addition made by the A.O.

As regards the addition of cash deposits of Rs.12,58,559/-, the CIT(Appeals) observed that Shri Sashikant Sachdeo, a partner of the assessee firm, on 19 occasions had during the year deposited cash aggregating to Rs.12,58,559/- in the books of account of the assesse firm, which, thereafter, was utilized for purchasing “demand drafts” of an equivalent amount on the same date against his name. It was also observed by the CIT(Appeals) that the aforesaid cash deposits were not routed through the capital account of the above-mentioned partner, viz. Shri Sashikant Sachdeo. Also, it was observed by the CIT(Appeals) that the ledger account of the assessee firm was not found at the time of survey operation on 31.01.2005.

Apropos the explanation of the assessee firm that it had merely allowed the use of its bank account by its sister concern, viz. M/s. Ramesh Chemicals Industries (supra) for facilitating payments as required by the latter’s suppliers, the same did not find favor with the CIT(Appeals). It was observed by the CIT(Appeals) that neither the purpose for which the assessee firm had issued “demand drafts” nor the details of recipients were made available. Holding a conviction that the assessee firm had 8 M/s. Jalaram Trading Co. Vs. ITO, Ward-1(1), Bilaspur /RPR/2014 failed to discharge the onus that was cast upon it as regards explaining the nature and source of the cash credits in its bank account, the CIT(Appeals) concurred with the treating of the same as unexplained cash credits u/s.68 of the Act by the A.O.

The assessee, being aggrieved with the order of the CIT(Appeals), has carried the matter in appeal.

I have heard the ld. Authorized Representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by the Ld. AR to drive home his contentions.

During the course of the hearing of the appeal, it was submitted by the Ld. AR that the impugned discrepancy in the stock, i.e., deficit stock of Rs. 28,715/- (on physical stock-taking), had resulted on the basis of a tentative trading account that was prepared by the assessee firm on 31.01.2005. Referring to the aforesaid discrepancy, it was submitted by the Ld. AR that the same works out at a miniscule figure of 2.9% of the total stock value of Rs.9.84 lacs. The Ld. AR further submitted that the deficit stock in the hands of the assessee firm was attributable to multiple reasons, viz. (i) quantitative details of the stock were not maintained by the assessee firm; (ii) value of the stock (as per books of account) on 31.01.2005 was arrived at on the basis of tentative trading account; and (iii) the assessee firm was trading numerous items of karyana. The Ld. AR submitted that as there was a meager

After thoughtful consideration, I cannot persuade myself to concur with the claim of the Ld. AR that as the discrepancy in the stock on the date of the survey is minuscule, therefore, no adverse inference was liable to be drawn in its hand. To the said extent, I concur with the view taken by the CIT(Appeals), who had rejected the said claim of the assessee firm. But at the same time, I find substance in the claim of the Ld. AR that in the case of deficit stock, there was no justification for the A.O. to have made an addition of the entire amount in the hands of the assessee firm. I say so for the reason that now when purchases were duly accounted for in the books of the assessee firm, therefore, on a deficit stock that had surfaced at the time of survey proceedings, the addition was liable to be restricted to the extent of the profit element which the assessee would have made by carrying out sales outside its books of accounts. Accordingly, I restrict the addition in the hands of the assessee firm by applying its GP rate of 6.4% on the amount of deficit stock of Rs.28,715/-, and thus sustain the addition to the extent of Rs.1838/-. Thus, the Ground of Appeal No.1 raised by the assessee is partly allowed in terms of the aforesaid observations.

The A.O. observed that a perusal of the records found during the course of survey proceedings revealed cash deposits aggregating to Rs.12,58,559/- made on 10 M/s. Jalaram Trading Co. Vs. ITO, Ward-1(1), Bilaspur /RPR/2014 19 occasions during the year against the name of Shri. Sashikant Sachdeo (partner of the assesse firm), which, thereafter, were utilized for purchasing “demand drafts” for an equivalent amount on the date of the deposit itself. Explaining the nature and source of the aforesaid cash deposits, the Ld. A.R. submitted that the same was the money belonging to its sister concern, viz. M/s. Ramesh Chemicals Industries (supra), which was utilized by the latter for drawing “demand drafts” in favor of its supplier, viz. M/s Mamta Industries, Bilaspur, by using the bank account of the assessee firm with State Bank of India. Elaborating further, it was averred by the Ld. A.R that M/s Mamta Industries, Bilaspur, i.e., supplier of agarbattis to M/s. Ramesh Chemicals Industries (supra) had insisted on the payments by way of “demand drafts” drawn on the State Bank of India. The Ld. AR submitted that as M/s. Ramesh Chemicals Industries (supra) did not have a bank account with the State Bank of India, therefore, the assessee firm had come to its rescue by allowing it to use its bank account with the State Bank of India for making payments in the desired manner to the aforementioned supplier.

Explaining the modus operandi that the assessee firm had adopted to accommodate its sister concern, viz. M/s Ramesh Chemical Industries, the Ld. AR submitted that Shri. Sashikant Sachdeo (as a partner of M/s Ramesh Chemical Industries) would withdraw cash from M/s Ramesh Chemical Industries (supra) and his “Haste A/c” (i.e. current a/c) with M/s. Ramesh Chemicals Industries (supra) would stand debited by the said amount. Thereafter, Shri Sashikant Sachdeo (as a partner of the assessee firm) would deposit the aforesaid amount of cash with the 11 M/s. Jalaram Trading Co. Vs. ITO, Ward-1(1), Bilaspur /RPR/2014 assessee firm and his “Haste A/c” (i.e. current a/c) with the assessee firm would be credited by the said amount. On the same date of cash deposit, a “demand draft” would be drawn on the bank account of the assessee firm with State Bank of India favoring M/s. Mamta Industries (supra), i.e., the supplier of M/s Ramesh Chemical Industries (supra) and the “Haste A/c” of Shri Sashikant Sachdeo (with the assessee firm) would be debited by the said amount (including commission charges for the drawing of “demand drafts”). On the other hand, on making the payment to M/s Mamta Industries (supplier), the “Haste A/c” of Shri. Sashikant Sachdeo (as a partner with M/s Ramesh Chemical Industries) would be credited with the amount of the “demand draft” drawn in favor of M/s Mamta Industries (supra) along with the amount of bank commission charges. Explaining the reason as to why the aforesaid transactions were not appearing in the “capital account” of Shri Sashikant Sachdeo (as a partner of the assessee firm), the Ld. A.R submitted that the same was for the reason that there were two accounts of Shri Sashikant Sachdeo (supra) i.e., “regular A/c” (i.e. “Capital a/c”)) and “Haste A/c”. Carrying his contention further, it was averred by the Ld. AR that the aforesaid transactions carried out by the assessee firm to accommodate its sister concern, viz. M/s. Ramesh Chemical Industries (supra) for making payments to its supplier were routed through the “Haste A/c.” of Shri Sashikant Sachdeo (as a partner with the assessee firm). It was further submitted by him that as the entire amount of cash deposits in Shri. Sashikant Sachdeo (Haste A/c) with the assessee firm, which were sourced out of withdrawals made by him from his “Haste account” with M/s. Ramesh Chemical Industries, were 12 M/s. Jalaram Trading Co. Vs. ITO, Ward-1(1), Bilaspur /RPR/2014 on the same date nullified by a “debit” of an equivalent amount in lieu of the “demand draft” that would be drawn on the bank account of the assessee firm with State Bank of India, therefore, no balance remained at the end of the year.

In order to fortify his aforesaid claim, the Ld. AR had taken me through the copy of “Haste A/c.” of Shri Sachikant Sachdeo (supra) in the books of account of M/s. Ramesh Chemicals Industries, Page 1 & 2 of APB. On a perusal of the aforesaid “Haste A/c” of Shri Sashikant Sachdeo with M/s. Ramesh Chemical Industries, it transpires that the said account on 19 occasions was debited for cash withdrawals, including commission charges (for the drawing of demand drafts) during the year under consideration. Corresponding to the cash withdrawals made out of the aforesaid “Haste A/c” of Shri Sashikant Sachdeo (as a partner with M/s. Ramesh Chemical Industries), I find that there are cash deposits of equivalent amounts on 19 occasions during the year in the said person’s “Haste A/c” with the assessee firm, i.e., M/s. Jalaram Trading Company, Page 3 of APB. Also, I find that the cash deposits in Shri Sashikant Sachdeo (Haste A/c) with the assessee firm had been utilized to the last of paisa for the drawing of “demand drafts” of amounts equivalent to the amount of cash deposit, on the date of deposit itself. At this stage, I may herein observe that the entire amount of cash deposits on 19 occasions had been fully utilized/debited for the drawing of “demand drafts” and payment of commission charges (for the drawing of demand drafts); and thereafter, the balance in “Haste A/c” of Shri Sashikant Sachdeo with the assessee firm as on 31.03.2004 was reflected at Nil.

On the basis of the aforesaid facts, I find some substance in the claim of the Ld. AR that the cash deposits in Shri Sashikant Sachdeo (Haste A/c) with the assessee firm during the year under consideration were sourced out of cash withdrawals that were made from Shri Sashikant Sachdeo (Haste A/c) with M/s. Ramesh Chemicals Industries. At the same time, I find that the aforesaid explanation as regards the nature and source of the cash deposits of Rs. 12,58,559/- (supra) in the books of account of the assessee firm was summarily rejected by the lower authorities and, thus, was never verified by them. Considering the fact that the “cash book” of M/s Ramesh Chemical Industries (supra), Pages 4 -21 of APB (signed by the Income-tax Inspector at the time of survey proceedings on 31.01.2005, i.e., at Page 4 & Page 21) was available before the department, the claim of the assessee firm that the cash deposits in question in its books of accounts were in turn sourced out of the cash withdrawals from Shri. Sashikant Sachdeo (Haste A/c) could not have been summarily brushed aside by the lower authorities by terming the same as a mere eye wash. I am of the considered view that the matter requires to be restored to the file of the A.O. The A.O in the course of the set-aside proceedings, is directed to verify the claim of the assessee firm that the cash deposits of Rs. 12,58,559/- (supra) shown against the name of Shri. Sashikant Sachdeo (supra) in its books of account were sourced out of the cash withdrawals from Shri. Sashikant Sachdeo (Haste A/c) with M/s Ramesh Chemical Industries (supra). In case the claim of the assessee firm is found to be in order, then, the addition of Rs. 12,58,559/- (supra) made by the A.O u/s 68 of the Act, which, thereafter, had been sustained by the 14 M/s. Jalaram Trading Co. Vs. ITO, Ward-1(1), Bilaspur /RPR/2014 CIT(Appeals) shall stand vacated. Needless to say, the A.O. shall, in the course of the set-aside proceedings, afford a reasonable opportunity of being heard to the assessee firm, which shall remain at liberty to substantiate its claim on the basis of fresh documentary evidence. Thus, Ground of Appeal No.2 raised by the assessee firm is allowed for statistical purposes in terms of the aforesaid observations.

As the Ld. AR had not advanced any argument as regards the Ground of Appeal No.3, therefore the same is dismissed as not pressed.

Ground of appeal No.4, being general in nature, is dismissed as not pressed.

In the result, the appeal of the assessee is allowed for statistical purposes in terms of the aforesaid observations.