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Discrepancy in cash inventory & cash in hand is untenable if certain expenses incurred after survey proceedings are yet to be entered in books of accounts: ITAT

2019-TIOL-1631-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘A’ MUMBAI

ITA No.5731/MUM/2015
Assessment Year: 2012-13

DEPUTY COMMISSIONER OF INCOME TAX-1
(1)(1), 579, AAYAKAR BHAVAN
M K ROAD, MUMBAI-400020

Vs

M/s ALUMILITE ARCHITECTURAL PVT LTD
5TH FLOOR, DHIRAJ CHAMBERS
9 HAZARIMAL SOMANI MARG
FORT, MUMBAI-400001
PAN NO:AABCA0567C

Mahavir Singh, JM & N K Pradhan, AM

Date of Hearing: May 15, 2019
Date of Decision: July 31, 2019

Appellant Rep by: Mr R A Dhyani, DR
Respondent Rep by: 
Mr Biren Gabhawala, AR

Income Tax – Section 133A.

Keywords – Discrepancy in cash inventoried and cash in hand – Survey.

The assessee company, engaged in the business of fabrication and installation of windows and doors, filed its return of income for the relevant AY. The assessee was surveyed u/s 133A of the Act. During the course of survey, the assessee was found to be in possession of cash in hand of Rs. 5,56,090/-. But as per the books of accounts, the cash in hand was Rs.9,90,354/-. In response to the query raised by the AO, the assessee submitted that the cash in hand could not be updated due to the ongoing survey proceedings and therefore, there was a shortfall in cash found. However, the AO was not convinced with the explanation of the assessee and treated the discrepancy in cash inventoried and cash in hand as per books as expenditure not incurred for the purpose of business and thereby made an addition of Rs.4,34,264/- to the income shown. On appeal, CIT(A) deleted the addition.

On appeal, Tribunal held that,

Whether disallowance of discrepancy in cash inventory and cash in hand can be made if certain expenses incurred after survey are yet to be entered in books of accounts – NO : ITAT

++ in the instant case, Shri S.K. Damani has admitted in his answer to Q. No. 48 of the statement recorded on oath during the course of survey, pertaining to the shortage that cash was withdrawn from cash in hand for which vouchers were yet to be entered in the books of accounts. The AO has not pointed out any specific defect in the vouchers furnished by the assessee. The AO has made a general remark that expenses incurred even on 29.02.2012 were shown in the books. However, a perusal of the details clearly shows that the expenses including payment of toll tax, octroi charges, postage/courier, staff welfare etc. were incurred after survey come to Rs.97,092/- and Rs.7,182/- pertaining to Bhiwandi office and Mumbai respectively. It was found that the assessee has explained reasonably that all expenditure relate to business only and is against advances made. In view of this, it was decided to confirm the order of the CIT(A).

Revenue’s appeal partly allowed

ORDER

Per: N K Pradhan:

This is an appeal filed by the Revenue. The relevant assessment year is 2012-13. The appeal is directed against the order of the Commissioner of Income Tax(Appeals)-2, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).

2. The 1st ground of appeal

Whether on the facts and in the circumstances of the case and in Law, the Ld. CIT(A) was correct in deleting the addition made on account of cash expenses of Rs.4,34,264/- which was not explained during the course of survey action and the AO conclusively proved the same to be bogus expenses in the assessment.

2.1 Briefly stated, the facts are that the assessee filed its return of income for the assessment year (AY) 2012-13 on 01.10.2012 declaring total income of Rs.70,12,000/-. It is engaged in the business of fabrication and installation of windows and doors. The assessee was surveyed u/s 133A of the Act by the ITO 1(1)(1), Mumbai on 23.02.2012. During the course of survey, the assessee was found to be in possession of cash in hand of Rs.5,56,090/-. But as per the books of accounts, the cash in hand was Rs.9,90,354/-. In response to the query raised by the AO vide order sheet noting dated 23.03.2015 to explain the difference, the assessee filed a reply dated 25.03.2015 stating that the cash in hand could not be updated due to the ongoing survey proceedings and therefore, there was a shortfall in cash found. However, the AO was not convinced with the above explanation of the assessee and treated the discrepancy in cash inventoried and cash in hand as per books as expenditure not incurred for the purpose of business and thereby made an addition of Rs.4,34,264/- to the income shown.

2.2 In appeal, the Ld. CIT(A) observed that (i) Shri S.K. Damani has admitted in his answer to Q. No. 48 of the statement recorded on oath during the course of survey, pertaining to the shortage of cash that cash was withdrawn from cash in hand for which vouchers were yet to be entered in the books, (ii) the assessee has furnished a statement reconciling the cash in hand account that the expenses incurred along with the vouchers which relate to the period 01.04.2011 to 29.02.2012, (iii) the AO has not pointed out any specific defect in the vouchers furnished, (iv) the AO has made a general remark that expenses incurred even on 29.02.2012 were shown in the books of accounts; however, perusal of the details shows that the expenses including payment of toll tax, octroi charges, postage/courier, staff welfare etc. incurred after survey comes to Rs.97,092/- and Rs.7,182/- pertaining to Bhiwandi office and Mumbai respectively, (v) in the instant case, shortage of cash has arisen because the entries relating to expenses for which advances are given out of cash available in hand, admittedly, were yet to be recorded.

Thus observing, the Ld. CIT(A) deleted the addition of Rs.4,34,264/- made by the AO.

2.3 Before us, the Ld. DR relies on the order of the AO. On the other hand, the Ld. counsel for the assessee relies on the order of the Ld. CIT(A).

2.4 We have heard the rival submissions and perused the relevant materials on record. In the instant case, Shri S.K. Damani has admitted in his answer to Q. No. 48 of the statement recorded on oath during the course of survey, pertaining to the shortage that cash was withdrawn from cash in hand for which vouchers were yet to be entered in the books of accounts. The AO has not pointed out any specific defect in the vouchers furnished by the assessee. The AO has made a general remark that expenses incurred even on 29.02.2012 were shown in the books. However, a perusal of the details clearly shows that the expenses including payment of toll tax, octroi charges, postage/courier, staff welfare etc. were incurred after survey come to Rs.97,092/- and Rs.7,182/- pertaining to Bhiwandi office and Mumbai respectively. We find that the assessee has explained reasonably that all expenditure relate to business only and is against advances made. In view of the above facts, we confirm the order of the Ld. CIT(A) and dismiss the 1st ground of appeal.

3. The 2nd ground of appeal

Whether on the facts and in the circumstances of the case and in Law, the Ld. CIT(A) was correct in deleting the addition made on account of bogus expenses to one Shri Manish Yadav for Rs.16,12,394/- despite the fact that the assessee could not reconcile the expenses booked in the name of Shri Manish Yadav in the course of assessment.

3.1 The issue relates to disallowance of payment of Rs.16,12,394/- by the assessee to labourers through Shri Manish Yadav. The AO noted that Shri Yadav, through whom payment of Rs.16,12,394/- was made, did not maintain the relevant details, though he admitted having received the amount from the assessee and paid to the labourers. The AO concluded that the assessee could not completely reconcile the expenses booked in the name of Shri Yadav and therefore, the expenses are not genuine and therefore, not allowable.

3.2 In appeal, the Ld. CIT(A) observed that (i) the assessee has produced the wage registers containing the signatures of the recipients along with copies of bills and vouchers and details of expenses, (ii) vide answer to Q. No. 5 of the statement recorded during the time of survey, the assessee has pointed out that Shri Dinesh Ojha has stated that “all the IOUs are reconciled after receipt of supporting bills and vouchers for expenses incurred from the site and then squared off”, (iii) the assessee has further contended that Shri Manish Yadav and Others are not educated and do not have accounting knowledge, (iv) there is force in the contention of the assessee that group leader such as Shri Manish Yadav etc. are entrusted with all the responsibilities to disburse payment and after payment is made to the workers, receipt is obtained and the attendance is maintained and therefore, there was no obligation on the part of the assessee to take receipt from individual workers.

Thus observing, the Ld. CIT(A) relied on the decision of the Hon’ble Karnataka High Court in the case of Karnataka Rural Infrastructure Development Ltd. v. ITO, TDS (2014) 41 taxmann.com 497 and deleted the addition of Rs.16,12,394/- made by the AO.

3.3 Before us, the Ld. DR relies on the order of the AO, whereas the Ld. counsel relies on the order of the Ld. CIT(A).

3.4 We have heard the rival submissions and perused the relevant materials on record. In the instant case, we notice that vide answer to Q. No. 5 of the statement recorded at the time of survey, Shri Dinesh Ojha has stated that “all the IOUs are reconciled after receipt of supporting bills and vouchers for expenses incurred from the site and then squared off”. We agree with the observation of the Ld. CIT(A) that there is force in the contentions of the assessee that group leader such as Shri Manish Yadav and Others are entrusted with all the responsibilities to disburse payment and after payment is made to the workers, receipt is obtained and the attendance is maintained and therefore, there was no obligation on the part of the assessee to take receipt from individual workers.

In view of the above facts, we confirm the order of the Ld. CIT(A) and dismiss the 2nd ground of appeal.

4. The 3rd ground of appeal

Whether on the facts and in the circumstances of the case and in Law, the Ld. CIT(A) was correct in deleting the addition made on account of cash expenses u/s 40A(3) amounting to Rs.2,45,20,683/- out of Rs.2,52,79,054/-, despite the fact that the AO in the assessment conclusively proved that even IOU payment is an expense which the assessee has incurred for business purposes only and the assessee was wrongly showing it as a book entry and further the IOU is not a loan or advance.

The 4(a) ground of appeal

4a. Whether on the facts and in the circumstances of the case and in Law, the Ld. CIT(A) was correct in deleting the addition made on account of renovation in directors’ residence in cash of Rs.29,67,780/- which was clearly a non-business expenditure and the same being unexplained expense is added u/s69C of the Act based on a loose paper impounded in the survey action.

4.1 During the course of assessment proceedings, on verification of the details, the AO found that number of expenses in the cash book were exceeding the limit of allowable cash expenses prescribed under the Act. In response to a query raised by the AO vide show cause notice dated 20.03.2015 to explain why cash expenses incurred by it in violation of provisions of section 40A(3) should not be disallowed, the assessee filed a reply dated 23.03.2015 stating that cash expenses are given on IOU basis as advances and later on adjusted towards actual expenses and most of these are for the purpose of labour payments to contractors, daily wage labourers, octroi etc.

However, the AO noted that the assessee failed to reconcile completely the expenses booked in cash, which are exceeding Rs.20,000/- on one day. The total of such expenses, which are incurred in cash, during the year under consideration, where individual payments are exceeding Rs.20,000/- on each such date is Rs.2,52,79,054/- (excluding cash in hand on Bhiwandi and octroi expenses in cash). The AO made a disallowance of the above amount u/s 40A(3) of the Act.

The AO further noted that as per the loose papers found and impounded during the course of survey the assessee had incurred Rs.69,21,532/- on renovation of a flat in Jolly Maker Chamber. This flat belongs to the Director of the company and the expenses include cash payment of Rs.29,67,780/-. In response to a query raised by the AO, the assessee submitted that the expenses have been claimed in the Director’s personal account, and not by itself. However, the AO was not convinced with the said explanation and made a disallowance of the above amount of Rs.29,67,780/-.

4.2 In appeal, the Ld. CIT(A) having examined the ledger accounts filed by the assessee before him observed that considering the nature of business activity and keeping in view the procedure followed by the assessee for accounting the payments made on IOU basis and the details of expenses which are adjusted against these payments, accepted the assessee’s contention that IOU payments are not debited as expenses. The Ld. CIT(A) also accepted that the assessee has adjusted the expenses against such IOU payments and necessary entries in this regard are made in the books. Further, it is held by him that since the project of the assessee is labour intensive, debiting 21% towards labour costs appears to be fair. However, observing that the possibility of inflation of labour expenditure cannot be ruled out, the Ld. CIT(A) disallowed 3% of the above expenses which works out to Rs.7,58,371/- and allowed the balance of Rs.2,45,20,683/-.

Regarding the disallowance of Rs.29,67,780/- made by the AO towards renovation of Director’s residence in cash, the Ld. CIT(A) examined the copies of personal ledger account for renovation expenses and fixed assets account of the Director Shri S.K. Damani and shareholder Smt. Manju Damani and held that (i) the AO has not brought any material on record to indicate that the expenses incurred are debited to the P&L account of the assessee to establish that the funds of the company are indeed diverted to the Directors but claimed as expenses in the hands of the assessee, (ii) the addition is made merely on the basis of survey report without corroborating by any independent and cogent evidence, which would land support to the survey finding.

Thus observing the Ld. CIT(A) deleted the addition of Rs.29,67,780/- made by the AO.

4.3 Before us, the Ld. DR relies on the order of the AO, whereas the Ld. counsel relies on the order of the Ld. CIT(A). Further the Ld. counsel relies on the order of the Tribunal in assessee’s own case for AYs 2010-11, and 2012-13

4.4 We have heard the rival submissions and perused the relevant materials on record. We are of the considered view that the issue regarding cash expenses u/s 40A(3) decided in one year is not applicable in some other year. The facts leading to cash payment in violation of provisions of section 40A(3) in one year cannot be replicated in some other year. Therefore, instead of blindly following the order of the Co-ordinate Bench on issues which needs verification of facts, we have to examine the following contentions.

It is found that vide letter dated 23.03.2015, the assessee filed a reply before the AO explaining that cash expenses relating to Rs.2,52,79,054/- are given on IOU basis as advances and then later on adjusted towards actual expenses. However, the documents/evidence supporting the above contentions were not filed before the AO.

Also we find that the assessee could not file the supporting documents in relation to its claim regarding cash payment of Rs.29,67,780/- on renovation of Director’s residence.

Considering the above, we set aside the order of the Ld. CIT(A) on the above two grounds of appeal and restore the matter to the file of the AO to make an order afresh, after giving reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant documents/evidence before the AO. Thus the 3rd and 4(a) grounds of appeal are allowed for statistical purposes.

5. The 4(b) ground of appeal

4b. Whether on the facts and in the circumstances of the case and in Law, the Ld. CIT(A) was correct in deleting the addition made on account of expense made at the directors’ residence of Rs.25,81,779/- and further expense of Rs.10,40,536/- in cash being diverted from business, which are non-business expenditure.

5.1 The AO disallowed a sum of Rs.25,81,779/-, claimed by the assessee to have been spent in cheque, but is again on account of renovation of Director’s residence. Further, the AO disallowed Rs.10,14,536/- in cash being diverted from business.

5.2 In appeal, the Ld. CIT(A) observed that addition of Rs.25,81,779/- has been made based on the figures appearing on the loose paper found during the course of survey and marked as page No. 80 of Annexure A-1. On perusal of the details furnished before him, the Ld. CIT(A) found that the assessee has not debited in its books of accounts the expenses incurred on renovation of Director’s residence, as is evident from the copies of individual ledger account of Directors, ledger account of renovation expenses, fixed asset account, balance sheet etc. Further, the Directors are filing their individual income tax returns. He observed that as per balance sheet of the Directors as on 31.03.2011 and 31.03.2012, the expenses incurred on renovation are added to their fixed assets.

On the basis of above reasons, the Ld. CIT(A) deleted the addition of Rs.25,81,779/- made by the AO. Further, he deleted the disallowance of Rs.10,14,536/- made by the AO on the reason that no material or corroborative evidence was brought on record to arrive at the conclusion that the above amount was diverted to the Directors.

5.3 Before us, the Ld. DR relies on the order of the AO, whereas the Ld. counsel relies on the order of the Ld. CIT(A).

5.4 We have heard the rival submissions and perused the relevant materials on record. The AO has made the addition of Rs.25,81,779/- on the basis of figures appearing on the loose paper found during the course of survey and marked as page No. 80 of Annexure-1. There is merit in the finding of the Ld. CIT(A) that as per the details, the assessee has not debited in its books of accounts the expenses incurred on renovation of Director’s residence as is evident from the copies of individual ledger account of Directors, ledger account of renovation expenses, fixed asset account, balance sheet etc. Facts being so, we confirm the order of the Ld. CIT(A) deleting the addition of Rs.25,81,779/- made by the AO.

We also agree with the Ld. CIT(A) that the AO has not brought out any material or corroborative evidence to arrive at the conclusion that Rs.10,14,536/- was diverted to the Directors. Accordingly, we confirm the order of the Ld. CIT(A) on the above ground of appeal.

Thus the ground of appeal No. 4(b) is dismissed.

6. The 5th ground of appeal

Whether on the facts and in the circumstances of the case and in Law, the Ld. CIT(A) was correct in deleting the addition made by the AO of Rs.1,96,60,129/- being profit estimated on ‘work in progress’ in respect of unbilled sales not offered for tax.

6.1 During the course of assessment proceedings, the AO found that as per the survey findings, the assessee has not billed the goods cleared with excise component despite physical delivery of goods to clients and therefore the WIP shown represents cost of unbilled sales of the year. Observing that the gross profit of the assessee is 43.85%, the AO arrived at the profit element on account of WIP at Rs.2,45,75,161/- (43.85% of Rs.5,60,43,696/-). The AO allowed 20% of the abovementioned gross profit on account of WIP as expenses and brought to tax the balance amount on account of WIP of Rs.1,96,60,129/- (i.e. 80% of Rs.2,45,75,161/-).

6.2 In appeal, the Ld. CIT(A) deleted the above addition made by the AO with the following observation:

“In the present case, there is no finding recorded by the Assessing Officer that the method following by the appellant distorts the profits of the particular year. It appears that the addition is made contrary to the facts of the case and against the provisions of law and also with pre conceived notions and that the addition is based on conjectures and surmises. On going through the chart for reconciliation revenue on percentage completion method in respect of Sheth Builders Pvt. Ltd. as per accounting policy AS 7, the appellant has offered revenue realization in four financial years i.e. 2010-11, 2011-12, 2012-13 and 2013-14 by offering 100% of the revenue from the particular projection. The AR of the appellant company is realizing the income from the above pattern by following the percentage completion method and plead that there is no leakage/suppression of revenue. In such a situation, there is no justification for the addition of Rs.1,96,60,129/- made by the Assessing Officer on the basis of estimate of GP. Accordingly, it is held that the said addition is not sustainable and therefore, same is deleted.”

6.3 Before us, the Ld. DR relies on the order of the AO. On the other hand, the Ld. counsel for the assessee submits that the issue has been decided in favour of the assessee by the order of the ITAT in assessee’s own case for AY 2010-11 and thus supports the order passed by the Ld. CIT(A).

6.4 We have heard the rival submissions and perused the relevant materials on record. We find that similar issue arose before the ITAT ‘A’ Bench, Mumbai in assessee’s own case for AY 2010-11 (ITA No. 6753/Mum/2014). The Tribunal vide order dated 28.09.2017 = 2017-TIOL-1410-ITAT-MUM held as under :

“10. We have heard the rival parties and perused the relevant materials placed before us. We find that the assessee has been regularly showing the WIP in its accounts which represents the unbilled work done on behalf of the various clients. The nature of business of the assessee is such that materials are normally delivered at the sites of the customers/ contractor’s and necessary modifications and fittings are done at the site of the project. At the yearend incomplete work is shown as WIP. This is a regular feature in business of the assessee. The WIP is automatically accounted for in the next year and also billed accordingly depending upon the completion of work and profit on the said amount is offered to tax accordingly. We find merit in the submissions of the ld.AR and has gone through the previous years in which the ld.CIT(A) has deleted the similar additions made by the department. The department has not further appealed before the higher forum. In view of these facts and circumstances we are of the considered view that the order of CIT(A) is not correct in upholding the additions and therefore we reverse the same and direct the direct the AO to delete the addition.”

Facts being identical, we follow the above order of the Co-ordinate Bench and confirm the order of the Ld. CIT(A). Thus the 5th ground of appeal is dismissed.

7. In the result, the appeal is partly allowed.

(Order pronounced in the open Court on 31.07.2019)

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