Case Law Details
Nayagi Fireworks Limited Vs ACIT (ITAT Chennai)
Introduction: The case of Nayagi Fireworks Limited vs. ACIT for Assessment Year (AY) 2017-18 revolves around the contentious issue of confirming the addition of cash deposits amounting to Rs. 99.50 Lacs. The order was passed by the Commissioner of Income Tax (Appeals) of the National Faceless Appeal Centre (NFAC), Delhi, concerning an assessment conducted by the Assessing Officer (AO) under section 143(3) on December 18, 2019. Nayagi Fireworks Limited is a resident corporate entity involved in the manufacturing of fireworks used during festival seasons.
Detailed Analysis: During the assessment proceedings, it was revealed that the company made cash deposits of Rs. 100.50 Lacs after demonetization from November 14, 2016, to December 31, 2016. The company claimed that these deposits were sourced from the cash balance recorded in the books as of November 8, 2016. However, the AO held that the company failed to substantiate these accruals from sales collections, worker advances recovery, and other sources, and subsequently added this amount to the company’s income as unexplained cash credit under section 68.
In the appellate proceedings, the company provided a summary of its cash position, explaining the source of the cash deposits. According to this summary, a substantial amount of Rs. 96.90 Lacs was sourced from the OTS-Accumulation Account. The company argued that the source of the cash deposits was adequately explained in this manner.
However, the CIT(A) upheld the addition of Rs. 2.60 Lacs related to worker’s advances received back, stating that the company failed to provide any evidence proving the legitimacy of these advances. Regarding the OTS-Accumulation Account, the CIT(A) rejected the company’s submissions, stating that they lacked documentary evidence. The bank loan account was declared non-performing (NPA) on August 12, 2018, and a notice under the SARFESI Act was issued on August 14, 2018, for loan recovery. The CIT(A) argued that instead of repaying the interest-bearing bank loan, the company chose to accumulate cash, which was not a valid decision. The company was unable to clarify the source of this cash accumulation, and the bank’s notice did not support the company’s contention of accumulating cash for the one-time settlement (OTS). Therefore, the addition made by the AO under section 68 was confirmed.
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