No Sales Suppression Addition Solely Based on Abstract Textile Data

DCIT Vs Arumuga Cottspin Pvt.Ltd.  (ITAT Chennai)

The Income Tax Appellate Tribunal (ITAT) Chennai recently delivered a significant judgment in the case of DCIT (Deputy Commissioner of Income Tax) versus Arumuga Cottspin Pvt. Ltd. The case pertains to the Assessment Year 2015-16 and involves appeals filed by both the Revenue and the assessee against the order of the Commissioner of Income Tax (Appeals)-16, Chennai.

Background of the Case:

The primary issues under consideration were:

1. Disallowance of interest on borrowed capital under section 36(1)(iii) proportionate to the amount advanced to sister concerns.
2. Alleged suppression of sales, leading to an addition of Rs. 1,76,65,652/-.
3. Addition of unexplained cash credits under section 68 amounting to Rs. 3,23,67,993/-.

Interest Disallowance under Section 36(1)(iii):

The Assessing Officer (AO) disallowed the interest on borrowed capital, alleging that interest-bearing funds were diverted for non-business purposes to sister concerns. This was based on the interest-free advances made by the assessee to related parties. The disallowance amounted to Rs. 49,44,000/-. However, the Commissioner of Income Tax (Appeals) [CIT(A)] found that there were no fresh interest-bearing loans taken during the year, and therefore, there could be no diversion of interest-bearing funds. The ITAT concurred with the CIT(A) and held that the disallowance had rightly been deleted.

Alleged Suppression of Sales:

The AO alleged that the value of finished goods sold was significantly lower than the valuation of opening and closing stock. The AO computed the alleged suppression of sales at Rs. 1,76,65,652/- based on an average rate and added it to the income of the assessee. The CIT(A) confirmed the addition. However, the ITAT held that no single instance of suppression of sales had been proven, and the allegation was not backed by material evidence. The ITAT emphasized that the sale price depends on multiple factors, and the average price computed by the AO was erroneous. Consequently, the addition on account of alleged suppression of sales was deleted. Importantly, the ITAT noted that no such addition could have been made merely by relying upon abstract data as issued by the Ministry of Textiles.

Unexplained Cash Credits under Section 68:

The AO observed that the assessee received cash from 22 parties, and the same was treated as unexplained cash credits under section 68. Confirmatory letters were sent to verify the genuineness of these parties, but the assessee could not provide the address of three parties. Letters sent to six parties were returned un-served, and some parties denied having any transactions with the assessee. The AO added Rs. 3,23,67,993/- as unexplained cash credits. The CIT(A) confirmed the addition but allowed telescoping of the alleged suppression of sales against the unexplained cash credits. The ITAT held that the impugned parties were sundry debtors, and their ledger extracts showed running accounts. The addition was held to be not sustainable, and the entire amount was deleted.

Conclusion:

In conclusion, the ITAT partially allowed the assessee’s cross-objections and dismissed the revenue’s appeal. The judgment emphasizes the importance of concrete evidence and the necessity for the revenue to establish allegations with supporting material. Additionally, it highlights that additions cannot be made solely based on abstract data issued by the Ministry of Textiles without a direct nexus to the taxpayer’s specific case.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

1.1 Aforesaid appeal by Revenue for Assessment Year (AY) 2015-16 arises out of the order of learned Commissioner of Income Tax (Appeals)-16, Chennai [CIT(A)] dated 17-01-2023 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 31-12-2017. The grounds taken by the Revenue read as under:

1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law.

2 The Ld.CIT(A) erred in deleting the addition of Rs.49,44,000/- made towards disallowance of interest on borrowed capital u/s.36(1)(iii) proportionate to amount advanced to sister concerns.

2.1 The Ld.CIT(A) erred in concluding that there cannot be diversion of interest bearing loan funds as advances to sister concerns when there are no fresh interest bearing loans taken during the year, without appreciating that the assessing officer has disallowed the interest expenses claimed during the year which is proportionate to the interest on amount advanced to sister concerns.

2.2 The ld.CIT(A) failed to appreciate that the assessee had not demonstrated that the loans advanced to sister concerns and the expenditure incurred by the assessee in the form of interest is wholly and exclusively for the purpose of business.

3. The Ld.CIT(A) erred in directing the assessing officer to telescope the addition made toward suppression of sales amounting to Rs.1 ,76,65,652/- against the addition of 3,23,67,993/- made towards unexplained cash credits.

3.1 The Ld.CIT(A) failed to appreciate that the assessee has not substantiated the sources of cash credits were the amount generated by suppression of sales and there is no correlation^· drawn between the quantity, date and amount of sales suppressed.

3.2 The Ld.CIT(A) failed to appreciate that the assessee claimed during the assessment proceedings that the cash credits were made out of Cash sales. But on verification of the claim, only 5 parties out of 22 parties replied, categorically denying the cash transactions with the assessee. The assessee had not furnished confirmation from the remaining parties. Thus, the assessee failed to prove that cash credits were made out of cash sales.

3.3 The Ld.CIT(A) erred in allowing telescoping by observing that the sales suppression quantified by the assessing officer to the extent of Rs.1 ,76,65,652/- should have flown somewhere and sitting somewhere, without any evidence furnished by the assessee that the cash generated out of sales suppression was reintroduced in the form of cash credits.

4. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of learned CIT(Appeals) may be set aside and that of the Assessing Officer be restored.

1 .2  The assessee has filed cross-objection wherein the grounds raised by the assessee read as under: –

1. That the Ld.CIT(A) is justified in deleting the addition of Rs.49,44,000/- made towards disallowance of interest on borrowed capital u/s.36(1)(iii) of the Act proportionate to amount advanced to sister concerns.

2. That the Ld.CIT(A) is not justified in sustaining the addition of Rs.1,76,65,652/- made by the Assessing Officer towards alleged suppression of sales.

3. That the Ld.CIT(A) is not justified in confirming the addition of Rs.3,23,67,993/- made by the Assessing Officer u/s.68 of the Act by treating the cash receipts from the customers as unexplained cash credits.

4. Without prejudice to the above, that the Ld.CIT(A) is justified in directing the Assessing Officer to telescope the addition made towards suppression of sales amounting to Rs.1 ,76,65,652/- against the addition of Rs.3,23,67,993/- made towards unexplained cash credits.

1.3 The Registry has noted delay of 5 days in revenue’s appeal. Similar delay of 21 days has been noted in assessee’s cross-objections. Considering the period of delay, both delays are condoned and we proceed with adjudication on merits.

1 .4 As is evident, three issues fall for our consideration i.e. (i) Interest disallowance u/s 36(1)(iii); (ii) Addition on account of alleged suppression of sales; (iii) Addition of unexplained cash credit u/s 68.

1.5 Having heard rival submissions and upon perusal of case records, our adjudication would be as under. The assessee being resident corporate assessee is stated to be engaged in manufacturing of cotton yarns.

2. Interest disallowance u/s 36(1 )(iii)

2.1 This disallowance stem from the observation of Ld. AO that the assessee made interest-free advances for Rs.1323.82 Lacs to related parties. The assessee had received similar interest-free advances from related parties for Rs.1014.47 Lacs. Since the assessee obtained secured loans from banks and paid interest, Ld. AO alleged that interest bearing funds were diverted for non-business purposes to the sister concerns. Accordingly, Ld. AO, applying interest rate of 16% to net advance amount i.e. Rs.309.35 Lacs, computed impugned disallowance u/s 36(1)(iii) for Rs.49.44 Lacs.

2.2 During appellate proceedings, the assessee summarized the CC Bank account and Term Loan Bank accounts and demonstrated that closing balance in these accounts was much less than the opening balances which would show that there was, in fact, reduction in interest bearing secured loans during this year. The Ld. CIT(A) concurred that where there are no fresh interest-bearing loans taken during this year and therefore, there could be no diversion of interest bearing funds for non-business purposes as alleged by Ld. AO. Accordingly, the impugned disallowance was deleted. Aggrieved, the revenue is in further appeal before us.

2.3 From the tabulation made by Ld. CIT(A) in para-5.3 of the impugned order, it could be seen that there is overall reduction in the unsecured loans during this year since opening loans stood at Rs.20.18 Crores as against closing loans of Rs.17.41 Crores. Upon perusal of assessee’s financial statements as placed on record, it could be seen that the assessee uses mixed funds to conduct its business. In such a case, the presumption would arise in assessee’s favor that the interest-free funds were utilized to make interest-free investments / advances and the onus would be on Ld. AO to establish that interest bearing funds were utilized to make the advances. Unless this exercise is carried out by revenue, no such disallowance could have been made. Upon perusal of financial statements, we also find that the interest-free funds as available with the assessee are much more than the net interest free advances made by the assessee to its sister concerns. Therefore, the impugned disallowance has rightly been deleted by Ld. CIT(A). The corresponding grounds raised by the revenue, in this regard, stand dismissed.

3. Addition on account of alleged suppression of sales.

3.1 Upon perusal of stock valuation as submitted by the assessee, Ld. AO observed that sales were made at Rs.150/- per Kg as against the fact that opening and closing stock was valued at Rs.195/- per Kg and Rs.214/- per Kg respectively. The same was tabulated as under: –

3.2 The Ld. AO held that the value of the finished goods was valued very less in sales. The assessee justified the same on the ground that some portion of the finished good contained Hank Yarn which is priced at a lower rate. However, no such proof could be adduced. The Ld. AO further observed that in one of the sale bill, the yarn was sold for Rs.195/- per kg. However, the price of cotton yarn (both hank and cones) as obtained from the Ministry of Textiles for the FY 2014-1 5, would show the following data: –

3.3 The Ld. AO further observed that the price ranges from Rs.250 to Rs.222 per Kg for Hank Yarn and Rs.210 to Rs.184 per Kg for Cones and therefore, the sales were undervalued. Finally, Ld. AO adopted average rate of Rs.184/- per Kg and applying the same to the quantity of finished goods sold, Ld. AO computed alleged suppression of sales for Rs.176.65 Lacs and added the same to the income of the assessee. The Ld. CIT(A) confirmed the stand of Ld. AO against which the assessee is in further appeal before us.

3.4 From the facts, it emerges that the assessee is a corporate entity and maintaining its books of accounts. The accounts are subjected to audit. No single instance of suppression of sales has been brought on record by Ld. AO and no discrepancies in the stock statement have been pointed out. There is no allegation that assessee’s gross profits are not commensurate with earlier years or there is substantial change in the same. In our considered opinion, no such addition could have been made merely be relying upon abstract data as issued by Ministry of Textiles. The allegation of Ld. AO is not backed by any material evidence. The sale price would depend upon multiple factors viz. quality as well as quantity. The average price computed by Ld. AO at Rs.150/- is completely erroneous. Therefore, this addition has no legs to stand. By deleting the same, we allow the corresponding grounds raised by the assessee.

4. Addition of unexplained cash credit u/s 68

4.1 The Ld. AO observed that the assessee received cash from 22 parties which are tabulated in para 6.1 of the assessment order as under: –

In order to verify the genuineness of these parties, confirmatory letters were sent. However, the assessee could not provide address of 3 parties. The letters sent to 6 parties were returned un-served. Few of the parties denied having made any cash payment or having any transaction with the assessee. Considering the same, Ld. AO held that cash so received was unexplained cash credit u/s 68 and the same was added to the income of the assessee.

4.2 During appellate proceedings, the assessee assailed the addition on the ground that the business is conducted mainly through the brokers and it is the broker who plays a vital role in conducting sales as well as ensuring collection from the customers. The same was evident by the fact that a survey was conducted in the case of the assessee on 23.03.2017 wherein summon were issued to the broker Shri Senthil Kumar and his statement was recorded. Shri Senthil Kumar explained clearly his role as a broker to conduct the sales. The assessee submitted that these amounts were, in fact, realization from debtors. The business was conducted through brokers and Ld. AO did not appreciate the business model of the assessee. The assessee, in the alternative, sought telescoping of addition of suppression of sales.

4.3 The Ld. CIT(A), while confirming this addition, accepted alternative argument of the assessee and allowed telescoping of addition of Rs.176.65 Lacs made on account of alleged suppression of sales against unexplained cash credits and restricted the impugned addition to the extent of Rs.147.02 Lacs. Aggrieved, the assessee as well as revenue is in further appeal before us.

4.4 From the facts, it emerges that the impugned listed parties are sundry debtors of the assessee. The ledger extract of all these parties have been placed on page nos. 52 to 111 of the paper book. Upon perusal of the same, it could be seen that all these are running accounts. The assessee has made sales to these parties and realized the payment through banking channels as well as through cash. In few cases, opening balances have been realized during this year. Most of the parties are having opening and closing ledger balances. In such a case, merely on the basis of outcome of confirmatory letters, the said receipts could not be treated as the income of the assessee. The sales are not in doubt. We find that all the ledgers are running ledgers which are duly reflected in the audited financial statements. The outcome of the confirmatory letter was to be understood in the background of the business model of the assessee. Undisputedly, assessee’s business was being conducted through the brokers who play vital role in concluding sales and ensuring realization from the debtors. The same would explain the fact the few of the debtors would not have direct dealing with the assessee. Therefore, we are of the considered opinion that this addition is not sustainable in law. Hence, we delete the impugned addition in its entirety i.e., to the extent of Rs.323.67 Lacs. The corresponding grounds raised by the assessee stand allowed. The revenue has assailed the telescoping as granted by Ld. CIT(A) and accordingly, this ground has been rendered infructuous.

Conclusion

5. The assessee’s cross-objections stand partly allowed whereas the revenue’s appeal stand dismissed.

Order pronounced on 1^st November, 2023