ACIT, CIRCLE - 1, GORAKHPUR V. M/S CRAZY SNACKS (P) LTD., GORAKHPUR

ITA 8/VNS/2021

AI Insights

The case revolves around the appeal by the Assistant Commissioner of Income Tax, Gorakhpur against M/s. Crazy Snacks (P) Ltd., concerning the assessment year 2013-14. The primary issues pertained to disallowances made under section 40A(3) of the Income Tax Act, 1961, due to cash payments exceeding Rs. 20,000, and claims of damaged goods and special discounts debited to the Profit & Loss account. The Assessing Officer (AO) had made substantial disallowances based on the findings during a survey under section 133A, which were contested by the assessee. The CIT(A) provided partial relief to the assessee, which was challenged by the Revenue in the Tribunal.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 26055 (ITAT-VARANASI)
• Duration Of Justice: 3 year(s) 8 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-11-2024
• Appeal Filed By: Department
• Order Result: Dismissed
• Next Hearing Date: 12-09-2024
• Assessment Year: 2013-2014
• Appeal Filed On: 25-03-2021
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMALENDU NATH MISHRA
• Assessee Lawyers: ARVIND SIKARIA
• Keywords: Business income; Commercial expediency; Gift; Loose papers; Bogus
• Section: 143(3); 131; 40A(3)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, CIRCUIT BENCH, VARANASI BEFORE: SHRI B.R. BASKARAN, ACCOUNTANT MEMBER & SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA No.8/VNS/2021 (Assessment Year :2013-14) Assistant Commissioner of Income Tax, Circle-1 Gorakhpur Vs. M/s.Crazy Snacks (P) Ltd., Kansal House 7, Park Road, Diwan Bazar Gorakhpur- 273 001 Uttar Pradesh PAN/GIR No.AADCC2371G (Appellant) .. (Respondent) Assessee by Shri Arvind Sikaria & Shri D.D.Srivastava Revenue by Shri Amalendu Nath Mishra Date of Hearing 12/09/2024 Date of Pronouncement 29/11/2024 आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the Revenue against order dated 18/09/2020, passed by Commissioner of Income Tax (Appeals)-Gorakhpur for the quantum of the assessment passed u/s 143(3) for the Assessment Year 2013-14. 2. In the grounds of appeal, the Revenue has raised the following grounds:- ITA No.8/VNS/2021 Crazy Snacks Pvt. Ltd 2 1. The Learned CIT(Appeal), Gorakhpur has erred in law and on facts in deleting the disallowance of Rs.2,41,09,548/- made due to cash expenses paid by the assessee in violation of section 40A(3) of the Income Tax Act, 1961 without appreciating facts discussed by A.O. 2. The Learned CIT(Appeal), Gorakhpur has erred in law and on facts in deleting the disallowance of Rs.4,18,00,927/- made on account of claim of damaged goods wrongly debited to Profit & Loss account without appreciating facts discussed by A.O 3. The Learned CIT(Appeal), Gorakhpur has erred in law and on facts in deleting the disallowance of Rs. 10,59,01,177/- made on account of special discount paid to parties dubiously debited to Profit & Loss account without appreciating facts discussed by A.O. 3. The brief facts are that Assessee Company is engaged in the business of manufacturing of bread, bakery and other confectionery products which are fast moving and highly perishable items. In this case the action u/s.133A was conduced on 24/12/2012 and as per the ld. AO during the course of survey action various incriminating documents were impounded. From the perusal of the various impounded materials in the form of raw material register, stock register, cash book and other purchase register, ld. AO noted that assessee had made purchases in cash exceeding amount of Rs. 20,000/- and accordingly same is not allowable u/s.40A(3). From various registers and documents reflecting various items of purchases, he has noted various cash payments made to various vendors and the parties and since these payments were more than Rs. 20,000/-, accordingly he made addition of 20% of aggregate purchases under various items of purchases. The aggregate disallowance under various heads of purchases has been ITA No.8/VNS/2021 Crazy Snacks Pvt. Ltd 3 calculated at Rs.2,67,88,387/-. He has also scanned the copy of cash book as well as purchase register and stock register under various heads of items and noted that these cash payments are to be disallowed u/s.40A(3). 4. From perusal of these details which has been incorporated in the assessment order, it is seen that there are cash purchases exceeding Rs.20,000/- but there are hundreds of entries of cash purchases which are far below amount of Rs.20,000/- and even running into few hundreds. In his entire order he has simply scanned copy of various loose papers, the details of payments and has calculated the disallowance, without analyzing the payments and quantum of amount. He has picked up all the items where the cash payments have been made, without examining whether it is within or above the prescribed limit of Rs.20,000/- and without considering the explanation of the assessee and the reasons citing circumstances where assessee has to make the payment in cash. 5. Before the ld. AO and ld. CIT (A) assessee submitted that the business model of the assessee is that it has to make payments for various raw materials like eggs, maida, edible oils, packing materials, salts, ghee etc., and even the small payments made to the labourers, contractors, transporters, thela walas, including some salary paid to the staff and outsiders on weekends and late hours of night when delivery or pick up was done. Most of the payments as noted by the AO were given in holidays, Saturday and Sundays and also late hours of night which fact has not ITA No.8/VNS/2021 Crazy Snacks Pvt. Ltd 4 been considered by the ld. AO at all. All these details were filed before the ld. CIT (A) who called for the remand report from the ld. AO. Before the ld. AO during the remand proceedings assessee has submitted his explanation which has been reproduced from pages 5-10 of the appellate order. However, the ld. AO has relied upon the observation and the finding of the ld. AO and did not rebut any of these explanations. 6. The ld. CIT(A) on perusal of the facts on record and considering the entire circumstances of the case has given part relief after observing as under:- “A perusal of the assessment order and the remand report shows that the payment were made in cash but looking the circumstances that the factory of the appellant operated 24*7 and 365 day of the Year it is not possible for the appellant to make each and every payment through bank account. as discussed earlier provision of section 40A(3) of the Act are not restrictive but they are enacted with a view to stop introduction of black money in to the system in disguise of payments. It is for the AO to make independent verification regarding the nature and circumstances of the payments made in cash. The assessee is also at liberty to demonstrate the business needs of the same In this case the AO has relied upon the entries found in the diary and cash book of the appellant and has made the additions accordingly. Further the contention regarding the business needs is also corroborated by the verification made by assessing officer mentioned in his remand report. It is also pertinent to note that every cash payment could not be income of the assessee, it should be limited to the Net profit on the sales declared by the assessee supported by the many decision made by the Hon'ble courts. ITA No.8/VNS/2021 Crazy Snacks Pvt. Ltd 5 In view of above facts I find that the disallowance made u/s 40A (3) is unwarranted a in this case, However it is also a fact that cash payments have been made by the appellant and the same is also not denied by the appellant itself accordingly the disallowance is directed to restricted to 10% of Rs. 2,67,88387/-, i.e. 26,78,838/ The appellant gets partial relief.” 7. Before us ld. DR submitted that nowhere assessee has pointed out the exceptions provided in Rule 6DD(J) and if the assessee has made cash payment and some of the cash payments are into few lakhs also, then how can it be held thar such cash payments are not hit by the provisions of Section 40A(3). In the alternative she submitted that the matter can be restored back to the file of the ld. AO to verify whether the payment made to various vendors and payments are less than Rs.20,000/- and amounts which are more than Rs.20,000/-then same should be confirmed. She further submitted that the manner in which ld. CIT(A) has given relief by restricting the disallowance by way of adhoc disallowance to 10% of Rs.2,67,58,357/- is against the provision of Section 40A(3) because there cannot be any adhoc disallowance. 8. On the other hand, ld. Counsel drew our attention to the various details incorporated in the assessment order to point out that there are many payments for purchase of raw materials, freight, transportation, payment to labourers etc., which were much below Rs.20,000/-. Further, assessee has also given the details of all the payments which were made in the late hours of the night and during weekends and holidays. All the major payments otherwise have been made through cheques where ITA No.8/VNS/2021 Crazy Snacks Pvt. Ltd 6 there is a bulk purchase from the factories. Thus, looking to the circumstances and commercial expediency, no disallowance should have been made. 9. We have heard both the parties and also perused the relevant finding given in the impugned order. As noted above, ld. AO has incorporated all the loose sheets found including purchase register, stock register and other details of cash book and ledger to draw inference that since all these payments have been made in cash therefore, there is a clearcut violation of Section 40A(3) and cumulatively he has made an addition of Rs.2,67,50,387/-. From the perusal of all these details which have incorporated in the assessment order, it is seen that in many cases the payments are much less than Rs.20,000/- also and there are various other payments which are far exceeding Rs.20,000/-. One of the major contention of the assessee was that most of the payments which were made by the assessee to various vendors, transporters, labourers and for purchase of various raw materials and packaging details were paid on holidays, i.e., Saturday and Sunday and other holidays. Further, the factory of the assessee runs 24 hours and various transporters take the payment after unloading all the goods at the spot which are mostly at the closing of banking hours and even supply of raw materials or the vendors supplying various ingredients and raw materials required by the assessee from manufacturing of various bakery and confectionery items are made at odd hours. During the assessment proceedings as well as remand proceedings, assessee has given this explanation but there is no rebuttal by the ld. AO ITA No.8/VNS/2021 Crazy Snacks Pvt. Ltd 7 in the remand report, at least nothing has been brought on record before us. Now under these circumstances can disallowance be made u/s 40A (3). The relevant provision of Section 40A (3) as was applicable for the A.Y.2013-14 reads as under:- “Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise that by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure. \"Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub section (3) and this sub section where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, in such cases and under such circumstances as maybe prescribed, having regard to the nature and extent of baking facilities' available, considerations of business expediency and other relevant factors\". 10. One of the crucial test and exceptions which have been provided in the proviso is for no disallowance under this section are; firstly, circumstances as may be prescribed which are prescribed under Rule 6D(J)(2); secondly having regard to nature and extent of banking facility available; and lastly, consideration of business expediency alongwith other relevant factors. While examining the expenditure incurred in cash within the scope of Section 40A (3), one has to see considerations and circumsatnces relevant for business expediency and other ITA No.8/VNS/2021 Crazy Snacks Pvt. Ltd 8 relevant factors and also the nature and extent of banking facilities. Assessee has given the various factors and business expediency in its explanation that, since assessee is dealing in highly perishable items and assessee’s factory is running 24 hours which require continuous supply of raw materials and dispatch of finish goods for which it requires labourers and transporters and these raw materials are supplied and dispatched on non-banking hours especially late in the night and middle of night and also during the weekends and holidays where it is not possible to give a cheque. Further small vendors and transporters will not accept cheque at late and odd hours for such a payment and on weekends. For such a quick moving items of bakery and confectionary which are highly perishable and where raw materials and items like, maida, milk, eggs and various other ingredients are required to manufacture and is to be supplied in the market immediately because of very low shelf life, assessee has to make the payment in cash otherwise it will be very difficult to carry on such kind of business. These are extreme circumstances where payments in cash are necessitated. It is not the case of the ld. AO that all the payments debited in the books of account have been made in cash. He has just picked up only those items which have been paid in cash and entire amount has been added without even looking to the fact that most of the items are below Rs.20,000/-. It is under these circumstances, the ld. CIT (A) held that most of these expenses cannot be disallowed. Although such adhoc disallowance of 10% is not that criteria for giving a relief because each and every item ITA No.8/VNS/2021 Crazy Snacks Pvt. Ltd 9 needs to be examined either to give relief or to confirm addition. Here in this case, there are thousand of items which have been enlisted by the ld. AO on various dates and he has simply made the addition without even examining the explanation and details filed by the assessee, even during remand proceedings. Further, now it would be impossible after more than 10 years to examine every payment and circumstances in which cash payment was made. There could be some instances where cash payment would have been made beyond commercial expediency also but when there is no such finding by the AO despite opportunity given to the AO in remand proceedings, then under these facts it would be difficult to deviate from the reasons given by the CIT(A) while granting part relief even if there could be little possibility of some disallowance but is very hard to segregate at this stage. In our view looking to these facts and circumstances and explanation of the assessee although no disallowance should have been made but, since assessee is not in appeal therefore the partial disallowance confirmed by the ld. CIT(A) at Rs.26,78,838/- is upheld. Accordingly, the balance relief deleting the addtion by the ld. CIT (A) is upheld and accordingly, ground No.1 raised by the Revenue is dismissed. 11. The second issue relates to disallowance of Rs.4,18,00,927/- on account of claim of damaged goods. The case of the ld. AO is that assessee has debited sum of Rs.4,26,28,492/- on account of damaged goods claimed to have been paid to the parties. In response to the show-cause notice assessee had given party wise details for the damaged goods paid ITA No.8/VNS/2021 Crazy Snacks Pvt. Ltd 10 and stated that these claims and payments have been made to various parties in shape of credit note / cash issued to the parties. After incorporating impounded loose sheets of 12 pages AO observed that there are few damaged goods claimed which are over and above the actual damage. Once such instance given by the ld. AO is that one party, named as M/s. Maurya Bread wherein the proprietor has stated that he get commission of 4% on the sale of goods of manufacture by the assessee and he does not get any special discount on damaged goods and some of the items like bread and other items are returnable to assessee but there are some items which company does not take back damaged goods and loss is borne by him. From this ld. AO inferred that assessee has claimed excessive damaged goods. Ld. AO estimated that percentage of damaged goods out of sale at 0.66% which according to him was excessive. He took the figure of month of April 2012 wherein the sales of goods for Rs.6,24,45,611/- and damaged goods claimed paid to the parties were Rs.4,16,445/- which comes to 0.66% and based on that he has estimated the overall excess damage claim of Rs.4,18,927/-. The ld. CIT (A) has deleted the addition holding that the entire basis for making the addition by the ld. AO is based on statement of only one vendor out of 400 odd vendors and that too it was not confronted to the assessee. 12. After considering the submissions made by the parties and on perusal of the material placed on record, it is seen that the assessee’s contention before the authorities has been that the payments have been made to the vendors who has sold bread ITA No.8/VNS/2021 Crazy Snacks Pvt. Ltd 11 and other confectionery items to the market. There were more than 400 vendors involved in selling of the products but ld. AO has taken note of one vendor Shri Ram Suresh Maurya which admittedly was not even confronted to the assessee. The assessee had filed the details of damaged goods and of discounts paid to these vendors on account of damaged goods alongwith confirmation from various parties in support of the contention. It is a matter of fact that in the subsequent years specific queries were raised and assessee has given all these details and confirmations and no adverse inference has been drawn in any of the assessment orders. It has been pointed out before us that claim of damaged goods was there in the earlier years also and subsequent years wherein in the assessment order passed u/s. 143(3) for the A.Y.2008-09, 2012-13 and 2014- 15 such claim has been accepted. 13. Another important fact as borne out from the order of the Ld. CIT (A) is that during the remand proceedings five more vendors were summoned u/s.131 by the ld. AO who had personally appeared before the ld. AO and had given the statement under oath and in their statement they have admitted that they were engaged in the sale of bread and other products and the company has given commission @12% to cover up the damages and further gifts / discounts were also availed by these sellers as per the terms and conditions mutually agreed by them and certain special discount has been given on account of claim of damage and unsold goods. The ld. CIT (A) has deleted the addition after observing as under:- ITA No.8/VNS/2021 Crazy Snacks Pvt. Ltd 12 “A perusal of the assessment order remand report of assessing officer as well as various submission made by the appellant shows the appellant is a manufacturer of bread, pav, bun and other bakery items. These items are of small value and the sale is dependent on the commission paid by the manufacturer. These are highly perishable goods having a shelf life of Three or four days. It is also a known fact that the sale of these items are made by street bakery shop / vendors only, for the purpose they get commission, incentive as well as claim of damage goods also It is a common practice that the unsold and damaged stock is returned to the manufacturer and he reimburses the claim accordingly. A perusal of order u/s 143(3) of the IT act 1961 dated 30.03.2016 shows that the said addition was made only on the basis of statement of only one vendor whose statement of oath recorded during the assessment proceeding out of total 400 odd vendors and same was also not confronted to the appellant. In view of fact and considering the remand report of Assessing officer I find that the addition made by the AO is unjustified, and not based on facts of the case, accordingly the same is directed to be deleted.” 14. The aforesaid finding of the ld. CIT (A) deserves to be accepted because looking to the perishable items in which assessee dealt there is more likelihood of damaged or unsold goods for which assessee had given discount or special discount to various vendors to cover up such damages and also they have ascertained unsold damaged stock which was returned to the manufacturer which assessee has reimbursed to these vendors. Thus, such an addition made by the ld. AO is directed to be deleted. In the result, ground No.2 raised by the Revenue is dismissed. ITA No.8/VNS/2021 Crazy Snacks Pvt. Ltd 13 15. Lastly, with regard to disallowance of Rs.10,59,01,117/- made on special discount paid to the parties. The ld. AO noted that assessee has debited this amount on special discount paid to various parties and in response to the notice to explain the nature of the said expenditure with supporting documents assessee had filed the details alongwith letter dated 29/03/2016 which is acknowledged by him in para 13.1.1 of the order. The ld. AO after analysing some of the sheets containing details of special account had made following observations to make the addition:- “13.14 This loose sheet contains the following information: 1. Party name 2. Total sale 3. Fresh return 4. Total sales 5. Dry sales 6. Special discount 7. Net dry 8. Wet sale 9. Specails discount 10. Net wet 11. Damage 12. Total Special discount 13. Actual wet 14. Actual net 13.15 As per this loose sheet L-38 total sales for the month of April, 2012 is 6,24,45,611/- and total special discount has been disclosed as NIL. Thus, it is clear that total special discount for the month of April, 2012 is NIL whereas the ledger account submitted by assessee shows that for the month of April, 2012 special discount paid to parties has been claimed at Rs. 63,09,603/- The content of Loose sheet L-38 certifies that assessee has claimed bogus \"special discount\" in the books, where as per the loose sheet, special discount is Rs Nil. One of the party, whose names ITA No.8/VNS/2021 Crazy Snacks Pvt. Ltd 14 have been submitted by assessee in month wise ledger namely M/s Maurya Bread Agency Prop. Shri Ram Suren Maurya, Cantt, Gorakhpur has stated that; \"we are getting commission of 4% on the sale of goods manufactured by crazy snacks private limited. We did not get any special discount. Only bread and bund are returnable item and all other items like Rusk etc., are not take back by the company as damaged goods and this loss has to borne by us.\" 13.16 The statement of Sri RS Mourya is already produced above, who has been examined u/s 131 of the Income-tax Act, 1961. Therefore, in view of the above discussion and statement of Sri R S Mourya, I hold that the assessee company has claimed bogus \"Special Discount to the Parties\" The calculation of allowable damage good claimed paid to parties is as under; 13.17 Therefore, since asseessee has not paid any special discount as claimed in the Profit & Loss Account, accordingly, total expenditure claimed under this head amounting to Rs 10,59,01,177/-is disallowed and added back to the total income of the asseessee (Addition of Rs10,59,01,177/-)” 16. The ld. CIT(A) held that since the addition was made on the similar ground as was made for claiming of damaged goods which was based on statement of one vendor, the ld. CIT(A) has deleted the said addition. 17. After considering the submissions and on perusal of material placed on record, it is seen that the ld. AO based on loose sheets of month of April 2012 noted that there was no special discount whereas assessee has claimed discount of Rs.63,09,603/- in the books of accounts. It has been clarified that the quantum of discount is not worked out on month to ITA No.8/VNS/2021 Crazy Snacks Pvt. Ltd 15 month basis but overall payments have been made and the discount is offered to various vendors depending upon sales or damaged goods returned etc., assessee debits the amount. Moreover in the remand proceedings, ld. AO has examined other five vendors who have clearly clarified their rate of commission gifts and discounts given to them by the assessee on various terms and conditions and special discount on claim of damaged and unsold goods. Thus, we do not find any infirmity in the order of the ld. CIT (A) in granting relief on this count because addition made by the ld. AO is purely based on his surmise and without any material fact on record except referring to statement of one vendor which was not even confronted to the assessee. If during the course of remand proceedings, ld. AO has carried out verification and examination and recorded the statement of the vendor, who have accepted and clarified the claim and AO has accepted the same, then there is no reason for sustaining this addition. 18. In the result, appeal of the Revenue is dismissed. Order pronounced on 29/11/2024. Sd/- (B.R. BASKARAN) Sd/- (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Varanasi; Dated 29/11/2024 KARUNA, sr.ps ITA No.8/VNS/2021 Crazy Snacks Pvt. Ltd 16 Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Varanasi 1. The Appellant 2. The Respondent. 3. The CIT(A), Varanasi. 4. CIT 5. DR, ITAT, Varanasi 6. Guard file. //True Copy// "