M/s Roop Square Private Limited, Ludhiana V. ACIT-CC-1, Ludhiana

ITA 199/CHANDI/2021

• Counselvise Citation: [2022] 107 COUNSELVISE.COM (IT) 0878 (ITAT-CHANDIGARH)
• Duration Of Justice: 11 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-08-2022
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2018-2019
• Appeal Filed On: 22-08-2021
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Unexplained investment; TDS
• Section: 69; 69C; 40A(3); 40(a)(ia); 194C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES: CHANDIGARH BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER I.T.A No. 199/CHD/2021 (ASSESSMENT YEAR-2018-19) M/s Roop Square Pvt. Ltd. Ghumar Mandi Chowk, Civil Lines Ludhiana. PAN:AACCR8811R (Assessee) Vs.. Asstt. CIT, Central Circle-1, Ludhiana. (Revenue) Assessee by Shri Ashwani Kumar , CA. Revenue by Shri Akashdeep, JCIT.Sr. DR. ORDER Per VIKRAM SINGH YADAV, A.M.: This is an appeal filed by the assessee against the order of ld. CIT(A)-5, Ludhiana dated 30.07.2021 pertaining to Assessment Year 2018-19. 2. In Ground No. 1, the assessee has challenged the sustenance of addition of Rs.52,150/- out of total addition of Rs.4,31,000/- made by the AO on account of Date of Hearing 27.07.2022 Date of Pronouncement 03.08.2022 I.T.A No. 199/CHD/2021 2 alleged difference in stock found at the time of physical verification on the date of search. 3. In this regard, briefly the facts of the case are that during the course of search, physical stock inventory was prepared and the stock of Rs.8,70,77,237/- comprising of both garment and jewellery stock in hand was found. Further a provisional trading account on the date of search was prepared and applying the G.P. rate of last year, the value of closing stock was estimated at Rs.7,91,44,234/- and resultant difference of Rs.79,33,003/- was proposed to be treated as unexplained investment and a show cause was issued to the assessee, during the course of assessment proceedings. In response the assessee submitted that the value of the garments were taken on the basis of tag price whereas in the books of accounts, the same is valued at cost and where the last year G.P. rate of 10.81% is reduced, the physical stock comes to Rs.672.61 lacs and difference is only Rs 6.63 lacs. It was further submitted that the direct expenses such as job work cartage, freight inward, fabrication material were omitted to be taken as part of trading account and where the same taking into consideration amounting to Rs.10.94 lacs, the stock as per books will be excess by Rs 4.31 lac which is very negligible keeping in view the percentage of total stock found and which could be due to minor difference in gross profit during the period as compared to last year. I.T.A No. 199/CHD/2021 3 The submissions so filed by the assessee were considered but not found fully acceptable to the AO. As per the AO, there is a difference of Rs 4,31,000/- as excess stock admitted by the assessee after proper reconciliation and excess stock is to be treated as unexplained investment u/s 69 of the Act and which was brought to tax in the hands of the assessee. 4. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) and reiterated the submissions made before the AO. As per the ld. CIT(A), the AO has accepted the reconciliation of stock submitted by the assessee during the assessment proceeding and the deficiency of stock physically found in comparison to the books leads to the conclusion that sales have been made outside the books of account and profit thereon to be brought to tax. Thereafter, applying the G.P. rate of 12.1% declared by the assessee for the year under consideration, the addition of Rs.52,150/- was sustained and the remaining addition made by the AO was deleted. Against the said findings, the assessee is in appeal before us. 5. During the course of hearing, the ld AR submitted that excess stock has been determined at Rs 4.31 lac which is very negligible keeping in view the percentage of total stock found and which could be due to minor difference in I.T.A No. 199/CHD/2021 4 gross profit during the period as compared to last year. It was further submitted that no corroborative material has been found during the course of search and no defects have been pointed out in books of accounts and therefore, the addition so sustained by the ld CIT(A) be deleted. 6. Per contra, the ld DR submitted that under taxation laws, the issue is not about materiality of transaction and what is relevant is whether the assessee has provided appropriate explanation regarding excess stock found in the books of accounts as compared to physical stock and which has been reconciled and workout basis the calculation submitted by the assessee during the appellate proceedings. It was submitted that the ld CIT(A) has been reasonable enough where he has brought to tax only the profits thereon holding the stock has been sold outside the books of accounts and only an addition of Rs 52,150/- has been upheld out of Rs 431,000/- and remaining addition has already been deleted. It was accordingly submitted that the assessee doesn’t deserve any further relief and the ground of appeal be dismissed. 7. We have heard both the parties and perused the material available on record. We are of the considered view that the ld CIT(A) has duly considered the entirety I.T.A No. 199/CHD/2021 5 of facts and circumstances of the case and has rightly worked out the profits, applying the gross profit rate as declared by the assessee, on the stock which after proper reconciliation has been found excess in the books of accounts as compared to physical stock and thereby lending credence to the finding that the said stock has been sold outside the books of accounts. Nothing has been brought on record to rebut the said findings of the ld CIT(A) and therefore, we do not see any justifiable basis to interfere with the finding of the ld. CIT(A) and the same is hereby confirmed and the ground of appeal taken by the assessee is dismissed. 8. Ground No.2 relates to sustenance of addition of Rs.2,92,875/- out of total addition of Rs. 12,59,466/- made by the AO u/s 36(1)(iii) of the Act. 9. In this regard, briefly the facts of the case are that during the course of search, cash of Rs.7,40,050/- was physically found and as per the books of account prepared till 31.10.2017, cash in hand of the business comes to Rs.1,12,37,807/- and accordingly assessee was issued a show cause as to why the said sum should not be brought to tax. In response, the assessee submitted that the books of account were not updated and as per the updated books of account as on 31.10.2017, cash in hand comes to Rs.31,80,670/- and it was submitted that I.T.A No. 199/CHD/2021 6 remaining cash was with the officers of the company in safe custody and the Sr. employees for the purpose of meeting routine and day to day petty expenses. The reply so filed by the assessee was considered but not found acceptable to the AO. As per the AO, the assessee make a story to justify such a huge cash given for safe custody of Sr. employee, books were not updated as on 31.10.2017 at the time of search and if the amount was taken to senior employees, the same should have been entered as imprest money at that time only. Further the AO referred to the statement of O.P. Sachdeva and Shiva Sachdeva where there is no mention of imprest account. The AO accordingly held that the assessee has withdrawn Rs.10497557/- from regular books of account for non business purposes and thereafter taking into consideration the fact that the assessee has average borrowings of Rs 1,96,34,460/- and has paid interest of Rs.4776165/- which comes to 24.32%, worked out interest on Rs 1,04,95,557/- amounting to Rs 12,59,466/- by applying rate of 12% which was disallowed invoking the provisions of section 36(1)(iii) of the Act. 10. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) and reiterated the submissions made before the AO. The ld. CIT(A) considered the submissions of the assessee that as per the updated books of I.T.A No. 199/CHD/2021 7 account, the cash balance as on 31.10.2017 comes to Rs.31,80,670/- and accordingly cash shortage of Rs.24,40,620/- as submitted by the assessee was accepted and disallowance was restricted to 12% of the cash found short after updating the books of account and the disallowance of Rs.292,875/- was sustained and the balance additions were directed to be deleted. Against the said findings, the assessee is in appeal before us. 11. Heard both the parties and pursued the material available on record. The ld CIT(A) has accepted the working of cash shortage of Rs.24,40,620/- as submitted by the assessee. The explanation of the assessee that the cash has been handed over to the staff members remain uncorroborated and therefore, as a necessary corollary, we agree with the finding of the AO that the cash so found short has been utilized for non-business purposes. Further, where the taxing authorities have applied average rate of 12% on such funds being utilized for non-business purposes, we donot find any infirmity in the said finding of the ld. CIT(A) and the same is hereby confirmed and the ground of appeal taken by the assessee is dismissed. I.T.A No. 199/CHD/2021 8 12. In ground no. 3, the assessee has challenged the sustenance of addition of Rs.9 lac u/s 40(a)(ia) of the Act. In this regard, briefly the facts of the case are that the AO during the course of assessment proceeding issued a show cause on the basis of statement of Shri. Shah Niwaz Rehman recorded during the course of search as to why the provisions of section 40(a)(ia) r.w.s. 69C should not be invoked. In response, the assessee submitted that it deals in wide variety of readymade products and sales are dependent upon choice of the customers and additional work like alteration, fitting and embroidery work is also requested by its customers for which workers are hired on casual basis. As per assessee, the amounts of expenses incurred in the form of casual wages are debited to embroidery expenses account and expenses relating to material used are debited to fabrication material account. Further the payment is made based upon the work allotted and their performance and not accounted for/recorded in the salary register. It was also submitted that Shri. Shah Nawaz was an employee of the assessee company who was an experienced hand in this kind of work and supervised the casual workers to ensure the quality of work and to maintain the proper record. However, Shri Shah Nawaz was not a contractor and these workers were not hired by him. It was submitted that Shri Shah Nawaz is in continuance employment since 2011 whereas the workers have joined only in the year 2017. It I.T.A No. 199/CHD/2021 9 was submitted that there was no contractor- contractee relationship between Shri. Shah Nawaz and the assessee company which was also stated by Shri Om Prakash during the search. It was also submitted that monthly payment to each workers varies from Rs.9000/- to Rs.15000/- duly recorded in cash and payment to each one was within the limit prescribed u/s 40A(3) of the Act. Since the payment on account of embroidery was lower than threshold u/s 194C, no TDS was done on such payment. The submissions so filed by the assessee were considered but not found acceptable to the AO. As per the AO, even after considering the reply of the assessee that Shri Shah Nawaz was a regular employee (though not admitted), this does not stop him to work as a contractor or a labour supplier. It was held by the AO that merely the fact that the assessee has not passed the entry in respect of the expenses in a particular way, the transaction/payment will not become sacrosanct. It was held by the AO that it is only Shri Shah Nawaz who received the amount in cash from assessee company and then he used to give it to the workers. Further, the claim of the assessee that the expenses on payment are booked on day today basis is clearly an afterthought as the assessee was unable to prove this version during search or post-search enquiries. Moreover ledger cash book was not found updated at the time of search. Further referring to the statement of Shah Nawaz, the AO held that in his statement, Shri. Shah Nawaz admitted that no TDS has been I.T.A No. 199/CHD/2021 10 deducted on this amount and admitted that his team is working in M/s Roop Square Group and referring to question No. 2 of statement where he admitted that he is a contractor, the AO recorded the finding that they cannot be an iota of doubt that Shri. Shah Nawaz was a contractor and payment made to him was liable to be subjected to TDS and given that no TDS has been deducted on a sum of Rs.30 laces, the AO disallowed a sum of Rs. 9 lacs invoking provisions of section 40(a)(ia) of the Act. 13. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) and reiterated the submission made before the AO. The ld. CIT(A) specifically referring to the statement of Shri Shah Nawaz recorded on 1.11.2017 held that in the said statement Shri Shah Nawaz clearly admitted that he works on contract and he is a contractor having 20 to 25 Karigar and given the fact that the assessee has not been able to rebut the statement of Shri Shah Nawaz, the AO has rightly held that there was nothing to prevent Shri Shah Nawaz to act as a contractor apart from employment and therefore, the disallowance made by the AO was upheld. Against the said findings, the assessee is in appeal before us. I.T.A No. 199/CHD/2021 11 14. During the course of hearing, the ld AR submitted that Shri Shah Nawaz was an employee and not a contractor. It was submitted that merely basis his statement, the addition has been made by the AO and which has been sustained by the ld CIT(A). It was submitted that the causal wages is paid to workers and the month-wise worker-wise details are on record and which has not been considered by the lower authorities. It was submitted that there is no default which has been committed by the assessee as the individual payment to workers fall below the threshold prescribed under section 194C of the Act and provisions of section 40(a)(ia) has been wrongly by the AO and upheld by the ld CIT(A). 15. Per contra, the ld DR drawn our reference to the findings of the AO as well as the ld CIT(A) and submitted that shri Shah Nawaz in his statement recorded during the course of search has clearly admitted that he works on contract and he is a contractor having 20 to 25 Karigar. It was submitted that the assessee has failed to rebut the statement of Shri Shah Nawaz and accordingly, the ld CIT(A) has upheld the findings of the AO and the ground of appeal taken by the assessee deserve to be dismissed. I.T.A No. 199/CHD/2021 12 16. Heard both the parties and pursued the material available on record. At the outset, it is noted that the AO has stated in his order that there is nothing which stops Shri Shah Nawaz to work as a contractor besides being an employee of the assessee company. Therefore, limited issue before us is whether Shri Shah Nawaz who besides being an employee of the assessee company has worked as a contractor and got paid for such services or not. The basis of holding that Shri Shah Nawaz is a contractor by the AO is his statement recorded during the course of search at the premises of the assessee company. In his statement, he has stated that he is a contractor, he has 20-25 karigars with him , he takes work on contract and he works at the assessee’s premises. Basis the said statement, the AO has held that no tax has been deducted at source on amount of Rs 30 lacs paid by the assessee company during the year to Shri Shah Nawaz, accordingly, 30% of the amount was disallowed invoking provisions of section 40(a)(ia) of the Act. The assessee is challenging the said statement of Shri Shaw Nawaz and has raised various contentions before the lower authorities and which have again been reiterated before us. The contentions so advanced are however not backed by any corroborative evidence to dislodge the statement so recorded during the course of search. Passing of entries in the books of accounts which is well within the control of the assessee and not even supported by any receipts signed by the individual I.T.A No. 199/CHD/2021 13 workers confirming the receipt of money directly from the assessee company is not sufficient enough to dislodge the findings of the AO that the payment has been made directly to Shri Shah Nawaz who in turn distributes to the workers. There are no statements of any of the workers employed at the assessee’s premises which contradict the statement of Shri Shah Nawaz and support the version of the assessee that they were hired directly by the assessee and also paid directly by the assessee. Therefore, taking into consideration the entirety of facts and circumstances of the case, we do not find any infirmity in the finding of the ld. CIT(A) and the same is hereby confirmed and the ground of appeal taken by the assessee is dismissed. In the result, the appeal of the assessee is dismissed. Order pronounced in the open Court on 03/08/2022. Sd/- Sd/- (DIVA SINGH) (VIKRAM SINGH YADAV) JUDICIAL MEMBER ACCOUNTANT MEMBER *AKV* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT Assistant Registrar