AO can not say that Assessee should not keep cash balance in Hand

By | December 8, 2015

Facts of the Case :-

Assessee is a firm engaged in the business of manufacturing grey cloth.On scrutiny of the accounts, ld. AO noticed that assessee has paid interest expenditure of Rs. 31,13,303/-. It has also kept cash balance of Rs. 18,19,967/-. Such interest was paid to the creditors who have supplied yarn to the assessee.

AO Contention

Assessee is not receiving any interest on late payment by sundry debtors, but while assessee made interest payment to sundry creditor.

He observed that there should not be any requirement to keep cash balance of Rs.18,19,967/- and incur interest expenditure of Rs.31,13,303/-. On an ad hoc basis he made an addition of Rs.9,09,983/- (being @ 50% of late payment interest paid)

CIT (Appeal)

On appeal, ld. CIT(A) has deleted the addition

Held by CIT

AO has interfered in the wisdom of assessee of doing the business. The ld. AO felt that assessee should do the business in a particular way and should not keep some cash balance in hand.Therefore, in our opinion,CIT(A) has rightly deleted the addition.

IN THE ITAT AHMEDABAD BENCH ‘C’

Deputy Commissioner of Income-tax, Circle-2, Surat

v.

Ashok Weaving Works

RAJPAL YADAV, JUDICIAL MEMBER
AND ANIL CHATURVEDI, ACCOUNTANT MEMBER

IT APPEAL NO. 773 (AHD.) OF 2012
[ASSESSMENT YEAR 2008-09]

AUGUST  13, 2015

D.C. Mishra, Sr. DR for the Appellant. M.J. Shah, AR for the Respondent.

ORDER

Rajpal Yadav, Judicial Member – Revenue is in appeal before us against the order of CIT(A) dated 9/1/2012 passed for Asst. Year 2008-09. In the first ground of appeal, Revenue has pleaded that ld. CIT(A) has erred in deleting the addition of Rs.9,09,983/-.

2. Brief facts of the case are that assessee is a firm engaged in the business of manufacturing grey cloth. It has filed its return of income on 30.9.2008 declaring total income of Rs. 62,704/-. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) of the I.T. Act, 1961 was issued on 26.8.2009 which was duly served on the assessee. On scrutiny of the accounts, ld. AO noticed that assessee has paid interest expenditure of Rs. 31,13,303/-. It has also kept cash balance of Rs. 18,19,967/-. Such interest was paid to the creditors who have supplied yarn to the assessee. On query of AO, it was contended by the assessee that it made purchases of yarn of Rs. 2,95,92,854/-. It has to incur interest expenditure on late payment of the purchase price which has been worked out to Rs. 16,37,101/-. According to the assessee it was in the line of business norms. The AO was not satisfied with the explanation of the assessee. He observed that there should not be any requirement to keep cash balance of Rs.18,19,967/- and incur interest expenditure of Rs.31,13,303/-. On an ad hoc basis he made an addition of Rs.9,09,983/-. The finding recorded by the AO reads as under :—

“I have considered, assessee’s submission carefully. While going through overall picture of assessee, it came to know that assessee has paid interest expenses of Rs.31,13,303. On one side assessee is paying such high interest expenses and on other hand he is keeping cash balance of Rs.18,19,967/-. Which does not seem to be genuine business situation. Further assessee is not receiving any interest on late payment by sundry debtors, but while assessee made interest payment to sundry creditor.

So, I herewith disallow interest Exp. Of Rs.9,09,983 @ 50% of late payment interest paid.”

3. On appeal, ld. CIT(A) has deleted the addition.

4. With the assistance of ld. representatives, we have gone through the record carefully. The assessee has alleged that it made purchases of yarn of Rs.2,95,92,854/-. On certain occasion it could not make payment in time. Therefore, it has to make the payment of yarn along with interest on the amount due. The AO did not find fault with the purchases made by the assessee nor doubted the existence of the parties who have supplied the yarn. Any way, the AO has interfered in the wisdom of assessee of doing the business. The ld. AO felt that assessee should do the business in a particular way and should not keep some cash balance in hand. It should discharge its liability towards purchase of yarn. But, i.e. not the correct way visited with the AO. Therefore, in our opinion, ld. first appellate authority has rightly deleted the addition.

5. In the next ground of appeal the Revenue has pleaded that ld. CIT(A) has erred in deleting the addition of Rs.26,52,783/- which was added by the AO by estimating G.P.

6. Brief facts of the case are that assessee had shown GP @ 14.72%. The AO was of the view that assessee has achieved high turnover, it owned machinery, had support of sister concern and made investment of more than 2.16 crores. Therefore, it should not earn nominal profit of Rs.62,704/-. The AO has estimated the GP at 19% and made addition of Rs.26,52,783/-. The reasons assigned by the AO are summarized in paragraph No.5 of the assessment order which read as under :—

“5. Following data will show that assessee’s account has many irregularities which is not reconciliable and so rejection of books and estimation of profit is the only way to assess the income-

a. Turnover of assessee is Rs.6,04,42,003/- while debtor of assessee is 19,49,63,623/- i.e. average credit period of debtor is 4 month’s outstanding which is highly abnormal.
b. Sundry creditor of assessee for goods is Rs.89,97,117/- while purchase is Rs.2,95,92,854/- which is also near to 3.50 month’s outstanding which is abnormally high.
c. Total job work expenses is Rs.126,95,096/- while outstanding creditor for expenses is Rs.83,71,842/- which is more than 8 months outstanding and not believable. Further assessee had not submitted list of outstanding creditors for expenses in his audit report which also create doubt.
d. So based on above figure it is quite clear fact that assessee is not showing correct picture in his books of account. So I herewith reject books of account of assessee u/s 145(3) of the I.T. Act and estimate the GP of the assessee as follows

So based on above figure, it is very clear that assessee has inflated expenses so I herewith estimate GP at 19% and thereby make GP addition of Rs.26,52,783/-.”

7. On appeal, ld. CIT(A) has deleted the addition by recording the following finding:—

“4.2 During the course of assessment proceedings, it was submitted that the gross profit of the appellant for the year was 14.72% which compared favourably with gross profit of 14.4% in AY 2007-08 and 13.45% in AY 2006-07. It was also submitted that gross profit had increased in absolute terms also (Rs.78 lacs to Rs.88 lacs). It was also pointed out that book results were accepted in scrutiny assessment for AY 2007-08. It was further mentioned that the appellant regularly maintains books of accounts with quantity records. It was submitted that the AO compared book results of the appellant with three parties, two of which were outside concerns and whose facts were not disclosed to the appellant while the third concern which was an associate had a different business model from the appellant – operated in the local market, had different class of machineries and much lower turnover. It was argued that none of the cases were comparable. It was further argued that the AO had rejected the books of accounts, regularly maintained and audited, without finding any specific defects in the books and without appreciating that the results for the year were better than preceding years for which book results had been accepted. It was further argued that the reason given for rejecting books -larger working capital cycle than the average working capital cycle- and estimating higher gross profit was incorrect as higher than average working capital cycle would result in lower profits. It was also submitted that the details for all creditors for expenses were given to the AO. It was submitted that all required books were maintained and at no point did the appellant failed to satisfy the correctness of the profits returned by it and therefore rejecting books only on the basis of comparison with other parties without finding specific defects was not sustainable. The appellant relied on the decisions in the case of Malini Ramjivan Jagannath 207 CTR (Raj) 19, Madnani Construction Corporation 296 ITR 45, Alluminium Industries Pvt. Ltd. 80 Taxman 180 (Gau.).

5. I have gone through the facts of the case. The appellant maintains regular books of accounts which are audited. The book results have been accepted in earlier assessments under scrutiny. The gross profit shown during the year is higher than the book results accepted in earlier assessment in scrutiny. The details of creditors were made available to the AO during the course of assessment proceedings. Larger than normal working capital cycle only indicate inefficiency and not defect in the books and at best could be the starting profit of investigation and not conclusion. No specific defects have been pointed out in the books during the year. The appellant has correctly objected to the comparison made with other concerns as the details of the said concerns were not made available to it and there were differences in operating business model with sister concern. Even otherwise, merely because the gross profit obtained by the appellant was lower than the gross profit obtained by other persons involved in similar trade does not establish that the books of the appellant was defective. Since no specific defects have been pointed out in the books, the book results could not have been disturbed. The addition made to the book result is therefore deleted. This ground is allowed.”

8. With the assistance of the learned representative, we have gone through the record carefully. Section 145 has a direct bearing on the controversy, therefore, it is salutary upon us to take note of this provision.

“145(1) Income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’ shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the official gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.”

9. From the bare reading of this section, it would reveal that it provides the mechanism how to compute the income of the assessee. According to sub-clause (i), the income chargeable under the head “Profits and gains of the business or professions or income from other sources” shall be computed in accordance with the method of accountancy employed by an assessee regularly subject to the sub-section (2) of section 145 of the Act. Sub-section (2) provides that the Central Government may notify in the Official Gazette from time to time the accounting standard required to be followed by any class of assessee in respect of any class of income. Thus, it indicates that income has to be computed in accordance with the method of accountancy followed by an assessee, i.e., cash or mercantile. Such method has to be followed keeping in view the accounting standard notified by the Central Government from time to time. Sub-clause (3) provides a situation, i.e., if the Assessing Officer is unable to deduce the true income on the basis of method of accountancy followed by an assessee then he can reject the book results and assess the income according to his estimate or according to his best judgment. The Assessing Officer in that case is required to point out the defects in the accounts of assessee and required to seek explanation of the assessee qua those defects. If the assessee failed to explain the defects then on the basis of the book results, income cannot be determined and Assessing Officer would compute the income according to his estimation keeping in view the guiding factor for estimating such income.

10. In the light of above, if we examine the facts of the present case then it would reveal that AO has not pointed out any defect in the books which unable him to deduce the true income. His approach was that assessee ought to have earned more income than the one shown by it. G.P. disclosed during this year is better than that of immediately preceding two years. The ld. counsel for the assessee pointed out that in earlier two years assessments were under section 143(3). The reference of Rs. 62,704 made by the AO is in respect of income where the GP of the assessee is Rs.88 lacs. If this approach of the AO is considered then no assessee shall have any loss. The ld. CIT(A) has appreciated this aspect in the finding extracted (supra). After going through the finding of CIT(A) we do not find any error in his order. This ground of appeal is rejected.

11. Ground Nos.3 & 4 are general which do not call for any specific finding. Therefore, these are rejected.

12. In the result, appeal of Revenue is dismissed.

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