IN INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH AHMEDABAD Before Shri Rajpal Yadav, JM, & Shri Manish Borad, AM. ITA No. 2258/Ahd/2013 Asst. Year: 2007-08 M/s Laheri Cotton Industries, Vs. ACIT, Bharuch Range, Nr. Minhas Park, Bharuch. Tankaria Road, Palej, Dist. Bharuch. Appellant Respondent PAN AAAFL8676P Appellant by Shri T. P. Hemani & P. B. Parmar, ARs Respondent by Shri James Kurien, Sr. DR Date of hearing: 6/10/2016 Date of pronouncement: 20/10/2016 ORDER PER Manish Borad, Accountant Member. This appeal of assessee for Asst. Year 2007-08 is directed against order of ld. CIT(A)-III, Baroda, dated 13.06.2013 in appeal No.CAB-III/110/2012-13 passed against order u/s 143(3) of IT Act, 1961 (in short Act) framed on 29/12/2009 by ACIT, Bharuch Circle, Bharuch. Following grounds have been raised by assessee:- ITA No. 2258/Ahd/2013 2 Asst. Year 2007-08 1. learned CIT(A) has erred both in law and on facts of case in confirming ad hoc disallowance made in respect of canteen expenses to extent of 10% of such expenses. 2. learned CIT(A) has erred both in law and on facts of case in confirming addition of Rs.8,17,630/- made in respect of discrepancy in stock of Deoiled cakes. 3. learned CIT(A) has erred both in law and on facts of case in confirming disallowance of Rs.10,15,351/- being 20% of total cash expenses of Rs.50,76?755/-. 4. Both lower authorities have passed orders without properly appreciating fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by appellant from time to time which ought to have been considered before passing impugned order. This action of lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 5. learned CIT(A) has erred in law and on facts of case in confirming action of Id. AO in levying interest u/s 234A/B/C of Act. appellant craves leave to add. amend, alter, edit, delete, modify or change all or any of grounds of appeal at time of or before hearing of appeal. 2. Briefly stated facts of case are that assessee is partnership firm engaged in purchase and sale of cotton seeds and D-oiled cakes. Return of income was filed on 16/10/2007 declaring total income at Rs.78,46,880/- accompanied by Tax Audit Report u/s 44AB of Act. case was selected for scrutiny assessment and notice u/s 143(2) of Act was issued followed by notice u/s 142(1) of Act along with questionnaire. Necessary details were supplied as and when called for. Survey under section ITA No. 2258/Ahd/2013 3 Asst. Year 2007-08 133A of Act was carried out 28.02.2007. Voluntary disclosure of Rs.69.88 lakhs as unaccounted income related to unaccounted cash of Rs.7,00,000/-, unaccounted stock of Rs.57,00,000/-, on money paid for purchases of plot Rs.2,00,000/- and unaccounted investment in construction of factory & godown of Rs.388,000/-. case was discussed and income was assessed at Rs.1,00,62,004/- after making following additions :- 1) Remuneration/interest paid To lady partners Rs.3,30,042/- 2) Out of canteen expenses Rs.20,506/- 3) Late payment of PF Rs.31,592/- 4) Undisclosed stock Rs.8,17,633/- 5) Cash expenses Rs.10,15,351/- 3. In appeal before first appellate authority addition towards canteen expenses of Rs.20,506/-, undisclosed stock of Rs.8,17,633/- and disallowed cash expenses of Rs.10,15,351/- were sustained and remaining were deleted. 4. Aggrieved, assessee is now in appeal before Tribunal. First we take up ground no.1 towards ad hoc disallowance of canteen expenses sustained by ld. CIT(A) to extent of 10% as against 20% disallowed by Assessing Officer. 5. Ld. AR submitted that canteen expenses are towards break-fast and tea provided to employees and customers. Proper books of account are maintained and financial statements are audited and all ITA No. 2258/Ahd/2013 4 Asst. Year 2007-08 expenses are related to business as such no disallowance is called for. 6. On other hand, ld. DR supported orders of lower authorities. 7. We have heard rival contentions and perused material placed before us. Assessee is aggrieved with 10% disallowance sustained by ld. CIT(A) of canteen expenses. We observe that assessee is having turnover of Rs.28.87 crores, G.P. 2.07 crores and total income declared Rs.78.47 lacs approx. Canteen expenses are normally related to tea, coffee which sometimes are not supported by proper bills and vouchers. Ld. CIT(A) has sustained disallowance at 10% as against 20% disallowed by Assessing Officer. In order to meet ends of justice we feel it justified to sustain 5% of total canteen expenses. Accordingly, this ground is partly allowed. 8. Now we take ground no.2 wherein ld. CIT(A) has confirmed addition of Rs.8,17,630/- in respect of discrepancy in stock of D-oiled cakes. During course of assessment proceedings ld. Assessing Officer observed that books stock of D-oiled cake during survey was at 107.90 quintals whereas as per physical verification it was found 1093 quintals. In view of Assessing Officer difference of physical stock and books stock i.e. 985.10 quintals (physical stock 1093 quintals 107.90 quintals) was not disclosed during course of ITA No. 2258/Ahd/2013 5 Asst. Year 2007-08 survey and, therefore, by applying value of Rs.830/-, per quintal addition towards unaccounted stock at Rs.8,17,630/- was made. 9. Ld. CIT(A) confirmed addition on account of unaccounted stock by observing as under :- 8.4. I have considered facts of case and submission ma.de by AR of appellant. submissions made by appellant are false and misleading. As per appellant's submission closing stock as per books of accounts as on date of survey was worth Rs,5,05,75,5997- whereas closing stock as per physical verification was Rs.5,62,72,190/-. On examination of documents filled by appellant before undersigned, it is seen that while calculating value of stock as per books of accounts on date of survey, , quantity of de-oil cake has been taken as 1093 quintals by appellant and same has been accepted by survey team. In physical inventory of closing stock prepared during course of survey, quantity of this item has been again taken as 1093 quintals. Thus no disclosure during survey has been made on account of discrepancy in stock as per books and physical inventory of this particular item. It was only on account of examination of impounded books of accounts during course of assessment proceeding AO detected that the-stock as on date of survey this particular item as per books of accounts was only 107.9 quintals. Hence, he added value of difference in stock as per books of accounts and physical inventory amounting to Rs.8,17,630/- to total income of appellant. From assessment order, it is also seen that AR of appellant had admitted such addition and agreed for it during course of assessment proceedings. Hence, it is held that AO has rightly made this addition. Accordingly, this ground of appeal is dismissed. 10. Aggrieved, assessee is now in appeal before Tribunal. Ld. AR submitted that during course of assessment proceedings Assessing Officer observed that during course of survey, appellant's "books" were impounded as per which closing stock of "de-oiled cake" (i.e. "Khor") on date of survey was 107.90 quintal as against 1093 quintal being stork as per "physical verification" resulting into difference of 985.10 quintal (i.e. 1091 - 107.90). AO adopted rate of Rs.830/- per quintal and made impugned ITA No. 2258/Ahd/2013 6 Asst. Year 2007-08 addition of Rs.8.17.630/- (i.e. 985.10 x 830) for such discrepancy with finding that such stock was not disclosed during survey. said addition was confirmed by CIT(A). 10.1 Ld. AR further submitted that both AO and CIT(A). failed to appreciate that appellant had made total disclosure of Rs.69,88,000/- during course of survey out of which Rs.57,00,000/- was in respect of "unaccounted stock" (Pg.2, Para 5 of Asst. Order). Since value of "stock as per books on date of survey was Rs.5.05.75.599/-whereas value of "physical stock on said date was Rs.5.62.72.190/- resulting into discrepancy of Rs.56.56.591/-, disclosure of Rs.57.00.000/- was made on account of "unaccounted stock" (Pg.8 of C1T(A) s order). Inventory of stock found during survey containing detailed break-up of value of Rs.5.62.72.190/- is placed on Pg.17 of P/B perusal of which makes it clear that such value includes Rs.9,07,190/- being value of 1093 quintals of "Khor" (i.e. de-oiled cake) @ Rs.830/- per quintal (PI. refer Sr. no.5 of such inventory). Since appellant has already made disclosure of Rs.57.00.000/- in respect of "unaccounted stock" on account of difference in value of stock as per books (i.e. Rs.5,05,75,599/-) and value of physical stock (i.e. Rs.5,62.72.190/-) which includes, difference in respect of "de-oiled cake (i.e. "Khor")" as well, no separate addition is again called for in respect of very same item. Accordingly, action of AO and CIT(A) has resulted into double addition in respect of unaccounted stock of khor which has never been intention of legislature. CIT(A) has given incorrect finding that while calculating value of stock as per books of accounts ITA No. 2258/Ahd/2013 7 Asst. Year 2007-08 on date of survey quantity of de oil cake has been taken as 1093 quintals and same has been accepted by survey team . fact is that stock of de-oil cake as per books on date of survey was only 107.80 quintals as is evident from Pg.6, Para 8 of Asst. Order, from remand report dated 28.07.11 (Pgs.18-21 @ 20 of P/B) as well as from last page of stock register of "Khor" as per books which shows quantity of khor at 107.80 quintals (PI. refer Last line' of stock register on Pg.22 of P/B). It is submitted that in case stock of khor as per books had been taken at 1093 quintals on date of survey, then there might have been no discrepancy on account of stock of khor and impugned addition wouldn't have been made at all. Thus, said finding of CIT(A) is erroneous. In light of above, impugned disallowance deserves to be deleted. 11. On other hand, ld. DR supported orders of lower authorities. 12. We have heard rival contentions and perused material on record. Through this ground assessee has challenged action of ld. CIT(A) for sustaining addition of Rs. 8,17,630/- made in respect of discrepancy in relation to d-oiled cake. From going through records, we observe that voluntary disclosure of Rs.69.88 lacs was made during course of survey u/s 133A of Act conducted on 28.2.2007. This disclosure of Rs.69.88 lacs included Rs.57 lacs towards unaccounted stock. On going through page 17 of paper book wherein physical inventory sheet of stock prepared on date ITA No. 2258/Ahd/2013 8 Asst. Year 2007-08 of survey by DCIT, Bharuch is placed showing quantitywise details of physical stock of five items. In this sheet at sl. No.5 item Khor (de- oiled cake). 1094 quintals is valued at Rs.9,07,190/-. Further on page 22 of paper book copy of stock register forming part of books of account relating to stock item Khor (d-oiled cake) found during course of survey duly inspected by Income-tax Inspector is placed. From going through same we find that closing stock on date of survey of item Khor is shown at 107.90 quintals. On perusal of these documents it is clear that books of assessee of de-oiled cake Khor was 107,90 quintals whereas on date of survey and physical stock taken by Revenue authorities was 1093 quintals. To this extent there is no dispute. only allegation by Assessing Officer is that unaccounted stock of 985.10 quintals valued at Rs. 8,17,630/- has not been included in voluntary disclosure relating to unaccounted stock of Rs.57 lacs. 13. Further we observe that as per physical inventory sheet prepared by Revenue Officer on date of survey included stock of de-oiled cake (Khor) of 1093 quintals and total value of physical stock of assessee at Rs.5,62,72,190/-, and value of closing stock as per books of account on date of survey as per statement on oath given by assessee at Rs.5,05,75,599/-. difference of these two items i.e. value of physical stock and value of books stock comes to Rs.56,56,591/- rounded to Rs.57 lacs matches amount offered by assessee towards unaccounted stock at time of survey. We are, therefore, of view that as alleged unaccounted stock of Rs.57,00,000/- has already been offered by ITA No. 2258/Ahd/2013 9 Asst. Year 2007-08 assessee as unaccounted income during course of survey forming part of total voluntary disclosure of unaccounted income of Rs.69,88,000/- which included surrender of Rs.8,17,630/- towards excess stock of 985.10 quintals of item Khor (de-oiled cake). impugned addition of Rs.8,17,930/- has been wrongly made by ld. Assessing Officer and therefore, cannot stand for. We delete same. Accordingly, this ground of assessee is allowed. 14. third ground of appeal relates to confirmation of disallowance of Rs.10,15,351/- being 20% of total cash expenses of Rs.50,76,755/- which mostly relate to salary and wages paid to casual workers. Ld. CIT(A) has confirmed disallowance by briefly observing as below :- 9.3. I have considered facts of case and submission made by AR of appellant. AO has pointed out several discrepancies in vouchers / bills maintained by appellant in support of these expenses made in cash. He has mentioned that on these vouchers names of ..the recipient as well as responsible for making payment were not found, narration and purpose were not found and even number and date were missing. PF contribution for employees made by appellant is Rs.2,872/- per month which shows that employee on permanent roll of appellant have been paid very small portion of such cash expenses. This means that majority expenses are being made to casual workers. These labours are being engaged directly by appellant and appellant has no where stated that any record on basis of which these persons can be identified has been maintained by it. Under such circumstances, disallowance made by AO on estimate basis cannot be faulted. Hence, this disallowance is upheld and this ground of appeal is dismissed. 15. Assessee is now in appeal before Tribunal. 16. Ld. AR submitted that ld. Assessing Officer found that appellant has incurred cash expenses of Rs.50.76.755/- out of which majority of expenses are on account of salary and wages paid to employees ITA No. 2258/Ahd/2013 10 Asst. Year 2007-08 and casual workers and vouchers in respect of same had certain detects such as self-made vouchers, no signature of recipient, no narration and purpose, no date etc. AO also found that monthly PF contribution amounts to Rs.2.872/- and hence, took view that same hardly qualifies such substantial expenses. Thus AO concluded that cash expenses were incurred for purpose other than business purpose and accordingly. AO made disallowance of Ms. 10.15.351/- being| 20% of cash expenses of Rs.50.76.755/- which came to be confirmed by CT1(A). Both AO and CIT (A) failed to appreciate that appellant is engaged in business of purchase & sale and ginning of cotton, crushing of cotton seeds and sale of; de-oiled cakes (khor). Appellant's business activity is labor intensive and various workers are required for loading/unloading, ginning, pressing, oil wash. etc. To get such work done, local laborers are called for on need basis. Since such laborers arc illiterate and do not have any bank account, it is essential to make cash payments to them. Such payments are recorded by vouchers/register/petty cash etc. and same are duly authenticated by person-in-charge of such activity. In such scenario, no bills can be obtained from such laborers. However, records as specified above have been duly audited without any adverse remark by auditor. Copy of Tax Audit Report and audited accounts are placed at Pgs.24-62 of P/B. It is submitted that such expenses have been incurred wholly and exclusively for business of appellant and looking to business activity of appellant, it is necessity to incur such expenses in cash. It is also not case of AO/CIT(A) that there is no necessity 10 incur such expenses in cash. ITA No. 2258/Ahd/2013 11 Asst. Year 2007-08 16.1 Further, as against cash expenses of R.s.50.76.755/-. appellant's turnover is of Rs.21,87,23,.166/- (Pgs.39-62 @ 48 of P/B) which shows that such cash expenses amount to hardly 2.32% of total turnover. In light of typical business activity of appellant, such meager cash expenses are fully justified. As regards some defects in vouchers maintained by appellant in respect of such cash expenses, it is submitted that since such sum has been paid to local and illiterate laborers, it is quite difficult to maintain full proof records. 16.2 As regards PF contribution of R.s.2.872/- per month, same is for employees who are on pay-roll of appellant whereas majority of cash expenses are in respect of wages paid to casual workers called for on need basis and hence there can be no PF' contribution pertaining to such casual laborers. Neither AO nor CIT(A) has come out with any concrete evidence to effect that| no work has been done by casual laborers in lieu of which they have been paid cash : or that such expenses have been incurred for purpose other than cash. Impugned addition has been made merely on basis of assumptions and surmises which is not tenable in eyes of law. In light of above, impugned addition ought to have been deleted in toto. 16.3 Alternately, some token disallowance be confirmed to cover-up for defects in vouchers maintained in respect of cash expenses so as to meet ends of justice. ITA No. 2258/Ahd/2013 12 Asst. Year 2007-08 17. On other hand ld. DR supported orders of lower authorities. 18. We have heard rival contentions and perused material on record. Through this ground assessee has challenged action of ld. CIT(A) in confirming disallowance of Rs.10,15,351/- being 20% of cash expenses of Rs.50,76,755/-. We observe that assessee is having turnover of Rs.27.81 crores which is mainly related to purchase and sale of D-oiled cake and ginning cotton which normally involves use of casual workers and labourers for loading and unloading purposes and payments are made on daily basis in cash. Books of account are duly audited and no major defect has been observed by Revenue authorities. No qualification has been made by auditors in cash expenses exceeding Rs.20,000/-. Further, we also find that impugned cash expenditure of Rs.50,76,755/- are just 2.3% of total turnover. In given facts and circumstances of case when gross turnover, purchases and GP are not disputed it would be unfair to make ad hoc disallowance to extent of 20% of cash expenses. However, one cannot ignore fact that payments to casual workers and labourers and petty cash expenses round year may not be supported by proper documentation at all times, therefore, in order to meet ends of justice, we find it justified to sustain disallowance @ 5% of total cash expenses which will be at Rs.2,53,838/- as against Rs.10,53,351/- sustained by ld. CIT(A). In result, this ground of assessee is partly allowed. ITA No. 2258/Ahd/2013 13 Asst. Year 2007-08 19. Ground nos.4 & 5 are of general nature, which need no adjudication. 20. In result, appeal of assessee is partly allowed. Order pronounced in open Court on 20th October, 2016 Sd/- sd/- (Rajpal Yadav) (Manish Borad) Judicial Member Accountant Member Dated 20/10/2016 Mahata/- Copy of order forwarded to: 1. Appellant 2. Respondent 3. CIT concerned 4. CIT(A) concerned 5. DR, ITAT, Ahmedabad 6. Guard File BY ORDER Asst. Registrar, ITAT, Ahmedabad 1. Date of dictation: 19/10/2016 2. Date on which typed draft is placed before Dictating Member: 20/10/2016 other Member: 3. Date on which approved draft comes to Sr. P. S./P.S.: 4. Date on which fair order is placed before Dictating Member for pronouncement: 5. Date on which fair order comes back to Sr. P.S./P.S.: 6. Date on which file goes to Bench Clerk: 21/10/16 7. Date on which file goes to Head Clerk: 8. date on which file goes to Assistant Registrar for signature on order: 9. Date of Despatch of Order: M/s Laheri Cotton Industries v. ACIT, Bharuch Range, Bharuch