TMI Blog2011 (12) TMI 345X X X X Extracts X X X X X X X X Extracts X X X X ..... y the addition made by invoking the provision contained in section 41(1) as the provision contained in section 68 is not applicable for the simple reason that these credits were not made for the first time in this year in the books of account - The facts submitted by the ld. counsel regarding the credits being old and their not being written off in the books of account stand undisputed - the provision contained in section 41(1) is also not applicable - Decided in favor of the assessee Regarding addition of ₹ 2,17,11,006 on account of employees' contributions to provident fund and the ESI - during the year the assessee had inter-alia deducted an amount of ₹ 2,17,11,006/- from the salaries paid to the employees. However, the amounts were not credited to respective accounts of the employees before the due date defined u/s 36(1)(va) - Supreme Court in the case of Alom Extrusions Ltd (2009 (11) TMI 27 - SUPREME COURT) - Held that: if the amount is not deductible u/s 36(1)(va), it is deductible u/s 43B - Decided in favor of the assessee Regarding addition of ₹ 20.00 in respect of diversion of interest-bearing funds to its subsidiary company - the assessee advanced m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of advertisement expenses were added or disallowed, as the case may be. These additions/disallowances were deleted by the CIT (Appeals)-XIII, New Delhi, in the impugned order. Aggrieved by this order, the revenue is in appeal before us. 2. In regard to ground nos. 1 and 2 dealing with perversity of the impugned order and addition of ₹ 80,31,100/- in respect of short cash on the date of survey, the ld. CIT, DR referred to the facts that excess stock and shortage in cash were found on the date of survey. Both these amounts were offered for tax in statement recorded u/s 133A(3)(iii). As against the aforesaid, it was mentioned in the notes on accounts annexed with the audit report that no entry has been passed in the books in respect of either of these items as the assessee was forced to surrender the amount. The Board of Directors are of the view that the surrender should not be accepted and the company should explain the facts to the assessing officer. This stand was partly changed when the return was filed on 31.10.2007, in which excess stock was offered for taxation but shortage in cash was not offered for taxation. Challenging the note, it was submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... test of human probabilities should be employed in testing its claim made in the return of income. If so done, the conclusion which can be drawn is that the ld. CIT (Appeals) ought to have confirmed the addition made by the AO in respect of short cash. 5. We have considered the facts of the case and submissions made before us. We may initially examine the evidence on record in this matter. Page nos. 22 and 23 of the paper book contain the statement of Shri Mahinder Pal, the Director DGM (Finance) of the assessee-company. It is specifically deposed that he is finance director and looking after finance and accounts. He is Managing Director and operating bank accounts. When confronted with the discrepancies in cash by way of question no. 8, it is deposed that he has no explanation to offer. The same is reiterated in question no. 9 but it is also further deposed that to buy peace of mind the amount of discrepancy is offered for taxation provided no penalty or prosecution proceeding is initiated. It is also deposed that he agrees with the valuation of stock done by the survey party and he has no explanation regarding difference of ₹ 1,44,25,183/- at present. This amount is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is no doubt true that entries in the account books of the assessee amount to an admission that the amount in question was laid out or expended for cultivation, upkeep or maintenance of immature plants from which no agricultural income was derived during the previous year. An admission is an extremely important piece of evidence but it cannot be said that it is conclusive. It is open to the person who made the admission to show that it is incorrect. The ld. CIT, DR stressed on the finding that an admission is an extremely important piece of evidence and that it is for the assessee to show that it is incorrect if it wants that it should not be acted upon. Further, he relied on the decision of Hon'ble Madras High Court in the case of CIT v. S. Khader Khan Son [2008] 300 ITR 157. Referring to the decisions in the case of Dr. S.C. Gupta v. CIT [2001] 248 ITR 782/118 Taxman 252 (All.) and Pullangode Rubber Produce Co. Ltd. ( supra ), it has been mentioned at page 163 that where assessee surrenders some income for taxation pursuant to a survey, which is retracted in the course of assessment proceedings on the ground that it was rendered under duress, the finding of the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petitioner himself has placed on record, sufficiently shows that the sum of ₹ 20.00 crore has been voluntarily offered by the petitioner pending finalization of the assessment. The fact that payment is made under protest does not mean that the same is made because of any coercion or harassment. The case of the ld. CIT, DR is that the assessee has himself offered major amount for taxation relating to discrepancy in stock. The assessee has changed his stand while suggesting notes on accounts, which has also been partly changed subsequently. Since the assessee has not taken any consistent stand on statement, the addition made by the AO should be upheld. 6.2 Reliance has also been placed on the decision of Hon'ble Himachal Pradesh High Court in the case of Hira Singh Co. v. CIT [1998] 230 ITR 791/98 Taxman 201. On the fact of the case, the Hon'ble Court mentioned that from the questions and answers it transpires that the transaction was not disowned by the assessee. The assessee accepted the genuineness and truth of the bill and only added that it was a kacha bill and it would not find a place in the regular accounts. This was only a question of fact which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in section 44AD, declaring net profit of 9.56% of the total consideration. The AO made the addition of the on-money . In coming to the conclusion that the addition was not warranted, the Tribunal noted two facts that-(i) the assessee had declared profit of more than 8% of total sales, and (ii) there was no evidence or material on record to make the addition of on-money . 7. Thus, the facts are that survey was conducted at the business premises of the assessee on 08.01.2007. Two important facts were recorded, i.e., excess stock of ₹ 1,44,25,183/- was found and there was cash deficiency of ₹ 80,31,100/-. Both these amounts were offered for taxation in the statement furnished by Director-cum-DGM (Finance) to the authorized officer. The assessee-company reneged completely from the statement and it was mentioned in Notes on Accounts that the statement was obtained by force and that the matter should be explained to the AO. In view of this stand, no entry was passed in respect of stock or cash in the books of account. This stand was also partly changed while filing the return of income, in which the discrepancy in stock was offered for taxation but discrepancy in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3A is much lower than the evidentiary value of statement u/s 132(4). There is another factor in this case that the fact discovered regarding shortage in cash ipso facto does not lead to inference of earning income of ₹ 80,31,100/-. The statement is in relation to the inference to be drawn rather than the position of fact. The question is-whether, a statement regarding inference can be binding without any further evidence of the actual earning of income? We find that even if the explanation of the assessee that the cash is lying elsewhere is not accepted and, therefore, there is an actual discrepancy in cash, the amount or any part thereof cannot be brought to tax straightway unless it is shown that the monies were used for earning unaccounted income by entering into undisclosed transactions. This conclusion, according to us, stays even in the face of the argument of the ld. CIT, DR that the assessee has displayed low tax morality. It is in this context that the circular of the Board, referred to by the ld. CIT (Appeals), assumes importance. The officers have been advised that there should be focus and concentration on collection of evidence of income which leads to informatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 68. 8.1 In the impugned order, it is mentioned that ostensibly the addition made by invoking the provision contained in section 41(1) as the provision contained in section 68 is not applicable for the simple reason that these credits were not made for the first time in this year in the books of account. Therefore, the addition has been made on the ground that these liabilities have ceased to exist. The provision contained in section 41(1) is applicable only when the liability ceases to exist etc. This condition is not satisfied because the assessee has shown the liability in the books of account thereby holding itself to be in debt to the respective party. The amount has also not been written off unilaterally to the credit of profit and loss account. If the amount had been so credited, it would have been taken as income under Explanation-1 to section 41(1). In absence thereof, the amount cannot be taken as the income of the assessee either under section 68 or 41(1). 8.2 The ld. CIT, DR thereafter did not make any argument regarding justification of the addition made by the AO. 8.3 On the other hand, the ld. counsel referred to the undisputed facts that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees to be the income in the first instance. Section 36(1)(va) allows the deduction in respect of any sum received by the assessee from any of his employees to which the provision of section 2(24)(x) applies if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the due date. The definition of the term due date is contained in the Explanation , which has been reproduced earlier. Further, the provision contained in section 43B allows the deduction on the basis of actual payment and in view of amendment, it has been interpreted even in the case of employees' contributions that payment up to due date of filing of the return u/s 139(1) is deductible in computing the total income. However, the first hurdle to be crossed for getting the deduction is under section 36(1)(va). The assessee has not crossed this hurdle by dint of which the money received from the employees become income and corresponding deduction is not admissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e u/s 43B. Accordingly, this ground is also dismissed. 11. Ground no. 5 is that the ld. CIT (Appeals) erred in deleting the addition of ₹ 20.00 lakh, made by the AO by invoking provision u/s 36(1)(iii) in respect of diversion of interest-bearing funds to its subsidiary company. 11.1 It was observed by the AO that the auditors report mentioned that the assessee-company has granted interest-free unsecured loans to its subsidiary company. The maximum amount outstanding in the year was ₹ 8.09 crore and the balance at the end of the year was ₹ 1.00 crore. The assessee has also claimed the deduction of interest in this year. In this connection, the assessee was required to explain as to why interest debited in the accounts to the extent it relates to the aforesaid advances should not be disallowed. It was explained that the assessee has sufficient paid-up capital and general reserves to cover the advances. Therefore, it cannot be said that any interest-bearing fund has been advanced to the subsidiary company. The AO considered the facts and the submissions made before him. It is mentioned that the working capital was utilized for the purpose of purchase of raw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tendered by the assessee before the ld. CIT (Appeals). It is stated that the assessee had its own interest-free funds of about ₹ 20.37 crore. The AO has committed an error in arriving at such funds because the depreciation claimed on fixed assets has not been added back. The provision contained in section 36(1)(iii) were explained that interest should be payable on borrowed capital which has been used for the purpose of business for claiming deduction. It is further stated that all advances were made from a separate account in which only sales were credited. Therefore, the advances have no nexus with the borrowings. Page nos. 26 to 31 contain the explanation of the assessee. In paragraph no. 7, it is stated that ledger account of Inkam Enterprises and photocopy of bank account are enclosed. However, none of these documents are filed in the paper book. In further explanation before the AO (page no. 32 of the paper book), it is mentioned that own interest-free funds amount to about ₹ 20.36 crore as per annexure-A. This annexure is also not there in the paper book. Page no. 93 shows the position of own funds available as on 31.03.2006. The computation is reproduced below: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the AO by holding that borrowings to the extent of advances made to M/s Inkam Enterprises are not for the purpose of business? 12.1 At this stage, we may examine the cases relied upon by the rival parties. The ld. CIT, DR relied on the decision in the case of Marolia Sons v. CIT [1981] 129 ITR 475 (All.). In the decision, it has been mentioned that for getting deduction of interest u/s 36(1)(iii), there should be a borrowing for the business purpose on which interest has been paid. From the statement of the case, it would appear that from the borrowings made by the firm, a large amount has been given to Ram Deo Marolia for his personal purposes. As the borrowings had not been used for the business of the assessee-firm, the Tribunal held that the deduction claimed by the assessee was not admissible. Argument of the ld. counsel for the assessee was since the borrowing was made for the purpose of business, the interest paid thereon should be deducted irrespective of final utilization of the money. This argument has not been accepted by the court. It was opined that the question of disallowance of interest on borrowings was not a different question, but another aspect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction on account of applicability of section 40(b)(iv). It was further mentioned that sections 30 to 38 contain other deductions whereas section 40 is a limit on the deduction. Therefore, even if the assessee is entitled to deduction u/s 36(1)(iii), the assessee would not be entitled to claim deduction for interest payment exceeding 18/12% per annum. In this case, the loans were granted in August/September, 1991, which continued up to assessment year 1997-98. The loans were advanced for the business purpose and the interest thereon did not exceed 18/12% per annum. The payment of interest was allowed in earlier assessment years. Therefore, it was held that the assessee was entitled to deductions under both the provisions as indicated in the order. 12.5 On examination of the facts on record, it is seen that the monies were advanced from the current account, in which only sale proceeds were credited. The claim of the assessee is that such advances arising out of this account had no nexus with the borrowings which were credited in another account. We are not in agreement with this argument. The reason is that sales contain only a small portion of profit, which can be said to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perusal of the bill of M/s Sumit Enterprises, it was found that the payment is made for printing diaries with the logo and the name of the company. The payment was made to Roller Act Press Services for printing of product catalogue and folder. The AO held that these payments were in pursuance of a works-contract and, therefore, the assessee should have deducted tax at source by dint of provision contained in section 194C. The tax had not been deducted. Therefore, the amount was disallowed by invoking the provision contained in section 40(a)(ia). 13.2 Before the ld. CIT(A), it was submitted that the manufacture and supply of a product in accordance with the specification of the assessee does not amount to a works contract as it has not supplied any material. Therefore, the provision contained in section 194C does not apply. The ld. CIT (Appeals) considered the facts and submissions made before him. It has been held by him that purchase of advertisement material from a person without supplying any material used in preparation of the material cannot be termed as works contract . Therefore, the provision contained in section 194C is not applicable. Accordingly, the addition has b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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