TMI Blog2016 (5) TMI 481X X X X Extracts X X X X X X X X Extracts X X X X ..... re than ₹ 20,000, it has been made through account payee cheque only as evident from the submission of the assessee. In view of the above, we conclude that the assessee has not violated provisions of section 40A(3) of the Act on account of payment exceeding for the purchase of old ornaments exceeding ₹ 20,000 - Decided in favour of assessee Disallowance u/section 40(a)(ia) - melting loss incurred by KARIGARS is nothing but payment made to KARIGARS without deducting TDS- Held that:- There is undoubtedly loss occurred in the course of melting and manufacturing process of gold. These melting and manufacturing activities are carried out by the KARIGARS who are paid the service charges in the form of cash as per the market prevailing system. Accordingly we opined that the aforesaid loss cannot be termed as payment to KARIGARS. As per the order of the AO the assessee duly explained the loss of gold incurred during the course of melting and manufacturing process to the tune of 906.880 grams. Such a loss was not doubted by the AO at the time of assessment but the addition for the loss of gold 166.170 grams was made due to non-availability of reconciliation. In our view mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of ₹ 28,69,878/-. The effective ground is reproduced below:- 1) That the Learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of ₹ 28,69,879, made by the Assessing Officer, under section 40A(3) of the Income Tax Act, 1961, when actual cash payments never exceeded the sum of ₹ 20,000 on any date whatsoever. 3. Brief facts as culled out from the record are that assessee is a Private Limited Company and engaged in the business of manufacturing and retailing of gold silver ornaments and precious and semi precious stones. The assessee filed its return of income on 30-09-2009 declaring total income of ₹ 2,13,930/- under the head business profession . However, AO framed u/s 143(3) of the Act by assessing the income of assessee at ₹ 34,40,850/-. It was submitted that when customers exchanged their old ornaments in place of new ornaments then assessee accounts for purchase and sale of the ornaments simultaneously. The difference between purchase sale value is settled either by cash or account payee cheque. In such a situation, assessee issued two invoices one for purchase of ornaments and other one for s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pendent purchase and sale in the books of accounts but in actuality the party account was adjusted with the net amount. For example, Mr. S. Bhattacharjee sold old gold to the assessee and the assessee issued the purchase memo which is placed on record on page 3 of the paper book. The value of the purchase of the old gold was ₹ 20,890/- and the same was shown as payment to the party in the cash book on page 45 of the paper book. The assessee sold new gold for ₹ 20,725.00 to the aforesaid party on dated 26/10/2008 vide sale memo no. 8CM/1547 which is placed on page 4 of the paper book. The same sale was shown as receipt in the cash book on page 42 of the paper book. But in actuality in the instant case only the difference amount of ₹ 165.00 (sale price ₹ 20,725/- purchase price ₹ 20,890/-) was paid to the aforesaid party. However, in the cash book both purchase sale were recorded at the full value. The assessee also submitted that wherever the payment exceeds ₹ 20,000 then the payment was made by way of account payee cheque only. Besides the above, assessee further submitted that the above process of payments are permitted in terms of clause (d) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is allowed. 6. Second issue raised by assessee in this appeal is that ld. CIT(A) erred in confirming the order of AO by disallowing a sum of ₹ 2,53,243/- under section 40(a)(ia) of the Act considering the melting loss incurred by KARIGARS is nothing but payment made to KARIGARS without deducting TDS. For this, assessee has raised effective ground as under:- 2) That the Learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of ₹ 2,53,243 made arbitrarily by the Assessing Officer under section 40(a)(ia) of the Income Tax Act, 1961 on the alleged ground that the melting loss incurred by karigars is, actually, amount paid to them without deducting tax at source. 7. The assessee hired the services of KARGARS for the making of ornaments. During the year, assessee in some cases received the lesser weight of gold from the KARIGARS and those KARIGARS were either paid lesser or no amount for their services. Accordingly the AO opined that the payment to those KARIGARS has been paid in the form of the gold. The assessee submitted that the lesser gold was received due to loss of gold in manufacturing process which is bound to happ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is actual loss. In our considered view that there is undoubtedly loss occurred in the course of melting and manufacturing process of gold. These melting and manufacturing activities are carried out by the KARIGARS who are paid the service charges in the form of cash as per the market prevailing system. Accordingly we opined that the aforesaid loss cannot be termed as payment to KARIGARS. As per the order of the AO the assessee duly explained the loss of gold incurred during the course of melting and manufacturing process to the tune of 906.880 grams. Such a loss was not doubted by the AO at the time of assessment but the addition for the loss of gold 166.170 grams was made due to non-availability of reconciliation. In our view merely assessee failed to provide the reconciliation does not mean that the payment has been made in the form of gold. The AO should have brought cogent reasons for treating the loss of gold as payment to the KARIGARS. As we find that the loss of 906.880 grams was duly explained which shows that there was the system of making the payment in cash to the KARIGARS. Accordingly we held that the less gold received from the KARIGARS cannot be termed as payment to K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is dismissed. Being aggrieved by this order of Ld CIT(A) assessee is in second appeal before us. 14. We have heard rival contentions and perused the materials available on record. Before us ld. AR submitted that gold was deposited by the customers and the same has been reflected in the books of accounts and none of the liability with regard to the gold deposit has been written off in the books. Therefore the question of treating the unexplained gold as income does not arise. On the other hand the ld. DR relied on the order of authorities below. 15. From the aforesaid discussion, we find that the assessee at the time of assessment framed by the AO the assessee failed to reconcile the gold received from the customers to the tune of 30.100 grams therefore the same was treated as income. However from the submission of the assessee we find that the liability towards the deposit of gold from the customers was very much reflecting in the books of the assessee for the relevant year and no such liability was written back in the year. Now it is really clear that a trading liability can be taxed only if it is written off in the books of accounts. In the instant case although the ..... 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