Shri Yelamaddi Srinivasa Rao,, Khammam vs Department Of Income Tax

ITA No.226/Hyd/13 : Assessment year 2007-08

Income Tax Officer Ward 2, V/s. Shri Yelamaddi Srinivasa Rao, Karimnagar Khammam

(PAN - AGXPB 4324 M ) (Appellant) (Respondent)

Appellant by : Shri Rajat Mitra DR

Respondent by : Shri S.Rama Rao

Date of Hearing 12.3.2015 Date of Pronouncement 18.3.2015

ORDER

Per P.M.Jagtap, Accountant Member :

This appeal is preferred by the Revenue against the order of the learned Commissioner of Income-tax (Appeals) Vijayawada, dated 14.12.2012, whereby he deleted the additions of Rs.17,89,500 made by the Assessing Officer on account of unexplained cash credits under S.68 and also restricted the disallowance of Rs.1,71,532 made by the Assessing Officer out of various expenses to Rs.760,000.

2. The assessee in the present case is an individual, who is proprietor of M/s. Hi Tech Tools & Morbo Rocks & Granite Tiles at Khammam. The return of income for the year under consideration was filed by him on 11.2.2008 declaring an income of Rs.8,19,024 and agricultural income of Rs.1,95,000. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has received advances from four parties 2 ITA No.226/Hyd/2013 Shri Yelamaddi Srinivasa Rao, Khammam

aggregating to Rs.17,89,500. Since the said advances were claimed to be received by the assessee for supply of materials, he was called upon by the Assessing Officer to furnish the details of supplies made to the concerned our parties against the advances. In reply, it was submitted by the assessee that no material was actually supplied against the said advances, and the same were returned back in the subsequent year. Since both the receipt and payment of advances were found to be made in cash, the Assessing Officer required the assessee to establish the identity and capacity of the concerned creditors as well as the genuineness of the transactions. Although the assessee produced confirmation letters of the concerned four parties, the Assessing Officer found that the relevant particulars such as mode of payment, permanent account number, etc. were missing. He also found that all the confirmation letters were identically worded and the same were not supported by any other documentary evidence such as Balance Sheet of the concerned parties reflecting the advances made to the assessee, their income-tax returns, etc. The Assessing Officer, therefore, held that the creditworthiness of the concerned four parties was not satisfactorily established by the assessee and relying on the decision of the Hon'ble Kerala High Court in the case of CIT V/s. K.M.Mahim (213 ITR 820), he treated the advances of Rs.17,18,500 received by the assessee as unexplained cash credits under S.68. In the said case, it was held by the Hon'ble Kerala High Court that apart from filing the confirmation letters, the assessee having failed to produce any other evidence to establish the capacity of the concerned creditors, there was clear failure on the part of the assessee to discharge the burden that lay upon him to prove the relevant cash credits in terms of S.68. Accordingly, addition of Rs.17,89,500 was made by the Assessing Officer to the total income of the assessee on account of unexplained cash credits under S.68.

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3. During the course of assessment proceedings, it was also found by the Assessing Officer on verification of the supporting vouchers produced by the assessee for various expenses that the expenses claimed by the assessee were not fully verifiable. In this regard, he noted that some of the expenses claimed by the assessee were supported by only self made vouchers and the same were not amenable for proper verification. Accordingly, a disallowance of R.1,71,532 being 10% of the various expenses claimed by the assessee was made by the Assessing Officer, on account of unverifiable element involved in the expenditure claimed by the assessee. The total income of the assessee was thus computed by the Assessing Officer for the year under consideration at Rs.27,80,060 vide order dated 31.12.2009 passed under S.143(3) of the Act.

4. Against the order passed by the Assessing Officer under S.143(3), an appeal was preferred by the assessee before the learned CIT(A), challenging the action of the Assessing Officer in making the addition on account of unexplained cash credits under S.68 and disallowance of expenses. After considering the submissions made by the assessee as well as the material available on record, the learned CIT(A) deleted the addition made by the Assessing Officer under S.68 for the following reasons given in paragraph No.4A of the impugned order-

"4A. First addition is advances received from 4 parties against supply of materials amounting to Rs.17,89,500. When called upon to explain as to why materials were not supplied, the appellant has informed the AO that in the next year such advances were returned. Now, the AO has invoked the provisions of section 68 on the ground that only confirmations were furnished, but not that such confirmations were accompanied by statutory documents like PAN, copies of IT returns, account copies of the creditors in the books of the appellant, audited balance sheet of the purchasers 4 ITA No.226/Hyd/2013 Shri Yelamaddi Srinivasa Rao, Khammam

reflecting the advances in such balance sheets etc and etc and for such alleged lapses the impugned addition was made by the AO, which is under challenge now. In course of the appellate proceedings, it is explained that the impugned advances were received for certain quality of granite material, which is to be excavated from the natural deposits. But, the appellant could not supply the material due to his own business problems and accordingly these amounts were returned in the subsequent year. The AR relied on the decision of the Apex Court rendered in the case of CIT vs. Smt.P.K.Noorjahan, reported in (1999) 237 ITR 570(SC), wherein under similar circumstances, the addition made by the AO was ordered to be deleted. In any case, when the appellant has said that the advances received were returned in the next year, the AO could have verified the factual position with reference to assessment records of the next assessment year to come to a proper conclusion, which was not done by him. In the circumstances, as the advances stand refunded in the next assessment year, on which there was no adverse finding by the Revenue, I am of the opinion that the AO was not justified in making the impugned addition and he is accordingly directed to delete the same."

5. The disallowance of Rs.1,71,532 made by the Assessing Officer out of various expenses claimed was also restricted by the learned Assessing Officer to Rs.70,000 for the following reasons given in paragraph 4B of the impugned order which reads as under-

"4B. Second addition is due to disallowance of expenditure on some heads at 10% for Rs. 1,71,532 as per the details mentioned at Para 4 on page no 3 to 4. In course of the appellate proceedings, the AR has broadly conceded that elements of factors like cash payments, self made vouchers etc. are there, but such things are common in this line of business and suggested that some disallowance may be considered. In view of the facts, circumstances, nature of business and other explanations offered by the AR. I am of the firm view that ends of justice are met if the disallowance is restricted to Rs. 70,000 and the AO is directed to restrict the addition to this extent only and thus the appellant gets a relief of Rs.1,01,532.

6. Against the order of the learned CIT(A) giving relief to the assessee as above, Revenue has preferred this appeal before the Tribunal on the following grounds-

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"a. The ld. CIT(A) erred both in law and in facts of the case.

b. The ld. CIT(A) erred in concluding that the AO could have verified the factual position with reference to assessment records of the next assessment year, as the AO has verified and found that both the receipt and repayments were by means of cash. The same was clearly mentioned in the assessment order at para 3.1

c. The ld. CIT(A) ought to have observed that the AO doubted the genuineness of transaction as both the receipt and payment were in cash and the assessee failed to discharge the burden that lay upon him to prove the genuineness of cash credits.

d. Reliance is placed on the following judicial pronoun- cements wherein it was held that the onus of proving the source of a sum of money found to have been received by an assessee is on him. When the nature and source of a receipt, whether it be of money or other property, cannot be satisfactorily explained by the assessee, it is open to the revenue to hold that it is the income of the assessee.

i. Roshan Di Hatti Vs. CIT (SC) 107 ITR 938 ii. Khale Khan Mohammad Hanif Vs CIT (SC) 50 TR 1

e. Reliance is also placed on the judicial pronouncements in the case of CIT Vs. Baju Patnaik (SC) 160 ITR 674 and

Dhanalakshmi Steel Re-rolling Mills Vs CIT (AP) 228 ITR 780 wherein it was held that assessee must prove identity of credits, capacity of the creditor to advance money and the genuineness of transaction.

f. The Id. CIT(A) erred in deleting the addition of Rs.17,89,500/- as the advances stand refunded in the next assessment year without proving the genuineness of the transaction as the assessee failed to furnish statutory documents such as identity of person, PAN, IT returns of the prospective purchasers, copies of the assessee's account in the purchasers' books of account, audited balance sheet of the purchasers reflecting the advances made to the assesee and the creditworthiness of the creditors.

g. Reliance is placed on the following pronouncements wherein it was held that mere proof of identity of creditor or that transaction was by of cheque is not sufficient anti addition u/s.68 is upheld as the assessee failed to prove the genuineness of credit.

i. Mangilal Jain Vs ITO (Mad) 315 ITR 105 ii. CIT Vs. Precision Finance P. Ltd. (Cal) 208 ITR 465 6 ITA No.226/Hyd/2013 Shri Yelamaddi Srinivasa Rao, Khammam

h. Reliance is placed on the following judicial Pronoun- cements wherein it was held that where any sum is found credited in the books of the assessee for any previous year it may be charged to Income Tax as the income of the assessee for that previous year if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the AO, not satisfactory.

i. Sumanti Dayal Vs CIT (SC) 214 ITR 801 ii. Vasantibai N.Shah Vs CIT (Bom) 213 ITR 805 iii. Sreelekha Banerjee & Ors. Vs CIT (SC) 49 ITR 112

i. The ld. CIT(A) ought to have sustained the disallowance of expenditure of Rs.1,71,532/- as the self made vouchers were deficient in as much as they do not contain narration regarding the nature of work carried out, the quantum of work done and the piece rate per unit of work to enable examination of the reasonableness of the expenditure.

j. The ld. CIT(A) erred in restricting the disallow- ance to Rs.70,OOO/- without any basis.

k. Any other ground that may be urged at the time of Hearing"

5. We have heard the arguments of both the sides and also perused the relevant material on record. Grounds (a) and (k) raised by the revenue in this appeal are general in nature, which do not require any specific adjudication. As regards the issue involved in grounds (b) to (h) relating to the deletion by the learned CIT(A) of the addition of Rs.17,89,500 made by the Assessing Officer, it is observed that advances aggregating to Rs.17,89,500 were claimed to be received by the assessee from four parties during the year under consideration in cash against supply of material. No supply of material against the said advances, however, was made by the assessee and since the advances were claimed to be repaid in the subsequent year again in cash, the Assessing Officer required the assessee to establish the identity and capacity of the concerned creditors as well as the genuineness of the relevant transactions by furnishing relevant evidence. The assessee, however, failed to discharge its onus satisfactorily in as much as the confirmation 7 ITA No.226/Hyd/2013 Shri Yelamaddi Srinivasa Rao, Khammam

letters of the concerned creditors filed by him did not contain the relevant details such as mode of payments, Permanent Account Number of the concerned creditors etc. Copies of the said confirmation letters are placed on record before us in the paper book filed by the assessee and a perusal of the same shows that the said letters worded identically, do not even contain the dates of issuance of the confirmation letters. The assessee also failed to file any other documentary evidence such as income tax particulars of the creditors or their balance sheets to show that the advances claimed to be given by them to the assessee were duly reflected in their income tax return or even in their Balance Sheets. Despite this failure of the assessee to discharge the onus of establishing the creditworthiness of the concerned creditors, the learned CIT(A) strangely deleted the addition made by the Assessing Officer under S.68 vide his impugned order, and that too, in our opinion, on all irrelevant and immaterial grounds. It is undisputed that the advances in question received by the assessee in cash represented cash credits and the assessee having failed to discharge the primary onus that lay upon him to establish inter alia the capacity of the concerned creditors, the provisions of S.68 were clearly attracted, as rightly held by the Assessing Officer relying on the decision of the Kerala High Court in the case of K.M.Mahim (supra). The stand taken by the assessee that the advances were repaid in the subsequent period was entirely irrelevant and immaterial to the issue of addition made by the Assessing Officer under S.68, and the learned CIT(A) in our opinion, was not justified to take into consideration this irrelevant and immaterial aspect to delete the addition made by the Assessing Officer on account of unexplained advances under S.68 of the Act.

6. At the time of hearing before us, learned counsel for the assessee also has not been able to raise any material argument or 8 ITA No.226/Hyd/2013 Shri Yelamaddi Srinivasa Rao, Khammam

file any relevant evidence to establish the creditworthiness of the concerned creditors from whom the amount in question was claimed to be received by the assessee as advances in cash. In our opinion, the relief allowed by the learned CIT(A) on this issue was totally unwarranted and his impugned order on this aspect is liable to be set aside. Accordingly, we set aside the impugned order of the learned CIT(A) on this issue and restore that of the Assessing Officer. Grounds (b) to (h) of the Revenue in this appeal are accordingly allowed.

7. As regards the issue involved in grounds (i) and (j) relating to the disallowance of Rs.1,71,572 made by the Assessing Officer out of various expenses, which is sustained by the learned CIT(A) to the extent of Rs.70,000, it is observed that the relevant expense claimed by the assessee such as block cutting charges, champering charges, machinery maintenance, polishing charges, cleaning chares, etc. were in the nature of the business expenditure regularly required to be incurred by the assessee going by the nature of his business. Moreover, the nature of these expenses claimed by the assessee is such that they are sometimes required to be paid by way of self-made vouchers. Although some deficiencies in such self made vouchers were pointed out by the Assessing Officer by stating that the same did not contain complete details of the nature of work done, the quantum of work done, etc., we are of the view that the disallowance of 10% of the total expenses made by the Assessing Officer for such deficiencies was on the higher side keeping in view the nature of the expenditure claimed by the assessee as well as the nature of assessee's business, and the learned CIT(A) was quite fair and reasonable to restrict the same to Rs.70,000. We, therefore, find no infirmity in the impugned order of the learned CIT(A) on this issue and 9 ITA No.226/Hyd/2013 Shri Yelamaddi Srinivasa Rao, Khammam

upholding the same, we dismiss grounds (i) and (j) of the Revenue's appeal.

8. In the result, Revenue's appeal is partly allowed.

Order pronounced in the court on 18th March, 2015

Sd/- Sd/-

(Asha Vijayaraghavan) (P.M.Jagtap) Judicial Member Accountant Member

Dt/- 18th March, 2015

Copy forwarded to:

1. Shri Yelamaddi Srinivasa Rao, Prop. Hitech Tools & Marbo Rocks & Granite Tiles, Plot No.18, IDA Khammam

2. Income Tax Officer Ward 2, Karimnagar

3. Commissioner of Income-tax(Appeals) Vijayawada

4. Commissioner of Income-tax, Hyderabad

5. Departmental Representative, ITAT, Hyderabad. B.V.S