Validity of addition due to difference in opening vs. closing cash balance

short overview : After considering audited balance-sheet, opening cash balance and closing cash balance, AO had not doubted closing cash balance of cash as on 31-3-2011. Also, assessee had pointed out that over all cash balance had remained the same. Thus, lesser opening cash balance as on 1-4-2002 did not call for any addition during the year under consideration as no unexplained cash was introduced in books of account.

AO noticed that cash balance as per cash book for assessment year 2011-12 was Rs. 8,09,803 but for assessment year 2012-13 opening cash balance was shown as Rs. 7,41,900. AO, therefore, added Rs. 67,903 to total income of assessee being difference in cash balance.

 it is held that After considering audited balance-sheet, opening cash balance and closing cash balance, AO had not doubted closing cash balance as on 31-3-2011. Also, assessee had pointed out that over all cash balance had remained the same. Thus, lesser opening cash balance as on 1-4-2002 did not call for any addition during the year under consideration as no unexplained cash was introduced in books of account.

Decision: In assessee’s favour.

IN THE ITAT, PUNE BENCH

SUSHMA CHOWLA, J.M. & ANIL CHATURVEDI, A.M.

Asstt. CIT v. Chaudhary Cars (P) Ltd.

ITA No. 957/PUN/2016

4 April, 2019

Assessee by: Nikhil Pathak

Revenue by: Sudhendu Das

Anil Chaturvedi, A.M.

This appeal filed by the Revenue is emanating out of the order of Commissioner (Appeals)-12, Pune dt. 25-2-2016 for the assessment year 2012-13.

2. The relevant facts as culled out from the material on record are as under :–

Assessee is a company stated to be a dealer in Toyato Cars. A search and seizure action under section 132 of the Act was conducted in Chaudhari Group of cases on 4-10-2011. The assessee is a part of Chaudhari group of cases. Assessee filed its return of income for assessment year 2012-13 on 26-9-2012 declaring total income at Rs. Nil. The case was taken up for scrutiny and assessment was framed under section 143(3) read with section 153B of the Act vide Order, dt. 19-3-2014 and the total income was determined at Rs. 1,53,89,690. Aggrieved by the order of assessing officer, assessee carried the matter before learned Commissioner (Appeals), who vide Order, dt. 25-2-2016 (in appeal No. PN/Commissioner (Appeals)-12/790,791/2014-15) granted substantial relief to the assessee. Aggrieved by the order of learned Commissioner (Appeals), Revenue is now in appeal before us and has raised the following grounds :–

“1. On the facts and circumstances of the case, whether the learned Commissioner (Appeals) is justified in deleting the addition of Rs. 67,903 made by the assessing officer on account of Reconciliation of Difference in cash balance.

2. On the facts and circumstances of the case, whether the learned Commissioner (Appeals) is justified in deleting the addition amounting to Rs. 25,00,000 made on account of seized material found and failed to justify the transaction.

3. On the facts and circumstances of the case, whether the learned Commissioner (Appeals) is justified in deleting the addition amounting to Rs. 3,05,060 made on account of difference in cash available and recorded in books of accounts.

4. On the facts and circumstances of the case, whether the learned Commissioner (Appeals) is justified in restricting the addition of Rs. 6,71,338 to Rs. 1,47,964 by allowing relief to the extent of Rs. 5,23,644

5. On the facts and circumstances of the case whether the learned Commissioner (Appeals) is justified in deleting the addition amounting to Rs. 1,06,00,000 on account of Deemed Dividend under section 2(22)(e) of the Income Tax Act.

6. On the facts and circumstances of the case, whether the learned Commissioner (Appeals) is justified in deleting the addition of Rs. 2,45,388 made by the assessing officer on account of Unproved Creditors.”

3. First ground is with respect to deleting the addition of Rs. 67,903 on account of reconciliation of difference in cash balance.

3.1. During the course of assessment proceedings assessing officer noticed that the cash balance as per cash book for assessment year 2011-12 was Rs. 8,09,803 but for assessment year 2012-13 the opening cash balance was shown as Rs. 7,41,900. The assessee was asked to explain the difference in cash balance. The assessee furnished explanation which was not found acceptable to the assessing officer. Assessing officer therefore added Rs. 67,903 to the total income of assessee being the difference in cash balance. Aggrieved by the order of assessing officer, assessee carried the matter before learned Commissioner (Appeals), who deleted the addition by observing as under :–

“12.2 I have gone through the assessment order and submissions filed by the appellant. Brief facts are that assessing officer noted that as per cash book for assessment year 2011-12, the closing cash balance was of Rs. 8,09,803 whereas opening cash balance for assessment year 2012-13 was of Rs. 7,41,900. Before the assessing officer no explanation was furnished to reconcile the difference. However, during the course of appellate proceedings it was submitted that as on 31-3-2011 as per audited books of accounts appellant had closing cash balance of Rs. 8,09,803 as per the main cash book and of Rs. 1,96,216 as per the Workshop cash book and total cash balance as on 31-3-2011 was Rs. 10,06,019 and not Rs. 8,09,803. Copy of audited balance sheet which was also furnished before the assessing officer also reflected closing cash balance of Rs. 10,06,019. Opening cash balance of 1-4-2011 matched with the closing balance. Without going into the correctness of the reconciliation filed before me, the fact remains that the assessing officer had not doubted the closing balance of cash as on 31-3-2011. The lesser opening cash balance as on 1-4-2011 does not call for any addition during the year under consideration as no unexplained cash was introduced in the books of accounts. Therefore, addition made by the assessing officer of Rs. 67,903 is deleted and ground raised by the appellant is allowed.”

Aggrieved by the order of learned Commissioner (Appeals), Revenue is now in appeal before us.

4. Before us, learned D.R. supported the order of assessing officer. Learned A.R. on the other hand, reiterated the submissions made before assessing officer and learned Commissioner (Appeals). He further submitted that assessee had maintained two cash books one main cash book and another cash book for Workshop. He pointed to the balance of the cash books for main and work-shop which were placed at page 99 and 100 of the paper book. He submitted that in next year though there was difference in the balance between main cash book and work-shop cash book but over-all there was no difference in cash balance and in support of which, he pointed to the summary of cash book placed in Paper Book. He therefore submitted that the assessee has explained the discrepancies and thus no interference to the order of learned Commissioner (Appeals) is called for.

5. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to discrepancies in cash balance. We find that learned Commissioner (Appeals) while deciding the issue has noted that after considering the audited Balance-Sheet, opening balance and closing balance, assessing officer had not doubted the closing balance cash as on 31-3-2011. Before us, assessee has pointed out that over all cash balance has remained the same. The submission of the assessee has not been controverted by Revenue. Further, no fallacy in the findings of learned Commissioner (Appeals) has been pointed by Revenue. In such a situation, we find no reason to interfere with the order of learned Commissioner (Appeals). Thus, the ground No. 1 of Revenue is dismissed.

6. 2nd ground is with respect to denial of addition of Rs. 25 lakh.

6.1. During the course of search at the residential premises of Shri Girish B. Chaudhari, documents as per Annexure-A1 Pages 6 and 7 containing certain transactions were seized. The assessee was asked to explain the transactions recorded in those documents. assessing officer noted that since assessee has not explained the transactions with regard to the payment made to Palai Saheb in cash, he made addition of Rs. 25 lakh shown in the seized documents. Aggrieved by the order of assessing officer, assessee carried the matter before learned Commissioner (Appeals), who deleted the addition after considering the submissions of assessee and the remand report received from assessing officer by observing that all the transactions found on the seized loose papers were reflected in the bank statement of Bhagwat Narayan Chaudhary (B.N. Chaudhary) and the cash was withdrawn from the account of B.N. Chaudhary. He has further noted that assessee had received Rs. 25 lakh by way of cash transfer which was returned back by bank transfers. He therefore held that the addition made by the assessing officer on account of cash paid of Rs. 25 lakh to Mr. Palai in the hands of assessee was not justified. He accordingly deleted the addition.

7. Before us, learned D.R. supported the order of assessing officer. Learned A.R. on the other hand, reiterated the submissions made before assessing officer and learned Commissioner (Appeals) and submitted that the entire transaction was explained and there was no basis for making addition. He thus supported the order of learned Commissioner (Appeals).

8. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to addition of Rs. 25 lakh. We find that learned Commissioner (Appeals) after considering the submissions of assessee, remand report received from the assessing officer has noted that credit of Rs. 25 lakh from M/s. Pavitra Traders was received by B.N. Chaudhary and assessee has nothing to do with and similarly the cash was withdrawn from the bank account. Assessing officer has not carried out any verification from M/s. Pavitra Traders to disprove the contention of the assessee. We further find that while deciding the issue, learned Commissioner (Appeals) has given a finding that assessee has received Rs. 25 lakh by way of bank transfer of B.N. Chaudhary on 16-7-2011 which was returned in two installments through banks. He therefore held that addition made by the assessing officer on account of cash paid to Mr. Palai was not called for in the case of assessee. Before us, Revenue has not pointed out any fallacy in the findings of learned Commissioner (Appeals). We therefore find no reason to interfere with the order of learned Commissioner (Appeals) and thus, the ground No. 2 of Revenue is dismissed.

9. Ground No. 3 is with respect to deletion of addition of Rs. 3,05,060.

9.1. During the course of search action at the assessee’s premises at Jalgaon, cash of Rs. 1,810 was found against which cash as per cash book was Rs. 2,81,543 resulting in difference of Rs. 2,79,733. It was explained that cash was taken by the Director to his home. During the course of search at the residence of B.N. Chaudhary cash of Rs. 2,38,950 was found. Thus, there was still shortage of Rs. 40,783, for which the assessee was called upon to explain the descrapancy. On the basis of details furnished by the assessee, it was noticed that cash balance as per main cash book as on 4-10-2011, i.e., the date of search was Rs. 96,942 and as per the work-shop cash book, the opening cash balance was Rs. 4,48,878. The aggregate cash as per cash books was Rs. 5,45,820 against which actual cash of Rs. 2,40,760 (Rs. 2,38,950 + Rs. 1,810) was found. The submissions made by the assessee about the difference of cash were not found acceptable to the assessing officer. Assessing officer therefore treated the difference in cash of Rs. 3,05,560 to be not properly explained and therefore made its addition. Aggrieved by the order of assessing officer, assessee carried the matter before learned Commissioner (Appeals), who deleted the addition by observing as under :–

“14.2 I have gone through the assessment order and submissions filed by the appellant. Brief facts are that as per books of account prepared cash balance as per cash books (main cash book and workshop cash book) on date of search was noted by the assessing officer at Rs. 5,45,820 as against that physical cash of Rs. 2,40,760 was found during the search. The assessing officer sought explanation regarding the shortage of cash. It was submitted before him that books of accounts were not completed and many vouchers of petty expenses were to be entered in cash book and remaining cash was taken by MD Mr. Mahesh Chaudhary. The assessing officer did not accept the explanation and added the shortage of Rs. 3,05,060 as income of the appellant. In the case of shortage of cash, no addition was justified as appellant had withdrawn the explained money and might have spent the same without claiming any expenditure in the P & L account. It was not the case of excess cash found physically or there was unexplained cash found recorded in the cash book. Therefore, addition made of Rs. 3,05,060 was not called for and stands deleted. Ground raised by the appellant is allowed.”

Aggrieved by the order of learned Commissioner (Appeals), Revenue is now in appeal before us.

10. Before us, learned D.R. supported the order of assessing officer. Learned A.R. on the other hand, reiterated the submissions made before assessing officer and learned Commissioner (Appeals) and further submitted that on the date of search, books of accounts were not completed and many vouchers were still to be entered in cash book and the remaining cash was taken by M.D. Mr. Mahesh Chaudhary. He further submitted that it was not the case of excess cash found physically or unexplained cash found. He thus supported the order of learned Commissioner (Appeals).

11. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to addition of Rs. 3,05,060. Learned Commissioner (Appeals) while granting relief has noted that it was not the case of excess cash found or there was unexplained cash found recorded in the cash books. He further held that in case of shortage of cash, no addition was justified as assessee has withdrawn the money and might have spent the same without claiming any expenditure. He accordingly deleted the addition. Before us, Revenue has not pointed out any fallacy in the findings of learned Commissioner (Appeals). Thus, the ground No. 3 of the Revenue is dismissed.

12. Ground No. 4 is with respect to restricting the addition of Rs. 6,71,338 to Rs. 1,47,964.

12.1. During the course of survey, at the assessee’s premises at Jalna stock of spare parts of Rs. 49,61,203 was inventoried. Considering the GP rate of 22% the cost of such stock was worked out at Rs. 38,69,739 as against which the book stock was Rs. 45,41,377. Assessing officer thus worked out the physical shortage of stock of Rs. 6,71,338 and concluded that the goods were sold out of the books. He accordingly made addition of Rs. 6,71,338. Aggrieved by the order of assessing officer, assessee carried the matter before learned Commissioner (Appeals), who granted partial relief by observing as under :–

“15.2 I have gone through the assessment order and submissions filed by the appellant. Brief facts are that during the course of survey at the business premise of the appellant, stock of spares was inventorised with the help of CEO Shri Shankar Banai at Rs. 49,61,203. For working out cost of the spares, GP of 22% was reduced and the cost of physical stock was worked out at Rs. 38,69,739 whereas book stock was Rs. 45,41,377.

In this manner, there was shortage of physical stock by Rs. 6,71,338 and according to assessing officer goods costing Rs. 6,71,338 were sold outside the books. On the other hand, appellant contended that spare parts stock was reported to the consignor Toyota Company through automated accounting system provided by them. There was no question of any difference in stock. However, assessing officer did not accept the explanation and added entire shortage of stock of Rs. 6,71,338 as income of the appellant. During the course of appellate proceedings, appellant contended that there could not be any difference in stock as same was maintained on Toyota software. Without prejudice to it, it was submitted that the assessing officer had wrongly adopted GP at 22% for working out the cost of the stock whereas GP for the assessment year 2012-13 comes to 17.91% and if the GP was adopted at 17.91%, the shortage would be of Rs. 4,68,726. It was also contended that in case of shortage of stock only gross profit margin was to be taxed and accordingly, maximum addition of Rs. 83,948 can be sustained. I find contention of the appellant partly acceptable. The assessing officer had adopted GP rate of 22% as found at the time of survey on the basis of GP of period upto date of survey. The GP of preceding year as well as for the period 1-4-2011 to the date of survey was relevant for working out cost of stock whereas appellant is considering GP of period subsequent to date of survey. Therefore, GP of 22% adopted by the assessing officer is justified.

However, I agree with the appellant that in case of shortage of stock, cost of shortage of stock has to be replaced with sale proceeds which was not booked by the appellant meaning thereby that only gross profit rate on stock sold outside the books has to be taxed. Accordingly, unrecorded profit would work out at Rs. 1,47,694 (6,71,338 x 0.22). Addition to the extent of Rs. 1,47,694 is upheld and appellant gets relief of Rs. 5,23,644. Ground raised by the appellant is partly allowed.”

Aggrieved by the order of learned Commissioner (Appeals), Revenue is now in appeal before us.

13. Before us, learned D.R. supported the order of assessing officer. Learned A.R. on the other hand, reiterated the submissions made before assessing officer and learned Commissioner (Appeals) and further submitted that on the addition that has been upheld by learned Commissioner (Appeals) assessee is not in appeal.

14. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to addition on account of alleged shortage of physical stock of goods. Assessing officer made addition by working out the G.P. at 22% being the G.P. rate upto the date of survey. Learned Commissioner (Appeals) has noted that for working out cost of the spare parts, assessing officer had adopted the GP rate of 22% as found at the time of survey on the basis of GP period upto the date of survey. Learned Commissioner (Appeals) observed that in case of shortage of stock, the gross profit ratio on the stock sold outside the books has to be taxed. He worked out the unrecorded profits at Rs. 1,47,964 and upheld the addition to that extent. Before us, Revenue has not pointed out any fallacy in the findings of learned Commissioner (Appeals). We therefore find no reason to interfere with the order of learned Commissioner (Appeals). Thus, the ground of the Revenue is dismissed.

15. 5th ground is with respect to the deletion of addition of Rs. 1,06,00,000 on account of deemed dividend under section 2(22)(e) of the Act.

15.1. During the course of assessment proceedings, assessing officer noticed that assessee had received loan of Rs. 1,06,00,000 from Associate Company namely M/s. BNC Power Projects Ltd. and Shri B.N. Chaudhary was the beneficial share holder to the extent of 98% beneficial holding in the assessee’s company. Assessing officer also noted that BNC Power Projects Ltd., has accumulated profit of Rs. 1125.7 lac after reducing the deemed dividend of Rs. 368.27 lac taxed in assessment year 2011-12. He also noted that a loan of Rs. 1,06,00,000 was advanced by B.N. Chaudhary to assessee during the relevant accounting period. He held that since B.N. Chaudhary beneficial shareholder was the lender of the company provisions of section 2(22)(e) of the Act were applicable. He accordingly made addition of Rs. 1,06,00,000. Aggrieved by the order of assessing officer, assessee carried the matter before learned Commissioner (Appeals), who after relying on the decision of Bombay High Court in the case of CIT v. Universal Medicare (2010) 324 ITR 263 (Bom) : 2010 TaxPub(DT) 1700 (Bom-HC), CIT v. Impact Containers Pvt. Ltd., (2014) 367 ITR 346 (Bom) : 2014 TaxPub(DT) 3354 (Bom-HC) and CIT v. Jignesh P. Shah (2015) 372 ITR 0392 (Bom) : 2015 TaxPub(DT) 0618 (Bom-HC), gave a finding that since assessee did not held the beneficial shares in the lending company, provisions of section 2(22)(e) of the Act were not applicable. He accordingly deleted the addition made by the assessing officer. Aggrieved by the order of learned Commissioner (Appeals), Revenue is now in appeal before us.

16. Before us, learned D.R. supported the order of assessing officer. Learned A.R. on the other hand, reiterated the submissions made before assessing officer and learned Commissioner (Appeals) and further submitted that since assessee did not held any beneficial shares in BNC Power Projects Ltd., provisions of section 2(22)(e) of the Act are not applicable. He thus supported the order of learned Commissioner (Appeals).

17. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to addition of Rs. 1,06,00,000 under section 2(22)(e) of the Act. Assessing officer held that since B.N. Chaudhary was the beneficial share holder of the lending company, i.e., BNC Power Projects Ltd., and had subsequently share holding in the assessee’s company, provisions of section 2(22)(e) of the Act are applicable. We find that learned Commissioner (Appeals) after relying on the decision of Hon’ble Bombay High Court in the case of Universal Medicare (supra) has held that the payment cannot be taxed in the hands of assessee and assessee did not held any beneficial shares in the lending company. Before us, Revenue has not pointed any contrary decision in its support nor has pointed any fallacy in the findings of learned Commissioner (Appeals). We therefore find no reason to interfere with the order of learned Commissioner (Appeals). Thus, the ground of Revenue is dismissed.

18. Ground No. 6 is with respect to addition of Rs. 2,45,388 on account of unproved sundry creditors.

18.1. During the course of assessment proceedings, assessee was asked to file confirmations for Rs. 1,11,678 from M/s. Dhanaraj Auto Paint and Rs. 1,33,710 from M/s. Planners, Mumbai. Assessing officer noted that since assessee did not furnish any confirmations, assessing officer treated the aggregate balance of Rs. 2,45,388 as unproved sundry creditors and made its addition. Aggrieved by the order of assessing officer, assessee carried the matter before learned Commissioner (Appeals) who deleted the addition —

“18.3 I have gone through the assessment order and submissions filed by the appellant. In view of the facts that appellant did not get sufficient time to obtain confirmations from the trade creditors, the confirmations filed are admitted as additional evidence in the interest of substantive justice. Perusal of the ledger account and the confirmation filed by the creditor M/s. Dhanraj Auto Paint revealed that it had opening credit balance of Rs. 1,45,433 and sold material to the appellant during the year and also received payments during the year resulting in closing credit balance of Rs. 1,19,965. Similarly, confirmation filed by the other creditor M/s. Planners, Mumbai revealed that creditor had given consultancy and bill of Rs. 3,58,475 was raised. The appellant deducted the tax at source of Rs. 37,138 and made payments of Rs. 1,87,627 during the year through banking channel which resulted in closing credit balance of Rs. 1,33,710. The assessing officer had not doubted the purchases made and consultancy given during the year. Similarly, payments made to these parties were not disputed. The assessing officer has accepted all other transactions but held closing balance as unproved. It was also not the case of the assessing officer that liabilities at the yearend had ceased to exist. No material has been brought on record to hold that either parties were nonexistent or material services were not supplied. Facts of the issue involved and contentions raised are identical to the facts of the ground no. 3 of appeal for assessment year 2011-12. Hence, in view of detailed discussion at para 5.5 therein, the addition made by the assessing officer of Rs. 2,45,388 is deleted and ground raised by the appellant is allowed.”

Aggrieved by the order of learned Commissioner (Appeals), Revenue is now in appeal before us.

19. Before us, learned D.R. supported the order of assessing officer. Learned A.R. on the other hand, reiterated the submissions made before assessing officer and learned Commissioner (Appeals).

20. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to addition of Rs. 2,45,388 on account of unproved sundry creditors. We find that learned Commissioner (Appeals) after considering the submissions has given a finding that during the year there were transactions with the aforesaid parties. Assessing officer had not doubted the purchases made and consultancy given and the payments made were also not disputed and that assessing officer had accepted all other transactions but held closing balance as unproved. He has further given a finding that Revenue has not proved that the parties were not in existence or material or services were not supplied. He therefore deleted the addition. Before us, Revenue has not pointed out any fallacy in the findings of learned Commissioner (Appeals). We therefore find no reason to interfere with the order of learned Commissioner (Appeals). Thus, the ground of the Revenue is dismissed.

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