Short Overview  Cash found short could not be treated or deemed to be income of assessee under section 69/69B/69C when said sections deem investments/money, the source of which assessee offers no explanation about, as income of assessee. Accordingly, there was no case for making any addition under section 68.

AO made addition on account of cash found short during search by invoking provisions of section 68 and also holding that same was to be taxed under section 115BBE. Assessee’s case was that cash short, at most represented expenses/outgoings out of cash available with assessee not accounted for in books of assessee. 

It is held that Cash short, at most represented expenses/outgoings out of cash available with assessee not accounted for in books of assessee. Such unaccounted expenses were sourced from cash available with assessee. How, therefore, could same be treated or deemed to be income of assessee under section 69/69B/69C when said sections deem investments/money, the source of which assessee offers no explanation about, as income of assessee. Accordingly, there was no case for making any addition on account of cash found short with assessee.

Decision: In assessee’s favour.

IN THE ITAT, CHANDIGARH BENCH

SANJAY GARG, J.M. & ANNAPURNA GUPTA, A.M.

A.P. Refinery (P) Ltd. v. DCIT

ITA No. 1279/Chd/2019

16 October, 2020

Assessee by: Ashwani Kumar, CA Aditya Kumar, CA

Revenue by: Arvind Sudarshan, Joint Commissioner

Annapurna Gupta, A.M.

The above appeal has been preferred by the assessee against the order of the Commissioner (Appeals)-5, Ludhiana ((in short referred to as ‘Commissioner (Appeals)’), dated 2-8-2019, relating to assessment year 2017-18, passed under section 250(6) of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’).

2. Ground no. 1 raised by the assessee reads as under :–

1. That order passed under section 250(6) of the Income Tax Act, 1961 by the learned Commissioner (Appeals)-5, Ludhiana is against law and facts on the file in as much as he was not justified to arbitrarily uphold an addition of Rs. 5,87,189 made by the learned assessing officer by applying G.P. rate of 7.53% on the stock found short by Rs. 77,98,000 which as per the appellant had actually been mis-appropriated by M/s. PBR Agro Industries, Mehal Kalan.

3. The challenge in the above ground is against the addition confirmed by the Commissioner (Appeals) of Rs. 5,87,189, made by applying GP rate of 7.53% on the stock found short by Rs. 77,98,000 during search conducted on the assessee.

4. Brief facts relating to the case are that the assessee is engaged in manufacturing of Rice Bran and Sunflower Oil and during manufacturing by products are also produced like DOC, fatty acids etc which are sold separately. A search under section 132 of the Act was conducted in this case on the assessee on 31-8-2016 and inventory of stock was prepared as per which the value of stock came to Rs. 38,06,83,592. As against this, the stock as per the books, on the basis of trading account prepared as on 31-8-2016, was Rs. 38,84,82,000. Thus, there was difference and the stock physical found was short by Rs. 77.98 lacs. This finding was confronted to the assessee and in reply, it was submitted that there was litigation with M/s. PBR Agro Industries regarding mis-allocation of DOC of 600 to 650 MT which was stored in their premises the value of the same was calculated at Rs. 70-75 lacs taking the rates as Rs. 11,570 per ton. In support of this contention, the assessee submitted that a Civil Suit against the said concern was filed and also a Memorandum of Understanding was drawn wherein there is mention of liability of Rs. 70 lacs payable to the assessee. It was further argued that the said party had issued a cheque of Rs. 62 lacs, at the back of which the fact of misappropriation of DOC had been admitted. The reply was considered by the assessing officer who observed that no such entries had been made in the stock register/books of accounts of the assessee and keeping in view the above, the assessing officer considered the difference in stock to represent unaccounted transactions. Thus, the amount of Rs. 77.98 lacs was considered as sale made outside the books of accounts, for which the assessee could not bring on record any corroborative material. Accordingly, gross profit rate of 7.53% was applied on these sales and an addition of Rs. 5,87,189 was made to the taxable income of the assessee.

5. The matter was carried in appeal before the learned Commissioner (Appeals) who upheld the addition holding as under :–

“The facts of the case, basis of addition made by the assessing officer and the arguments of the AR during the course of appellate proceedings have been considered. The AR has reiterated the argument that the assessee took a Godown on rent and the stock was transferred to Godown of M/s. PBR Agro Industries. It is submitted that stock of value approximately Rs. 77.98 lacs had been misappropriated by the said concern and in consequence the appellant filed Civil Suit for recovery of amount due on account of shortage of stock and a Memorandum of Understanding was executed between the promoters of M/s. PBR Agro Industries wherein there is mention of liability of Rs. 70 lacs payable to the appellant. The AR has also filed a copy of cheque of Rs. 62 lacs issued to the assessee in this regard. On the backside of this cheque, the following narration is given :–

“This cheque is against the use of RB-DCC approximately 600 MT which was stored inside the premises of PBR Agro. The balance amount would be decided when the balance DCC is lifted from site.

For PBR AGRO INDUSTRIES

Sd/

Partner/Auth. Signatory”

From the above narration, it is clear that the cheque has been given against the use of RB-DOC approximately 600 MT by M/s. PBR Agro Industries. It is also mentioned that the balance amount would be decided when the balance DOC is lifted from the site. From the endorsement at the back of cheque, it is clear that for all practical purposes, the payment was received in lieu of stock and thus represents the sale considerations received by the assessee in respect of stock of the assessee used by M/s. PBR Agro Industries which was stored inside the premises of M/s. PBR Agro Industries,. Even if, it is considered that it was in the nature of compensation for misappropriation of stock of the assessee by M/s. PBR Agro Industries then also for all practical purposes, it represents sales since the amount was received against the stock. The assessing officer has not added the whole of the amount but only the income element has been brought to tax by applying the GP rate. Under the facts and circumstances of the case, the addition of Rs. 5,87,189 is found sustainable and hence confirmed.”

6. Before us, the learned Counsel for the Assessee reiterated the contention made before the lower authorities that the shortage in stock could not be treated as sales made outside the books of the assessee, since it had been duly explained both during assessment proceedings as well as appellate proceeding with necessary evidences, that the shortage related to stock of RBDOC which had been misappropriated by M/s. PBR Agro Industries from whom the assessee had taken a godown on rent for storing the stock. That the assessee had filed a civil suit for recovery of amount due and a MOU had also been executed with the promoters of M/s. PBR Agro Industries who had accepted their liability of Rs. 70 Lacs payable to the assessee and had also issued a cheque of Rs. 62 Lacs in pursuance to the MOU mentioning the aforesaid fact at the back of the cheque. Therefore. Learned Counsel for the assessee pleaded that having duly explained and proved the shortage of stock as being on account of misappropriation by M/s. PBR Agro Industries, there was no reason at all to treat the same as sales outside the books of account.

7. The learned Departmental Representative on the other hand relied on the order of the learned Commissioner (Appeals)

8. We have heard both the parties and also gone through the order of the learned Commissioner (Appeals). We find merit in the contention of the learned Counsel for the Assessee that it had offered a duly substantiated explanation of the shortage of stock being on account of misappropriation of stock stored by it in the godown taken on rent from M/s. PBR Agro Industries. Evidences in the form of civil suit instituted by the assessee against M/s. PBR Agro Industries, the MOU with the promoters of PBR Agro Industries accepting their liability to pay the assessee Rs. 70 Lacs on account of the mis-appropriation and the payment by cheque of Rs. 62 lacs by M/s. PBR Agro Industries to the assessee as a consequence of the MOU was also filed. The cheque also mention of the fact of payment being made on account of user of stock lying with M/s. PBR Agro. None of the aforesaid facts/evidences have been rebutted by the Revenue nor any infirmity pointed out in the same. In fact we find that even the learned Commissioner (Appeals) has accepted the explanation of the short stock to the extent of it being related to stock stored by the assessee with M/s. PBR Agro, but has rejected the explanation of misallocation of the said stock by M/s. PBR Agro. The learned Commissioner (Appeals) has held that considering the fact that the assessee had received payment from M/s. PBR Agro in lieu of stock the same is in the nature of sale even if it relates to misappropriated stock.

We are unable to concur with the learned Commissioner (Appeals)’s reasoning. Having accepted the fact of stock found short with the assessee being that stored by it with M/s. PBR Agro basis the evidences filed by the assessee in this regard, we see no reason to disbelieve, for no apparent reason, the factum of misappropriation of stock by M/s. PBR Agro when these very same evidences clearly bring out this fact. The evidences have to be read in entirety. The institution of Civil Suit by the assessee against M/s. PBR Agro for misappropriation, the acceptance of liability by M/S PBR Agro in the MOU signed with the assessee and the issuance of cheque of Rs. 62 lacs in part discharge of the liability, all substantiate the fact of misappropriation of stock by M/s. PBR Agro as contended by the assessee. The learned Commissioner (Appeals)’s reasoning for treating it as sale to M/s. PBR Agro, we find, is patently absurd. Merely because the payment has been received in lieu of stock, does not make it sale consideration. There is a huge difference between sale consideration and compensation and the two cannot be equated. And the assessee having proved with evidence that the shortage in stock was on account of misappropriation by M/s. PBR Agro Industries and the revenue not having brought before us any evidence to the contrary to controvert this explanation of the assessee, the payment cannot be said to be on account of sale. We therefore hold the explanation of the assessee for the shortage of stock to be bona fide and direct the deletion of addition made to the income of the assessee of Rs. 5,87,189, by treating the shortage of stock as sales outside the books and applying GP Rate thereon.

9. Ground No. 1 of the Appeal is allowed.

10. Ground No. 2 of the appeal reads as under :–

2. That he was further not justified to uphold action of the learned assessing officer in making an addition of Rs. 9,06,522 on account of cash found short by invoking the provisions of section 68 and also holding that the same to be taxed under section 115BBE of the Income Tax Act, 1961.

11. Facts of the case in brief are that during the search, as per physical inventory cash amount of Rs. 6,88,200 was found as against the cash balance of Rs. 19,94,722 as per cash book. The assessee was confronted with this discrepancy and asked to explain the difference of cash found short by Rs. 13,06,522. In reply, it was submitted that the cash of Rs. 6 lacs was given to Sh. Shiv Kumar, the Director of the assessee company for safe custody and the balance difference was stated to be due to non-punching of certain entries/non-updating of cash book on the relevant date. The assessing officer further mentioned that cash of only Rs. 4,15,000 was found from the residential premises of Sh. Shiv Kumar Goyal and when confronted about the source, it was stated that the cash of Rs. 4,00,000 pertains to M/s. A. P. Refinery (P) Ltd. and balance Rs. 15,000 was for household utilization. The assessing officer thus gave a benefit of Rs. 4,00,000 and out of difference of Rs. 13,06,522 still there was difference of Rs. 9,06,522 for which the assessee could not put up any documentary evidence on record. It was observed that the assessee could not file any evidence like cash account/impressed account/expenses made but not punched in the system and the inability to furnish the said details cast a doubt over the financial transactions and maintenance of accounts especially the cash book which represents the daily cash status of the company. Thus, an addition of Rs. 9,06,522 was made to be charged to tax under section 115BBE of the Income Tax Act, 1961 at special rates mentioned therein.

12. Learned Commissioner (Appeals) upheld the order of the assessing officer holding as under :–

“The facts of the case, basis of addition made by the assessing officer and the arguments of the AR during the course of appellate proceedings have been considered. The AR has submitted that the addition could not be made under section 68 of the Income Tax Act, 1961. Regarding the discrepancy, it is reiterated that some entries were to be punched in the cashbook on the date of search owing to which there was a difference between the cash as per the cashbook viz-a-viz. cash found and counted on the date of search. It is also submitted that the expenses were incurred out of cash shown in the books of accounts and accordingly as per the AR, such expenses could not be termed as unexplained expenditure. It is however noted that the details of such expenses which were allegedly incurred out of the cash have not been submitted by the AR even during the appellate proceedings nor any “bills/vouchers supporting such arguments have been filed by the AR. It is also not brought on record, the entries which remained to be punched in the cashbook on the date of search resulting into difference in the cash as per the cash book and the cash found on physical counting. It is accepted that the cash as per the cashbook was more than the cash found physically at the time of search and the difference was Rs. 13,06,522. This indicates that cash has been taken from the premises without making an entry in the cashbook. Only an amount of Rs. 4,00,000 was found at the residence of Sh. Shiv Kumar but the balance amount of Rs. 9,06,522 still remained unaccounted for. This amount could have been either used for payments towards unaccounted expenses or utilized towards investments which were not recorded in the books of accounts of the assessee. In either case, addition is required to be made in the hands of the assessee as deemed income under section 69 or under section 69B/69C etc. because the AR has not given the details of utilization of the cash amount found short during the course of search proceedings. Under the facts and the circumstances of the case and in view of the discussion above, the action of the assessing officer in charging the amount of Rs. 9,06,522 under section 115BBE at the special rates, is found sustainable as per law and hence confirmed.”

13. Before us, learned Counsel for the assessee reiterated the contention made before the lower authorities and learned Departmental Representative relied on the order of the Commissioner (Appeals).

14. We have heard both the parties. The issue before us relates to addition made to the income of the assessee on account of cash found short with the assessee. Cash short, at the most represents expenses/outgoings out of cash available with the assessee not accounted for in the books of the assessee. Such unaccounted expenses are sourced from cash available with the assessee. How therefore can they be treated or deemed to be income of the assessee under section 69/69B/69C of the Act when the said sections deem investments/money, the source of which the assessee offers no explanation about, as income of the assessee.

We therefore hold that there is no case for making any addition on account of cash found short with the assessee and the addition so made of Rs. 9,06,522 is directed to be deleted.

15. Ground No. 2 of the appeal is allowed.

16. In the result, appeal of the Assessee is allowed.