Rajdhani Flour Mills Ltd vs DCIT

Seized documents in Annexure A-1 to A-45 found in the premises of B-30, Lawrence Road, Industrial Area, Delhi containing freight register, vehicle in details, Dharam Kantha receipts, general voucher registers, purchase details etc

Seized document in Annexure A-46 seized from B-30, Lawrence Road, Industrial Area, Delhi containing tally data of Rajdhani flour mills limited. Further at the time of lifting of prohibitory order on 3-3-2023, seized documents in Annexures A-1 to A-121 seized from B-30, Lawrence Road, Industrial Area, Delhi containing freight register, vehicle in details, Dharam Kantha receipts, general voucher registers, purchase bills etc were also found and seized. The Learned AO observed that on perusal and analysis of the above seized documents during search action, it was gathered that as a usual practice, when the truck enters the plant, the security guard enters the truck details in a register, then the weight of the truck is measured at Dharam Kantha and a digital weighing slip is generated. Thereafter, a quality check is done by the quality control team, which records its findings on the digital weighing slip. As per the above process, three basic documents (apart from the invoice) that are generated in the process or entry in the movement register, digital weighing slip and the record of quality parameters on the weighing slip. Accordingly, basic documents of purchases from various parties were verified on a sample basis during the search. As a result of this verification process on a sample basis, it was found that many bills from few parties did not have any supporting documentation.

It was submitted that the learned AO erred in making the addition without correct appreciation of the facts. The assessee company is engaged in the manufacturing of Besan. The assessee purchases chana from various sources such as NAFED, Imports, Licensed Arhatiyas and brokers. In respect of purchases from/ through brokers, the brokers give commitment (Sauda) to deliver agreed quantity of chana at mutually decided price. The said mutually decided price is inclusive of mandi tax. The price quoted by the broker is not dependent on the source from which the broker procures the chana. The brokers procure the goods from various sources such as Authorized agents (Arhatiyas) or mandis of various states and also directly from the farmers. It was submitted that when the purchases are from authorized agents or Mandis of the state, Mandi tax is levied whereas when the goods are procured directly from the farmers, the mandi tax is not levied. When the brokers supplied goods to the assessee company, which have been procured by them from the Mandis and licensed Arhatiyas (on which mandi tax has been paid) the broker issue bills to the assessee company at the agreed price alongwith proof of payment of mandi tax. For example, if the agreed price is say Rs. 52 per kg, the broker bills the assessee @ Rs 52 per kg and provide proof of levy of mandi tax say Rs 1 per kg. Thus, the price of Rs 52 per kg is inclusive of mandi tax and that is the amount which is claimed by assessee as the purchases. However, if the goods supplied by the broker to assessee have been procured by them directly from the farmers, no mandi tax have been levied. Since the agreed price with broker was Rs 52 per kg (which was inclusive of mandi tax), the broker saved Rs. 1 in respect of Mandi tax and therefore, the assessee insists to the broker to revise the agreed price after giving some portion of benefit of mandi tax saved. Thus, the broker issue bills to the assessee @ say Rs. 51.50 per kg (instead of agreed price of Rs 52). Thus, instead of agreed price of Rs 52/- per kg, the assessee company actually get the goods @ Rs 51.50/- and there is saving of Rs 0.50 to the assessee. It was submitted that the assessee has claimed the expenditure of purchase @Rs 51.50 only which has been actually paid and incurred by it. The assessee has saved Rs 0.50 per kg from mandi tax and similarly Rs 0.50 has been saved by the broker. Hence there is no case of any excess expenditure claimed by the assessee. We find that this saving of Rs 0.50 has been treated by the learned AO as inflated purchase whereas, the fact of the matter is that the assessee has not claimed the expenditure of saving of Rs 0.50 per kg at all. The assessee has claimed the expenditure of purchase of Rs 51.50 only. This fact has been duly appreciated by the learned CITA after due examination of the relevant records and documents placed on record. The relevant observation of the learned CITA in this regard are as under:-

(emphasis supplied by us)

None of the aforesaid factual findings given by the learned CITA could be controverted by the revenue before us by cogent evidences except placing reliance on the observations made in the assessment order. Hence we do not deem it fit to interfere with the order of the learned CITA in this regard. Accordingly, the Issue No. 1 raised hereinabove in the appeal of the revenue is dismissed.

The CIT(A) has deleted the addition by holding as under: -

None of the aforesaid factual findings given by the learned CITA could be controverted by the revenue before us by cogent evidences except placing reliance on the observations made in the assessment order. Hence we do not deem it fit to interfere with the order of the learned CITA in this regard. Accordingly, the Issue No. 2 raised hereinabove in the appeal of the revenue is dismissed.

We have heard the rival submissions and perused the materials available on record. The Learned AO noted from the ITR of the assessee that has claimed CSR expenses amounting to Rs 8,23,000 and the same was not added back while computing the total income in the return as per Explanation 2 to section 37(1) of the Act. Accordingly, the Learned AO proceeded to disallow the same in the assessment. This action of the Learned AO was upheld by the Learned CITA.

At the outset, we find that the provisions of Explanation 2 to section 37(1) of the Act are very clear that expenditure incurred on CSR activities cannot be held to be wholly and exclusively meant for the purpose of business of the assessee and accordingly liable for disallowance. However, the Learned AR before us submitted that the said expenditure would be alternatively eligible for deduction under section 80G of the Act as CSR expenditures represent only donations given to various eligible institutions. But from the records, we find that the details of CSR activities are not available from the orders of the lower authorities. Hence, we deem it fit and appropriate to restore this issue to the file of Learned AO for de novo adjudication in accordance with law and to consider the claim of deduction under section 80G of the Act if it is found that assessee had indeed made contributions to eligible institutions. The law is well settled that assessee would be entitled for deduction under section 80G of the Act in respect of contributions made to eligible institutions that were categorized as CSR expenditure. We direct the Learned AO accordingly. Hence, the Ground No. 5 raised by the assessee is allowed for statistical purposes.

Respectfully following the same, we quash the assessment framed under section 143(3) of the Act for the Assessment Year 2022-23 by the Learned AO as bad in law and void ab initio.

Since the entire assessment is quashed, the adjudication of other grounds become academic in nature and they are left open.

The Learned AO noted that negative difference referred in the above table implies out of book sales and positive difference mentioned in the above table reflects unexplained investment. The taxability of the same by considering the chana rate as Rs 46 per kg and besan rate at Rs 65 per kg are as under:

The assessee was asked to provide the sales ledger, stock ledger and purchase ledger for the year under consideration and explain the difference as mentioned above. The assessee submitted its reply on 31-05-2024. In its reply, the assessee pointed out some calculation mismatch at serial number 10 and 11 of the Exhibit-1 of the statement of Shri Krishnakumar Sharma i.e. for chana 2060 Quintals = 2060 kg and chana Dal-1205 Quintals = 1205 kg. The said discrepancy was found to be correct by the Learned AO.

Further, the assessee claimed with respect to serial number 9 of Exhibit-1 of the statement of Shri Krishnakumar Sharma i.e. Dust that no such packaging of 450 kgs is done in their business. The learned AO noted that this claim of the assessee is not found tenable as the Exhibit - 1 was duly confronted to Shri Krishna Kumar Sharma who is the plant supervisor at Premises B-30, Rajdhani Floor Mills Limited and during the search proceedings he did not find any discrepancies in it. The extract of Exhibit 1 is reproduced in page 65 of the assessment order in a tabular form.

The assessee further claimed that the difference of 2868.99 Quintals found by the search party in the stock at Premises 2248-2250, Rai unit is because the search team had taken various stocks on estimation and without actual physical verification. The learned AO disregarded this contention of the assessee on the ground that during the search and seizure action, the inventory was prepared and the same was confronted to employees of the assessee during statement recorded on oath and no objection was raised by them.

Further, the assessee claimed that the total stock found available during the search and seizure action is as per the books of the assessee and the difference found in the stock is due to standard weight taken by the search team while preparing the inventory of stock. Further, the learned AO disregarded this contention on the ground that assessee did not furnish any documentary evidence in support of its claim except filing the list of items which was sought to be disregarded by the learned AO on the ground that they are self-serving.

Further, the learned AO revised the premises wise position of stock found during physical verification and its matching with the books of accounts as under:-

Tentative rate of chana on 21.01.2023: Rs. 46/kg ad Besan: 65/kg ‘Revised/corrected after considering the reply of the assessee

Based on the aforesaid revised discrepancies, the revised unexplained investment and unaccounted sales were worked out as under:-

A show cause notice was issued to the assessee to add Rs 1,12,780 (30360 + 82420) as unaccounted sales and Rs 2,07,47,392 (8152500 + 12594892) as unexplained investment. The assessee submitted its reply on 17.06.2024 clearly objecting to the addition by pointing out that there were no discrepancies at all in the physical stock and the book stocks. The assessee also duly brought on record the calculation mistakes done in the revised computation as under:-

With respect to rejection , it was inadvertently calculated as 60*50 kgs= 300 kgs instead of 60*50 kg =3000 kgs.

The rate for calculation of Dust was adopted at Rs 46 per kgs whereas the assessee buys the same at 0.50 paisa per kg. The assessee also submitted the bill of Dust purchase. The rate in the bills of Dust varies from 0.40 paisa per kg to 0.60 paisa per kgs. This claim of the assessee was found to be correct by the learned AO.

With respect to the difference of 115480 kgs found in the finished goods at premises of assessee B-30 , it was submitted that the quantity has not been considered as per the books of accounts and assessee always holds finished stock of approx. 1 lakh kg. The assessee in support of this submitted stock registered from 15.2.2023 to 25.1.2023. The assessee further claimed that the above stock has been sold and sales duly recorded in the books of accounts. The assessee also submitted sales bills in support of the same. Further assessee stated that the remaining addition, if any, must be restricted to gross profit only as the addition relates to unaccounted sales.

The learned AO agreed to the aforesaid discrepancies and corrected the figures of additions to be made on account of unaccounted sales and unexplained investments as under:-

Tentative rate of chana on 21.01.2023: Rs. 46/kg ad Besan: 65/kg. *2700 KG added on account of correct calculation of rejection and dust has been subtracted. **After considering the reply of the assessee finished Goods found to be accounted.

Admitting to the submission of the assesese with respect to Dust, the total amount of dust is 54900 kgs * 0.60 per kg – Rs 32,940 was treated as unexplained investment.

Accordingly, the learned AO made addition of gross profit @ 6.4% (as per audited financials) on unaccounted sales of Rs 18,67,680 (1754900 + 30360+82420) and made an addition of Rs 1,19,532 (1867680*6.4%) as business income of the assessee. But in respect of unexplained investment in stock as worked out above, the learned AO made an addition of Rs 1,26,27,832 (12594892 + 32940) under section 69 read with section 115BBE of the Act.

Before the Learned CITA, the assessee explained that the excess stock was arrived by the Learned AO merely on estimation and without actual verification of the stocks. An Affidavit in this regard was also submitted by the assessee in support of its contentions. Further, the assessee submitted that the only source of income of the assessee is business of manufacturing of Besan and allied products and there cannot be any undisclosed sources of income warranting any addition under section 69 read with section 115BBE of the Act. It was vehemently submitted that the only source of income is emanating out of the business of the assessee. The assessee further submitted that the alleged excess stock could be brought to tax only as business income under section 28 of the Act and not under section 69 of the Act and in support of this proposition, it placed reliance on the decision of Hon’ble Rajasthan High Court in the case of PCIT vs Bajargan Traders in ITA 258 / 2017 dated 12-09-2017. The Learned CITA however in principle agreed to the additions made by the Learned AO, but held that the excess stock addition would only have to be treated as business income under section 28 of the Act as the only source of income for the assessee is income from business and not under section 69 read with section 115BBE of the Act. Aggrieved, both the assessee as well as the revenue are in appeals before us.

At the outset, we find that the revenue in its appeal had raised a ground that the Learned CITA erred in deleting the addition made on account of excess stock. But on perusal of the Learned CITA order, we find that the Learned CITA had only confirmed the addition. Hence, the ground per se of the revenue in this regard is factually incorrect as there cannot be any grievance for the revenue. Further, the revenue had not challenged the treatment given by the Learned CITA to convert the head of income from unexplained investment to business income under section 28 of the Act. Accordingly, the ground raised by the revenue for this addition is dismissed.

The assessee before us had challenged the confirmation of addition made by the Learned AO on account of excess stock. We find that the assessee had duly brought on record the various discrepancies in the calculation of discrepancies in quantity by the learned AO for both raw materials and finished goods. It is not in dispute that the search team and the learned AO had adopted the quantity of raw materials at standard weight. This in our considered opinion is wrong as the quantity of stock would vary in each baggage. Hence any difference in stock worked out by the revenue with this basic and preliminary discrepancy need to be rejected at source. The assessee had also duly filed an affidavit that the search party had taken the quantity of stock merely on estimation without carrying out any physical verification actually at the premises of Rai Unit of assessee. The various discrepancies pointed out by the assessee were only partially considered by the learned AO which itself goes to prove that the search party had considered the alleged excess stock only on estimation. The books of accounts and the book results of the assessee were not even sought to be rejected by the revenue by applying the provisions of section 145(3) of the Act. Merely because certain employees and the plant supervisor, present on the date of search, did not object to the wrong consideration of quantity of stock considered by the search party, it cannot be said that the assessee had made investment out of books warranting any addition. Obviously on the date of search, the employees and the plant supervisor would be in great tension and would be only praying for the search team to exit as early as possible from the premises. Hence the addition made based on the behaviour of the plant supervisor and the employees at the time of search would not be sustainable in the eyes of law, when the assessee was able to prove with cogent evidences, stock registers, purchase ledger and sales ledger that there were no discrepancies in the stocks found physically and the stocks recorded in the books of accounts. Further the contention of the assessee that the standard rate of Rs 46 per kg for chana and Rs 65 per kg for besan cannot be adopted. This may be relevant to work out the approximate value of stock at the time of search, but when the same is sought to be compared with the stock ledger, then the values already reported in the stock ledger would be more authentic when no defects were pointed out by the revenue or the search party in the maintenance of stock ledgers of the assessee. In these circumstances, the contention of the assessee that the stocks were considered by the search party and thereafter by the lower authorities on estimation need to be accepted. Hence we have no hesitation to delete the addition made in the sum of Rs 1,26,27,832 on account of excess stock. Accordingly, the Ground No. 6 raised by the assessee is allowed.

We have heard the rival submissions and perused the materials available on record. During the course of search, cash of Rs. 41,35,220 was found by the search party as under:-

Premises at B-30, Lawrence Road, Industrial Area, Delhi - Rs.26,69,220

Premises at C-34/3, Lawrence Road, Industrial Area, Delhi - Rs 12,00,000

Premises at 2248-50, Rai Industrial Area, HSSIIDC, -Rs. 2,66,000 Sonipat, Haryana

Total -Rs.41,35,220

Out of this, Rs. 12 lakhs was considered in the hands of Shri Chetan Jain, Director of the assessee company. Out of the remaining cash of Rs. 29,35,220, the Learned AO gave benefit of Rs. 10,99,061 being cash in hand as on the date of search as per the books of accounts of the assessee and made addition for the remaining amount of Rs. 18,36,159.

The assessee submitted that Rs 12,00,000 was not found in the premises of C-34/3, Lawrence Road, Industrial area, Delhi and that the same was found from the residence of Shri Chetan Jain. The assessee submitted that no separate addition need to be made in the sum of Rs. 18,36,160 on account of cash found as the learned AO had made separate addition of Rs. 16,00,000 in respect of unaccounted cash sales. Accordingly the assessee pleaded for telescoping benefit from the learned CITA. The learned CITA duly appreciated this contention of the assessee and observed that the learned AO had made unaccounted cash sales addition of Rs. 16,00,000 and had also made addition of Rs. 18,67,680 on account of gross profit. Hence, these sums are very much available as a source to explain the cash of Rs. 18,36,160 found at the time of search and accordingly the assessee would be entitled for telescoping benefit. We do not find any infirmity in this order of the learned CITA as the learned CITA had rightly prevented the double addition made by the learned AO – (1) on account of unaccounted sales and gross profit addition and (2) on account of unexplained cash found at the time of search. Accordingly, the ground raised by the revenue challenging the deletion of addition on account of cash found at the time of search is hereby dismissed.