2011 (12) TMI 345 - AT - Income Tax

Addition - Survey party recorded two important findings of fact that-(i) physical stock found was in excess of book stock by an amount of ₹ 1,44,25,183/-; and (ii) cash found was short of the cash as per cash book by an amount of ₹ 80,31,100 - the assessee has taken up shifting stands in various times and, therefore, there is reason to come to the conclusion that the assessee tried to foreclose enquiry by making confession at the time of survey - statement u/s 133A is not on oath and the section does not provide that it can be used for the purpose of the Act - The officers have been advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or what is not likely to be disclosed before the revenue - assessee has displayed low tax morality, that cannot be a ground for sustaining an addition, which inference is otherwise not deductible under the law - Decided in favor of the assessee Regarding addition u/s 68 - it is mentioned that ostensibly the addition made by invoking the provision contained in section 41(1) as the provision contained in section 68 is not applicable for the simple reason that these credits were not made for the first time in this year in the books of account - The facts submitted by the ld. counsel regarding the credits being old and their not being written off in the books of account stand undisputed - the provision contained in section 41(1) is also not applicable - Decided in favor of the assessee Regarding addition of ₹ 2,17,11,006 on account of employees contributions to provident fund and the ESI - during the year the assessee had inter-alia deducted an amount of ₹ 2,17,11,006/- from the salaries paid to the employees. However, the amounts were not credited to respective accounts of the employees before the due date defined u/s 36(1)(va) - Supreme Court in the case of Alom Extrusions Ltd (2009 (11) TMI 27 - SUPREME COURT) - Held that if the amount is not deductible u/s 36(1)(va), it is deductible u/s 43B - Decided in favor of the assessee Regarding addition of ₹ 20.00 in respect of diversion of interest-bearing funds to its subsidiary company - the assessee advanced monies to the sister concern free of interest. The monies were advanced from a current account in which only sales proceeds were credited - The claim of the assessee is that such advances arising out of this account had no nexus with the borrowings which were credited in another account - the main account and the account from which advances have been made will have to be seen cumulatively for arriving at a decision as to whether any own money was available for making advances as aforesaid - As no attempt has been made to find out the nexus between borrowing and lending - Decided in favor of the assessee by way of remand to AO

Issues Involved:
1. Addition of Rs. 80,31,100/- for short cash found during the survey.
2. Addition of Rs. 2,36,904/- under Section 68 for unclaimed liabilities.
3. Addition of Rs. 2,17,11,006/- for employees' contributions to provident fund and ESI.
4. Disallowance of Rs. 20.00 lakh under Section 36(1)(iii) for interest-free loans to a subsidiary.
5. Disallowance of Rs. 10,27,038/- under Section 40(a)(ia) for advertisement expenses.

Detailed Analysis:

1. Addition of Rs. 80,31,100/- for Short Cash Found During the Survey:
The survey conducted on 08.01.2007 revealed two discrepancies: excess stock of Rs. 1,44,25,183/- and a cash shortfall of Rs. 80,31,100/-. The Director-cum-DGM (Finance) offered both amounts for taxation but later retracted the cash shortfall in the return. The CIT (Appeals) deleted the addition of Rs. 80,31,100/- based on the claim that the statement was made under duress and was a conditional surrender. However, the Tribunal found no evidence of coercion and noted the shifting stands of the assessee. Despite the dubious conduct, the Tribunal concluded that the addition could not be sustained solely on the statement without corroborative evidence of income generation from the shortfall. The Tribunal upheld the CIT (Appeals) decision, emphasizing the need for evidence of income generation from the shortfall.

2. Addition of Rs. 2,36,904/- under Section 68 for Unclaimed Liabilities:
The AO added Rs. 2,36,904/- as unclaimed liabilities under Section 68, arguing they had ceased to exist. However, the CIT (Appeals) found that these liabilities were old and not written off in the books, making Section 68 inapplicable. The Tribunal agreed, noting that the liabilities were not new credits and had not ceased to exist, thus affirming the CIT (Appeals) decision to delete the addition.

3. Addition of Rs. 2,17,11,006/- for Employees' Contributions to Provident Fund and ESI:
The AO added Rs. 2,17,11,006/- for late deposits of employees' contributions to provident fund and ESI, citing Section 36(1)(va). The CIT (Appeals) deleted the addition, relying on the Supreme Court's decision in Alom Extrusions Ltd., which allows deductions for payments made before the due date of filing the return under Section 43B. The Tribunal upheld this view, confirming that the payments were made before the due date for filing the return, thus deductible under Section 43B.

4. Disallowance of Rs. 20.00 Lakh under Section 36(1)(iii) for Interest-Free Loans to a Subsidiary:
The AO disallowed Rs. 20.00 lakh, arguing that interest-bearing funds were diverted to the subsidiary. The CIT (Appeals) deleted the disallowance, noting that the advances were made from a current account with sufficient own funds. However, the Tribunal found the need to ascertain the actual availability of own funds and their utilization. The matter was remanded to the AO for a detailed examination of the nexus between borrowings and advances.

5. Disallowance of Rs. 10,27,038/- under Section 40(a)(ia) for Advertisement Expenses:
The AO disallowed Rs. 10,27,038/- for non-deduction of tax at source under Section 194C, treating the payments for diaries and catalogues as works contracts. The CIT (Appeals) deleted the disallowance, stating that the assessee did not supply any material, thus not constituting a works contract. The Tribunal upheld this view, noting that the payments were for manufacturing and supplying products without any material supplied by the assessee, thus not falling under Section 194C.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal upholding the CIT (Appeals) decisions on most issues but remanding the matter of interest-free loans to a subsidiary for further examination.

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