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2016 (5) TMI 481 - AT - Income TaxDisallowance u/s 40A(3) - cash payments exceeding the sum of ₹ 20,000 - Held that - None of the case the payment is exceeding ₹ 20,000 for the purchase of old ornaments. In all the cases where the addition was made by the AO on account of deemed payment of ₹ 20,000 on the purchase of old ornaments, the assessee sold ornaments in exchange thereof. As a result, the net payment was made the party for the purchase of old ornaments. However the assessee in its books of accounts was showing purchase and sale in full value and the same was also recorded as payment for the purchase and receipt for the sale in the cash book. In our considered view merely recording the connected purchase and sale transactions independently and separately instead of net adjusted amount in the cash book does not amount the violation of section 40A(3) of the Act. On examination of record of the net amount of purchase and sale of the ornaments we did not find even a single case where the payment is exceeding ₹ 20,000. However we find that wherever the payment exceeds for purchase more than ₹ 20,000, it has been made through account payee cheque only as evident from the submission of the assessee. In view of the above, we conclude that the assessee has not violated provisions of section 40A(3) of the Act on account of payment exceeding for the purchase of old ornaments exceeding ₹ 20,000 - Decided in favour of assessee Disallowance u/section 40(a)(ia) - melting loss incurred by KARIGARS is nothing but payment made to KARIGARS without deducting TDS- Held that - There is undoubtedly loss occurred in the course of melting and manufacturing process of gold. These melting and manufacturing activities are carried out by the KARIGARS who are paid the service charges in the form of cash as per the market prevailing system. Accordingly we opined that the aforesaid loss cannot be termed as payment to KARIGARS. As per the order of the AO the assessee duly explained the loss of gold incurred during the course of melting and manufacturing process to the tune of 906.880 grams. Such a loss was not doubted by the AO at the time of assessment but the addition for the loss of gold 166.170 grams was made due to non-availability of reconciliation. In our view merely assessee failed to provide the reconciliation does not mean that the payment has been made in the form of gold. The AO should have brought cogent reasons for treating the loss of gold as payment to the KARIGARS. As we find that the loss of 906.880 grams was duly explained which shows that there was the system of making the payment in cash to the KARIGARS. Accordingly we held that the less gold received from the KARIGARS cannot be termed as payment to KARIGARS. - Decided in favour of assessee Addition on account of non-production of the reconciliation statement of the gold deposit lying with the assessee - Held that - the assessee at the time of assessment framed by the AO the assessee failed to reconcile the gold received from the customers to the tune of 30.100 grams therefore the same was treated as income. However from the submission of the assessee we find that the liability towards the deposit of gold from the customers was very much reflecting in the books of the assessee for the relevant year and no such liability was written back in the year. Now it is really clear that a trading liability can be taxed only if it is written off in the books of accounts. In the instant case although the assessee failed to give the reconciliation but such liability was not written off in the books of accounts. Accordingly in our considered view the aforesaid liability cannot be termed as income under section 41(1) of the Act. On contrary ld. DR failed to bring anything on record to controvert the argument of the assessee. So the liability towards the deposit of gold cannot be treated as income of the assessee - Decided in favour of assessee
Issues Involved:
1. Disallowance under section 40A(3) of the Income Tax Act, 1961. 2. Disallowance under section 40(a)(ia) of the Income Tax Act, 1961. 3. Addition on account of non-production of reconciliation statement for gold deposits. Issue-wise Detailed Analysis: 1. Disallowance under section 40A(3) of the Income Tax Act, 1961: The first issue raised by the assessee was the disallowance of ?28,69,878/- under section 40A(3) of the Income Tax Act, 1961. The assessee, a Private Limited Company engaged in the business of manufacturing and retailing gold and silver ornaments, argued that actual cash payments never exceeded ?20,000 on any date. The Assessing Officer (AO) found that payments for old gold purchases exceeded ?20,000, violating section 40A(3). The AO disallowed ?28,69,878/- as these transactions did not fall under any exceptions specified in rule 6DD of Income Tax Rules 1962. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the AO's action. Upon appeal, the Tribunal found that in none of the cases did the net payment for old ornaments exceed ?20,000. The transactions were recorded at full value in the cash book, but the actual settlement was only for the difference amount. The Tribunal concluded that merely recording transactions independently instead of net adjusted amounts does not violate section 40A(3). The Tribunal also noted that wherever payments exceeded ?20,000, they were made through account payee cheques. Therefore, the Tribunal reversed the orders of the lower authorities and allowed the appeal on this ground. 2. Disallowance under section 40(a)(ia) of the Income Tax Act, 1961: The second issue involved the disallowance of ?2,53,243/- under section 40(a)(ia) for payments made to KARIGARS without deducting TDS. The AO opined that the melting loss incurred by KARIGARS was actually a payment made to them in the form of gold. The assessee argued that the loss was due to the manufacturing process, which is recognized up to 3.5% as wastage in Foreign Trade Policy. The AO disallowed the amount for the loss of 166.170 grams of gold, considering it as payment without TDS. The Tribunal found that the loss occurred during the manufacturing process and was not a payment to KARIGARS. The Tribunal noted that the assessee explained the loss of 906.880 grams, which was accepted by the AO, but the addition for 166.170 grams was due to non-availability of reconciliation. The Tribunal held that the loss could not be treated as payment to KARIGARS and reversed the orders of the lower authorities, allowing the appeal on this ground. 3. Addition on account of non-production of reconciliation statement for gold deposits: The third issue was the addition of ?45,872/- due to the non-production of a reconciliation statement for gold deposits. The AO treated the value of 30.100 grams of unexplained gold as income. The CIT(A) confirmed this addition, stating that the assessee could not reconcile or explain the gold deposits. The Tribunal noted that the liability towards the deposit of gold from customers was reflected in the books and had not been written off. The Tribunal held that a trading liability could only be taxed if it is written off in the books of accounts. Since the liability was not written off, it could not be treated as income under section 41(1) of the Act. The Tribunal reversed the orders of the lower authorities and allowed the appeal on this ground. Conclusion: In conclusion, the Tribunal allowed the appeal of the assessee on all three grounds, reversing the orders of the lower authorities. The disallowances under sections 40A(3) and 40(a)(ia) and the addition for unexplained gold deposits were all overturned. The Tribunal emphasized the importance of actual transactions and the proper reflection of liabilities in the books of accounts.
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