Mukul Kumar Shrawat, J.M.:— Revenue is in Appeal and the Assessee has filed Cross Objection, both arising from the order of learned CIT(A)-II, Surat dated 13.11.2008.

A. Revenue's Appeal (ITA No. 563/Ahd/2009)

“[1] On the fact and circumstances of the case and in law, the learned CIT (A) has erred in deleting the addition made by the A.O. of Rs. 1,95,50,000/- on account of negative cash balance holding that since the second cash book was submitted before the Assessing Officer to examine the same which is summarily rejected by the A.O. ignoring the material fact that—

[a] the assessee has furnished the copy of current capital account of the partner only during the course of appellate proceedings and the Ld.CIT(A) has not allowed the opportunities to the Assessing Officer to examine such account and to assign findings thereon, as envisaged under Rule 46A of the IT. Rules.

[b] the Ld.CIT(A) has not appreciated that furnishing of ‘current capital account’ of the partners showing huge cash balances is nothing but the negative cash balances of Rs. 1,95,00,000/-”

2. Facts in brief as emerged from the corresponding assessment order passed u/s. 143(3) dated 24.12.2007 were that the assessee is in the business of trading of iron and iron scrap. A return of income was filed declaring Rs. 11,98,650/-. From the records, it was noted by the AO that a survey was conducted by the Enforcement Wing of the Sales Tax Department. According to AO, the said department had detected unaccounted stock of Rs. 6,39,239/- and unaccounted sales of Rs. 3,41,335/-. It has also been noted by the AO that the Sales Tax Department had passed the necessary order to that effect. Further, Sales Tax Department had also levied a penalty of Rs. 98,239/- vide an order dated 25th April, 2005, as noted by the AO. The AO has scrutinized the cash book and thereupon noted that there was a debit balance of Rs. 1,93,61,599/- as on 13th of January, 2005. According to him, there was negative balance in the cash book. The assessee's main argument was that as per the cash book in “blue colour bind” there was introduction of cash in the name of Anwar Ali H. Lakhani which has covered up the discrepancy which was found in the original cash book. The AO has not found this second cash book as a reliable account and thereupon detailed discussion held as under:

4.7. In show cause notice, proposal for addition was made for Rs. 1,93,61,599/-, but when the assessee has further produced a new cash book found to be unbelievable but has claimed to have introduction of cash to the extent of Rs. 1,95,50,000/-, it is under the compulsion of the circumstances to take note of this amount for taxation. Here, with a view to remove any doubt which may arise or may be possessed at any stage of proceeding, it is necessary to once again clarify the basic issue under consideration. The assessee has shown debit balance in cash book not because of any notional or because of misprinting or lack of full printing of all the entries in cash book but such negative balances are there, as mentioned in show cause notice because of two reasons, one is various expenditure like transportation, day to day expenditure, miscellaneous expenditure, scrap cutting gas expenses, salary expenses, wages expenses, office expenses, octroi expenses and other allied expenses. Secondly this deficiency is because of various deposits in banks mainly cash and also on account of payments made to the various parties from where purchases has been shown to have been made. Therefore, negative balance in cash book is not a notional one but it is because of incurrence of expenditure, deposits in banks and payments made to the vario us parties.

4.8 Further, after receipt of show cause notice when fabricated new cash book has been introduced or put up during the course of hearing proceedings, it has been noticed that unexplained cash has been introduced in the name of one partner who used to attend the proceeding and was well aware of the basic question under consideration. Because of unexplained introduction of cash in new cash book, it is circumstantial-boundation to take this amount for taxation as the assessee as completely failed to prove otherwise or to explain the source of deposits also. Therefore, alternatively this amount of Rs. 1,95,50,000/- is to be taxed, otherwise, in normal course the first part of the issue under consideration, that is, negative balance shown in cash book to the tune of Rs. 1,93,61,599/- would have been the quantum of taxation. Hence, finally an amount of Rs. 1,95,50,000/- is added to the total income of the assessee which is the consequential effect of negative balance in original cash book and after introducing the cash which was unknown or undisclosed one. For this addition, penalty u/s. 271(1)(c) is initiated for concealment and furnishing inaccurate particulars of income.”

3. When the matter was carried before the First Appellate Authority, the issue was decided in Assessee's favour in the following manner:

“There were basically three sets of accounts, which were crucial to the issue of introduction of unaccounted cash of Rs. 1,95,50,000/-. The first was the cash book of the Assessee, the second was the current account of Shri Anwar Ali Lakhani held with the Assessee firm, and the third was the cash book of M/s. R.H. Patel & Co., the proprietorship concern of the Assessee. I have examined all the three very carefully. With regard to the cash book of the Assessee firm, it is an accepted fact that the accounting software requires journal entries to be indexed which means that such entries are debited on credited to the respective accounts from the journal. The fact that the indexing was not done while taking the print-out of the first cash book was proved by there being no daily balances drawn, which was done in the second cash book which had been prepared after due indexing. Since, the second cash book was also submitted before the AO to explain the negative cash balance, it was imperative for the AO to examine the same without summararily rejecting it. The examination would mean seeking explanation of the cash introduced on different dates. The explanation was provided by the second most important account or book, which was the current account held by Shri Lakhani with the Assessee firm, and whose credits and debits throughout the year totalled Rs. 2,00,50,000. Both the debits and credits to this account corresponded to the cash book of the proprietorship firm, M/s. ??? R.H. Patel & Co. I have compared the entries. It is not a one-sided transaction whereby cash had been introduced continuously from R.H. Patel & Co. into Shri Lakhani's current account with the Assessee firm. The entries show that cash had moved both ways, from M/s. R.H. Patel & Co. into the Assessee firm, and from the Assessee firm into M/s. R.H. Patel &. Co. depending upon the necessity at any point of time. The source of the cash in the books of R.H. Patel & Co. is the daily sale of petrol and diesel. Petrol and diesel being essential commodities are covered by Essential Commodities Act and the register which records the daily sales is stamped and verified by the Mamlatdar, Palsana, Dist. Surat. Therefore, the source of the cash in the hands of R.H. Patel & Co. being substantiated, the transfer of such cash into the books of the Assessee through the current account of Shri Lakhani, also stands substantiated and verified. The books of account of R.H. Patel &. Co. was audited by M/s. Jain, Kothari and Kankaria, C.As. and a copy of the Audit Report has been furnished by the AR.

6.3 Taking into account the facts and circumstances of the case as discussed above in considerable detail, it is held that firstly, there was no negative cash balance in the books of the Assessee firm, and secondly, the introduction of the cash in the books of the Assessee, totaling Rs. 1,95,50,000/- stood satisfactorily explained. The AO therefore, is directed to delete the addition of the sum of Rs. 1,95,50,000/-”

4. From the side of the Revenue, learned DR, Smt. Sonia Kumar appeared and placed strong reliance on the observation of the AO. Her first objection was that the assessee has not maintained the correct books of account. At the time of sales tax survey negative cash was found as per the cash book impounded, which was later on covered up by producing another cash book which was not an authentic document. She has also pleaded that cash introduction by one Sri Anwar Ali H. Lakhani has also not been explained. Because, the assessee had not shown the transfer of cash tallied with the books of the assessee firm. She has pleaded that learned CIT(A) has ignored all those facts and wrongly deleted the addition.

4.1 On the other hand, from the side of the respondent-assessee, learned AR, Mr. Tushar Hemani appeared and argued that the copy of cash book of Amir Traders was duly placed before the AO to demonstrate that there was shortage of cash. Learned AR has also pointed out that as per the ledger account of Anwar Ali H. Lakhani in the books of Amir Traders the amount has been transferred either from his personal account or from the proprietory concern of the Firm, viz., R.H. Patel and Co. Further, in respect of two cash books produced, he has pleaded that there was some technical reason due to which the first cash book was not completed; hence, when the indexing was done properly then the second cash book was produced before the AO. Further, it was the duty of the AO to detect any mistake in the second cash book filed during the course of assessment proceedings. For this legal proposition, he has placed reliance on the decision of Pipush Kumar O. Desai, 247 ITR 568 (Guj.). Learned AR has also argued that there was sufficient evidence on record to prove that there was no shortage of cash balance because the same was transferred date-wise from the accounts of Anwar Ali H. Lakhani partner of the Firm which can be verified at any stage of proceedings.

5. We have heard both the sides at some length. We have examined the documents of the compilation filed before us. Facts of the case have revealed that there was a cash book which was stated to be “purple coloured” and stated to be computer generated containing pages 1 to 56. On scrutiny of these “purple colour” cash book it was found that there was a debit cash balance of Rs. 1,93,61,599/- as on 13th January, 2005. The AO has also made an observation that from 16.05.2004 to 20.01.2005 there was constant negative cash balance. Thereafter the assessee has produced another cash book which was stated to be in a “blue colour”. This “blue colour” cash book has contained the entries of cash on different dates in the name of Sri Anwar Lakhani. A doubt was raised by the Revenue in respect of correctness of this cash book. The AO has therefore prepared a date-wise position of negative balance in the assessment order and on that basis computed the negative cash balance of Rs. 1,93,61,599/- as on 13th January, 2005.

5.1 At this juncture, the first issue which is to be resolved by us is that whether the cash book in “blue colour” which was later on placed before the AO can be considered as an evidence to determine the correct income of the Assessee. To answer this question we have examined the law laid down by the Hon'ble Gujarat High Court in the case of Pipush Kumar O. Desai (supra) wherein a legal proposition has been laid down that it is open to an authority not to agree with the evidence or statement filed, but it is expected to give reason for such an disagreement. Merely on the ground that a statement has been prepared afterwards should not be a reasonable basis to reject that explanation, commented by the Hon'ble Court. It is expected to give reason to reject the explanation given through the support of a cash book/statement after examining the facts and figures narrated therein. By placing reliance on this legal proposition as laid down by the Hon'ble Jurisdictional High Court we are of the view that cash book which was submitted by the assessee subsequently was required to be examined by the AO. The AO is free to confirm the veracity of that cash book so that the question of negative cash can be decided in an authenticated manner. The cash book stated to be in blue colour should not therefore be disregard in summarily manner merely on the ground that it was prepared after the inquiries were raised by the Department.

5.2 After holding the legal position as above, we have noted that the AO had examined the balance-sheet of Sri Anwar Lakhani for the Financial Year 2003-04 and noted that there was a capital which was not sufficient to explain the cash introduced by him in the books of accounts of the assessee. There was a comment of the AO that the capital as per the books was deployed in the fixed assets. During the course of hearing, we have also inquired whether the date-wise transaction from the account of the said partner can be demonstrated by placing the contra ledger account from both the concern, but it was pleaded that the total books of account have already been placed before the AO as well as before learned CIT(A) therefore it was not again furnished before the Tribunal as it was not doubted by the lower authorities. However, we are not in agreement to these submissions especially when we are not able to satisfy ourselves that there was a regular transfer of fund from the books of account of the partner to the accounts of the assessee-firm or in the books of R.H. Patel & Co. and that there was no shortage of the cash balance in the books of the assessee-firm. Rather, this is a factual aspect which can be ascertained at any point of time by examining the relevant books of accounts; hence, for this limited purpose we hereby refer this issue back to the stage of the AO so that the assessee can demonstrate that there was genuine transfer of funds introduced by the partner and that there was no shortage of the cash as alleged by the Revenue Department. For this limited purpose the matter is restored back; hence this ground of the Revenue may be treated as allowed for statistical purpose only.

6. Ground No. 2 is reproduced below:

“[2] On the fact and circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition made by the A.O. of Rs. 13,29,575/- on account of unexplained cash credits holding that the A.O. has not insisted and not appreciated that the assessee had effected sales to the prospective buyers in the subsequent year which is credited in the Profit & Loss Account against the advance taken by it from such prospective buyers and thereby the addition on account of unexplained advances is ‘double taxation’ in the hands of the assessee, ignoring the material fact that the stand taken by the assessee of having made sales to the said parties in the next year is nothing but an afterthought by the assessee to furnish his self servicing submission/details in the appellate proceedings.”

6.1 It was noted by the AO that the assessee had shown cash entries in the name of 21 persons as “advance from the customers”. The AO incorporated in the assessment order the list of those 21 persons. A query was raised and in compliance it was informed that the assessee is engaged in the business of trading of iron scrap on wholesale as well as on retail basis. It was informed that in respect of sales from few retailers the advance was received during the year under consideration at the fag end of the year and the sale was executed in the subsequent year. The sales so executed in the subsequent year were offered to tax in that year. However, the AO was not convinced and in his opinion certain sales were made after a long gap of five months and in some of the cases the parties were not found at the address given hence disbelieved the explanation of the assessee. According to him, the assessee has introduced its own money in the name of small retailers. The impugned amount of Rs. 13,29,575/- was taxed in the hands of the assessee.

7. When the matter was carried before the First Appellate Authority, learned CIT(A) has held in favour of the assessee as under:

“10. I have carefully considered both the positions. At the very outset, it must be stated that I do not agree with the position taken by the AO. She observed that iron scrap was not such a precious matter or commodity which would require a customer to pay advance. This observation is not based on any market research or survey or any statistical analysis of the business of scarp dealing. From the breaking/dismantling of ships, a lot of valuable scarp is generated, especially metals such as copper, aluminum, iron, steel etc. The body of a ship is made of solid steel plates, the quality of which is of very high standard, especially of the ship which had been built in shipyard of the western country. Such scarp is generated only when old ships are available for breaking/dismantling. It therefore becomes necessary for prospective customers to book the scrap in advance. On the other hand, the Assessee as a shrewd business person would want to create an artificial scarcity and shortage of supply in the market so that the customers pay in advance and the Assessee's liquidity is enhanced.

10.1 The next ground taken by the AO is that, the sale bills were prepared after 5 months. This cannot be a ground to treat the advances as unexplained cash credits. As mentioned by the AR, the scrap can be sold only when the ship is broken or dismantled and that cannot be done easily. On the arrival of a ship the customers book the scrap in advance which is generated in later months. This would mean that there would be a time gap between the receipt of advance and the supply. This also happens in other businesses where the demand outstrips supply. In such a situation, the AO was not justified in examining the issue from the point of view of unexplained cash credits, and thereby seeking the identity and creditworthiness of the customers and even the genuineness of the transactions. The ledger accounts clearly showed that such advances had been squared off, and the goods had been supplied in the subsequent year, which proved that the advances were not cash credits. Most importantly, the advances were included in the sale that was credited to the P & L Account, which meant that the addition of the advances as unexplained cash credits, had clearly resulted in double taxation. This was neither understood nor appreciated by the AO.”

8. From the side of the Revenue, learned Sr.D.R., appeared and argued that there was no such market practice in iron trading to take advance from the customers. She has also pleaded that there were no other instances of advance received from other customers except these 21 parties as detected by the AO. She has also argued that the unexplained cash credit was required to be taxed in the year under consideration.

9. From the side of the respondent-assessee, learned AR has explained that there was some parties who came forward with advance with a guarantee from the assessee to supply the iron in the subsequent years; therefore, the assessee has received the advance and duly credited in its books of account. In the subsequent year sales were executed and duly reflected in the books of account. Since, the said amount has already been taxed by the assessee in the next year; therefore, there was no justification on the part of the AO to disbelieve the action of the assessee. Learned AR has also placed reliance on an order of Hon'ble Gujarat High Court pronounced in the case of CIT v. Vishal Exports Overseas Limited (Tax Appeals No. 2471, 2473, 2475, 2476 of 2009 order dated 3rd of July, 2012 wherein vide paragraph 5 an observation was made as under:

“5. Revenue carried the matter in appeal before the Tribunal. The Tribunal did not address the question of correctness of the C.I.T.(Appeals)'s conclusion that amount of Rs. 70 lakhs represented the genuine export sale of the assessee. The Tribunal however, upheld the deletion of Rs. 70 lakhs under section 68 of the Act observing that when the assessee had already offered sales realisation and such income is accepted by the Assessing Officer to be the income of the assessee, addition of the same amount once again under section 68 of the Act would tantamount to double taxation of the same income.”

10. Having heard the submissions of both the sides and after perusal of the relevant record we are also of the opinion that the impugned addition was made on a wrong premise, especially when the assessee has demonstrated that the sales were executed in the subsequent year. Respectfully following the decision of Hon'ble Jurisdictional High Court, as cited supra, we hereby confirm the findings of learned CIT(A) and dismiss this ground of the Revenue.

11. Ground No. 3 is reproduced below:

“[3] On the fact and circumstances of the case and in law, the learned CIT (A) has erred in deleting the addition made by the A.O. of Rs. 12,74,550/- on account of low gross profit holding that the turnover has increased by 65 times and it was inevitable that there would be a fall in gross profit of narrow margin of 1.43% which is justifiable on the key facts of the case ignoring the material fact that the assessee had failed to substantiate the fall in gross profit by furnishing any evidence and reasonable explanation as well as has failed to reconcile the anomalies and discrepancies notices during the course of assessment proceedings.”

11.1 On a turnover of Rs. 8,91,29,384/- the assessee has shown gross profit at Rs. 62,45,956/- so the gross profit ratio was 7.01%. As against that, in the preceding year on the total turnover of Rs. 5,39,81,921/- the assessee has shown the gross profit at Rs. 45,55,519/- and the ratio of the gross profit was 8.44%. According to AO, the assessee had failed to give any reason for low gross profit. He has also mentioned that certain sales were not verifiable because the notice u/s. 133(6) were returned unserved which proved that the parties were not in existence. After mentioning few case laws he has made the addition of Rs. 12,74,550/- by applying the difference of 1.43% of two gross profit ratio.

12. When the matter was carried before the First Appellate Authority, learned CIT(A) has allowed the issue in assessee's favour as under:

“18. I find that the AO dealt with the matter in a very summary manner. Even though she may have been right prima facie in rejecting the book results on the basis of her initial findings, there was no ground for making any addition on account of low GP. The GP was just not low by any standard. The facts brought out by the AR clearly show that there was an all round development and increase in the Assessee's business, and hence in the profits, resulting in higher payment of taxes. Percentages can often be misleading. When the denominator is high the percentage automatically becomes low. In this case, the turnover had increased 65 times and it was inevitable that there would be a fall in the GP ratio which fell only by the narrow margin of 1.43%, a fall was fully justified given such facts of the case. The AO has pointed out the matter concerning the unverifiable sales, but has not brought on record the relevant facts in their totality; who were the parties to whom letters u/s. 133(6) were issued and which were the letters which had came back unserved. There is no mention of any such fact at all. All said and done, I am of the view that the AO was not justified in making the addition of Rs. 12,74,550 on account of low GP. The same will stand deleted.”

13. From the side of the Revenue, learned Sr.D.R. has supported the order of the AO mainly on the ground that in a situation when there was fall in gross profit ratio and the sales were not fully verifiable; therefore, the AO was justified in making the impugned addition.

14. From the side of the respondent-assessee, learned AR has informed that the AO had failed to notice that the assessee's sales have increased by more than 65%, which has also resulted into a better net profit on which the assessee had paid the tax. Learned AR has also argued that due to substantial increase in turnover there was a slight deduction in the profit margin which was offered to the customers by the assessee to achieve sales. The narrow margin of 1.43% was justified, especially when the sales as well as purchases were vouched.

15. Having heard the submission of both the sides, we are also of the view that the marginal decrease in the gross profit ratio was properly explained by the assessee; hence the AO was not justified in making the impugned addition. The admitted factual position is that the turnover had gone up from 5.39 crore of the last year to the turnover of the year under consideration at 8.91 crore. Further, during the course of hearing, we have inquired from learned DR about the assessment record, specifically the position of the notices issued u/s. 133(6) of IT Act to certain parties. Learned DR has placed before us a separate folder of the notices issued u/s. 133(6) of IT Act and on perusal we have noted that there were few compliances made by those parties to whom the sales were executed by the assessee. Hence, according to us the allegation of non verification of sales was not absolutely corrected. Under the totality of the facts and circumstances of the case, we find no fallacy in the view taken by learned CIT(A) and the same is hereby confirmed, consequently the ground of the Revenue is dismissed.

16. In the result, the Revenue's Appeal is partly allowed that too for statistical purpose.

B. Cross Objection No. 177/Ahd/2011

17. Ground No. 1 of the Cross Objection is reproduced below:

“1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-Tax (Appeals) has erred in confirming the addition of Rs. 111922/- made by the AO as the earning of profit generated through unaccounted purchases and sales thereon detected by the sales tax department. Therefore, the same may kindly be deleted.”

18. It was observed by the AO that there was a survey by the “Enforcement Wing of Sales Tax Department” on 3rd of January, 2005. During the course of Sales Tax survey certain unaccounted purchases to the tune of Rs. 12,37,102/- were found. On the basis of the gross profit of the assessee the Sales Tax Department had estimated the sales at Rs. 13,99,024/-. On that basis, the STO has passed the order. On those lines, the AO has held that on the said sales there was an element of gross profit of Rs. 1,11,922/- which was taxed in the hands of the assessee.

19. When the matter was carried before the First Appellate Authority, learned CIT(A) has confirmed the addition as under:

“14. I have carefully considered the action taken by the AO, as also the written submissions of the AR. To begin with, I am of the view that both the figures of sales and purchases were fictitious and were worked out on estimate, on the basis of what the Sales-tax authorities had determined as unaccounted sales and unaccounted stock. The point to note, is that, at the point of time when the Sales-tax Department surveyed the Assessee's premises, the sales of Rs. 3,41,335 was in the provisional stage, awaiting confirmation from the buyer(s), regarding the weight of the goods dispatched/received. Since, such sales was subsequently entered in the books on receipt of confirmation, for Income-tax purposes it couldn't be treated as unaccounted. Similarly, the stock of Rs. 6,39,239 may have been unaccounted on the date of the survey by the Sales-tax Department, i.e. on 03-01-2005 but once such stock had been accounted for and included in the books before the end of the financial year, it could not be said that such stock had remained unaccounted for Income-tax purposes. Therefore, there was absolutely no merit in making the addition of the sums of Rs. 3,41,335/- and of Rs. 6,39,239/- on the basis of the Sales-tax order. On the basis of such findings, the Sales-tax Authorities, with the help of a very complicated and twisted methodology worked out the sales at Rs. 13,99,024, and then, after applying the GP rate, the unaccounted purchases at Rs. 12,87,102. It has been observed by the AO that such unaccounted purchases were not correlated with any sale. This is factually incorrect as is clearly seen from the methodology adopted by the Sales-tax authorities. First, the figure of Rs. 3,41,335 was held as representing unaccounted sales, and the same figure could not be utilised by adding it to the unaccounted stock of Rs. 6,39,239 to work out another sale figure of Rs. 13,99,024. Such method is simply incomprehensible. How could one sale figure be used to work out another sale figure by applying 30% profit thereon? Further, once the profit on such transaction had been worked out at Rs. 1,11,922, no further addition could be made on account of purchase and sales, The addition of the sum of Rs. 12,87,102/- and of Rs. 13,99,024/- will therefore have to be deleted. Consequently, the only addition which would be confirmed will be the sum of Rs. 1,11,922/-”

20. From the side of the Cross Objector, learned AR has pleaded that the Sales Tax Authority has erroneously concluded that the assessee was unable to explain the stock and certain sales. In fact certain previous bills were raised which were not duly considered by the said Department. He has concluded that the impugned addition was made merely on an estimated profit on estimated purchases as well as on estimated sales. The addition being based upon estimation deserves to be deleted.

21. From the side of the Revenue, learned DR has supported the view taken by learned CIT(A).

22. Heard both the sides. Perused the record. Before us in the compilation an English translation of the sales tax assessment order is placed. According to which an investigation was carried out at the business premises in the presence of partners, Sri Anwar Lakhani. Further it was noted that the Trader i.e., the Assessee was not able to explain cash in hand of Rs. 25,282/-, stock in trade of Rs. 6,39,239/- and suspense sales of Rs. 3,35,335/-. In that order, it was also held that there was existence of unaccounted purchases which were not proved. After applying gross profit margin the unaccounted purchase amounting to Rs. 12,87,102/- was taxed. We are of the view that in a situation when an another authority has given a finding that there were unaccounted purchases then it is not fair to disregard those finding of the Sales Tax Department. In the result, we hereby confirm the findings of learned CIT(A) made in the hands of the assessee and dismiss this ground of the Cross Objector.

23. Ground No. 2 is reproduced below:

“2. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-Tax (Appeals) has erred in confirming the sales tax penalty of Rs. 98,239/- made by the AO. Therefore, the same may kindly be deleted.”

24. Facts of the case have revealed that there was a survey by the Sales Tax Department and thereupon sales were found made out of the books, which resulted into a levy of sales tax penalty of Rs. 98,239/-. It was noted by the AO that the said penalty was levied by STO(9) Surat vide an order dated 25th of April, 2005. The expenditure being penal in nature was disallowed by the AO.

25. When the matter was carried before the First Appellate Authority, the action of the AO was confirmed.

26. From the side of the Cross Objector, learned AR has pleaded that the amount paid was not penal in nature but it was compensatory in nature. The amount was paid prior to the sales tax order hence it was to be treated as an advance payment of sales tax. Learned DR has supported the orders of the authorities below.

27. Having heard the submissions of both the sides and after perusing the records of the case, we are also of the view that a penalty was imposed by the Sales Tax Department; hence, the expenditure being penal in nature is not admissible as per law. We are not convinced by the argument of learned AR; that it was compensatory in nature as it was paid as an advance payment of tax; because no such evidence was placed before us. Resultantly, we hereby confirm the findings of the authorities below and dismiss this ground of the Cross Objection.

28. Ground No. 3 is reproduced below:

“3. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-Tax (Appeals) has erred in confirming the addition of Rs. 732181/- made the AO u/s 40(a)(i)(ia). Therefore, the same may kindly be deleted.”

29. On examination of the “Transportation Expenses” it was observed by the AO that the aggregate payment made to six different parties have attracted the provisions of Section 194 C of IT Act. The AO has listed the names of the parties as follows:

“(i) Mamta roadlines Rs. 162311/- (ii) Shreenath Transport Rs. 118200/- (iii) Shreeji Roadlines Rs. 164865/- (iv) Maruti Roadlines Rs. 61900/- (v) Raj Roadways Rs. 61900/- (vi) Ambica Transport Rs. 63100/- Rs. 732181/-

30. According to AO, the assessee has not deducted TDS on the impugned contractual payment nor filed any TDS return. According to him, the Assessee had failed to deduct the tax on the payment made to truck owners/transporters; therefore, violated the provisions of Section 40(a)(ia) of IT Act. The expenditure was claimed of Rs. 7,32,181/- was disallowed.

31. When the matter was carried before the Appellate Authority, learned CIT(A) has discussed the provisions of Section 194C of IT Act and thereupon held that the AO was justified in invoking the provisions of Section 40(a)(ia). Learned CIT(A) has also rejected the alternate plea of the assessee that the amount which was below Rs. 20,000/- should not be disallowed because there was no requirement of deduction of tax at source. According to this alternate argument a sum of Rs. 3 lac should not have been disallowed by the AO. However, learned CIT(A) has rejected this alternate plea as well.

32. Learned AR has argued that there was no contract between the assessee-firm and the said transporter. Those transporters were directly appointed by the suppliers by whom the assessee has purchased the iron. The payment was made at the time of the delivery to respective truck drivers under the head “Transportation Expenses”. Those drivers/truck owners were independent persons and not at all working as a sub-contractor of the assessee. According to him, the provisions of Section 194C have wrongly been applied on the facts of the case. Reliance was placed on the following decisions:

“1. Commissioner Of Income-Tax v. Poompuhar Shipping Corporation Ltd.,, 282 ITR 3 (Mad)

2. CIT v. United Rice Ltd.,, 322 ITR 594 (P&H)

3. Commissioner Of Income-Tax v. Ess Kay Construction Co.,, 267 ITR 618 (P&H)

4.M/s. Parishram Transport v. ITO, ITA No. 351/Ahd/2009 and 255/Ahd/2010.”

33. From the side of the Revenue, learned DR has supported the orders of the authorities below.

34. We have heard the submissions and perused the orders placed before us. We have also perused the account of “transportation expenses” in the books of accounts of the assessee. As per this account cash payment was made to various road lines; namely, Mamta Road Lines, Shreeji Road Lines, Bhavesh Transport, Shreenath Transport, etc. All these payments were made in cash with the narration “paid in cash” in small amount ranging from Rs. 4,000/- to 8,000/-. Even, the AO has noted those very facts that as per the bills and vouchers cash payment was made to various truck owners/transporters. The aggregate amount paid to a particular transporter was calculated by the AO and thereafter a total disallowance in respect of the above referred six parties amounting to Rs. 7,32,181/- was made. The Assessee's preliminary contention was that the payment was not contractual in nature because there was no element of contract between the assessee-firm and those transporters. In support of this contention a judgment of ITAT ‘D’ Bench Ahmedabad is placed before us pronounced in the case of Parish Ram Transport bearing ITA No. 351/Ahd/2009 and 255/Ahd/2010 A.Y. 2008-09 order dated 5.10.2012 wherein few decisions referred as under:

“(i) Chuharmal v. Cit,, (1988) 172 ITR 250 (SC)

(ii) Ekonkar Dashmesh Transport Company v. CBDT,, (1955) 219 ITR 511 (Mad) and

(iii) Anant Mill Co. Ltd. v. CIT,, (1995) 212 ITR 72

(iv) Merilyn Shipping And Transport, 136 ITR 23 and

(v) Gujarat Road Lines v. ITO, ITA No. 3023/Ahd/2008 order dated 30.03.2012 of ITAT Ahmedabad “D” Bench.”

35. The Respected Co-ordinate Bench has placed reliance on a decision of Hon'ble Madras High Court pronounced in the case of CIT v. Pompher Shipping Corporation Ltd., 282 ITR 3 (Madras). We have noted that the fact of this case are rather more convincing because in a situation when there was no evidence of existence of any contract between the assessee and those transporters and the goods were transported to the assessee at the behest of the supplier then the assessee was not under an obligation to deduct the tax at source at the time of payment to truck drivers/owners. We, therefore, reverse the findings of the authorities below and direct to delete the addition. This ground of the Cross Objection is allowed.

36. Ground No. 4 is reproduced below:

“4. On the facts and in the circumstances of the case, the learned Commissioner of Income-Tax (Appeals) has erred in confirming the addition of Rs. 177400/- on account of excess claim of salary and Rs. 140273/- out of wages and kharajat expenses made by the AO. Therefore, the same may kindly be deleted.”

37. It was noted by the AO that in the profit and loss account salary was claimed at Rs. 4,89,400/- whereas in the salary register the amount reflected was at Rs. 3,12,000/-. According to AO, there was an excess claim of Rs. 1,77,400/- which was disallowed by the AO. Likewise in respect of Wages claimed the AO has disallowed 50% of the total expenditure in the absence of proper verification. Resultantly, total disallowance of Rs. 5,28,083/- (Rs. 1,77,400 + Rs. 3,50,083) was made. Before learned CIT(A) it was explained that in the salary register the fix salary was paid to the office staff but there was other staff to whom the salary was paid and their names have not appeared in the salary register. Likewise in respect of “Wages and Kharajat Expenses” it was informed that small time labour was hired and the payment was made. Learned CIT(A) was of the view that on this account 50% disallowance made by the AO was towards higher side. It was restricted to 20% hence the total disallowance sustained was at Rs. 3,17,673/- (Rs. 1,77,400/- + Rs. 1,40,273/-).

38. Heard both the sides. Perused the orders in the light of the compilation filed. We are of the view that merely on the basis that the some of the amounts or names were not recorded in the salary register, the impugned disallowance should not have been made. The AO was required to investigate the basis of the total salary paid as claimed in the profit and loss account. The assessee's explanation was that the salary register was maintained for “office staff but in addition to that the salary was also paid to other staff such as accounting staff, etc, hence the total expenditure was claimed in the profit and loss account. This fact has not been contradicted by Revenue Department before us. Likewise, in the case of payment of Wages etc we have seen that the AO as well as CIT(A) both have made the disallowance merely on an estimation without appreciating the explanation of the assessee. According to us, such an estimation was uncalled for, hence we hereby reverse the same. Resultantly, this ground of the Cross Objection is allowed.

39. Grounds No. 5, 6 and 7 are reproduced below:

“5. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-Tax (Appeals) was justified in deleting the addition made by the AO of Rs. 19550000/- on account of negative cash balance. Therefore, the deletion so made may kindly be upheld.

6. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-Tax (Appeals) was justified in deleting the addition made by the AO of Rs. 1329575/- on account of unexplained cash credit. Therefore, the deletion so made may kindly be upheld.”

7. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-Tax (Appeals) was justified in deleting the addition made by the AO of Rs. 1274550/- on account of low G.P. Therefore, the deletion so made may kindly be upheld.”

40. In the Cross Objection, these grounds are merely raised in support of the view taken by learned CIT(A) hence need no independent adjudication especially when the relevant issues have already been discussed in the above paragraph of this order.

41. In the result, this Cross Objection is partly allowed.

42. Finally, the Appeal of the Revenue as well as the Cross Objection of the Assessee, both are partly allowed.