On mere assumptions no addition shall be made for difference in cash Balance

Fact and Issue of the case

Assessee was a partnership firm engaged in cold storage business with its head office at Sahson AO found that actual cash with the concerns of assessee was Rs.27,39,932.86/- whereas assessee had shown the cash at hand at Rs. 64,70,642.65/-, meaning thereby the cash amounting to Rs.37,30,709.79/- was unexplained. AO had observed that the excess cash shown in the balance sheet may either relate to bogus liability or unexplained cash from undisclosed source introduced by the partners. AO further remarked that assessee had not maintained regular books of a/c in the shape of cash book, ledger etc. The search & seizure action did not result in recovering any books of a/c from the business premises of the firm or from the residential premises of the partners of the firm. AO had treated Rs. 37,30,710/- as bogus liability and had made the additions u/s 68. It was held that it was not a case where money was not recorded in the books of account of assessee. Assessee maintained regular books of account in past, on which regular assessments had been framed, had not been disputed during the course of arguments. Merely because the books of account maintained by assessee were not found during the course of search was no ground to reject the books of account produced by assessee before AO.

Since the balances were coming up from the earlier years, therefore, it was the duty of AO to have scanned the entire cash book in order to say that the cash balance shown in the books of account in hand at Rs.64.70 lacs was correct or not, but AO did not do any exercise and merely comparing the seized paper from the audit report made the addition. AO was not definite in his finding while making the addition because he was of the view that either the bogus liability had been created or unexplained cash had been introduced by the partners and for both the propositions, AO had not brought any evidence on record to substantiate his allegations. On the one hand, AO relied upon the balance sheet and the audit report prepared by assessee showing excessive cash in books and on other side considered the seized paper which had shown lesser cash in hand for the purpose of making addition. It was clear that AO had done only artificial working of lesser cash as against higher cash shown in the books of account of assessee. Therefore, it was neither a case of addition u/s. 68 nor section 69A. Examining the case of assessee from every possible angle, addition of Rs.37,30,710/- was wholly unjustified.

Observation of the tribunal

Tribunal have considered the rival submissions and the material on record. The ld. Counsel for the assessee, during the course of arguments, referred to U.P. Regulations of Cold Storage Act, 1976, which regulated the functioning of cold storages and extended to whole of Uttar Pradesh. The definition of cold storage has been provided as “Cold Storage” means an enclosed chamber insulated and mechanically cooled by refrigeration machinery to provide refrigerated condition to agricultural produce stored therein, but does not include refrigerated cabinets and chilling plants having a capacity of less than 100 cubic metre. The definition of “hirer” provides “a man who on payment hires space in a cold storage for storing agricultural produce”. Licensee would mean “any person to whom a license is granted under this Act”. The meaning of “receipt” has been provided as “receipt means a cold storage receipt including a duplicate receipt issued by a licensee under this Act. According to section 5 of the above Act, no person shall carry on the business of storing any agricultural produce in a cold storage except under and in accordance with the terms and conditions of a license granted under this Act.

Permission is required for construction of cold storage from Licensing Officer on specifying circumstances. According to section 12 of this Act, every licensee shall take such care of the goods stored in his cold storage as a man of ordinary prudence would take of his own goods under similar circumstances and conditions. Section 13 provides duty of every licensee before commencement of business every day, display and exhibit in the prescribed manner on or near the main entrance of cold storage, the information regarding total capacity of cold storage, capacity physically occupied and vacant capacity. Section 14 provides, licensee shall not refuse to store potato seeds of bona fide cultivators, and further provides that no licensee shall refuse to accept the agricultural produce for storages in his cold storage without any lawful excuse. Section 15 provides, every licensee shall keep in his cold storage agricultural produce of one hirer separate from such produce of other hirer and from other produce of the same hirer, for which a separate receipt has been issued, so as to permit at all times the identification and easy delivery thereof.

Section 16 provides licensee to allow facilities for the hirers to inspect the goods. Section 19 provides above delivery of goods and provides, every licensee shall on demand made by or on behalf of the hirer, deliver the goods stored in the cold storage, provided the hirer surrenders the receipt and pays all charges due to the hirer. Every receipt so surrendered to the licensee shall be defaced and shall not be re-issued. Subject to agreement between the parties, the hirer may take partial delivery of the goods stored in a cold storage and in every such case, the licensee shall make necessary endorsement on the receipt and return it to the hirer. Section 20 provides licensee’s lien over possession of goods in cold storage until the receipt thereof is surrendered and necessary charges are paid in accordance with section 19. Section 27 provides every licensee shall maintain account books and records in such form and manner as may be prescribed. Section 32 provides, every licensee shall issue in the form prescribed, a receipt for the agricultural produce stored in his cold storage. The above salient features / provisions in the U.P. Regulation of Cold Storages Act clearly specify the rights and duties of the licensee and hirer.

The assessee claimed to have received rent from the hirer for storage of potatoes in its cold storage. Thus, the above Act clearly specified and highlighted that the licensee could run the business of cold storage on getting license from the State Government for the purpose of storage of agricultural produce and at the time of inward and delivery of goods to the hirer, the hirer shall have to surrender the receipt to the licensee. Therefore, the above Act clearly provides mandatory maintenance of receipts by the licensee in prescribed form for issue to the hirers for storage of agricultural produce. In the above Act, the licensee is not authorized to store their own agricultural produce for business purpose in the same cold storage. No violation of the above Act has been noticed or brought on record by the Assessing Officer in this case. It is, therefore, clear from the findings of the authorities below that the assessee did not violate the terms of provisions of the U.P. Regulation of Cold Storages Act, 1976.

The cold storage of the assessee has specified storage capacity. The incoming of the potatoes stored in the cold storage have not been disputed. However, it is not clarified in the orders of the authorities below as to when the assessee allegedly stored its own potatoes, in which investment has been made in purchase, where the incoming potatoes kept on hire have gone out of the storage. It is also not specified in the orders of the authorities below whether there had been further space available for keeping/storage of the potatoes of the assessee alleged to have been purchased for investment purposes. When potatoes are released from the storage to the hirer, the receipts are surrendered by the hirer and the goods are delivered to the hirer on payment of charges. The assessee in the paper book has filed large number of rent receipts which are issued to the constituents/owners of potatoes in which complete details have been mentioned to show to whom the goods have been delivered with complete particulars and weight of potatoes etc. Thus, the assessee maintained the mandatory receipts meant for keeping and delivery of the agricultural produce to the hirer in their cold storage.

No incriminating material / evidence was found in the search or survey that the assessee made any investment in purchase of potatoes or made sales thereof or earned profit thereon. During the course of search and survey, no unaccounted stock of potatoes belonging to the assessee was found. No evidence has been brought on record to prove any history of the assessee in past for dealing in potatoes or making investment in purchase of potatoes. The assessee maintained proper books of account. Gate passes are issued to release the potatoes to owners/constituents and copies retained by the assessee. Weight receipt (Taul Parchi) is issued with complete details of potatoes and the names of owners/constituents are filed in the paper book to support the above findings. Bhandaran and Nikasan Registers were also seized as A-2/22, A-2/9, A-1/1 to A- 1/5. These contain complete details of gate passes, Taul Parchi, number of bags, weight, delivery and rent etc. The same tally with the seized documents P-11 to P- 13, which is the only basis of the addition. At the remand proceedings, these documents were produced before the AO and the AO vide order sheet dated 23.07.2012 found the contention of the assessee to be correct and the receipt book and Taul Parchi support the contention of the assessee and the entries tally with the seized paper P-11 to P-13 and the AO on verification and test checking found the contention of the assessee to be correct. It would lead to irresistible conclusion that the assessee delivered back the same goods (potatoes) to their owners / constituents, who have stored their goods in the cold storage of the assessee, on surrender of rent receipts after expiry of storage period. It would also establish that the assessee did not make any investment in purchase of potatoes. Sale of potatoes by the assessee or earning of profit thereon is only assumption of the AO without corroborated by any evidence or incriminating material on record.

The explanation of the assessee is fully corroborated by Taul Parchi and the rent receipts. The assessee has filed voluminous Taul Parchies and rent receipts in the paper book, which falsify the findings of the AO. No evidence was found against the assessee at the assessment stage of dealing in potatoes. The AO wanted to tax the assessee on such unaccounted income on account of unaccounted investment in potatoes and unaccounted profit but no evidence has been brought on record to establish any such case against the assessee. Therefore, the onus on the AO to tax a particular income against the assessee has not been discharged. It appears that the addition has been made merely on the names and addresses have not been mentioned in the exit register. It was, thus, a presumption of the AO only that the assessee made unaccounted investment in the purchase of potatoes, in which there is nothing on record to support such finding of the AO. The details maintained by the assessee in Bhandaran and Nikasan registers, rent receipts, Taul Parchi clearly support the case of the assessee that in the exit register, the assessee delivered back the goods to the same constituents/owners of potatoes who stored their goods on surrender of rent receipt and on payment of rent charges. Nothing is provided that it was mandatory for the assessee to mention the names and addresses in the exit register also.

The assessee in page 71 to 72 of the written submissions has mentioned that in earlier assessment years as well as in subsequent assessment years, the assessee earned only income on account of rent, therefore, the authorities below on the principle of consistency should have accepted the claim of assessee. On examination of the Bhandaran and Nikasan register and comparison with the seized document P-11, 13 tribunal find that all the entries are same at the time of delivery of goods which were recorded at the time of inward entry of taking the potatoes for storage except that names of the parties are not mentioned. Therefore, there is nothing before the AO to support his findings of assessee making unaccounted investment in purchase of potatoes or making sales or earning profit thereon. Since no violation of the Rules of Cold Storages Act has been brought on record and the assessee maintained mandatory rent receipts as per this Special Act, which is available on record, therefore, the authorities below should not have drawn adverse inference against the assessee. In the absence of any incriminating material or evidence against the assessee, are of the view that the huge addition made against the assessee was merely based on presumption and assumptions of facts, which cannot take place of legal proof. No evidence of purchase, sales or unaccounted stock belonging to the assessee during the course of search or survey was found or established.

Thus, the assessee has been able to prove that the assessee acted only as a bailee and earned rental income. Thus, the authorities below have acted against the assessee in haste in making substantive addition without any basis and without considering entire seized material. We, therefore, do not find any justification for the authorities below to make or confirm the addition of the aforesaid nature. Tribunal accordingly, set aside the orders of the authorities below and delete the addition of Rs.23,31,28,321/-. Resultantly, the grounds of appeals of the assessee on this issue are allowed. Ground No. 3 to 15 are allowed. The assessee on ground No. 16 & 17 challenged the addition of Rs.3,01,703/- under the head ‘diesel expenses’. On examination of books of account, it was found that the purchase vouchers for diesel expenses claimed under the head generator expenses in cash are not supported by evidence. The assessee also explained before the AO that certain vouchers are misplaced or not traceable.

The AO accordingly disallowed 10% out of these expenses. The ld. CIT(A) following his order for the assessment year 2005-06, confirmed the addition. The ld. Counsel for the assessee submitted that prior to search, no disallowances have been made on this head and comparative chart is filed at PB-113. On consideration of the rival submissions, tribunal are of the view that the authorities below were justified in disallowing the expenses under this head because it was admitted by the assessee before the AO that certain vouchers are misplaced or not traceable. However, the AO has not given exact details of the amount, in which the vouchers have not been produced before him at assessment stage. The diesel is used in generator, which is necessary for running of cold storage due to frequent failure of electricity in the State of U.P. Therefore, it was necessary component/expense for running the cold storage. Considering the above, it would be reasonable and appropriate to restrict the addition by disallowing 5% of the expenses instead of 10% confirmed by the authorities below. We, accordingly, modify the orders of the authorities below and restrict the addition of disallowance to 5%. In the result, these grounds of appeal of the assessee are partly allowed.

On ground No. 18 & 19, the assessee challenged the disallowance of petrol expenses of Rs.77,099/- and disallowance of 1,17,246/- under the head depreciation on car for personal user. The AO noted that personal user of the car by the partners cannot be denied and accordingly, 20% of these expenses have been disallowed. The ld. CIT(A) following his order for the assessment year 2005-06 confirmed the additions. On consideration of the rival submissions, tribunal are of the view that the addition is excessive in nature. The assessee is a firm and running a cold storage at different branches Therefore, vehicles must have been used for the purpose of business. Nothing is specified in the order as to how the AO disallowed 20% of the expenses, but in absence of maintenance of any record or logbook of the vehicles, it could be inferred that the vehicles have been partly used for other than business purposes. Further, in preceding assessment year as per chart filed at PB- 115 prior to block period, no disallowance has been made under this head.

Therefore, the addition appears to be excessive in nature We, accordingly, modify the orders of the authorities below and restrict the disallowance to 5% of the expenses on both these disallowances of expenses. The AO is directed to disallow 5% of expenses instead of 20%. These grounds of appeal of the assessee are partly allowed. On ground No. 20 and 21, the assessee challenged the addition of Rs.5,47,928/- on account of addition under the head ‘building’. The AO found that the assessee has made addition to the fixed assets under the head building. The assessee was required to produce the bills/vouchers for verification but no compliance was made. Therefore, the matter was referred to the Valuation Cell on 19.10.2011, who had submitted the report on 09.12.2011. This report was confronted to the assessee and the assessee filed his objections in which one of the objections was that the report of the DVO is not independent and it was prepared after obtaining the details of year-wise investment in construction from the assessee. It was only the opinion of the AO and that the DVO inspected the property on 18.11.2011 whereas the construction fall in different assessments from 2004-05 to 2010-11.

The AO, however, did not accept the contention of the assessee and the difference in the cost of construction / investment as noted by the DVO and disclosed by the assessee was considered as investment from undisclosed sources in a sum of Rs.5,47,928/- and addition was accordingly made. The ld. CIT(A) following his order for the assessment year 2005-06 confirmed the addition. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and submitted that the assessee maintained proper books of account which have not been rejected and during the course of search, no incriminating material was found against the assessee. The AO did not reject the books of account of the assessee which contained day-to-day expenditure/investment recorded in the books of account. Therefore, the addition is unjustified. On the other hand, the ld. DR relied upon the orders of the authorities below.