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Mere non production of cash purchase bills does not make Purchase bogus

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ITAT AHMEDABAD BENCH ‘D’

Income-tax Officer

versus

Navjivan Synthetics

IT APPEAL NO. 226 (AHD.) OF 2009
C.O. NO. 35 (AHD.) OF 2009
[ASSESSMENT YEAR 2005-06]

Date of Pronouncement – 06.07.2012

ORDER

Kul Bharat, Judicial Member – The Revenue and the assessee have filed appeal and cross-objection respectively against the order of the learned Commissioner of Income-tax (Appeals)-V, Surat, dated October 21, 2008, passed in appeal No. CAS-V/302/2007-08.

First we take up the appeal of the Revenue

2. In this appeal the Revenue has raised the following grounds of appeal :

“1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred, in deleting the addition of Rs. 1,24,012 made by the Assessing Officer on account of work-in-progress, without appreciating the facts of the case.

2. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in deleting the addition of Rs. 4,45,327 made by the Assessing Officer on account of bogus purchases, without appreciating the facts of the case.

3. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred, in deleting the addition of Rs. 1,10,125, made by the Assessing Officer on account of rebate and discount, without appreciating the facts of the case.”

3. The facts, in brief, are that in this case return of income for the assessment year 2005-06 declaring nil income was filed on October 24, 2005. The assessee is engaged in the business of dying, finishing and printing work of art silk grey fabrics. The case was picked up for scrutiny and the assessment was framed under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”). Thereby the Assessing Officer, after discussing the case and examining the details filed by the assessee, made additions on account of disallowance under section 40(a)(ia) of the Act of Rs. 2,64,101, addition of Rs. 1,24,012 on account of work-in-progress and purchases treated as bogus of Rs. 5,55,415. The assessee, feeling aggrieved by the order of the Assessing Officer carried the matter before the learned Commissioner of Income-tax (Appeals), who confirmed the disallowance of Rs. 2,64,101 as was made on account of disallowance under section 40(a)(ia) of the Act. However, the learned Commissioner of Income-tax (Appeals) deleted the addition made on account of work-in-progress to the extent of Rs. 1,10,125 and also deleted the addition made on account of bogus purchase totalling to Rs. 5,55,452 including the amount of rebate and discount amounting to Rs. 1,10,155. The first ground is against deletion of addition made on account of work-in-progress.

4. The learned Departmental representative vehemently argued that the order of the learned Commissioner of Income-tax (Appeals) is erroneous. He strongly supported the order of the Assessing Officer. On the contrary the learned authorised representative supported the order of the learned Commissioner of Income-tax (Appeals) and submitted that the assessee has been following the same method from the inception. He submitted that work-in-progress is not shown in the books of account and this practice was being followed. It is submitted that if the work-in-progress is recorded as on March 31, 2005, the assessee should get the benefit of the same in the next financial year, i.e., on April 1, 2006. It is the submission that while calculating work-in-progress, the Assessing Officer ought to have considered the opening stock work-in-progress also. The Assessing Officer did not consider the work-in-progress in opening stock. The learned authorised representative submitted that the Assessing Officer has wrongly applied the decision of the hon’ble Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44. The learned authorised representative relied upon the judgment of the hon’ble High Court of Delhi in the case of CIT v. Mahavir Alluminium Ltd. [2008] 297 ITR 77.

5. We have heard the rival submissions and perused the material available on record. We find that the Assessing Officer has observed that on verification of the books of account, it is seen that the assessee has not shown closing stock of work-in-progress. It is pertinent to mention here that the fabric under process bears part of the expenses incurred on account of colour, chemical, wages, power and fuel, etc. Therefore, on March 31, 2005 the fabrics under process did carry such expenses which formed part of the closing stock of work-in-progress. Further, the Assessing Officer observed the valuation of closing stock of work-in-progress is to be worked out and added to the income of the assessee. However, the claim of the assessee for setting off opening work-in-progress was rejected on the ground that the assessee had never shown work-in-progress in the past year or in the subsequent years. The hon’ble High Court of Delhi in the case of Mahavir Alluminium Ltd. (supra) observed that paragraph 23, 1.3 of the guidance note itself make it clear that whenever any adjustment is made in the valuation of inventory, this will affect both, the opening as well as the closing stock. Further, it was observed by the hon’ble High Court that if any adjustment is required to be made by statute, the effect of same should be given irrespective of opening consequence for tax purpose. Section 145A of the Act begin with a non obstante clause and therefore, to give effect to section 145A of the Act, if there is a change in closing stock as on March 31, 1999 there must necessarily be a corresponding adjustment made in the opening stock as on April, 1998. We find that the learned Commissioner of Income-tax (Appeals) while dealing with this issue observed as under :

“The assessee submitted the statement/work-in-progress of the opening stock as well as the closing stock. The Assessing Officer did not consider the work-in-progress of work-in-stock. The hon’ble Supreme Court in its decision in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC) specifically stated that recalculating the value of the opening stock and the closing stock by adding overhead expenditure, I have carefully considered both the positions. I think that the work-in-progress of the working stock is also required to be considered.”

6. We do not find any infirmity in the order of the learned Commissioner of Income-tax (Appeals) in view of the law laid down by the hon’ble High Court of Delhi in the case of Mahavir Alluminium Ltd. (supra) wherein it has been held that whenever any adjustment is made in the valuation of stock, this will affect both ; opening as well as closing stock. It is evident that the Assessing Officer has not taken into account the opening stock of work-in-progress, therefore, we do not find any merit into this ground of appeal of the Revenue. This ground of appeal of the Revenue is hereby rejected.

7. Grounds Nos. 2 and 3 are interconnected hence are being taken together.

8. The next ground is with regard to deletion of addition of Rs. 4,45,327 made by the Assessing Officer on account of bogus purchases. The learned Departmental representative strongly relied upon the order of the Assessing Officer. He submitted that from the confirmation of account from M/s. Agrawal Enterprises it was noticed that there are total purchases of Rs. 12,14,042 only and there was a difference of Rs. 4,45,327 in the account of M/s. Agrawal Enterprises and the ledger of M/s. Agrawal Enterprises submitted by the assessee before the Assessing Officer wherein the assessee has shown total purchases of Rs. 16,59,369. He submitted that the Assessing Officer had also noticed from the confirmation that it had allowed a discount of Rs. 1,10,125 to the assessee.

9. We have heard the rival contention and perused the material available on record. We find that the learned Commissioner of Income-tax (Appeals) has dealt this issue as under :

“This issue has been dealt with in paragraph 4.5 of the assessment order. The Assessing Officer asked for contra account of five parties. The assessee submitted all the contra confirmation accounts except M/s. Agrawal Enterprise. The assessee repeatedly demanded the contra confirmation account of the assessee from the books of M/s. Agrawal Enterprise. M/s. Agarwal Enterprise asked for the copy of account in the books of the assessee. The assessee immediately sent the copy of account of M/s. Agarwal Enterprise from its books of account. Even then, M/s. Agarwal Enterprise did not send the contra confirmation account to the assessee. Thereafter, the assessee vide its letter dated December 12, 2007 informed the Assessing Officer to collect the contra confirmation from M/s. Agarwal Enterprise.

The assessee submitted the copies of accounts of M/s. Agarwal Enterprise for the financial years 2004-05, 2005-06 and 2006-07. The assessee showed the payments by account payee cheques to the tune of Rs. 12,02,240 to M/s. Agarwal Enterprise in the financial year 2005-06 and submitted the copy of bank statements for proving the cheques clearance. The assessee further submitted the copies of bill, which shows and which were not shown in the accounts. The assessee further submitted the copies of delivery challans and weighing slips. All these material shows that the assessee had shown all the purchase bills while M/s. Agarwal Enterprise has not shown cash sales bills.

M/s. Agarwal Enterprise has allowed rebate and discount amounting to Rs. 1,10,125 when one truck of lignite valuing to about Rs.20,000 who will give rebate and discount of about 5 trucks. I have carefully considered both the positions. I do not think that any disallowance could be made from the cash purchase as bogus and non-verifiable. Regarding rebate and discount amounting to Rs. 1,10,125 the assessee states who will give such a huge amount as rebate and discount, but it is done for making adjustment of accounts and at the same time wrongly claimed as rebate and discount in the profit and loss account. The addition of the sum of Rs. 4,45,327 as bogus purchase and Rs. 1,10,125 being the amount of rebate and discount, totalling to Rs. 5,55,452 will therefore, stand deleted.

It is pertinent to note that this however will not prevent the assessee to inform the Assessing Officer of the supplier party about these findings so that the issue can be examined for ascertaining the tax implication at the supplier’s end. Prima facie it seems that M/s. Agarwal Enterprise has not shown these sales to the appellant, in their books of account.”

10. The learned authorised representative strongly supported the order of the learned Commissioner of Income-tax (Appeals). He submitted that it is categorically recorded by the learned Commissioner of Income-tax (Appeals) that the assessee had submitted copy of the delivery challan and weighing slips, etc., evidencing that the assessee had in fact made purchases from M/s. Agrawal Enterprises. He submitted that for the lapse on the part of M/s. Agrawal Enterprises, the assessee cannot be made to suffer. The assessee has furnished the evidence in support of its claim of the purchases, therefore, its purchases cannot be termed as bogus merely on the basis that such purchases were not recorded by the seller in his books of account. So far rebate and discount are concerned, the assessee had never received rebate and discount and such rebate and discount who will give when the price of lignite is of Rs. 20,000.

11. We find that the Assessing Officer has observed that in response to show-cause notice issued to the assessee specifying the defects noticed in M/s. Agrawal Enterprises, the assessee has simply escaped by saying that it is not their mistake if the seller did not show the cash sales in their books of account. It was further observed by the Assessing Officer that on verification of the copies of account furnished by the assessee, it was noticed that the assessee had claimed to have made cash purchase from M/s. Agrawal Enterprises during the period October 22, 2004 to December 31, 2005 however, verification of the contra confirmation filed by M/s. Agrawal Enterprises, it was noticed that they had not shown such cash in their account. The contention of the assessee was not found acceptable by the Assessing Officer because of the reason that the assessee could not explain the necessity of making payment of the accounts below Rs. 20,000 when full amount exceeded Rs. 20,000. Moreover, it was noticed from October 22, 2004 the assessee had shown purchase bill numbers from Sl. Nos. 185 of 196 and from January 10, 2005 the Sl. No. of the bills start from 209. This showed certain discrepancies in the bills. The bills started from Sl. No. 209 dated January 10, 2005 onwards only finds space in the account of supplier M/s. Agrawal Enterprises. In such circumstances, the cash purchases claimed to have been made by the assessee was not verifiable. We find that the learned Commissioner of Income-tax (Appeals) has recorded that the material produced in the form of copies of bills were recorded into the books of assessee but were not recorded into the accounts of M/s. Agrawal Enterprises. He further recorded that the assessee has submitted the copies of delivering challans and weighing slips. On the basis of material placed before him he came to the conclusion that the assessee had shown all the purchase bills while M/s. Agrawal Enterprises has not shown all the purchases bills and cash sales. This finding is not controverted by the Revenue by placing the material evidence. In this view of the matter we do not find any infirmity in the order of the learned Commissioner of Income-tax (Appeals) therefore, this ground of the Revenue’s appeal is rejected.

12. The next issue is with regard to discount and rebate. Since the Assessing Officer has categorically observed that such amount reflected into confirmation of accounts of M/s. Agrawal Enterprises, the contention of the assessee is that such huge discount and rebate would not have been given as seeing the value of material. Moreover, the Commissioner of Income-tax (Appeals) has given a finding that M/s. Agrawal Enterprises has not recorded the correct transaction in its books of account. The Revenue has not brought any material to rebut the finding of the learned Commissioner of Income-tax (Appeals). This contention of the assessee is acceptable on the basis that in the normal practice nobody would give such a huge rebate. This ground of the Revenue’s appeal is dismissed.

13. In the result, the appeal of the Revenue is dismissed.

14. Now we take up the cross-objection of the assessee.

The assessee has raised the following ground of cross-objection :

“The Commissioner of Income-tax (Appeals) erred in upholding the disallowance of Rs. 2,64,101 though there was no breach of section 40(a)(ia).”

15. The only issue for determination is whether the assessee is liable to deduct tax under section 194C of the Act. The contention of the learned authorised representative is that since no payment was in excess of Rs. 20,000 therefore, the assessee was not liable to deduct tax. The learned authorised representative submitted that the authorities failed to appreciate the fact that there was no contract between the assessee and transporters. He submitted that GMDC supplies lignite from their various mines and such supply is affected through various transporters as such there was no contract between the assessee and the transporters. On the contrary, the learned Departmental representative supported the order of the authorities below on this issue.

16. We have heard rival submissions perused material available on record. We find that the Assessing Officer has observed as under :

“As regards non-deduction of TDS on transportation charges paid to transporters, it is noticed that though the assessee was liable for deduction of TDS on transportation under section 194C of the Income-tax Act, the assessee has not made TDS at all on the such payments, thereby liable for disallowance of whole such expenditure under section 40(a)(ia) of the Income-tax Act. In this connection, there is no force in the contention put forth by the assessee for not making TDS from the payments made to transporters. It is mandatory on the part of the assessee to deduct tax at source when the aggregate value of contract exceeds Rs. 50,000 in a financial year. Up to September 30, 2004, the assessee was not liable to deduct tax under section 194C since no payment in excess of Rs. 20,000 was made to a single person as was the law till that date. However, after October 1, 2004, the law was amended to provide deduction of tax when the aggregate value of contract exceeds Rs. 50,000 in a financial year. On verification of both these two accounts it is noticed that the assessee has made payment to the following parties which is liable for deduction of tax under section 194C of the Income-tax Act but still not deducted and paid to the Government account, as per section 22(1) of the Income-tax Act. In view of the above, the transportation charges paid on which the TDS has not been made and not deposited in the Government account are liable to be disallowed under section 40(a)(ia) of the Income-tax Act.”

17. Further learned Commissioner of Income-tax (Appeals) has decided this issue as under :

“During the proceedings before me, the assessee explained that the transportation expenses were actually incurred and xerox copies of all the bills were submitted. The assessee explained its case vide its letter dated December 12, 2007 and December 24, 2007 and vide submission dated August 11, 2008. M/s. Radhey Transport of Char Rasta, Jagadia, Dist : Bharuch 393110 was paid Rs. 1,24,414 by way of transport charges is assessed to income-tax on P. Account No : ADZPP-8246-K and M/s. Pooja Roadways of Char Rasta, Jhagadia, Dist : Bharuch 393110 was paid Rs. 1,07,721 as transport charges and also assessed to income-tax bearing P. Account AEUPP-7806-H. The total of two transport agencies comes to Rs. 2,64,101 (Rs. 1,24,414 + 1,07,721). The total addition of Rs. 2,64,101 was made, out of this Rs.2,32,135 as stated above explained and hence the difference of Rs. 31,966 (Rs. 2,64,101 – Rs. 2,32,135), which is below Rs. 50,000 and hence not required to deduct tax. The addition of the sum of Rs. 2,64,101 has therefore, been sought to be deleted.

I have gone through the rival contentions and applied my mind to the issue. I see no merit in the appellant’s argument who has tried to complicate the issue and stretched a simple logic too far. The crux of the matter is that the total payment on which tax was to be deducted is Rs. 2,64,101. This has not been done and therefore the same has been justifiably disallowed as per the provisions of section 40(a)(ia) of the Act. I do not therefore see any infirmity in the Assessing Officer’s action and the same is upheld.”

18. We have given one thoughtful consideration to rival submissions of the parties. Section 194C(1) of the Act mandates deduction of tax by a person who is responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract between the contractor and a specified person. Further, in case, the sum credited or paid or likely to be paid are credited to the account of the contractor or the contractor if such sum does not exceed Rs. 20,000 no tax is deductible in terms of section 194C(5) of the Act, however, if the aggregate of the amount paid during the financial year exceeds the limit prescribed by the provision to section 194C(5) of the Act. Therefore, from the plain reading of the provision it is evident that tax is deductible if the payment is made for carrying out a work in pursuance of a contract. Since the aggregate amount paid exceeds the limit prescribed under section 194C(5) of the Act, therefore, the first argument of the assessee is not acceptable. The other argument that there was no contract between the transporter and the assessee is also not acceptable in view of the fact, although the transporter was assigned by GMDC, but the payment to such transporter is made by the assessee on execution of such work. The opening line of section 194C(1) makes it clear that the assessee was liable to deduct tax since it reads any person responsible for paying any sum to any resident. In this case admittedly the assessee was responsible for paying sum to the transporter. In this view of the matter we do not find any infirmity into the order of the learned Commissioner of Income-tax (Appeals). Therefore, this ground of the cross-objection is dismissed.


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