All surrounding circumstances to a transaction is to be examined by AO in deciding genuineness of a claim

CA Saurabh Chokhra

Brief of the case:

The ITAT Mumbai in the above cited case held that the surrounding circumstances and human probabilities attached to a transaction should be examined by considering the transactions as a whole. Therefore, AO cannot decide the geniuses only finding some unusual things  but also bound to examine the things which are indicating that the claim of assessee may  be genuine.

Facts of the case:

• The assessee is a partnership firm and is engaged in the business of trading and export of diamond and allied items. During the course of assessment proceedings, the AO made enquiries with regard to the purchases made by the assessee by issuing notices u/s 133(6) of the Act to certain parties.
• The AO disallowed the purchases made from one M/s Trichipuram Trading Pvt Ltd (TTPL) as no reply was received from the party in response to notices u/s 133(6) and the party also could not be traced on the address provided by the assessee.
• The AO suspected that the assessee should have fabricated the various documents furnished before him and accordingly he sent them for examination to the Central Forensic Science Laboratory (CFSL), Hyderabad. However, the report from CFSL was not received till the time of passing of the appellate order. Further , the AO received information from DGIT (Inv), Mumbai that the Sales tax department of Mumbai has provided list of persons who are providing hawala bills and the said list contained the name of TTPL. It was also noticed that the PAN number given by the TTPL was found to be invalid and further the said company has failed to file  accounts with Registrar of Companies.
• Accordingly, the AO has doubted about the claim of purchases made from TTPL and accordingly held that the purchases were bogus and disallowed the same.
• CIT(A) also upheld the disallowance made by the AO by treating the transaction as made in nature of accommodation entries take place in secret.
• Aggrieved assessee is in appeal before ITAT Mumbai.
  

Contention of the Assessee:

• Assessee submitted that the purchases made from TTPL was available as closing stock as at the year end and they were exported in the succeeding years .The fact that the assessee has exported the goods was not controverted. It is a known fact that the claim of export cannot be considered to be not-genuine, since the export cannot take place without clearance from Customs Authorities, another arm of Government of India.
• It was also submitted that in the report of CFSL the documents were found genuine and not tempered. And regarding non –production of another broker it was submitted that the relationship between both the brokers got strained due to the returning of goods.
• With regard to involvement of TTPL in Hawala , it was submitted that the assessee has purchased goods through a broker and hence it was not aware of antecedents of the supplier company. He further submitted that the goods have been exported, which could not have been done without receiving goods in physical condition. He further submitted that the assessee has, thereafter, reimported the same goods and returned back the same to the very same supplier.
• Further, the very fact that the assessee had to re-import the goods shows the genuineness of the claim, since a prudent business man would not normally bear the cost of re-import, payment of import duty etc.
  

Contention of the Revenue:

• It was contended that the burden to prove an expenditure claimed by the assessee always lies upon the assessee. The bills given by TTPL do not contain the description and quality of diamonds supplied by them and hence the Ld CIT(A) was justified in holding that the assessee could not prove that the said purchases were available as stock at the year end and then exported.
• He submitted that the tax authorities have rightly relied upon the decision of Hon’ble Supreme Court rendered in the case of Sumati Daya where in it was held that the tax authorities are entitled to go beyond the evidences and examine the issue from the angle of human probabilities and human conduct.
  

Held by ITAT Mumbai:

• A careful perusal of the orders passed by the tax authorities show that they have not accepted the claim of purchases of diamonds from TTPL on the reasoning that the said transaction defies the human probabilities in as much neither the seller nor the broker of the seller is traceable and seller sold diamonds to assessee on approval basis even without knowing assessee company directly.
• But tax authorities did not prefer to examine the claim of export of same goods in the succeeding year and re-import of the same goods thereafter. The surrounding circumstances and human probabilities attached to a transaction should be examined by considering the transactions as a whole.
• The assessee has furnished various documents before the assessing officer during the course of remand proceedings to support the claim of purchases. The assessee also proved that the said purchases were available in stock by linking the closing stock available as at the year end with the relevant invoices.
• If closing stock available with the assessee was not accepted as the materials purchased from TTPL, then the tax authorities should have pointed out that the closing stock represented some other purchases. the assessee has also shown that the said goods were exported subsequently and there should not be any doubt that a person cannot sell any goods without purchasing the same.
• AO did not doubt the claim of sales in the succeeding year. As a matter of fact, the sales cannot be disapproved, since the assessee has exported the goods by obtaining clearances from RBI and Customs authorities. The assessing officer has suspected the correspondences exchanged between the assessee and the client, who imported the goods from the assessee, under the impression that those papers should have been fabricated and accordingly sent them for examination to CFSL, Hyderabad.
• Further, the report from CFSL has not given any adverse report against those documents, which fact has not been controverted by the revenue. Thus, one of the basis for suspecting the transactions has been proved wrong.
• When the evidences are available with the assessee and when the tax authorities have not brought any material to contradict the same, we are of the view that the tax authorities are not justified in rejecting the evidences furnished by the assessee to support the transactions of purchases.
• In view of the foregoing discussions, there is no reason to suspect the claim of purchases of goods from TTPL, particularly when the assessee is able to support the said claim with documentary evidences, stock register, confirmations etc. and more particularly in view of the fact that the assessee has exported the very same goods.
• In tribunal’s view the theory of human probability has been applied to only part of transactions and not to the whole round of transactions. In any case, it cannot be said that the claim of the assessee defies the human probabilities, when one examines the documents furnished by the assessee.
• Accordingly the disallowance was ordered to be deleted. In result the appeal of assessee was allowed.