Case Law Details
Diamond Food Products Vs CIT (Kerala High Court)
Kerala High Court held that allegation regarding bogus purchases of raw-material i.e. paddy without verification of books of accounts including stock register, ledger, etc. is not justifiable in law. Accordingly, disallowance u/s. 37(1) of the Income Tax Act set aside.
Facts- The appellant had filed its return of income declaring a total income of Rs.71,15,290/- by declaring a net profit of 0.91%. While completing the assessment, the assessing authority considered the appellant’s claim for deduction of the amount spent for purchasing paddy from small farmers and, which was used in connection with the manufacture of food products by the appellant. Although the appellant had furnished the names of 8503 persons from whom he had supposedly purchased paddy, the assessing authority found that no confirmation was received from any of those persons to support the appellant’s contention that they were the persons who supplied paddy to the appellant. The assessing authority, therefore, disallowed the deduction claimed by the appellant towards the purchase of paddy from the said persons and added this to the income declared by the appellant. For the sake of completion of the facts, we might point out that there was an inconsistency in the order of the assessing authority in the treatment of the said amount inasmuch as in one part of the assessment order he refers to the provisions of Section 40A(3) as the basis on which the additions are made whereas in a latter part of the assessment order, the disallowance is traced to Section 37(1) of the Income Tax Act.
First appellate authority confined the addition to Rs. 16,14,411/-. Appellate Tribunal restored the order of assessing authority. Being aggrieved, the present appeal is filed.
Conclusion- Held that in the instant case, as rightly noticed by the First Appellate Authority, it is not in dispute that the assessing authority did not verify the books of accounts including the Stock Register, Ledger, Cash Purchase Register, etc., to see whether the allegation regarding bogus purchases of raw material (paddy) was justified or not. In the absence of such verification, we are of the view that there was no justification for proceeding on the assumption that there was no purchase of paddy from unregistered farmers, and for making additions to the income declared by the assessee by disallowing the expenses claimed under Section 37(1) of the Income Tax Act. In our view, the findings to the contrary of the Appellate Tribunal cannot be legally sustained and it is only the order of the First Appellate Authority that confines the disallowance to an amount of Rs.16,14,411/- that can be legally sustained.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
In this Income Tax Appeal, the appellant assessee M/s. Diamond Food Products impugns the order dated 28.04.2023 of the Income Tax Appellate Tribunal, Cochin Bench, Ernakulam in ITA No.51/Coch/2017.
2. The brief facts necessary for the disposal of the appeal are as follows:-
For the assessment year 2013-14, the appellant had filed its return of income declaring a total income of Rs.71,15,290/- by declaring a net profit of 0.91%. While completing the assessment, the assessing authority considered the appellant’s claim for deduction of the amount spent for purchasing paddy from small farmers and, which was used in connection with the manufacture of food products by the appellant. Although the appellant had furnished the names of 8503 persons from whom he had supposedly purchased paddy, the assessing authority found that no confirmation was received from any of those persons to support the appellant’s contention that they were the persons who supplied paddy to the appellant. The assessing authority, therefore, disallowed the deduction claimed by the appellant towards the purchase of paddy from the said persons and added this to the income declared by the appellant. For the sake of completion of the facts, we might point out that there was an inconsistency in the order of the assessing authority in the treatment of the said amount inasmuch as in one part of the assessment order he refers to the provisions of Section 40A(3) as the basis on which the additions are made whereas in a latter part of the assessment order, the disallowance is traced to Section 37(1) of the Income Tax Act.
3. In an appeal preferred by the appellant before the First Appellate Authority, the said authority found that the assessing authority had not found any defect in the audited books of accounts of the assessee including the Stock Register and the Cash Purchase Register that reflected the trade results of the assessee. He further found that it was not in dispute that the appellant had maintained complete quantitative details of purchases and had also maintained Day Book, Ledger, Stock Register, Cash Purchase Register, etc., and these were also produced before the assessing authority for verification. He therefore concluded that in the absence of a rejection of the trade results as borne out by the said accounts maintained by the appellant, a disallowance in respect of expenses incurred for purchase of a raw material, could not have been made. The First Appellate Authority, however, found that the price declared as the purchase price of paddy from unregistered farmers was Rs.14.92 per Kg as against the average price of Rs.14.82 per Kg at which the paddy was purchased from registered farmers and farmers societies. He therefore, disallowed the expenses claimed towards the purchase of paddy to the extent of Rs.0.15 per Kg in respect of those purchases effected from unregistered dealers. The net addition made to the income declared by the appellant assessee was thus confined to Rs.16,14,411/-.
4. Both the assessee and the revenue preferred appeal before the Appellate Tribunal. The assessee’s appeal was in the nature of a cross objection to the revenue’s appeal. The Tribunal by the impugned order restored the findings of the assessing authority. The reasoning discernible from the order of the Appellate Tribunal appears to be that the burden of proof to show the actual incurring of expenses, to the extent claimed as deduction, is always on an assessee, and viewed from that angle, the appellant herein had not discharged the burden by adducing evidence with regard to the actual incurring of the stated expenses while purchasing paddy from unregistered farmers. Finding thus, the Appellate Tribunal proceeded to set aside the order of the First Appellate Authority and restore the order of the assessing authority.
5. In the appeal before us, the appellant assessee raises the following substantial questions of law:-
a) Was the tribunal justified in confirming the disallowance of the assessee’s claim of purchase expenses of Rs.5,53,20,069 (of paddy) treating it as not genuine in the facts and circumstances of the case.
b) Has not the tribunal erred in treating the entire purchase of paddy worth Rs.5,53,20,069/- as bogus without disturbing the trade results of production of Rice as revealed in the Audited Report available before the tribunal, in the facts and circumstances of the case.
c) Has not the tribunal failed in appreciating the fact that when the purchase alone is disallowed and the production results returned are accepted as such, there would be more yield (in this case rice) than the raw material (in this case Paddy) used for production, in the facts and circumstances of the case.
d) Has not the tribunal erred while deciding the appeal filed by the revenue, in not bearing in mind the decisions of Hon’ble High Courts of Bombay and Gujarat in [2020]424 ITR 338 (Bom) : Principal Commissioner of Income Tax v. Rishbhdev Technocable Ltd; and [2013]355 ITR 290(Guj) : Commissioner of Income Tax v. Bholanath Poly Fab Pvt. Ltd respectively, where it was held that whether parties from whom such purchases were or whether such purchases themselves were bogus, not the entire purchase price but the profit embedded in purchase alone is liable to tax.
6. We have heard Sri. Marthanda Varma Pandalai. K the learned counsel appearing for the appellant assessee and Sri. Jose Joseph the learned Standing counsel for the Income Tax Department.
7. On a consideration of the rival submissions, we find that, for the reasons that are to follow, this appeal must necessarily succeed. While the Appellate Tribunal in the impugned order relies on the decisions in CIT v. Calcutta Agency Ltd. [(1951) 19 ITR 191 (SC)], Lakshmiratan Cotton Mills Co. v. CIT 1(1969) 73 ITR 634 (SC)], Ram Bhadhur Thakur 1(2003) 261 ITR 390 (Ker) (FB)], Travancore Titanium Product Ltd. v. CIT 1(1966) 60 ITR 277 (SC)], CIT v. Radha Kishan Nandlal 1(1975) 99 ITR 143 (SC), Udhavdas Kewalram v. CIT 1(1967) 66 ITR 462 (SC)], Omar Salay Mohamed Sait v. CIT 1(1959) 37 ITR 151 (SC)], CIT v. R. Venkataswamy Naidu 1(1956) 29 ITR 529 (SC)], and Dhiraj Lal Girdharilal v. CIT 1(1954) 26 ITR 736 (SC)] we are of the view that the said decisions have no application to the peculiar facts in the instant case. The said decisions deal with cases where the expenses that were sought to be disallowed by the assessing authority were unproven ones that were incurred by the assessee in the course of his business. They were not, however, in the nature of expenses incurred for purchase of a raw material. The Appellate Tribunal overlooked the fact that where the expense claimed is in connection with purchase of a raw material for the business, the rejection of the books of accounts maintained by the appellant assessee was a necessary precondition for proceeding with an estimation of income by disallowing the expenses stated by the assessee to have been incurred for deriving that income. In the instant case, as rightly noticed by the First Appellate Authority, it is not in dispute that the assessing authority did not verify the books of accounts including the Stock Register, Ledger, Cash Purchase Register, etc., to see whether the allegation regarding bogus purchases of raw material (paddy) was justified or not. In the absence of such verification, we are of the view that there was no justification for proceeding on the assumption that there was no purchase of paddy from unregistered farmers, and for making additions to the income declared by the assessee by disallowing the expenses claimed under Section 37(1) of the Income Tax Act. In our view, the findings to the contrary of the Appellate Tribunal cannot be legally sustained and it is only the order of the First Appellate Authority that confines the disallowance to an amount of Rs.16,14,411/- that can be legally sustained. We, therefore, allow this appeal by setting aside the impugned order of the Appellate Tribunal, restoring the order of the First Appellate Authority, and answering the questions of law raised in favour of the assessee and against the revenue to the extent indicated above.
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