Addition of Rs. 1,19,848/- on ad hoc basis without specifying/pinpointing which voucher is not verifiable
After hearing both the sides and perusing the entire material available on record along with the paper book filed by the assessee as well as the orders of the authorities below and the written submissions filed by both the sides, we observe in respect of ground No.1(i) that during the course of assessment proceedings the assessee did not give details as required by the AO in respect of certain expenses as quoted (supra) and for want of sufficient evidence/vouchers. The AO disallowed the lumpsum of the total expenditure claimed. The contention of the ld. AR is not acceptable that the adhoc disallowance cannot be made. During the course of assessment proceedings the AO specifically asked to the assessee for production of the evidence/bills and vouchers but the assessee did not produce any vouchers. He has rightly confirmed 10% of the total expenditure. The AO was unable to verify the actual expenses incurred by the assessee with proper supporting vouchers. Therefore, the ground raised by the assessee is rejected. Ld. AR referred to the decision of the CIT(A) in case of Kumar Sunrise Jewellers, we are also not binding on the decision of the CIT(A), therefore, this ground is dismissed.
FULL TEXT OF THE ITAT JUDGEMENT
This is an appeal filed by the assessee against the order dated 08.12.2017, passed by the CIT(A), Bhubaneswar for the assessment year 2013-2014, on the following grounds of appeal :-
(1) For that the order of assessment dated 21/03/2016 passed U/s.143(3) of the l.T. is otherwise is illegal, arbitrary and bad in law as the facts were neither duly appreciated by the learned AO as well as Learned GIT (A-1). Hence, the order of the learned CIT (A-1), BBSR as well as order of assessment passed by the learned AO is liable to be set aside.
1 (i) Expenses disallowed at Rs.1,19,848/-
For that the learned AO is erred in making addition of Rs. 1,19,848/- on ad hoc basis without specifying/pinpointing which voucher is not verifiable;
(ii) Disallowance of carriage inwards at Rs. 2,64,014/-
For that the Learned AO is erred in not providing sufficient opportunity to produce the vouchers to that effect even though the expenditure inevitable for the business;
(iii) Capital introduced by the partners disallowed U/s. 68 of the I.T. Act at Rs.12,30,000/-.
For that the learned AO is erred in making such additions in the hand of the firms even though all the partners are the assessees under his jurisdiction having perpetual source of income shown in previous returns;
(iv) Addition of Rs. 59,95,483/- on the ground of discrepancies in stocks found in course of survey.
For that the Learned AO is erred in making such addition without considering the stock reconciliation statement submitted in course of assessment proceedings by upholding the facts germinated in course of survey in absence of statement of partners on oath U/s. 131 of the I.T. Act;
(v) Cash purchase of gold at Rs.66,96,965/-disallowed U/S.40-A (3) of the I.T. Act
For that the learned AO is erred in making such huge addition without considering the genuine hardship of the sellers of the Tribal area as well as in contravention of provision under 6DD (d), 6DD(g), 6DD(k) of Income Tax Rules;
(vi) Sundry creditor at Rs. 9,56,250/- added as unexplained;
For that the learned AO is erred in making such addition without affording sufficient opportunity to submit the details of sundry creditor;
2. That the evidences which have not been produced before the Learned AO it has no relevancy to produce the same before the higher authority as per the decision of Hon’bie Apex Court and exclusively AO is empowered/authorized to verify the same.
3. That any other ground(s) incidental to the grounds of this case may kindly be allowed to urge at the time of hearing of this case;
4. That any other evidences incidental to the grounds of this case may be permitted to adduce at the time of hearing of this case.
2. Brief facts of the case are that the assessee derives income from purchase of gold and silver and after making different varieties of gold and silver ornaments sells the same to different customers. The assessee filed its return of income for the assessment year 2013-2014 on 01.10.2013 disclosing the total income of Rs.1,48,430/-. A survey operation u/s.133A of the Act was carried on in the business premises of the assessee firm on 04.04.2012. The case of the assessee was selected for scrutiny under compulsory category and statutory notices u/s.143(2) & 142(1) of the Act were issued to the assessee. In response to the same, the assessee appeared from time to time and produced books of accounts like purchase/sales registers, purchase/sales memos etc.. during the course of assessment proceedings, the AO found that the assessee could not produce the cash book and the vouchers for the various expenses could not be produced for verification purpose. During the course of assessment proceedings, it was noticed that the assessee has claimed following major expenses in the profit and loss account
|i)||Staff salaries||Rs. 4,72,100/-|
|ii)||Workers wages||Rs. 4,72,830/-|
|iii)||Electricity charges||Rs. 37,779/-|
|iv)||Entertainment expenses||Rs. 24,620/-|
|v)||Pooja and charity||Rs. 32,350/-|
|vi)||Staff bonus||Rs. 24,000/-|
|vii)||Staff welfare expenses||Rs. 22,449/-|
|viii)||Staff vehicle petrol||Rs. 22,652/-|
|ix)||Packs, bags and covers||Rs. 60,746/-|
|x)||Shop sadar expenses||Rs. 28,950/-|
For the above expenditure claimed by the assessee in the profit and loss account, the assessee was asked to produce the supporting bills and vouchers but the assessee could not furnish on a single occasion to the details sought by the AO. Therefore, the AO disallowed lumpsum 10% of the total expenses claimed by the assessee i.e. Rs.1,19,848/-(10% of Rs.11,98,476/-) and added back to the total income of the assessee. Further on examination of the profit and loss account the AO found that he has claimed amount of Rs.2,64,014/- towards carriage inwards but the assessee could not comply the questionnaire issued on 05.06.2015 in this regard. Therefore, the Assessing Officer (AO) added the entire amount of Rs.2,64,014/- as a bogus expenses claimed in the profit and loss account. Further on perusal of the capital account of the partner’s fresh capital contribution of the partners of Rs.12,30,000/-. In this regard the assessee submitted financial statements and explanation regarding the capital contribution by the partners before the AO but he was not satisfied and made addition u/s.68 of the Act in the hands of the partnership firm totaling to Rs.12,30,000/- .
3. During the course of survey proceedings u/s.133A of the Act on 04.04.2012, the survey team found some discrepancy in the stock maintained by the assessee and in this regard the assessee had paid Rs.8 lakhs as advance tax but while filing the return of income, however, the assessee did not disclose the stock discrepancy amount and claimed the refund for the advance tax paid which was allowed after proceeding the return. In the course of survey carried on 04.04.2012, the inventory of stock was taken and the discrepancy of following gold and silver stock was found in the course of survey operation :-
|Gold||1633.66 gm||42,42,333/-(Excess stock found)|
|Silver||35 kg.063 gm.||17,53,150/-(Shortage in stock found)|
In this regard, the AO asked the assessee as to why the stock discrepancy amount shall not be treated as income during the year under consideration. In response to the same, the assessee filed his explanation as under :-
“As regards the alleged excess stock of gold and shortage of silver on the date of survey i.e. 04.04.2012 the assessee would like to state that there is no such difference in stock as evident from the following statement :-
|Particulars||Qty. on 1.4.12 as per trading a/c.||Purchases 14.12 to 3.4.12||Sales 1.4.12 to 3.4.12||Stock on 4.4.12 as per records||Physical stock as per survey|
|Gold||8951.002 gms||40.00 gms||45.75 gms||8,945.25 gms||8,911.09 gms|
|Silver||98021.71 gms||–||730.00 gms||97,291.71 gm||63,359.00 gm|
The AO did not accept the explanation of the assessee observing that no objection/retraction was filed by the assessee soon after survey for the stock discrepancy found. Accordingly, the AO added the total amount of Rs.59,95,483/- (Gold of Rs.42,42,333/- + silver of Rs.17,53,150/-) to the total income of the assessee treating the same as undisclosed income.
4. Further in the course of survey operation, the books of accounts i.e. purchase/sales registers and purchase/sales memos were impounded. On verification of said impounded books and also the purchase/sales registers and purchase/sales memos for the balance part of the year produced in the course of assessment proceedings, the AO noticed that the assessee has purchased all the gold and silver by paying cash. Further verification of bank account, the AO found that all the times for the entire year cash withdrawal was made by issuing self-cheques. From the documents, the AO noticed that the assessee on some days the purchase of gold and silver has been made by paying cash in exceeding Rs.20,000/- to a single party/person by violating the provisions of Section 40A(3) of the Act, 1961. Accordingly a show cause notice was issued to the assessee on 22.01.2016. In response to the show cause notice the assessee filed written explanation on 17.02.2016, which reads as under :-
“A) In fact it is the usual practice of the gold and silver business concerns that on many occasions the assessee is getting new ornaments made through local karigars for which job work charges are being paid by assessee. That most of the purchases are made from village customers on the condition that the customers purchase new jewellery from the assessee. Such purchases of old gold and silver purchases were treated as credit purchases, for which there was no payment in cash ever made for those transactions since these were adjusted against sales effected to such customers by the assessee for which there is also no receipt of cash and the assessee charges making charges separately for the same. Thus such instances of old gold and silver purchases is in reality an exchange-of new jewellery for old jewellery and differential amount, if any, alone was paid by assessee. The sale of new jewellery happens on a day later to the date of old jewellery on different occasions since new jewellery would be delivered to the customers only after making changes suggested by customers. Thus, in the result, there is no outflow of cash on these exchange transactions of old gold and siver. Thus though the assessee has showed purchase of jewellery, the actual scenario is that those are credit purchase since there were contra transactions giving credit to the concerned sellers. At the time of effecting the sales, the entries were made in a reverse manner for adjusting against the credit. Such transactions could not be considered as violation of Section-40A(3), just for the reasons they are contra transactions. Thus there is no violation of the provisions of Sec.40A(3) of old gold and silver out of the total purchases. Thus these transactions are well covered by exceptions provided in Rule 6DD(d) of the IncomTax Rules.
B) It is also true fact that there are petty purchases on many days for which many customers either hesitate to disclose their names due to small value in which case the assessee usually on many occasions uses single purchase vouchers for all petty purchases. This is being done in the interest of business expediency. Thus, such instants of gold and silver purchases shall not be taken cash purchases.
C) That on many occasions the assessee used to purchase old gold and silver in surrounding villages (where there is no banking service) through our staff for price advantage to whom payments are made in cash at those villages to effect purchases in the villages and those transactions are also covered under Rule 6DD(k) of the Income Tax Rules. That any purchaser (assessee firm) of gold jewellery, especially if he is doing it as a business, would like to exploit the urgency of the seller. Prices can be brought down. The assessee is in the business of jewellery and, therefore, it would be more interested in buying old gold jewellery rather than gold from authorized dealers because of the price advantages. This aspect is also required to be kept in view. Thus, such instances of purchases of gold and silver from village people at their respective villages through staff are not cash purchases.
D) That all purchaser invoices have been signed by the parties. The assessee can not be expected to verify the address of the sellers. The assessee has to accept whatever address has been given to it. There are practical difficulties in verifying the address. Further, once the seller suspects that the assessee firm is not prepared to accept the address given by him, he may not be interested in selling the jewellery to the assessee firm. It is a question of mutual trust and once there is suspicion, the assessee’s business interest will suffer. That the assessee, in the nature of its trade, cannot insist for an identification process akin to Know Your Customer (KYC) rules applied by banks. There is ho such mandatory requirement in the business of jewellery to maintain any records in line with KYC norms of bank. In fact, a prudent businessman might not insist on such rigorous process since insistence on such conditions will be to the detriment of his business. That in the nature of the trade of the assessee it may not possible to get full address of all the customers and even if the customers give their address, there Is no means available to the assessee to ensure that such addresses ark right.
E) Section 40A(3) is not an absolute prohibition on the cash payments. The Rules 6DD provides for the circumstances in which cash payments in excess of Rs.20,000.00 can be allowed as deduction. These instances are, not cumulative but are distinctive. The purchases of gold and silver have been on Sundays and banking holidays and those are covered by exceptions given in clause(g )of Rule 6DD as no banking service is served on those days.
F) That any purchaser (assessee firm) of old gold jewellery, especially if he is doing it as a business, would like to exploit the urgency of the seller. Prices can be brought down. The assessee is in the business of jewellery and, therefore, it would be more interested in buying old gold jewellery rather than gold from authorized dealers because of the price advantages. This aspect is also required to be kept in view. Therefore, the ground realities of the business had to be seen while interpreting the provisions of Sec.40A(3) of the Act.
1) Gold purchases: (In Rs.)
1. Purchases (Through staff at villages) 16,12,420.00
2. Purchases on Sunday/bank holidays. 8,97,995.00
3. Exchange value of old gold and silver. 20.33,350.00
4. Petty purchases. 14,90,620.00
2) Silver purchases: (In Rs.)
1. Petty purchases 2,66,980.00
2. Purchases on Sundry/bank holidays. 1,30,500.00
3. Exchange value of old gold and silver. 2,85,100.00
In view of the above ground realities and in the interest of business expediency, the assessee requests your goodselves to kindly accept the above genuine explanation and the provision of Sec.40A(3) is not applicable to the assessee as explained above and the same may not kindly be treated as income of the assessee.”
5. On perusal of the balance sheet of the assessee firm it was noticed that the sundry creditors are appearing in the balance sheet of Rs.9,56,250/-. In this regard, the assessee was asked to produce the complete details i.e. name and address of the sundry creditors along with ledger accounts but the assessee did not file regarding query asked by the AO. The AO observed that the entire purchase has been made through cash, therefore, there is no question of sundry creditors is arising. Accordingly, the AO added the entire sundry creditors shown in the balance sheet as on 31.03.2013 included into the total income of the assessee.
6. Feeling aggrieved from the order of AO, the assessee filed appeal before the CIT(A). The ld. CIT(A) after considering the assessment order and submissions of the assessee, dismissed the appeal of the assessee.
7. Aggrieved from the order of CIT(A), the assessee filed appeal before the Income Tax Appellate Tribunal.
8. Ld. AR before us filed paper book and also filed written submissions which read as under :-
1. That the Appellant is a partnership firm consisting of four numbers of partners namely (i) Shri Paidisetty Manmadha Rao (PAN No.BKGPP0788M); (ii) Shri Paidisetty Satya Santosh (PAN No.AAPPP3758B); (iii) Smt. Paidisetty Sushila (PAN No.AEKPP8689J) and (iv) Shri Paidisetty Manikanta (PAN No.BKGPP0789L). All of them are income tax Assessees under jurisdiction of ITO, Rayagada. The firm is a trading retailer dealt with the business of gold and silver ornaments. The firm purchases old gold and silver jewellers from the tribal people of the locality and after making them new ornaments sales the same to the customers. The Appellant in due course of business maintained the books of accounts consisting of sale and purchase register, ledger accounts of expenditure as well as party ledger. The same was produced before the Learned AO at the time of assessment.
2. That there was a survey operation conducted in the beginning of the AY 2013-2014 i.e. on 04/04/2012 in the business premises of the Appellant Firm u/s.133-A of the I.T.Act.
4. That on the date of survey, while verifying the stock inventory of gold and silver, the Appellant has paid advance tax at Rs. 8, 00, 000/-and in I.T. return has not disclosed stock discrepancy thereby the advance tax, paid at the time of survey, was refunded to him subsequently after processing the return u/s.143 (1) of the I.T. Act. However, the Appellant has submitted its income tax return for the AY 2013-2014 on 01/10/2013 disclosing total income at Rs. 1, 48, 430/-. Due to survey conducted in the business premises of the appellant firm the department selected for scrutiny under compulsory category for the AY 2013-2014. Statutory notices were issued to the Appellant Firm and the Appellant has complied by submitted the books of accounts on different dates. The learned AO after verifying books of accounts as made the additions as under:
(i) Expenses disallowed at Rs.1,19,848/-
(ii) Disallowance of carriage inwards at Rs. 2, 64,014/-
(i) Capital introduced by the partners disallowed U/s. 68 of the I.T. Act at Rs. 12, 30, 000/-.
(ii) Addition of Rs. 59, 95, 483/- on the ground of discrepancies in stocks found in course of survey.
(iii) Cash purchase of gold at Rs.66, 96, 965/-disallowed U/s.40-A (3) of the I.T. Act.
(iv) Sundry creditor at Rs. 9, 56, 250/- added as unexplained;
5. That the Appellant firm against such order of assessment filed Appeal before the Learned CIT(A-1),BBSR vide ITA No. 0127/20162017. The learned CIT (A) vide order dated 08/12/2017 confirmed the order of learned AO without due application of mind which is not sustainable for the reasons as under:
(a) In so far as expenses disallowed at Rs. 1, 19, 848/- is concerned, it may be stated that the learned AO has disallowed the expenses on ad hoc basis without pin pointing which of the expenses vouchers are not verifiable. In the previous year of assessment, AY 2012-2013, the claim of expenditure was fully allowed. The inevitable of expenditure for the purpose of business is not at all disputed by the Department. But on ad hoc basis the learned AO disallowed 10% of the claim of expenditure without any basis while disallowing 5% of expenditure in similar situation in the case of Kumar Sunrise Jewellers vide appeal No.0128/2016-2017 dated 08/03/2018 (additional paper book under Annexure-19 at Page-175 para 5.2). Discretion cannot be used discriminatorily not power can be exercised in a pick and choose manner. Thus, on the face of the decision taken in the case of Kumar Sunrise Jewellers (supra) disallowance of expenditure at Rs. 1,19, 848/- is bad in law. Hence the disallowance of expenditure is liable to be deleted.
In so far as disallowance of carriage inwards at Rs. 2, 64, 014/- is concerned, it may be stated that this expenditure is inevitable for the business. After considering this aspect, the learned AO for the previous assessment year 2012-2013 allowed Rs. 2, 52, 612/- (2.06%) as Against the purchased turnover of Rs.1,22,61,994/-. During the year in question, the Appellant claimed carriage inwards at Rs. 2, 64, 014/- (3.62%) as against the turnover of Rs.72,96,390/-. The learned AO disallowed the entire claim without considering vouchers being filed by the Appellant which is bad in law. Thus, the addition is liable to be deleted.
In so far as Capital introduced by the partners disallowed U/s. 68 of the I.T. Act at Rs.12,30, 000/- as under:
(i) Shri Paidisetty Manmadha Rao (PAN No.BKGPP0788M) – Rs.8,50,000/-. The source is from agricultural income out of A. 19.031 dec – Page 28 of paper book, Share income from Hotel Vasudev as a partnerships firm (PAN No. AABFH8990F) –Page 50 of the paper book, share income from Sunrise Jewellers not properly verified by the AO.
(ii) Shri Paidisetty Satya Santosh (PAN No.AAPPP3758B) –Rs.Nil.
(iii) Smt. Paidisetty Sushila (PAN No.AEKPP8689J) –Rs. 1,25,000/-. The source was out of income from Agrl. land measuring A. 10.01 acrs-Annexure-16 series of additional paper book at page-1, income from house property-Page 36 of paper book and Share income from Sunrise Jewellery-page 13 to 26 of the paper book, Annexure-3.
(iii) Shri Paidisetty Manikanta (PAN No.BKGPP0789L) –Rs.2,55,000/-. The source was out of share income from Sunrise Jewellers -Annexure-series of the paper book, income from commission brokerage and Agrl. Land shown in her I.T.return.
In this regard it may be stated that the books of accounts of the firm has been audited u/s.44 AB of the I.T. Act. The books of accounts has not been rejected by the learned AO. The investment made by the partners out of their own sources of income as clearly revealed from their respective income tax returns that they have the capacities for such investment. Without verifying their returns the learned AO ought not to have came to conclusion that the partners cannot introduced capital. Thus, the addition in the hands of the partnership firm is bad in law because all the partners are the assessees under the jurisdiction of ITO, Rayagada having perpetual source of income shown in previous year returns as would be evident from Annexure-4 (series), Annexure-5, Annexure-6,Annexure-7 (series) and Annexure-8 (series) of the paper book. The identity of the partners have not been doubted by the learned AO and from their respective returns of income the creditworthiness have very much established. The learned AO had never attempted by issuing notice to the partners to establish their induction of capital in shape of cash in the firm. Hence the addition is liable to be deleted from the hand of the firm. The learned AO had never attempted.
(d) In so far as addition of Rs. 59, 95, 483/-on the ground of discrepancies in stocks found in course of survey is concerned, the learned AO failed to examine the income tax return for the AY 20122013 in so far as quantification stock is concerned based on record viz; closing stock of gold was -8951.002 gms and silver-98021.71 gms which had susceptibly taken by the learned AO as under:
|Opening stock of gold as on 1.4.2011 as stated by you as
per return of income at
Purchase as per register Sale effected upto 31.3.12(-)
|Closing stock as per stock
inventory as on 4.4.2012 Excess stock found
It may be stated that in so far as GOLD, the opening stock as taken by the Learned AO is not based on record. The Appellant has stated before the Learned AO at the time of survey that he will reconcile the figures and paid advance tax amounting to Rs. 8,00,000/-towards excess stock, if any, found. The Appellant filed I.T. return AY 2012-2013 on 30/09/2012 in which it was fairly disclosed the closing balance of gold as on 31/03/2012 at: 8951.002 gms. This stock shown in the return is well supported by the audited statement of accounts (Annexure-2, at page 10 of the paper book). The Appellant had reiterated the aforesaid facts before the learned AO as well as Learned CIT (A) as could be fortified by the written note of submission filed before both the forums (Annexure-10 series at page 71 & Annexure-13 at page 92 of the paper book).
|Opening stock of silver as on per return of income at Purchase as per register Sale effected upto 31.3.12(-)||1.4.2011 as stated by you as
|Closing stock as per stock
inventory as on 4.4.2012 shortage of stock found
It may be stated that in so far as SILVER, the opening stock as taken by the Learned AO is not based on record. The Appellant has stated before the Learned AO at the time of survey that he will reconcile the figures. The Appellant filed I.T. return AY 2012-2013 on 30/09/2012 in which it was fairly disclosed the closing balance of silver as on 31/03/2012 at :98021.710 gms. This stock shown in the return is well supported by the audited statement of accounts (Annexure-2, at page 10 of the paper book). The Appellant had reiterated the aforesaid facts before the learned AO as well as Learned CIT (A) as could be fortified by the written note of submission filed before both the forums (Anne \ure-10 series at page 71 & Annexure-13 at page 92 of the paper book).
As per the audited books of accounts which had been shown in the I.T. returns filed by the Appellant the figure of GOLD and SILVER are as under:
|1.||Opening Stock as on
|8951.002 gm||98021.71 gm|
|2.||Purchases from 1.4.12 to 3.4.12||40.00 gms||NILL|
|3.||Sale 1.4.12 to 3.4.2012 (-)||45.75gms||730.00 gm|
|4.||Stock on 4.4.12||8945.25 gms||97291.71 gm|
|5.||Physical stock as per survey||8911.09gm||63359.00 gms|
|6.||Excess/shortage (+)||34.16 gms||33932.71 gms|
The learned AO as well as learned CIT (A) have utterly failed to take note of the facts supported with documentary evidences and acted in a manner contrary to the facts placed before them. In so far as Gold is concerned there should not have been any addition and similarly in so far as Silver is concerned addition ought to have been made due to discrepancy, at best on 33932.71 gms valued at Rs.11.13.650/- based on data disclosed in the return for the AY 2013-2014. Thus, at best the rate of net profit disclosed in the return at 1.09% to be taken into consideration for addition. In this context, the Hon’ble High Court of Madhya Pradesh in the case of Balchand Ajit Kumar, 263 ITR 610 (MP) and Hon’ble Gujurat High Court in the case of CIT v President Industries, 258 ITR 654 (Guj) is referred to wherein it was held that the total sale amount cannot be treated as income. Only an element income can be taxed in case of unaccounted amount of sales.
In so far as addition of Cash purchase of gold at Rs.66,96,965/- U/s.40-A (3) of the I.T. Act is concerned it may be stated that the Learned AO in course of survey operation has gone through the purchase register and purchase memo wherein it has been pointed out that the gold purchased more than Rs. 20, 000/-without issuing cheque or draft to that extent to the customers from whom the gold and silvers have been purchased.
The detailed purchase of gold and silver in cash are as under:
|1. Purchase through staff at village||-Rs. 16,12,420/-||-Rs.Nil|
|2. Purchase on Sunday and Bank holidays||-Rs. 8,97,995/-||-Rs. 1,30,500/-|
|3. Exchange value of gold and Silver||-Rs.20,33,350/-||-Rs.2,85,100/-|
|4. Petty purchases||-Rs. 14,90,620/-||-Rs.2,66,980/-|
It may be stated that in a similarly situated case the learned CIT (A) in another assessee of similar nature of trade has deleted the addition on account of Sunday and Bank holidays, exchange value of gold and silver. In the instant case, the said addition ought to be deleted as the Department has not approached this Hon’ble Tribunal against the order of the CIT (A) vide IT Appeal No.0128/2016-2017 dated 8.3.2018 in case of Kumar Sunrise Jewellers at Rayagada.
In the instant case neither the AO nor Id. CIT(A) has doubted the genuineness of payment made in respect of goods purchased by the assessee or the identity of the sellers as the Assessing Officer has himself stated in the assessment order that the payment are made through cash. The Hon’ble Rajasthan High Court decision in case of Harshila Chordia vs. ITO 208 CTR 208 it was held that exceptions contained in Rule 6DD are not exhaustive and that the said Rule must be interpreted liberally. The genuineness of the transaction and identity of the payee has not been doubted and the business expediency has been established, the addition ought not to have been made by the learned Assessing officer.
Further, the Hon’ble Supreme Court upheld the applicability of section 40A(3) to payment made for acquiring stock-in-trade and raw materials and also affirmed the decision of Hon’ble Rajasthan High Court in case of Fakri Automobiles v. CIT  24 Taxman 578/160 ITR 504 (Raj) to the effect that the payments made for purchasing stock-in-trade or raw material should also be regarded as expenditure for the purposes of section 40A(3) of the Act. The Hon’ble Supreme Court referring to the provisions of section 40A(3) as existed at relevant point in time which talks about considerations of business expediency and other relevant factors and Rule 6DD(j) which provides for the exceptional or unavoidable circumstances and the fact that the payment in the manner aforesaid was not practical or would have caused genuine difficulty to the payee and furnishing the necessary evidence to the satisfaction of the Assessing Officer as to the genuineness of the payments and the identity of the payee has held that:
“The terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule.”
In case of Ajmer Food Products (P.) Ltd. v. JCIT [IT Appeal No. 625 (jp) of 2014, dated 28-9-2016] a similar issue has come up before the Coordinate Bench and speaking through one of us, it was held as under:
“4.5 The genuineness of the transaction as well as the identity of the payee are not disputed. Further, the appellant has explained the business expediency of making the cash payments to both the parties which has not been controverted by the Revenue. Following the decision of Gujarat High Court in case of Anupam Tele Services (supra) and Rajasthan High Court in case of Harshila Chordia (supra), the addition of Rs. 45,738/- under section 40A(3) is deleted.”
The predominant judicial view is that cash payment in excess of Rs.20,000/- would not lead to disallowance u/s.40A(3) automatically without considering the circumstances and geniuses of the transactions. The purpose of provisions of Section 40A (3) is to prevent transactions of unaccounted money. If the transactions are genuine, the provisions of section 40A (3) should not be applied mechanically. In the instant case the transactions are genuine. This view is fortified by the order of Learned CIT (A) dated 16.6.2015 in ITA No. 0400/14-15, in the case of M/s. Jarnal Singh & Co. Thus, applying the law cited above, the entire addition need to be deleted.
That in so far as addition towards Sundry creditor at Rs. 9,56,250/- as unexplained is concerned, it may be stated that the Appellant for the AY 2012-2013 had disclosed the sundry creditor at Rs. 19,25,860 under Annexure-2, page 11 of the paper book. Similarly for the AY 2013-2014 the Appellant had disclosed the sundry creditor at Rs. 19,25, 860/-. The learned AO made addition of Rs. 9,56,250/-treating the same as bogus as the Appellant submit anything in so far as addition of Rs. 9,56,250/-. But the fact remains that the Appellant has submitted the party ledger account before the learned AO who has allowed Rs.9,69,910/- and disallowed the remaining amount of Rs. 9,56,250/-. In this context, the ledger account of the Sundry Creditors under Annexure-18 series of additional paper book at page 144 to 162 clearly displays the chart of Sundry Creditors disallowed by the learned AO where the entire address with PIN number has submitted. As per Annexure-18 series the opening balance of the Sundry Creditor as on 1.4.2012 were as follows:
|Names||Closing balance as on 31.3.2012||Payment
during the AY
|Closing balance as on 31.3.2013|
|Gudula Satya Rao||Rs.64.221/-||4,200/-||60,021/-|
|B.Rama Devi||Rs. 74,715/-||7,900/-||66,815/-|
|Durga Prasad Panda||Rs.54,620/-||6,500/-||48,120/-|
The carry forward figures of Sundry Creditor of 17 numbers was at Rs.10, 33, 950/- as stated above alleged by learned AO as bogus from whom the Appellant purchased the Gold & Silver ornaments but did not pay the entire amount and in the current year has paid at Rs. 77,700/-thereby the remaining balance was at Rs. 9, 56, 250/-. Therefore, the Sundry Creditor of Rs. 9, 56, 250/- were related to previous AYs. Therefore, the closing figure of previous years ought not to have been added in the current year of assessment as clearly held by Hon’ble High Court of Rajsthan reported in 2008 (301) ITR page 404 where the Hon’ble High Court have held that sum carried forward from preceding year not an investment or cash credit generated during the relevant year not taxable as income of that year. Therefore, the opening balance of trade creditors cannot be treated as unexplained cash credited ought not to have been added u/s. 68 of the I.T. Act. Thus, the entire addition of Rs. 9, 56, 250/-is liable to be deleted.
8. On the other hand, ld. DR relied on the orders of authorities below and submitted his written submission which reads as under:-
In addition to relying on the assessment order and the appellate order following submissions are made.
I. Objection to the paper book.
1. False Certificate. The certificate to the paper book filed by the learned AR is false in view of the papers against the last si. no. (15) being in the nature of additional evidence. These are details of sundry creditors with confirmations from page 107 – 124 as annexure – 15 series. These are inferred to be additional evidence as these have not been referred to either by the AO or the CIT (A) in their respective orders. Relevant extract from the assessment order: Pg 15, paragraph 7’ Vide questionnaire issued, the following query was asked for (for) necessary compliance:-
“Complete name and address of the sundry creditors… “
However, nothing could be filed by the assessee regarding the query as asked though the assessee was reminded time and again in course of hearing for furnishing the same. ‘
At least, name and addresses of sundry creditors, which are part of these papers are explicitly on record not to have been submitted to the AO.
2. Additional evidence.
i. The additional evidence in the form of details of sundry creditors with confirmations from page 107 – 124 as annexure – 15 series against the last si. no. (15) of the paper book may kindly be regulated in accordance Rule 29 of IT (AT) Rules. Specified conditions under the Rule for the Tribunal to allow additional evidence are not satisfied:
a. The Tribunal has not required it;
b. Sufficient opportunities. Income tax authorities have not decided the case without sufficient opportunities. This fact is also relevant in the context of the argument of insufficient opportunities taken for certain grounds of appeal [1(h): disallowance . i carriage inwards and l(vi): sundry creditors added as unexplained].
A. AO. Opportunity provided has been discussed in first two paragraphs of the assessment order. ARs different from the current one were appearing before him. Hearing was fixed as many as 17 times. It was taken up on 6 occasions out of these. On other dates either no compliance was made or these were adjourned to other dates on petition for the same.
B. CIT(A). At the level of the CIT(A) opportunity provided by him has been discussed in paragraphs 2 of page 2 and 3 of his order. Hearing was fixed as many as 10 times. The only response of the assessee was an adjournment petition and a piece of written submission. Appearance followed the threat of ex-parte disposal without further opportunity. That too was only with the adjournment petition. The AR was even accommodated on an unscheduled date on his request.
C. Ground 2. As per the same paragraph of the order of the CIT(A)-
‘ For further discussion and filing of evidences in support of the written submission, the case was adjourned’ many times but there was no compliance. With a view to pre-empting a possible charge of default at the first appellate level as well, ground 2 has been taken that production of evidences before higher authority not produced before the AO have no relevance, on the basis of an uncited apex court decision whereas it is possible under specified conditions and circumstances u/r 46A of Income Tax Rules. But the AR goes on to contradict himself by surreptitiously adducing additional evidence at the end of the same paper-book with a false certificate and without the required application stating reasons therefor.
50 the additional evidence shall not be allowed u/r 29 of IT (AT) Rules.
ii. Paper-book preparation. Sub-rule 7 of Rule 18 of the IT (AT) Rules provides that paper-books not confonning to the Rule 18 are liable to be ignored. Sub-rules of the Rule 18 not conformed to are 3 and 4.
a. Sub-rule 3 requires ‘Each paper’ (emphasis added) to ‘be certified … ‘with Authority before whom it was filed.’ Authorities before whom ‘Each paper’ was filed have not been mentioned paper-wise and the certificate is false as demonstrated in paragraph 1.
b. Sub-rule 4 of Rule 18 provides for additional evidence not to form part of the same paper-book. It makes a separate paper-book mandatory for additional evidence. It also mandates an application stating reasons for filing additional evidence to accompany the separate paper-book of additional evidence. So this paper-book is liable to be ignored u/r 18(7) of IT (AT) Rules.
iii. Prayer. In case of allowing the additional evidence despite this submission it is prayed that-
a. This specific objection of sub-rules of Rule 18 not conformed to and conditions for additional evidence u/r 29 of IT (AT) Rules not satisfied, may kindly be taken on record;
b. It may kindly be recited in the order,
c. Reason may kindly be recorded as required u/r 29 of IT (AT) Rules.
II. Ground 1(iv)„ Reconciliation of AO’s computation and assessee’s submission on stock discrepancy.
The survey was 4 days into the beginning of the Previous Year (P/Y).
|Derivation aspects||AO’s computation||Assessee’s submission|
|1||Stock as per record||As on the end of the preceding P/Y. Justification-Paragraph 5, pg. 6 of the assessment order:
c In course of survey operation the partner was asked to update the purchase/sales register as on the date of survey and to calculate the stock position… ‘
|Contains transactions during the 3 days prior to the survey from the beginning of the P/Y. No purchase of silver, minor sales of silver ornaments relative to the stock as per record. Gold involves both purchase and sales making net marginal difference to the same.|
|2||Physical stock of silver ornaments.||62459 gm.||63359 gm. Slightly higher.|
|First day of the preceding P/Y.||First day of the P/Y|
|ITR||Trading a/c filed with ITR.|
|5||Stock as on 31/03/2012 or 01/04/2012||Gold (gm.)||Silver (gm.)||Gold (gm.)||Silver (gm.)|
|7247.4 3 Discre pancy with trading a/c with ITR||97522.5 Discrepancy with trading a/c with ITR||8951.002 (More)||98021.71 (More)|
|6||Basis of purchase and sale during the period||Register||Register||Nil||Nil|
|7||Purchase as per register||2979.64||48100|
|8||Purchase as per trading a/c (gm)*||4775.650•||48600||No reconciliation of the huge dichotomy between purchase as per
register impounded during survey and that as per trading a/c for the preceding
|No reconciliation of purchase as per register-impounded during survey and that as per trading a/c for the preceding P/Y|
|9||Sales as per register (gm)||2449.49||21515.5|
|10||Sales as per trading a/c (gm)||2544.44||21515.5||No reconciliation of sales as per
register impounded during survey and that as per ‘trading a/c for the preceding P/Y
|11||Discrepancy||Excess||Shortage||Shortage; No explanation.||Shortage; No explanation of the admitted shortage, even though less.|
III. Ground l(v): Cash purchase of gold-Disallowance u/s 40A(3).
i. The exception on account of Sundays and holidays to the disallowance u/s 40A(3) of Income Tax Act, of cash expenditure above the threshold is contained in the clause (j) of rule 6DD, in force during the relevant period. The exception is for payment ‘required”to be made on such days. No case has been made out why payments concerned were ‘required’ to be made on such days instead of a day earlier or a day later. The exception is not available simply because ciays orcrie experrotctrre rfappen ca de Stmakys or riaridays.
ii . Holidays apart from Sundays have not been identified for verification.
Petty purchases. The same memo allegedly reflecting consolidated purchases from a set of petty sellers could not have been issued to several sellers.
The copy of the learned AR can be served only on furnishing his e-mail ID by the office of the hon’ble Tribunal.
Further the ld. DR submitted in respect of ground Nos.1(i) & (ii) that no bills and vouchers were produced before the AO, therefore, the AO was justified to make addition which has been rightly confirmed by the CIT(A). In respect of ground No.1(iii) regarding partners capital contribution, the assessee could not justify the capital introduction that they had no capacity to introduce the capital as contributed by partners firm. The assessee has also unable to discard the findings recorded by the AO. Ld. DR in respect of ground No.1(iv) stated that during the course of survey proceedings, he had accepted that there was discrepancies found in the stocks of gold and silver and admitted and paid advance tax, if there was no discrepancies in the stocks then why the assessee paid advance tax in this regard. He also drew our attention on the balance sheet as on 31.03.2012. In respect of value of closing stock of gold and silver in which there is a totaling difference in the financial statements in respect of stock of gold and silver. Ld. DR further submitted in respect of ground No.1(iv) that the assessee had purchased gold and silver on cash, therefore, Section 40A(3) of the Act is clearly applicable and he submitted in respect of similar cases, the CIT(A) has allowed in regard to the addition u/s.40A(3) of the Act after relying on the judgment of the Hon’ble Andhra Pradesh High Court is also not applicable because the rules made in this regard is not applicable in the impugned assessment year. Therefore, the AO and CIT(A) both are justified to make and confirm the addition made u/s.40A(3) of the Act. Further the ld. DR submitted in respect of sundry creditors that there is difference in the figures mentioned in the opening balance which are not tallied from the financial statements and details submitted in the paper book. The entire details have not been supplied by the assessee before any of the authorities below, therefore, the authorities below are justified in this regard.
9. After hearing both the sides and perusing the entire material available on record along with the paper book filed by the assessee as well as the orders of the authorities below and the written submissions filed by both the sides, we observe in respect of ground No.1(i) that during the course of assessment proceedings the assessee did not give details as required by the AO in respect of certain expenses as quoted (supra) and for want of sufficient evidence/vouchers. The AO disallowed the lumpsum of the total expenditure claimed. The contention of the ld. AR is not acceptable that the adhoc disallowance cannot be made. During the course of assessment proceedings the AO specifically asked to the assessee for production of the evidence/bills and vouchers but the assessee did not produce any vouchers. He has rightly confirmed 10% of the total expenditure. The AO was unable to verify the actual expenses incurred by the assessee with proper supporting vouchers. Therefore, the ground raised by the assessee is rejected. Ld. AR referred to the decision of the CIT(A) in case of Kumar Sunrise Jewellers, we are also not binding on the decision of the CIT(A), therefore, this ground is dismissed.
10. In respect of ground No.1(ii), the AO has added to the total expenditure on carriage inwards of Rs.2,64,014/- for want of supporting documents. As the assessee purchases valuable articles from outside also, therefore, safety is necessary and there must be incurred some expenses towards carriage inwards. The total purchase of gold is Rs.98,31,994/- and silver purchased is Rs.24,30,000/-. Considering the facts of the case and looking to the nature of business of the assessee, we restrict the disallowance made by the AO and confirmed by the CIT(A) to the extent of 50% of Rs.2,64,014/-. Thus, the assessee gets relief of Rs.1,32,007/-. This ground is partly allowed.
11. Ground No.1(iii) is with regard to capital introduce by the partners, this issue is covered in favour of the assessee by the decision of CIT Vs. Metachem Industries, 245 ITR 160 (MPHC), wherein the Hon’ble High Court has held as under :-
6. So far as the responsibility of the assessee is concerned, it is satisfactorily discharged. Whether that person is an income-tax payer or not or from where he has brought this money is not the responsibility of the firm. The moment the firm gives a satisfactory explanation and produces the person who has deposited the amount, then the burden of the firm is discharged and in that case that credit entry cannot be treated to be the income of the firm for the purposes of income-tax. It is open to the Assessing Officer to take appropriate action under Section 69 of the Act, against the person who has not been able to explain the investment. In the present case, there is the concurrent finding of both the Commissioner of Income-tax (Appeals) as well as of the Tribunal that the firm has satisfactorily explained the aforesaid entries.
7. We are, therefore, of the opinion that the view taken by the Tribunal is correct and the aforesaid question is answered against the Revenue and in favour of the assessee.
Respectfully following the decision of the Hon’ble High Court, we allow this ground of appeal of the assessee. Thus, the assessee gets relief of Rs.12,30,000/-.
12. The issue raised in ground No.1(iv), is with regard to discrepancies found in the stocks of gold & silver on the date of survey i.e. on 04.04.2012 just after closure of the dates of the financial year. The survey team has pointed out some discrepancy in physical stocks taken by them to which the assessee had stated before them that he will reconcile the issue. From the statement of the assessee and audited financial statements for the financial year 31st March, 2012, the closing stock of gold is 8951.002 gms and for silver of 98021.710 gms and the total purchase and sales of gold for three days is 40 gms and sales is 45.7 gms. Therefore, the stock as on 04.04.2012 of gold is 8945.25 gms, therefore, there is net resultant excess of stock is 34.15 gms which is unreconciled. Further in respect of silver there was a closing stock as on 31.03.2012 is 98021.7 gms, therefore, lthe resultant stock as on 04.04.2012 is 97291.71 gms. These two excess/shortage of stocks have not been reconciled by the assessee and he has conceded during the course of hearing before us that there was an actual discrepancy of the excess/shortage of stocks. Both the parties were unable to explain that there was any pending assessments or appeal in regard to the financial year 31.03.2012 at any stage. Therefore, we conclude that there is no any assessments are pending for the financial year 31.03.2012 i.e. it means the closing stock shown by the assessee in his audit report for the year ending 31.03.2012 has already been accepted by the revenue authorities. The closing stocks as on 31.03.2012 shall be opening stock for financial year 2012-2013 which has not been disputed by any of the authorities below. On date of survey the survey team has calculated the excess stock found after considering the opening balance from 01.04.2011. The assessment is framed on i.e. on 21.03.2016 whereas the audit report for 31.03.2012 was prepared on 24.09.2012, which was much available at the time of framing of assessment according to which if we consider the opening balance as on 01.04.2012, there will be excess/shortage of stocks as calculated by us above but not the excess stock calculated by the survey team, therefore, the excess stock found by the survey team is not acceptable in the light of the financial statements available as on 31.03.2012. During the course of hearing ld. AR of the assessee has also accepted that there is excess/shortage of stocks. In the case of gold and silver he conceded that there is an excess stock found of 34.16gms and in case of silver 33,932.71 gms, respectively. He also conceded that the net profit rate should be added instead of entire value of the excess/shortage of the stocks. In this regard, he has also relied on the judgment as cited in his written submissions. However, we are not in agreement with the submission of the ld. AR regarding the profit element as offered by the ld. AR of the assessee. The shortage found of silver of 33,932.71 gms are conceded by the ld. AR on behalf of the assessee, therefore,, the entire value of the silver is to be added into the total income of the assessee, which has not been recorded properly in the books of accounts of the assessee. Further in respect of excess of 34.16 gms which are found excess is investments and the value of this is also to be added into the total income of the assessee. In this regard, the case law relied on by the ld. AR of the assessee is not applicable in the present case. Therefore, this ground of appeal of the assessee is partly allowed.
13. With regard to addition made u/s.40A(3) of Rs.66,96,965/- , the AO has disallowed that the assessee has violated the provisions of Section 40A(3) of the Act regarding purchase of gold and silvers. On careful consideration of the details submitted by the ld. AR of the assessee that the assessee has purchased gold and silver through staff at villages, on Sunday/bank holidays, exchange value of old gold and silver and petty purchases, no doubt the assessee has violated the provisions of Section 40A(3) of the Act but there are some instances under which the assessee may get relief as per sub-rule (k) of Rule 6DD of I.T.Rules, 1962. For completeness of our order, we would like to reproduce the provisions of Rule 6DD(k) as under :-
[6DD. No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account 2[account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as prescribed under rule 6ABBA, exceeds ten thousand rupees]
(k) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person;
No doubt that the AO has accepted that the purchases have been made by the assessee and the payments have also been made by the assessee to the sellers. We found substance on the submissions made by the ld. AR of the assessee in his written submissions which has been quoted in the above paras. In the written synopsis the ld. AR has relied on the judgment of Hon’ble Rajasthan High Court in the case of Harshila Chordia and Fakri Automobiles. The decision of Hon’ble Gujarat High Court in the case of Anupam Tele Services are squarely applicable in the present case in hand, therefore, relying the above judgments of the Hon’ble High Courts, we allow this ground of appeal of the assessee.
14. With regard to this ground No.1(vi) the ld. AR of the assessee has submitted in his written submissions that the sundry creditors appearing in the balance sheet are relating to previous assessment years and not any fresh creditors have been created and the AO has also noticed that the assessee is making payment in cash. Considering this view if the creditors are relate to the previous assessment years and no fresh creditors have been created, the addition cannot be made in impugned assessment year. To support our view, reliance can be placed on the decision of coordinate bench of the Tribunal in the case of Lycos India Limited, ITA No.02/CTK/2018, order dated 01.09.2020, wherein the Tribunal has observed as under :-
12. On merits of the case, with regard to addition of Rs.1,42,04,290/-relating to sundry creditors, there was an opening balance of Rs.1,25,24,747/- (approx) as on first date of the financial year in the books of the assessee and the closing balance is Rs.1,42,05,241/-(approx) On further perusal of the assessment order, the AO has doubted the genuineness of the sundry creditors which could not be proved by the assessee at the time of assessment as well as at the appellate stage and we further notice that the assessee has shown cost of raw material consumed of Rs.2,50,70,322.18 and he has shown also revenue from operations of Rs.4,09,10,036.44 and there is also closing stock of raw materials as well as of the work-in-progress and finished goods. From the order of AO, we find that the AO has accepted the cost of raw material consumed, work-in-progress and finished goods as well as revenue from operations but the AO has not accepted the current liabilities appeared in the books of the assessee. Without the purchases, how the manufacturing process can be done and sales can be made. If there was not genuine or bogus creditors credited by the assessee the effect must be given on the financial statements prepared by the assessee. But the AO has one-sided taken view that the purchase is bogus. This view of the AO is not correct and our view is supported by the decision of the coordinate bench of the Tribunal in the case of Smt. Sudha Loyalka ITA No.399/Del/2017, order dated 18.07.2018, wherein the Tribunal has observed as under :-
“6. After hearing both the parties and perusing the entire material on record, we find that the only effective issue in the present appeal is against the addition of Rs.3,50,94,758/- made by A.O. and confirmed by Ld. CIT(A) on the ground that closing credit balances of 26 parties could not verified. The above addition included a sum of Rs. 5,50,000/- made by AO vide page 16 of the assessment order in the name of Erica Enterprises P Ltd. This difference is due to the cheque issued but not presented for payment. The A.O. has given the list of 26 parties under two heads i.e. one list of 20 suppliers aggregating to Rs. 2,78,20,495/-i.e. where notices were issued u/s 133(6) but were received back undelivered with the remarks that no such firm/left/ koi jankari nahin / not related / wrong address etc. given at page 3-4 of the assessment order and six suppliers aggregating to Rs. 67,24,263/- in respect of which though notices were served but confirmations were not received given at page 13-14 of the assessment order. We further find that Ld. CIT (A) has confirmed the addition vide discussion made at page 25-30 of the appeal order. These amounts added are the closing credit balances of the suppliers as on 31.3.2012 which is evident from PB 42-66. In our considered opinion, the sustaining of impugned addition is not justified due to the following reasons:-
i). It has not been mentioned either by A.O or by Ld. CIT(A) as to under which section of the Income Tax Act, these closing credit balances appearing as on 31.03.2012 could be added. Therefore, non-mentioning the precise provision of law makes the impugned addition bad in law.
ii) If addition has been made u/s 68, such could not be added and that too of this much of amount as there was no sum received from these parties & that too during the year under appeal which is evident from the copies of account of these parties enclosed in the paper book at PB 42-66 which would show that either there were opening credit balances or were purchases.
iii). After perusing the PB Pg. 42-66 and PB Pg. 144, we find that purchases from these parties were aggregating to Rs 1,90,88,538/- and it has been held in the following judicial decisions that credit on account of purchases cannot be added u/s 68.
Addition under section 69 – Unexplained investment in purchases – Purchases made by assessee having been properly recorded in books of account and supported by authenticated purchase bills / vouchers for which payments were made through banking channels, and sales against these purchases are not doubted, addition under section 69 was not justified merely because suppliers could not be located and were not produced for examination – RAJESH P. SONI VS. ACIT 100 TTJ 892 (AHD ‘D’).
Section 68 cannot be applied for taxing unconfirmed sundry creditors – CIT vs. Vardhman Overseas Ltd (2012) 343 ITR 0408 (Del).
Income-Cash credit-Credit purchases-Provisions of s. 68 are not attracted to amounts representing purchases made on – credit-Tribunal- has recorded a categorical finding of fact based on appreciation of materials and evidence on record that the AO has accepted the purchases, sales as also the trading result disclosed by the assessee-It has also recorded a finding that the two amounts in question represented the purchases made by the assessee on credit-Therefore, addition of said amounts could not be made under s. 68 (COMMISSIONER OF INCOME TAX vs. PANCHAM DASS JAIN 74 CCH 0623 (All HC) Income-Cash credit-Credit purchases-Provisions of s. 68 are not attracted to amounts representing purchases made on credit -Astt. CIT vs. Har Singar Gutkha (P) Ltd. 9 DTR 604(Lucknow) Construction business-Trade purchases-Assessing Officer rejecting books while deciding purchase transactions not genuine but relying on return accepting profit-Assessing Officer ought to have proceeded under section 144-Addition under section 68 not justified-Income-tax Act, 1961, ss. 68, 144, 14S(3)-Amitabh Construction P. Ltd. vs. Addl. CIT 335 ITR 523 Glharkltand) (PARA 11-15 OF THE DECISION) Income from undisclosed sources-Addition under s. 69C-Purchases not verifiable-Alleged suppliers did not appear before the AO in response to summons issued under s. 131 despite repeated opportunities-AO treated the purchases from the said parties as non-genuine and made addition of that amount under s. 69C and also applied proviso to s. 69C-Not justified- Once sales were made by the assessee obviously purchases were made- Therefore, purchases could not be treated as unexplained expenditure and addition thereof could not be made under s. 69C or by invoking proviso to s. 69C – Nisraj Real Estate & Exports (P)) Ltd. vs. Asstt. CIT 31 DTR 456(JP ‘A’) CASH CREDIT-Failure by creditors to participate in inquiry and furnish accounts-Does not mean that creditors lacked identity-No material to show that amounts advanced by creditors in reality represented money belonging to assessee-Sums cannot be treated as cash credits-Income-tax Act, 1961-CIT v. CHANDELA TRADING CO. P. LTD. 372 ITR 68 (Cal) Income from undisclosed sources-Addition-Alleged bogus purchases-AO was not justified in making the disallowance of purchases made by the assessee merely due to non-filing of confirmation from suppliers especially when assessee has filed certificate from the bank indicating the facts that cheques issued by it were cleared and no defect in the books of account was pointed out by AO-YFC Projects (P) Ltd. vs. Dy. CIT 46 DTR 496 (Del. ‘I’)
iv). We note that Opening balances amounting to Rs. 1,60,19,598/- (PB
144) (PB 42-66) which is evident from copies of account of these parties enclosed in the paper book at PB 42-66 is not justified on the ground that when assessee has not claimed any expense to that extent during the year under appeal, where is the question of making disallowance of such amount?
v). If addition has been mentioned u/s 41(1), ingredients of section 41(1), the burden of proof which is resting on revenue in view of the following judicial decisions has not been discharged. 6.1 There is no evidence that the liability has ceased to exist and that too in the year under appeal. The very fact these amounts are being shown as payable in the balance sheet of the assessee go to establish that there was no cessation of the liability as held in the following judicial decisions: – 6.2 Impugned liabilities are very much payable by the assessee as and when demanded and unless it is demanded, these are bound to be shown as outstanding. The very fact that these liabilities are appearing in the balance sheet is a strong acknowledgement of the debts payable by the assessee as has recently been held in the case of CIT vs Tamilnadu Warehousing Corporation 292 ITR 310(Mad). It has also been held in the case of Ambica Mills Ltd vs CIT 54 ITR 167 (Guj) that liability shown in the balance sheet is a clear case of acknowledging the liability and such liability cannot be treated to have ceased so as to attract section 41(1). That being so, where is the question of holding the said liabilities as ceased to exist, more so when assessee herself is acknowledging the liabilities to be paid? How can a third party that too a quasi – judicial authority hold in the absence of any material that the liability is not payable by the assessee? Therefore, the addition made on the basis of the presumption does not have either factual or legal lags to stand. Reliance is also placed on the decision of Sita Devi Juneja 325 ITR 593(P&H). 6.3 It is settled law by umpteen number of decisions including the decision of the apex court in the case of Sugauli Sugar Works vs CIT 236 ITR 518(SC) that the cessation of the liability can be done not by the unilateral act but it can certainly be so by the bilateral act. So long as the appellant is recognizing her liability to pay to these creditors, where is the question of a quasi judicial authority to intervene & to say on behalf of sundry creditors or on behalf of the appellant that amount is not payable by the assessee? Here there is not even unilateral act, let alone the bilateral act, Therefore also, action of AO in holding the liabilities ceased to exist may please be reversed.
6.4 Even in law, the addition is not sustainable for more than one reason. Section 41(1) of the Act is a deeming fiction according to which an amount which does not have any trace of income is treated as income liable to suffer the brunt of tax. Therefore, as per the established canons of law, the burden to prove that a particular amount falls within the four corners of section 41(1) is on the shoulder of the Assessing Officer without which the addition cannot be made and if made is liable to be deleted. 6.5 The first pre-requisite for the applicability of section 41(1) is there must be a trading liability in respect of which the deduction has been claimed and allowed and burden to prove the twin conditions to the effect of the above facts, it goes without saying, is on revenue. There is not even an iota of whisper as to whether the impugned creditors were in respect of trading liability for which any deduction was ever claimed and allowed and if allowed, in which year was it allowed so on so forth. This is evident from a plain reading of the assessment order. Therefore, Ld. A.O. miserably failed to discharge the said burden in view of the following decisions and therefore this addition is liable to be deleted on this Short ground alone. There could very well be the possibility of the loan creditors or advances from the business constituents under the head of sundry creditors for which there could never be any claim of deduction having been allowed. 6.6 The A.O. has not established with evidence that the liability in respect of the above outstanding balances has ceased to exist. AO has gone on presumption and that too by placing the burden wrongly on the shoulders of the assessee. Section 41(1) does not envisage any such presumption of cessation and fix the incidence of tax thereon. 6.7 In the absence of any material having been brought on record to establish that the deduction was claimed or credit balance has been remitted, addition cannot be made u/s 41 (1) in view of the following decisions:
7· Steel and General Mills Co. Ltd vs ClT 96 ITR 438(Del) • CIT vs Nathubhai Desha Bhai 130 ITR 238 (MP) • Liquidator, Mysore Agencies P Ltd vs CIT 114 ITR 853(Karn) • K.V. Moosa Koya & Co vs CIT 175 ITR 120,124(Ker) • CIT vs Pranlal P Doshi 201 ITR 756(Guj) 6.8 The third burden which was on A.O. was to establish that cessation if at all has happened, has happened in the year under appeal. After all, liability to tax can be fixed in the year to which it pertains and to no other year. Liability to tax any ceased liability in a particular year does not depend on the action of A.O. in selecting a case in scrutiny of that year. Merely because A.O. chose to enquire about the creditors in this year and if assessee fails to establish the existence of the liability in this year (even if it is so assumed) then also it cannot be said that the liability ceased to exist only in this year and not before. Nobody can be permitted to fix the year of taxability by a conscious design or omission, be he an assessee or an Assessing Officer. Therefore, viewed from any angle, the addition made by A.O. is liable to be deleted.
6.9 Moreover, sales made by the assessee have been accepted and also the purchase have been accepted by the sales tax authorities and so much so purchase input tax credit has been given as is evident from sales tax returns at PB 18-41 and sales tax assessment order at PB 135. 6.10 Even assuming that purchase could not be got verified, the fact that the sales have been accepted such sales obviously could not have been made without purchases. Therefore, in such situation G.P. Rate of the earlier years can act as a guide as held in judicial decisions including 355 ITR 290 (Guj) PB 17 is the copy of G.P. chart of various years. 6.11 We note that PB 136-143 is the copy of profit and loss account and trading account of earlier years together with assessment orders u/s 143(3) in which G.P. at the rate of 3.52%,4.13%, 2.99%, 2.~9%, 2.60%,2:21 %, 1.88% for Financial years 2007-08, 2008-09, 2009-10, 2010-11, 2012- 13, 2013-14, 2014-15 respectively has been accepted (PB 17). 6.12. Without prejudice to above, the assessee’s sale was Rs. 6.21 Crores as is evident form profit and loss account enclosed at PB 13 and assessed income is at Rs. 3.54 Crores as is evident from the last page of the assessment order which would constitute 56% of the sale which is impossible and against all norms.
7. In view of above discussions, it is clear that the transactions were not bogus and therefore, the case laws relied upon by the Ld. DR are not applicable in this case. As far as case law relied upon by the Ld. CIT(A) as well as relied by the Ld. DR during the hearing i.e. La Medica 250 ITR 575(Del), we note that Hon’ble High Court has specifically noted in this decision that this was not the case of the assessee at any stage prior to the Hon’ble High Court whereas in this case, this was the plea taken by assessee before Ld. CIT(A) that if sale has been accepted, purchases must have been made. How can there be sale without purchases? Hence this decision does not apply.
8. In the background of the aforesaid discussions and respectfully following the aforesaid decisions, we are of the opinion that the Authorities below are not justified in making / sustaining the addition in dispute. Accordingly, the total addition of Rs.3,50,94,758/- made by the AO and confirmed by the Ld. CIT(A) is hereby deleted.
On careful perusal of the above observations of the Tribunal, we find that the issue involved in the present case of the assessee is squarely applicable to it. Respectfully following the same, we delete the addition made by the AO and confirmed by the CIT(A) on account of unexplained sundry creditors. Thus, ground No.2 of appeal of the assessee is allowed.
15. Respectfully following the above decision of the coordinate bench of the Tribunal, we delete the addition made by the AO and allow this ground of appeal of the assessee.
16. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 12/03/ 2021.