1. The Assessee is a public limited company and engaged in the business of manufacturing of textile products. Income tax return showing loss of Rs. 26,92,682/- was filed for Assessment Year (‘AY’) 1995-96.
2. Regular assessment u/s 143(3) of the Income-tax Act was completed on 26/02/1998 at an income of Rs. 27,74,100/- (Addition of unexplained cash credit and interest-free loan and advances).
3. A search was conducted by the Central Excise Department on 18/05/1998 wherein it was found that the assessee was showing an inter-unit transfer of finished goods whereas it was selling the same in the domestic market to avoid the excise duty. On the basis of the same case of the assessee was reopened u/s 147 of Income-tax Act.
4. The assessee during the assessment proceedings was requested to produce the books of accounts but it expresses its inability to do so as the books of account were seized by the Excise Department.
5. Bogus sale – During the course of reopening assessment AO conduct inquiry on 10 parties who assessee had shown sales, and found they did not exist. Accordingly, the AO treated the sum of Rs. 3,75,39,177/- being 33% of the total sales shown at Rs. 11,37,55,083/- as unexplained cash credit under section 68 of the Act.
(Addition of Rs. 3,75,39,177)
6. Suppressed Sales – Further, relying on the report of the excise department it was observed that a product ‘Polyester Texturized Yarn’, quantity 1860 tonnes, was sold at 49.50/- per kg whereas fair price is Rs. 68/- per kg. This difference in price of Rs. 18.50 (68-49.50) amounts to suppressed sales. Therefore, the addition of Rs. 3,44,10,000/- (18.50 x 1860 tonnes) is made.
(Addition of Rs. 3,44,10,000)
7. Before CIT(A) and ITAT
The assessee filed an appeal with CIT(A) who deleted the addition. Further, revenue filed an appeal before ITAT, who restored the matter to AO for fresh adjudication by stating that ‘verification of books of account by the AO is necessary and essential to decide both the issues.’
8. Second innings proceedings
The AO, therefore, issued notice u/s 143(2) and asked the assessee to furnish books of accounts. The assessee again stated that books of accounts are seized by the Central Excise Department and cannot be furnished and requested that books may directly be collected from Central Excise Department.
In the absence of books of accounts, AO again confirmed the addition of Rs. 7,46,23,277/- (Rs.3,75,39,177/- under section 68 of the Act and Rs. 3,44,10,000/- suppression of sales) to the total income of the assessee.
9. Before CIT(A)
The assessee again filed an appeal before CIT(A) who allowed partial relief on suppressed sales accepting the assessee’s contention that the fair rate adopted by central excise department does not pertain to a year under consideration.
10. Before ITAT
Both assessee and revenue filed an appeal before ITAT.
The ITAT held that admittedly, the amount of sale as claimed by the assessee was offered to tax by reflecting the same in the trading and profit and loss account. This fact has not been doubted by the authorities below. However, the existence of the parties was not proved by the assessee based on the documentary evidence during the proceedings.
11. Bogus sales added u/s 68
Bogus sales added u/s 68
“The amount of sales by itself cannot represent the income of the assessee who has not disclosed the sales. The sales only represent the price received by the seller of the goods for the acquisition of which it has already incurred the cost. It is the realisation of excess over the cost incurred that only forms part of the profit included in the consideration of sales. Therefore, unless there is a finding to the effect that the investment by way of incurring cost in acquiring goods which have been sold has been made by the assessee and that has also not been disclosed, the question whether entire sum of undisclosed sales proceeds can be treated as income, answers by itself in the negative.”
The ITAT Ahmedabad has harped upon the mechanical practices adopted by the Assessing Officers to make addition u/s 68. The moot point is that a sale which already forms part of books of account cannot be added again u/s 68 due to the reasons that