Section 68 cannot be applied in relation to the sales receipt

Shree Sanand Textiles Industries Ltd. Vs DCIT (ITAT Ahmedabad)

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

• In this connection we note that the impugned amount has been taxed twice firstly the same was treated as sales and secondly the same was treated as unexplained cash credit under section 68 of the Act.
• The assessee has explained to the authorities below that the impugned amount represents the sale which has not been doubted by the authorities below. Thus, in our considered view, the impugned amount cannot be treated as unexplained cash credit under section 68 of the Act merely on the ground that the assessee failed to furnish the details of the existence of the parties.
• The provisions of section 68 cannot be applied in relation to the sales receipt shown by the assessee in its books of accounts. It is because the sales receipt has already been shown in the books of accounts as income at the time of sale only.
• We are also aware of the fact that there is no iota of evidence having any adverse remark on the purchase shown by the assessee in the books of accounts. Once the purchases have been accepted, then the corresponding sales cannot be disturbed without giving any conclusive evidence/findings.

Addition deleted

Bogus sales added u/s 68

• Hon’ble Gujarat High Court in the case of President Industries reported in 258 ITR 654 held as under:

 “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.”

• There was no allegation by the authorities below that the assessee has made some investment in the sales which has been suppressed.
• The additions were on the basis of the information received from the central excise department. The proceedings of the central excise department had been dropped.

Addition deleted

Conclusion:

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

• Sales are already recorded in the books of accounts and the addition of the same amounts to double taxation.
• A prejudiced view on sale cannot be drawn when purchases are accepted without any reservation.
• Section 68 connotate amount credits in books of account remained unexplained need to be added. Recorded sales are not unexplained cash credits.