ITO WARD 2(1), ERODE vs. K.KULANDAIVEL, ERODE

The order of the CIT(A) is contrary to the facts of the case.

The CIT(A) erred in not appreciating the fact that it was only Mr. Sekar, a friend of the assessee who has stated that Velmurugan Traders of which the assessee is the proprietor was only a name lender and that enquiries have not been conducted with the parties from whom the purchases were actually made, i.e., M/s. Shri Tirumala Traders and M/s. ldeal Trading Company as to come to a conclusion that these two parties were the actual beneficiaries and not the assessee. 3. The CIT(A) erred in deleting the addition as not sustainable and directing the Assessing Officer to pass on the relevant materials to the Assessing Officers of M/s. Shri Tirumala Traders and M/s. Ideal Trading Company without appreciating the fact that it is still not inquired into with M/s. Shri Tirumala Traders and M/s. ideal Trading Company as to who were the beneficial Owners. 4. The CIT(A) erred in not holding the assessment as protective till such time the addition, was made in the hands of the M/s. Shri Tirumala Traders and M/s. ldeal Trading Company. 5. The CIT(A) erred in deleting the addition of 'trade advance' of Rs. 13 lakhs by holding the amount as received in the F.Y 2012-13 without appreciating the fact that the balance sheet of the assessee furnished as part of the return for the A.Y 2013-14 does not disclose any outstanding liabilities leave alone in the name and style of 'trade advances'. As is evident, the revenue is aggrieved by grant of certain relief by Ld. CIT(A) in the impugned order. The Ld. CIT-DR advanced arguments supporting the assessment framed by Ld. AO. The same has been controverted by Ld. AR. The revenue has placed on record assessment orders passed in the case of Mrs. Nisha Devi Niketan (Prop. M/s Tirumala Traders) and M/s Ideal Trading Company. Having heard rival submissions and after perusal of case records, the appeal is disposed-off as under. Assessment Proceedings 2.1 The assessee admitted returned income of Rs.2.49 Lacs and the case was selected for complete scrutiny due to low profit rate. It transpired that the assessee purchased pepper from 14.12.2013 to 21.03.2014 for Rs.1084.04 Lacs. The substantial purchase were made from Shri Tirumala Traders and M/s Ideal Trading Co. in cash which led Ld. AO to invoke the provisions of Sec.40A(3) against the assessee, 2.2 During the course of assessment proceedings, summons was issued u/s 131 and the statement of assessee was recorded on 3 - 21.12.2016, the relevant portion of which has been extracted in the assessment order. We have gone through the same. The assessee admitted that it started business of pepper during the year 2013-14 and he was maintaining the books of accounts. In reply to question no.5, the assessee admitted that he was doing the business as a bill trader only. He obtained Sales Tax / VAT registration (RC) in proprietary concern M/s Velmurugan Traders. However, the RC was stated to be utilized by one Shri Sekar against monthly payment of Rs.3000/- to the assessee. The assessee also admitted that purchase bills were received from Shri Sekar and handed over to the Auditor Shri K. Ayyasamy for accounting purposes. The sales bills were also stated to be issued by M/s Velmurgan Traders in the name of different persons as per the directions of Shri Sekar. The sale bills were also stated to be given to auditor for accounting purposes who maintained the entire books of the assessee. The assessee also admitted that he had opened a bank account and given the passbook and Cheque book to Shri Sekar. 2.3 The summons was also issued by Ld. AO to Shri S. Sekar and his statement was recorded on 21.12.2016. He admitted that the assessee was his old friend and there was a connection of pepper business. He stated to be working as a broker for pepper business on commission basis under oral agreement with M/s Tirumala Traders. He would collect bills of supply of M/s Tirumala Traders and hand over the same to the assessee. The entire consignment would be distributed to local traders against sales bills issued by M/s Velmurugan Traders. In reply to question no.8, it was admitted that 4 - the cash would be collected by officials of M/s Tirumala Traders from traders directly. 2.4 The sworn statement of Ms. P Nithya (Chartered Accountant) was also recorded on 22.12.2016. She had audited the books of M/s Velmurugan Traders and confirmed that the assessee was engaged in pepper trading. The sales as well as purchases were made in cash. 2.5 The sworn statement of Shri K. Ayyasamy, Auditor was also recorded on 22.12.2016 wherein he submitted that the books were maintained by the assessee who would bring purchase bills sales bills, cash books for preparing VAT returns etc. 2.6 Considering the fact that entire purchases were made in cash in violation of provisions of Sec.40A(3), Ld. AO disallowed cash purchases to the extent of Rs.1052.61 Lacs and added the same to the income of the assessee. Another addition of Rs.13 Lacs was made u/s 68 which was shown as trade advances stated to be received even before the business was started by the assessee. Appellate Proceedings 3. The Ld. CIT(A) held that the assessee was doing business as a bill traders. The VAT registration was used by one Shri S. Sekar against which the assessee received monthly payment of Rs.3000/-. Shri S. Sekar worked on commission basis for M/s Tirumala Traders. Therefore, the assessee merely provided accommodation entries to M/s Tirumala Traders. Entire sales and purchase were in cash. The cash was collected by officials of M/s Tirumala Traders. The assessee was merely a name lender and the assessment should be made in the hands of the beneficial owners. Accordingly, 5 - disallowance made u/s 40A(3) was deleted. The Ld. AO was directed to pass all relevant material to the assessing officer of M/s Tirumala Traders and M/s Ideal Trading Company. The trade advance of Rs.13 Lacs stated to be received from M/s Tirumala Traders was received in financial year 2012-13 which could not be added in this year and accordingly, the same was also deleted. Aggrieved, the revenue is in further appeal before us. Our findings and Adjudication 4. From the fact, it emerges that the assessee has floated a proprietary concern which has been used to carry out actual trading of pepper. The assessee has acted as a conduit in execution of these transactions on behalf of other traders. The assessee was collecting purchase bills and issuing sales bills at the instance of other party and maintaining proper books of accounts and getting them audited as required under law. Even the assessee allowed the other party to operate its bank accounts in the manner as desired by him. It is also discernible that these transactions are not mere paper transactions but actual trading has taken place. Under these circumstances and considering the fact that the assessee has connived with the transactions which have taken place through the assessee, the assessee cannot back-track from these transactions and the consequences flowing from these transactions has to follow. We find that the assessee has made sale of Rs.10.64 Crores and made purchases of Rs.10.84 Crores. The disallowance of entire purchase transactions u/s 40A(3) would virtually amount to bringing to tax entire sales proceeds which cannot be held to be justified since there is complete correlation between sale and purchase 6 - transactions. Considering the factual matrix of the case, we direct Ld. AO to estimate assessee’s income @5% of sales made by the assessee instead of making full disallowance u/s 40A(3). The separate addition of Rs.13 Lacs, in such a case, would not be required. We order so.

The appeal stands partly allowed in terms of our above order. Order pronounced on 08th February, 2023.