LILLIPUT KIDWEARS LTD.,NEW DELHI vs. DCIT, NEW DELHI

Per Dr. B. R. R. Kumar, Accountant Member:

Bogus Purchases:

“3.3.4…….The factual position is that the impugned purchases were apparently made in the months of June, July and December, 2010. The survey was carried out in October, 2011, to be precise on 13.10.2011. The so called purchases have been recorded in the ledger account found and impounded from the computer hard disc at Annexures A-3 Page no.60. The corresponding vouchers were not found during the course of survey. The appellant was asked to produce the bills for purchases from Vardhman Fabrics both during the course of survey (refer to question no.28 of the statement of Sh. Sanjeev Narula, Managing Director) and also during the course of assessment proceedings. The appellant has not been able to produce the bills till date. The party was not found at the address furnished by the appellant either during the course of survey or during the enquiries made by the AO through his Inspector during the post-survey assessment proceedings. The report of the Inspector reproduced at Para 3.2.1 indicates that the said party was never existing at the premises. The appellant was apprised of all these facts and given show cause vide point no.6 of show cause notice dated 10.03.2014, that unless the party was produced and the vouchers were furnished, the purchases allegedly made from M/s Vardhman Fabrics would be treated as bogus purchases. Even thereafter the appellant failed to produce the party or the vouchers and placed reliance on certain case laws wherein it was held that once the identity of the supplier had been furnished and the payment has been made by account payee cheques, it was incumbent on the part of the AO to exercise his statutory powers and enforce the attendance of the said suppliers. The submissions during the appellate proceedings have also been considered and are discussed serially in the ensuing paragraphs.

3.3.5. It has been the consistent refrain of the appellant that since the entire records relating to the said party had been impounded by the department during the course of survey on 13.10.2011, no adverse inference can be drawn. In this regard, it may be stated that the survey was initiated as a result of allegations that the appellant company was resorting to fudged purchases. The appellant was very much aware as to the contents of the documents impounded during the course of survey and had filed the complete details of documents impounded as per Annexure A-1 to A-9 in the format prescribed by the AO in response to serial no.34 of the notice u/s 142(1) dated 10.10.2013. This letter is available at pages 47 to 50 of paperbook-1 filed during the appellate proceedings. The appellant indicated that the ledger account of Vardhaman Fabrics pertaining to the A.Y. 2011-12 was available at page-60 of Annexure A-3. This ledger account is available at page 74 of paperbook-1 filed during the appellate proceedings. None of the other Annexures A-1 to A-9 contain the bills and vouchers relating to M/s Vardhman Fabrics and hence it is clear that no such bills and vouchers exist.

3.3.6. With regard to the adverse inference drawn by the AO regarding return of the 133(6) notice at the address furnished by the postal authorities, the appellant's contention is that such return of notice has not been confronted. This claim is factually incorrect as the AO had clearly mentioned at point no. 17 of the show cause notice dated 10.03.2014 that the notice u/s 133(6) issued to Vardhman Fabrics on 21.02.2014 at the given address had been received back from the postal authorities. The appellant has also contended that if the AO was not inclined To believe the material relied upon by the assessee, he could have used the coercive powers u/s 131 available to him to enforce attendance of the creditors/suppliers. I find that this argument is legally indefensible as in the present case, even the identity of the supplier has not been established by the appellant. What was found during the survey was the ledger account of the party sans address/PAN. During the assessment proceedings, the AO sought party-wise and month-wise details of purchase and sale of raw-material, packing material and finished goods vide sl.no.22 of the questionnaire issued with a notice u/s 142(1) dated 10.10.2013 and pursuant to the same these details were filed on 23.12.2013. The AO issued notice to the party at the address furnished by the appellant. If, as contended by the appellant, the party was existing and was duly assessed to tax, it was incumbent on the appellant to produce the party or in the alternative, to furnish the complete latest address and the PAN of the party when the AO noticed it that the party was not available at the given address. The reliance placed by the appellant on Delhi High Court decision in Genesis Commet (P) Ltd. (163 Taxman 482) is misplaced as in the case before the High Court, the parties had responded to the summons issued u/s 131 by the AO and filed confirmations regarding receipt of commission, the names of the parties who had been introduced by the commission agents and also the copy of account of the assessee. Despite this the AO had insisted that the assesses produce the parties which the High Court did not approve and it was in this context that the High Court held that the AO could have used the coercive powers to enforce their attendance. I have also perused the Allahabad High Court decision in the case of EMC Machine Works (supra) and find that the facts are distinguishable. In that case, the High Court disapproved of the best judgment assessment concluded under the 1922 Act for failure to produce the original books of accounts, which had been seized by the Police and which had been presented before the AO and examined by him on a number of occasions in the past. I fail to see how the appellant has drawn a parallel with the facts of the above mentioned case law. As already stated herein above, the identity of the supplier had not been established, let alone the genuineness of the transaction, and it is not a case that the appellant has discharged the initial burden cast upon it.

3.3.7. The appellant has also contested the findings of the reports of the Inspector on the ground that the Inspector's report had not been confronted and in any case there are several decisions wherein it has been held that the report of the Inspector has no evidentiary value. I have perused the assessment record and find that the notice u/s 133(6) had been issued to the concerned party and only on return back of the notice with the remarks, 'no such concern' by the postal authorities, did the AO requisition the service of the Inspector to factually confirm the postal authorities remarks regarding the address credentials of the said party. The report of the inspector corroborated the remarks of the postal authorities and thereafter, keeping in view the principles of natural justice, the appellant was apprised in the show cause dated 10.3.2014 that the party was not traceable despite best efforts at the given address. The Inspector's report might not (nave .been furnished to the appellant but' the appellant had been apprised that the party did not exist at the address given and hence I see no infirmity in the AO's action in not confronting the Inspector's report to the appellant. The case laws cited by the appellant are not relevant as the decisions of the Courts were rendered in connection with Inspector's reports to carry out ascertainment of fair market value of property (which is a technical valuation) as in the case of Delhi Housing and Finance Corporation (supra), the ascertainment of the rental value of the free accommodation provided by the employer to the assessee (which form the basis for reopening of assessment) as in the case of JS Bindra (supra), market rent of house property to determine ALV as in the case of Diven Dembla (supra) or to determine whether the land was an exempt capital asset u/s 2(14)(iii) and whether the land in question was situated beyond 8 kms from municipal limits, as in the case of Lai Singh (supra).

3.3.8. The final contention of the appellant is that the fact that assessee had surrendered the purchases in the subsequent year had no relevance to the genuineness of the purchases in the instant year. It is contended that neither the statement recorded during survey has any evidentiary value nor had it even been admitted that the purchases were bogus. This contention is also not acceptable. Undoubtedly, in contradistinction to the power under section 133A, section 132(4) of the Income-tax Act enables the Authorized Officer to examine a person on oath and any statement made by such person during such examination can also be used in evidence under the Income-tax Act. On the other hand, whenever statement is recorded under section 133A of the Income- tax Act, it is not given any evidentiary value obviously for the reason that the officer is not authorized to administer oath and to take any sworn statement which alone has evidentiary value as contemplated under law. However the Courts including the Delhi High Court in Dhingra Metal Works (supra) have also held that it is settled law that though an admission is extremely important piece of evidence, it cannot be said to be conclusive and it is open to the person who has made the admission to show that it is incorrect. In the present case the appellant has neither produced the original vouchers, the confirmation from the party regarding purchases made nor has it produced the party or produced the latest address to enable the AO to make further enquiries. The survey has been specifically conducted by the department on the ground that the appellant in indulging in inflation of purchases. Instead of producing the relevant vouchers and bills, the Managing Director of the appellant company has thrown the gauntlet at his purchase department, that the aspect of purchase of goods is looked after by them. The survey at the appellant's business premises at D-93, D-95 and D-99 Okhla Indl. Area did not reveal the existence of even a single voucher for purchases made from the said party and also other parties. The appellant has not reconciled the purchases made from the party vis- a-vis the stock register and the sales. It may also be recalled that the survey and consequential additions, including trading additions, have been made in the background of the fact that there was consistent decline in GP from 61.51% for A.Y. 2005-06 to 37.67% in the current assessment year. The explanation of the appellant that the fall in GP was on account of introduction of multi brand outlets on which the assessee company had to give more discounts has been found to be factually incorrect, as the rates of trade discount as a percentage of the gross sales remain the same as in the previous year. Moreover, the expenses on the advertisement, publicity and sales promotion would not have decreased from 1.81% to 1.51% if it was factually correct that such multi brand outlets have been indeed introduced. The facts of the appellant's case are also distinguishable from the case of Nangalia Fabrics Pvt. Ltd. (Gujarat High Court reported in 220 Taxman 17), and the facts of Nikunj Enterprises (Bombay High Court reported in 216 Taxman 171) as the addition had been made in those cases only on the ground that the parties were not traceable. Moreover the assessee had filed letters of confirmation of the suppliers and stock reconciliation statements and the books of accounts of the assessee had not been rejected. It was on only under these circumstances that the Courts held that simply because the suppliers did not appear before the AO or the CIT(A), it could not be said that the purchases were bogus.

3.4. Keeping in view the detailed discussion in the preceding paragraphs, it is held that the purchases in question debited to the P&L account amounting to Rs.1,22,68,401/- are not genuine and the AO's findings in this regard deserve to be confirmed. Ground no.3 is dismissed.”

Deduction u/s 80IC:

“4.1.1. Perusal of the legislative history behind the section 80IC shows that the government intended to provide impetus to industrial activity carried out (a) either in priority area/location [as per section 80IC(2)(a) which was to be based on a certain specified investment on capital goods/machinery and which were prohibited from manufacturing articles or things under Schedule XIII which is a negative list] or (b) in priority/thrust sectors [as per section 80IC(2)(b)], The priority area/location was to be notified by the Board and the priority/thrust sectors were notified in Schedule XIV. Simultaneously the CBDT issued notification no. S.O. 741(E) dated 21.6.2004, notifying the area within the relevant states, which would be applicable for the claim of this deduction. This was subsequently amended and expanded by inclusion of certain areas within the State of Uttaranchal by notification no. S.O. 283 dated 3.10.2006. There are certain other conditions which are to be met by an assessee claiming deduction as per section 80IC(2)(a) and this would be discussed in the subsequent paragraphs. The claim that the appellant was actually engaged in manufacturing activities has also not been substantiated. The unit of the appellant may be located in an industrial area but that does not, per se, establish that the unit of the appellant is an industrial unit. When an assessee makes a claim for exemption of its income under certain provisions of the I.T. Act, it is for the assessee to substantiate the claim through the statutory documents required under the Act and/or other documentary evidences to support the claim. I have perused both the notifications and find that, that village Mahuakheraganj in Kashipur Tehsil of Udhamnagar District was notified in the notification 741(E) 28.06.2004. However, the appellant has not showed with reference to the exact khasra no. of the location of the undertaking to show that is covered by the notification. Even in the order of Commissioner and Central Excise dated 30.04.2013, there is no reference to the khasra no., as has been argued by the appellant. The appellant's factory is located at plot no.34, Nand Nagar Industrial Estate, Phase I, Aliganj Road, Kashipur, District Uddhamsingh Nagar. It is the appellant's appeal and he was expected to produce the necessary evidences, particularly when the revenue involved in the said claim is more than Rs. 3 crores. In the absence of specific proof therefore, that the manufacturing unit of the appellant is not situated in the notified area although it is located in the eligible State, the claim of the appellant for deduction u/s 80IC is not allowable.

4.2. I have also examined the contention of the AO that the audit report as required under 80IC(7) read with 80IA(7) has not been filed along with the return of income. The claim of the appellant, on the other hand, is that in view of sub-rule (2) of Rule 12 read with section 139(1D), there was no obligation to furnish the 10CCB report along with the return before the assessing officer in the submissions made on 28.02.2014. I have perused the assessment record and find that although the appellant claimed to have enclosed the P&L account and the balance sheet along with the 10CCB audit report at pages 75 to 91 enclosed to the said submissions, these pages contain the order of the Commissioner, Customs and Excise, Meerut-II dated 30.04.2013. I also find that, following the submission, the AO issued show cause notice dated 10.03.2014 stating that since complete details and justification of the claim for deduction u/s 80IC for Rs.3,28,73,740/- had not been filed till date, the appellant may explain, in the absence thereof, why the said claim should not be disallowed. In response to this letter also, the appellant in the response dated 24.03.2014 only referred to point no.16 of the letter dated 10.03.2014 (actually filed on 28.02.2014). Thus, it is seen that despite specific show cause on the part of the AO, the necessary audit report of the accountant has defined by the explanation below sub section (2) of section 288 has never been furnished before the completion of the assessment proceedings. The audited accounts that were produced before the AO are audited by S.R. Batliboi and Co., Gurgaon and the audit report in form 3CD certifying that the impugned deduction u/s 80IC is available to the appellant is signed by K.M Agarwal & Co. In the present proceedings, the appellant has enclosed the audit report in Form 10CCB of M/s. M.L. Puri, CA. As per the said audit report, the eligible business is not a new undertaking but the date of substantial expansion has been mentioned as 09.12.2008. Be that as it may, the requirement of furnishing the audit report under 80IC(7) read with 80IA(7) before the completion of assessment proceedings, has been mandated by the statutory provisions and judicial interpretations so that the A.O. may examine whether all specified conditions in that section have been met before granting the deduction.

4.2.1 I have also perused the decisions of the Delhi High Court in Centimetres Electricals (P) Ltd., as well as other decisions relied upon by the appellant in allowing the benefit u/s 80IA wherein the Courts had arrived at the conclusion that the requirement of filing the audit report along with the return is not mandatory but directory and that if the audit report is filed at any time before the framing of the assessment, the requirement of section 80-IA(7) would be met. However, these cases do not come to the rescue of the appellant as despite the specific show cause issued by the AO, the audit report of the accountant as required under the provisions of the Act have not been filed before the AO. Therefore, while agreeing with the appellant that there is no obligation under the statute to furnish the impugned audit report with the return of income, the settled law is that the same has to be filed prior to the completion of the assessment. The reason as to why such report has to be filed before the AO is that it is for the AO to examine whether all the conditions mentioned in section 80IC are satisfied or not. Even in the present proceedings, the appellant has not made out any case that there were circumstances which prevented it from filing the impugned audit report before the AO. It is found that the statutory auditor in Form 3CD has commented that the company is engaged in both the business of manufacturing as well as trading of apparel and related accessories. Against the net turnover of Rs. 560.41 crores, the appellant purchased finished goods to the tune of Rs. 240.37 crores and also incurred job work expenses of Rs. 15.40 crores. There was stock of finished goods of Rs. 145.86 crores lying with the appellant at the close of the balance sheet and figure of the last years closing stock of finished goods was Rs.69.17 crores thereby leading to the conclusion that the net outgo of stock of finished goods during the year by way of sales was Rs.76.69 crores. As per the financial statement, in the notes to accounts the value of the imports of finished goods and accessories that the appellant imported is mentioned at Rs. 73.46 crores. A rough and ready calculation shows that, as against what could at best be Rs. 169.89 crores (560.41 - 240.37 - 76.69)-73.46 by way of manufacturing in the eligible unit, in the financial statement that is now enclosed with the Form 10CCB (M.L Puri & Co.), the sales of the Kashipur undertaking has been showed at Rs. 362.50 crores. These facts have not been examined by the AO and in the absence of any mitigating circumstances and substantiating proof that the appellant was prevented from filing the same before the AO, the impugned audit report that has been filed in the present proceedings, is not admissible as additional evidence, nor has any such request been made.

4.2.2 The Gujarat High Court adjudicated a matter in which the tax audit report as required u/'s 80IB(7) was filed for the first time before the Hon'ble High Court in the case of PT/s. Panasonic Energy (I) Co. Ltd. [367 ITR 245]-wherein the High Court discussed the legal requirement of admissibility of additional evidences before the first appellate authority and the necessity of the same being filed before the AO in the following words:

4.3 Coming to the alternate argument of the appellant that the appellant is engaged in the manufacturing of Woven Readymade Garments falling under chapter heading 6101 to 6117, this argument is also not allowable on merits as perusal of the order of the Commissioner, Customs and Central Excise, Meerut- II, dated 30.4.2014 reveals that the appellant was earlier manufacturing readymade garments under the eight digit Central Excise Tariff Heading 62092000 and was availing exemption from Central Excise duty (vide notification no.30/2004 - CE dated 9.7.2004) prior to 1.3.2011. The said exemption was withdrawn on branded garments (i.e. readymade garments that are sold under brand name) by the amending notification no.12/2011-CE dated 1.3.2011. Duty @ 10% ad valorem was chargeable under the assessable duty value which was 45% of the MRP. Vide the said order, the appellant was given benefit of exemption of excise duty as per notification 50/2003 -CE w.e.f. 7.3.2011 as a result of the legal precedence and it has not been examined by the Central Excise Authorities as to whether the specific goods produced by the appellant falls under the head "woven readymade garments under Chapter heading 6101 to 6117". Consequently the alternate argument of the appellant is also not acceptable.”

Reconciliation of Finished Goods:

10.3 During the course of appellate proceedings the same explanation as was offered before the A.O. has been filed by the appellant vide letter dated 02.05.2016 that the sales were reversed as per AS-9 as on 31.03.2011 and shown as sales in the subsequent year. The appellant has also admitted vide letter dated 02.05.2016 during the present proceedings that as a result of the reversal of debtors, since the admitted gross profit for the year is 37%, the profits for the year have been reduced by an amount of Rs.1,75,57,432/- (4,74,52,520x37/100). I have perused the submissions made and the total stock statement as on 31.03.2011 filed at page 225 of the paper book. The stock against MBO/ Buyer Seller stands shown at Rs. 3,16,35,014/- whereas the amount reversed in respect of MBO and buyers sellers as per ledger account is Rs.4,74,52,520/-. Apparently, therefore, the appellant has not included the value of stock in the total stock statement nor is this amount shown in the goods in transit in respect of MBO and buyers sellers and given consequential effect to the reduction in the debtors.