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Income Tax Appellate Tribunal, AHMEDABAD “B” BENCH
Before: Shri Rajpal Yadav & Shri Amarjit Singh
Revenue by: Shri Mudit Nagpal, Sr. D.R. Assessee by: Shri Mehul K. Patel, A.R. Date of hearing : 23-08-2019 Date of pronouncement : 01-10-2019 आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-
This assessee’s appeal for A.Y. 2008-09, arises from order of the CIT(A)-6, Ahmedabad dated 14-09-2021, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.
The assessee has raised following grounds of appeal:-
Page No 2 Harshad Jashwantlal Soni vs. Addl. CIT “1. The learned CIT(A) has erred in law and on facts in confirming the addition on account of alleged bogus purchases to the extent of 10% of such purchases i.e. Rs.11,69,875/- out of total addition of Rs.1,16,98,747/- without proper consideration and appreciation of the facts of the case. In view of facts and submissions filed as well as legal position, the impugned addition on account of bogus purchases ought to have been restricted to the profit @ 5% on such purchases already shown and offered in the books of account apart from VAT paid on such purchases. 1.2 The learned CIT(A) while confirming the addition to the extent of 10% of alleged bogus purchases on account of profit which the appellant could have saved has failed and/or ignored the fact that the appellant had already offered about 5% profit on such purchases in the books of account and had also paid VAT of Rs.1,16,987/- on the said purchases as reflected in the books of account and hence the learned CIT(A) ought to have given credit of the same.
2. The learned CIT(A) erred in law and on facts in confirming the addition of Rs.14,18,613/- on account of disallowance of interest merely on surmises and assumptions as well as without proper consideration and appreciation of the facts of the case. In view of facts and submissions filed as well as legal position, the impugned addition of Rs.14,18,613/- requires to be deleted. 2.1 The learned CIT(A) failed to appreciate the fact that the appellant was having sufficient interest free funds available at its disposal and thus as held by various courts of law including the Hon'ble ITAT, Ahmedabad Bench, no addition is warranted.
3. The learned CIT(A) erred in law and on facts in confirming the addition of Rs.2,01,614/- on account of disallowance U/S.14A of the Act without proper consideration and appreciation of the facts of the case. In view of facts and submissions filed as well as legal position as laid down by various courts of law including the Hon'ble Supreme Court, the impugned addition of Rs.2,01,614/- requires to be deleted. 3.1 The learned CIT(A) failed to appreciate the fact that no exempt income has been earned by the appellant during the year at all and that the investments have not been made out of borrowed funds. That apart, the AO has not established any proximate cause for disallowance which is the condition precedent for invoking the provisions of Section 14A as laid down by the Hon'ble Supreme Court.
4. The learned CIT(A) has erred in confirming the addition of Rs.72,072/- on account of difference in the account of Jasbhai Jewellers without properly considering the facts and submissions filed. In view of facts of the case and explanation furnished, the impugned addition requires to be deleted.
The learned CIT(A) has erred in confirming the addition of Rs.65,625/- while invoking the provisions of Section 145A of the Act on account of adjustment in the value of closing stock without proper consideration and appreciation of the facts of the case and gross misinterpretation of the provisions of Section 145A of the Act. In view of facts of the case and explanation furnished coupled with legal position, the impugned addition requires to be deleted. 5.1 The learned CIT(A) further failed to appreciate the fact that the appellant having followed exclusive method of accounting, the learned AO ought to have made similar adjustment to the opening stock, purchases and sales as per the specific provisions of Section 145A of the Act instead of making adjustment to only the closing stock. Accordingly, the impugned addition requires to be deleted.”
The brief fact is that return of income declaring income of Rs. 4,98,930/- was filed on 30th Sep, 2018. The case was subject to scrutiny assessment and notice u/s. 143(2) of the act was issued. The assessment u/s. 143(3) of the act was finalized on 29th December, 2010. The assessee is trading in gold and silver bullion, gold jewelry and cut and polished diamonds. The remaining facts of the case pertaining to different grounds of appeal are discussed while adjudicating these grounds of appeals:-
Ground No. 1 (Confirming addition @ 10% of bogus purchases)
Page No 3 Harshad Jashwantlal Soni vs. Addl. CIT
During the course of assessment, the assessing officer stated that assessee has not furnished the complete address of the following 10 parties from whom the assessee had claimed to have purchased gold jewelry:- Sr. No. Name Purchase shown (Rs.) 1. Mahendrabhai K. Shah 989768/- 2. Roopesh Rameshchandra Soni 951475/- 3. Manoj B. Soni 935984/- 4. Lalo Babulal Soni 978587/- 5. Jayaniilal mandalia 1006995/- 6. Tinabhai Jayantiial 1047888/- 7. Dharmendra Babulal 1006880/- 8 Batukbhai Kanjibhai Soni 916781/- 9. Bipinbhai Chimanlal Chokshi 917650/- 10. Girish Himmatlal 9,52,140/- 11. Narendra Babulal 1052175/- 12. Rakesh Chandulal Chokshi 942424/- The assessee has explained that he had made purchases from the aforesaid parties through account payee cheque only and the name of these parties were reflected in the bank statement. Thereafter, the assessing officer has asked the assessee to submit the detail of cheque payment and name of the bank etc. On the basis of information received from the assessee, the assessing officer has obtained copies of cheques from Vijaya Bank and noticed that all these cheques were issued account payee payee only and later on account payee stamp in the cheque struck off and signed by the assessee and converted into bear cheque. After receipt of this information, Page No 4 Harshad Jashwantlal Soni vs. Addl. CIT the assessing officer has issued 133(6) notice to the Bhuj Mercantile Bank Ltd for providing the information regarding the account in which the aforesaid cheques were credited. On receiving of information from the Bhuj Mercantile Co-operative Bank, the assessing officer noticed that above referred cheques were credited in the account of Arihant Avenue & Credit Ltd and Yogesh Trading Company Ltd. Thereafter, the assessing officer has issued summon u/s. 131 to the aforesaid two parties. Their statements were recorded. The director of Arihant Avenue & Credit Ltd. in his statement admitted that the above cheques have been received from Shri Hariraj Paper Mill Ltd. for crediting into their account against the advances given to the Shri Hariraj Paper Mill Ltd. and he has also submitted the copy of account of Shri Hariraj Paper Ltd. in his book. In the case of Yogesh Trading Company in the statement its proprietor has stated that cheque was given to him by the assessee for discounting against the said cheque and the cash had been paid to the assessee. On further verification, the assessing officer stated that inspector has reported that Shri Hariraj Paper Mills Ltd was in BIFR since 2003 and no payment of any outstanding amount can be made by the company to any creditors without prior approval of the BIFR. Further, the assessing officer has obtained detail of RD and URD purchases along with complete addresses and issued notices u/s. 133(6) to all the URD purchases. However, the notices issued u/s. 133(6) were returned un-served and found that purchase parties were not existed at the given addresses. Therefore, the purchases remained unverifiable. Consequently, the assessing officer has made disallowance of Rs. 1,16,98,747/- being bogus purchases introduced in the name of different parties mentioned in the assessment order.
Page No 5 Harshad Jashwantlal Soni vs. Addl. CIT
5. The assessee has preferred appeal before the ld. CIT(A) The ld. CIT(A) has restricted the addition to the extent of 10% of such purchases and balance addition were deleted. Relevant part of decision of ld. CIT(A) is reproduced as under:- “3.3 I have considered the facts of the case, assessment order and appellant’s submission. Assessing officer disallowed purchases of gold jewellery in the name of certain persons on the grounds that the purchases are not verifiable and the payments for the same were made otherwise than account payee cheques. Appellant' had disclosed purchases from certain parties as mentioned in the assessment order quoted above however on verification of these parties, AO found that these parties do not exist at the given address and appellant also could not produce these parties or provide their current whereabouts. Therefore purchases disclosed by the appellant in its books are clearly unverifiable. Appellant also agreed that he is not able to verify the purchases. Appellant mentioned the prevailing practice in jewellery market. Appellant also submitted that as per quantity tally, jewellery purchased were sold and therefore even if purchases are from unverifiable parties, appellant would have purchased from somewhere else otherwise sales should also not be considered. It is not in dispute that appellant sold the gold jewellery claimed to have been purchased from aforesaid parties. Since sales of these gold jewellery items are reflected in the profit and loss account, the addition of entire purchases cannot be made. The decisions relied upon by the assessing officer wherein 100% disallowance of purchases were confirmed are those in which quantity tally of goods purchased and sold were not there. In the absence of quantity tally, it cannot be said that assessee purchased goods from some other parties even if the parties disclosed were found to be bogus or not traceable. In the case of appellant, undoubtedly purchased quantity has been sold and sales have been booked therefore these decisions do not apply. In other decisions relied upon by the appellant, extra profit earned from such unverified purchases were taxed. Appellant submitted that by purchasing from unregistered and unverifiable parties, he could have saved 8-9%, out of which about 5% gross profit is disclosed. However there is no basis for appellant's working of extra profit. The transaction is not in gold bullion but in old gold jewellery where benefit from such unverified parties could be much more. The various decisions confirmed addition in the case of bogus purchases to the extent of 5% to 25% depending on the nature of business. In the appellant's case it would be appropriate to make the addition of 10% of unverified purchases. In view of this the addition made by the assessing officer is confirmed to the extent of 10% of such purchases and balance addition is deleted. As regards assessing officer's alternative disallowance under section 40 A (3), it is argued that no disallowance can be made under section 40A(3) in view of the decision of honourable ITAT Ahmedabad Bench in the case of Vijay Proteins Ltd. (supra) and also the other decisions quoted by the appellant and reproduced above in the submission of the appellant. In the identical facts, CIT (A) XVI, Ahmedabad in the case of Devendra G Jain, HUF by order dated 10-01-2011 held that in such cases disallowance under section 40 A (3) cannot be made. Since assessing officer considered the purchases bogus and rejected books and addition in respect of the same is confirmed to the extent of 10% in previous para, the decisions relied upon by the appellant are applicable and accordingly no disallowance can be made under section 40 A (3).”
We have heard the rival contentions on this issue. It is clear from the finding of ld. CIT(A) as cited above in this order that assessing officer has Page No 6 Harshad Jashwantlal Soni vs. Addl. CIT found that parties from whom the assessee has made purchases were not existed at the given addresses and the assessee also could not produce those parties for verification and also could not provide their current location and addresses. Even the notices issued u/s. 133(6) by the assessing officer could not be served on the addresses given as per the bills produced by the assessee. Looking to the above facts and circumstances, the ld. CIT(A) has given a substantial relief to the assessee on the ground that sale of gold jewelry items were reflected in the P & L account and the addition of entire purchases cannot be made. Considering the above, we observe that ld. CIT(A)’s decision to restrict the disallowance to 10% of such purchases on the reasoning that assessee has earned extra profit from the purchases made from un-registered parties is justified. Therefore, we do not find any merit in the appeal of the assessee and the same is dismissed.
Ground No. 2 (Disallowance out of interest Rs. 14,18,613) 7. During the course of assessment, the assessing officer noticed that assessee has given interest free advances to various parties and the balance outstanding at the end of the year in the account of parties was Rs. 13,28,85,548/-. The assessing officer stated that assessee has not charged any interest on advances given to the parties, however, it has debited interest expenses of Rs. 14,18,613/- in the profit and loss account. The assessee has submitted that interest free advances were made out of interest free fund and not any interest bearing borrowings were used to advance interest free advances. The assessing officer has not accepted the explanation of the assessee and disallowed an amount of Rs. 14,18,613/- being the interest Page No 7 Harshad Jashwantlal Soni vs. Addl. CIT attributable to the funds utilized for giving interest free advances to these parties. The ld. CIT(A) has dismissed the appeal of the assessee.
We have heard rival contentions. The ld. counsel has contended that during the course of assessment proceedings vide letter dated 22-04-2010 the details of interest free fund along with copies of ledger account placed in the paper book from serial no. 76 to 90 were submitted and the same were not considered by the assessing officer and CIT(A) before deciding this issue. We have observed that the assessee has submitted such details of interest free funds from Aryavati Impax Pvt. Ltd., Aravati Commodity Pvt. Ltd. and other parties with complete detail of bank account and date of transactions. These undisputed facts were not contradicted by the assessing officer and ld. CIT(A), therefore, the decision of ld. CIT(A) is not justified. Accordingly, this ground of the assessee is allowed.
Ground No. 3 (Disallowance u/s. 14A) 9. During the course of assessment, the assessing officer asked the assessee to explain the applicability of section 14A in the case of assessee. The assessee has stated that it has not earned any except income, therefore, no disallowance u/s. 14A be made. The assessing officer has not accepted the explanation of the assessee and computed the disallowance as per rule 8D of the I.T. Rule to the amount of Rs. 2,01,514 after taking into account the investment made by the assessee in the shares. The ld. CIT(A) has sustained the addition.
Page No 8 Harshad Jashwantlal Soni vs. Addl. CIT
We have heard the rival contention. During the course of appellate proceedings, the ld. counsel has placed reliance on the decision of Hon’ble Jurisdictional High Court of Gujarat in the case of Corrtech Energy Pvt. Ltd. 372 ITR 97 wherein it is held if no exempt income is earned then no disallowance can be made u/s. 14A of the act. Respectfully following the decision of Hon’ble Gujarat High Court, we consider that the decision of ld. CIT(A) in sustaining the addition in respect of fact that no exempt income was earned is not justified , therefore, the appeal of the assessee is allowed on this issue.
Ground No. 4 is in respect of difference in account was not pressed, therefore, the same stands dismissed.
Ground No. 5 (Addition to closing stock u/s. 145A of the of Rs. 65,625/-) 12. During the course of assessment, the assessing officer noticed that while valuing the closing stock, the assessee has not included VAT of Rs. 65,625/- being 1% of value of closing stock in the value of closing stock. Therefore, the assessing officer has made addition of Rs.65,625 in the income of the assessee after referring section 145A of the act. The ld. CIT(A) has sustained the addition made by the assessing officer.
We have heard the rival contentions. During the course of appellate proceedings, the ld. counsel has contended that the assessee was not debiting the expenses on account of VAT either in his trading account or profit and loss account as per method of accounting regularly followed by him. He has further submitted that VAT payment and receipt are separately shown in the Page No 9 Harshad Jashwantlal Soni vs. Addl. CIT balance sheet. The ld. counsel has also referred the decision of ITAT in the case of SPX Flow Technology dated 12-12-2018. In the light of the above facts and circumstances, we consider that assessee has consistently followed the exclusive method and VAT was not debited as expenses in the P & L account and these facts were not contradicted by the lower authorities. Therefore, the appeal of the assessee on this issue is allowed.
In the result, the appeal of the assessee is partly allowed.