SHETKARI SOLVENT (INDIA) LIMITED,NAGPUR vs. ACIT C.C. 1(1), NAGPUR

आयकर अपीलीय अिधकरण ukxiqj �यायपीठ, ukxiqj म� । IN THE INCOME TAX APPELLATE TRIBUNAL NAGPUR BENCH, NAGPUR �ी डी. क�णाकरा राव, लेखा सद�य एवं �ी िवकास अव�थी, �याियक सद�य के सम� BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM आयकर अपील सं. / ITA No.137/NAG/2012 िनधा�रण वष� / Assessment Year : 2007–08 Shetkari Solvent (India) Ltd., UG–7&8, Jagat Chambers, Near Ambedkar SQR, Central Avenue, Bagadganj, Nagpur–440008. .......अपीलाथ� / Appellant PAN : AABCS0105N बनाम / V/s. ACIT, Central Circle–1(1), ……��यथ� / Respondent Nagpur. Assessee by : Shri Abhay Agarwal, Adv. Revenue by : Shri U. U. Kasar, DR सुनवाई क� तारीख / Date of Hearing : 26.03.2019 घोषणा क� तारीख / Date of Pronouncement : 27.03.2019 आदेश / ORDER PER D. KARUNAKARA RAO, AM: This appeal is filed by the assessee against the order of CIT(A)-1, Nagpur dated 11.01.2012 for the Assessment Year 2007-08. 2. The revised grounds raised by the assessee are as under :– “1. That the learned CIT(A) erred in confirming the addition of Rs.5,79,60,000 on account of alleged bogus purchases of Soya DOC

2 ITA No.137/NAG/2012 (Rs.2,48,40,000 from Prafull Rice Mills & Rs.3,31,20,000 from Shri Vyankatesh Rice Mill) during AY 2007–08. 2. That the learned CIT(A) erred in confirming the addition of Rs.2,27,05,900 on account of alleged bogus purchases of Poha Bhusa (Rs.1,01,40,000 from Dange Rice Mill & Rs.1,25,65,900 from Shri Shankar Rice Mill) during AY 2007–08. 3. That the learned AO erred in not providing copy of third–party statements relied for making addition relating to alleged bogus purchases (Grounds of Appeal No.1 & 2), nor granted an opportunity to cross examine the said parties thereby breaching principles of natural justice and hence additions made are not justified. 4. Without prejudice to Grounds above, the Assessee submits that in case the corresponding sales have not been doubted, then the entire alleged bogus purchases cannot be disallowed but only the profit embedded in the purchases be subjected to tax. 5. The Assessee craves leave to urge, move any other ground of Appeal at the time of hearing with the permission of your Honours.” 3. Briefly stated the relevant facts include that the assessee is a company and is engaged in the business of solvent extraction and edible oil refinery. The assessee filed the return of income declaring at Nil income u/s 139 of the Act. Based on the information gathered during the search action in the business premises of the assessee of Rana–Maven Group, Nagpur on 27.03.2008, the Assessing Officer initiated the proceedings u/s 153C of the Act in the case of the assessee. During the scrutiny proceedings, the Assessing Officer noticed that the payments made to the contractors are without

3 ITA No.137/NAG/2012 making the TDS. Thus, the Assessing Officer made addition of Rs.3,60,961/–. 4. Further, the Assessing Officer found that the assessee engaged in bogus purchases of De–oiled Cake (DOC) and Poha Bhusa (Rice Husk) from certain parties namely (i) Prafull Rice Mills; (ii) Dange Rice Mill; (iii) Shankar Rice Mill and (iv) Vyankatesh Rice Mill amounting to Rs.8,06,65,900/–. Considering the facts that these purchases made from the above-said parties, who did not have even the sales tax number, the Assessing Officer called for an explanation of the assessee on the genuineness of the purchases. There was a statement of Shri Ashok Kumar Rathi, who merely gave an evasion reply and offered additional income towards all these discrepancies. Considering the facts, the transactions were not properly documented with reference to the raw materials i.e. DOC as well as Poha Bhusa. The Assessing Officer, after considering the facts that all the sales were accounted and the payments are to be made towards the purchases, took an adverse view in this matter and disallowed the entire purchases of Rs.8,06,65,000/– as ‘non–genuine transactions’. The relevant contents are discussed in para 5.8 and 5.9 of the assessment order and the same are extracted as under :–

4 ITA No.137/NAG/2012 “5.8 As regards the assessee's plea that, as the sales are accounted for, the purchases cannot be treated as bogus, it is seen that the assessee's argument does not hold true, as the alleged purchases from these four parties, are used mainly for mixing the same with the DOC, which is subsequently sold as Poultry Feed. Thus, these alleged purchased items (from the above-mentioned four parties), are not sold independently as such and, therefore, the 'purchase must correspond to sale', theory does not hold good in this case. The assessee has shown these bogus purchases in its books only to decrease its G.P., by mixing the above-mentioned Poha Bhusi with the DOC. This does not necessarily mean that the sales corresponding to the bogus purchase of Poha Bhusi have to be treated as not genuine, for the simple reason that the sales have been duly recorded with proper bills and entries in the books and regular payments received; whereas the assessee does not have any evidence like original purchase bills, delivery challans, transport receipt and confirmation from the parties regarding the above bogus purchases. Accordingly, the theory propounded by the assessee to relate the bogus purchases to the sales and thereby not consider the corresponding sales (corresponding to the bogus purchases), does not hold good. The assessee's objections are, therefore, totally misplaced and, hence, not accepted. 5.9 Thus, on the basis of the above discussion and after duly considering the submissions made by the assessee during the assessment proceedings as well as the relevant portion of the statements of Shri Ashok Kumar Rathi, recorded during the search, it is conclusively proved that purchases of Poha Bhusa/DOC/DORB of Rs. 8,06,65,900/- from the aforesaid four parties during the F.Yr. 2006-07, are not genuine. The assessee has increased its purchases to the extent of Rs. 8,06,65,900/-, in order to suppress its income for the AY 2007- 08. Accordingly, the above amount of Rs. 8,06,65,900/-, on account of the alleged purchases of Poha Bhusa/DOC/DORB, etc., is disallowed and added to the total income of the assessee. The penalty proceedings u/s 271(1)(c) of the Act are separately initiated, for concealment and furnishing of inaccurate particulars in respect of income chargeable to tax.” 5. Aggrieved with the same, the assessee filed an appeal before the CIT(A). On this issue, the CIT(A) recorded the reasoning in para 7 of her order and upheld the views of the Assessing Officer and confirmed

5 ITA No.137/NAG/2012 the addition of Rs.8,06,65,900/-. The contents of para 6.1 and 7 are relevant in this regard. For the sake of completeness, the said paras are extracted hereunder :- “6.1 In this ground appellant has challenged the action of the AO in disallowing Rs. 8,06,65,900/- on account of alleged purchases of Poha bhusa/DOC/DORB. In this regard appellant has stated as follows:- "According to the Assessing Officer that enquiries made by the A.C.I.T.(Inv) during the search showed that purchase to the extent of Rs. 8,06,65,900/- of Poha bhusa/ DOC/DORB was not genuine. The person in whose name the purchases appeared namely Prafull Rice Mill etc denied the sale of the items mentioned above. The Assessing Officer has however not carried out any independent enquiries. Basing on the said investigation added the amount as bogus purchases. However the Assessing Officer has accepted the whole sales of Poha/ DOC/ DORB as shown above as genuine. He also accepted the quantities shown in the accounts. But he refused to accept the above purchases from four persons. Accepting for the argument sake that the purchases are not genuine how could it be possible to sell the Poha Bhusa/DOC/DORB to the extent mentioned above from nothing. Therefore there must be some purchases from persons other than the above persons and their names have been given as sellers to show that their were purchases. The Assessing Officer also did not consider the impossibility of a sale of poha bhusa/DOC/DORB without a corresponding purchases. Though the names given may be wrong without considering this aspect the Assessing Officer has added the amount of Rs 8,06,65,900/-. A sale and corresponding purchases are inseparable integral part of a transaction/ transactions because the profit arises from the sale and purchase and the same cannot be dissected. The Assessing Officer erred is adding an amount of Rs. 8,06,65,900/- as bogus purchases." 7. I have carefully considered the issue before me. It is not disputed by appellant that the alleged sellers have denied having sold goods to the appellant. Appellant has not rebutted these findings but instead contended that the quantity-wise details and sales have been accepted.

6 ITA No.137/NAG/2012 In my considered opinion the finding in the assessment order is based on proper investigation. The denial in the course of sworn statements u/s 132(4) by Shri Prabhakar Dange, Prop. Of Dange Rice Mill, Shri Shankar Lonkar, Prop. of Shri Shankar Modern Rice Mill and Shri Sukhdeo Sadashiv Kumbhare that they have not entered into transactions with the assessee shifted the onus on the appellant to prove that purchases have been made from other parties. Even the primary details of such alleged parties from whom such purchases are said to have been made has not been furnished by appellant. Thus appellant has failed to discharge its onus to show that the purchases to the extent claimed are indeed genuine. Appellant has further not lead any evidence in this regard or given any details whatsoever of parties who had the capacity and the stock to enter into transactions with the appellant. As pointed out by AO appellant does not have any record of the purchases by way of payment bills, delivery challans, transport receipts and confirmation from the parties. However all the sales have been supported by proper bills and entered in the books of account and record of payment received. Further as pointed out by AO statements recorded by DDIT-Unit-II, Nagpur has clearly pointed out that the purchases are bogus as all the concerned parties have denied having made sales of poha bhusa/DOC/DORB etc. to the assessee. Similarly the balances of these four parties are outstanding with no payments having been made to the purchasers, although the quantum involved is quite considerable strengthen the AO's conclusion that the purchases are not genuine. The findings of the AO in this regard are therefore upheld. This ground is therefore dismissed.” 6. Aggrieved with the above order of the CIT(A), the assessee is in appeal before the Tribunal with the aforesaid extracted revised grounds. 7. With special reference to the ground no.3, ld. Counsel for the assessee submitted that the purchases are genuine and filed various additional evidences, which found part of pages 1 to 16 of the Paper Book. He also submitted that no cross-examination was granted by

7 ITA No.137/NAG/2012 the Assessing Officer in connection with the evidences gathered by him against the assessee. Before us, the assessee filed a written submission and the same are extracted hereunder :- “1. The learned AO erred in disallowing the entire purchases of Poha Bhusa and Soya DOC purchased from specified parties amounting to Rs.8,06,65,900. The learned AO erred in not appreciating that Poha Bhusa was consumed and Soya DOC was sold during the year. The learned AO has not doubted the sales made during the year. The Assessee has maintained quantitative details in respect of Soya DOC and Poha Bhusa. The quantitative details are enclosed as additional evidence vide separate application (Refer Pages 1 to 16 of Paper Book- Additional evidence). On perusal of the details especially quantity of closing stock, it is evident that the stock purchased from the specified parties were consumed/sold during the year. The learned AO did not appreciate that there cannot be a sale without corresponding purchase. The books of accounts and the stock register/ quantitative details were produced before the learned AO during the course of assessment proceedings however, the learned AO did not appreciate the same. 2. The Assessee has maintained regular books of account and got the same audited. The learned AO did not find any defect in the books of account. The books of account were not rejected by the learned AO. The purchase bills of the specified parties were impounded during the course of search proceedings at Rana-Maven group and the learned AO erred in observing that the Assessee did not produce bills obtained from the parties. The Assessee was a sick company and it was facing liquidity crunch and could not make payments to the creditors within time. Therefore, the payments of the specified parties were outstanding as of the year-end. The Assessee had subsequently sold goods to the aforesaid parties in financial year 2010-11 as final settlement (Refer Pages 17 to 20 of Paper Book – Additional Evidence). Copy of audited financials for FY 2010-11 is enclosed at Pages 21 to 48 of Paper Book - Additional Evidence. Statement of third party not provided: No opportunity of cross examination granted 3. During the assessment proceedings the Assessee was issued show cause notice informing that the investigation wing has carried out enquiries regarding the purchases made from specified parties and concluded that the purchases were bogus. However, the Assessee was

8 ITA No.137/NAG/2012 not informed that adverse third-party statements were recorded by the investigation wing; neither copy of the statements of the third parties were provided to the Assessee. The Assessee was not provided an opportunity to cross examine the aforesaid parties. The aforesaid action of department has led to breach of principles of natural justice and hence, additions made are not justified. The Assessee relies on the decision of Hon'ble Supreme Court of India in the case of Andaman Timber Industries (Civil Appeal 4228 of 2006). The assessing officer did not make any independent enquiries but merely relied on the enquiries made by the investigation Department. No incriminating document relating to Assessee was impounded during search at Rana - Maven Group 4. There was a search and seizure operations under section 132 of the act carried out at the residence and business premises of the Rana- Maven group. The assessment in Assessee's case was done under section 153C of the Act. The Assessee submits that the documents impounded during the search were purchase bills of specified parties (recorded in books), copy of financials etc. pertaining to the Assessee which were part of the books of account of the Assessee and were not incriminating in nature [Copy of satisfaction note u/s 153C is enclosed at Pages 2-3 of Paper Book (Factual)]. Therefore, the assessment made under section 143(3) read with section 153C of the act itself is invalid and bad in law. Without prejudice, only profit embedded in alleged bogus purchases can be subjected to tax 5. Without prejudice, the Assessee submits that in case the corresponding sales have not been doubted, then the entire purchases cannot be disallowed but only the profit embedded in the purchases be subjected to tax. Therefore, the Assessee submits that in case the purchases are treated as bogus then only reasonable profit percentage attributable to the purchases be subjected to tax. The Assessee has enclosed GP/NP ratio for last 5 years at Page 49 of Paper Book - Additional Evidence). The Assessee relies on the decision of Hon'ble Gujarat High Court in the case of CIT v. Simit P. Sheth (356 ITR 451) (Guj HC). Past losses (AY 1997-98 & AY 1998-99) have been allowed to be carried forward and set-off during AY 2007-08 pursuant to BIFR scheme 6. The Assessee submits that it is a sick industrial undertaking. It had applied before the BIFR who had up sanctioned and approved the

9 ITA No.137/NAG/2012 scheme in the case of Assessee pursuant to which the brought forward losses pertaining to assessment year 1997-98 and 1998-99 amounting to 14.03 crores approx. were allowed to be set-off against the Profits to be declared by the Assessee during rehabilitation period upto 31st of March 2013. Accordingly, the brought forward losses were set-off against the income of the Assessee for AY 2007-08 and balance loss was carried forward to subsequent years. As a result, there is no demand outstanding for the assessment year 2007-08 [Copy of BIFR order and the order giving effect passed by learned AO are enclosed at pages 11 to 20 of Paper Book (factual)].” 8. On the other hand, ld. DR for the Revenue relied heavily on the orders of the Assessing Officer and the CIT(A) and submitted that the assessee failed to demonstrate the genuineness of the transactions. He also mentioned the facts relating to the non-supply of information are incriminating material raised for the first time before the Tribunal and, therefore, the same should not be entertained. 9. During the rebuttal time, ld. Counsel for the assessee relied on the Hon'ble Supreme Court judgement in the case of Kishinchand Chellaram vs. CIT, 125 ITR 713 (SC) for the proposition and submitted that the addition should not be sustained when the same are based on the incriminating material gathered at the back of the assessee. Granting proper opportunity is the requirement of the law. Assessee relied heavily on the additional evidences furnished before us. The ld.

10 ITA No.137/NAG/2012 AR submitted that the entire purchases cannot be disallowed where the sales are accepted by the lower authorities. 10. We have heard both the sides on this issue and perused the orders of the authorities below. We have also perused the Paper Book filed before us, which included the “additional evidences”. It is a case of the assessee that the additional evidences relating to the quantitative details of purchases, sales, closing stock etc. are significant. The ld. AR submitted that the Assessing Officer disturbed only the purchases and not the sales. The Paper Book from pages 1 to 48 filed before us are relevant in this regard. Further, he also relied on the Hon'ble Supreme Court judgement in the case of Andaman Timber Industries (Civil Appeal 4228 of 2006) in support of his contents for demand of cross-examination. He also submitted that the addition made by the Assessing Officer on account of bogus purchases is outside the scope of search assessment made u/s 153C of the Act. The assessee also raised various other issues without prejudice. The issue relating to the carried forward to the past losses qua the BIFR scheme is also relevant for reconsideration in the remand proceedings.

11 ITA No.137/NAG/2012 11. From the written submission, it is evident that the assessee raised various legal arguments i.e. making disallowances without rejecting the bills/sales of the assessee; the making addition in the search and seizure assessment which are not based on the seized/incriminating material etc. 12. Considering the above, we are of the view the issue raised in the revised grounds is not directly connected to the grounds raised before the lower authorities as well as before us in the original appeal memo. Nevertheless, the issues are borne out of the orders of the lower authorities. Considering the commonality of the issues and the existence of the legal grounds, we are of the opinion the legal issue should be admitted and remanded to the file of the Assessing Officer for fresh adjudication of the issue relating to the addition of Rs.8,06,65,900/-. 13. In the remand proceedings, the Assessing Officer shall grant a reasonable opportunity of being heard to the assessee in the remand proceedings. The Assessing Officer shall also admit the additional evidences, if any the assessee may like to file before him in the interest of justice. Accordingly, with these directions, all the legal as

12 ITA No.137/NAG/2012 well as merit related issues raised before us are allowed for statistical purposes. 14. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced on 27th day of March, 2019. Sd/- Sd/- (िवकास अव�थी /VIKAS AWASTHY) (डी. क�णाकरा राव/D. KARUNAKARA RAO) �याियक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER ukxiqj / Nagpur; �दनांक / Dated : 27th March, 2019. Sujeet आदेश क� �ितिलिप अ�ेिषत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT(A) 4. The CIT िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, ukxiqj ब�च, 5. ukxiqj / DR, ITAT, Nagpur Bench, Nagpur. गाड� फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, ukxiqj / ITAT, Nagpur.