SRI SAI TRADERS,WARANGAL vs. ITO, WARD-1, WARANGAL

Succinctly stated, the assessee firm had filed its return of income for AY 2017- 18 on 24.03.2018, declaring an income of Rs.25,600/-. Subsequently, the assessee firm's case was selected for “limited scrutiny” under CASS. Thereafter, notice under Section 143(2) of the Act, dated 24/09/2018 was issued, followed by notices under Section 142(1) of the Act, calling upon the assessee firm to furnish the requisite details.

During the course of assessment proceedings, the AO observed that the assessee firm had claimed to have carried on the business of an “Adthi”, i.e., a Commission Agent in the Agricultural Market, Warangal, earning commission at 2% on the agricultural produce handled by it. According to the assessee firm, the sale proceeds received from traders were deposited into its bank account and thereafter withdrawn in cash to make payments to the farmers, who insisted on cash payments.

The AO, however, sought information under Section 133(6) of the Act from the “Agricultural Market Committee, Warangal” (AMC). On the basis of the information so received, the AO recorded a finding that the assessee firm was not on the rolls of the AMC as an Adthi Commission Agent with PAN ACOFS0815M. The AO further observed that there existed two PANs in the name of the firm, namely, ACOFS0815M and ADNFS6655B, and was of the view that while the return of income had been filed with one PAN, the business transactions were being carried out through another PAN. The AO, proceeding on the aforesaid premise, rejected the explanation of the assessee and estimated its income at 5% of the total debits of Rs.5,74,79,841/- appearing in the bank account, thereby making an addition of Rs.28,73,992/- and determining its total income at Rs.28,99,592/-.

Aggrieved, the assessee firm carried the matter in appeal before the CIT(Appeals), who dismissed the appeal and sustained the addition made by the AO.

The assessee firm, aggrieved with the CIT(A) order, has carried the matter in appeal before us.

We have heard the Ld. Authorised Representatives of both parties, perused the orders of the authorities below and considered the material available on record.

Shri AV Raghuram, the learned Authorised Representative (for short, "AR") for the assessee firm, assailed the orders of the lower authorities. Referring to the certificate issued by the Office of the Agricultural Market Committee, Warangal Urban, it was submitted that the assessee-firm bearing PAN ACOFS0815M was duly registered as an “Adthidar” (Commission Agent in Food Grains) vide Licence No.209 for the period 01.04.2013 to 31.03.2018. It was further submitted that the very same certificate states that the licence stood cancelled with effect from 17.06.2017, since the partners had thereafter constituted another partnership firm under the same trade name, namely M/S. Sri Sai Traders, bearing PAN ADNFS6655B, and obtained a fresh licence in favour of the newly constituted firm.

Elaborating further, the learned AR submitted that although the assessee-firm was a registered Adthidar during the relevant previous year, the AO had called for information from the AMC only during the course of assessment proceedings conducted between 24.09.2018 and 27.12.2019, by which point in time, the licence standing in the name of the assessee-firm had already been cancelled with effect from 17.06.2017. The Ld. AR submitted that the reply furnished by the AMC, stating that the assessee firm was not on its rolls, merely reflected the position prevailing on the date the information was sought and not the factual position during the previous year relevant to the assessment year under consideration. Carrying his contention further, the Ld. AR submitted that as the AO proceeded entirely on misconceived facts by treating the assessee firm as an unregistered commission agent and, on that erroneous premise, estimated its income at 5% of the total bank withdrawals, the impugned addition so made was liable to be vacated.

Per Contra, the learned Departmental Representative (for short, “DR”) relied upon the orders of the lower authorities.

We have given thoughtful consideration to the contentions advanced by the Ld. Authorised Representatives of both parties in the backdrop of the orders of the authorities below.

Controversy before us lies in a narrow compass, i.e., sustainability of the impugned addition made by the AO based on the information gathered by him from AMC, as per which the assessee firm was not on its roll as an Adthidar (Commission Agent in Food Grains). Accordingly, the primary basis on which the AO rejected the explanation of the assessee firm and estimated its income is the information received from the “Agricultural Market Committee” (for short, “AMC”) under Section 133(6) of the Act stating that the assessee was not registered as an Adthi Commission Agent.

However, the certificate issued by the Office of the “Agricultural Market Committee, Warangal Urban”, now brought to our notice, prima facie reveals that the assessee-firm bearing PAN ACOFS0815M had in fact been granted Licence No.209 and remained a registered Adthidar during the period 01.04.2013 to 31.03.2018. The certificate further clarifies that the licence was cancelled only with effect from 17.06.2017, as the partners had thereafter constituted another partnership firm bearing PAN ADNFS6655B and obtained a fresh licence in favour of the newly constituted entity.

In our view, prima facie, the reply furnished by the “Agricultural Market Committee” during the assessment proceedings appears to reflect only the position existing on the date when the information was sought, i.e., during the assessment proceedings conducted in the financial years 2018-19 and 2019-20, and it does not necessarily establish that the assessee firm was not a licensed Adthidar during the relevant previous year corresponding to AY 2017-18.

In our considered view, the aforesaid factual aspect strikes at the very root of the assessment. Once the basic premise adopted by the AO is shown to require verification, the consequential estimation of income at 5% of the bank debits also cannot be sustained without a fresh examination of the factual position. Likewise, the issue regarding the existence of two PANs and the circumstances in which the subsequent partnership firm came into existence also requires proper verification in the light of the explanation furnished by the assessee firm.

We are, therefore, in terms of our aforesaid observations, of a firm conviction that the matter requires restoration to the file of the AO for a fresh examination. Accordingly, in the interest of substantial justice, we set aside the impugned order passed by the l CIT(A) as well as the assessment order and restore the matter to the file of the AO with a direction to verify the certificate issued by the ”Agricultural Market Committee, Warangal Urban”, and examine the factual position regarding the registration of the assessee firm as an Adthidar during the relevant previous year, as well as verify the circumstances under which the licence came to be cancelled with effect from 17.06.2017 and a fresh licence was issued in favour of another partnership firm, and thereafter decide the issues afresh in accordance with law. Needless to say, the AO shall, in the course of the set-aside proceedings, afford a reasonable opportunity of being heard to the assessee firm.

As we have restored the matter to the file of the AO on the aforesaid issue, we refrain from expressing any opinion on the merits of the estimation of income at 5% of the bank debits or on the explanation regarding the existence of two PANs, which issues are left open to be examined by the AO uninfluenced by any observations contained in this order.

Before parting, we may herein observe that the assessee firm has also raised a legal ground challenging the validity of the assessment on the ground that the AO travelled beyond the scope of the “limited scrutiny” for which the case was selected under CASS. As we have already restored the matter to the AO's file on the primary factual issue that goes to the root of the assessment, we do not consider it necessary to adjudicate the aforesaid legal ground at this stage, which is thus left open.

In the result, the appeal filed by the assessee is allowed for statistical purposes.