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Income Tax Appellate Tribunal, DELHI BENCH ‘E’, NEW DELHI
Before: Sh. H. S. SidhuDr. B. R. R. Kumar
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘E’, NEW DELHI Before Sh. H. S. Sidhu, Judicial Member Dr. B. R. R. Kumar, Accountant Member (Through Video Conferencing) ITA No. 2805/Del/2018 : Asstt. Year : 2013-14 ITA No. 2806/Del/2018 : Asstt. Year : 2014-15 M/s AMQ Agro India Pvt. Ltd. Vs Asstt. Commissioner of Income C-134, Ground Floor, Defence Tax, Central Circle-19, Colony, New Delhi-110024 New Delhi (APPELLANT) (RESPONDENT) PAN No. AAECA0929M
ITA No. 4408/Del/2018 : Asstt. Year : 2013-14 ITA No. 4409/Del/2018 : Asstt. Year : 2014-15 Deputy Commissioner of Income Vs M/s AMQ Agro India Pvt. Ltd. Tax, Central Circle-19, C-134, Ground Floor, Defence New Delhi Colony, New Delhi-110024 (APPELLANT) (RESPONDENT) PAN No. AAECA0929M Assessee by : Sh. Sh. Hiren Mehta, CA & Sh. Ashwani Gupta, CA Revenue by : Ms. Pramita M. Biswas, CIT DR. Date of Hearing: 08.12.2020 Date of Pronouncement: 22.01.2021 ORDER Per Dr. B.R.R. Kumar, Accountant Member:
Theses appeals have been filed by the assessed and revenue against the orders of ld. CIT (A)-27, New Delhi dated 06.04.2018
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 2 AMQ Agro India Pvt. Ltd. 2. Since, the issues involved in all these appeals are common, they were heard together.
ITA Nos. 2805 & 2806/Del/2018 (Assessee’s appeal)
In ITA No. 2805/Del/2018, following grounds have been raised by the assessee: “1. That on the facts and circumstances of the case and in law, the order passed by CIT (A)-27, New Delhi (hereinafter referred to as CIT (A)), is bad in law.
That on the facts and circumstances of the case and in law the CIT (A) was not justified in restricting the addition of Rs.21,94,53,432/- made by the AO on account of bogus purchases upto Rs.5,48,63,358/- being 25% of total bogus purchases amounting to Rs.21,94,53,432/- disallowed by the AO by rejecting the submission of the appellant company made during the course of appellate proceedings.
2.1 That the Ld CIT (A) has erred in holding that the facts of the appellant case are similar to the facts of the judgments given by the Hon'ble Supreme court in the case of N.K. Proteins Vs. DCIT and Hon'ble Gujarat High Court in the case of Vijay Proteins Ltd Vs CIT by rejecting the specific submission made by the appellant company that the facts of alleged decisions are different from the facts of the appellant case.
That on the facts and circumstances of the case and in law the CIT (A) was not justified in upholding the action of AO in making an addition of Rs. 96,73,948/- by treating the entire sales as undisclosed income, by rejecting the contention of the appellant that all income emanating out of the incriminating seized documents on the basis of which the alleged addition on account of Domestic sales has been made has already been disclosed in the Income Tax Return filed in response to notice u/s 153A based
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 3 AMQ Agro India Pvt. Ltd. upon the application filed before the Income Tax Settlement Commission (ITSC), which was rejected and hence not decided by ITSC in AMQ Group of entities.
3.1 That the CIT (A) was not justified in upholding the alleged addition by not considering and not adjudicating the submission of the appellant that during the course of assessment proceedings the appellant had requested for providing the recasted books of accounts on the basis of which alleged addition on account of undisclosed domestic sales has been computed but neither the books of accounts nor any basis for making alleged addition was provided by the AO to the appellant.
3.2 That the CIT (A) was not justified in upholding the alleged addition by rejecting the submission of the appellant that the entire sales cannot be added as undisclosed income, it is only the profits emanating from undisclosed sales after reducing corresponding purchase cost and overheads that could have been taxed.
3.3 That the CIT (A) was not justified in upholding the alleged addition by not considering the submission of the appellant that the AO has not provided credit for the income from undisclosed activity of meat sale/ purchase already included in the return of Income filed in response to notice u/s 153A based upon the application filed before the Income Tax Settlement Commission (ITSC), which was rejected and hence not decided by ITSC in AMQ Group of entities.
That the CIT(A) was not justified in holding, that the addition of Rs. 13,98,33,256/- on account of alleged cash payments outside books of accounts for purchases of meat products protectively added in the hands of the appellant and substantively added in the hands of Moin Akhtar Qureshi, is deleted in the hands of the appellant subject to outcome of appeal in the case of Moin Akhtar Qureshi and further if the
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 4 AMQ Agro India Pvt. Ltd. aforesaid addition is deleted in that case it would get revived in appellant's case.
4.1 That the CIT(A) erred in not adjudicating the issue regarding undisclosed sales (Rs. 96,73,948/-) and undisclosed cash payments (Rs. 13,98,33,256/-) together in a co-joint manner as both the issues are linked and of overlapping nature in as much as the undisclosed activity of sale/purchase of meat products outside books of accounts involved payments in cash, utilization of cash for purchases, subsequent sale, realization of cash from sales and reutilization of same cash for further purchases and therefore the same cash was rotated in the undisclosed business year after year for the entire block period from AY 2008-09 to AY 2014-15.
That on the facts and circumstances of the case and in law the CIT (A) was not justified in restricting the addition of 26,62,088/- made by the AO by disallowing the 50% of the expenses incurred through credit card upto Rs. 10,65,435/- being 20% of the expenses incurred through credit cards without considering the contention of the appellant made during the course of appellate proceedings that the alleged expenses have been incurred due to commercial expediency for the purpose of the business of the appellant company only.
That on the facts and circumstances of the case and in law the CIT (A) was not justified in restricting the addition of 39,32,904/- made by the AO by disallowing the 50% of the "Other expenses" incurred during the year upto Rs. 16,50,761/- without considering the contention of the appellant made during the course of appellate proceedings that the alleged expenses have been exclusively incurred for the purpose of the business of the appellant company and properly supported by evidence.
That on the facts and circumstances of the case and in law the CIT(A) was not justified in upholding the action of the assessing officer in making addition of Rs.3,78,000/- on account of rent paid to Ms. Alka
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 5 AMQ Agro India Pvt. Ltd. Pandy in respect of Guest House of the company at Nanital by holding that the same was never used for business purpose without considering the submission of the appellant company that the same is near to the factory of the appellant company and was taken on rent for business use only. 8. That on the facts and circumstances of the case and in law the CIT(A) was not justified in upholding the action of the assessing officer in making addition of Rs.4,11,184/- u/s 14A without considering the submission made by the appellant company during the course of appellate proceedings that no part of the administrative expenses incurred is directly or indirectly attributable for earning of the exempt income as the investments were made on single day and monitoring of the same has been done by the outside fund managers.
8.1 Without prejudice to the above, the CIT (A) has erred in not considering the fact that the average investment considered by the AO for calculating the alleged disallowance is not correct.
That on the facts and circumstances of the case and in law the CIT (A) was not justified in upholding the action of the AO in not reducing from the assessed income the amount of additional income already included in the Return of Income filed in response to notice u/s 153A based upon the application filed before the Income Tax Settlement Commission (ITSC), which was rejected and hence not decided by ITSC in AMQ Group of entities.”
In ITA No. 2806/Del/2018, following grounds have been raised by the assessee:
“1. That on the facts and circumstances of the case and in law, the order passed by CIT (A)-27, New Delhi (hereinafter referred to as CIT (A)), is bad in law.
That on the facts and circumstances of the case and in law the CIT (A) was not justified in restricting the addition of
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 6 AMQ Agro India Pvt. Ltd. Rs.37,52,45,574/- made by the AO on account of bogus purchases upto Rs.9,38,11,393/- being 25% of total bogus purchases amounting to Rs.37,52,45,574/- disallowed by the AO by rejecting the submission of the appellant company made during the course of appellate proceedings.
2.1 That the Ld CIT ( A) has erred in holding that the facts of the appellant case are similar to the facts of the judgments given by the Hon'ble Supreme court in the case of N.K. Proteins Vs. DCIT and Hon'ble Gujarat High Court in the case of Vijay Proteins Ltd Vs CIT by rejecting the specific submission made by the appellant company that the facts of alleged decisions are different from the facts of the appellant case.
That on the facts and circumstances of the case and in law the CIT (A) was not justified in upholding the action of AO in making an addition of Rs. 31,69,853/- by treating the entire sales as undisclosed income, by rejecting the contention-of the appellant that all income emanating out of the incriminating seized documents on the basis of which the alleged addition on account of Domestic sales has been made has already been disclosed in the Income Tax Return filed in response to notice u/s 153A based upon the application filed before the Income Tax Settlement Commission (ITSC), which was rejected and hence not decided by ITSC in AMQ Group of entities.
3.1 That the CIT (A) was not justified in upholding the alleged addition by not considering and not adjudicating the submission of the appellant that during the course of assessment proceedings the appellant had requested for providing the recasted books of accounts on the basis of which alleged addition on account of undisclosed domestic sales has been computed but neither the books of accounts nor any basis for making alleged addition was provided by the AO to the appellant.
3.2 That the CIT (A) was not justified in upholding the alleged addition by rejecting the submission of the appellant that the entire sales cannot be added as undisclosed income, it is only the profits emanating from undisclosed sales after reducing corresponding purchase cost and overheads that could have been taxed.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 7 AMQ Agro India Pvt. Ltd. 3.3 That the CIT (A) was not justified in upholding the alleged addition by not considering the submission of the appellant that the AO has not provided credit for the income from undisclosed activity of meat sale/ purchase already included in the return of Income filed in response to notice u/s 153A based upon the application filed before the Income Tax Settlement Commission (ITSC), which was rejected and hence not decided by ITSC in AMQ Group of entities.
That the CIT(A) was not justified in holding, that the addition of Rs. 5,00,53,067/- on account of alleged cash payments outside books of accounts for purchases of meat products protectively added in the hands of the appellant and substantively added in the hands of Moin Akhtar Qureshi, is deleted in the hands of the appellant subject to outcome of appeal in the case of Moin Akhtar Qureshi and further if the aforesaid addition is deleted in that case it would get revived in appellant's case.
4.1 That the CIT(A) erred in not adjudicating the issue regarding undisclosed sales (Rs. 31,69,863/-) and undisclosed cash payments (Rs. 5,00,53,067/-) together in a co-joint manner as both the issues are linked and of overlapping nature in as much as the undisclosed activity of sale/purchase of meat products outside books of accounts involved payments in cash, utilization of cash for purchases, subsequent sale, realization of cash from sales and reutilization of same cash for further purchases and therefore the same cash was rotated in the undisclosed business year after year for the entire block period from AY 2008-09 to AY 2014-15.
That on the facts and circumstances of the case and in law the CIT (A) was not justified in restricting the addition of 37,37,843/- made by the AO by disallowing the 50% of the expenses incurred through credit card upto Rs. 14,95,137/- being 20% of the expenses incurred through credit cards without considering the contention of the appellant made during the course of appellate proceedings that the alleged expenses have been incurred due to commercial expediency for the purpose of the business of the appellant company only.
That on the facts and circumstances of the case and in law the CIT (A) was not justified in restricting the addition of 79,908/- made by the AO by disallowing the 50% of the
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 8 AMQ Agro India Pvt. Ltd. "Other expenses" incurred during the year upto Rs.31,963/- being 20% of the other expenses incurred without considering the contention of the appellant made during the course of appellate proceedings that the alleged expenses have been exclusively incurred for the purpose of the business of the appellant company and properly supported by evidence.
That on the facts and circumstances of the case and in law the CIT(A) was not justified in upholding the action of the assessing officer in making addition of Rs.9,92,945/- u/s 14A without considering the submission made by the appellant company during the course of appellate proceedings that no part of the administrative expenses incurred is directly or indirectly attributable for earning of the exempt income as the investments were made on single day and monitoring of the same has been done by the outside fund managers.
7.1 Without prejudice to the above, the CIT (A) has erred in not considering the fact that the average investment considered by the AO for calculating the alleged disallowance is not correct.
That on the facts and circumstances of the case and in law the CIT (A) was not justified in upholding the action of the AO in not reducing from the assessed income the amount of additional income already included in the Return of Income filed in response to notice u/s 153A based upon the application filed before the Income Tax Settlement Commission (ITSC), which was rejected and hence not decided by ITSC in AMQ Group of entities.”
ITA Nos. 4408 & 4409/Del/2018 (Revenue’s appeal)
In ITA No. 4408/Del/2018, following grounds have been raised by the revenue: “1) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the addition of Rs. 16,45,90,074/- made on account of bogus purchase, by restricting the addition to the extent of Rs.5,48,63,358/-, being 25% of total bogus purchases amounting to Rs.21,94,53,432/-.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 9 AMQ Agro India Pvt. Ltd. 2) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the addition of Rs Rs.3,23,25,480/- made on account of under invoicing of export sales.
3) The Ld. Commissioner of Income Tax(Appeals) has erred in law and on the facts in deleting the protective addition of Rs.13,98,33,256/- on account of cash received in Omasum Delhi Account.
4) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the addition of Rs. 1,94,98,086/- made on account of outstanding creditors.
5) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the addition of Rs. 15,96,653/- on account of expenditure through credit cards and foreign travelling, by restricting the addition to the extent of Rs. 10,65,435/- out of the total disallowance of Rs.26,62,088/-.
6) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the addition of Rs.22,82,142/- on account of other expenses, by restricting the addition to the extent of Rs. 16,50,761/- out of the total disallowance of Rs.39,32,904/-.
7) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the addition of Rs. 22,68,000/- on account of salary expenses.
8) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the addition of Rs. 68,85,000/- on account of unexplained investment u/s 69 of the IT Act, 1961.
9) (a) The order of the CIT(Appeals) is erroneous and not tenable in law and on facts.”
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 10 AMQ Agro India Pvt. Ltd. 6. In ITA No. 4409/Del/2018, following grounds have been raised by the revenue: 1) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the addition of Rs.28,14,34,180/- made on account of bogus purchase, by restricting the addition to the extent of Rs.9,38,11,393/-, being 25% of total bogus purchases amounting to Rs.37,52,45,574/-.
2) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the addition of Rs.6,64,78,110/- made on account of under invoicing of export sales.
3) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the protective addition of Rs.5,00,53,067/- on account of cash received in Omasum Delhi Account.
4) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the addition of Rs. 11,98,61,713/- made on account of outstanding creditors.
5) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the addition of Rs.22,42,706/- on account of expenditure through credit cards and foreign travelling, by restricting the addition to the extent of Rs. 14,95,137/- out of the total disallowance of Rs.37,37,843/-.
6) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the addition of Rs.47,945/- on account of other expenses, by restricting the addition to the extent of Rs.31,963/- out of the total disallowance of Rs.79,908/-.
7) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the addition of Rs. 31,38,000/- on account of salary expenses.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 11 AMQ Agro India Pvt. Ltd. 8) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the addition of Rs.10,80,000/- on account of interest free advances.
9) The Ld. Commissioner of Income Tax (Appeals) has erred in law and on the facts in deleting the addition of Rs. 7,98,54,200/- on account of sale of investment.”
Addition on account of Bogus Purchases:
ITA No. 2805/Del/2018 (Ground No. 2) ITA No. 2806/Del/2018 (Ground No. 2)
ITA No. 4408/Del/2018 (Ground No. 1) ITA No. 4409/Del/2018 (Ground No. 1)
The AO has made addition of Rs.21,94,53,000/- treating the purchases as bogus. The ld. CIT (A) has treated 75% of the purchases as genuine and 25% of the purchases as bogus.
The assessee came into appeal against the confirmation of 25% of the purchases and revenue came into appeal against the deletion of 75% of the purchases.
The relevant facts are that the assessee is engaged in the activity of exporting "OMASUM" and "OFFAL". These items are stomach of the buffalo. The assessee company buys raw meat from farmers or slaughter houses for extracting raw Omasum and Offal. These are then put through a process to get the final finished Omasum and Offal which are exported. The details of purchases made by the company during the assessment years under consideration are as under: Asst, year Cash purchases Credit purchases Total 2013-14 20,83,90,270/- 41,65,43,102/- 62,49,33,372/- 2014-15 58,04,25,032/- 32,35,43,094/- 90,39,68,126/-
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 12 AMQ Agro India Pvt. Ltd. 10. During the course of assessment proceedings the Assessing officer has made disallowance on account of purchases by holding certain purchases as bogus purchases. The disallowance of purchases made by the AO also includes purchases for which payment were made in cash by holding that the same are required to be disallowed U/s 40A (3) of the I.T Act.
Asst. Total Total amount Cash purchases Year purchases treated as bogus included in the purchases overall figure of disallowance 2013-14 62,49,33,372/- 21,94,53,432/- 20,83,90,270/- 2014-15 90,39,68,126/- 37,52,45,574/- 32,35,43,094/-
The reasons given by the AO while treating the purchases as bogus are as under: i. That the majority of purchases recorded in the books of accounts of the assessee company are not supported by the third-party invoices/ vouchers. ii. The payments against majority of purchases are made only in cash, where each payment is made for an amount equal to or less than Rs.20,000/-, even in respect of these no primary voucher or bills/ other evidences were made. iii. The quantitative records in respect of purchases are not maintained in terms of actual inward quantities as per invoices and the quantities are stated to have been recorded net off wastages, without any corresponding record of the same. iv. No evidences are made available in respect of such payments either in the form of payment vouchers or in the form of acknowledgement of such payments by the recipients.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 13 AMQ Agro India Pvt. Ltd. v. The parties to whom payments are stated to have been made are not identifiable due to lack of any evidence to prove identity/ existence of such parties. vi. The rates of purchases as recorded in the books of accounts of the assessee company are very high as compared to the average export rates of buffalo meat, more particularly when the nature of procurement by the assessee is waste product and buffalo meat is the main usable product. vii. Considering the manner in which the payments are recorded at amounts equal to or less than Rs.20000/- on a day spread over various days, even when the purchase values from the respective parties are very high, it appears that the payments are recorded in the books of account in such a way that the limit prescribed u/s 40A (3) is not violated. viii. The payments made by the assessee are not covered under exclusions given in Rule 6DD for the reason that the purchases made by the assessee is through various persons not directly from the cultivator, grower or producer of such products, the payment to whom is excluded from applicability of provisions of section 40A(3). Apart from this, the assessee has not maintained any records to prove that the payments made by it fall within the exclusions prescribed in Rule 6DD.
While deleting the 75% of the addition made by the AO on account of bogus purchases, the ld. CIT (A) held as under:
……….The AO observed that the appellant company has claimed total purchases of raw meat of buffalo (Omasum and Offal) at Rs.62,49,33,372/- and these purchases are largely made from slaughter houses or the rural areas from the persons/parties who sell the waste part of buffalo meat which are left out after selling the main buffalo meat consisting of bone embedded flesh and fine parts.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 14 AMQ Agro India Pvt. Ltd. As per AO, for these purchases, no purchase invoices or vouchers are issued by the third party and major part of the payments have been made in cash for which full identity of the sellers is not kept on record. The Special Auditor had already pointed out during the special audit that complete details of seller parties are not maintained by appellant. The AO has also applied the provisions of section 40A(3) read with Rule 6D of I. T. Rules to disallow the cash payments on account of purchases made by appellant. On the other hand, appellant has claimed that out of total purchases of Rs.62,49,33,372/-, purchases amounting to Rs.41,65,43,102/- are on credit basis for which payments. have been made through cheque and proper third party invoices/vouchers are available in the records of the company and for the balance amount of purchases at Rs.20,83,90,270/- made in cash are in normal course of business of assessee company which are in accordance with the practice followed in the meat industry and are specifically covered and allowed under the provisions of section 40A(3) under Rule 6D of I. T. Rules. It is also submitted that corresponding export sales as well as local sales are made against these purchases and without the purchases, such sales are not possible. As per it, the purchases are made mainly from farmers/cultivators/agents/producers and they accept the payment in cash and do not maintain the proper system of issuing regular invoices/bills etc.
8.1 In view of above, now the authenticity of expenses on account of purchases made by appellant are to be examined. As admitted by appellant and also mentioned by AO as well as Special Auditor, a large part of the purchases are not properly vouched by appellant. Out of the total purchase amount of Rs.62,49,33,372/-, the purchases of Rs.21,94,53,434/- have been found bogus by the AO as no invoices/purchase bills were found by him as well as Special Auditor. Out of these purchases, the payments of Rs.20,83,90,270/- have been made in cash for which the self made vouchers by appellant for the amounts Rs.20,000/- or less have been maintained. Obviously, these are self serving document without any corroborative evidence just to show that the payments have been made to certain persons/parties in lieu of purchases. To establish the genuineness of these purchases, the appellant could not produce/furnish any
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 15 AMQ Agro India Pvt. Ltd. purchase bills/third party vouchers either during special audit or during the assessment proceedings. Since these are the expenses in the form of purchases, which have been claimed by appellant by reducing its profit, onus is on it to establish the authenticity and genuineness of these expenses with the support of primary evidence in the form of purchase bills. But the same has not been done. The appellant failed to produce these purchase bills or any corroborative evidence to establish the genuineness of these purchases. During the appellate proceedings, appellant has filed the copies of ledger accounts of these persons/parties and the details of purchases and the payments made against it, which further raise doubt on the authenticity of the transactions. These ledger accounts clearly show that the persons/parties from whom the purchases have been made, belong to different areas of Uttar Pradesh and after making sales to the appellant company, payments have been received by them of identical amounts of Rs.20,000/-, Rs.19,500/- or Rs.19,000/- on regular basis almost on alternate day or in the gap of few days. They have not received the full cash payment of the material sold by them on any date though the appellant has made payments of Rs.20,000/- or Rs.19,500/- to various persons on the same date. In place of calling the person from different places on a particular date and giving them Rs.19,000/- or Rs.20,000/- to each one, the appellant could have made the full payment of one or few persons against their purchases.
It is also not practically possible to come from the faraway places by the persons to received the cash amount of Rs.20,000/- on each date from the appellant. For example, one person Ikbal Zarif from Saharanpur sold the material of Rs.78,897/- to appellant on 03.12.2012 and got the payments in cash amounting to Rs. 19,000/-, Rs.20,000/-, Rs.20,000/-, Rs.20,000/-, Rs.20,000/- and Rs. 14,000/- on 05.12.2012, 07.12.2012, 10.12.2012, 13.12.2012, 17.12.2012 and 31.12.2012. Similarly, one person namely Jawaid from Kanpur sold the material of Rs.66,820/- to appellant and received the cash payments of Rs.20,000/-, Rs. 19,000/-, Rs.19,000/-, Rs.19,000/-, Rs.20,000/- and Rs.20,000/- on 04.09.2012, 07.09.2012,12.09.2012, 18.09.2012, 21.09.2012 and 24.09.2012. Similar is in the position in other months also. One more person, namely Junaid
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 16 AMQ Agro India Pvt. Ltd. from Qasganj sold the material of Rs.92,193/- on 07.05.2012 to appellant and received the cash payments of Rs.20,000/- on each day on the dates of 10.05.2012, 17.05.2012, 22.05.2012, 24.05.2012, 25,05.2012, 28.05.2012 and 31.05.2012. These are very few instances out of the total purchases made by appellant just to show that in what manner the purchases have been made and cash amounts have been paid by appellant allegedly to these parties. Similar is the nature of payments and frequency of payments made by appellant to other parties. In almost all the cases, cash payments have been made on alternate day or in the gap of two-three days. However, it is practically not possible to these persons/parties to come from distant places and receive the payments from assessee either at Rampur or at Delhi and that also Rs.20,000/- or less on each date though it is apparent from these ledger accounts, on a given date, appellant has made payments to several persons and to everybody, less than Rs.20,000/-. It has been further seen from these ledger accounts that out of more than 400 sellers of material, on a single date i.e. 12.03.2013, cash payments to 283 persons/parties of the amounts Rs.20,000/- or less to each have been made against the purchases. Similar is the position on other dates also wherein on any single date, payments of Rs.20,000/- or less to each have been made to more than 200 persons/parties. He could have easily made payments to one or few persons/parties against their total purchases at one instance instead of asking them to come on alternate days or in the gap of few days to receive the payments. All these facts clearly reflect that the appellant has just manufactured the evidence in the form of self made vouchers to justify the claim that purchases are genuine. However, it is evident from its own admission as well as observation of AO and Special Auditor that the primary evidence in the form of original bills/third party vouchers were not produced by appellant during the proceedings before them. Moreover, the claim of appellant cannot be verified from any real time corroborative evidence to establish that these purchases are genuine.
8.1.1 Moreover, the quantitative records in respect of purchases also raise the doubts on authenticity of purchases made by appellant and quantitative details
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 17 AMQ Agro India Pvt. Ltd. recorded in the books of account. Whatever gross weight of material has been purchased by appellant by giving a certain rate has not been entered into the books of account rather net off wastage, without any corresponding record of the same have been entered and both the quantities do not tally with each other. It can, therefore, not be ascertained whether the quantities and rates of purchases have been correctly entered into books of account for the purpose of making sales as while making sales, net off the wastage of material has been mentioned and rates also have been applied accordingly. Moreover, the plea taken by appellant regarding the cash purchases that the same are covered by the provisions of Rule 6DD are also not sustainable as the appellant has failed to establish that the material has been purchased directly from the cultivator, grower or producer of such products, the payment to whom is excluded from the applicability of provisions of section 40A(3) of L T. Act.
8.1.2 In view of above, it is held that the AO was justified in treating the expenses on account of purchases of Rs.21,94,53,432/- as bogus and unexplained. In such situation, whether entire amount of purchases has to be added back or the profit margin embedded in such amount would be subject to tax, Hon'ble Gujarat High Court1 in the case CIT vs. Bholanath Poly Fab Pvt. Ltd 355 ITR 290 has opined that only the profit element would be subject to tax. The observation of Hon'ble Court is as under:-
"6. We are of the opinion that the Tribunal committed no error. Whether the purchases themselves were bogus or whether the parties form whom such purchases were allegedly made were bogus is essentially a question of fact. The Tribunal having examined the evidence on record came to the conclusion that, the assessee did purchase the cloth and sell the finished goods. In that view of the matter, as natural corollary, not the entire amount covered under such purchase, but the profit element embedded therein would be subject to tax. This was the view of this court in the case of Sanjay Oilcake Industries vs. CIT [2009] 316 1TR 274. Such decision is also followed by this court in a judgment dated August 16, 2011, in Tax Appeal No. 679 of 2010 in the case of CIT vs. Kishor Amrutlal Patel. In the result, tax appeal is dismissed."
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 18 AMQ Agro India Pvt. Ltd.
8.1.3. In view of the above, now it has to be decided what would be the element of profit embedded in bogus purchases as found by AO during the assessment proceedings. In this regard, recently in a case namely Virendra Kumar Gupta vs. CIT in ITA No. 2721/Del/2016, dated 13.12.2017 for A.Y. 2006-07, Hon'ble Delhi ITAT Bench 'G' has dealt with the issues of such bogus purchases and after relying on the judgments of Hon'ble Supreme Court in the case of N. K. Proteins vs. DCIT and Hon'ble Gujarat High Court in the case Vijay Proteins Ltd vs. CIT, observed as under:-
"12. Now coming to ground of addition of Rs. 5247565/- on account of Bogus purchases, Rs. 262377/- on account of commission paid on obtaining the accommodation entries and addition of 20% of the purchase of Rs. 1049513/- on account of understatement of the profit for the same. The Ld. AR did not submit any major argument on this but relied on the submission made before the Ld. CIT(A).
The Ld CIT DR vehemently supported the orders of the lower authorities, relying on the following judicial pronouncement:
a. PCIT Vs.Paramount Communication (P) Ltd. 2017-TIOL-253-H.C-IT b. PCIT Vs. Paramount Communication (P) Ltd. 292 ITR 444 c. CIT Vs. Arun Malhotra 363ITR 195 d. N K Proteins Vs. CIT 2017-TIOL-23HC-U e. Vijay Proteins Ltd. Vs. ACIT 58 ITD 428 (Ahmadabad) f. CIT Vs. La Medica 117 Taxmann 628 (Delhi)
The various decisions cited by the Ld. CIT DR as well as the contention of the assessee before the lower authorities were considered. The Hon'ble Supreme Court in case of NK Proteins Ltd. Vs. DCIT in 2017- TIOL-23-SC-IT has confirmed on the similar circumstances addition to the extent of 25% of the bogus purchases. Similar view has been taken by the Hon'ble Gujarat High Court in NK Industries Ltd. Vs. DCIT 2016 TIOL- 3165-HC-AHM-IT dated 20.06.2016 and
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 19 AMQ Agro India Pvt. Ltd. Vijay Proteins Ltd. Vs. CIT 58 Taxmann.com 44. Therefore, the addition made by the Ld. Assessing Officer in the present case of whole of the purchase consideration cannot be sustained. The various judicial precedents cite before us also suggest that addition should be restricted to the extent of 25% of the purchases. Further, the decision relied upon by the Ld. Department Representative of Hon'ble Delhi High Court in case of CIT Vs. La medica 250 ITR 575 do not apply to the facts of the case as in that particulars case the goods were pledged with the bank and the person from whom the purchases were made and how was operating the bank account was the employee of the group concern of the assessee. However, in the present case there is no such finding similar to that judgment. Further, assessee has already recorded the sales of the goods allegedly purchased from these bogus parties. Further, the Ld. CIT(A) has categorically stated at page No. 39 of his order under the heading "actual transaction" that goods have actually been purchased from grey market by cash payment from the cash generated outside the books of account and on quantitative details shown by the assessee, it has to be reasonably presumed that assessee purchased material from market in cash and bills were obtained from the above two bogus concerns of the accommodation entry provider. Therefore, it is apparent that the addition of whole of the amount cannot be made. Therefore, in view of the decision of the Hon'ble Supreme Court and Hon'ble High Court cited by the Ld. DR, we direct the Ld. Assessing Officer to restrict the addition @25% of the total purchases of Rs. 5247565/- from these tainted parties. Accordingly, the addition is restricted to Rs. 1311891/- and balance addition of Rs. 3935673/- is deleted. In the result ground No. 4 to 7 are partly allowed."
8.1.4. Since the facts of the present case are similar to the facts of the case discussed by Hon'ble Gujarat High Court and Hon'ble ITAT, Delhi while giving the aforesaid decisions, the ratio given by Hon'ble ITAT has to be applied here also. Respectfully following the same, I also restrict the addition made by AO at Rs.5,48,63,358/-, being 25% of total bogus purchases amounting to
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 20 AMQ Agro India Pvt. Ltd. Rs.21,94,53,432/- as computed by him during the assessment proceedings. The balance addition of Rs.16,45,90,074/- is deleted. The assessee gets part relief.”
During the arguments, the ld. AR argued extensively on various points which are mentioned in brief as under:
“A comparative analysis of profit margins of contemporaneous meat exporting companies is given here as under:
Name of the company AY 2013-14 AY 2014-15 %GP %NP %GP %NP AMQ Agro India Pvt. 12.63 5.23 11.11 3.44 Hind Agro Industries 5.63 1.30 6.31 1.30 Al-Hamd Agro foods 10.83 1.25 10.55 1.80 Products Pvt. Ltd. Al-Kabeer Exports Pvt. 5.56 1.43 5.49 0.99 Amroon Foods Pvt. Ltd. - ltd - 7.97 0.68 Eagle continental Foods 0.53 1.59 Pvt. Ltd.
Before us, the ld. AR argued, 1. That, from the perusal of the above comparison of % Gross profit and % net profit of six companies with the assesse company it is evident that no company in the similar line of business is earning as much as profit as the assessee company.
That, the AO is trying to impose on the assesse company by disallowing the purchases made by the assesse company as bogus purchases. All the above comparable case are of meat exporting companies with substantial turnover. Their audited balance sheets have been retrieved from prowess.cmie.com and the said data is in public domain.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 21 AMQ Agro India Pvt. Ltd. 3. That ,in addition to above, the contention of the appellant is that the appellant is maintaining proper quantitative records for all the cash and credit purchases made during the year and the rates of the purchases made on cash basis are comparable with the rates of purchases made on the credit basis.
That in the assessment order of the assessee company, the Ld AO has relied upon the average export sale price of buffalo meat taken from agriexchange.apeda.gov.in to contend that average purchase cost of buffalo meat was lower than the average purchase cost of the company.
In regard, it was argued that the assesse company is mainly engaged in the business of sale of “Omasum and Offal” which is different from buffalo meat. It may be emphasized that Omasum is a delicacy in countries such as China, Vietnam etc. Therefore, raw material price of Omasum is higher than that of ordinary buffalo meat. Therefore, comparison made in the assessment order of the assessee company for disallowing the alleged purchase as bogus, is not valid. In case if a comparison is required then the same may be made between average export sale rate of Omasum and not buffalo meat.
It was argued that the action of the Assessing Officer in disallowing purchases, by treating them as bogus, without rejecting books of accounts is not sustainable. It is a well settled proposition that books of accounts cannot be rejected unless their completeness and correctness is established to be doubtful by finding specific defects in the books. In the present case not a single defect has been pointed out in the books of accounts and therefore its completeness and correctness cannot be doubted and hence the same cannot be rejected.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 22 AMQ Agro India Pvt. Ltd. 17. It was repeated that the books of accounts have not been rejected. Being that the position, the disallowance of purchases made in the assessment order is not sustainable. Reliance in this regard is placed on the decision of Gujarat High Court in the case of Yunus Haji Ibrahim Fazawafa Vs. CIT 70 taxmann.com 93 (Guj.). It was argued that if the Assessing Officer has accepted the sales made by the assessee and if that be so, it would indicate that the assessee must have made purchases, otherwise it would not be possible for the assessee to make the sales.
The ld. AR argued that the disallowance has been made in respect of purchases by holding that no evidentiary documents were provided. It is not the case of the Assessing Officer that out of total purchases recorded in documents substantiating evidence in the form of invoices, quantitative records, proof of payments, identity/ existence of the payee is not available in respect of the aforesaid purchases and hence the same has been treated as bogus purchases not supported with bills. The Assessing Officer has also made disallowance u/s 40A (3) amounting to Rs. 20,83,90,270/- for which payment is made in cash. The said disallowance of Rs. 20,83,90,270/- is included in the overall disallowance of Rs. 21,94,53,432/-.
It was argued that the assessee company has done corresponding export sales during the relevant assessment year which would not have been possible, had the purchases been bogus.
It was argued that the theory of bogus purchases introduced in the assessment order is not based on correct premise. This can be demonstrated by way of a comparison of the GP & NP ratio of the assessee company which was 12.36% & 5.23% respectively with that of the other contemporaneous meat exporters. To illustrate the GP & NP
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 23 AMQ Agro India Pvt. Ltd. percentage of Hind Agro Industries during AY 2013-14 was 5.63% & 1.30% respectively, GP & NP percentage of At Hamd Agro Food Products Pvt. Ltd. was 10.83% & 1.25% respectively and that of At Kabir Export Pvt. Ltd. was 5.56% and 1.43% respectively. Thus the GP & NP percentage of the assessee company was far more than those of other meat exporters during the relevant assessment year.
It was argued that the GP & NP percentage is computed after reducing the figure of alleged bogus purchases the resultant yield would come to 45.39% and 37.99% which is highly unrealistic.
Argued that, the assessee is buying meat in the form of slaughtered meat directly from the farmers which are located in remote village areas. These parties are agriculturists who sell meat after getting their livestock, slaughtered from a slaughtering house. It may be noted that the cattle which is slaughtered is having negligible economic value and therefore the same is slaughtered by the owners and thereafter the slaughtered meat (in case of the assessee company Offal/ Omasum) is sold off.
As regards substantiating documents to evidence the purchases, it was explained that a detailed party-wise purchase register is being maintained. Copies of Ledger Account of all the parties from whom purchases have been made are available. In each ledger account of the respective party the quantity of Offal/ Omasum purchase is duly recorded in Kgs.
Cash payments made to such parties are also recorded in the said Ledger accounts. A copy of the purchase register along with ledger accounts of all the parties is being furnished.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 24 AMQ Agro India Pvt. Ltd. 25. It was further submitted that there is a separate voucher recording the quantity, rate and value of purchases made from each party. This document is nothing but a purchase invoice which is generated by the assessee company instead of the seller. Further, each and every seller's payment voucher is available in respect of individual payments made to a particular party. These payment vouchers are counter signed by the party. The name and city/village of the party is duly recorded on the payment voucher. Copies of all such vouchers pertaining were also produced before the ld. CIT(A).
It was argued that in view that the assessee company is having original substantiating documents in the form of purchase invoices and the payment receipt vouchers duly signed by party acknowledging the receipt of cash payment, the A.O. is not correct in holding that no substantiating documents exist in respect of cash purchases.
The ld. AR relied on the decision of Hon’ble Kerala High Court in the case of CIT v. Interseas Food Exporters 188 Taxmann 343 (Kerala). In this case, cash purchases of fish and fish products were disallowed by applying the provisions of section 40A (3) and further a part disallowance was made in respect of purchase against cash payments. Part disallowance of cash purchase was sustained by CIT (A) and reversed by Tribunal on the ground that assessee cannot be expected to prove purchase against payment of cash.
On the other hand, the ld. DR argued, 1. That, payment u/s 40A(3) are allowed only when the payment is made for the purchase of produce of animal husbandry which includes meant AND the payment for the same is made to cultivator, grower or producer of such articles, produce or products.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 25 AMQ Agro India Pvt. Ltd.
That, the total purchase invoice have not been produced and the assessee has not provided third party vouchers.
That, the price of Omasum has been inflated as the cost of procurement of such products is very less.
That, the average rate of purchase price varied from Rs.143/- to Rs.400 per kg whereas the meat rate was quite less.
That, in the absence of purchase invoice, the AO has rightly made the disallowance.
That, the payments have been spread over various dates only to avoid the provisions of Section 40A(3).
The ld. DR reiterated the findings of the AO which are as under: i. That the majority of purchases recorded in the books of accounts of the assessee company are not supported by the third-party invoices/ vouchers. ii. The payments against majority of purchases are made only in cash, where each payment is made for an amount equal to or less than Rs.20,000/-, even in respect of these no primary voucher or bills/ other evidences were made. iii. The quantitative records in respect of purchases are not maintained in terms of actual inward quantities as per invoices and the quantities are stated to have been recorded net off wastages, without any corresponding record of the same. iv. No evidences are made available in respect of such payments either in the form of payment vouchers or in the form of acknowledgement of such payments by the recipients.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 26 AMQ Agro India Pvt. Ltd. v. The parties to whom payments are stated to have been made are not identifiable due to lack of any evidence to prove identity/ existence of such parties. vi. The rates of purchases as recorded in the books of accounts of the assessee company are very high as compared to the average export rates of buffalo meat, more particularly when the nature of procurement by the assessee is waste product and buffalo meat is the main usable product. vii. Considering the manner in which the payments are recorded at amounts equal to or less than Rs.20000/- on a day spread over various days, even when the purchase values from the respective parties are very high, it appears that the payments are recorded in the books of account in such a way that the limit prescribed u/s 40A (3) is not violated. viii. The payments made by the assessee are not covered under exclusions given in Rule 6DD for the reason that the purchases made by the assessee is through various persons not directly from the cultivator, grower or producer of such products, the payment to whom is excluded from applicability of provisions of section 40A(3). Apart from this, the assessee has not maintained any records to prove that the payments made by it fall within the exclusions prescribed in Rule 6DD.
Rebutting the revenue arguments of the ld. AR submitted that the provisions of Section 40A(3) are not at all applicable in the case of the assessee as no single payment has been made in excess of Rs.20,000/- on any given day and the revenue could not stretch the issue beyond the provisions of the Act. He has also argued that all evidences have been produced before the authorities below.
Heard the arguments of both the parties and perused the material available on record.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 27 AMQ Agro India Pvt. Ltd. 32. We find that the ld. CIT (A) has considered the issue of the provisions of Section 40A(3) and has not given any adverse finding against the assessee thus disputing the contention of the Assessing Officer. We have examined the issue and find that the provisions of Section 40A(3) are not applicable as the payments have not been made which are more than Rs.20,000/- to a person on any given day. Hence, the provisions are not attracted. Further, we have also gone through the clarification issued by the CBDT which exempt attraction of provisions of Section 40A(3) in the case of producer of meat. For the sake of ready reference, the clarification issued by the CBDT is reproduced herewith:
“CLARIFICATION REGARDING THE MEANING OF THE EXPRESSION "THE PRODUCE OF ANIMAL HUSBANDRY’ USED IN SUB-CLAUSE (ii) OF CLAUSE (f) OF RULE 6DD OF THE INCOME-TAX RULES, 1962 CIRCULAR NO. 4/2006, DATED 29-3-2006 Disallowance of twenty percent of the expenditure under the provisions of sub-section (3) of section 40A is made in the computation of income in any case where a payment is made otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft for a sum exceeding twenty thousand rupees. However, payment otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft does not attract the aforesaid disallowance in certain circumstances prescribed under Rule 6DD of the Income-tax Rules, 1962. Such exceptions, inter alia, refer to payment made to the producer for the purchase of the produce of "animal husbandry (including hides and skins)….." under sub-clause (ii) of clause (f) of rule 6DD.
Representations have been received from certain quarters that some Income-tax authorities are permitting payment of cash beyond rupees twenty thousand for the purchase of livestock and meat by considering
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 28 AMQ Agro India Pvt. Ltd. them to be covered under the aforesaid sub-clause and at the same time some others are making disallowances. Divergent decisions are being attributed to ambiguity regarding the meaning of the expression ‘the produce of animal husbandry’ used in sub-clause (ii) of clause (f) of rule 6DD.
The Board after examination of the issue are of the view that the expression ‘the produce of animal husbandry’ used under rule 6DD(f)( ii) would include ‘livestock and meat’ and in a case where payment exceeding rupees twenty thousand is made to a producer of the products of animal husbandry (including livestock, meat, hides and skins) otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft for the purchase of such produce, no disallowance should be attracted under section 40A(3) read with rule 6DD. It is further clarified that exception will not be available on the payment for the purchase of livestock, meat, hides and skins from a person who is not proved to be the producer of these goods and is only a trader, broker or any other middleman by whatever name called.”
Coming to the issue of action of the Assessing Officer and the ld. CIT (A), we find that the ld. CIT (A) has rightly deleted the addition to the extent of 75%. We have gone through the issue with relevance to the observation of the revenue authorities below.
The contentions of the revenue that majority of the purchases recorded in the books of accounts are not supported by the third party invoices has been examined and find that all the invoices have been prepared by the assessee and got signed by the individual meat producers. All the invoices pertaining to the purchasers made from the slaughter houses have been duly invoiced. The revenue cannot come to a
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 29 AMQ Agro India Pvt. Ltd. conclusion that the purchases were bogus just because the payments have been made in cash which is allowable as per the provisions of the Income Tax Act. The observation of the revenue that the quantitative records have not been maintained is found to be contrary to the Annexure attached to the assessment order wherein quantity as per the invoice and as per the tally mentioned. The quantitative detail of export is also available. Hence, it cannot be said that the quantitative records have not been maintained.
The contentions of the revenue that cash payments have been made regularly on different dates to the same person and it cannot be expected that a person comes to receive the cash payment stay for a period of 4-5 days in Delhi. It was clarified that the payments have made to the farmers and butchers at villages by the employees of the company. Hence, it cannot be said that the recipients stayed long with the assessee company to receive the payments.
Regarding proving of the identity, the revenue has not brought on record that any person to whom the payments have been made has been asked by the revenue to be produced by the assessee and wherein the assessee has failed to do so. We have also gone through the export of the Omasum and the Offal made by the assessee and find that the cost of material ranged upto 93% of the export sales. The books of accounts have been accepted and no fault has been found out by the revenue. The profits declared by the assessee company of 12.3% GP and 5.3% NP are higher than the average of the industry. Even on a theoretical basis, if the disallowance of the Assessing Officer is considered, the profits would zoom to 45% of GP and 37% NP which would be a highly unrealistic. The action of the revenue accepting the exports as per the books of accounts and disallowing the expenses of purchases which realigns the profits with a
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 30 AMQ Agro India Pvt. Ltd. rise of 40% and treating the books of accounts as correct is an inbuilt in- congruency.
The moot point we have considered is whether there could be any exports in quantity in the absence of purchase of the goods. We find that when the Omasum and Offal are purchased and then processed there would be a processing losses of 25 to 35% on account of loss of intestinal remnants. While the quantity of purchases and the quantity of exports is available on records, the revenue did not bring about any difference in the quantities purchased minus processing loss and the quantity of exports made. In the absence of that the issue of bogus purchases cannot be held to be valid.
On going through the entire factum, keeping in view that the purchases have been duly entered in the books of accounts, the vouchers have been maintained, payments have not been made beyond Rs.20,000/-, exports have been made, sales have been duly entered, the failure of the revenue directing the assessee to produce any parties or to summon the parties to prove the purchases as bogus, and in the absence of rejection of books of accounts and in the presence of evidence of quantitative tally of the purchases and exports, we direct that the addition made on account of bogus purchases is not legally tenable. In conclusion, the appeal of the assessee is allowed and that of the revenue is dismissed. Addition on account of undisclosed domestic Sales:
ITA No. 2805/Del/2018 (Ground No. 3 to 3.3 & 4) ITA No. 2806/Del/2018 (Ground No. 3 to 3.3 & 4)
ITA No. 4408/Del/2018 (Ground No. 2 & 3) ITA No. 4409/Del/2018 (Ground No. 2 & 3)
This issue relates to addition on account of undisclosed domestic sales and under invoicing of the export sales, the ld. Counsel for the
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 31 AMQ Agro India Pvt. Ltd. assessee at the very outset stated that this issue is squarely covered in assessee’s own case in ITA Nos. 2801 to 2803, 169 & 2804/Del/2018 vide order dated 29.05.2020 for the assessment years 2008-09 to 2012-13.
The ld. AR relied on the order of the ITAT in their own case for the earlier years.
The ld. Sr. DR supported the order of the ld. CIT (A).
We have gone through the record in its entirety.
We find that these issues stands covered in the case of the assessee in ITA Nos. 2801 to 2803, 169 & 2804/Del/2018 vide order dated 29.05.2020 for the assessment years 2008-09 to 2012-13, the relevant findings read as under: With regard to export sales:
“46. So far as the argument of the ld.CIT-DR that the addition made on account of bogus purchases are based on incriminating documents found during the course of search is concerned, we find from the assessment order that the addition was made by the AO not on account of any incriminating material found during the course of search, but, on account of non-availability of supporting vouchers for purchases recorded in the books of account, payments made in cash for such purchase where each payment is less than Rs.20,000/-, non-maintenance of quantitative records for purchases, rate of purchases shown in the books appears to be on the higher side and that the parties are not identifiable, etc. The AO has prepared the chart for each assessment year containing the total purchases made by the assessee, purchases for which invoices are not available and payments made in cash, the details of which are already given in the preceding paragraph at para No.5 of this order. There is absolutely no mention of any incriminating material/evidence to show that the purchases booked in the books of account are bogus except the books of account found to be maintained in the name of “OMASUM-DELHI” during the course of
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 32 AMQ Agro India Pvt. Ltd. search operation at the premises of Mohd. Shahnawaz, 5618, Second Floor, Bast Harphool Singh, Above MCD School, Sadder Bazar, Delhi-110006 for which separate addition has been made by the AO on account of sales outside the books of account under the nomenclature – Domestic Sale and Cash payment in the name of “OMASUM-DELHI.”
We, therefore, do not find any merit in the argument of the ld. CIT-DR that the addition on account bogus purchases are based on any incriminating material/evidence found during the course of search.
Now, coming to the addition on account of under- invoicing of export sales, it is the argument of the ld. CIT- DR that the same is based on the e-mail between the assessee company and the Mr. Lucky Yuan, a trade associate of the assessee company according to which an amount of 1 lakh USD has been paid abroad for payment against supply of Omasum container to be dispatched from Rampur Factory in the next week. A perusal of the said e- mail shows that it is dated 20t h March, 2009 which pertains to A.Y. 2009-10 and, therefore, the ratio of the decision in the case of Kabul Chawla (supra) is squarely applicable for A.Y. 2008-09, 2010-11 and 2011-12. We, therefore, hold that no addition can be made for these years. So far as the A.Y. 2009-10 is concerned, a perusal of the assessment order shows that the addition is basically made on account of difference in rates of sales which resulted under-invoicing. We find, the ld.CIT(A) while deleting the addition by relying on the decision in the case of Kabul Chawla (supra) has also decided the issue on merit. He has observed that an e-mail cannot lead to the conclusion that the assessee is engaged in the under-invoicing of export sales or hawala transactions. According to the ld.CIT(A), it is only a presumption drawn by the AO, but, there is no evidence on record to show that the difference in the rates of sales resulted in under- invoicing. Further, the ld.CIT-DR could not controvert the findings of the ld.CIT(A) that the AO failed to co-relate the amount generated through under-invoicing of sales, if any and sending it abroad to be deposited in the bank accounts of the two entities or making payment to various parties as alleged. Further, the assessee has also explained satisfactorily that there can be various reasons for difference in the rates of goods exported such as size and quality of items, volume of transactions and relationship with buyers, etc. The relevant observation of the CIT(A)
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 33 AMQ Agro India Pvt. Ltd.
has already been reproduced in the preceding paragraph. In view of the above and in absence of any incriminating material found during the course of search on account of under-invoicing of export sales, the ld.CIT(A) in our opinion, was fully justified in deleting the additions.”
With regard to protective addition and cash payments: “53. So far as the grounds raised by the assessee are concerned, the assessee has basically challenged the addition on account of undisclosed domestic sales, protective addition on account of cash received in OMASUM-DELHI account and not giving set off of the additional income on account of the profit declared in 153A return. For A.Y. 2010-11, the assessee has taken another ground challenging the addition on account of TDS not deducted.
So far as the addition on account of undisclosed domestic sales and protective addition on account of cash received in OMASUM-DELHI account is concerned, we find, during the course of search, certain documents were found and seized inventorised as Annexure A-1 to A-45/Party D- 11. The said seized material along with daily backed up data found to be maintained in Tally software was referred as OMASUM-DELHI account. On the basis of the seized material, the AO made additions by holding undisclosed domestic sales and unexplained cash payments, the details of which are as under:- (Amount in Rs.) Assessment Undisclosed Undisclosed Protective addition on Year domestic sales domestic sales account of cash added in the added in the received in Omasum hands of AMQ hands of Moin Delhi A/c in AMQ Agro Agro India Pvt. Akhtar Qureshi and substantive Ltd. addition in the hands of Moin Akhtar Qureshi 2008-09 5,66,01,452 2,42,57,765 8,95,00,000 2009-10 3,71,84,257 4,54,47,425 17,73,84,049 2010-11 4,65,90,949 8,28,28,354 28,68,36,793 2011-12 5,20,70,899 1,38,41,631 55,95,50,573 2012-13 1,32,76,893 19,83,904 13,21,11,994 2013-14 96,73,948 25,71,556 13,98,33,256 2014-15 31,69,863 3,91,781 5,00,53,067 Total 21,85,68,261 17,13,22,416 143,52,69,732
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 34 AMQ Agro India Pvt. Ltd. 55. The grand total of the alleged undisclosed domestic sales in the hands of AMQ Agro Pvt. Ltd. of Rs. 21,85,68,261/- and alleged undisclosed domestic sales in the hands of Moin Akhtar Qureshi of Rs.17,13,22,416/- comes to Rs.38,98,90,677/-. The said gross amount of undisclosed domestic sales has been apportioned between AMQ Agro India Pvt. Ltd. and Moin Akhtar Qureshi on the basis of their respective turnover for the relevant assessment year. On the basis of the data tabulated above, addition of Rs.5,66,01,452/- has been made in the assessment order holding undisclosed sales. So far as the cash received on OMASUM account aggregating to Rs.143.52 crores, the entire amount was protectively added in the hands of AMQ Agro India Pvt. Ltd. and substantively in the hands of Moin Akhtar Qureshi. For the A.Y. 2008-09, addition of Rs.8.95 crore has been made holding undisclosed cash payment for OMASUM account protectively in the hands of the assessee, i.e., AMQ Agro India (P) Ltd. and substantively in the hands of Moin Akhtar Qureshi for A.Y. 2008-09.
We find, in appeal, the ld. CIT(A) sustained both the additions, the reasons for which has already been reproduced in the preceding paragraphs. We find, the ld. CIT(A) confirmed the addition of Rs.5.66 crores by holding that the assessee failed to establish that there were any additional purchases outside the books of account against undisclosed sales. According to him, by simply submitting that undisclosed profit was declared before the Income-tax Settlement Commission and, therefore, only peak amount should be added does not explain the source of undisclosed sales. He accordingly, upheld the action of the AO in making the addition on account of undisclosed domestic sales.
So far as protective addition of Rs.8.95 crore is concerned, the ld. CIT(A) held that the AO has made corresponding addition on substantive basis in the hands of Moin Akhtar Qureshi and, therefore, the addition made on protective basis in the hands of the assessee was deleted subject to the decision of the appellate authority in the case of Moin Akhtar Qureshi. So far as the argument of the assessee that the additional income of Rs.1.85 crore voluntarily disclosed before the Income-tax Settlement Commission and unclaimed in the return filed in response to section 153A should be reduced from the final undisclosed income was rejected by the CIT(A) on
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 35 AMQ Agro India Pvt. Ltd. the ground that nothing was submitted in its support during the appellate proceedings.
It is the submission of the ld. Counsel for the assessee that no basis for computing the addition of Rs.5.66 crore and Rs.8.79 crore was provided by the AO and, therefore, the addition made by the AO and sustained by the CIT(A) is not correct. It is his submission that the transactions related to cash payment to Md. Shahnawaz for making purchase and in turn domestic sales made by him are intrinsically related to each other. According to him, the search operation did not detect the entire amount of undisclosed sales as the figures of undisclosed sales i.e., Rs.38.98 crore whereas the figures of cash paid for purchase is Rs.143.52 crore. According to him, both the transactions are co-related to each other inasmuch as payment of cash resulted in making of purchases outside the books of account and, thereafter, sale of cash purchases was made outside books of account giving rise to undisclosed sales. It is also his submission that the entire amount of sales of Rs.38.98 crore (for the assessment year under appeal – Rs.5.66 crore) cannot be brought to tax as it is only the net profit embedded in it which is the undisclosed income. For the proposition that the entire unaccounted sales cannot be added to income, but, only the net profit is to be added, the ld. Counsel for the assessee relied on various decisions which have been reproduced earlier in this order.
We find some force in the above argument of the ld. Counsel for the assessee. In our opinion, the AO has grossly erred in adding the entire undisclosed sales as income of the assessee by holding that purchases are recorded in the regular books of account. However, contrary to the same, it is stated at number of places in the assessment order that the assessee was engaged in the activity of making undisclosed purchases, through Shri Mohd. Shahnawas. These instances from the assessment order are again being reproduced for the sake of clarity:- “Page 47 of Asst Order
"Further the above chart shows cash money to the tune of Rs.146.66 crores have been received by Mohd. Shahnawaz during the period FY 2007-08 to FY 2013-14, which Mohd shahnawaz stated to have receive from either you I.e Moin Akhtar Qureshi, Prop. Abdul Majeed
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 36 AMQ Agro India Pvt. Ltd. qureshi or from M/s AMQ Agro Pvt Ltd and has been utilized by him for making purchase of Omasum Slaughter meat for both the concerns."
Page 54 of Asst order
"Thus it is dear that although M/s AMQ Agro India pvt ltd was purchasing animal byproducts from different suppliers through Mohd Shahnawaz but instead of integrating books of OMASUM DELHI with its own regular books of accounts maintained at Rampur, the group was indulging in out of books purchases by utilizing cash that was generated over a period of time through unaccounted sources by Moin Akhtar Qureshi"
Page 52 of Asst order
"9. B Details of cash given to Mohd Shahnawz for unaccounted purchases" Page 54 of Asst order "Thus while Mohd Shahnawaz was engaged by the group for making purchases, there would have been no difficulty in recording so in the books of accounts, if the withdrawals for purchases had been only from meat business."
Page 54 of the Asst order
"Thus it is dear that although the group was purchasing animal by products from different suppliers through Mohd. Shahnawz but instead of integrating books of OMASUM DELHI with own regular books of accounts maintained at Rampur, the group was indulging in out of books purchase by utilizing cash that was generated over a period of time through unaccounted sources."
Page 55 of the Asst order
Please state whether the above cash payment to Mohd. Shah Nawaz are reflected in the books of accounts of afore mentioned proprietorship concern and company. If above payments are not accounted for in the books of accounts of M/s Abdul Majeed Qureshi and M/s AMQ Agro Pvt Ltd then why these should not be treated as unexplained cash purchase made by these two concerns. Further, how these cash purchase are going to be segregated to the between the concern/ company."
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 37 AMQ Agro India Pvt. Ltd. 60. We find, the ld. CIT(A) has overlooked the above contents of the assessment order and recorded an incorrect finding that the assessee failed to establish that there were any additional purchases outside the books of account against the undisclosed sales.
Under these circumstances and from the various arguments made by both the sides, we are of the opinion that the following issues need to be decided i.e.
a) In a case where undisclosed sales outside books of account has been detected, whether the entire sales can be added as income or only the net profit can be brought to tax which is emanating out of such unaccounted sales, b) In a case where evidence/material has been found indicating undisclosed sales outside books of account and cash payments for making purchases outside books of account, whether separate additions are called for or the net profit emanating out of such undisclosed sales/purchase activity is to brought to tax. c) In a case where additional income on account of profit from undisclosed sales/purchase activity has already been offered to tax in the return filed in response to notice u/s 153A, whether the credit for such income has to be provided against undisclosed income computed from the activity of undisclosed sales/purchase outside books of account.
A perusal of the orders of the authorities below show that the search operation did not detect the entire amount of undisclosed sales since the figures of the undisclosed sales mentioned in the assessment order is Rs.38.98 crores whereas the figures of cash paid for purchase is Rs.143.52 crores for the entire block period for A.Y. 2008-09 to 2014-15.
We find merit in the argument of the ld. Counsel that the transaction related to cash payments to Mohd. Shahnawaz for making purchases and in turn domestic sales made by him outside the regular books of account are correlated to each other. Both these transactions are correlated to each other inasmuch as payment of cash resulted in making of purchases outside the books of account and, thereafter, sale of goods purchased in cash was made outside the books of account giving rise to undisclosed sales which again yielded realization of cash
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 38 AMQ Agro India Pvt. Ltd. which was again rotated for making subsequent cash purchases. Therefore, we are of the considered opinion that under no circumstances the entire amount of cash payments aggregating to Rs.143.53 crore can be added as it is the same cash which is getting circulated year after year during the course of entire block period. The various decisions relied on by the ld. Counsel for the assessee also support to the proposition that in such circumstances it is the peak balance only which are to be taxed and not the entire cash payment.
We also find some merit in the argument of the ld. Counsel for the assessee that the entire amount of sales aggregating to Rs.38.98 crore (for the year under appeal Rs.5.66 crore) cannot be brought to tax and only the net profit embedded in the same should be added as the undisclosed income of the assessee. It has been held in various decisions that even if undisclosed sales are assumed to have been emanated out of purchases recorded in the regular books of account, only the profit element can be considered to be the income of the assessee and under no circumstances the entire sales can be considered to be the income of the assessee. It has also been held in various decisions that in case where stock is found short during search operation only the GP is added on the presumption that such stock recorded in the books of account found short is presumed to have been sold outside books of account. The various decisions relied on by the ld. Counsel for the assessee that the entire unaccounted sales cannot be added to the total income, but, only the net profit is to be added also support his case.
Therefore, we are of the considered opinion that the undisclosed income from the activity of domestic trading in meat products through Mohd. Shahnawaz by the AMQ Group including the assessee has to be computed in a consolidated manner by determining the profit from such undisclosed activity which would take care of the undisclosed sales as well as cash payments towards purchases. Under these circumstances, we deem it proper to restore the issue to the file of the AO for computing the undisclosed income from the activity of trading with the following specific directions:-
i) In the present case, the undisclosed sales detected pursuant to the search action aggregates to Rs.38.93 crores as compared to undisclosed purchase
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 39 AMQ Agro India Pvt. Ltd. aggregating to Rs.143.52 crores. Therefore, yearwise profit from undisclosed activity will be determined by the AO by applying the GP rate on the basis of the figure of the yearwise purchase rather than sales. ii) For working the net profit from undisclosed activity , the AO may take combined simple average of gross profit of all the years comprised in the block period (A.Y.s 2008-09 to 2014-15) as per audited balance sheet of the assessee for A.Y. 2008-09 to 2014-15. This would take care of any aberrations and distortions. The above method of determination of profit from undisclosed trading in meat product, in our opinion, is fair and reasonable and would meet the ends of justice under the peculiar facts and circumstances of this case. The average gross profit so determined shall be applied across all the assessment years to determine the profit from undisclosed activity. Needless to say, the gross profit rate percentage will have to be appropriately modified upwardly to correspond the same to gross profit percentage on purchases. iii) The figure of purchases (Rs.143.52 crores in total) in respect of each assessment year will be apportioned between the assessee M/s AMQ Agro India Pvt. Ltd. and Moin Akhtar Qureshi in the same proportion as has been done in the assessment order in respect of undisclosed sales. iv) The amount of profit from undisclosed activity in meat trading determined in the above manner will be the undisclosed income of the assessee for each assessment year. v) The AO shall also determine the initial capital required for the undisclosed purchase in the first year i.e., A.Y. 2008-09 based on a working capital cycle of 15 days since the product is a perishable one. The above initial capital so computed by the AO shall be apportioned between the assessee i.e., AMQ Agro India (P) Ltd. and Moin Akhtar Qureshi on the basis of their respective purchases and to be added to the income of the assessee as undisclosed investment.
Ground of appeal No.2 and 3 of the assessee’s appeal are accordingly disposed in the terms indicated above and are treated as allowed for statistical purposes.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 40 AMQ Agro India Pvt. Ltd. 67. Before parting with this order, we may further mention that in the case of the assessee AMQ Agro India Pvt. Ltd., the addition on account of cash payments for purchases aggregating to Rs.143.57 crore has been made on protective basis and substantively the same has been added in the hands of the Moin Akhtar Qureshi. However, in the present case, the matter in dispute is not as to in which hands the addition is to be made, but, the dispute is with regard to correct determination of the undisclosed income from undisclosed activity of meat trading. By deciding the manner of computation of undisclosed income and its appropriation between the assessee and Moin Akhtar Qureshi, the issue regarding protective and substantive addition also gets resolved automatically.
The appeal of the revenue on these issues gets intrapolated in the above reasoning. We find that the facts & circumstances and the proposition of law have not altered on this issue during the years before us. Hence, we direct that the AO to follow the directions given at para 65 of the order of the ITAT mentioned above for the assessment years 2008-09 to 2012-13.
Sundry Creditors: ITA No. 4408/Del/2018 (Ground No. 4) ITA No. 4409/Del/2018 (Ground No. 4)
This issue relates to the addition of amounts on account of unexplained sundry creditors.
The order of the ld. CIT (A) on this issue is reproduced below for ready reference and for eliciting of the facts: “It was observed by AO during the assessment proceedings that the assessee has shown sundry creditors of the aforesaid amount from various parties but neither the complete addresses nor their confirmations were given by assessee. It is further observed that during the special audit of the accounts also, the assessee failed to provide the aforesaid details. The reply of the assessee that
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 41 AMQ Agro India Pvt. Ltd. the sundry creditors of Rs.13,93,59,799/- relate to the purchases made during the year and other misc. expenses incurred and the payments have been made in the subsequent years and there was no outstanding balance as on date, therefore, no confirmations from those creditors could be sought, was not accepted by AO and he added the total outstanding balances amounting to Rs.11,98,61,713/- (after reducing the sundry creditors of Rs.1,94,98,086/- already added in A.Y. 2013-14) as unexplained creditors. On the other hand, appellant has submitted that the payments in respect of all the purchases as well as misc. expenses were outstanding on 31.03.2014 as trade creditors and payments to these creditors were made subsequently during the next financial year and finally no outstanding balance remained at the end of the said year.
In view of the aforesaid rival submissions, now the issue has to be examined. As per chart given by appellant during the appellate proceedings in respect of outstanding credit balances, it can be seen that there were purchases and other expenses under the different heads amounting to Rs.63,61,70,389/- during the year against which the major part of payments were made by appellant during the year itself and only Rs. 13,88,00,871/- remained to be paid which were shown as outstanding credit balances. As per the details given by appellant, these payments were also made by it within 3-4 months of the subsequent financial year and finally no outstanding balance remained to be paid by it. Thus, the outstanding balances of these creditors remained for few months only. Moreover, the details of these creditors were available with AO and Special Auditor while examining the purchases made and expenses incurred by appellant during the year. So there was no need to ask the separate details of these creditors. The AO has failed to raise any objection or find any default in the accounts of these creditors or purchases from them or payments made by appellant. The AO also failed to establish that any benefit accrued to the assessee in the form of deemed profit or gains of business by way of remission or cessation of these liabilities in the hands of appellant. In such situation, when the trade creditors belong to the purchases made or expenses incurred during the year which have been accounted for in the books of account and payments
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 42 AMQ Agro India Pvt. Ltd. have also been made by appellant shortly after the purchases made or expenses incurred, the trade creditors stand explained and no addition can be made u/s 41(1) of I. T. Act by way of remission or cessation of trading liability in the hands of appellant merely for the reason that these outstanding balances existed as on 31.03.2014 i.e. end of the financial year. In view of this, I delete the addition made by AO and allow the ground taken by appellant.”
Before us, the ld. DR relied on the order of the Assessing Officer whereas the ld. AR relied on the order of the ld. CIT (A).
We find that, a. The amounts have been duly reflected in the books of accounts under the head sundry creditors – the expenses are payable as on the date of preparation of the balance sheet. b. There is no dispute that the amounts have been paid subsequently to the creditors. c. The provisions of Section 41(1) cannot be invoked wherein the amounts have been already paid off. d. There was no evidence of the creditors being forfeited their amounts. e. There was no evidence to prove that the creditors are bogus.
Hence, we decline to interfere with the order of the ld. CIT (A).
Credit Card Expenses:
ITA No. 2805/Del/2018 (Ground No. 5) ITA No. 2806/Del/2018 (Ground No. 5)
ITA No. 4408/Del/2018 (Ground No. 5) ITA No. 4409/Del/2018 (Ground No. 5)
This issue relates to confirming of Rs.10,65,400/- being 20% of the expenses incurred to credit cards by the assessee and deletion of
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 43 AMQ Agro India Pvt. Ltd. Rs.15,96,653/- by the revenue. The AO disallowed an amount of Rs.26,62,088/- on account of disallowance of expenses incurred by assessee through credit cards and on foreign travelling. It was observed by AO that the Special Auditor pointed out that the assessee incurred the expenses of Rs.44,76,082/-, Rs.2,16,048/- and Rs.6,35,045/- under the heads Director Foreign Travel, Export Development Expenses and Traveling & Conveyance through credit cards but no invoices were maintained to justify that the said expenses were made for business purposes. In view of this, the AO also asked the assessee to provide such details supported with the documentary evidence and to justify the allowability of these expenses, to which, the assessee filed no reply during the assessment proceedings. The only answer given by assessee was that the issue raised in the special audit report is not related to any seized material and therefore cannot form part of assessment proceedings u/s 153A of I. T. Act. During the appellate proceedings also, assessee has tried to justify its claim that there was commercial expediency and the expenses were incurred for the purpose of business only. However, in the light of these facts and rival submissions, it can be seen that the assessee has incurred the major part of aforesaid expenses on the foreign traveling of directors and these expenses were incurred through credit cards for which no bills/vouchers or any documentary evidence were provided. In absence of the primary evidence, it is difficult to ascertain whether the directors have incurred these expenses on their leisure trips or business trips to the foreign countries. What are the business connections with those countries or what efforts have been made by directors to expand his business in those countries by making trips, has not been explained by assessee. It has not even given the details during the assessment proceedings of those countries to which the directors went on trip and business opportunities explored by them. Similarly, In respect of other
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 44 AMQ Agro India Pvt. Ltd. expenses also, assessee failed to provide the primary evidence in the form of bills/vouchers to ascertain that the said expenses were incurred for business purposes. The AO disallowed only 50% of these expenses and allowed the remaining expenses treating them genuine business expenses.
The ld. CIT (A) restricted the disallowance to 20% of these expenses wherein no bills/vouchers have been produced/filed by assessee to establish that they are genuine expenses and incurred for business purposes. The revenue is in appeal for the part of 80% deleted by the ld. CIT (A) and the assessee is in appeal against confirmation of 20% of the expenses.
Before us, the ld. AR argued with regard to entire addition that during the course of the special audit U/s 142(2A) it has been explained to the auditors that presently the company is not maintaining invoices for the expense incurred through credit cards. It has also been submitted that as the company is engaged in the export business, the same involves extensive foreign travelling by the directors of the company to maintain the business relations with the buyer/ supplier of the products. The expenses pointed out by the auditors which have been paid through the credit cards of the directors are for making the payments of these business expenses only and do not involve any personal expenses of the directors of the company. It has also been stated that Assessee Company is maintaining all credit card statements in respect of the expenses incurred through credit cards from the perusal of which the nature of expenses can reasonably be inferred i.e. for business or personal purposes.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 45 AMQ Agro India Pvt. Ltd. 53. It was argued that the observation of the special auditors that in the absence of requisite information/ documents we cannot ascertain the genuineness of such expenditure and whether the same has been incurred for the business of the assessee company is not correct. It is further argued that the assesse company has segregated the business and non- business expenses in the credit card statement and only claimed expenses where there exists commercial expediency. It was argued that no expense has been specifically pointed out by the revenue which can be treated as non-business expenditure.
The ld. DR argued that even the special auditors pointed out that in the absence of requisite information they were unable the ascertain the genuineness of the expenditure and it is for the assessee to prove that the expenditure has been infact incurred for business purpose.
Heard the arguments of both the parties and perused the material available on record.
We find that the Break-up of the expenses incurred under each head and the expenses considered by the AO for making disallowance of Rs.26,62,088/-( 50% of 53,27,175/-) is as under:
Details of expenses Amount Amount disallowed Incurred Foreign travelling 63,98,364/- 44,76,082/- Export development 10,34,380/- 2,16,048/- Travelling, Conveyance 3,09,034/- 6,35,045/- TOTAL 77,41,778/- 53,27,175/- (50%)
We find that the AO has not followed any reasonable or logical approach to hold that why out of the total expenses of Rs. 77,41,778/- incurred by the assessee company under the above heads, the amount of
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 46 AMQ Agro India Pvt. Ltd. Rs.53,27,175/- has been segregated for making the alleged disallowance. This proves that the disallowance has been made on adhoc basis only.
Under the head Travelling and Conveyance expenses, the total expense claimed by the assessee company in its profit & Loss Account is Rs.3,09,034/- however the Id AO has considered the expenses of Rs.6,35,045/- under this head for making the alleged disallowance which smacks of any logic. While Air tickets for business trip which have been paid through the company's account, but boarding, lodging and food expenses that have been paid through the credit card of the directors is disallowed as non- business expenditure is not justified. The AO has not considered this aspect while making the alleged disallowance. The action of the AO is against the settled proposition that in case of the company, the expenses cannot be treated on adhoc basis as personal in nature without bringing any cogent evidence on record.
Therefore in the absence of any reasonable basis for disallowance, the disallowance is hereby directed to be deleted.
Other Expenses:
ITA No. 2805/Del/2018 (Ground No. 6) ITA No. 2806/Del/2018 (Ground No. 6)
ITA No. 4408/Del/2018 (Ground No. 6) ITA No. 4409/Del/2018 (Ground No. 6)
This issue relates to disallowance of total expenses of Rs.39,32,904/- made by AO on account of other expenses. The AO observed that the special auditor pointed out that the assessee company did not provide any bills/vouchers or relevant supporting documents in respect of expenses under the heads Carriage Outwards and Director Foreign Travel amounting to Rs.75,44,000/- and Rs.2,24,807/-
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 47 AMQ Agro India Pvt. Ltd. respectively. It was further observed by the AO that the assessee had incurred expenses of Rs.42,000/- and Rs.55,000/- towards repair of Plant & Machinery and godown maintenance in contravention of provisions of section 40A(3) of I.T. Act, 1961.
As per AO, the assessee did not give any satisfactory reply to the proposed disallowance of these expenses and, therefore, the AO made the disallowance of Rs.39,32,904/- [50% of Rs.77,68,807/- plus Rs.42,000/- + Rs.55,000/- on contravention of section 40A(3)] and added back to the income of assessee.
While the AO made disallowance @ 50% of the total amount of Rs.78,65,800/- of Rs.39,32,900/-, the ld. CIT (A) has restricted the amount to 20% and accorded a relief of Rs.22,82,140/-. The revenue is in appeal against the relief of Rs.22,82,140/- and the assessee is in appeal against the confirmation of Rs.16,50,760/-.
Before us, the ld. AR submitted that the above said payments have been done for carrying out the repair & maintenance work at the factory of the company at Rampur. The supporting bills of the parties to whom payments have been submitted. It was argued that the payments have made to small local suppliers who does not have any banking arrangement and accepts the payment in cash only. The company has to utilize the services of these vendors for small works at the time of immediate requirements in the factory. The above said payments as pointed out by the special auditors are not the single payments but were made for miscellaneous jobs carrying out by these suppliers on different dates for which consolidated bill has been raised. It is further argued that no specific expenditure which is not allowable has been pointed out by the revenue.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 48 AMQ Agro India Pvt. Ltd. 64. The Break-up of expenses under each head considered by the AO for making alleged disallowance of Rs.39,32,904/- along with the remarks of the assessee company submitted before the ld. CIT (A) have been relied upon. S. No Expenses Amount Payment Appellant Brief Submission. debited Incurred made to under head during the year 1 Carriage 77,79,400/- UP Bombay The amount has been 1. Outward Road incurred towards carriage Service outward expenses for carrying the Finished product from the Rampur factory of the appellant to the Bombay Port for subsequent export. The alleged amount has 2. been paid to M/s UP Bombay Road services during the year through account payee Cheque only. The confirmation from 3. the party has been shown to the special auditors. The same is also enclosed at page No. to 2 Director 2,24,807/- NA 1. The amount has been taken Foreign twice. The amount has already Travelling been considered while making disallowance underground No.10 3 Repair of 42,000/- Faizen The amount has been 1. Plant & Engineering paid for carrying out the day to Machinery works day smail/Miscellaneous Jobs at the factory of the appellant at Rampur. The copy of ledger 2. account & copy of the bill raised by the party is enclosed at page No.. . to. . The payments made by 3. cash, specifically covered u/s 40A(3) of the I T Act.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 49 AMQ Agro India Pvt. Ltd. 4. God own 55,000/- Sharma iron The amount has been 1. Maintenanc . Works paid for carrying out various e repair jobs in the god own of expenses the appellant company at Rampur. The copy of the ledger 2. account & copy of the bill raised by the party had been duly submitted during the course of assessment proceedings. The payment made by 3. cash, specifically covered u/s 40A/3) of the IT Act.
It was argued that the assessing officer has made the alleged addition in very arbitrary manner without considering the reply of the assessee in which the assessee has submitted the necessary supporting documents.
It was argued that having regard to the nature & size of the business of the assessee the disallowance of expenses incurred by holding the ground that the same have not been incurred for the purpose of the assessee business is highly unjustified, hence the same is liable to be deleted.
The ld. DR argued that even before the Special Auditors or before the AO, the assessee could not give any details with regard to the genuineness of the expenses incurred.
Heard the arguments of both the parties and perused the material available on record.
We find that the amount of Rs.77.79 lacs has been paid by the assessee to the transporter namely M/s UP Bombay Road Services. No default of TDS has been brought to our notice nor any evidence proving
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 50 AMQ Agro India Pvt. Ltd. non-availing of the services through this transporter. The amounts have been used for transporting the finished product from Rampur (UP) to Bombay Port for export. In the absence of any other evidence contra, no disallowance is called for. An amount of Rs.2.24 lacs has already been dealt while dealing with disallowance of expenses of Credit Cards. Hence, this is considered as a repeated addition under this head. Regarding the repair & maintenance of Rs.42,000/- and Rs.55,000/- incurred for miscellaneous job work at the factory for petty repairs are to be allowed keeping in view the fact that causal small expenses are required to be met at factory premises on day to day basis.
Rent paid for Guest House:
ITA No. 2805/Del/2018 (Ground No. 7)
This issue relates to disallowance of rent expenses of Rs.3,78,000/-. During the assessment proceedings, it was observed by AO that the assessee company has incurred expenses amounting to Rs.3,78,000/- towards rent of guest house for premises situated at Nainital taken on rent from Ms. Alka Pandey for which the assessee company failed to provide any rent agreement/rent receipts to verify the same. During the appellate proceedings, assessee has submitted that the guest house at Nainital was taken for the purpose of company business and photocopy of rent agreement was enclosed with the reply filed during the assessment proceedings.
The ld. CIT (A) confirmed the addition on the grounds that the issue herein is not providing the copy of rent agreement rather usage of premises for business purposes, to which the assessee has failed to give any details or any supporting evidence to support its claim. The ld. CIT (A) held that the assessee may have paid the rent to Ms. Alka Pandey for the
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 51 AMQ Agro India Pvt. Ltd. premises situated at Nainital but the said premises has been used for business purposes has not been proved by assessee to claim these expenses as business expenses.
Before us during the arguments, the ld. AR argued that vide questionnaire dated 26.08.2016, the assessing officer has asked to submit the detail of Full address of the main office along with all the units/ factory branch office of the assessee company in response to which the assessee company vide its reply dated 05.09.2016 had submitted the requisite detail about the factory and registered officer of the assessee company. The assessing officer in his alleged questionnaire did not ask about the guesthouse of the company, thus the assessee company had not submitted any detail about the guest house maintained by the company at Nanital. Hence the contention of the assessing officer on later stage of the proceedings or at the time of Assessment order that the assessee company had not submitted the detail of the guest house in its reply dated 05.09.2016 is wrong. Hence the addition alleged addition made by holding this ground is not tenable and liable to be deleted.
It was submitted that vide notice dated 12.05.2017 , the Ld AO had specifically asked to the assessee company to explain why the rent agreement was not provided for rent expenses of guest house amounting to Rs.2,83,500/-. And the assessee has submitted that the payment has been made towards rent for the company's guest house at Nainital, taken from Ms. Alka Pandey for the purpose of the company business. In this regard, it was submitted that the Ld AO while disallowing the alleged rent expenses has not considered the specific reply Of the assessee company dated 29.05.2017 in response to the specific query asked by the AO in its show case notice dated 12.05.2017 in which the assessee company has clearly stated that the rent has been paid in respect of guest house of the
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 52 AMQ Agro India Pvt. Ltd. company in Nanital taken from Ms. Alka Pandey and a photocopy of the agreement was also enclosed. Therefore the contention of the Ld AO white disallowing the alleged rent expenses on the ground that the assessee company has failed to substantiate its claim of rent expenses of Rs.3,78,000/- is not tenable as the Ld. AO at the time of forming his opinion on disallowing the alleged rent expenses has not considered the reply submitted by the assessee during the course of assessment vide its letter dated 29.05.2017 along with the supporting documents.
The ld. DR relied on the order of the ld. CIT (A).
We find that while the AO which allow the expenses owing to the non-furnishing the rent agreement, the ld. CIT (A) after obtaining the rent agreement disallowed the amount holding that the assessee has not proved that the guest house utilized for business purposes. Such action on the part of the ld. CIT (A) cannot be held to be correct in the absence of any specific query or questionnaire issued to the assessee on this issue.
Disallowance of Expenses u/s 14A:
ITA No. 2805/Del/2018 (Ground No. 8) ITA No. 2806/Del/2018 (Ground No. 7)
This issue relates to disallowance of expenses of Rs.4,11,184/- u/s 14A of I. T. Act. During the assessment proceedings, it was observed by AO that the assessee has claimed the exempt income of Rs.37,41,776/- against which no expenditure has been disallowed. He further observed that the assessee company has shown average investment in different companies amounting to Rs.8,22,36,735/- and, therefore, as per computation under Rule 8D of I. T. Rule, the expenses of Rs.4,11,184/- were to be disallowed.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 53 AMQ Agro India Pvt. Ltd. 77. During the proceedings before us , the ld. AR argued that investments made by the assessed was the different companies and involve minimal administrative involvement, therefore, no administrative expenses were directly or indirectly attributable for earning of the said dividend income. Therefore, no disallowance is liable to be made. He relied on the provisions of Section 14A(2).
The ld. DR argued that the assessee has shown the exempt income of Rs.37,41,776/- but no expenses at all have been computed against it. The objection raised by assessee, that no administrative expenses have been incurred to earn such exempt income, has no force, as it is only a general statement without the support of any details or evidence.
Heard the arguments of both the parties and perused the material available on record.
The provisions of Section 14A(2) reads as under: “14A……… (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.”
We have perused the facts on record, the investments at the beginning of the year were to the tune of Rs.7.8 Cr. and at the end of the year were of Rs.8.6 Cr. The average investments being Rs.8.2 Cr. on which Rs.4.1 lacs has been disallowed by the AO being 0.5% of the average investments. In the case Indiabulls Financial Services Ltd. Vs. DCIT 395 ITR 242, Hon'ble Jurisdictional Court has held that undoubtedly, the language of Section 14A presupposes that the AO has to adduce some
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 54 AMQ Agro India Pvt. Ltd. reasons if he is not satisfied with the amount offered by way of disallowance by the assessee. In the instant case, the AO have issued notice on 23.05.2016 and also on 26.08.2016. He has enquired as to why not the disallowance be in accordance with the Rule 8D. In this case, the assessee has suo moto disallowed no expenditure. It is not the case where the investments are stagnant and no alternation in the investments has been made. This is not the case where the assessee has disallowed certain amounts and for which the AO was not in satisfaction of such disallowance made by the assessee.the satisfaction of the AO is absolute in this case. It cannot be accepted that assessee has not at all incurred any expenses to earn the exempt income. The investments of the assessee are to the tune of Rs.5.2 Cr. in BNP Paribas Flexi Debt funds, Rs.2.7 Cr. in Al-Fahem Meatax Pvt. Ltd. and Rs.68.8 lacs in Prima Foods Pvt. Ltd. Hence, keeping in view the entirety of the issue and keeping in view the judgment of the Hon’ble Jurisdictional High Court, we decline to interfere with the order of the ld. CIT (A).
Addition on Account of Rate Difference Rs.8,00,00,000/Rs.7,98,54,200:
ITA No. 2806/Del/2018 (Ground No. 8) ITA No. 4409/Del/2018 (Ground No. 9)
The issue has been dealt at page nos. 74 to 79 of the assessment order and page nos. 55 to 57 of the order of the ld. CIT (A).
The brief facts are as under: This issue pertains to the additions of Rs.8,00,00,000/- and Rs.7,98,54,200/- on account of bogus entries passed by assessee. It was observed by AO during the assessment proceedings that the assessee has made entry of Rs.8,00,00,000/- in purchase ledger account with the narration as rate difference on the last date of the
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 55 AMQ Agro India Pvt. Ltd. financial year i.e. 31.03.2014 and claimed it as deduction by reducing its taxable income. Similarly, the entry of Rs.7,98,54,200/- was passed on the same date by crediting the account in the name of M/s Millinnium Propcon Pvt. Ltd., its sister concern. This amount was shown as proceeds received from sale of investment to the aforesaid entity. While making enquiry during the assessment proceedings, it was found by AO that in respect of the entry of Rs.8,00,00,000/-, a cheque was issued on 31.03.2014 by assessee to Mr. Shahnawaz and the entry in the ledger was passed as rate difference of the purchases made. However, the assessee did not satisfactorily explain this entry to revenue authorities and only submitted that the query pointed out is not relevant for tax purposes. It was further observed by AO that the cheque issued for making payments towards alleged rate difference was in fact not deposited in the bank and within few days the entry was reversed in the books of account by assessee. Similarly, in respect of the entry of Rs.7,98,54,200/- on account of funds received allegedly from M/s Millinnium Propcon Pvt. Ltd. on account of sale of investment, same was reversed back in the accounts of appellant by nullifying the effect of credit of the said amount. However, the AO made the addition by disallowing the amount of Rs.8,00,00,000/- claimed as deduction and Rs.7,98,54,200/- also as unexplained cash credit in the hands of appellant.
The ld. CIT (A) held that the appellant has passed a bogus entry of Rs.8,00,00,000/- as on 31.03.2014 showing the narration as rate difference against the purchases and created a liability. For this purpose, cheque of the said amount was issued in the name of Mr. Mohd. Shahnawaz to give the colour of genuineness and claimed this expenditure as deduction in the profit and loss account and reduced its taxable income to that extent. The ld. CIT (A) held that as
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 56 AMQ Agro India Pvt. Ltd. demonstrated by AO and admitted by appellant also, there was no actual transactions and the cheque was never deposited in the bank account and in the next financial year the entry was reversed in the books of account of appellant. Thus, a bogus claim was made by appellant by passing the aforesaid entry and claiming the bogus expenses which is liable to be disallowed.
In respect of the entry of Rs.7,98,54,200/-, the ld. CIT (A) held that this amount was shown as received from M/s Millinnium Propcon Pvt. Ltd. against the sale of investment for the purpose of showing the receipts to be incurred for making payment towards rate difference in the account of Mr. Mohd. Shahnawaz. It was held that this entry was a corresponding entry only and neither any actual amount was received by appellant nor any sale of investment was made. It was held that the only effect of this entry was that the funds were created to pass the corresponding entry of Rs.8,00,00,000/- for claiming deduction and reducing the taxable income. The ld. CIT (A) deleted the addition of Rs.7,98,54,200/- made by the AO on account of sale of investment.
Before us, the ld. DR relied on the assessment order whereas the ld. AR relied on the order of the ld. CIT (A) with regard to sale of investments.
We find that this issue is interrelated and to be adjudicated together. The fact of receiving of the cheque, examination of the purchase ledger for rate difference, account of Shahnawaz, the receipt of the funds from M/s Millinnium Propcorn Pvt. Ltd. and payment to Shahnawaz have to be examined in detail. Hence, in the interest of justice, we remand this issue to the file of the AO for adjudication de novo. The AO shall collect the relevant material, consider the explanation of the assessee and pass
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 57 AMQ Agro India Pvt. Ltd. an order on this limited issue after duly following principles of natural justice.
These grounds are treated as remanded back to the file of the AO.
Salary Expenses:
ITA No. 4408/Del/2018 (Ground No. 7) ITA No. 4409/Del/2018 (Ground No. 7)
As per the order of the ld. CIT (A), this issue relates to the disallowance of salary expenses of Rs.22,68,000/- It was observed by AO during the assessment proceedings that, as pointed out by Special Auditor, the assessee has paid salary of the aforesaid amount in cash to its class-IV employees who do not have bank accounts and are working in the factory located in a small town in U.P. namely Rampur. It was further observed by him that the salary register produced during the assessment proceedings appeared to be recently created and in handwriting of the same person. The AO, therefore, after making these observations, disallowed the salary paid in cash amounting to Rs.22,68,000/- u/s 40A(3) out of the total salary expenses claimed at Rs.28,68,000/- by assessee. During the assessment proceedings as well as appellate proceedings, assessee submitted that the salary register produced before AO contain the name of employees, amounts of salary paid and signatures of the respective employees but the AO rejected the same citing the superficial reasons.
It was also submitted that the provisions of section 40A(3) are not applicable in its case as no single payment of salary to each employee during each month exceeding Rs.20,000/- has been made. It was also submitted that if the assessee has not paid any salary to the employees that means the assessee company was working without employees, which
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 58 AMQ Agro India Pvt. Ltd. seems to be highly illogical and imaginary on the part of AO keeping in view of the size and nature of operations shown by the assessee company.
In view of the aforesaid facts and observations, the issue has been considered. The ld. CIT (A) held that it is apparently clear from the observations of AO that he has given the superficial reasons for disallowing the salary expenses. There is no bar in making cash payments towards salary to its employees by any assessee company and the provisions of section 40A(3) of I. T. Act could apply only in those cases where the payments exceed Rs.20,000/- at a single occasion, which is not the case of AO as all the payments have been made by assessee for the amount less than Rs.20,000/- on each occasion. It was held that not having bank account by the employees does not lead to the conclusion that the salary paid by assessee to its employees was not genuine or not for business purposes.
Before us, the ld. DR relied on the order of the Assessing Officer whereas the ld. AR relied on the order of the ld. CIT (A).
a. We find that the turnover of the assessee during the year is Rs.66,06,33,163/-, for which the quantum of salary is quite reasonable and genuine. b. Merely for the reason that the payments have been made in cash and the staff members are not having bank accounts, it cannot be held that salary expenses are not genuine. c. Further, the provisions of section 40A(3) of I. T. Act are not applicable in its case as none of the payments have been made exceeding Rs.20,000/- to any person on any of the occasion.
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 59 AMQ Agro India Pvt. Ltd. d. The observation of AO that the salary register has been recently created is also not the right basis to disallow as nothing contra has been brought on record by AO to substantiate his claim.
Ergo, we decline to interfere with the order of the ld. CIT (A).
Interest Free Advances:
ITA No. 4409/Del/2018 (Ground No. 8)
The assessee has in total advanced loan of Rs.1 Cr. to its sister concerns for which the AO has charged notional interest @ 12% as the assessee has not received any interest from the sister concerns. It was argued that the advances were given for business purpose such as supply of meat products.
The ld. CIT (A) has deleted the notional interest made by the AO on the grounds the assessee cannot be forced earn income.
Having heard the arguments of both the parties, we hold that the issue of disallowance of interest has reached finality with the judgment of Hon’ble Supreme Court in the case of Hero Cycles (P.) Ltd. Vs. CIT, Ludhiana [2015] 379 ITR 347. The proposition laid down by the Hon’ble Apex Court is that where the assessee had sufficient own interest free funds along with interest bearing funds and had made or advanced sums for non business purposes without charging any interest, the presumption that would arise is that the investment had been made out of interest free funds generated or available with the assessee, is still a good law in the light of the decision of the Hon’ble Apex Court in the case of Hero Cycles Ltd. (supra).
Hence, we decline to interfere with the order of the ld. CIT (A).
ITA Nos. 2805, 2806, 4408 & 4409/Del/2018 60 AMQ Agro India Pvt. Ltd. Unexplained Investment u/s 69A: ITA No. 4408/Del/2018 (Ground No. 8)
The assessee company invested in share capital of M/s Primo Foods Pvt. Ltd. and was allotted 688500 shares of the value of Rs.68,85,000/- on 02.08.2013. The AO held that this amount was not reflected in the balance sheet and brought this amount to tax u/s 69A.
The ld. CIT (A) verified the same and gave a categorical finding of the fact that the amount has been duly reflected in the audited balance sheet of the assessee company as at 31.03.2013 in Schedule 16 short term loan and advances, under Sub-Clause –C under loans and advances to related parties.
Since, the investments are the part of the balance sheet and since the sources of investment stands explained and verified by the ld. CIT (A), we decline to interfere with the order of the ld. CIT (A) on this ground.
In the result, both the appeals of the assessee are partly allowed and both the appeals of the revenue are dismissed. Order Pronounced in the Open Court on 22/01/2021.
Sd/- Sd/- (H. S. Sidhu) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated: 22/01/2021 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR