MR. M.L. KRUPAL,KODAGU vs. ITO, WARD-1, MADIKERI

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and submitted that these grounds were not specifically urged in the original grounds of appeal filed before the ld. CIT(A). Further, ld. &382/Bang/2012 Late M.L. Krupal, Bangalore Page 8 of 21. A.R. of the assessee submitted that these grounds do not involve any investigation of any new facts otherwise on record of the department and are also pure question of law and accordingly prayed to admit the additional grounds and dispose of the case on merit for the advancement of substantial cause of justice. Reliance is placed on the decision of Hon’ble Apex Court in the case of National Thermal Power Company Ltd. Vs. CIT reported in 229 ITR 383 and also on the ratio of the decision of Hon’ble Karnataka High Court in the case of Gundathur Thimmappa and Sons reported in 70. ITR 70.

7. Ld. D.R. on the other hand, opposed the additional grounds taken by the assessee at this stage.

9.1 Ground No. 1 as reproduced at Para No. 3 above, is with regard to the alleged suppression of sales amounting to Rs. 6,34,501/-. It was submitted by the ld. AR of the assessee that during the course of survey proceedings, it was noticed that sales as per sales tax assessment order dated 09.02.2007 was Rs. &382/Bang/2012 Late M.L. Krupal, Bangalore Page 9 of 21 13,87,07,613/- and the sales as per the sales register / as declared in trading account was Rs. 13,80,73,112/- which is after deducting sales tax collected and paid amounting to Rs. 6,59,932/-. In support of his claim, the assessee filed Form no. 04 – Annual Turnover filed before the sales tax authority and submitted that the statutory auditor while finalizing the accounts for the year ending 31.03.2005 has observed the sales difference of Rs. 6,59,932/-. Lastly, the ld. AR of the assessee submitted that instead of addition of the difference of entire sales consideration, the GP ratio on the differential amount of sales may be considered for the additions.

9.2 Ld. DR on the other hand vehemently submitted that when the purchases were already claimed fully, found to be correct and approved by the Assessing Authorities, then the entire difference of sales consideration represents the income only which may only be added.

9.3 We have heard the rival submissions and perused the material on record. It is an undisputed fact that the difference of Rs. 6,34,501/- is on account of sales determined as per sales tax assessment order dated 09.02.2007 amounting to Rs. 13,87,07,613/- and sales as per the sales register / as declared in trading account amounting to Rs. 13,80,73,112/-. Therefore, in our opinion, undisputedly, the difference amount of Rs. 6,34,501/- is on account of Sales only which the assessee is claiming to have declared in the trading account after deducting sales tax collected and paid amounting to Rs. 6,59,932/-. The AR of the assessee by way of additional grounds submitted that only the profit element embedded in sales should be considered as an addition towards alleged suppression of sales. On going through the audited books of accounts for the AY 2005-06, we find that the assessee has declared a gross profit ratio of 1.76%.

&382/Bang/2012 Late M.L. Krupal, Bangalore Page 10 of 21 9.4 We are also of the opinion that the entire sales cannot be added as income of the assessee, but addition can be made only to the extent of estimated gross profits embedded in the sales and that the income from suppressed sales should be determined by assessing the gross profit of the assessee. The courts have consistently upheld this principle that only the profit portion of the sales should be considered for income tax purposes. Accordingly, by applying the GP Ratio of 1.76% on total sales suppression of Rs. 6,34,501/-, we confirm the addition of Rs. 11,167/- as income of the assessee and accordingly partly allow this ground raised by the assessee.

10.1 Before us ld. AR of the assessee submitted that the addition is purely based on the stock statement given to Canara Bank for the purpose of increasing the OD loan. This has no relevance to the real facts as can be verified from the books of accounts. Normally this is done as the bankers would not accept the amount of advance paid to the coffee growers as security for determining the drawing powers. Further, the AR submitted that even the price quoted in the stock statement has no relevance with the price prevalent in the market at that point of time and accordingly, requested to delete the GP addition made by the AO based on pure guess and surmises.

&382/Bang/2012 Late M.L. Krupal, Bangalore Page 11 of 21 10.2 Ld. DR on the other hand vehemently submitted that each year the assessee has submitted inflated stock statements to the bank as compared to the books of accounts which amount to high GP. Therefore, the AO has rightly re-casted the trading account and added Rs. 15,95,091/- under head of GP Additions.

10.3 We have heard the rival submissions and perused the material on record. It is an undisputed fact that the assessee has admitted that he has given an inflated stock statement to Canara Bank in order to enhance OD limit from existing limit of Rs.30 lakhs to Rs. 50 lakhs. The AO based on stock statement for the months of March 2003, March 2004 and April 2005 respectively as furnished to the bank re-casted the trading account for AY 2005-06 by treating opening stock amounting to Rs. 35,74,910/- and closing stock as Rs. 51,70,000/- as against NIL opening stock and closing stock declared by the assessee in his audited trading and profit loss account. The difference of opening and closing stock amounting to Rs. 15,95,091/- has been brought to tax under the head GP Additions.

10.4 Considering the facts enumerated above, we are of the considered opinion that the entire addition of Rs. 15,95,091/- is based on the stock statement given to Canara Bank for enhancing the OD limits which in our view has no relevance to the real facts. In the normal course of business, the entities submit stock statements to banks for the purpose of securing loans or credit lines. The stock statements submitted to the banks in order to induce higher credit facilities do not constitute conclusive evidence of actual stock level or income. In our opinion, any income addition must be supported by independent evidence. A stock statement given by the assessee to the bank cannot be the sole basis for any addition in his tax assessment. Further, the revenue must prove that the stock reported to the bank accurately reflects the true &382/Bang/2012 Late M.L. Krupal, Bangalore Page 12 of 21 stock and that the books of accounts are manipulated to suppress the income. Without such corroboration, a discrepancy alone is insufficient to warrant an addition. In this case, the assessee provided a reasonable explanation for the discrepancy. Therefore, there was no deliberate suppression of Income and accordingly, we delete the entire addition of Rs. 15,95,091/- on account of GP additions. Hence, we allow this ground of appeal.

11. Ground No. 4 as reproduced at Para No. 3 above with regards to pure question of law i.e. whether the tribunal can change the foundation of addition from sectiion 69C of the Act as held by the ld. CIT (A) to 69A of the Act and further, whether the provisions of sect. 69A of the Act are applicable on the facts and circumstances of the case. We are of the considered opinion that as in the preceding paragraph, we have already held that the GP addition amounting to Rs. 15,95,091/- on account of difference of opening and closing stock declared to the bank authority for the purpose of obtaining / enhancing OD loan without any corroborative evidence cannot be sustained, this ground becomes infructuous and accordingly dismissed as infructuous.

12. Ground No. 5 as reproduced at Para No. 3 above with regards to bogus creditors of Rs. 7,24,000/-. The AR of the assessee submitted that the assessee has shown total sundry creditors amounting to Rs. 42,36,272/-. The AO asked to furnish name and detailed address along with confirmation letters and also copy of account extracts. The assessee vide letter dated 11.11.2008 submitted that there was a balance of Rs. 42,36,272/- to various coffee planters and the same was cleared during the month of April out of the amount received from sundry debtors amounting to Rs. 56,36,800/- and furnished the list of sundry creditors along with names and addresses. The AO had issued letters to the above parties to appear and in response, 3 parties appeared on &382/Bang/2012 Late M.L. Krupal, Bangalore Page 13 of 21 17.12.2008 and the statements of parties were recorded. The AR of the assessee further submitted that the addition of Rs. 7,24,000/- is on account of additions in respect of these three creditors who appeared personally before the AO and confirmed to have agricultural income and also submitted agricultural land holding details in support of their claim. Therefore, the purchases made from these are not disputed and therefore, the addition on this account is unwarranted.

12.1 The ld. DR on the other hand submitted that these three creditors who appeared before the AO had not confirmed the exact amount shown as payable by the assessee to them. Therefore, the AO has rightly added sum of Rs. 7,24,000/- in respect of these three creditors who appeared before the AO.

12.2 We have heard the rival submissions and perused the material on record. It is an undisputed fact that these three numbers of sundry creditors namely, B. M. Sannappa, B. L. Muttanna and B.M. Duddaiah appeared before the AO and confirmed to have agricultural income as well as agricultural land holdings. Further, Sri. B. M. Sannappa due to his old age could not remember the exact amount payable or receivable. The other two creditors, namely Sri. B. L. Muttanna and Sri. B.M. Duddaiah also could not confirm the exact amount receivable from the assessee although all the three have confirmed to have some receivable from the assessee.

12.3 The AO has alleged that the list of sundry creditors has not been enclosed with the return of income filed on 30.10.2005. We could not understand where these lists of sundry creditors are required to be enclosed along with the return of income to be filed. Further, in our view all these three sundry creditors had appeared before the AO and have confirmed to have agricultural income and &382/Bang/2012 Late M.L. Krupal, Bangalore Page 14 of 21 agriculture land holdings. They also confirmed to have receivables from the assessee but could not state the exact amount to be received from the assessee. Therefore, in our view, the additions of Rs. 7,24,000/- with respect to these three creditors solely on the basis of their statements cannot survive. We take note of the fact that these sundry creditors had also filed confirmation by way of additional evidence before the Tribunal in the first round. Therefore, we have no hesitation in deleting the sum of Rs. 7,24,000/- added as bogus credits and accordingly, these grounds of appeal is allowed.

13. Ground No. 6 as reproduced at Para No. 3 above with regards to addition of Rs. 11,88,000/- on the ground that the few creditors neither appeared before the AO nor filed any confirmations establishing their identity, creditworthiness and genuineness of the transaction. The ld. AR of the assessee submitted that the ledger extracts and RTC/Pahani were produced in connection of these three creditors. Further, confirmation letters from all the three creditors dated 09.12.2012 by way of additional evidence were furnished on 12.02.2013 thereby proving the creditworthiness of the creditors by way of producing RTC/Pahani and confirmation letters and accordingly prayed to delete the addition on this account.

13.1 Ld. DR on the other hand submitted that since all the three creditors neither appeared before the AO nor filed any confirmations before him, establishing their identity, creditworthiness and genuineness of the transaction, the AO has rightly added sum of Rs. 11,88,000/- in respect of these three bogus creditors.

13.2 We have heard the rival submissions and perused the material on record. It is an undisputed fact that the purchases &382/Bang/2012 Late M.L. Krupal, Bangalore Page 15 of 21 made with respect to these three creditors were not disputed by the AO. Further, it is also an undisputed fact that the ledger extracts and RTC/Pahani in connection with the three creditors were also produced in the first round as placed in paper book-1. Further, the confirmation letters from all the three creditors dated 09.12.2012 by way of additional evidence were furnished on 12.02.2013. In view of the above, we find no reasons to sustain the addition under head bogus creditor especially when all the purchases were not disputed by the AO. Hence, we are also deleting the addition of Rs. 11,88,000/- under head bogus creditors and accordingly, this ground of appeal is also allowed.

14. Ground No. 9 as reproduced at Para No. 3 with regard to additions amounting to Rs. 3,50,06,130/- treated as unexplained source of income by the AO whereas the ld. CIT(A) directed the AO to work out the peak of credits to arrive at the unaccounted money deposited for these transactions. During the course of assessment proceeding, the AO obtained bank statement from the Canara Bank and found that the outstanding OD balances was not reflected in the liability side of the balance sheet. The assessee explained that, he had borrowed overdraft limit of Rs. 30 lakhs which was used for payment of advance to coffee growers. After the coffee procured was sold, the proceeds realized were used for cash deposits and the deposit of Rs. 3,50,06,130/- represents the same.

14.1 Before CIT(A) also, the assessee explained his business which involves purchase of coffee from small coffee growers against cash payment. The cash withdrawals are done by withdrawing cheques in the name of his staff and others. Any money unutilized is again deposited in the bank accounts. Further, assessee has submitted a written submission and also produced the abstract of the OD account showing withdrawals and payments and the amount of such cash withdrawals of Rs. 1,37,30,000, the amount of Rs. &382/Bang/2012 Late M.L. Krupal, Bangalore Page 16 of 21 1,75,91,912 was paid to Planters, Rs. 49,19,073 to dealer supplies and Rs. 10,20,000/- paid to Tilak as imprest for purchases amounting to Rs. 3,72,60,985/- was available to assessee for deposit. After considering the above submission, the ld. CIT(A) observed that there were no continuous deposits based on the bank statements, it was observed that there were periodical deposits and cheques were issued to various individuals which appears to be complete set of trading outside the books for which OD account is used accordingly, upheld that it would be appropriate to work out the peak of credits to arrive at the unaccounted money deposited for these transactions. The CIT(A) also directed the AO to work out the result of these purchase and sales and make appropriate addition while giving due credit of closing stock of earlier year which was available for deposit.

14.2 The Tribunal in the first round held that the entire amount of closing stock of earlier year has been considered by the AO as opening stock of the present year and the additions was made by the AO to the extent of excess of closing stock of the present year over such opening stock. It means that the entire amount of opening stock has been considered as part of the closing stock of the present year and therefore, such opening stock cannot be available for explaining cash deposit in the bank because, even if it is held that opening stock was sold and the sale prices was used for purchasing different items which were available in closing stock then also, G.P. addition has to be made in respect of such sales out of opening stock. Under these facts, the assessee does not deserve any relief on this point. Moreover, the Tribunal held that the ld. CIT(A) has no power to set aside the matter to the file of the AO and he has to decide the issue himself and if required, he may obtain remand report from the AO.

&382/Bang/2012 Late M.L. Krupal, Bangalore Page 17 of 21 14.3 The ld. AR of the assessee vehemently submitted that the AO has not been able to attribute any other source to cash deposit and therefore it must be treated as business receipts and accordingly brought to tax on the basis of net profit rate accepted by the AO for the undisputed income.

14.4 The ld. DR on the other hand submitted that the ld. CIT (A) erred in deleting the addition made on account of unexplained cash credit on a presumption that such cash credits have resulted from the cash flow generated on account of the trading activity of the assessee and hence the entire addition of Rs. 3,50,06,130/- should be made as unexplained cash credit instead of restricting it to the peak of the same.

14.5 We have heard the rival submission and perused the available materials on record. On verification of information obtained from Canara Bank vide account no. 1147 maintained by the assessee, the AO found that assessee has made cash deposit to the bank on various dates amounting to Rs. 3,50,06,130/- The outstanding OD balance as on 31.03.2005 was Rs. 21,42,611/-. On verification of balance sheet, it was seen that the balance of Rs. 21,42,611/- has not been duly reflected in the liability side of the balance sheet. We are of the opinion that the OD/CC accounts are generally tailored for businesses to manage their working capital and operational expenses. It's a type of short-term credit that allows the assessee to withdraw money from their bank account up to a pre-approved limit. Therefore, in our view these accounts are opened only for the convenience of business transactions. The assessee during the course of assessment proceedings admitted to have borrowed OD limit of Rs. 30 lakhs from Canara Bank during the year 2003-04 and the same was closed on 20.10.2005. Further, the assessee stated that he used to draw cash from the said account and utilize the same for paying advance to the coffee &382/Bang/2012 Late M.L. Krupal, Bangalore Page 18 of 21 growers. After the coffee was procured from them and sold in the market, the proceeds realized were deposited in cash in the said overdraft account. Before the ld. CIT(A), the assessee once again explained that his business involved purchase of coffee from small coffee growers against cash payment. The cash withdrawals were done by withdrawing cheques in the name of his staff and others. Any money unutilized was again deposited in the bank accounts. Further, assessee had submitted a written submission and also produced the abstract of the OD account showing withdrawals and payments and the amount of such cash withdrawals of Rs. 1,37,30,000, the amount of Rs. 1,75,91,912 was paid to Planters, Rs. 49,19,073 to dealer supplies and Rs. 10,20,000/- paid to Tilak as imprest for purchases amounting to Rs. 3,72,60,985/- was available to assessee for deposit.

14.6 We are of the considered opinion that the assessee from the very beginning is submitting that he is only in the business of trading in coffee under the name and style of M/s. Prime Commodities. The authorities below also could not bring any contrary material on record to disprove that the cash deposit in the OD account is not from his business operations. Further, the assessee had explained that his business involves purchase of coffee from small coffee growers against cash payment. The cash withdrawals are done by withdrawing cheques in the name of his staff and others. Any money unutilized is again deposited in the bank accounts. The assessee further explained that, he had borrowed overdraft limit of Rs. 30 lakhs which was used for payment of advance to coffee growers. After the procured coffee was sold, the proceeds realized were also used for cash deposits and the deposit of Rs. 3,50,06,130/- represents the same. Further, the ld. CIT(A) is of the view that owing by the nature of the bank account, it looks like a “periodical trading”. The CIT(A) also held that it appeared to be a complete set of trading outside the books of &382/Bang/2012 Late M.L. Krupal, Bangalore Page 19 of 21 account for which the bank OD was used. Therefore, the source of cash deposit is from the activity of trading also confirmed by the ld. CIT (A). Being so, we are of the opinion that the peak credit benefit should not have been applied by the ld. CIT (A). Where the assessee claims that all deposits are from genuine business transactions, then the benefit of peak will not be available. 14.7 In view of the above, we are of the opinion that the deposits into the OD account no. 1147 maintained by the assessee at Canara Bank amounting to Rs. 3,50,06,130/- are nothing but the turnover of the assessee from trading business of coffee. We are also of the opinion that the entire turnover also cannot be added as income of the assessee, but addition can be made only to the extent of estimated gross profits embedded in the turnover as the assessee has already claimed entire business expenses in his profit and loss account and that the income from the turnover amounting to Rs. 3,50,06,130/- should be determined by assessing the gross profit of the assessee. We are of the considered opinion that the profit portion of sales should be considered for income tax purposes. Accordingly, by applying the GP Ratio of 1.76% on total turnover of Rs. 3,50,06,130/-, we confirm the addition of Rs. 6,16,108/- as income of the assessee and accordingly, we partly allow this ground raised by the assessee.

In view of the above, we partly allow the appeal of the assessee with the above directions/observations.

15.1 With regards to ground No. 1 as raised by the Revenue, we are of the considered opinion that since in Para 14 above, we have already held that the cash deposits in bank account no. 1147 maintained by the assessee at Canara Bank are on account of only &382/Bang/2012 Late M.L. Krupal, Bangalore Page 20 of 21 coffee trading activity of the assessee in the absence of any contrary material brought on record by the revenue, the benefit of peak credit will not be available to the assessee. Accordingly, we dismiss this ground of appeal of the Revenue.

15.2 With regard to ground no. 2 as raised by the Revenue, since in Para No. 10, we have already held that the entire addition of Rs. 15,95,091/- is based on the stock statement given to Canara Bank for enhancing the OD limits which in our view has no relevance to the real facts. In the normal course of business, the entities submit stock statements to banks for the purpose of securing loans or credit lines. The stock statements submitted to the banks in order to induce higher credit facilities do not constitute conclusive evidence of actual stock level or income. In our opinion, any income addition must be supported by independent evidence. A stock statement given by the assessee to the bank cannot be the sole basis for any addition in his tax assessment. Further, the revenue must prove that the stock reported to the bank accurately reflects the true stock and that the books of accounts are manipulated to suppress the income. Without such corroboration, a discrepancy alone is insufficient to warrant an addition. In the present case consequent on adopting the closing stock in the trading account, the AO held that the closing stock should have been reflected in the Current Asset and the OD account balance as on 31.03.2005 should have been reflected in the liability side and accordingly, the excess of asset over liability amounting to Rs. 30,27,389/- (Rs. 51,70,000 – Rs. 21,42,611) was brought to tax. We are of the considered opinion that additions solely based on the stock statement given to Canara Bank for enhancing the OD limits that too without any additional substantial evidence cannot be sustained. Accordingly, we dismiss this ground of the Revenue.

&382/Bang/2012 Late M.L. Krupal, Bangalore Page 21 of 21 In the result, appeal of the assessee is partly allowed for statistical purposes and appeal of the Revenue is dismissed.