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Facts
The assessee, a partnership firm engaged in manufacturing and trading of yarn and cloth, filed its return declaring income. The case was selected for scrutiny due to abnormal cash deposits during demonetization. The Assessing Officer (AO) rejected the books of account and made additions for alleged bogus transactions and unexplained cash deposits.
Held
The Tribunal held that the rejection of books of account by the AO lacked justification as no specific defects were identified and sufficient documentary evidence was provided by the assessee. The Tribunal also found the enhancement of Gross Profit rate and the additions for cash deposits to be arbitrary and not supported by facts or law.
Key Issues
Whether the Assessing Officer was justified in rejecting the assessee's books of accounts and making additions based on alleged bogus transactions and unexplained cash deposits without pinpointing specific defects.
Sections Cited
145(3), 69A, 250, 142(1), 143(2)
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आयकर अपीलीय अिधकरण,च"ीगढ़ "ायपीठ “ए”, च"ीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “A”, CHANDIGARH HEARING THROUGH: PHYSICAL MODE "ी लिलत कुमार, "ाियक सद" एवं "ी कृणव" सहाय, लेखा सद" BEFORE: SHRI. LALIET KUMAR, JM &SHRI. KRINWANT SAHAY, AM आयकर अपील सं./ /Chd/ 2024 िनधा"रण वष" / Assessment Year : 2017-18 M/s Kaur Sain Spinning Mills बनाम The Asst. CIT A-17, Phase-VIII, Focal Point, Circle-1, Ludhiana Ludhiana, Punjab- 141010 "ायीलेखासं./PAN NO: AADFK0668B अपीलाथ"/Appellant ""थ"/Respondent िनधा"रती की ओर से/Assessee by : Shri Ashwani Kumar and Ms. Muskan Garg, C.A’s राज" की ओर से/ Revenue by : Shri Vivek Vardhan, Addl. CIT, Sr. DR सुनवाई की तारीख/Date of Hearing : 18/03/2025 उदघोषणा की तारीख/Date of Pronouncement : 08/04/2025 आदेश/Order PER LALIET KUMAR, J.M:
This is an appeal filed by the Assessee against the order of the Ld. CIT(A)/NFAC, Delhi dt. 19/06/2024 pertaining to Assessment Year 2017-18. 2. In the present appeal Assessee has raised the following grounds:
1. That order passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income Tax (Appeals), NFAC, Delhi is against law and facts on the file in as much as Learned CIT(A) was not justified to uphold the action of Learned Assessing Officer in rejecting the books of accounts without pin-pointing any specific defect in the maintenance of the books of accounts.
2. That Learned CIT(A) was further not justified to arbitrarily uphold the action of the Learned Assessing Officer in making an addition of Rs. 48,80,064/- by adopting an arbitrary G. P. rate of 13.06% as against 12.56% on the declared turnover of the appellant.
3. That Learned CIT(A) was further not justified to arbitrarily uphold the action of the Learned Assessing Officer in making an addition of Rs. 41,00,000/- on account of cash deposited during demonetization period u/s 69A of the Income Tax Act, 1961 without appreciating the fact that the entire cash deposited was out of withdrawals made from the bank account of the appellant firm in the earlier periods.
3. Briefly, the facts of the case are that the assessee is a partnership firm engaged in the manufacturing and trading of yarn and cloth, which filed its return on 27/10/2017 for A.Y. 2017-18, declaring an income of Rs. 16,27,100/-. The case was selected for scrutiny under CASS due to abnormal cash deposits during the demonetization period.
2 As per AO, the facts and circumstances of the case lead to only one conclusion: there is only trading of bills with no actual purchase/sale transactions between the M/s. B.S. Traders and M/s. Kaur Sain Spinning Mills, therefore, the nature of the transaction with M/s B.S. Traders are bogus purchase/sale transactions. These are sham transactions/paper transactions which result in inflating financial statements i.e. by increasing the turnover so as to increase the cash credit limits/loans from the bank. The Assessing Officer (AO) rejected the books of accounts under Section 145(3) of the Income Tax Act, 1961, mentioning discrepancies in transactions with M/s B.S. Traders, the absence of supporting documents, and the lack of evidence for the actual movement of goods. The AO estimated the Gross Profit (GP) rate at 13.06% as against the declared 12.56%, leading to an addition of Rs.48,80,064/-. Further, cash deposits of Rs.41,00,000/- during demonetization were treated as unexplained under Section 69A. The total assessed income was computed at Rs.1,06,07,160/-.
Against the order of the Ld. AO the assessee went in appeal before the Ld. CIT(A). The Ld. CIT(A) sustained the order of the AO by stating as under: “ I have gone through all the submissions and documents furnished by the appellant and the same are not tenable due to the reasons mentioned below. The appellant has not submitted gate inward register/gate outward register/bills and vouchers related to movements to goods and therefore has not discharged its onus regarding movements of goods. Appellant stated that there was no trading transaction between them and the said concern so the question of movement of goods should not be the basis of any adverse inference to be drawn. The appellant stated that they used to deliver the material directly to the purchasers. The appellant has not given any documentary evidences to prove this. It furnished only trading of bills with no actual purchase/sale transactions between the M/s. B.S.Traders and M/s. Kaur Sain Spinning Mills, therefore the nature of transaction with M/s B.S. Traders are held to be bogus purchase/sale transactions. I do not find any justification to interfere with the order of the AO, hence the ground of appeal adduced by the appellant is not upheld.”
5. Feeling aggrieved by the order of the Ld. CIT(A) the assessee is in appeal before us.
During the hearing, the Ld. AR contended that the books of accounts were properly maintained and duly audited. All the transactions, particularly those with M/s B.S. Traders who had returned the advances later, were carried out through banking channels. Importantly, the Ld. AO failed to identify or point out any specific defects in the books of accounts, thereby undermining the justification for any adverse inference.
3 6.1 Ld. AR submitted that the assessee challenged the arbitrary enhancement of the Gross Profit (GP) rate to 13.06%, arguing that this increase ignored the consistent upward trend in the GP declared in earlier years. Despite the AO accepting the sales figures declared in the books, the GP was manipulated without any concrete evidence indicating suppression of income. This selective treatment, according to the assessee, lacked any rational basis and was not supported by material evidence. 6.2 Ld. AR submitted that regarding the cash deposits, the assessee clarified that these were sourced from earlier cash withdrawals made before the demonetization period. These cash movements were duly recorded in the cash book, and the AO failed to establish a direct nexus between the deposits and any alleged bogus transactions. Hence, the assumption of unexplained or suspicious cash deposits was unfounded. 6.3 The Ld. AR submitted that regarding the of M/s B.S. Traders’ existence, the assessee submitted documentary proof, including the VAT registration certificate and the assessment order of M/s B.S. Traders, to establish the entity’s legitimacy. However, both the AO and the Ld. CIT(A) failed to acknowledge or consider this evidence, thereby ignoring material facts relevant to the assessment.
Per contra, the Ld. DR argued that the documentary evidence on record comprising bank statements, cash books, and the absence of critical registers clearly demonstrated that the assessee engaged in window dressing and bogus transactions. The DR further argued that the failure to produce sufficient documentary proof to substantiate the transactions with M/s. B.S. Traders and to clarify the source of cash deposits during the demonetization period justified both the rejection of the books and the subsequent additions to the income. It was further contended that the arbitrarily adopted gross profit rate and the classification of the cash deposits as unexplained were reasonable conclusions drawn from the available evidence, thereby supporting the adjustments made in the assessment.
We have heard the rival contentions and perused the material available on record. The Ld. AR, during the course of hearing had drawn our attention to the notice issued by the Ld. Assessing Officer on 25/11/2019 whereby the assessee was called 4 upon to produce the various documents by 27/11/2019. The assessee, vide reply dt. 26/11/2019 had produced the following documents before Assessing Officer:
S. No. Particulars 1 Copy of Computation of Income 2 Copy of Audited Balance Sheet, P&L Account & Tax Audit Report in Form 3CB & 3CD 3 Copy of Income Tax Return Acknowledgment 4 Copy of Notice issued u/s 143(2) 5 Copy of Notice issued u/s 142(1) dated 25.11.2019 issued by ACIT, Circle-1, Ludhiana 6 Enclosures filed with reply dated 26.11.2019 during assessment proceedings: 6(a) Copy of Cash Book 6(b) Copy of Bank Book for the period 01.04.2016 to 31.03.2017 6(c) List of Sundry Debtors with PAN 6(d) Confirmed Copy of Account Sundry Debtors: i. Babita Fabrics ii. YSR Enterprises iii. Vallabh Knittings iv. S.M. Hosiery Works v. Bansal Knitting Works vi. Mittal Yarn Agency 6(e) Copy of Account Sundry Debtors: i. Aadi Knit Fab ii. ANS Knitwears iii. Arham Yarns iv. Bros Entertainment Shoppe Pvt. Ltd. v. Gaurav Yarns vi. J. Arim Fabrics Pvt. Ltd. vii. Jain Yarns viii. Kaur Sain Exports Ltd. ix. Moti Knit Fab x. Nishu Enterprises 5 xi. OM Yarn Plus Pvt. Ltd. xii. Prem Fabrics xiii. Rajeev Textiles xiv. Rex Global Ltd. xv. Rex Sewing Machine Co. Ltd. xvi. Ridhi Sidhi Enterprises xvii. RY Enterprises xviii. S.J. Fabrics xix. Square Corporation xx. Tanishq Fibres xxi. Vista Knitberry Fashions Pvt. Ltd. xxii. Wool Way Exports 6(f) Copy of Account Sundry Creditors: i. A.B. Gupta Knitwears ii. D.D. Enterprises iii. Garg Acrylics Ltd. iv. Glaze Garments India Ltd. v. Indiana Acids & Chemicals Pvt. Ltd. vi. R.K. Dyes Pvt. Ltd. vii. R.K. Oswal Hosiery Factory viii. R.K. Satyam Dyes & Chemicals ix. SEL Mfg. Co. Ltd. x. SEL Textiles Ltd. xi. Venus Cotsyn India Ltd. xii. Vishal Traders 6(g) Confirmed Copy of Account Sundry Creditors: i. Kaur Sain Exports Ltd. ii. Venus Garments (India) Ltd. iii. Ridhi Sidhi Enterprises 6(h) Stock-Tally 6(i) Gross Profit Chart 6 8.1 Despite filing the above-noted documents / information, the Assessing Officer rejected the assessee's books of account by issuing the notice. Admittedly, the above- noted documents, along with the audited accounts of the assessee, were available with the assessee; however, despite that, the Assessing Officer has rejected the books of account of the assessee. At the stage, it is essential to point out that the sole basis of making the addition in the hands of the assessee was the non-receipt of the response from M/s B.S. Traders having PAN Number FQCPS0991H and the report of the inspector Mr. Pankaj Behl on 04/12/2019. Based on the non-receipt of the reply from B.S. Traders and also on account of the report of Shri Pankaj Behal the Ld. Assessing Officer as well as the Ld. CIT(A) have concluded that the nature of transactions with M/s B.S. Traders were bogus in nature. We found that the Assessing Officer of Bharat Singh (B.S. Traders) have passed the assessment order for the Assessment Year 2017-18 thereby only making the addition of Rs. 2,50,000/- and assessing the income at Rs. 5,43,000/-.