THE ITO, WARD-1(2)(3), AHMEDABAD vs. MOHAMMEDARIF IBRAHIMBHAI SHAIKH, AHMEDABAD

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, AHMEDABAD [CONDUCTED THROUGH VIRTUAL AT AHMEDABAD] BEFORE SHRI PRAMOD M JAGTAP, VICE PRESIDENT & Ms. MADHUMITA ROY, JUDICIAL MEMBER I.T.A. No. 1115/Ahd/2019 (Assessment Year: 2012-13) ITO Vs. Mohammedarif Ibrahimbhai Ward-1(2)(3), Shaikh, Prop. of M/s. I.K. Ahmedabad International, House No. 314, Baitul Ibrahim, Kagdiwad, Ellisbridge, Ahmedabad-380006 [PAN No. AHEPS2816H] (Appellant) .. (Respondent) C.O. No. 10/Ahd/2022 (in ITA No. 1115/Ahd/2019) (Assessment Year: 2012-13) Mohammedarif Ibrahimbhai Shaikh Vs. ITO House No. 314, Baitul Ibrahim, Ward-1(2)(3), Kagdiwad, Ellisbridge, Ahmedabad Ahmedabad-380002 [PAN No. AHEPS2816H] (Appellant/Cross Objector) .. (Respondent) I.T.A. No. 962/Ahd/2019 (Assessment Year: 2014-15) ITO Vs. Mohammedarif Inbrahimbhai Ward-1(2)(3), Shaikh, Prop. of M/s. I.K. Ahmedabad International, House No. 314, Baitul Ibrahim, Kagdiwad, Ellisbridge, Ahmedabad-380006 [PAN No. AHEPS2816H] (Appellant) .. (Respondent) Appellant by : Shri Vijaykumar Jaiswal, CIT DR & Shri R. R. Makwana, Sr. DR Respondent by: Shri Dushyant Maharshi, A.R. Date of Hearing 23.03.2022 Date of Pronouncement 31.05.2022

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 2 - O R D E R PER Ms. MADHUMITA ROY, JM:

The cross appeals and the separate appeal filed by the respective parties are directed against the order dated 02.04.2019 and 05.032019 passed by the Ld. CIT(A)-10, Ahmedabad arising out of the separate orders dated 15.12.2017 & 29.12.2016 passed by the ITO, Ward-1(2)(3), Ahmedabad under Section 143(3) r.w.s. 147 and 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for A.Ys. 2012-13 & 2014- 15 respectively. Since all the appeals relate to the same assessee these are heard analogously and are being disposed of by a common order for the sake of convenience.

C.O. No. 10/Ahd/2022 (A.Y. 2012-13):- 2. At the threshold the Ld. A.R. argued on the maintainability of appeal. Since it goes to the root of the matter we have decided to address the same first.

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 3 - dealing for his business during that period the appeal memo was received by the accountant of the appellant. After his return to India the said accountant forgot to handover the said copy to the assessee and the appeal could not be filed in due time. Immediately thereafter, in the month of March, 2020 the Covid pandemic 2019 in India started due to which the entire business was disrupted and the assessee was unable to file the Cross Objection during pandemic. He has further relied upon the direction dated 10.01.2022 passed by the Hon’ble Supreme Court whereby and whereunder limitation period has been extended due to pandemic. In that view of the matter, there is no excessive or inordinate delay in filing the instant Cross Objection before us by the assessee and he, thus, prays for condonation of the same. In this regard, he has further relied upon the judgment passed by the Hon’ble Apex Court in the matter of Collector, Land Acquisition vs. Mst. Katiji & Ors., reported in (1987 AIR 1353) wherein the delay has been condoned in a meritorious matter for the ends of justice.

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 4 - upon the order dated 10.01.2022 passed by the Hon’ble Apex Court we condone the delay.

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 5 - “Reasons recorded for re-opening of assessment in the case of Shri Md. Arif Ibrahimbhai Shaikh, PAN : AHEPS2816H for A.Y. 2012-13. Assessee is an individual engaged in export of live animals (goats & sheep) mainly to UAE. He is doing his business in the name of style of a proprietorship entity M/s. I K International. Assessee filed his return of income for A.Y. 2012-13 on 30.09.2012 declaring income of Rs.9,67,616/-. The same was assessed u/s. 143(3) and income was determined at Rs.9,92,620/- vide order dated 21/01/2015 During the verification of case records, it was noticed from cash book that assessee has made the payment in excess of Rs.20,000/- per persons in day and total cash payment comes to Rs.6,28,53,975/-. As per Section 40A(3) of the Act, where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure. Since the expenditure has been incurred in violation of provision of section 40A(3), the same is required to be disallowed, Failure to do so resulted in underassessment of income Rs. 6,28,53,975/-. In view of the above facts, I have reason to believe that income chargeable to tax to the extent of Rs. 6,28,53,9075/- is escaped assessment within the meaning of section 147 of the I T Act. Therefore, I am satisfied that it is a fit case for reopening assessment to issuing of notice u/s. 148.

” 10. It is the case of the assessee that the details in respect of the issue involved in the notice under Section 147 of the Act has already been furnished during the assessment proceeding. In this regard, the reply dated 11.08.2014 filed by the assessee in response to the notice under Section 142(1) and 143(2) of the Act available at Page 43 of the Paper Book has been brought to our notice.

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 6 - Considering all such details filed by the assessee the assessment was finalized by the Ld. AO upon making addition of Rs. 25,000/-. It is pertinent to mention that the Ld. DR has also failed to support his argument by showing any new evidence / tangible evidences in forming the reason to believe that income chargeable to tax to the extent of Rs. 6,28,53,975/- has escaped assessment within the meaning of Section 147 of the Act.

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dealing with the identical issue the Hon’ble Apex Court has been pleased to observe as follows:

“4. On going through the changes, quoted above, made to section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987 , re- opening could be done under above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1-4-1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re- open the assessment. Therefore, post 1-4-1989 , power to reopen is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain pre-condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1-4-1989, Assessing Officer has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987 , Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in section 147 of the Act. However, on receipt of representations from the Companies against omission of the words "reason to believe", Parliament re-introduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No. 549 , dated 31-10-1989, which reads as follows : "7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression 'reason to believe' in section 147. —A number of representations were received against the omission of the words 'reason to believe' from section 147 and their substitution by the 'opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, 'reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989 , has again amended section 147 to reintroduce the expression 'has reason to believe' in place of the words 'for reasons to be recorded by him in writing, is

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 8 - of the opinion'. Other provisions of the new section 147, however, remain the same." [Emphasis supplied] 5. For the aforestated reasons, we see no merit in these civil appeals filed by the Department, hence, dismissed with no order as to costs.”

ITA No. 1115/Ahd/2019 (A.Y. 2012-13):-

ITA No. 962/Ahd/2019 (A.Y. 2014-15):-

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Rs. 8,10,000/- without appreciating the fact that the disallowance u/s. 40A(3) was correctly made by the Assessing Officer after it was found that the payments made by the Assessee to the extent of Rs. 4,62,50,000/- were not covered under rule 6 DD of I.T. Rules, 1962 and hence, the provisions of section 40A(3) were directly applicable. (b) While doing so, the learned CIT(A) failed to take note of Circular No 4/2006 dated 29.03.2006 and subsequent clarification vide Circular no. 8/2006 dtd. 06.10.2006 in correct perspective according to which the persons to whom payments were made by the assessee could not be termed as ‘producers’ of livestock and hence, were not covered under the exceptions provided under Rule 6DD(e) of the Income-tax Rules 1962. (2) The learned CIT(A) erred in inferring from the remand report that the Assessing Officer had re-determined the quantum of disallowance at Rs 81,00,000, without taking note of the fact that the Assessing Officer never stated in the remand report that the remaining amount of Rs 3,81,50,000/- (i.e. 4,62,50,000-81,00,000) was not liable for disallowance u/s 40A(3) of the Income-tax Act, 1961. (3) The learned CIT(A) based in his decision on the premices of genuineness and the identity of cattle suppliers as well as genuineness of transactions without realizing the primary fact that these persons were not ‘producers’ of livestock for the purpose of Rule 6DD(e) and because of this, the disallowance u/s 40A(3) of the I.T. Act, 1961 made by the Assessing Officer was justified. (4) Without prejudice to the above, the Ld. CIT(A) has erred in law and on facts by restricting the disallowance to Rs. 8,10,000/- out of Rs. 4,62,50,000/-, being profit element calculated @ 10% of Rs. 81,00,000/-[unverified purchases], which is perverse and bad in law as there is no such provision for taking profit element while making disallowance u/s 40A(3) of the IT Act, 1961. (5) The ld. CIT(A0 has erred in law and/or on facts by restricting the disallowance to Rs.5,00,000/- from Rs.35,72,673/- (out of total expenditure of Rs.1,78,63,369/-) in absence of any documentary evidences with regard to expenses claimed. (6) On the facts and circumstances of the case, the ld. CIT(A) ought to have upheld the order of the Assessing Officer. (7) It is, therefore, prayed that the order of ld. CIT(A) may be set aside and that of the Assessing Officer be restored.”

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 10 - disallowance under Section 40A(3) of the Act to the extent of Rs. 4,62,50,000/- holding payments made by the assessee not covered under Rule 6 DD of the I.T. Rules,1962.

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 11 - 19. The brief facts leading to the case is this that the assessee is engaged in business of trading in and export of Animals (Live Stock) in the name of I K International, a proprietorship concern. The assessee has purchased the live stock being sheep and goats mainly from shepherds/breeder of nearly village who are stated to be basically unorganized, illiterate farmers/shepherds for a price of Rs. 3600-4000 per sheep/goat. These sellers are resident of nearby villages and nomads to whom even banking facilities are not available and thus, the assessee had to pay them in cash. The assessee has further purchased live stock from traders to whom payment was made by A/c payee cheque. The modus operandi of the assessee’s business is as follows:

Whenever there is any intention of sale livestock the assessee generally appoints a broker who, in turn, on behalf of the assessee approaches the nearby area, verifies the livestock, carries out the sorting depending on the quality of live stock, breed etc. and finally decides the live stock to be purchased. The assessee maintains a register which keeps the detail of number of sheep/goats and the detail of the party from whom these are purchased. The broker in turn charges commission from those shepherd/farmers, who intend to sale their live stock. Some times when it becomes impossible to get the required quantity of live stock to be exported from the surrounding farmers/shepherds these are purchased directly from the trader’s payments whereof was made through A/c payee crossed cheque. The appellant further maintains a ledger of such broker in his books for the purpose of identification of the person through whom live stock is purchased. Under each such ledger the assessee maintains sub-ledger of all

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 12 - shepherds from whom the live stock is purchased in the form of register of total sheeps/goats purchased through such broker; party wise breakup of the person from whom the same is purchased is also maintained. Quantitative details qua broker/trader are also maintained by the assessee. Since the shepherds are generally nomads and do reside in far remote places which are not even villages and in the absence of banking facilities available with them in such rural areas cash payment is made to those shepherds/farmers.

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 13 - payment exceeding Rs. 20,000/- was made to any party in a day and therefore, there is no violation of the provision of Section 40A(3) of the Act as was the main contention of the Ld. A.R. Assessee by filing additional evidences before the Ld. CIT(A) duly established the fact that the cash payments were made to the shepherds/ farmers and not the traders. The case of the assessee is this that the Ld. AO added the entire turnover considering it as the total income of the assessee whereas keeping in view of the principle of real income, the real income can be added and not the total turnover. In this regard, the ratio laid down by the Jurisdictional High Court in the case of CIT vs. Bholanath Poly Fav (P) Ltd.(supra) the Ld. CIT(A) rightly estimated the real income as 10% of the turnover and restricted addition to Rs. 8,10,000/-. The Ld. A.R., therefore, relied upon the order passed by the Ld. CIT(A).

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 14 - reasonable as contended by the Ld. D.R. With the above argument the Ld. DR finally relied upon the order passed by the Ld. AO.

(i) While issuing notice under Section 144 of the Act also for finalizing assessment under Best Judgment Assessment, disallowance of Rs.1,25,63,451/- was proposed whereas ultimate disallowance was made to the tune of Rs.4,62,50,000/- under Section 40A(3) of the Act violating the principle of natural justice which vitiates the entire proceeding.

(ii) On merit as the word ‘livestock” clearly mentioned in sub-clause (ii) of clause (e) of Rule 6DD after the amendment in rules, there is no need to refer any circular for the issue a Circular No. 4/2006 and 8/2006. The provision of Rule 6 DD(e) (ii) is squarely applicable to the case of the assessee.

(iii) There was no payment exceeding Rs.20,000/- was made by the assessee in a day to any particular party while purchasing livestock.

(iv) The payment made in cash is to be viewed in the context of commercial expediency and necessity of business as the payment is made to small villagers/shepherds who were from unorganized sector.

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 15 - (v) Further that Section 40A(3) was designed to counter tax evasion through such claims of expenditure in cash. The provisions of Section 40A(3) are attracted only in cases where the genuineness of expenditure incurred in cash is in doubt. The provision under Section 40A(3) further envisages following situation wherein disallowance could not be made:

a. circumstances as prescribed in rule 6 DD

b. having regard to nature and extent of banking facility and consideration of business expediency and other relevant factor it was contended by the assessee that nowhere in the assessment order the Ld. AO doubted the purchases made by the appellant.

c. The reason for disallowance is only on the alleged finding that the appellant has not been able to prove the payments made to farmers/shepherds and not to traders or middleman. It is an admitted fact that assessee has made cash payment and further that nowhere the genuineness of the transaction, payment of purchase of livestock has been doubted by the Ld. AO. In fact, the villagers/shepherds only insist on cash payments. It is the prevalent practice in such type of business that payments are always required to be made in cash to the owner of the livestock (animal).

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 16 - assessee. The same were duly considered and supplied to the Assessing Officer and Remand Report was sought for on the basis of those additional evidences adduced by the assessee upon verification of the export sales made by the assessee.

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 17 - 28. It further appears from the remand report that all the 27 persons names whereof appearing in the Table-A have stated to have engaged in the business of purchasing lambs, nurturing them and selling them during the year under consideration. It was further admitted by them that they were engaged in the business of selling of sheep and goats with the assessee during the year and amount were received in cash. After interaction with those parties the Ld. AO came to a finding that they are basically illiterate, not maintaining books of accounts or any accounts of purchase and sale of such livestock. It is noticed that the sale amount received by those parties were not matching to the ledger account submitted by the assessee. However, payment outstanding at the end of the year was duly confirmed by them.

In reply to the Remand Report it was submitted by the assessee that when the sales are not doubted the entire purchase cannot be questioned. At the most, the G.P. element of these purchase of Rs. 67,00,000/- at 8% specified in Section 44AD or 10% may be added.

However, the Ld. CIT(A) was not agreed to the proposition given by the Ld. Assessing Officer in making addition on the total turnover than on real income. He, therefore, estimated 10% of the impugned amount and considered that same as disputed amounts to be added. The order passed by the Ld. CIT(A) is reproduced as below: “11. Decision: I have examined the assessment order and submission made by the appellant. The appellant submitted certain additional documents and the matter were remanded to Assessing Officer on 04/05/2018. The Assessing Officer has submitted remand report on 03/08/2018 after making necessary inquiries. After considering all the facts and circumstances, the additional evidence submitted by the appellant is

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admitted as there was a reasonable cause for not producing the evidences before the A.O. and the same is considered necessary to go to the root of the controversy involved. Therefore, same are admitted for adjudication to provide natural justice to appellant and such admission is supported by following case laws: Kamlaben S Bhatti 44 Taxman.com 459 (Guj.) Dharmamdev Finance Pvt. Limited 43 taxman. Com 395 (Guj.). ACIT vs. Jogindersingh (ITA No. 2942/Delhi/2011) ITAT, Delhi Anmol Colour India Pvt. Ltd. vs. ITO 31 SOT 18 (JP) 121 ITJ 269: ITAT, Jaipur. CIT vs. Khanpur Cool Synthicate (1964) 53 ITR 225 (SC): I have examined the contents of remand report and the rejoinder filed by the appellant 10.1 The first ground of appellant is against disallowance of the Act stating that the amount of Rs. 4,62,50,000/- paid in cash to various parties is in violation of Section 40A(3)of the IT Act and hence disallowed. The modus operandi of business of the appellant which is explained during assessment proceeding is that the appellant is engaged in business of trading in and export of Live stock viz. sheeps and goats. The live stock is generally available with the breeders of nearby village who are basically unorganized and illiterate farmers/shepherds etc. Hence, whenever they have an intention to sale the live stock, they appoint a broker who in turn approaches the nearby city area and approaches intended buyers like appellant. The payment of above purchase is made by the appellant in cash. Further, all the purchase of live stocks made by appellant is exported. During the course of assessment, appellant had produced documents in support of exports viz. Shipping bill etc. and none of which has been doubted by AO. Hence, the transactions entered by appellant have not been doubted by assessing officer. 10.2 During the course of assessment, assessing officer had issued show cause notice on 07/12/2016 proposing addition of Rs. 1.25 crores u/s 40A(3) which has been perused. The issue of show cause notice has been mandated in income tax in accordance with the principle of natural justice. In recent instruction no. 20/2015 dated 29th December 2015 issued by CBDT pertaining to assessment it has been clearly mentioned that the Board desires that “in all cases under scrutiny, where the Assessing Officer proposes to make additions or disallowances, the assessee would be given a fair opportunity to explain his position on the proposed additions/disallowances in accordance with the principle of natural justice. In this regard, the Assessing Officer shall issue an appropriate show cause notice duly indicating the reasons for the proposed additions/disallowances along with necessary evidences/reasons forming the basis of the same." However, on perusal of the show cause notice, addition proposed has been Rs. 1.25 crores whereas in the assessment order, Assessing officer has made addition of Rs. 4.625 crores therefore contended to be against the principles of natural justice. Further, Delhi High Court in the case of Maruti Suzuki India Ltd. v. Addl. CIT, TPO[2010] W.P. (C) 6876 OF 2008, has opined that non-issue of proper show-cause

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notice can be fatal to the proceedings under the Income-tax Act, 1961 Also, Hon. Apex court in case of Uma Nath Pandey v. State of UP AIR 2009 SC 2375, inter alia, observed as under: 'Notice is the first limb of this principle. It must be precise and unambiguous. It should appraise the party determinatively the case he has to meet. Time given for the purpose should be adequate so as to enable him to make his representation. In the absence of a notice of the kind and such reasonable opportunity, the order passed becomes wholly vitiated. Thus, it is but essential that a party should be put on notice of the case before any adverse order is passed against him' Thus, in the present case, it is argued that assessing officer has clearly failed in issuing appropriate show cause notice and has clearly vitiated principles of natural justice by making addition of Rs. 4.625 crore as against Rs. 1.25 crores as stated in the show cause notice. The appellant is of the opinion as to how the initial amount as stated in show cause notice of Rs. 1.25 crore was derived and how the same went up to Rs. 4.625 crores, is not apparent from assessment order. The contention raised by the appellant found to be correct. 10.3 Even on merits, the main contention assessing officer is that appellant has made payment exceeding of Rs. 20,000/- which is in clear violation as mentioned in Section 40 A(3) has been submitted, Assessing officer failed to appreciate the fact that appellant is engaged in trading of livestock and hence the case of the appellant is squarely covered under Rule 6DD(e)(ii) as the payment is made for purchase of live stock. Assessing officer has further called for details like documentary proof that payment in cash was made "at their insistence". Such condition is no where stated section 40A(3) or Rule 6DD. Such a requirement has been specified only in circular 8/2006 which has been issued at a later date for clarifying meaning of the expression "produce of animal husbandary" to explain that includes "livestock". However, vide income tax seventh amendment rules, 2008 the word "live stock" is a part of Rule 6DD (e)(ii) which was not before when exception for animal husbandary was covered under clause (f) of rule 6DD and had the words as under:- "Rule 6DD: Cases and circumstances in which a payment or aggregate of payments exceeding twenty thousand rupees may be made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft. No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub- section (3A) of section 40A where a payment or aggregate of payments made to a parson in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees in the cases and circumstances specified hereunder namely: (f) where the payment is made for the purchase of— (i)......... or

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(it) the produce of animal husbandry (including hides and skins) or dairy or poultry farming; or (iii)........ or (iv)……..” Hence, circular 4/2006 as well as 8/2006 after the above amendment is not applicable to the facts of appellant. Also, it is an established principle that the circulars being clarificatory in nature are to be referred to when there is an ambiguity or lack of clarity. The word "live stock" clearly appears in exception as stated in Rule 6 DD (e)(ii) and hence there may not be any need to refer to any circular. However, CBDT Circular No. 4/2006 dated 29/03/2006 which clarify the meaning of the word "the produce of animal husbandry" used in sub clause (ii) of clause (f) of rule 6DD. According the clarification, the word "produce of animal husbandry" includes "Live Stock &Meat". This further confirms the stand taken by appellant. Now, referring to CBDT Circular No 8/2006, DATED 6-10-2006 which further clarifies the meaning of the word "produce of animal husbandry". Point 3 of the circular clearly mentions as under:- "3. The Board after examination of the issue is of the view that any person, by whatever name called, who buys animals from the farmers, slaughters them and then sells the raw meat carcasses to the meat processing factories or to the traders/retail outlets would be considered as producer of livestock and meat." Appellant being in the business of trading of live stock, only the emphasis as supplied above, is applicable since the later part of the circular would be applicable in case of purchase of meat and hence, appellant is not required to fulfill the conditions specified in para 4 of the circular which is applicable to producer of meat only and not in case of trader of live stock. Hence, the case of appellant being squarely covered by Rule 6DD, therefore there is no case of additions. 10.4 Also, the genuineness of purchases made by Appellant has not been doubted by Assessing Officer. The appellant has relied upon the decision of Hon. Gujarat High court in case of Anupam Tele Services v Income Tax officer (366 ITR 122) where in it is held that when genuineness of payment is not in doubt no disallowance can be made under Section 40 A(3). Further, appellant has relied upon the decision of various high courts. I have carefully consider the decisions where in it is held that where the payment is genuine, there cannot be denial of deduction of genuine and bona fide business expenditure merely because the assessee could not make the payment as provided in Section 40A(3). 10.5 Further, appellant has raised alternate plea on the ground of principles of "commercial expediency" and also that none of the payments exceeds Rs. 20,000/-. Since, as explained above, the payment made by appellant is not covered by the provision of Section 40 A(3) the alternate plea raised by the appellant has not been adjudicated upon. In my opinion the case of live stock exporter is on much more stronger looting than that of a dealer in meat.

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10.6 Further, remand report as submitted by Assessing Officer and rejoinder to the remand report as submitted by AR of the appellant during the course of hearing on 17/09/2018 have been duly considered. Assessing Officer after submission of additional evidences has not doubted the export sales made by the appellant. Assessing Officer had further issued summons to the persons from whom purchases had been made by appellant in order to cross verify the same. 27 persons out of total 34 summons issued had appeared before Assessing Officer and their statements were recorded. All the 27 persons confirmed the transactions entered into by them with appellant. As they are all shepherds who are from unorganized sector and not maintaining books of accounts, they were not able to confirm the exact amount of sales made by them to the appellant However, payment outstanding at the end of year was confirmed by them. Amongst the 7 persons who did not appear before Officer to attend the summons, one was deceased and others were those who were not residing nearby. In the remand report, Assessing Officer has proposed to restrict the addition to the tune of Rs. 81,00,000/- (Rs. 67,00,000/- paid to the persons who did not attend the summons and Rs. 14,00,000/- paid to the persons who appeared before Assessing Officer but possessing and operating their bank accounts). The relevant portion of remand report is as under: “3.7 To sum up, (a) Out of 38 persons, the names of 04 persons are repeated. (b) Out of 34 persons, on verifying the 26 persons on summons issued, it is revealed that they are shepherds and had sold livestock to the assessee and received cash payments during the year under consideration. However, in respect of 02 persons/entities viz, (i) Arif Sajid & Co. & (ii) Sultan & Co., out of 26 persons, it is revealed that they are operating their business from Ahmedabad and they might be used to banking system. Further, on verification, it is also noticed that the assessee has made payments of purchase of live stock through banking channel. Copy of ledger a/cs. of these 02 persons/entities submitted by assessee during assessment proceedings is enclosed for your kind perusal and ready reference. As pointed out in assessment order, it is seen that the assessee has made payments for purchase of livestock of Rs.10,00,000/- & Rs.4,00,000/- respectively from these 02 parties in cash aggregating to Rs. 14,00,000/- as during the year under consideration. Therefore, to this extent, the payments made to these 02 persons i.e, Rs.14,00,000/- cannot be allowed u/s 40A(3) read with Rule 6DD(e)(ii) of I.T Rules, 1962. (c) Further, out of 34 persons, 07 persons had not attended to the summons issued. In respect of one person viz. Ali Kosha Gaam (Ali Ibrarhim) (Sl.no. 24 of Table-A above), the summons was returned back with the remarks of postal authority as "the person is deceased does not exist and returned back". With respect to remaining 06 persons [Sl.nos.1 (repeating at 31), 6, 8, 12,18, 23 of Table-A above), it is revealed that neither the persons have complied to the summons issued nor the assessee has produced them

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for verification despite the opportunity given to the assessee vide order-sheet entry dated 27.07.2018. Thus, the assessee could not substantiate his claim of cash payments to these 07 parties also in accordance with Rule 6DD(e)(ii) of I.T Rules, 1962 by furnishing details and relevant evidences and producing them for verification, The assessee has shown to have made cash purchases from these parties of Rs.67,00,000/-; however, no any corroborative evidence has been filed to support its claim that cash payments have been made to these parties either in form of confirmation of parties & bills raised against such payments is in accordance with Rule 6DD(e)(ii) and hence the same cannot be allowed in-toto." Against the same appellant has pointed out that certain persons had expired but the total expenditure was genuine. Further, AR contended to confirm addition only of the profit element involved by replying upon the judgment of Hon. Gujarat High Court in case of CIT Vs. Bholanath Poly fab (P) Ltd. [355 ITR 290(Gujarat)]. Judgment of Hon. Gujarat High Court is as under: The Revenue is in appeal against the judgment of the Income-tax Appellate Tribunal dated July26, 2011, raising the following questions for our consideration : "(i) Whether the Income-tax Appellate Tribunal erred in law by not appreciating the fact that the assessee fad not kept day-to-day stock register, In the absence of which production of finished goods received, the shortage arrived, goods sent for processing, goods received from processing, etc., on a particular day could not be verified ? (ii) Whether the Income-tax Appellate Tribunal erred in law by not appreciating the fact that in the absence of day-to-day stock register, in the absence of which production of finished goods received, the shortage arrived, goods sent for processing, goods received from processing, etc., could not be verified and thus cannot be considered as evidence for purchase of goods ? (iii) Whether the income-tax Appellate Tribunal had erred in law by not appreciating the fact that the purchase made as claimed by the assessee, was not substantiated by any circumstantial evidence? (iv) Whether the Income-tax Appellate Tribunal had erred in law by not appreciating the fact that the parties, from which purchases were made, as claimed by the assessee, could not be found out by the Department and that the burden was on the assessee to prove the genuineness of the parties?" 2. Though the questions per se do not bring out the real controversy, having perused the orders on record with the assistance of the learned counsel for the Revenue, we find the following facts emerging from the record. 3. The respondent-assessee is engaged in the business of trading in finished fabrics. For the assessment year 2005-06, the Assessing Officer held that the purchases worth Rs.40,69,546 were unexplained. He, therefore, disallowed such expenditure claimed by the assessee and computed the total income of Rs. 41,10,187. 4. The issue was carried in appeal by the assessee before the Commissioner. The Commissioner rejected the appeal, upon which the assessee went in further appeal before the Tribunal. The Tribunal substantially allowed the assessee's appeal, in so

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far as the question of bogus purchase is concerned, the Tribunal concurred with the Revenue's views that such purchases were made from bogus parties. The Tribunal noted that the Assessing Officer had issued notice to all parties from whom such purchases were allegedly made. Such notices were returned unsrved by the postal authorities with the remark that the address was incomplete. The inspector deputed by the Income-tax Department also could not find any of the parties available at the given addresses. The assessee was unable to produce any confirmation from any of the parties. Though the assessee had claimed to have made payment by account payee cheques, upon verification, it was found that the cheques were enchased by some other parties and not by the supposed sellers. 5. Having come to such a conclusion, however, the Tribunal was of the opinion that the purchases may have been made from bogus parties, nevertheless, the purchases themselves were not bogus. The Tribunal adverted to the facts and data on record and came to the conclusion that the entire quantity of opening stock, purchases and the quantity manufactured during the year under consideration were sold by the assessee. Therefore, the purchases of the entire 1,02,514 meters' of cloth were sold during the year under consideration. The Tribunal, therefore, accepted the assessee's contention that the finished goods were purchased by the assessee, may be not from the parties shown in the accounts, but from other sources, in that view of the matter, the Tribunal was of the opinion that not the entire amount, but the profit margin embedded in such amount would be subjected to tax. The Tribunal relied on its earlier decision in the case of Sanket Steel Traders v. ITO [IT Appeal Nos. 2801 & 2937 (Ahd.) of 2008, dated 20-5-2011] and also made reference to the Tribunal's decision in the case of Vijay Proteins Ltd. v. Asstt. CIT[1996] 58 ITD 428 (Ahd). 6. We are of the opinion that the Tribunal committed no error. Whether the purchases themselves were bogus or whether the parties from 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 v. CIT [2009] 316 ITR 274 (Guj). 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 v. Kishor Amrutlal Patel. In the result, tax appeal is dismissed." Thus, after considering the decision of Hon. Gujarat High Court as above, I am of the view that the total amount of Rs. 81,00,000/- should not be added to the total income of appellant as real income is required to be taxed not the turnover. Now the next step would be to determine the income of the appellant out of this gross expenditure. It is well settled that gross turnover cannot be added as income of the assessee only the profits element embedded in such receipts can be taxed as income. The real income is to be taxed not the turnover as has been held in various judicial orders. There is no denying the fact that the appellant is in export business and the total business receipts have been deposited in bank accounts which have not been disputed at any stage. Hon'ble ITAT, Ahmedabad in the case of Dineshbhai Dhansukhlal Mithaiwala Vs. ITO 152 ITD 874 (Ahd.) has held ''Where aggregate

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credits in undisclosed bank account of assessee were considered as cash sales, entire sales could not be considered as income but only profit embedded in it be considered as income of assessee. Even when the purchases were not fully vouched, only profit was directed to be taxed and not the full amount involved as per ration laid down in following cases: CIT vs. Samir Synthetics Mill [2010] 326 ITR 410 (Guj.) CIT Vs. Bholanath Polyfab Pvt. Ltd. - (2013) 40 Taxmann 494(Guj) Hon'ble Karnataka High Court in the case of Shankar Khandsari Sugar Mills Vs. CIT 193 ITR 669 (Kar.) has observed that "In the absence of any prejudice to the revenue, and the basis of the tax under the Act being to levy tax, as far as possible, on the real income, the approach should be liberal in applying the procedural provisions of the Act. An appeal is but a continuation of the original proceeding and what the Income-tax Officer could have done, the appellate authority also could do." Reliance is placed on the decision of jurisdictional high court in the case of CIT vs. President Industries (258 ITR 654 (Guj) which has been accepted in the case of CIT vs. Samir Synthetics Mill [2010] 326 ITR 410 (Guj.) Therefore, a sense of proportion to be applied to come to a judicious decisions. The dynamics of the business as well as the profit ratio being shown by the Peer Group has to be the deciding factor in such matters of estimation. Only profit element involved in the transactions should be added which is estimated as 10% of the impugned amount and the same is considered to have taken care of the discrepancy involved. Hence, I hereby restrict the addition u/s 40A(3) to Rs. 8,10,000/- (10% of Rs. 81,00,000/-). The above decision is taken in view of following findings: (i) The amendment in IT rules (6DD) of 2008 is more relevant than the CBDT circular No.8/2006 and 4/2006. Hence, it would be considered as 'Executive overreach' if provisions u/s. 40A(3) are invoked. (ii) The show cause issued by Assessing Officer is not as per CBDT mandate prescribed vide instruction No. 20/2015. (iii) The total export sales are brought to tax in this case. Therefore expenditure incurred to effect such sales is required to be allowed. Any Shortcoming noticed in purchases by the AO can be considered for taxing the profit content therein on Adhoc basis as per ratio laid down by various judgments. The Assessing Officer is directed to restrict the disallowance to Rs. 8,10,000/- so made in assessment order u/s. 40A(3). The Ground No.1 is party allowed.”

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 25 - crores violating of the principle of natural justice. The judgement passed by the Hon’ble Delhi High Court in the case of Maruti Suzuki India Ltd vs. Addl. CIT reported in, TPO (2010) W.P. (C ) 6876 of 2008 has been duly taken care of by the Ld. CIT(A) in concluding that non-issuance of proper show cause can be fatal to the proceeding under the Income Tax Act. The Ld. AO clearly failed in issuing the appropriate show-cause notice thereby clearly vitiated the principle of natural justice by making addition of Rs.4.625 crores against the proposed addition of Rs.1.25 without showing reason as to how the same figure went up to Rs.4.625 crores as has rightly been agitated by the assessee before him. In our considered opinion such finding is found to be justified for the reason cited therein.

Moreso, when the word livestock clearly appears in exception clause in Rule 6DDE(ii) regarding of any circular is not required, as of the opinion formed by the Ld. CIT(A). According to the clarification the word ‘produce of animal husbandry’ includes ‘livestock and meat’. In this regard, the Ld. CIT(A) specifically observed as follows: “However, CBDT Circular No. 4/2006 dated 29/03/2006 which clarify the meaning of the word "the produce of animal husbandry" used in sub clause (ii) of clause (f) of rule 6DD. According the clarification, the word "produce of animal husbandry"

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 26 - includes "Live Stock &Meat". This further confirms the stand taken by appellant. Now, referring to CBDT Circular No 8/2006, DATED 6-10-2006 which further clarifies the meaning of the word "produce of animal husbandry". Point 3 of the circular clearly mentions as under:- "3. The Board after examination of the issue is of the view that any person, by whatever name called, who buys animals from the farmers, slaughters them and then sells the raw meat carcasses to the meat processing factories or to the traders/retail outlets would be considered as producer of livestock and meat." Appellant being in the business of trading of live stock, only the emphasis as supplied above, is applicable since the later part of the circular would be applicable in case of purchase of meat and hence, appellant is not required to fulfill the conditions specified in para 4 of the circular which is applicable to producer of meat only and not in case of trader of live stock. Hence, the case of appellant being squarely covered by Rule 6DD, therefore there is no case of additions.”

Once the business of the assessee of livestock has been confirmed and approved by the Revenue as per the conditions specified in Para 4 of the Circular the appellant is not required to fulfill the conditions specified in the Circular which is applicable to the producer of meat and not in case of trader of livestock and therefore, the case of the assessee has been found squarely covered Rule 6DD and consequently no addition is found to be warranted.

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 27 - were issued 27 duly appeared and their statements were recorded. It is also an admitted fact that all the shepherds were from unorganized sector and they are not maintaining books of accounts, neither been able to confirm the exact amount of sale made by them to the appellant. However, the payment outstanding at the end of the year was confirmed by them. Amongst the 7 persons, one already died and six since not attended before the AO, he proposed restriction of addition to the tune of Rs. 81 lakhs out of which 67 lakhs paid to the unattended parties and 14 lakhs to the those parties who were processing and operating their bank accounts. So far as, the party expired, the assessee has been able to justify that total expenditure to that particular person was genuine. Relying upon the Hon’ble Jurisdictional High Court in the case of CIT vs. Bholanath Poly Fav (P) Ltd., reported in 355 ITR 290 (Guj.), considering the contention of the assessee that addition only to the profit element involved is sustainable the Ld. CIT(A) upon due application of mind came to a conclusion that the total turnover of Rs. 81 lakhs as the total income of the assessee should not be added but the real income is required to be taxed. On this aspect he has taken note of the total export business receipts deposited in the bank accounts by the appellant which has never been disputed at any stage by the Revenue. Finally estimated 10% of the entire transaction as profit and restricted the addition to Rs. 8,10,000/- only, which is found to be rational. Thus, considering the entire aspect of the matter, the order passed by the Ld. CIT(A) is found to be just and proper without any ambiguity in restricting addition to Rs. 8,10,000/- under Section 40A(3) of the Act so as to warrant interference. We, therefore, confirm the same. The Revenue’s this ground of appeal is, thus, found to be devoid of any merit and thus dismissed.

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 28 - 32. Ground No. 5:- Restricting disallowance to Rs. 5,00,000/- from Rs. 35,72,673/- (out of total expenditure of Rs. 1,78,63,369/-) is the subject matter before us.

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 29 - 10. Grass Chara Exp. (Along with Sample Supporting Vouchers) 11. Kasar Vatav Exp. 12. Labour Exp. (Along with Sample Supporting Vouchers) 13. Legal Fees Exp. 14. Loading and Unloading Exp. (Along with Sample abstract of Registered maintained by the Assessee. 15. Misc. Exp. 16. Office Exp. 17. Petrol Exp. 18. Staff Salary Exp. (Along with Sample Supporting Vouchers) 19. Port (Wharfage) Exp. (Along with Sample Supporting Vouchers) 20. Stationery Exp. 21. Telephone Exp. 22. Travelling Exp. 23. Vaternarry Health Certi. Exp. (Along with Sample Supporting Vouchers).

ITA Nos.1115 & 962/Ahd/2019 & CO No.10/Ahd/2022(in ITA No. 1115/A/19) Asst. Years –2012-13 & 2014-15 - 30 - that the direct evidence was not available before the Ld. AO but at least the Ld. AO should have considered the circumstantial evidences while adjudicating the issue depending on the facts of the matter. Further that, during the remand proceeding export expenses pertaining to export invoices were duly verified by the Ld. AO like wharfage receipts and other related expenses.

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ii) ITA No. 1115/Ahd/2019 filed by the Revenue is dismissed. iii) ITA No. 962/Ahd/2019 filed by the Revenue is dismissed.

This Order pronounced in Open Court on 31/05/2022

Sd/- Sd/- (PRAMOD M JAGTAP) (Ms. MADHUMITA ROY) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad; Dated 31/05/2022 TRUE COPY TANMAY, Sr. PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)- 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 23.03.2022 & 30&31.03.2022 & 01.04.2022 & 29.04.2022 2. Date on which the typed draft is placed before the Dictating Member 23.03.2022&31.03.2022&01.04.2022&04.05.2022 3. Other Member………………… 4. Date on which the approved draft comes to the Sr.P.S./P.S 26 .05.2022 5. Date on which the fair order is placed before the Dictating Member for pronouncement .05.2022 6. Date on which the fair order comes back to the Sr.P.S./P.S 31 .05.2022 7. Date on which the file goes to the Bench Clerk 31.05.2022 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order……………………………………