ACIT CEN CIR 33, MUMBAI vs. ESKAY KNIT (I) LTD, MUMBAI

O R D E R Per G Manjunatha, AM : These two appeals filed by the assessee for AYs 2002-03 and 2003-04 and two appeals filed by the revenue for AY 2002-03 & 2003-04

2 Eskay Knit (I) Ltd are directed against separate, but identical orders of the CIT(A)-41, Mumbai dated 01-08-2011 and 02-08-2011. Since, facts are identical and issues are common, these appeals were heard together and are disposed of by this common order, for the sake of convenience.

3 Eskay Knit (I) Ltd Assessee:

The following grounds of appeal are without prejudice to one another.

1. On the facts and the circumstances of the appellant's case and in law, the Ld.CIT(A) erred to hold that sales return of Rs.3,41,53,476/- from 13 parties are not genuine and consequently erred in confirming the addition of Rs.3,41,53,476/-.

2. On the facts and the circumstances of the appellant's case and in law, the Ld.CIT(A) erred to hold that the sales of slow moving items made to 3 parties are not genuine and consequently erred in confirming the addition of Rs.8,42,020/-.

3. On the facts and the circumstances of the appellant's case and in law, the Ld.CIT(A) erred to hold that the transportation charges paid to 2 parties are not genuine and consequently erred in confirming the addition of Rs.6,09,917/-.

4. The Appellant crave leaves to add, amend, alter, modify and or withdraw any of the above grounds of appeal, which are without prejudice to one another. The appellant prays this Hon'ble Tribunal to delete the additions to the extent confirmed by the Ld. Commissioner of Income Tax (Appeals).

Revenue:

1: "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in holding that the claim of the assessee for return of goods, sold in earlier year, worth ? 151,36,56,0007- is a genuine claim." 2: "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in coming to the conclusion that claim of the assessee for loss of ? 109,06,77,5247- on account of revaluation of goods sold received back, is genuine claim merely on the basis of remand report of the assessing officer. In the remand report, the assessing officer has only expressed the opinion that part of the claim looks to be genuine and hence the CIT(A) should have given the decision on merit of the case." 3: "Whether on the facts and in the circumstances of the case and in law the Ld CIT (A) has erred in coming to the conclusion that claim of the assessee for loss of? 20,07,98,9807-on account of sale of slow moving goods is a genuine claim merely on the basis of the remand report of the assessing officer. In the remand report, the assessing officer has only expressed the opinion that part of the claim looks to be genuine and hence CIT(A) should have given the decision on merit of the case." \^" 4: "Whether on the facts and in the circumstances of the case and in law the Ld CIT (A) has erred in coming to the conclusion that claim of the assessee for transportation expenses of ? 36,96,0837- is a genuine claim merely on the basis of remand report of the assessing officer. In the remand report, the assessing officer has only expressed the opinion that part of the claim looks to be genuine and hence the CIT(A) should have given the decision on merit of the case".

The assessee neither appeared nor filed any adjournment application.

Therefore, the AO issued further notices on 13-02-2004, 21-06-2004 and 22-07-2004. Again there was no response from the assessee.

Therefore, summons u/s 131 was issued to the Managing Director, Shri Navish K Dayal. Since the assessee did not appear on the dates of hearing, even though number of opportunities have been given to the assessee to file the details, the AO, on the basis of information available on record observed that the assessee has declared huge losses on account of claim of sales returns amounting to Rs.151,36,56,000 was of the opinion that having regard to the nature and complexity of the accounts of the assessee and in the interest of revenue it was necessary to direct the assessee to get the accounts audited as per provisions of section 142(2A) of the Income-tax Act, 1961. Hence, a proposal to this effect was submitted to the competent authority and after obtaining necessary approval, Special Auditors, M/s Malpani & Associates, CAs were appointed for the purpose of conducting the special audit of books account of the assessee u/s 142(2A). Accordingly, a letter dated 18-03- 2005 was issued to the Auditors requiring them to submit their report on the issues discussed in the letter. The Special Auditor, M/s Malpani &

5 Eskay Knit (I) Ltd Associates had taken all efforts for completing the audit, as directed by the AO and made number of correspondence on various occasions as mentioned by AO, in his assessment order on page 5. The assessee, even before the Special Auditor was non-cooperative and hence, a letter was addressed by the AO to the assessee to provide all the books of account and relevant details to the Auditors to enable them to complete the Audit within the specified time. Finally, the Special Auditors have completed audit of books of account of the assessee and submitted their report in form 6B which has been reproduced by the AO in his order at para 5 on pages 6 to 14.

The assessee has also filed quotations, which are part of Exhibit A of the audit report on the basis of which the assessee has claimed that the sale price was fixed for the returned goods. To examine the genuineness of the claim of the assessee, the AO issued notices u/s 133(6) to few parties. The notices issued to parties were returned by the postal authorities in case of certain parties, as listed by the AO in assessment order at para 8. But, certain parties have filed details before the AO.

However, the AO observed that the parties have filed incomplete submissions. The details of notices issued by the AO, notices returned, replies received from the parties, have been narrated by the AO in his order at para 8 on pages 23 & 24. Those facts were confronted to the 7 Eskay Knit (I) Ltd assessee to explain with necessary evidence. Though, opportunity was given to the assessee to produce few parties with their books of account, documents, etc. to examine the genuineness of the transactions of sales return of finished goods, payment to transporters, sales of slow moving items of returned goods, the assessee has failed to file the same. In view of the above, the AO opined that the assessee has failed to discharge its onus in compliance during the course of assessment proceedings and also failed to file necessary details before the Special Auditor to show its commitment to explain the issue before the AO and accordingly, opined that the sales return claimed by the assessee and consequent loss on such sales return is not explained to the satisfaction of the AO and accordingly, made addition of Rs.112,48,31,000 loss to the total income of the assessee. The relevant discussion of the AO is extracted below:-

12. In respect of loss claimed of Rs. 11248.31 lakhs on account of downward valuation of returned goods, it can thus be concluded: a) The assessee has not followed the General system of control regarding the movement of goods at the factory. This fact is also certified by the Special Auditor. b) There was no mention of outward entry number on the outward stamps affixed on the delivery challans. c) Security inward and outward Registers were also not produced before the Special Auditor on the ground that they were dampened and destroyed during the flood in the year 2004. No documentary evidence such as FIR. Was filed in support of such claim. d) Copies of the invoices prepared by Debtors at the time of Sales" return were incomplete. e) The assessee failed to furnish before the Special Auditor and before the undersigned, the names and complete address of parties which returned sales. f) A few Confirmations of the sales returned made available to the Special Auditor as on 31.03.2001 were also incomplete.

8 Eskay Knit (I) Ltd g) The Lorry receipt, copy for sales return were also incomplete. The assessee failed to produce the confirmation of a number of transporters to the Auditor. h) The assessee claimed that the payments were made to the transporters through the petty cash book. However, the same was not produced for verification. i) No other documentary evidences such as octroi clearance/passing was produced to prove the movement of the goods. j) The quotations produced by the assessee for arriving at the sale value of Returned goods are also incomplete. k) No other supporting evidences ,vas submitted to substantiate the claim of change in fashion and shifting of the preference of fabrics by the customers. I) Though the goods are said to be lying with the alleged purchasers for more than a year and that too without receiving the payment it is surprising that no documents are available with the assessee showing the efforts made for recovery of sales consideration. m) The confirmations of parties which allegedly returned sales and transporters are either not submitted or were vague or did not bear any date and addresses or were incomplete. n) The notices u/s 133(6) were returned back, in majority of the cases, by the postal authorities with the remark 'not known/incomplete address'. This only indicates that such parties do not exist; however, the assessee was given an opportunity to produce such parties. But, the assessee failed to do so. o) The details filed by certain parties were incomplete and not supported by any documentary evidences and, therefore, cannot be accepted as genuine. Moreover the assessee has failed to produce the parties for cross- examination. p) Non-corporation of the assessee with the Department and with the Special Auditor as mentioned earlier leads to the only inference that the assessee is under the impression that it stands to gain by hiding information from the Revenue. This has to be seen as a deliberate attempt to thwart any investigation into its affairs by the Income-tax Department. q) The only evidence furnished by the assessee to support the claim of having taken efforts for recovery are a few letters of the Sales Executives of the Company. These letters are also not supported by any correspondence of the debtors or other parties related to such debtors. These are self serving papers created by the employees of the assessee Company and have no evidencing value. r) The assessee claims to have dealt with the parties for decades, but has been unable to prove the transactions under dispute or any other transactions of earlier or subsequent periods with them before the Special Auditor or before the undersigned. s) Despite several opportunities given, addresses of the parties to whom the returned goods are said to be sold during the F.Y. 2002-0, quantum involved etc, has not been furnished to enable me or the Special Auditor to verify the genuineness of the transactions. t) The assessee has failed to produce the parties along with their books of accounts and documentary evidences to substantiate the genuineness of the transactions for the claim of loss made. u) As regards the claim of returned goods sold in F.Y. 2002-03, it is clarified by the Special Auditor that the remark was given only on the basis of Audited Accounts of the F.Y. 2002-03 and not after examining the Books of Accounts of F.Y. 2002-03.

9 Eskay Knit (I) Ltd v) Following findings of facts can thus be summarized:- i) There have been no sales return as alleged. ii) The genuineness of these transaction of sales returns is not proved. iii) The claim of loss made on account of alleged return of goods is a fraudulent claim. Iv) Lower valuation of goods returned has no basis. In view of the foregoing the claim of loss made by the assessee at Rs. 11248.31 lakhs on account of alleged return of goods by various debtors and valued at lower rate and sold subsequently in the next year is held to be a fraudulent claim and is not acceptable. Therefore, the said amount of loss of R. 11248.31 lakhs is added to the total income of the assessee and assessed accordingly. Penalty proceedings u/s 271(1)(c) is also initiated on this account.”

10 Eskay Knit (I) Ltd moving stocks, the facts emerged are that there was no mention of outward entry number on the stamps affixed on the delivery challans. The outward registers were not produced on the ground that they were dampened and destroyed during the flood in the year 2004. No documentary evidences such as FIR was filed in support of the claim. The details of the parties to whom the assessee claims to have made the sales and realised the consideration are also incomplete in all respects. -No documentary evidences such as Octroi clearance/passing was produced to prove the movement of the goods. The assessee has sought to justify the claim of loss on the basis of the approval note of the Sales personnel of the assessee company and the quotation stated to have been received from the market. As regards the quotations obtained, detailed discussion and conclusion has already been arrived at in the preceding paras of this order (para 8). No other records of technical evaluation report or any other supporting evidences has been produced to show that the stock claimed to have been sold as slow moving stock was not capable of being sold as good stock which would have realised the full value. No documentary evidences proving the deterioration in the quality of goods and thereby reduction in valuation of goods as well as the reasons for such deterioration in the quality have been made available. It is the bounden duty of the assessee to substantiate with documentary evidences of genuineness of any claim. Here the assessee has not discharged his duties by producing the parties along with their books of accounts, documentary evidences etc. In spite of the assessee not discharging his duties, notices under sec.133(6) were issued, but were not complied with by the third parties. The fact of non-compliance by these parties was duly intimated to the assessee who was called upon to produce those parties for examination. However, this requirement was also not complied with by the assessee. In these circumstances, for reasons mentioned in this order earlier, the loss claimed by the assessee of Rs. 2016.41 lakhs is disallowed treating the transactions on the basis of which the loss has been claimed, as "sham" and assessed accordingly. Penalty under sec.271(1)(c ) is initiated separately. 14 Without prejudice to the above observation, the fact that the Special auditor has found specific defect in the accounts of the assessee in that the valuation of the stock-in- trade has been undervalued without any proper maintenance of relevant records in support of the allegations made by the assessee against the debtors. As per clause 22 of AS2 relating to the valuation of inventories (Stock), the estimates of net realizable value are to be based on the most reliable evidence available at the time the estimates are made as to the amount the inventories are expected to realise. The mere report by some sales personnel and a fact finding report not supported by authenticated evidences cannot form a reliable evidence as per AS2. The fact finding report has been established to be unacceptable for the reasons elaborately discussed in para 7 of this order. This is a clear case warranting the rejection of accounts u/s.145(2) of the I.T.Act. In view of the particular findings recorded by the Special Auditor and in the light of the specific facts mentioned in sub paras 12 & 13 above, the book results are hereby rejected and the claim of excessive loss & hereby rejected, Reliance is placed on the below mentioned decisions wherein the right of the Assessing Officer to reject the books of account based on his findings of the material placed before him and to invoke the provisions of section 145(2) has been upheld.

• Dhondiram Dalichand v. CIT (81 ITR 609)(Bom.) • Orissa Fisheries Development Corporation v. CIT (111 ITR 923) (Orissa) Narsinshingadas Ramakishan Pungaliya v.ACIT (272 ITR 467)(Raj)

11 Eskay Knit (I) Ltd amounting to Rs.621.340 lakhs, the AO observed that since the assessee has agreed for the disallowance of the loss by filing a revised statement of computation, no further discussion is necessary on the issue. Therefore, disallowed loss claimed by the assessee from scrapping of fixed assets. Similarly, the AO has disallowed transportation expenses claimed by the assessee for Rs.43.06 lakhs on account of transportation of returned goods by holding that although assessee claims to have paid transportation charges in cash and recorded in petty cash book, no evidence has been filed including petty cash book for verification. The assessee has filed copies of lorry receipts, but on verification of the lorry receipts, it is observed that there was no acknowledgement of the payments to the transporters, signature on the lorry receipts, stamp, etc. No further document such as receipts / vouchers evidencing the payments made to transporters relating to returned goods were produced. Therefore, opined that transportation charges claimed by the assessee is non genuine in nature and accordingly disallowed an amount of Rs.43.06 lakhs and added to the total income.

12 Eskay Knit (I) Ltd by limitation and, therefore, the same is illegal and void ab initio on the ground that the AO has taken additional time limit as provided under Explanation 1 to section 153 by taking recourse to the illegal and void ab initio order u/s 142(2A) of the Act which was rereferred to by the AO in order to buy time for the purpose of completing the assessment beyond the time limit u/s 153A of the Act. The assessee also taken a ground challenging the action of the AO in rejecting books u/s 145(2) of the Income-tax Act, 1961 by stating that the AO has rejected books of account without pointing out any specific instances of irregularities in the books of account maintained by the assessee only on wrong premise of interpreting the facts because there was no need for that at all. The assessee also filed elaborate written submissions on the issue of disallowance of loss claimed on account of sales returns which has been reproduced by the Ld.CIT(A) in his order at para 5.2 on pages 7 to 9.

The assessee has explained the observations made by the AO in the light of Special Audit report to argue that it has made sales to its regular customers in the normal course of business. However, such goods have been returned by the customers stating reasons which is beyond the control of the assessee. The assessee after putting in all the efforts to collect the dues from the customers has accepted the goods back. The AO without appreciating the facts, on wrong interpretation of facts has come to the conclusion that sales return claimed by the assessee is not 13 Eskay Knit (I) Ltd genuine in nature only on flimsy grounds such as there was no proper documentation kept ts monitor / account sales returns ignoring the fact that such sales returned has been subsequently sold in next financial year for an amount of Rs.38.85 crores on the basis of quotations received from bidders and also valuation done by sales team. The assessee also filed various additional evidence to prove genuineness of sales returns.

All these aspects have been discussed by the AO in his remand report dated 10-07-2009 and observed that on the basis of information furnished by the assessee and also supporting details filed by various parties, the transaction appears to be genuine.

15 Eskay Knit (I) Ltd observed that the AO has given number of opportunities to the assessee to submit complete details, but only partial details were submitted.

Secondly, the Special Auditors have raised objection that books of account, bills and vouchers were not maintained properly. In view of these facts, the AO has given an opportunity to the assessee to explain why the books of account shall not be rejected as per the provisions of section 145(2) of the Act. Since the AO has given due opportunity to the assessee before rejection of books of account and also the fact that books of account are complex in nature which is further supported by the findings of the Special Auditor in the report, there is no merit in the arguments of the assessee that the AO was erred in rejecting books of account u/s 145(2) of the Act. The relevant portion of the order is extracted below:-

“4.3 I have considered the submissions of the appellant, order of the AO and facts of the case carefully. It is noticed that during the assessment proceedings, the AO has given number of opportunities to the assessee to submit complete details but only partial details were submitted. Secondly, the special auditors has raised the objection that books of accounts, bills and vouchers were not maintained properly. In view of these facts, the AO has given an opportunity to the assessee to explain why the books of accounts may not be rejected as per the provisions of section 145(2) of the IT. Act. After considering the reply cf the appellant, the AO has rejected the books of account because these were not giving correct result to determine the profit for the year under consideration. To strengthen the view of the AO, reliance is placed on the decision of the Hon'ble Supreme Court in the case of CIT vs. A. Krishnaswamy Mudaliar 53 ITR 122 wherein it is held that sec. 145 does not compel the ITO to accept in all cases the balance-sheet of cash receipts and outgoing prepared from the books of account. Similarly, the Hon'ble Supreme Court in the case of CIT vs. McMillan & Co. 33 ITR 182 has also held that the ITO even when he accepts assessee's method of accounting is not bound by the figure of profit shown in the accounts. Keeping in view the facts and circumstances of the case and decision of the Hon'ble Supreme Court, it is held that the AO has noticed specific mistakes in the 16 Eskay Knit (I) Ltd books of accounts which has not given a correct profit for the year under consideration. Therefore, he has rightly invoked the provisions of sec. 145(2) of the IT. Act and has rightly rejected the bb~6l<s of accounts. Thus, the, decision of the AO is upheld and ground of appeal is dismissed.”

10. Insofar as addition made by the AO towards disallowance of loss claimed on sales returns, the Ld.CIT(A), on the basis of remand report submitted by the AO dated 19-06-2009 allowed relief to the extent of Rs.109,06,77,524 by holding that the assessee has filed various details including additional evidence in the form of confirmation from certain parties and also the AO has recorded statement from certain parties, wherein they have confirmed of having done transactions with the assessee and also return of goods. The Ld.CIT(A) further observed that out of the 39 parties, who were asked to be produced before the AO, assessee was able to produce only 26 parties and has failed to produce 13 parties with whom transactions of Rws.3,41,53,476 was shown by the assessee company. Therefore, out of total addition of Rs.112,48,31,000, an amount of Rs.3,41,53,476 has been sustained and balance amount of Rs.109,06,77,524 is deleted.

11. As regards addition made by the AO towards loss incurred on slow moving items of Rs.20,16,41,000, the Ld.CIT(A) observed that the assessee has filed various additional evidences including confirmation from the parties which has been sent to the AO for his comments. The AO, vide his remand report, examined the confirmations filed by the 17 Eskay Knit (I) Ltd parties and submitted that the transactions with those parties appeared to be genuine. This fact establishes that the genuineness of transactions is no more in doubt. However, out of the 5 parties called for by the AO, assessee has produced two parties and the remaining 3 parties were not produced nor did file any documentary evidences even during the remand proceedings. It showed that the assessee has not discharged its onus by submitting any documentary evidence or producing any party before the AOs examination. Therefore he opined that the genuineness of transactions has been proved relating to the loss claimed on sale of slow moving goods which, as per the remand report of the AO, only 3 parties were not produced with whom transactions of Rs.8,42,020 were made. Therefore, the addition made by the AO to the extent of Rs.8,42,020 was upheld and the balance amount of Rs.20,07,98,980 has been deleted. Similarly, in respect of disallowance of transportation charges of Rs. 43,06,000 on account of alleged unproved transportation expenses, the Ld.CIT(A) held that as per the remand report submitted by the AO, out of 7 parties called for examination, 5 parties were produced and examined which were held by the AO as genuine. Therefore, he opined that out of total disallowance of transportation expenses of Rs.43,06,000 the transportation charges paid to the extent of Rs,.6,09,917 is not proved and accordingly confirmed addition to the extent of Rs,.6,09,917 and deleted balance amount of Rs,.36,96,083.

18 Eskay Knit (I) Ltd Aggrieved by the order of Ld.CIT(A), assessee as well as revenue are in appeal before us.

In spite of various opportunities, the assessee failed to submit relevant details to the satisfaction of the AO, including confirmation from the parties, the details of transportation of goods, necessary correspondence made between the parties to follow up payment in respect of sales made in the earlier year, justification for downward valuation of sales. In response to the notice, the assessee has filed incomplete details which was reproduced by the AO on pages 17 to 19 of his assessment order.

On the basis of information furnished by the assessee, the AO observed that in almost all confirmation letters filed by the assessee, no proper address was given. The AO further observed that the assessee has not 19 Eskay Knit (I) Ltd followed the general system of control regarding the movement of goods at the factory. Since the assessee has failed to furnish necessary evidence to justify loss claimed on sales returns, the AO referred the matter for special audit of accounts of the assessee u/s 142(2A) of the Income-tax Act, 1961. The Special Auditors M/s Malpani & Associates, Chartered Accountants has conducted special audit of accounts of the assessee and issued a report with certain comments. The basic observations of the special auditors regarding non co-operation of the assessee to file necessary books of account and other documents. The Auditors also commented on books of account and other documents maintained by the assessee in respect of sales returns of Rs.15,136.56 lakhs. The AO, based on observations made by the Special Auditors in the report and also on the basis of information furnished by the assessee observed that the assessee has not followed the general system of control regarding the movement of goods at the factory. There was no mention of outward entry No. on the outward stamps affixed on the delivery challans, etc. The AO also commented on lorry receipts, copy of sales returns, invoices furnished by the assessee and observed that no proper details were furnished in lorry receipts regarding lorry No. and other details, therefore, he came to the conclusion that there have been no sales returns as claimed by the assessee and the genuineness of these transactions of sales returns is not proved and also the claim of 20 Eskay Knit (I) Ltd loss made on account of alleged return of goods is a fraudulent claim.

13. The Ld.AR for the assessee submitted that the Ld.CIT(A) erred in partially sustaining addition made by the AO towards loss claimed on account of sales returns of Rs.3,41,53,476 from 13 parties by holding that the assessee has failed to prove genuineness of transactions with those parties merely for the reason that those parties were not produced before the AO to file necessary evidence despite the fact that the assessee hs furnished complete details of sales returns received from the customers. The Ld.AR further submitted that it has admitted fact that the Ld.CIT(A) has called for remand report from the AO and the AO has categorically accepted in his remand report that the transactions with those parties in respect of sales returns appeared to be genuine on the basis of enquiries conducted during the course of remand proceedings.

The Ld.AR further submitted that the AO has issued summons to all parties u/s 133(6) for which certain parties were responded by filing necessary evidence and also appeared before the AO. The AO has recorded statement in the light of observations made in the assessment order for which they have categorically stated that they entered into sales transaction with the assessee and such goods have been returned in the subsequent financial year because of non movement. The Ld.CIT(A) having accepted the fact that the AO has certified the genuineness of transactions, erred in confirming sales returns from 13 parties only on the 21 Eskay Knit (I) Ltd basis of non appearance before the AO. The Ld.AR referring to the remand report submitted by the AO submitted that the AO has categorised the details in 3 categories as per which the assessee was asked to produce certain parties. The AO also listed out the names of parties, who were produced / filed details in respect of sales returns.

The AO also listed out parties from whom statement on oath was recorded. Likewise, the AO has examined parties in respect of transportation of goods and sale of slow moving goods and held that on the basis of details and supporting evidences filed by various parties and statement given by parties, it appeared that the transactions with those parties were genuine. When the AO himself has categorically admitted that these transactions are genuine in nature, there is no reason for the Ld.CIT(A) to sustain addition made by the AO in respect of 13 parties.

22 Eskay Knit (I) Ltd by the AO on various aspects of the case including the history of the assessee. The Ld.DR further submitted that the assessee group has history of inflating expenditure by bogus bills and diversion of bank funds for acquiring personal assets. The real intention of claim bogus losses is to divert bank funds by way of booking fictitious losses by under valuing the returned unsold stocks and distress sale of so-called slow moving goods. This is evident from the fact that the investigating agencies like enforcement directorate and CBI has registered cases against the group companies in Kolkatta & Mumbai in respect of bank loan defraud worth Rs.3,000 crores. The Ld.CIT(A), without appreciating these facts jumped into conclusion to delete additions made by the AO only on the basis of inconclusive findings given by the AO in his remand report. In this regard, he relied upon the decision of Hon’ble Supreme Court in the case of CIT vs Durgaprasad Moore 82 ITR 540 SC) and Sumati Dayal vs CIT (1995) 214 ITR 801 (SC).

23 Eskay Knit (I) Ltd as claimed by the assessee and the claim of loss made on account of the alleged return of goods is a fraudulent claim. The AO has taken support from the report of the Special Auditor issued u/s 142(2A) of the Act, to justify additions made towards loss claimed on account of sales returns.

The AO, basically doubted the documentations maintained by the assessee in respect of sales returns. The AO also questioned the basis of valuation arrived at to claim a loss of Rs.11,248.31 lakhs. According to the AO, the assessee has not followed general control system prevailing on that particular point of time regarding the movement of goods at the factory. For this, the AO has brought out certain examples of shortcoming in goods, inward and outward documentation and lorry receipts filed by the assessee. The AO also taken support from the report of the Auditor, which re-iterates observations made by the AO in his assessment order. On perusal of the observations made by the AO in his assessment order and the observations made by the Auditors in their report, we find that there is no substantive comments made by the Special Auditors on sales returns claimed by the assessee, The Special Auditors, rather, went on to comment on documentation maintained by the assessee. Further, the Special Auditors never gave any adverse

24 Eskay Knit (I) Ltd comments on sales returns claimed by the assessee. They have only commented on shortcoming in the documentation. These observations made by the AO in his assessment order and the Special Auditors have been fully negated by the AO in the remand proceedings which is evident from the fact that the AO has given clean chit to the assessee in respect of sales returns on the basis of enquiries conducted in respect of certain parties where he has given a categorical finding that those parties, who appeared before the AO stated that they have done transactions with the assessee in respect of sales and such sales have been returned in subsequent financial year. The AO also called for parties, who transported goods. The transporters, who appeared before the AO have categorically stated that they have transported goods. Although certain parties have not appeared before the AO in response to notice u/s 133(6), but fact remains that those who appeared in response to notice have admitted that these transactions are genuine and the observations made by the AO is incorrect. The Ld.CIT(A), after considering relevant facts and also taking into account the remand report of the AO observed that those parties, who appeared before the AO had confirmed the transactions by filing confirmations and also by furnishing proof of their identity and other details. The Ld.CIT(A) further observed that the statements of parties were recorded in which they confirmed the transactions. Accordingly, he came to the conclusion that the loss

25 Eskay Knit (I) Ltd claimed by the assessee on account of sales return is genuine. We further observe that in respect of those parties, who did not appear before the AO in response to notice issued u/s 133(6) appeared to be non genuine transactions and accordingly be has confirmed addition made by the AO to the extent of Rs.3,41,53,476 in respect of which 13 parties with whom the assessee had transactions. Thus, the Ld.CIT(A) has deleted additions made by the AO to the extent of Rs.109,06,77,524 and confirmed balance addition of Rs.3,41,53,426. The relevant observations of the Ld.CIT(A) is extracted below:-

“5.3. I have considered the submissions of the appellant, order of the AO and the facts of the case in brief are that the assessee has claimed loss of Rs.11248.31 lacs on account of revaluation of sales return of goods by various debtors. During the course of assessment proceedings, the AO has given number of opportunities to the assessee to submit its details. However, the assessee has submitted only partial details. Keeping in view the complex nature of the transactions, the AO has made a proposal that Special Audit be conducted u/s. 142(2A) of the I.T. Act which were approved by the Ld. CIT, Central-Ill and Special Audit was conducted in this case. The AO has noticed that even during the special audit, the desired.arguments were not submitted by the assessee. Again during the assessment proceedings, the AO has given a number of opportunities for the submissions of details and also issued notices u/s, 133(6) to the parties which were not complied with. On the basis of the conclusion drawn by the AO mentioned above, the AO has held the claim of loss of Rs.11248.31 lacs as bogus claim, hence disallowed the same and added back to the taxable income. On the other hand, the appellant has submitted that AO has not fully appreciated the facts and submissions made by the company during the assessment proceedings as given above. During the appellate proceedings some other additional evidences were submitted before my predecessor who has admitted the same and again the case was remanded back to the AO for verification and investigation. The AO has submitted the remand reports dated 05.06.2009, 19.06.2009 and 10.07.2009. The gist of these remand reports are reproduced as under : "On 23.02.2009, the assessee produced some of the parties concerned and out of the same, statetrfent on oath of two parties was recorded. Thereafter, on 10.04.2009, the assessee's representative appeared and filed details in respect of a few more parties. On that date also, statement of 2 parties was recorded. The details filed by all these aprties and the statement recorded are forwarded to yout goodself for kind perusal. It is noticed that these parties have confirmed the transactions and have furnished proof of their identity and filed certain details in support of the transactions. Meanwhile, notices u/s. 133(6) were issued to a few parties. Details in respect of some of these parties have been received on 23.02.2009 and 10.04.2009. However, in some cases,

26 Eskay Knit (I) Ltd the letters have been served but no replies have been received till date. Also, some notices have been returned back unserved by the postal authorities. It is noticed that thereafter, during the course of hearing on 21.04.2009, the assessee's representative was intimated about the fact that in some cases, the notices have been served nut no replies have been received till date and that some notices have been returns back unserved by the postal authorities. As per the order-sheet noting dated 23.04.2009, the assessee's representative appeared and filed letter stating that on account of the huge time gap between the dates of the transactions and the date of the notices u/s. 133(6), the parties may have shifted out of their last known addresses and that the assessee is not in a position to produce these parties. It is also contended that the assessee ahs been able to produce/file confirmation letters in respect of 33 parties, which include 5 transporters. It is further submitted that in ase further time is allowed, the assessee will make all out efforts to produce as many parties as possible. A copy of this letter is enclosed herewith for kind perusal. The assessee has also drawn attention to the fact that the AO had not allowed sufficient time to produce these parties at the time of the assessment proceedings and had proceeded to conclude the assessment in great hurry. Also, the assessee has placed reliance on various evidences adduced at the time of the assessment proceedings in support of the transactions concerned and the certificate issued by the Excise authorities in support of the assessee's contention that various books of accounts and relevant documents have been destroyed in the flood that occurred in Silvassa (where the assessee's factories andgodowns are located) in 2004". "With regard to the observations made by your goodself at para no.3 of the aforementioned letter dated 12.06.2009, it may be reiterated that on 23.02.2009, the assessee had produced some of the aprties concerned and out of the same, statement on oath of two parties was recorded and the other parties submitted the requisite details as required in the questionnaire issue, which are available on record. Thereafter, on 10.04.2009, the assessee's representative appeared alongwith few more parties and filed details in respect of these parties. On that date also, statement of 2 parties were recorded. The details filed by all these parties and The stefsmsat. recorded are available in the file named 'Remand Report', which is being forwarded In the case, the CIT(A), C-VIII had, vide letter dated 06.11.2007, directed the AO to allow one more reasonable opportunity to produce the requisite parties relating to the transaction under consideration and examine them. Accordingly, the assessee was asked to produce the parties, whose names were intimated to the authorized representative during the course of hearing on 10.02.2009. As stated in the earlier remand report dated 15,06.2009, the parties who were produced have confirmed the transactions and have furnished proof of their identity and filed details in support of the transactions. As stated earlier, the statements of 4 parties have been recorded and they have confirmed transaction. After considering the details and supporting filed by various parties and statement given by the parties the transactions appears to be genuine". "Returned Back Goods The assessee was asked to produce the following parties : • Benaifer Creations • Day Night Exports • Deepak Exports • Deepali Fabrics • Esha Fabrics • Gajanand Meena Exports • Hardayal Exports • Hemant Creations • Kalaniketan Export •LupinTexPrints • May a Wear • Nirav Garments • Patwardhan Exports • Pitruchaya Creations • Pranay Exports • Raghavan Fashions • Rahul Exports • Ramanuj Trading Co. • Rohit Enterprises • Royal Exports • Ruby Textiles • Satish Creations • Shinde Fabrics • Shiv Chaya Fab

27 Eskay Knit (I) Ltd • Style Creations • Umedmal Creations • A. B.C. Fashions • Biyant Hosiery • Jemina Trading Agency • Kamini Fashions • Kubal Fab • Nani Wear • Hardayal Exports • Hemgnt Creations » Kalaniketan Export • Lupin Tex Prints • May a Wear • Nirav Garments • Patwardhan Exports • Pitruchaya Creations • Pranay Exports • Raghavan Fashions • Rahut Exports • Rakesh Trading Co. • Rohtt Enterprises • Royal Exports • Ruby Textiles • Satish Creations • Shinde Fabrics • Shiv Chaya Fab • Style Creations • Umedmal Creations Statement on oath was recorded in respect of the following parties : •KalaniketanExport • Pranay Exports • Rahul Exports • Satish Creations Sale on slow moving goods : The assesses was asked to produce the following aprties : • Archana Cotspin P. Ltd. • Asha Trading Co. • Chirag Corporation • Maheshji Zhunshunwala • V. V. Enterprises Out of the above listed parties, the assesses has produced/filed details in respect of the following parties : • Archana Cotspin P. Ltd. • Asha Trading Co. Transporters of goods The assessee's representative was asked to produce the following parties in relation to transport of goods : • Agarwal Transport • Fatima Transport • Hiranandani Transport • Mahalaxmi Transport • Radha Krishna Transport • Narshi Nenshi & Sons • Shivam Roadways Out of the above listed parties, the assessee has produced/filed details in respect of the following parties: • Agarwal Transport • Fatima Transport • Hiranandani Transport • Mahalaxmi Transport • Radha Krishna Transport List of parties to whom notice u/s. 133(6) were issued : • Chintamani Fabrics • Farukh Exports • Gold Line Bharat

28 Eskay Knit (I) Ltd • Kedar Creations • Manasi Cretions • Shivam Roadways • lyer Creations • Narshi Nenshi & Sons • Arpit Roadlines Notices u/s. 133(6) were served on the following parties : • lyer Creations • Narshi Nenshi & Sons • Arpit Raodlines However, there has been no compliance from the respective parties. All the balance notices issued u/s. 133(6) were returned back unserved by the postal authorities". From the perusal of the remand reports submitted by the AO, it is clear in the remand report dated 19.06.2009 in which it was stated that parties who were produced have confirmed the confirmations and have furnished the proof of their identity and filed certain details in support of the transactions. The statements of four parties were recorded and they have confirmed the transactions. After considering the details and supporting evidences filed by the various parties and the statements given by the parties, the AO has held that the transaction appears to be genuine. From the detailed examination report made by the AO by summoning parties and issuing notices u/s. 133(6), it is clear that the AO has held that the transactions were genuine although out of the 39 parties who were asked to be produced before the AO, the assessee was able to produce only 26 parties and has failed to produce the following 13 parties with whom the transactions of Rs.3,41,53,476/- was shown by the assessee company. NAME OF THE PARTY Amount of Sales Return (Rs.) SR. NO, 1 A.B.C FASHIONS 3058150 2 BIYANT HOSIERY 767760 3 3127658 JEMINA TRADING AGENCY 4 3492406 KAMINI FASHIONS KUBAL FAB 5 2772814 NANI WEAR 3000464 6 NEW TAKE FAB 7 2979525 8 PALLAVI FAB 2614768 9 SAHAI CREATIONS 3663010 2564490 10 SANJAY EXPORTS 11 SUGAM SYNTHETICS 2358992 TAKE CREATIONS 1910111 12 13 VAISHALI CREATIONS 1843326

29 Eskay Knit (I) Ltd TOTAL 34153476

Since number of opportunities were given by the AO in the assessment proceedings and in the remand proceedings, the assessee has failed to prove the genuineness of transaction with these parties even during the appellate proceedings. Since it is well established fact and position of law, the onus is always on the assessee to prove the. genuineness of transaction before the AO before claiming any deduction. However, in the present case, the assessee has failed to prove the genuineness of transaction for the above said 13 parties amounting to Rs.3,41,53,476/-. Therefore, the addition made by the AO to the extent of Rs.3,41,53,476/- is confirmed and the balance addition.of Rs.109,06,77,524/- is deleted. The ground of appeal is partly allowed.”

17. The fact remains unchanged. The revenue failed to bring on record any further evidence to controvert the findings of facts recorded by the Ld.CIT(A) in the light of remand report furnished by the AO. Therefore, we are of the considered view that there is no error or infirmity in the findings of Ld.CIT(A) and hence, we are inclined to uphold findings of the Ld.CIT(A) and reject grounds taken by the assessee as well as the revenue.

18. The next issue that came up for our consideration from assessee as well as revenue appeal is disallowance of losses claimed on account of slow moving stocks of Rs.2016.41 lakhs. The AO has made addition towards loss claimed on slow moving stocks for the reason that there was no mention of outward entry No. on the stamps affixed on the delivery challans. The outward registers were not produced before the AO with the argument that they were not destroyed in flood in the year 2004. The AO further observed that no documentary evidence such as FIR filed in support of loss of records. According to the AO,

30 Eskay Knit (I) Ltd documentary evidence such as octroi clearance was produced to prove the movement of goods. The notices issued u/s 133(6) to the parties were returned unserved. Therefore, he opined that non production of the parties coupled with the fact that the assessee has failed to furnish necessary evidence to justify loss claimed on slow moving goods, therefore, he came to the conclusion that the loss claimed on account of slow moving stock is a sham transaction and accordingly made addition of Rs.2,016.41 lakhs.

31 Eskay Knit (I) Ltd relief to the additions made by the AO, except to the extent of Rs.8,42,020 in respect of 3 parties from whom no information has been received.

Hence, we are of the considered view that there is no error or infirmity in the findings given by the AO and accordingly we confirm the findings of Ld.CIT(A) and reject ground taken by the revenue as well as the 33 Eskay Knit (I) Ltd assessee.

The AO has given categorical finding in respect of transportation charges paid by the assessee where he has admitted that the parties, who have appeared before him have accepted the fact that they transported goods and also received payments. The fact that certain parties have not appeared before the AO may not be a solid reason for disbelieving total transactions. The Ld.CIT(A), after considering relevant facts and also taking into account remand report of the AO allowed relief towards addition made by the AO, except to the extent of Rs.6,09,917 in respect of two parties from whom no information has been received. Facts remain unchanged. The revenue fails to bring on record any evidence to controvert the findings of fact recorded by the Ld.CIT(A). Hence, we are inclined to uphold findings of Ld.CIT(A) and reject ground taken by the assessee as well as the revenue.

The assessee has filed various details in respect of sales made to parties before the Ld.CIT(A). The Ld.CIT(A) during appellate

35 Eskay Knit (I) Ltd proceedings has forwarded evidence filed by the assessee to the AO for his comments. The AO during remand proceedings issued notices to parties u/s 133(6) for which certain parties appeared and deposed before the AO and stated that the transactions with the parties are genuine.

Based on the evidence filed by the parties and also on the basis of statement recorded from them, the AO came to the conclusion that the transactions with those parties appeared to be genuine. The Ld.CIT(A) on the basis of evidence filed by the assessee and also taking into account the remand report of the AO allowed relief towards addition made in respect of loss claimed on slow moving stocks, except to the extent of Rs.9,85,76,986 in respect of 3 parties from whom no information has been received. No further evidence has been brought on record by the revenue to controvert the findings of fact recorded by the Ld.CIT(A) in the light of remand report of the AO. We find that the AO has examined the issue by calling for various details for which the parties have appeared before the AO and admitted of having done transactions with the assessee. Although, certain parties have not appeared before the AO, but those who appeared before the AO has admitted that the observations made by the AO in his assessment order is incorrect and the transaction with the assessee is genuine for which they have furnished necessary evidence. The Ld.CIT(A) has considered all these facts and came to the conclusion that the loss claimed by the 36 Eskay Knit (I) Ltd assessee on account of sale of sale of returned goods is genuine in nature and accordingly, deleted addition made by the AO, except to the extent of Rs.9,85,76,986 in respect of 3 parties. We do not find any error in the findings of the Ld.CIT(A). Hence, we are inclined to uphold the findings of Ld.CIT(A) and reject ground taken by the assessee as well as the revenue.

Except this, the AO has not brought out any other facts to deny depreciation claimed on assets which were put to use for the purpose of business in the earlier year. The provisions of section 32(1) is very clear inasmuch as once the asset is put to use, then whether the same has been used in the year under consideration or not is irrelevant for the purpose of claiming depreciation. This position has been clarified by various courts including Hon’ble Delhi High Court in the case of CIT vs Oswal Agro Mills Ltd (2012) 341 ITR 467 (Del) where it was held that depreciation is allowed on block of asset and the revenue cannot segregate a particular asset therefrom on the ground that it was not put to use. In this case, on perusal of facts it is clear that the texturised unit is part of the textile plant of the assessee and the unit was functioning in the earlier years. Therefore, we are of the considered view that once a particular machinery has been put to use for the purpose of business, it is immaterial whether such plant & machinery has been used in the year under consideration and any revenue has been generated from such unit. The expression used “for the purpose of business” includes user of assets in the earlier years. Once, the machinery was available for use, though not actually used, falls within the expression used “for the purpose of business of the assessee” and claim the benefit of 38 Eskay Knit (I) Ltd depreciation. The lower authorities without appreciating the fact, disallowed depreciation claimed on texturised unit, hence, we direct the AO to delete addition made towards depreciation claimed on texturised unit.

Order pronounced in the open court on September, 2018.