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Income Tax Appellate Tribunal, DELHI BENCH “A” New Delhi
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
The aforesaid appeal has been filed by the Revenue against impugned order dated 24.08.2012, passed by ld. CIT(Appeals), Muzaffarnagar for the quantum of assessment passed u/s. 143(3) of the Income Tax Act, 1961 for the Assessment Year 2009-10. In the grounds of appeal
, the following grounds have been raised by the Department:-
1. On the facts and circumstances of the case, the CIT(A) has erred in law in deleting the addition of Rs.6,35,058/- made by the Assessing Officer, without appreciating the facts that in the circumstances of the case, the provisions of section 145(3) of the I. 1 Act 1961 have rightly been invoked after pointing out steep discrepancies in the book of account of the assessee. 2 On the facts and circumstances of the case, the CIT(A) has erred in law in deleting the addition of Rs.4,97,317/- made by the Assessing Officer on account of closing stock after rejection of books of account under section 145(3) of the I.T. Act, 1961. 3 On the facts and circumstances of the case, the CIT(A) has erred in law by deleting the additions of Rs.22,10,000/- and Rs. 16,81,000/- made by the Assessing Officer account of cash credits under section 68 of the I.T. Act 1961, without appreciating the fact that the assessee has failed to discharge his onus to prove cash credits under section 68 of the I.T. Act, 1961. 4 The order of the CIT(A) be set aside and that of AO be restored.”
The brief facts are that the assessee is an individual and through his proprietorship concern, M/s. Bhagwati Rice Traders, the assessee is doing business of purchase and sale of rice on his own account and purchase and sale of paddy on commission basis. The trading result in respect of rice (on own account) was shown in the following manner:-
Particulars Value Quantity in Qtls. Average rate Opening -- -- -- Purchases 1,01,05,854 6300.80 1,603.90 Sales 88,71,972 5811.25 1,526.68
Closing 489.55 14,71,435 3,005.68 Stock 2.1 The method of valuation of closing stock as disclosed in the audit report was “at cost or market price whichever is lower”. The Assessing Officer required the assessee to explain that if the sale rate is taken at Rs.1526.68 per quintal, then there would be a loss and on the contrary the valuation of closing stock worked out is at a higher rate meaning thereby the profit had been adjusted into the closing stock. He therefore, required the assessee to furnish bills for purchase and sales for the last month. The assessee in response submitted that, since he is dealing in varieties of rice, that is, grade wise quality of rice, hence calculating the average value may not be correct approach to justify and assessee has correctly valued the at cost price or market value, whichever is less, hence there is no question of valuing stock at higher side. The Assessing Officer held that the assessee could not file the valuation of closing stock, as to how he has calculated the closing stock at Rs.489.55 Qtls. of rice at Rs.14,71,435/- which gives the rate of Rs.3005.68 per Qtl. The details of sales and purchase as required by the Assessing Officer has been reproduced at page 2 of the assessment order, from where he has pointed out certain defects which has been highlighted at page 3 and came to the conclusion that the assessee’s books are not reliable, and therefore, the same is to be rejected. He calculated the sale price of the rice at Rs. 5811.25 Qtls. as per the average purchase price of Rs.1635.97 after taking into account the gross profit of 2% declared by the assessee; and worked out the sales of Rs.95,07,030/- as against the sales declared by the assessee at Rs.88,71,972/- and thereby made an addition of Rs.6,35,058/-.
2.2 Thereafter, AO has taken the valuation of the closing stock at Rs.9,74,118/- as against the value of closing stock shown by the assessee at Rs.14,71,435/- and thereby, worked out the difference of Rs.4,97,317 and added the same. The relevant calculation of the Assessing Officer is reproduced hereunder:-
Vr.No. Date Qtls. Rate Value 3/46 15.2.2009 200 1362 2,72,400 1/47 12.2.2009 86 1180 1,01,480 1/45 2.2.2009 97 1405 1,36,285 Total 383 1332 5,10,165
The average cost price worked out at Rs. 1,332/- per Qtl. and, accordingly, the value of closing stock of 489.55 Qtls. worked out to Rs. 6,52,080/- only. 4(v) In the interest of justice to the assessee, I am further calculated the value of closing stock including the stock in hand at a higher rates as under:
Vr.No. Date Qtls. Rate Value 3/36 15.2.2009 200 1362 2,72,400 1/47 12.2.2009 86 1180 1,01,480 1/45 2.2.2009 97 1405 1,36,285 1/08 2.12.2008 150 3500 5,25,000 Total 533 1942 10,35,165
In this way the average cost price worked out at Rs.1,942/- per Qtl. and, accordingly, the value of closing stock of 489.55 Qtls. worked out to Rs. 9,50,706/- only. 4(vi) To come on a correct version I further calculate the value of stock on FIFO method as under:- Qtls. Rate Value 200 1362 2,72,400 1,01,480 86 1180 53.55 1405 75,238 150 3500 5,25,000 489.55 1389.82 9,74,118 2.3 Lastly, on the perusal of the cash book, the Assessing Officer noted that assessee has introduced cash for sum of Rs.38,10,000/- as on 04.11.2008. In response to the show cause notice, the assessee stated that he has transferred this amount from his proprietorship concern’s Current Account No.13326 to his individual SB Account No.6063; for sum of Rs.5,00,000/- on 24.10.2008; Rs.17,10,000/- on 27.10.2008; and Rs.16,00,000/- on 04.11.2008. The Assessing Officer noted that though there is a bank transfer from Current Account to SB Account, but it is also found that assessee has withdrawn cash from his SB account which has been stated to be kept with him, and on 04.11.2011, he has credited this money in the cash book. The Assessing Officer after examining the assessee’s reply on this point held that assessee could not explain as to why the amount has been transferred from his current account to his individual SB account and on the same day amount has been withdrawn in cash. Why the amount withdrawn in cash from individual saving bank account has not been credited to cash book on the same day. Thus, he doubted the source of cash deposit in the cash book. Thereafter, AO further noted that amount of Rs. 22,10,000/- has been withdrawn from the saving bank account in cash which has not been credited to the cash book on the same date. He noted that amounts aggregating to Rs.16,81,000/- has been transferred from his Current Account to SB account for a sum of Rs. 10,00,000/- on 07.11.2008; Rs.6,80,000/- on 08.11.2008 and Rs.9,95,000/- on 21.01.2009. Again the said amount has been withdrawn from SB account on the same day and on 01.01.2011 the assessee has credited this money to the cash book. Since there was a long gap in withdrawal and deposit of Rs. 16,81,000/-, he took adverse inference and treated it as unexplained cash credit in the books of the assessee.
Before the ld. CIT(A), detailed submission have been made by the assessee qua each and every addition made by the Assessing Officer which has been dealt and incorporated in detail by the ld. CIT(A). The entire written submissions were forwarded to the Assessing Officer for submitting his remand report, which too has been incorporated and detail in the impugned appellate order.
After taking note of the entire facts and material placed on record, the ld. CIT(A) on the issue of addition of Rs.6,35,058/- has noted down the following reasons given by the Assessing Officer for making the addition:- The sale of voucher No.2/67 is of dated 20-03-2009, and the (i) sale voucher No.2/68 is of dated 15-3-2009. In this way it is certified that the assessee managed his sales as per his convenience and not as per factual trading and principle of chronology. (ii) There were purchases made by the assessee only 150 Qtls. of rice at the rate of Rs.3,500/- per Qtl. on 29-11-2008 and 150 Qtls. have been purchased on 02-12-2008. He had sold 150 Qtls. of rice without taking any profit at the rate of Rs.3,500/- per Qtl. on 13-3-2009 to M/s Hari Chand & Sons. The balance 150 Qtl. stated to be remained with the assessee unsold. If the above rice was purchased on 29-11- 2008, it could not have been sold, then why he made purchases of the same quality of rice on 02-12- 2008. Further, if the 150 Qtls. rice has been sold on 13-3-2009, the inference is drawn that the rice sold was that which has been purchased on 02-12-2008 and the rice which was purchased on 29-11-2009 had already been sold without recording in the books. Furthermore, if the rice purchased on 29-11-2009 could not be sold out then why the same quality of rice has been purchased on 02-12-2008. The assessee could not tell as to when this quality of rice has been sold.
(iii) The assessee has sold out 482 Qtls. of rice on 4-12-2008 at the rate of Rs. 1,060/- per Qtl. As per the table no quality of rice has been purchased by the assessee which would be less than Rs. 1,635/-before 4-12-2008. I have seen all vouchers are taken over and on file which evident the rates of rice of different quality were much more of the rates. But the assessee has managed the sales in a lower rates and accordingly the gross profit get down to avoid proper taxation.
(iv) This shows that the assessee made purchases on higher rates and made sales on lower rates and only that’s why the average sale rate worked out to Rs. 1526.68 as against purchases average rate of Rs. 1603.90. On the contrary the closing stock has been valued at the rate of Rs.3005.68 (v) Various vouchers for purchases and sales found missing.
3.1 After considering the assessee’s submission and analysing the comments and reasoning of the AO, he has deleted the addition after detailed reasoning. The sum and substance of his finding can be summarized in the following manner:-
(i) Sales have been verified by the Trade Tax Department and no discrepancy has been found. (ii) It is evident that Ist grade quality of rice purchased by the assessee also contained IInd grade quality and residual rice which was sold for moderate and lower prices. Therefore, the inference drawn by the AO that the assessee had managed the sales on a lower rates has no force and is thus rejected. (iii) AO's inference that the rice purchased on 29.11.2008 at 150 Qtls. was sold outside the books of account is not backed by any material evidence on record and as such, is a presumption only.
(iv) Under the circumstances the AO was not justified in rejecting books of account by invoking the provisions of section 145 of the Act. (v) Further the working of sale price of 5,811.25 Qds. of rice on the basis of average price of Rs. 1,635.97 (Rs. 1,603.90 + 2% of gross profit) is also not based on material evidence on record. (vi) AO's action of application of average purchase price has no locus - standi and is accordingly rejected. (vii) Thus, action of the AO in estimating sales at Rs.95,07,030 has no basis and is accordingly rejected. (viii) The observation of AO that various vouchers for purchase and sales found missing also stand rejected as AO vide order sheet entry dated 21-12-2011 has noted "...produced purchase bills, sales vouchers, copies of the same for the last month purchases and sales were taken over...." There is no mention of missing vouchers or specific query to produce missing vouchers, if any. Therefore, the Assessing Officer’s observation are contrary to his observations in the assessment proceedings.
3.2 On the issue of difference in valuation of closing stock of Rs.4,97,317/-, ld. CIT(A) again after discussing the issue threadbare and considering the assessee’s explanation as well as the remand report of the Assessing Officer has deleted the addition, the reasoning of which can be summarized in the following manner:- AO had made the addition at Rs. 4,97,317/- on the (i) ground that after working out average rate of closing stock as per cost price method on the last purchases made by the assessee; working of closing stock including stock in hand at a higher rate and closing stock computed on the basis of FIFO method, the maximum value of closing stock came at Rs.9,74,118/-, whereas the assessee had shown a vague value of closing stock at Rs. 14,17,435/- and adjusted the profit into stock. It is observed that it is not a case of under valuation of stock (ii) but rather the appellant had shown closing stock at Rs.14,71,435/- as against Rs.9,74,118/- worked out by the AO.
The AO in his over-enthusiasm of making addition at any (iii) cost has lost sight of what inference he was drawing from such observation. The AO's computation does not result in any addition in (iv) assessee’s income. The books of account are duly audited which have been (v) verified by the auditor and is supported by bills/vouchers which were produced before the AO at the time of the assessment proceedings. The AO has not specifically pointed out any defects in the (vi) books of account. (vii) It is held that AO was legally and factually incorrect to make addition of Rs.4,97,317/-.
3.3 Lastly, with regard to the addition on account of unexplained cash credit in the books for a sums aggregating to Rs.22,10,000/- and Rs.16,81,000/-. The assessee’s explanation before the ld. CIT(A) was as under:-
“ As per ground no. 03 & 04 an addition on account of introduction of fresh cash amounting to Rs. 22,10,000/- and 16,81,000/- are baseless and against the law. Regarding introduction of cash on 4-11-2008 and 21-01-2009 the assessee deals in purchase of rice from the agriculturist who generally does not have bank accounts and prefers to accept payment on cash basis only. The assessee withdraw cash through saving bank account and keep with him to deal with the agriculturist who generally comes in odd hours i.e. early morning and the assessee has to make payment to the agriculturist on the spot on cash basis only. The assessee keeps cash with him on the basis of telephonic discussion with agriculturist but some time they does not come according to schedule time but the assessee has to maintain the cash on the presumption that agriculturist may come without schedule time . In this way the cash remains with the assessee and when the agriculturist does not come the assessee deposit the cash back in to the cash book after waiting for some time. The assessee keeps the cash as imprest account. Regarding short deposit of Rs. 1000 on 21.01.2009, the assessee has treated this amount as withdrawal. The amount kept in the imprest account was not elsewhere and was used only for purposes of this business. No fresh cash was introduced as mentioned by the A. O. hence the additional of fresh introduction of cash in baseless and against the law and it appear that Assessing Officer was predetermined to make addition in the instant case on the presumption/estimated basis only hence the addition of Rs.2210000 and Rs.1681000 is not correct and should be deleted.
3.4 After calling for the remand report and rejoinder by the assessee, the ld. CIT (A) accepted the assessee’s contention and deleted the said addition as per discussion appearing at pages 24 to 27. In sum and substance the reasons for accepting the assessee’s contention can be summarized as under:- i. It is observed that the source of deposit in cash book at Rs.22,10,000/- and Rs. 16,81,000/- is not in dispute. Rather the AO in the assessment order has mentioned that the bank transfer from Current Account to S.B. Account is verifiable. Once the source of transfer of fund to the cash book was established, it was not the case of the AO to question why the withdrawn sums from S.B. Account at Rs. 22,10,000/- and Rs. 16,81,000/- were deposited on the instance of last transfer on 04.11.2011 and 21.01.2009 respectively. ii. Admittedly, the cash of Rs. 16,81,000/- was lying outside the books of account for 76 days which was indicative of possible expenditure. iii. Here it was the case of the AO and to make discreet enquiries to the effect that the appellant could have expended those sums other than the business purposes. iv. However, no enquiry has been conducted that the impugned sums were somewhere else expended/invested or the cash introduced was fresh capital other than that withdrawn from the S.B. Account. v. It could not be rebutted by the AO that the amount kept at his person was meant for business purposes and not for personal use.
Before us the ld. D.R. strongly relied upon the order of the Assessing Officer and submitted that Assessing Officer has given very cogent reasons for making the addition on account of sales as well as in the closing stock. Ld. CIT(A) has not appreciated the fact that Assessing Officer has specifically pointed out the defect in the valuation of the closing stock which assessee could not explained it properly at the assessment stage. So far as on the issue of unexplained cash credit in the cash book of the assessee, he submitted that the assessee at the assessment stage could not properly corroborate as to why such an amount from his Current Account to individual SB account has been transferred and later on withdrawn and then after a lapse of time has been credited in the cash book without giving any business purpose. Thus, the inference drawn by the Assessing Officer is correct which should be upheld.
On the other hand, ld. counsel for the assessee, Mr. Akarsh Garg, first of all, submitted that the assessee’s sales and purchase are fully verifiable and the same is also verified by the Trade Tax Department. On factum which needs to be appreciated in trading of rice is that, the sale price of the rice varies from quality and grade wise and that is why at times it is sold below the purchase price. Because of its quality and grade which is generally segregated after the purchase of the rice. The Assessing Officer without making any inquiry or proper investigation or bringing any material or evidence on record that the assessee had made sales outside the books of account, was not justified in rejecting the books of account. The average purchase price of the rice adopted by him is also again not based on any proper material, albeit is based on his own presumption and surmise, therefore, estimation of sales made by him cannot be accepted as such. The ld. CIT(A) has duly appreciated these facts and has deleted the addition after detail analysis and considering the material on record which could be confirmed.
5.1 Similarly on the issue of difference in closing stock also, Ld. Counsel pointed out that here in the instant case the Assessing Officer has reduced the value of the closing stock which was shown at Rs.14,17,435/- to Rs.9,74,118/- and if that is so, then the net profit shown by the assessee will go into negative figure as it will reduce the figure from the credit side of the trading account. Thus this approach of the Assessing Officer cannot be upheld. Further it is a matter of record that rice/paddy is purchased from agriculturist which contains different quality of rice and after segregation of different quality of rice, the closing stock is valued accordingly. Here it is not a case of under valuation stock albeit stock has been shown at a higher value as compared to the Assessing Officer. Thus, no addition could have been made on this score.
5.2 On the issue of additions of Rs.22,10,000/- and Rs.16,81,000/-, he strongly relied upon the order of the ld. CIT(A) and submitted that the source of credit in the cash book is duly explained by withdrawals from the bank accounts of the assessee and again the transfer of the said amount from Current Account to SB account had also been given. There cannot be any presumption that the amount withdrawn has been utilized for non business purpose and some other cash has been introduced in the cash book. The assessee has duly explained the reasons for withdrawals for making the payments to agriculturist at the time of season for purchase of rice/paddy.
Assessing Officer has not brought any material on record to show that the said amount withdrawn from the bank account has been utilized in some other way and therefore, the observation and the finding of ld. CIT (A) while deleting the said amount should be confirmed.
We have heard the rival submission, perused the relevant findings given in the impugned orders as well as the material referred to before us. The assessee has been deriving income from purchase and sale of rice and paddy. As stated before the lower authorities, the assessee purchases rice from agriculturists and after the purchase different quality of rice is segregated into grade-I, grade-II and residual rice which is (kinki/broken rice). The different grade of rice is sold at differential rate and that is the reason why the rice has been sold at different rates and there may come a situation in certain transaction that sale price could go below the purchase price. The inference drawn by the Assessing Officer that the assessee has managed sales at a lower rate does not find any favourable consideration in the light of these facts which has not been rebutted by the Assessing Officer even in the remand proceedings. The basis for which he has calculated the average purchase price for estimating the sales is again sans any material or evidence and without considering the assessee’s line of business that different grade of rice is sold at different rates and therefore, to apply average rate of rice is not correct appreciation of the facts; and accordingly, the estimation of sales on such hypothesis does not hold much ground. Moreover, no specific defect in the sales and purchase has been pointed out by the Assessing Officer nor any discrepancy in any of the bills. Whatever few instances of incoherency has been highlighted by the AO has been amply rebutted by the Ld. CIT (A). The Assessing Officer has not made any kind of inquiry that the assessee has actually made sales outside the books and simply enhancing the sale price based on some hypothesis or working of average sale price cannot be sustained and therefore, the reasoning given by the ld. CIT (A) for deleting the addition is sustained.
6.1 On the issue of difference in valuation of closing stock of Rs.4,97,317/-, at the threshold, we agree with the contention of the ld. counsel for the assessee, that here it is not a case of under valuation of stock albeit the assessee had shown the closing stock at a higher value which is an item of credit side of the trading account shown at Rs.14,71,345/- which according to the Assessing Officer as per his working should be at a lower side at Rs.9,78,118/-. If closing stock is shown at the higher side it means that the profit would increase and if the closing stock is reduced, then we are unable to appreciate how an addition can be made in the trading account as it will disturb the balancing figure of gross profit. Apart from that, the Assessing Officer has failed to take note of the fact that different quality of rice has to be priced differently and the closing stock valued by the assessee at cost of market price whichever is lower, is an accepted method of valuation in which no defect has been pointed out by the Assessing Officer. The AO has first increased the sale based on his own working and then had tried to work out the value of closing stock, which approach has not been found to be correct by the Ld. CIT(A). The reasoning given by the ld. CIT (A) as discussed above does not call for any inference and therefore, we do not find any merit in the grounds raised by the Revenue and the same is dismissed.
6.2 Now coming to the issue of unexplained cash credit of Rs. 22,10,000/- and Rs.16,81,000/-, it is not in dispute that assessee has transferred the funds on various dates from his business account of proprietorship concern (Current account) to his individual SB account and from there money has been withdrawn, which after a span has been credited in the cash book. The assessee had explained before the Assessing Officer as well as before the ld. CIT (A) that assessee has been dealing with the agriculturists for the purchase of rice, who do not have any bank account and therefore, he has to maintain liquidity of cash for making the payment in cash. If the amount withdrawn is not required then the same is credited in the cash book. Ld. CIT (A) has deleted the said addition after detailed analysis and has given a categorical finding that a money withdrawal is meant for business purpose and the same money withdrawn has been found to be credited in the cash book. Once the source of deposit in the cash book has been explained from the bank transfer, that is, from Current account to SB account, and thereon withdrawals have been made from the same account which has been credited in the cash book, then the source of the cash credited in the books stands explained. We do not find any infirmity in the order of the ld. CIT (A) in deleting the said addition, without AO bringing any contrary material on record to rebut such finding of fact. There is high degree of presumption by the AO that the money withdrawn from the bank account and part of it which has been credited in the cash book after a gap of sometime becomes unexplained. The assessee has explained that cash was withdrawn for making the payment to the agriculturist as he used to purchase the rice from them and period of withdrawal too has been shown to coincide with the harvesting season and this explanation has not been proved to be incorrect by the AO. Accordingly, the order of the ld. CIT(A) is affirmed and the grounds raised by the Revenue on this score is dismissed.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open Court on 21st December, 2017.