ITO, NEW DELHI vs. M/S GANPATI HYDRO POWER PVT. LTD.,, NEW DELHI

In the Income-Tax Appellate Tribunal, Delhi Bench ‘C’, New Delhi

Before : Shri H.S. Sidhu, Judicial Member And Shri L.P. Sahu, Accountant Member

ITA No. 5629/Del./2012 Assessment Year: 2009-10

Income-tax Officer, vs. M/s. Ganpati Hydro Power Pvt. Ltd. Ward 12(1), New Delhi. (formerly Ganpati Retails Pvt. Ltd.) 63, Ring Road, Lajpat Nagar, New Delhi (PAN-AACCG9937F) (Appellant) (Respondent)

Appellant by Shri Naveen Chandra, Sr. DR Respondent by Shri Salil Kapoor, Advocate

Date of Hearing 12.10.2017 Date of Pronouncement 30.11.2017

ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the Revenue against the order of ld. CIT(A)XV, New

Delhi dated 03.09.2012 for the assessment year 2009-10 on the following ground :

“1. On the facts and circumstances of the case and in law the Ld. CIT(A) has erred in deleting the addition of Rs.35,12,58,126/- made by the Assessing Officer by holding that undisclosed income has been introduced under the garb of sales.”

24.10.2009 declaring profit at Rs.13,090/-. The case was selected for scrutiny and

notice u/s. 143(2) was served on the assessee within the stipulated time. The AR

of the assessee appeared before the AO at the fag end of the limitation date and

ITA No. 5629/Del./2012 2

filed few details which were kept on record by the AO. There was no compliance

till 13.12.2011. The first compliance was made only on 14.12.2011. During the

year under consideration, the assessee company derived income from property

development and trading of textile items. The Assessing Officer observed from the

profit and loss account and balance sheet that the assessee has shown following

figures :

Purchase Rs.35,11,19,546/- Sales Rs.35,12,58,126/- Sundry creditors Rs.34,99,19,546/- Loans and advances given Rs.35,00,00,000/-

There was a meager margin of Rs.1.38 lacs approximately from the above trading

activities. During the course of assessment proceedings, the Assessing Officer

asked the assessee for details of purchase and sales of fabrics, details of sundry

creditors and the persons to whom loans and advances were given by the assessee

company. In response, the assessee submitted the details of the purchases worth

Rs.35,11,19,546/- from 37 parties. The Assessing Officer observed from the

purchase list that major purchases were made from few creditors and major sales

were made to two parties, named Actif Corporation Ltd. & Eskay Knit India Ltd for

Rs.14.00 crs. each and the address of both debtors is same. The address of the

seller, M/s. Krishna Knitwear Technology Ltd., from whom the assessee made

ITA No. 5629/Del./2012 3

purchases of Rs.17,47,61,729/-, is also the same. The assessee had given loans and

advances only to three parties, which is as under :

Actif Corporation Limited 14,00,00,000/- Eskay Knit (India) Limited 14,00,00,000/- Tayal Energy Limited 7,00,00,000/-

There was no any cash / bank transaction made during the year and no direct or

indirect expenses were incurred by the assessee for doing its business. When these

facts were confronted to the assessee, it was submitted that freight is directly paid

by the seller of goods to the assessee company and in respect of transportation

charges, he submitted that there was no cost incurred by the assessee towards

transportation and no godown is maintained by the company. The AO further

observed that the assessee has passed entries in the books of account in the name

of Tayal Energy Ltd. For Rs.7.00 crores and it has been shown under the head “

loans & advance” whereas the assessee had shown sales in his books of account in

the name of other companies. The AO also observed that the assessee company

was incorporated on 20.08.2007 with registered capital of Rs.1,00,000/- only and

during the F.Y. 2007-08 it had very small transactions and started trading of

fabrics during F.Y. 2008-09, which is under appeal. The AO therefore, stated that

such a huge transactions at the initial stage of establishment in the facts and

circumstances of the present case cannot be generally believed. The Assessing

Officer issued letter on 20.12.2011 and specifically asked as under :

ITA No. 5629/Del./2012 4

A. Based on the facts of the case, please explain as to why the purchase/sale transactions of fabric not be treated as sham transaction.

B. And why on amount of Rs.35,12,28,126/- be treated as your undisclosed income introduced in the books of account under the garb of fabric sale.

In response to the above queries, the assessee submitted reply. He submitted that

a purchase worth Rs.15.00 crores has been reversed in the next year. The

Assessing Officer observed that the assessee had submitted replies of the queries

at the fag end of the year where examination could not be done by the Assessing

Officer. He also noted that the purchase and sales invoices were the same in

pattern and the confirmations filed were self serving documents. The AO relying

on some case laws, observed that the transactions are not genuine business

transactions and the transactions were rather entered to introduce unaccounted

money of the assessee company in the books of account under the garb of

purchase/sales of fabrics and its subsequent passing to the three companies as

‘loans and advances’ and the purchases and sales made of fabrics by the Assessing

officer has been treated as sham transactions by the Assessing Officer. Therefore,

he assessed the sales of Rs.35,12,58,126/- as undisclosed income of the assessee

introduced in the books of account in the garb of sale of fabrics. Aggrieved by the

above additions, the assessee appealed before the first appellate authority, who

ITA No. 5629/Del./2012 5

after considering the submissions and the order of the Assessing Officer, allowed

the appeal of the assessee observing as under :

5.1 It is also seen from the perusal of AO's order that if it is accepted that both the purchase and sales are bogus, then the profit from the same will also be bogus and as such there will be no taxable income. It is seen that AO has not pointed out the source from which he came to the conclusion that the undisclosed income has come to the appellant's accounts.

5.2 I find that the AO has added whole of the amount of sales as undisclosed income to the returned income, when the returned income itself is based on the audited annual accounts of the appellant and the net profit is arrived after considering sales, purchases and other costs, in that event in my humble view there is no basis for addition of amount of sales all over again. In coming to this conclusion I rely on the decision of Jharkhand High Court in the case of Amitabh Construction Pvt. Ltd. (335 ITR 523).

5.3 With regard to the conversion of "Debtors" to "Loan and Advances" it is quite obvious that both "Debtors" and "Loan and Advances" appear on the asset side of the balance sheet and the mere act of switching of the same from current assets to loans and advances cannot give rise to income, much less undisclosed income. These are merely the book entries and no new funds or any other asset has been introduced in the appellant's accounts which could be considered an attempt for legalizing its undisclosed income. In fact, the appellant did not have a bank account during the year under consideration.

5.4 It is quite strange that AO on one hand is treating the purchases and sales are sham transactions but on the other hand treats the loans and advances as genuine. AO therefore has failed to discharge onus cast on him when he is disregarding audited accounts of the appellant, as to how the value is passed on to the persons who are shown to have been given loans.

ITA No. 5629/Del./2012 6

5.6 As per the financial accounts it is seen that the capital of the appellant's company is merely Rs. 1,00,000 and he has not borrowed any other moneys in fact in the year under consideration, no bank account is being maintained by the appellant.

In my view in the whole modus operandi, there is no movement of any funds at all and mere books entries are there. Therefore, in the facts of the case there is no colorable device to evade the taxes. However, in my view it is a fit case to initiate proceedings under section 269 SS and 269T in respect of the parties where by mutual agreement the "Debtors" have been converted as "Loan and Advance", "creditors for goods" have been treated as "unsecured loan" as it is a case of taking or accepting loans and deposits otherwise than by an account payee cheques / bank drafts. The AO in his order vide para 11 has given a finding to this effect and therefore he is again directed to ensure the compliance of same.

In view of the above discussions, I am of view that when on one hand sales are duly been reflected in books of accounts, the additions of the like amount cannot be added to appellant's income as income from undisclosed sources when no evidence is available with the AO.

Tribunal.

Officer and submitted a written synopsis which reads as under :

“1.1 It is undisputed that the assessee joined the assessment proceedings at fag end of the limitation period. The assessee not only presented a story which cannot be believed but did not present any material to support the same.

1.2. The AO has narrated relevant facts in the Assessment order (which inter-alia include the facts in paras 3.1 to 3.22). A total unbelievable situation has been presented.

ITA No. 5629/Del./2012 7

2.1 The AO might not have said in so many words but it is clear case of disallowances of deduction claimed in respect of purchases.

2.2 There is ample material on record to shift onus on assessee to prove the genuineness of purchases which assessee failed to discharge and AO came to the conclusion that the purchases are bogus. Even before CIT(A) no material evidence has been placed to discharge this onus.

2.3 The Hon'ble Delhi High Court while delivering judgment dated 15 March, 2001 in case of CIT Vs. La Medica Vs. Commissioner of Income-tax (2001) 168 CTR Del 314 held that that It is to be noted that assessee’s stand was not that it was not open to the appellate Authority to make out a third case, which was not even the case of the assessee, to hold that the transactions were real and not fictitious as claimed by the revenue.

2.4 The relevant portion of the judgment is reproduced as under:

".. ...the question whether the purchases were made from some other source ought not to have weighed with the Tribunal as a factor in favor of the assessed. The conclusions of the Tribunal are, therefore, clearly erroneous, contrary to materials on record and have been arrived at without taking into consideration relevant material and placing reliance on irrelevant materials. It is to be noted that assessee’s stand was not that it had effected purchases from anybody else. Its stand throughout was that it had effected purchases from M/s. Kalpana Enterprises. It was not open to the Tribunal to make out a third case, which was not even the case of the assessed, to hold that the transactions were real and not fictitious as claimed by the revenue....."

2.5 It is also a case where apparently the purchases are not genuine. The ratio of Hon'ble SC which has been laid down in case of Daulat Ram Rawatmull 87 ITR 394(SC) is clearly applicable.

2.6 It is a simple matter of error on part of CIT(A) that the CIT(A) did not understand the preposition that by the purchases are bogus. 3.1 It is a simple matter of error on part of CIT(A) that the CIT(A) did not understand the preposition that by the device adopted by the assessee it is able to create a smoke screen to show that it has advanced loan of Rs. 35,12,58,71,216/-.

3.2 It is a simple matter of error on part of CIT(A) that the CIT(A) did not consider the matter in light of human probabilities. The CIT(A) ignored squarely applicable ratio of Hon'ble SC in case of Sumati Dayal Vs. Commissioner of Income-tax [1995] 80 TAXMAN 89 (SC) which states as under :

ITA No. 5629/Del./2012 8

"...that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities....."

5.1. It is a simple matter of error on part of CIT(A) that the CIT(A) did not understand the preposition that by the AO has effectively used section 68.

5.2 The Hon'ble High Court of Madhya Pradesh in case of V.I.S.P. (P.) Ltd. Vs. CIT (2004) 136 Taxman 482 (MP) has held that bogus credit entry in respect of purchase can lead to addition to the income. The Hon'ble High Court considered and rejected arguments of the asssessee that section 68 can be invoked only when books of accounts show cash entry and not otherwise. Paras 3 and 4 of the judgment are reproduced below :

"3. Learned counsel, appearing for the assessee placing reliance on the decision of the Supreme Court in Baladin Ram v. CIT (1969) 71 ITR 427 and the decisions of the Bombay and Allahabad High Courts in CIT v. Bhaichand H. Gandhi [1983] 141 ITR 671 and Sundar Lal Jain v. CIT [1979] 117 ITR 316, respectively, contended, that section 68 of the Act can be invoked only, when, the books of account of the assessee show the cash entry and not otherwise.

5.3 Hon’ble Delhi High Court in case of CIT vs. N.R. Portfolio (P) Ltd. [2014] 42 taxmann.com 339 (Delhi) has held that creating papers in routine course cannot in all cases tantamount to satisfactory discharge of onus.

5.4 Hon'ble jurisdictional High Court, in para 31, has held as under:

"31......... Identity, creditworthiness or genuineness of the transaction is not established by merely showing that the transaction was through banking channels

ITA No. 5629/Del./2012 9

or by account payee instrument. It may, as in the present case required entail a deeper scrutiny. It would be incorrect to state that the onus to prove the genuineness of the transaction and creditworthiness of the creditor stands discharged in all cases if payment is made through banking channels. Whether or not onus is discharged depends upon facts of each case. It depends on whether the two parties are related or known to each; the manner or mode by which the parties approached each other, whether the transaction was entered into through written documentation to protect the investment, whether the investor professes and was an angel investor, the quantum of money, creditworthiness of the recipient, the object and purpose for which payment/investment was made etc. These facts are basically and primarily in knowledge of the assessee and it is difficult for revenue to prove and establish the negative. Certificate of incorporation of company, payment by banking channel, etc. cannot in all cases tantamount to satisfactory discharge of onus. The facts of the present case noticed above speak and are obvious. What is unmistakably visible and apparent, cannot be spurred by formal but unreliable pale evidence ignoring the patent and what is plain and writ large, "(emphasis supplied).

appellate authority, also filed a written synopsis stating as under :

ITA No. 5629/Del./2012 10

rightly noted that the amount of sale cannot be added as income when the assessee has already credited the same in the Profit & Loss account.

• ACIT v. Ms. Aishwarya K. Rai [2010] 127 ITD 204 (Mumbai), the Mumbai ITAT at paragraph 4 held the following:

"4. ...It is no doubt true that the learned D.R. can make any arguments in support of the stand taken by the Assessing Officer but there are certain inherent limits of his arguments inasmuch as he cannot transgress the boundaries made by the Assessing Officer. In other words, the learned D.R. can support the action of the Assessing Officer with any arguments, he can rely on any case law in support of the Assessing Officer's case, but he cannot make out altogether a new case which was not the subject-matter of consideration by the Assessing Officer or the learned first appellate authority. To find fault in the assessment order is outside the domains of the arguments of the learned D.R. as such power vests with the learned CIT under section 263 for revising any order which is erroneous and prejudicial to the interest of the revenue. We are, therefore, not inclined to accept these grounds as they do not emanate from the orders of the authorities below... "

Ericsson AB v. Deputy Director of Income Tax [2012] 25 taxmann.com 466, the Delhi ITAT at paragraph 26 made the following observation:

"26, Even otherwise, the Ld. Departmental Representative cannot make out a new case, which is not of the case of the Assessing Officer. The Mumbai Bench of the Tribunal in Asstt. CIT v. Ms. Aishwarya K. Rai [2010] 127ITD204 (Mum.) held that the learned D.R. can

ITA No. 5629/Del./2012 11

support the action of the A.O. with any arguments and that he can rely on any case law in support of the A.O's case but he cannot make out any new case which was not the subject matter of consideration by the A. O. or the first appellate authority. It further held that to find fault in the assessment order is outside the domain of the argument of the Ld. D.R. as such powers vests with the Commissioner u/s 263 for revising any order which is erroneous and prejudicial to the interests of Revenue. The Tribunal, Pune Bench in ITO v. Anant Y. Chavan [2009] 126 TTJ (Pune) 984 has held as follows:- 'The D.R. only represents the A.O. who can do better than to justify his own action on the grounds which have been discussed in the assessment order or perhaps even on extended grounds. Undoubtedly, there can be occasions when AO fails to bring an income to tax or grant excessive deduction and the remedy for these lapses are prescribed by the provisions of S.I 47, 154 and 263 etc. but all these sections have certain time limits within which these sections can be invoked Whether it is a rectification of a mistake, or initiation of proceedings for income escaping assessment, or even a revision proceeding everything must be completed within the prescribed time limit. To suggest that even a proceeding before the Tribunal is a continuation of assessment proceedings and, therefore, the A.O. can be allowed to make up for his deficiencies will amount to rendering all these time limits as nugatory and redundant. It is indeed not open for the Tribunal to take away the benefit given by the A.O. When the AO decided to grant deduction u/s 80-113(10) in respect of residential units it was well considered and conscious decision on his part to have granted the benefit of deduction. With the benefit of hindsight this benefit of deduction might have been little more generous than what is found to be admissible by the Tribunal, but then the decision of the Tribunal has not yet reached finality and it is not an end of the route so far as legal developments in that regard are concerned. It is not the scheme of the Act that entire assessment is open before the Tribunal and it must consider the same. Ground which was raised by the Revenue was confined to profits relatable to commercial units and therefore, it is not really open to the Tribunal to go beyond the said ground. Jeypore Timber & Veneer Mills (P.) Ltd. v. CIT[1982] 137 ITR 415/[19831 12 Taxman 191 (Gau.) applied; CIT v. Assam Travels Shipping Service [1993] 199 ITR I/ 67 Taxman 269 (SC) and Jt. CITv. Sakura Bank Ltd. [2006] 100ITD215/[20061 6 SOT 684 (Mumbai) distinguished; Mcorp Global (P) Ltd. v. CIT [2009] 309 ITR 434/ 178 Taxman 347 (SC) followed". Mumbai Special Bench of the Tribunal in Mahindra & Mahindra Ltd, v. Dv. CIT [20101 122 1TD 216 / 30 SOT 374 {Mum.) (SB), held as follows:-"In our considered opinion the Id. D.R. has no jurisdiction to go beyond the order passed by the A.O. He cannot raise any point different from that considered by the AO or the C1T(A). His scope of arguments is confined to supporting or defending the impugned order. He cannot set up an altogether different case. If the Id. D.R. is allowed to take up a new contention de hors the view taken by the AO that would mean the Id. D.R. stepping into the shoes of the CIT exercising jurisdiction u/s 263. We. therefore, do not permit the Id. D.R. to transgress the boundaries of his arguments. Similar view has been taken by the Jodhpur Bench of the Tribunal in the case of Kwal Pro Exports v. Asstt. CIT [20081 110 ITD 59 (Jodh.1 This contention is therefore repelled as devoid of any merit. "The Hon'ble S.C. in MCorp Global (P.) Ltd. (supra) has held as follows:-"Held, that u/s 254(1) of the Act, the Appellate Tribunal had no power to take back the benefit conferred by the A.O. or enhance the assessment. Since the A.O. had granted depreciation in respect of 42,000 bottles that benefit could not be withdrawn."

ITA No. 5629/Del./2012 12

In view of the discussion, we hold that the Ld. Departmental Representative cannot make out afresh case for the first time during the course of arguments of the case.

• Mahindra & Mahindra Ltd. V Dy. CIT [2010] 122 ITD 126 (Mum.)(SB). • ITO v. Anant Y. Chavan [2009] 126 TTJ (Pune) 984 • Kwal Pro Exports v. Asstt. CIT [2008] 110 ITD 59 (Jodhpur)

"5.4. We have considered the facts of the case and rival submissions. From the submissions made before us, it is clear that the transactions of purchase and sale were recorded in the books of account and these transactions led to profit to the assessee, which was brought to tax. If sales have been effected out of purchases made from these parties, then, it cannot be said that the purchases were bogus. The finding of bogus sale can only lead to the inference that the corresponding amount should be deleted from the turnover of the assessee. The AO has also not rejected the books of account to estimate profit on these transactions in case it was a firm finding that purchases and sales were bogus"

ITA No. 5629/Del./2012 13

for A.Y. 2010-11 and the assessment order for A.Y. 2011-12 u/s 143(3) are enclosed herewith. It means that even for later assessment years, where the loans/advances have increased, the position is accepted by the Income Tax Department. Even on the principle of consistency, the order of the CIT(A) is liable to be upheld. Reliance is placed on the decision CIT v. Neo Poly Pack (P.) Ltd. (2000) 245 ITR 492.

The above noted decision is not relevant at all because in the said case, the addition was made on account of alleged bogus purchases because blank signed cheque-books and other material were recovered from the premises of NK PL during the course of search, which proved that the purchases were bogus and the Hon'ble Gujarat High Court in the case of NK Industries Ltd. v. DCIT [2016] 72 taxmann.com 289 (Guj) upheld the addition on account of bogus purchases and the SLP against the same was dismissed by the Supreme Court. In this respect our submission is as under:

a. In the case of the present assessee, no addition has been made by the AO in respect of the purchases made. The addition by the AO is on account of sales made which is rightly deleted by the CIT(A). The benefit given by the AO cannot be taken away by the Tribunal.

b. Without prejudice, the judgment of the Hon'ble Gujarat High Court in the case of NK Industries Ltd. v. DCIT (supra) is based on the fact that blank signed cheque books of the purchasing parties, endorsed in favour of NKPL were found during the search on NK Group of cases, whereas in the case of the assessee, the confirmation has been filed and no addition has been made by the AO on account of purchases made by the assessee. The judgment has to be read and understood with reference to issue involved in the case. No such material has been brought on record by the AO, in fact that is not the case of the AO in this case. Reliance is placed on Hon'ble Supreme Court's decision in the case of Sun Engineering Works (P) Ltd. (1992) 198 ITR 297 (SC).

c. It is not as if by simple dismissal of the SLP, the Hon'ble Supreme Court has laid down any law. Reliance is placed on the Kunhayammed and Ors. v. State of Kerala & Ors. 245 ITR 360. A similar argument was raised by the DR in the case of Dy. CIT v. Sh. Sunil Kumar [ITA No. 563/ASR/2016] and the said argument was dismissed by the ITAT and relief was given to the assessee following the decision of Hon'ble Bombay High Court in the case of CIT v. Nikunj Eximp Enterprises Pvt. Ltd. [2013] 35 taxmann.com 384.

In view of the above noted submissions, the appeal of the Department is liable to be dismissed.”

orders of the lower authorities. In brief, facts of the case are that assessee is a

ITA No. 5629/Del./2012 14

company allegedly engaged in the business of purchase and sale of fabric. During

the year, the Ld. assessing officer noted that assessee has made a purchase of Rs.

35.11 crores and has also made sales of Rs. 35.12 crores resulting in sundry

creditors of Rs. 34.99 crores arising out of the unpaid purchase consideration and

loans and advances of Rs. 35 crores arising as a debtor on sale of goods converted

into loans and advances by the assessee. Whole transaction of purchase and sales

entered into by the assessee were not settled by payment of sales consideration to

the suppliers who have supplied the fabric to the assessee as well as no

consideration is received by the assessee from the buyer of the goods. Therefore it

is apparent that the transactions of the purchases and sales remained as debtors

and creditors respectively for the whole year. The Ld. Assessing Officer in his letter

No. ITO/W-10(1)/2016-17 dated 26.04.2016 submitted to CIT/DR, ITAT, New

Delhi, which is placed on record, stated that the identical facts and circumstances

were prevailing in the next year wherein he has stated that for assessment year

2010 – 11, the quantum of loans and advances have increased to Rs. 68 crores and

to Rs. 72 crores in assessment year 2011 – 12. In assessment year 2010 – 11, the

purchases are around Rs.33 crores and the consequent figure of loans and

advances is Rs. 68 crores. Therefore, from the above facts it is crystal clear that

assessee is engaged in buying of goods without payment of consideration to the

creditors as well as not receiving consideration from the parties to whom the

ITA No. 5629/Del./2012 15

alleged sale of fabrics have been shown, i.e., debtors. Surprisingly, the sales

returned to the assessee are directly debited to the account of the suppliers in the

year. On examination of the whole transaction, the Ld. assessing officer was of the

view that assessee has not incurred any direct or indirect expenses for entering

into the turnover of the purchases and sales of such a huge magnitude. The

assessee stated that the freight is directly paid by the seller of the goods to the

assessee company. However, no such evidences were produced before the

Assessing Officer as to how the goods have travelled either to the Godown of the

assessee or straightway to the buyers of the goods from the assessee. The

movement of goods was doubted by the Ld. Assessing Officer. It is further stated

that no godown is maintained by the assessee company. All the purchase bills

shown by the assessee are also bearing the similar style. On request for the

examination of the buyer none of the buyer/ debtors appeared before the Ld.

Assessing Officer. The Ld. Assessing Officer further noted that not a single party

has made any payment to the assessee company in respect of fabric purchased

from the assessee company. But they are shown as a loans and advances by the

assessee. It is apparent that whole transaction has been carried out by the

assessee company as a conduit for the companies who have shown the loans and

advances from the assessee and also got deduction of the purchase cost. Therefore,

simply the amount of entry was provided by this company to the buyers from the

ITA No. 5629/Del./2012 16

assessee for the above sales made by the assessee. Further, the Ld. assessing

officer also noted that the goods sold and transferred to the parties, were shown as

loans and advances during the year under consideration in the balance sheet of the

assessee. However, the AO further observed that the parties, to whom the goods

were sold have returned the purchase worth Rs.15.00 crores in the next year, but

no evidences of transporting goods from the seller to the original buyer or to the

assessee was shown. No material is produced either before the AO or before us to

show the effect of these sales returned. Therefore, the Ld. assessing officer stated

that the above transaction of purchase and sale of fabrics made by the assessee are

not genuine business transactions as these transactions are rather an effort to

introduce the unaccounted money of the assessee company in the books of

accounts under the garb of purchase and sale of fabrics. Therefore, the Ld.

assessing officer made addition of these Rs.35.12 crores of the sales recorded by

the assessee. On appeal by the assessee, the Ld. CIT appeal deleted the above

addition. The main reason for deletion of the above addition is that sales have

already been offered by the assessee as income in the profit and loss account. The

Ld. CIT (A) was also of the view that when the purchases and sales are bogus, then

resultant profit there from is also bogus and therefore not chargeable to tax. The

Ld. CIT (A) also was of the view that when the books of accounts of the company

are audited and the net profit is arrived after considering the sale, purchase and

ITA No. 5629/Del./2012 17

cost then no addition can be made in the hands of the assessee. The Ld. CIT (A) was

also of the opinion that conversion of debtors to loans and advances also does not

result into any income and cannot be considered as an abnormal transaction. The

Ld. CIT (A) also stated that company does not maintain any bank account and the

company has share capital of merely Rs. 1 lakh and therefore the provisions of

section 269 SS and 269T also do not apply to the facts of the case. We are of the

considered opinion that the Ld. CIT (A) has merely believed the submission made

by the assessee before him without answering the many of the findings of the Ld.

assessing officer. The Ld. CIT (A) did not answer that how it is possible for a

company which is having a share capital of meager sum of Rs. 1 lakh and does not

have any bank account, to clock the turnover of Rs. 35 crores consecutively for 3 to

4 years and that too in the 2nd year of the establishment of the company. Further,

the Ld. CIT (A) has accepted the submission of the assessee that sales have already

been recorded in the books of accounts in the profit and loss account and therefore

there cannot be any undisclosed income. According to us, he has failed to

understand that what is the regular source of income and what is the unknown

source of income. In the present case the sales recorded by the assessee has been

shown in the disguised manner as regular income of the assessee whereas it is not

so, because the assessee has failed to prove the purchases of the goods. On looking

at the whole transaction, it is apparent that assessee is showing sales to some

ITA No. 5629/Del./2012 18

parties to suit their convenience without recovering money from them and in fact

they are showing the amount due to assessee company as loans and advances.

Therefore, it amounts to providing an accommodation entry to those parties as

loans and advances in the guise of purchases booked by them. It results into

deflating the profit of those parties as well as the bogus purchases in the hands of

the assessee on account of several parties who are not traceable. Merely because

the books of accounts of the company are audited, the Ld. CIT (A) has accepted

them, but he has not looked into the facts of the case that the purchases have never

been paid, the sales have never been realized, there is no bank account of the

company, there are no expenditure incurred by the assessee company for the

purchases and sales entered into, what are the modus operandi ?, where the goods

have been kept ? etc. All these questions raised by the Ld. assessing officer

remained unanswered and unverified in the order of the Ld. CIT (A ). Furthermore

none of the debtors as well as the creditors could remain present before the

assessing officer for their examination to show that how they have purchased and

sold fabrics to the assessee. In these peculiar circumstances, the decision of

Hon’ble Gujarat High Court in case of Ambuja exports Ltd vs DCIT, 86

Taxmann.com 69 is applicable where in it is held that where purchases made by

assessee from a proprietary concern were bogus and entries were in nature of

accommodation entries, merely because assessee had disclosed such entries in

ITA No. 5629/Del./2012 19

return filed and also showed such purchases in books of accounts would hardly be

sufficient to advance arguments of full and true disclosure by assessee. Though it

is not the case of reopening but assessment, hence the higher burden lies on the

assessee to prove genuineness of purchase and sales. Therefore, merely because

the purchases and sales have been shown in the books of accounts when they are

shrouded with the non-genuineness does not help the assessee. The Ld. CIT (DR)

has also relied upon the binding precedent in case of CIT versus la Medica (supra)

wherein on identical facts and circumstances the purchases have been treated as

income from the undisclosed sources. Furthermore, the Ld. CIT (A) has also not

answered the fact that the parties who made purchases of Rs. 20 crores are

existing at the address of the assessee company and the parties to whom the sales

have been recorded of Rs. 28 crores also exist at the address of the company. This

creates a doubt over the genuineness of the transaction for the reasons that when

the buyer and seller both exists at the same address what is the reason of routing

the transactions through assessee of such a huge magnitude. In view of the above

facts, the Ld. assessing officer has alleged that above purchase and sale

transactions of the fabrics are sham transactions, to which the Ld. CIT (A) has

brushed aside by holding that the books of accounts are audited and the sales have

been shown on the credit side of the profit and loss and already shown in the

income. We are of the opinion that Ld. CIT (A) has miserably failed to look into the

ITA No. 5629/Del./2012 20

various allegations made by the Ld. assessing officer with respect to the various

transactions recorded by the assessee. Furthermore, the Ld. assessing officer has

also mentioned in Para No. 6.6 that the details have been filed by the assessee

before him at the fag end of the time limit for completion of assessment when

proper enquiry could not be made by him. It was further stated by the Ld.

assessing officer that all confirmation with respect to the reversal of the sale and

purchases are just an afterthought when discrepancies detected. We could not find

that how the CIT (A) has dealt with these issues in his order. In view of the above

facts, in the interest of Justice, we set aside the whole issue back to the file of the

Ld. assessing officer with a direction to the assessee to produce the purchasers of

goods from the assessee i.e. buyers, the sellers of the goods to the assessee, i.e.

creditors and further to adduce evidences with respect to the movement of goods

to the buyers from the assessee and then from sellers of goods to the assessee. It

is also necessary to examine in this particular nature of transactions the reasons

that for consecutive 3 years whether there is any transfer of material between the

buyer and seller or not, so that the Ld. assessing officer may apply his mind to this

aspect also. It is also interesting to note that there is no transaction of payment of

consideration for sale of goods as well as for the purchase of goods through

cheques as assessee does not have any bank account and merely the share capital

of Rs. 1 lakh. Therefore how the whole transactions have been carried on by the

ITA No. 5629/Del./2012 21

assessee of such a huge magnitude without banking facilities is also required to be

examined. We are constrained to state on looking at the nature of the transactions

placed before us that the activities of the assessee company is no less than the

activities of a “shell Company”. This company has been used as a layer of money

to save the real beneficiaries. It is a revelation that company without having any

substances has got the outstanding credit of Rs 35 crores for purchases. As a final

fact finding authority we cannot close our eyes to the startling facts reveled before

us. The ld AR has objected to the report of the ld AO placed before us wherein

the transactions of the assessee were detailed for last three years. We do not

hesitate to reject the objection of the assessee. In fact the report of the Ld AO has

demonstrated the modus operandi of the assessee company prevailing for

consecutive three years. We are duty bound to set aside the whole issue back to

the file of the Assessing Officer to ascertain the correct and genuine state of affairs

by making complete inquiry in the peculiar facts of the case to ascertain

genuineness of the transactions, if at all it exits, otherwise it is also necessary to

verify how the sellers to the assessee have financed their sales when no money is

paid to them for three to four years and who is the beneficiary of the whole chain

of transactions. Further, Ld. AO may also examine that how buyers of the fabrics

from assessee have dealt with those goods. In short, the ld. AO may examine the

whole trail of these transactions of purchase and sales and find out the real

ITA No. 5629/Del./2012 22

beneficiaries of all these unusual transactions of purchase and sales entered by

assessee without flow of consideration. Therefore, the ld. AO may take a decision

about the real revenue from these transactions in the hands of the assessee.

Needless to say, that the assessing officer will give proper opportunity of hearing

to the assessee before deciding the issue on the merits. In case if the assessee fails

to adduce the necessary evidences as directed to his satisfaction, the ld AO may

pass the assessment as he deems fit in accordance with law and also recover tax

from the assessee or the beneficiaries by invoking the provisions of section 226 of

the Act. In the result the ground No. 1 of the appeal of the revenue is allowed with

above direction.

The Order is pronounced in open court on 30.11.2017.

Sd/- Sd/- (H.S. Sidhu) (L.P. Sahu) Judicial member Accountant Member

Dated: 30.11.2017 *aks* Copy of order forwarded to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order Assistant Registrar Income Tax Appellate Tribunal Delhi Benches, New Delhi