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Before: Shri S.K. Yadav & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: These cross appeals have been filed by the Revenue and the assessee against the order of ld. CIT(A), Meerut dated 11.05.2015 and 2 3232/Del./2015 for the assessment year 2011-12. Both the parties have raised following grounds in their respective appeals :
Grounds raised by Revenue: 1.Whether in the facts and circumstances of the case, the Ld. Commissioner of Income tax (Appeals) has erred in deleting the additions of Rs. 1,00,000/- under the head 'medical expenses' and Rs. 1,00,000/- under the head 'workman compensation' ignoring the fact that these additions had been made by the A.O due to lack of documentary evidence in support of these expenses. 2.Whether in the facts and circumstances of the case, the Ld. Commissioner of Income tax (Appeals) has erred in restricting the addition of Rs. 14,18,666/- to Rs 8,10,666/- inspite of the fact that this addition had been made by the A.O as the assessee had paid excess interest to two lenders at a rate that was much above the rate at which the assessee paid interest to other persons. 3-Whether in the facts and circumstances of the case, the Ld. Commissioner of Income tax (Appeals) is correct in deleting the addition of Rs. 17,15,837/- that had been made by the A.O on account of difference between the balance confirmations received from sundry creditors and balances as shown in the books of account of the assessee. 4.Whether in the facts and circumstances of the case, the Ld. Commissioner of Income tax (Appeals) is correct in deleting the addition of Rs. 34,95,471/- that had been made by the A.O on account of difference between the amount of purchases as confirmed by various parties and that reflected in the books of account of the assessee.
5. Whether in the facts and circumstances of the case, the CIT(A) has erred in law in deleting the addition of and 3 3232/Del./2015 Rs.20,42,24,661/- that had been made by the A.O on account of being bogus purchases ignoring the fact that despite being given opportunity to establish the veracity of the transaction, the assessee furnished inaccurate particulars and failed to prove the genuineness of transaction.
6. Whether in the facts and circumstances of the case, the CIT(A) has erred in law in deleting the addition of Rs.89,72,748/- made by the A.O as unexplained cash credit ignoring the fact that the assessee could not explain the said loan taken by it.
7. Whether in the facts and circumstances of the case, the CIT(A) has erred in law and fact in deleting the addition of Rs. 1,00,00,000/- that had been made by the A.O on account of disallowance of insurance claim written off in the books of account of the assessee since the assessee was not able to furnish any convincing reply as to why the claim of the assessee in respect of loss of stock due to fire was rejected by the insurance company.”
Grounds raised by assessee: “1. That the learned Commissioner of Income Tax (Appeals), Meerut (hereinafter referred to as 'Ld. CIT(A)') has erred in law as well as on the facts of the case by confirming an addition of Rs.8,10,666/- towards interest paid in excess of 12% P.A. on the loans borrowed by the appellant from an outsider through its directors holding that interest paid @ 20% P.A. on such loans was unreasonable and excessive and the findings & observations made are based on incomplete appreciation of the facts on record with the view of a taxman and not with the view of a businessman and the submissions of the appellant on the issue have not been considered in right perspective thereof.
2. That the Id. CIT(A) has erred in law as well as on the facts of the case by confirming an addition of Rs. 1,00,00,000/- and 4 3232/Del./2015 being the amount of insurance claim written off by the appellant to the debit of the profit & loss account and the various findings made and inferences drawn are based on incomplete and incorrect appreciation of facts on records and the observation of the Id. CIT(A) that the loss of stock, which can be claimed as deduction had to be limited to Rs.3,40,338/- being the amount of claim approved by the insurance company is incorrect and ill founded and the submissions of the appellant have not been considered in the right perspective thereof.”
Briefly stated, the facts of the case are that the assessee company is engaged in the business of manufacturing and trading of paper. The assessee filed its return of income on 28.09.2011, declaring a net taxable income of Rs.30,63,770/-. The case was selected for scrutiny and statutory notices were issued to the assessee. The assessment was completed vide order dated 28.03.2014 after making following additions to the total income of the assessee : (i). Addition on account of ‘medical expenses’ & ‘workman compensation’. Rs.2,00,000 (ii). Disallowance of excess interest paid on unsecured loans Rs.14,18,666 (iii). Addition on account of difference in sundry creditors. Rs.17,15,837 (iv). Addition on account of difference in purchases. Rs.34,95,471
ITA No. 4938 and 5 3232/Del./2015 (v). Addition on a/c of bogus purchases u/s. 69C. Rs.20,42,24,461 (vi) Addition on a/c of unexplained cash credit u/s. 68. Rs.89,72,748 (vii). Addition on a/c of Insurance claim written off. Rs.1,00,00,000
3. The addition of Rs.1,00,000/- each on account of medical expenses and on account of workman compensation out of total such expenses of Rs.16,60,862/- and Rs.8,50,000/- respectively have been made by the AO on the premise that some of the bills for medical expenses produced were not proper and that the copies of agreements and affidavits of the dependents of deceased persons were submitted only with respect to compensation of Rs.7,50,000/- whereas the assessee had debited Rs.8,50,000/- under the head workman compensation.
4. The addition of Rs.14,18,666/- on account of excess payment of interest was made by the AO on the premise that out of total unsecured loans declared, the assessee had paid interest at unreasonable rate of 20% only to two persons, i.e., Anand Prakash (Dynamic) and Ravi Prakash (Dynamic) whereas the and 6 3232/Del./2015 assessee had paid interest @ 6% to other unsecured loan depositors. He, therefore, disallowed the difference in interest @ 14% amounting to Rs.14,18,666/-, as excess payment of interest.
5. The next addition of Rs.17,15,837/- being difference in sundry creditors was made by AO observing that the assessee had shown sundry creditors of Rs.5,23,26,199/-. The AO issued notice u/s. 133(6) to the creditors and found that in some cases, confirmations of balances were received from the creditors and in some cases no reply was received. In some cases, creditors denied to have any business transactions with the assessee. The assessee filed reconciliation of the difference, but for want of original confirmations from such creditors, the difference of Rs. 17,15,837/- between the amount claimed by assessee and the amount confirmed by the parties, was added to the total income of the assessee. The details of such sundry creditors are mentioned at page 3 & 4 of the assessment order.
6. Similar was the position with respect to difference found in purchases. The assessee filed reconciliation of difference, but for and 7 3232/Del./2015 want of confirmation with respect to the balances, the details of which are given at page 4 of the assessment order, addition of Rs.34,95,471/-, being the amount of purchases not confirmed by the parties, was made u/s. 69C of the Act.
With respect to addition of Rs.20,42,24,661/- on account of bogus purchases, the AO noticed that the assessee had made maximum purchases of the aforesaid amount from M/s. Prakash Marketing Pvt. Ltd. with credit balance of Rs.1,46,70,433/-. In response to notice u/s. 133(6) sent to the above party at its new address furnished by assessee, the confirmation was received by AO whereby two confirmed copy of loan account and sale account were received, according to which sales have been shown to the assessee amounting to Rs.20,69,44,661/- and the loan receivable from the assessee company of Rs.89,72,748/- as on 01.04.2010.. The AO also observed that M/s. Prakash Marketing Pvt. Ltd. has filed return of income of Rs.1,02,994/- against his total sales of Rs.21,79,51,836/- and the assessee alone has shown purchase of Rs.20,69,44,661/- representing 94.95% of the total sale of Prakash Marketing Pvt. Ltd. The AO also observed that the and 8 3232/Del./2015 Inspector was again sent to enquire the office and other details of the above company at the new address given by assessee, who vide his report informed that no such company was found in existence at the given address. The AO, thereafter, visited the place where he met one of the directors of the assessee company. The assessee was directed to produce principal officer of the supplier company along with their books of accounts and the books of account of the assessee company. In response, the assessee filed written submissions, which the AO did not accept. The director of the supplier company appeared before the AO who recorded his statements and after considering the same along with replies of assessee and other attending facts of the case concluded that the purchases claimed to have been made from the said supplier is bogus and accordingly, made addition of Rs.20,42,24,661/- to the total income of the assessee u/s. 69C of the Act.
With respect to the last addition of Rs.1,00,00,000/- on account of disallowance of insurance claim, the relevant facts are that the AO noticed that the assessee debited insurance claim and 9 3232/Del./2015 written off amounting to Rs.1,00,00,000/- under the head ‘Administrative & Selling expenses’. In response to show cause notice, the assessee explained that he had not claimed the loss of stock due to fire in its Profit and loss account for the year in which the fire broke out, but the said loss was booked in the assets side of the balance sheet as insurance claim receivable. However, since the claim of the assessee was not fully accepted by the insurance company, the same was written off as expenditure. The AO observed that in view of ledger account of the assessee, it was clear that the assessee claimed excess loss of stock and not the actual loss thereof and the Insurance company measured and allowed the claim of Rs.50 lacs only. He, therefore, disallowed the excess claim of insurance written off of Rs.1.00 crore and the added the same to the total income of the assessee.
The assessee challenged all the above additions in appeal before the ld. CIT(A), who after considering the facts of the case, detailed submissions of the assessee, observations of the AO and verdicts of various higher courts, deleted the following additions: and 10 3232/Del./2015 (i). Addition on account of ‘medical expenses’ & ‘workman compensation’. Rs.2,00,000 (ii). Addition on account of difference in sundry creditors. Rs.17,15,837 (iii). Addition on account of difference in purchases. Rs.34,95,471 (iv). Addition on a/c of bogus purchases u/s. 69C. Rs.20,42,24,461 (v) Addition on a/c of unexplained cash credit u/s. 68. Rs.89,72,748 The ld. CIT(A), however, restricted the disallowance of excess interest paid on unsecured loans, from 14,18,666/- to Rs.8,10,666/-, thereby giving a relief of Rs.6,08,000/- to the assessee on this account. He also sustained the addition of Rs.1,00,00,000/- made by the AO on account of disallowance of insurance claim written off. The assessee was aggrieved by the sustenance of additions and the Revenue was not satisfied by the deletion of additions as noted above, hence, both the parties are in these cross appeals before the Tribunal. and 11 3232/Del./2015 10. We have heard the rival submissions and have carefully gone through the entire material available on record and we decide the issues involved in both these cross appeals as under :
Assailing the deletion of disallowance of Rs.1,00,000/- on account of medical expenses, the ld. DR reiterated the observations made by the AO on this count that some of the bills were found not proper. The ld. AR of the assessee, on the other hand, relied on the submissions made before the first appellate authority (A) and findings of the ld. CIT(A) recorded on this issue. On perusal of the records, we observe that the assessee had produced audited books of account before the authorities below and the AO has utterly failed to specify any defect either in the books of accounts or the relevant bills/vouchers of medical expenses placed before him. The learned CIT(A), therefore, has rightly deleted this addition after considering reasonableness of such medical expenditure in the backdrop of total medical expenditure claimed, i.e., 16,60,682/- against total turnover of Rs.62.17 crores. We, therefore, are not inclined to interfere with the conclusion reached by the ld. CIT(A) on this count while and 12 3232/Del./2015 deleting the disallowance made by the AO only on adhoc basis, as adhoc additions are not permissible under the IT Act.
Regarding deletion of Rs.1,00,000/- on account of workman compensation, the ld. DR submitted that the ld. CIT(A) was not justified in deleting this addition ignoring the fact that this amount was not substantiated by any documentary evidence before AO. On the other hand, the ld. AR of the assessee relied on the submissions made before the ld. CIT(A) and the conclusions reached by it. A perusal of the record shows that compensation of Rs.7,50,000/- was paid by assessee through cheques and remaining amount of Rs.1,00,000/- in cash on 08.07.2010 as is evident from the copy of ledger account placed in the paper book. A perusal of computation of income of assessee, we further find that the amount of Rs.1,00,000/- paid in cash already stood disallowed by the assessee itself in its computation of income u/s. 40A(3) of the Act. Therefore, in our considered opinion, the disallowance of this amount of compensation, as made by the AO, would amount to double addition not permissible in the facts and circumstances of the and 13 3232/Del./2015 case. Accordingly, ground No. 1 raised by Revenue deserves to be dismissed.
On the disallowance of excess interest paid on unsecured loans, amounting to Rs.14,18,666/- the contention of the ld. DR is that the ld. CIT(A) was not justified to restrict the addition to Rs.8,10,666/- without appreciating the fact that the payment of interest allegedly made to the two directors of the assessee company was at exorbitant rate of 20% if viewed from the rate of interest paid on other unsecured loans @ 6%. Therefore, the ld. AO was justified to disallow the interest paid in excess of 6%.
On the other hand, the contention of the ld. AR has been that the ld. CIT(A) was not justified in sustaining the disallowance to Rs.8,10,666/- towards interest paid in excess of 12%, thereby giving part relief of Rs.6,08,000/- vide impugned order. On this issue, the ld. AR has filed before us a written synopsis wherein he has made submissions and relied on various documentary evidences as under : “1. Written submissions as filed before CIT(A) at pages A-l to A-19 (relevant pages A-4 to A-5) of the paper book. and 14 3232/Del./2015
2. Letter dated 10/02/2014 filed before AO at pages 46-49 (relevant para 15 at page 48) of the paper book in which it was submitted that Directors of the Assessee Co. Sh. Anand Prakash and Sh. Ravi Prakash had raised loan from M/s Dynamic Weaving Pvt. Ltd. against their personal properties and advanced the same loan simultaneously to the Assessee Co. to fulfill the fund requirement of the Assessee Co. In other words, the Directors were paying interest @20% to M/s Dynamic Weaving Pvt. Ltd and were getting reimbursement from the Assessee Co. and in effect the total interest earned by them from the Assessee Co. was reimbursed to the lender Co. To prove, the same, copy of ITR, computation of income and relevant bank statement of the Directors Sh. Anand Prakash and Sh. Ravi Prakash as filed before the authorities below are placed at pages 50-59 of the paper book.
3. Confirmatory certificate issued by M/s Dynamic Weaving Pvt. Ltd. placed at pages 60 & 61 confirming that loan of Rs.2,00,00,000/- had been advanced to Sh. Ravi Prakash and Sh. Anand Prakash @20% p.a. against equitable mortgage of their land. 4. Copy of A/c of Ravi Prakash and Anand Prakash in the books of M/s Dynamic Weaving Pvt. Ltd., PAN Number and ITR of M/s Dynamic Weaving Pvt. Ltd. for the year under consideration placed at pages 62-64 of the paper book. 5. Comparative chart of interest paid to Directors @20% for the assessment years 2011-12 to 2013-14 towards reimbursement of interest on loan raised by them from M/s Dynamic Weaving Pvt. Ltd. as placed at page 2 of supplementary paper book from which it is evident that interest @ 20% has been allowed in the subsequent years i.e. 2012-13 and 2013-14 by the Dept itself. Copy of assessment order passed u/s 143(3) for the assessment year 2013-14 in the case of the Assessee Co. is placed at pages 5-9 of supplementary paper book. It may not be out of place to mention here that interest @20% amounting to Rs.10,00,000/- each was paid in the assessment year 2012-13 as loan was repaid by the Assessee Co. to its Directors on 01/10/2012 who in turn repaid the loan to M/s Dynamic Weaving Pvt. Ltd. on 04/10/2012 - kindly and 15 3232/Del./2015 refer to certificate of M/s Dynamic Weaving Pvt. Ltd. placed at page 61 of the paper book. As interest has been allowed by the Dept. itself in the subsequent years, therefore, Rules of consistency also apply for which reliance is placed on the following case laws: 193 ITR 321-323 Radhasoami Satsang Vs. CIT, (Supreme Court) also followed by P & H High Court in 278 ITR 262: "We are aware of the fact that, strictly speaking, resjudicata does not apply to income-tax proceedings Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year". 264 ITR 276, CIT VS. ARC Securities Printers (Delhi High Court) relevant portion from page 279 is reproduced below: "In the aforesaid factual background, we fail to appreciate as to how, when there is no change in the business of the assessee, relief under section 80-1 of the Act can be denied to them in respect of some of the assessment years when similar relief is granted for previous and subsequent years. We are of the view that having accepted at least in three assessment years that the assessee's business activity fell within the ambit of section 80-1 of the Act, the Revenue cannot be allowed to now turn around and contend that deduction under the said section is not available to them in respect of the present assessment years. In Union of India vs. Satish Panalal Shah [2001] 249 ITR 221, apex court has also deprecated the practice of the Department in accepting the correctness of a judgment on a particular issue in one case and challenging its correctness in another case". and 16 3232/Del./2015 6. It is also trite law that Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of Directors and assume the role to decide as to how the business is to be run. In this connection, reliance is placed on 288 ITR page 1, S.A. Builders ltd. Vs. CIT (SC) which approved Delhi High Court judgment in 254 ITR 377. Relevant portion of the judgment 2nd para page 8 is reproduced hereunder- "The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency". The court further held at page 9 as under: "We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself)". 7. Rate of interest being charged by the banks during the year under consideration was in the range of 15.75 to 18.25% on clean loans as is evident from the interest rate chart enclosed herewith as Annexure-l to these Synopsis. Beside, this rate of interest, the bank also charges processing fee, documentation fee, insurance charges of properties etc. in the range of 1% to 1.5% P.A. and the process of getting loan sanctioned from bank also involves lot of paper work and compliance to be made for which further cost is required to be incurred. As the Assessee Co. did not have any security of its own to pledge with the bank for availing loans, therefore, it had no alternative but to raise loan through its Directors. In this connection, reliance is placed on Delhi High Court judgment in the case of CIT vs. Shiv Kumar reported in 354 ITR 19 at page 20, in which submission of the assessee was accepted viz. that banks would not lend money without security and if unsecured loans are raised in the market, the rate of interest would be much higher than 18%. and 17 3232/Del./2015 In view of the above, the Ld. CIT(A) was not justified in allowing/restricting the interest paid @ 12% instead of 20%. Therefore, balance interest of Rs.8,10,6667- may kindly be allowed.”
Having considered the rival submissions in the light of findings of the authorities below, submissions of the assessee and various decisions relied on, we find considerable substance in the contentions of the assessee. It is worthwhile to point out that the ld. CIT(A) has restricted the disallowance based on his assumptions only and not on any cogent material on record. Such a disallowance, in our opinion, would amount to adhoc disallowance, not permissible under the Act. The ld. CIT(A) appears to have supported his assumption of rate of interest at 12% as reasonable by following reasons: (i). It is not clear as to what was the constraining factors which led the assessee to borrow from their directors at exorbitant rate of 20%.
(ii). The assessee could borrow the amount from financial institutions or commercial banks at the rate lower than 20%.
(iii). The lender company is not engaged in the primary business of advancing loans. and 18 3232/Del./2015 (iv). If the assessee has managed unsecured loans at the rate of 6% from other lenders, the loan with interest rate of 20% would be unreasonable from the point of view of a prudent businessman.
(v). All unsecured loans from different lenders would not bear uniform rate of interest.
We observe that the aforesaid reasons considered by the ld. CIT(A) for disallowance of assessee’s claim of interest are not tenable in view of the submissions made on behalf of the assessee duly supported by documentary evidence. The constraining factors to borrow the amount from/through directors is well explained by the assessee that the rate of interest being charged by the banks during the year under consideration was in the range of 15.75 to 18.25% on clean loans. This fact is evident from the clean from the interest rate chart enclosed filed with its written synopsis. There is also nothing on record to rebut the contention of the assessee that the banks also charge processing fee, documentation fee, insurance charges of properties etc. in the range of 1% to 1.5% P.A. and the process of getting loan sanctioned from bank also involves lot of paper work and compliance to be made for which further cost is required to and 19 3232/Del./2015 be incurred. In the light of these explanations, the interest payment at the rate of 20% on the impugned unsecured loans cannot be said to be exorbitant or unreasonable. We also do not find any material on record to disregard the contention of the assessee that the Assessee Co. did not have any security of its own to pledge with the bank for availing loans, therefore, it had no alternative but to raise loan through its Directors. Hon’ble jurisdictional High Court in the case of CIT vs. Shiv Kumar (supra), has accepted the submissions of the assessee in that case that banks would not lend money without security and if unsecured loans are raised in the market, the rate of interest would be much higher than 18%.
Apart from the above the version of the assessee stands supported by several documentary evidences such as copy of ITR, computation of income and relevant bank statement of the directors Sh. Anand Prakash and Sh. Ravi Prakash, placed at paper book page 5—59, Confirmatory certificate issued by M/s. Dynamic Weaving Pvt. Ltd., the original lender, placed at page 60 & 61, copy of account of both the directors in the books of M/s. and 20 3232/Del./2015 Dynamic Weaving Pvt., Ltd. along with its PAN and ITR placed at pages 62-64, comparative chart of interest paid to directors @ 20% for A.Yrs. 2011-12 to 2013-13 toward reimbursement of interest on loan raised by them from M/s. Dynamic Weaving Pvt. Ltd. and so on. Moreover, the Department itself has accepted the claim of interest paid @ 20% to the same directors in A.Y. 2012-13 and 2013-14 as is evident from the respective assessment orders of the assessee company. The ld. DR utterly failed to repudiate the contention of the assessee that the interest @ 20% amounting to Rs.10,00,000/- each was paid to its directors in 2012-13 as the loan was repaid by the assessee on 01.10.2012 the directors in turn repaid the same to M/s. Dynamic Weaving Pvt. Ltd. on 04.10.2012. In view of this applying the rule of consistency, the authorities below should have allowed the claim of assessee in view of decisions in the case of Radhasoami Satsang vs. CIT (supra) and CIT vs.ARG Securities Printers (supra). The other reasons assigned by the ld. CIT(A) are also not tenable in the eye of law in view of the decision of Hon’ble Supreme Court in SA Builders Ltd. vs. CIT(supra) and of Hon’ble Delhi High Court reported in 254 ITR 377. and 21 3232/Del./2015
In view of above discussion, we are not inclined to endorse the conclusion reached by the ld. CIT(A) and the addition sustained by him on this account deserves to be deleted. Accordingly, ground No. 1 of the assessee’s appeal deserves to be allowed and ground No. 2 of revenue’s appeal is dismissed.
Regarding the addition of Rs.17,15,837/- on account of difference in sundry creditors, and Rs.34,95,471/- on account of difference in purchases, the ld. DR submitted that the AO found a difference between the amounts claimed by the assessee as sundry creditors and as purchases and the amount confirmed by some of the sundry creditors and sellers. Some of the confirmations were not received. Therefore, the AO was justified to add the difference of Rs.17,15,837/- in sundry creditors and of Rs.34,95,471/- in purchases to the total income of the assessee, which have wrongly been deleted by the ld. CIT(A).
On the other hand, the ld. AR of the assessee relied on the submissions made before the ld. CIT(A) and the findings reached and 22 3232/Del./2015 by him on this account. It was further submitted that reconciliation statement of difference was filed before the Assessing Officer and party-wise explanation of the alleged differences was offered before the first appellate authority. The AO did not consider the explanation of the assessee and the reconciliation statements given at all. Therefore, the ld. CIT(A) was quite justified in deleting the additions.
We have considered the rival submissions and have gone through the entire material available on record. It is not in dispute that there was considerable difference in the amounts of sundry creditors as well as in the purchases made from different parties as claimed by the assessee and as confirmed by the sundry creditors and various sellers from whom the assessee made purchases. The ld. CIT(A) has accepted the explanations of the assessee observing that the Assessing officer has not given any reason for not accepting the veracity of reconciliation statement and that the payments to the sundry creditors and the alleged sellers were made through banking channels. However, the ld. CIT(A) has not recorded any finding that the reconciliation and 23 3232/Del./2015 statements furnished by the assessee regarding the impugned differences, were found verifiable from the books of accounts of assessee and that of sundry creditors as well as the sellers. It is no doubt true that the assessee had submitted reconciliation statements before the AO and the AO did not make thorough enquiry with reference to the books of account of the assessee as well as the books of sundry creditors and sellers, so as to verify the same before rejecting the explanation of the assessee. The crucial fact to be ascertained for adjudication of this issue is that the amounts claimed by the assessee should be cross-tallied with the accounts of sundry creditors and the sellers of goods. We, therefore think is appropriate to remit both these issues back to the file of Assessing Officer to properly examine the reconciliation statement filed by the assessee with reference to party-wise explanation furnished before the first appellate authority, as reproduced in the impugned order. After making proper enquiries, the AO shall decide these issues afresh after providing reasonable opportunity of being heard to the assessee. Accordingly, grounds Nos. 3 & 4 of the Revenue’s appeal are allowed for statistical purposes. and 24 3232/Del./2015
Assailing the deletion of addition of Rs.20,42,24,661/- made by AO on account of bogus purchases u/s. 69C, the ld. DR relied on the findings reached by the Assessing Officer and submitted that the ld. CIT(A) was not justified in deleting the addition ignoring the fact that the assessee failed to prove the genuineness of the purchase transactions.
On the other hand, the ld. AR relied on the submissions made before both the authorities below and the conclusions reached by the ld. CIT(A).
We have considered the rival submissions and have gone through the entire material available on record and we find no justification to interfere with the order of the ld. CIT(A) on this count. A perusal of the assessment order reveals that the Assessing Officer has treated the impugned purchases as bogus on the basis of discrepancies noted by him that the letter issued to M/s. Prakash Marketing Pvt. Ltd. u/s. 133(6) at his registered officer returned back un-served; that the supplier M/s. Prakash Marketing Pvt. Ltd. failed to produce the freight bills for and 25 3232/Del./2015 transportation of goods from Delhi to Meerut and there was vast difference between the amount of freight charges debited to the P&L Account, i.e. Rs.1,41,161/- for whole year and the amount of freight (Rs. 3 lacs approx. per month) told by director of supplier company in his statement before the AO; that the supplier company does not have any godown at Delhi as stated by its director in its statement; and that the supplier company failed to produce their purchase bills, cash payment vouchers to their suppliers and to prove the identity of its sundry creditors. Based on these discrepancies, the ld. Assessing Officer made addition of Rs. Rs.20,42,24,661/- as bogus purchases u/s. 69C. The ld. CIT(A) after considering the detailed reply given by the assessee and making an elaborate discussion on the issue deleted the addition observing as under :
“8.6 I have carefully gone through the assessment order as well as the written submission of the AR. The copy of entire set of submissions made by the AR was forwarded to the AO for his comments. The AO vide his letter dated 07.05.2015 repeated the same arguments which were made in the assessment order. It is important to note here that the AO has not rejected the books of account nor has he cast any doubt about the genuineness of sales made by the appellant, it is only the purchases which have been held as bogus. The appellant is a manufacturing company. In order to produce finished goods the manufacturer will have to and 26 3232/Del./2015 purchase raw materials. This is a fact which no reasonable person can dispute. But suppose, for argument's sake, it is accepted that the AO is right in treating a part of purchases as bogus. What would be the consequence of such an assertion ? What would be the impact of such assertion on the trading account of the appellant company ? We can understand this by doing the following analysis. For the A.Y 2011-12 the appellant company has shown the following trading figures in its audited trading account. Cost of raw material Sales- 62,17,48,614/- consumed = 27,89,56,500/- Manufacturing expenses Other income = 9,88,021/- 23,84,34,176/- Gross profit- 11,97,41,082/- Increase in stock = 1,43,95,123/- From the above it can be seen that the gross profit percentage shown by the assessee is 18.79%. Now suppose the purchases from the supplier company is reduced from the cost of raw material consumed. In this situation the computation of G.P, will be as follow:- Cost of raw material consumed Sales = 62,17,48,614/- 27,89,56,500 - 20,42,24,661 - 7,47,31,839/- Manufacturing expenses = Other income = 9,88,02 1/- 23,84,34,176/- Gross profit = 32,39,65,743/- Increase in stock 1,43,95,123/- From the above analysis it can be seen that if purchases worth Rs. 20,42,24,661/- is treated as bogus the G.P. of the appellant company shoots to 50.8% which in my opinion is extremely unlikely. 8.7 It is also to be kept in mind that the appellant has followed the same method of accounting consistently year after year and there is no change in its method of accounting during the concerned previous year. The PBDIT of the appellant has been in the range of 10 to 12% during the last two previous years. The ratio of raw material consumed to sales has been in the range of 1 to 2.25 during last two years. In others words there is nothing new in the accounts of the appellant during the concerned year. and 27 3232/Del./2015 8.8. There is another important point which is to be kept in mind. This is, as to what should be reasonable ratio between cost of raw material consumed and sales. For this purpose study of trading accounts of some paper manufacturing companies was made. A sample result of three such company is as follows:- (Figure in Rs. Crores for A.Y 2011-12 Name of the company Cost of material Value of sales consumed 1. Sree Sakthi Paper Mills 113.35 183.07 2. Star Paper Mills 112.71 259.59 3. Sirpur Paper Mills 155.84 364.59 If we compare the result of the appellant company with the result of the above mentioned concerns, we can see that the result shown by the appellant is comparable with others. However if the assertion of the AO that purchases worth Rs. 20,42,24,661/- is bogus is taken to be true the ratio of value of raw material consumed to sales in the case of the appellant would become almost 1:8. This ratio is again unbelievable. 8.9 In the assessment order, the entire focus of the AO was to discredit the state of affairs of the supplier company. But the moot question here is, even if the state of affairs of the supplier company is doubtful, what impact does it make on the books of the appellant. The appellant has debited the purchases in its books of accounts. It books were examined by the AO. It is an undisputed fact that the payment for purchases were made through account payee cheques. The appellant is a company which is subject to multiple audit test checks. Its accounts are audited under the provision of company law as well as under the provision of income tax law. The appellant is a manufacturing concern and consequently it has to submit its trading result before the Central Excise authorities also. In the return filed before Central Excise authorities figures of purchases and sales are required to be given. Similarly return is also required to be filed before commercial tax authorities wherein details of sales and purchases are also required to be given, Thus, It seems highly unlikely that and 28 3232/Del./2015 the appellant company would make payment for purchases through cheques but would not make any purchases in reality. It also seems unlikely that the appellant would inflate purchases, fudge its books of accounts and get away from the scrutiny of not one but three taxing departments namely, income tax, central excise and sales tax. 8.10 In the detailed discussion in the assessment order the AO has not – 1. Made any purchases to sales ratio analysis.
2. Doubted the sales, manufacturing expenses and other major expenses, 3. Doubted that finished goods have not been produced by the appellant 4. Doubted that payment for purchases have not been made through banking channels.
5. Doubted that bank account of the appellant is not debited by issue of cheques in favour of the supplier company.
6. Doubted that bank account of the supplier cortfpany has not shown matching credit entries. Instead of above points the AO has focused his entire attention to discredit the supplier company on circumstantial evidences. The AO seems to have lost sight of the fact that he was making an assessment of the appellant company and not of the supplier company. 8.11. It is interesting to note that the AO has quoted appellant's submissions that it is not possible to manufacture finished papers without there being the corresponding purchases of waste paper. However, he has brushed aside the submissions of the appellant by saying that that there are many possibility to make purchases by other means. Thus the AO has not denied that purchases per se have not been made, his only contention is that purchases made from the supplier company is unverifiable. However the hard facts of the transaction between the appellant and the supplier company are – and 29 3232/Del./2015 1. The supplier is a company incorporated as per the provision of companies act, 1956. It is a legal entity which can not be said to be non-existing. Further the supplier company was incorporated prior to the incorporation of the appellant company.
2. The supplier company is regularly filing its return of income.
3. The supplier company has supplied goods to parties other than the appellant company.
4. The appellant company has made payment for purchase through cheques.
5. The suppliers company has shown corresponding sales in its books and corresponding credit in its bank account.
6. The raw material have been transported from outside Uttar Pradesh. The necessary details as contained in form xxxviii issued by the commercial taxes department has been submitted before the AO. From a perusal of these forms it can be seen that the supplier company has transported paper waste for the use of appellant company. Considering the totality of above points the genuineness of transaction between the appellant company and the supplier company is established. 8.12 In the above paras we have seen, step by step that -
1. 1. There cannot be any manufacturing without purchase of raw materials.
2. If purchases of raw material worth Rs. 20,42,24,661/- is treated as bogus the G.P. of appellant company will shoot to more than 50%.
3. If purchases of raw material worth Rs. 20,42,24,661/- is treated as bogus the ratio of cost of raw material to sales would become 1:8 which is highly unlikely and unprecedented.
4. Lastly as per para 8.11 above there are enough hard evidences to suggest that the appellant has genuinely purchased material from the supplier company. On the other hand the queries raised by the AO in the assessment order has been sufficiently answered by the appellant both during and 30 3232/Del./2015 the assessment and the appeal proceeding. The starting point of the ACTs enquiry is from the fact that the notice issued by the AO was not served at the supplier company's address at Delhi. However the AO has not made any comment as to how notice issued by JCIT, Range-1, Meerut, was served at the same address in Delhi. Purchases being the basic component in any trading and manufacturing activity can not be held to be bogus on the basis of circumstantial evidence. 8.13 In a recent judgment given by the jurisdictional Allahabad High Court in the case of CIT Vs Jagdish Prasad Tewari 220 Taxmann 0141 (2014), it has been held that if the payments have been made by cheques and are reflected in the books of account of the assessee, no adverse inference can be drawn. In a judgment given by the Calcutta High Court in the case of Diagnostics Vs CIT 334 ITR 111 on a similar question, it has been held by the Hon'ble Court that ''if an assessee took care to purchase material by way of account payee cheques from a third party and subsequently, three years after the purchase, the said third party does not appear before the AO pursuant to the notice or even has stopped business, the claim of the assessee on that account cannot be discarded as non-existence ". 8.14 Considering the totality of facts and judicial pronouncements, I have come to a conclusion that there is enough material on record to suggest that the purchases made by the appellant from the supplier company are genuine. The grounds of appeal no, 7 is allowed and accordingly addition of Rs. 20,42,24,661/- is deleted.”
As far as the doubt of the Assessing Officer on the existence of the supplier company and other objections which led the AO to term the impugned purchases as bogus stand perfectly rebutted by the assessee and genuineness of the purchases made by the assessee from M/s. Prakash Marketing Pvt. Ltd. stand and 31 3232/Del./2015 undoubtedly proved by the following facts and evidences placed before the authorities below :
(i). M/s Prakash Marketing Pvt. Ltd. is dealing in waste paper, which is one of the basic raw materials of the assessee company, and has sold waste paper to many other paper mills, which proves that it is dealing in waste paper. The copies of the sales account and ledger accounts of all the parties to whom goods were sold by the said company during the relevant year, as appearing in the books of the said company were placed before the authorities below.
(ii). Copies of the audited balance sheet of the said supplier company for the FY 2010-11 & 2011-12 were placed before the lower authority.
(iii). Copies of the sales tax returns of the M/s Prakash Marketing Pvt. Ltd. for FY 2010-11 were placed wherein the total sales as shown in the profit & loss account has been declared.
(iv). Copies of Form 38 which is the declaration Form issued by commercial tax department of U.P. for import of goods from outside the state. These declaration forms for import of goods are issued by the U.P. Purchaser to the Ex. U.P. supplier in advance to ascertain the supply of goods after and 32 3232/Del./2015 filling in all the details of the consignments including the bills and bilties through which the goods are transported. Copies of all such import declaration forms-38 as issued by the appellant to M/s Prakash Marketing Pvt. Ltd. were said to have been produced before the AO. in physical during the course of the assessment proceedings for his verification. Hence, the objection of AO regarding non-submission of freight bills is not tenable, as the movement of goods stands corroborated from the above road permits (Forms-38).
(v). Copies of the ledger account of said company as appearing in the books of the assessee for three years i.e. FY 2009-10, 2010-11 & 2011-12 were placed before the lower authority, showing that all the payments have been made through proper banking channels.
(vi). Copy of bank statement of M/s Prakash Marketing Pvt. Ltd. were produced to support the contention that all the payments made by the assessee to the supplier company were duly credited to their bank accounts only.
(vii). The copy of the sanction letter of limit of Rs.4 crore, as sanctioned by the Punjab National Bank, to the M/s Prakash Marketing Pvt. Ltd. was also placed on record. and 33 3232/Del./2015 (viii).The notice u/s 133(6) issued to the said company on second occasion were duly replied. Copies of the said notice and the reply filed are placed on record.
(ix). The director of the said company, namely Sh. Vineet Aggarwal, appeared before the Id. A.O. and confirmed the sale of goods to the appellant. Copy of the statement on oath of Sh. Vineet Aggarwal are available on record.
(x). Copies of sales tax and excise return of the assessee company as filed with the concerned departments for the period FY 2010-11, as filed during the course of the assessment proceedings vide submission dated 18.11.2013 and 29.11.2013 are placed on record.
It is also borne out on record that the AO has not doubted the genuineness of sales; that the assessee is a manufacturing company and consumption of raw material is an essential ingredients of finished products sale. A perusal of impugned order will reveal that the ld. CIT(A) has also tested the conclusions of the AO on the anvil of trading account declared by the assessee giving profit rate of 18.79%. He has also observed that the assessee during the year under consideration has declared sales at Rs.62,17,48,614/- against cost of raw material and 34 3232/Del./2015 consumed of Rs.27,89,56,500/- and manufacturing expenses of Rs.23,84,34,176/-, which after considering the other income of Rs.9,88,021/- declared by assessee, gives gross profit of Rs.11,47,41,082/- representing to 18.79% with increase in stock of Rs.1,43,95,123/-. We, therefore, find substance in the observations of the ld. CIT(A) that if the purchases made from said supplier company worth Rs.20,42,24,661/- are deducted from the cost of raw material consumed, it will given GP of 50.8% which is not at all feasible in the trade of assessee. It is also not the case of Revenue that the ratio of raw material consumed to sale by the assessee during the year does not commensurate to such ratio declared by the assessee in preceding assessment years, rather it stands parallel to the material consumed in preceding years. Not only this, the trading results of the assessee company was also found parallel to other paper mills during the year under consideration as examined by the ld. CIT(A) in the impugned order, against which there is nothing from the side of Revenue. The Revenue has utterly failed to rebut the reasonable analysis made by the ld. CIT(A) while accepting the impugned purchases as genuine. and 35 3232/Del./2015
A perusal of the impugned order further reveals that there are other several glaring facts in the instant case, which if taken into account, there would remain no justification to raise a finger on the genuineness of the impugned purchases. Such facts have been well enumerated by the ld. CIT(A) in the impugned order as under : 1. The supplier is a company incorporated as per the provision of companies act, 1956. It is a legal entity which cannot be said to be non-existing. Further the supplier company was incorporated prior to the incorporation of the appellant company.
2. The supplier company is regularly filing its return of income.
The supplier company has supplied goods to parties other than the appellant company.
The appellant company has made payment for purchase through cheques.
The suppliers company has shown corresponding sales in its books and corresponding credit in its bank account.
The raw material have been transported from outside Uttar Pradesh. The necessary details as contained in form xxxviii issued by the commercial taxes department has been submitted before the AO. From a perusal of these forms it and 36 3232/Del./2015 can be seen that the supplier company has transported paper waste for the use of appellant company.
The ld. CIT(A) has further observed that the Assessing Officer has not -
1. 1. Made any purchases to sales ratio analysis.
2. Doubted the sales, manufacturing expenses and other major expenses, 3. Doubted that finished goods have not been produced by the appellant 4. Doubted that payment for purchases have not been made through banking channels.
5. Doubted that bank account of the appellant is not debited by issue of cheques in favour of the supplier company.
6. Doubted that bank account of the supplier cortfpany has not shown matching credit entries.
Following facts emerged in the instant case also could not be rebutted on behalf of the Revenue :
There cannot be any manufacturing without purchase of raw materials.
2. If purchases of raw material worth Rs. 20,42,24,661/- is treated as bogus the G.P. of appellant company will shoot to more than 50%. 3. If purchases of raw material worth Rs. 20,42,24,661/- is treated as bogus the ratio of cost of raw material to sales would become 1:8 which is highly unlikely and unprecedented. 4. Lastly as per para 8.11 above there are enough hard evidences to suggest that the appellant has genuinely purchased material from the supplier company. On the and 37 3232/Del./2015 other hand the queries raised by the AO in the assessment order has been sufficiently answered by the appellant both during the assessment and the appeal proceeding. The starting point of the ACTs enquiry is from the fact that the notice issued by the AO was not served at the supplier company's address at Delhi. However the AO has not made any comment as to how notice issued by JCIT, Range-1, Meerut, was served at the same address in Delhi. Purchases being the basic component in any trading and manufacturing activity can not be held to be bogus on the basis of circumstantial evidence.
In the totality of facts and circumstances and in view of the above discussion, we, therefore, find no justification to interfere with the well reasoned order of the ld. CIT(A), deleting the addition on this count. Accordingly ground No. 5 of the Revenue’s appeal is dismissed.
Similarly with respect to deletion of addition of Rs.89,72,748/- on a/c of unexplained cash credit u/s. 68, the ld. DR relied on the order of the AO and the ld. AR of the assessee relied on the submissions made before the first appellate authority and the findings reached by ld. CIT(A) in the impugned order. and 38 3232/Del./2015 31. On this issue also we do not find any justification to interfere with the order of the ld. CIT(A), who while deleting the addition has held as under : “9.3 I have considered the rival submissions as above. First of all it is seen from the facts of the case that the amount of Rs. 89,72,748/- has been shown as the opening balance of the amount payable to M/s Prakash Marketing Pvt. Ltd. The same amount has also been shown as receivable by the said party in the copy of ledger account filed by it before the AO. Further the appellant has paid the said amount during the relevant year through banking channels. It seems from the facts that M/s Prakash Marketing Pvt. Ltd. had entered the transaction of loan in their books in the name of M/s Sumit Agro Products Ltd. which was the earlier name of the appellant company. Considering the totality of facts, it seems that the AO has drawn wrong conclusion on this issue as the transaction in question is appearing as opening balance in the account book of both the appellant and M/s Prakash Marketing Pvt. Ltd. It is also to be considered here that there is no fresh credit of Rs. 89,72,748/- in the books of account of the appellant company during the concerned previous year and for this reason alone no addition can be made u/s 68 of the IT Act, 1961 because it is a necessary condition for the application of section 68 that an amount should be found credited in the previous year(emphasis given). Based on above discussion, the grounds of appeal no. 8 is allowed and the addition of Rs. 89,72,748/- is deleted.”
We do not find any material available on record to counter the findings reached by the ld. CIT(A) on this issue. The ld. DR failed to controvert the reasonings recorded by the ld. CIT(A) based on books of accounts of both the assessee company and the supplier company. Therefore, the deletion of addition u/s. 68 of and 39 3232/Del./2015 Rs.89,72,748/- also deserves to be sustained. Accordingly, ground No. 6 of the Revenue’s appeal is also dismissed.
Ground No. 7 raised in Revenue’s appeal challenging the deletion of addition of Rs.1,00,00,000/- on account of insurance claim, is misconceived, as the ld. CIT(A) has sustained this addition in the impugned order. Hence, this ground of appeal does not emerge from the impugned order and is accordingly not maintainable. However, the assessee vide ground No. 2 of its appeal has challenged the sustenance of this addition and contended that the written explanations offered by the assessee on this issue have not been considered by the ld. CIT(A) in right perspective.
We have heard the rival submissions on this issue. On perusal of the record, we find that the assessee has submitted before us copies of following documents with respect to loss of stock claimed in fire accident :
(i). Communication between assessee and Excise Deptt. Regarding reversal of the input excise credit on the and 40 3232/Del./2015 raw material destroyed in fire and documentary evidences regarding reversal of CENVAT credit and payment of custom duty on imported waste paper destroyed in fire at pages 553-559 of the paper book.
(ii). Quantitative stock register as prescribed by the Excise Dept. showing loss of quantity and verification by Excise Deptt. Placed at pages 560-565.
(ii). Copy of stock statement of the Assessee showing loss due to fire for the assessment year 2009-10 placed at page 547 of the paper book.
(iii). Copy of CST, VAT and Entry tax assessment order for the FY 2008-09 viz. the year in which stock was destroyed due to fire placed at pages 13-32 of the supplementary paper book and affidavit at page No. 34 to 35 of MD of the Company.
(iv). Copy of ledger A/c of insurance claim receivable for the assessment years 2009-10 to 2012-13 placed at pages 543-546 of the paper book.
On perusal of the orders of authorities below, we find that none of the authorities has examined the issue of actual loss incurred in fire with reference to the aforesaid books of accounts and evidences. The AO has observed that insurance claim was allowed by the Insurance Company at Rs.50 lacs, which figure does not stand corroborated by any material or evidence on record. The observation of the ld. CIT(A) that the amount of and 41 3232/Del./2015 insurance claim actually received at 3,40,338/- could only be claimed as deduction, also does not appear appealing to reason, for the amount of claim actually received cannot be treated as allowable on account of loss of stock. The contention of the assessee has been that he had claimed total loss of Rs.1,04,62,653/-, which after being adjusted with the receipt of claim of Rs.3,40,338/- on dated 02.03.2012, remained at Rs.1,01,22,315/-. Out of this amount, the appellant has written off Rs.1,00,00,000/-during the year under appeal and remaining Rs.1,22,315/- during A.Y.2012-13 and the loss claimed during A.Y.2012-13 stands allowed u/s 143(1). It is no doubt true that the assessee has made this claim by making an entry under the wrong nomenclature as “excess claim written off”, but in our opinion, nomenclature of an entry would not change the actual characteristics of the actual claim made by the assessee. In fact, the authorities below were required first to ascertain as to how much stock was available with the appellant on the date of fire accident, what was the insurance cover with respect to loss of stock, what was the actual loss of stock in fire and under what circumstances, the part of the loss claimed by assessee was and 42 3232/Del./2015 accepted in the subsequent assessment year 2012-13. No exercise appears to have been made by the authorities below first to ascertain these facts with reference to the books of accounts & evidences furnished by assessee or by way of other inquires from the respective competent authorities before deciding the claim of the assessee. Besides, for want of any explanation by assessee, we fail to understand as to why and how the assessee has written off partial claim of insurance amounting to Rs.1 crore in the year under consideration before final settlement of such claim by the Insurance company which was allowed at Rs.3,40,388/- in the subsequent year 2012-13 on 02.03.2012. The assessee is also required to clarify this position. In presence of these facts, we think it expedient in the interest of justice to restore this issue to the file of the AO to make thorough examination/enquiries in the matter and to decide the issue afresh in the light of observations made in the body of this order above. The assessee is directed to furnish all the books of accounts or evidences to support its claim before the AO and to cooperate with him in the matter. Needless to say, the assessee shall be given reasonable opportunity of being heard before deciding the issue afresh. As a and 43 3232/Del./2015 result, ground No. 2 of assessee’s appeal deserves to be allowed for statistical purposes.
In the result, the both the appeals of assessee and Revenue are partly allowed for statistical purposes. Order pronounced in the open court on 12.05.2017.