ITO, MEERUT vs. M/S. JAYANTI PRASAD JEEVAN LAL JAIN, MEERUT

We have carefully considered the rival contentions. Now coming to ground No. 1 of the appeal of the revenue wherein ld CIT(A) deleting the addition u/s 68 of Rs. 1807239/-has held as under:- “3.1 Ground No 2 contests the addition of Rs 18,07,239 under section 68 to the total income of the assessee in respect of sundry creditors. 3.2 The assessee company is engaged in the manufacture and trading of silver, gold and diamond jewellery. In the assessment order, the AO has recorded that notices under section 133 (6) of the Act were issued to 42 parties, from whom raw material had been purchased, at the addresses provided by the' assessee. The addition referred to in this ground of appeal relate to 4 parties in which the notices issued were returned unserved as the party could not be traced by the postal authorities or the addresses given were incomplete. It is noted that the four parties have been listed at serial numbers 1 to 4 on page 3 of the assessment order; Besides the remark given against each such party, there is no discussion in the entire order specifically relating to the four parties except at page 8 wherein it has been said that credit balances of these parties are held to be bogus and added to the total income of the assessee. -On perusal of the assessment order, this disallowance appears to have been made on account of the failure of the assessee to discharge onus in establishing the genuineness and authenticity of the purchases made from these parties. In the submissions dated 12.09.2013, filed during the appellate proceedings, it has been explained that the amount represents purchase of old gold jewellery and the credits arising out of such transactions in the name of the parties have subsequently been 'adjusted .against sale of new jewellery to the same parties. Details of the same have been given in the Annexure 2 to the submissions dated 12.09.2013. It is noted that the aggregate purchase of old jewellery from the four parties was Rs 30,53,113 whereas the aggregate sale to these parties was of Rs 26,28,724 (up to 31. 03. 2010) and thereafter of Rs 4,90,271 in the subsequent financial year. In the case of each of these four parties, sales were effected of value more than purchases from them and the difference was .settled by receiving the difference in cash. The AO has made the addition adopting -the aggregate value of purchase in the case of two parties and the net credit outstanding as at the end of the year in two cases. It has been, stated that all the transactions with the parties are duly reflected in the Ledger account and are supported by bills of purchase and sale. The Addl. CIT, Range 1, Meerut has given his comments on the submissions made by the-assessee ip the letter dated 12.09.2013. The comments have been given in the report dated 30.09.2013. The submissions of the assessee have not Page 4 of 9 been controverted in the said report. As a measure of abundant precaution, the assessee was asked to obtain confirmation from Shri Zahiruddin, the only party from whom purchases was in excess of Rs 10 lakhs. The same was obtained and was forwarded to the AO for comments, if any. The AO required, the assessee to produce this individual, who appeared and confirmed the transaction. A report in this regard has been furnished by the AO in his / letter dated 22.10.2013. 3.3 The facts and in considered. It is noted that due diligence has not been exercised by the AO while making the addition as evident from the fact that two cases, the addition has been made for the entire purchases made from the parties concerned, whereas in two other cases, only the credit balances at the end of the year have been added. Moreover, the AO was apparently not examined the nature of such purchases, which related to old jewellery against which sales have been made. The AO is not at all considered what treatment is to be accorded to the sales to these parties if the purchases are held to be bogus. Moreover, as a test case, verification was carried out in the case of one of the parties and no adverse comments have been given by the AO. If indeed both purchases and sales were to be bogus, the books of accounts-of the assessee ought to have been rejected by the AO, which has not been done. Accordingly, the addition to the total income cannot be sustained.”

The Ld. CIT appeal has deleted the above addition with respect to for parties in whose case the notices were issued and were returned on served as the party could not be traced by the postal authorities for the addresses given were in complete. He further held that without rejecting the books of accounts of the assessee the additions made by the Ld. assessing officer holding that the purchases and sales were bogus. He was further of the view that when the jewellery purchases have been sold it cannot be said that purchases were bogus. Even during the course of hearing before him he has also got confirmation of the parties and also put it across before the assessing officer and then after obtaining the remand report deleted the addition. The Ld. departmental representative could not point out any infirmity in the order of the learned 1st appellate authority, in view of this we confirm his finding in deleting the addition of Rs. 18,07,239/– under section 68 of the act to the total income of the assessee in respect of sundry creditors. In the result ground No. 1 of the appeal of the revenue is dismissed.

Ground No. 2 of the appeal of the revenue is against deletion of addition of Rs. 4, 94, 31, 314/-being bogus purchases to whom the enquiry letters percent under section 133 (6) of the IT Act sent by the Ld. assessing officer in which remained on complied even then the addition has been deleted by Page 5 of 9 the 1st appellate authority. The Ld. CIT (A) deleted the addition wide para No. 4.2 and 4.3 of his order holding as under:- “4.2 As mentioned above, the AO had issued enquiry letters to several parties. From the assessment order, the addition appears to have been made in respect of parties at serial number 1 to 22 listed on page 3 and 4 of the assessment order (the purchase made for an aggregate of Rs 1,61,30,657) and 5 parties listed on page 5 (the-purchase made for an aggregate of Rs 3,33,00,657). The additions have been made on the-ground that the purchases could not be verified since the notices issued to such parties had been returned back/remained uncomplied. During the appellate proceedings, it was explained that all such purchases were fully supported by purchase vouchers. The purchases made were of two types namely purchases of old jewellery and other purchases. Insofar as the 22 parties were concerned, these relate to purchase of old jewellery and the amount payable for such purchases were either settled by the sale of new jewellery amounting to Rs 1,00,90,438 (which includes net additional amounts being the difference between the purchase and sale value of the jewellery received/paid amounting to Rs 2,24,754) or by payment by account payee cheques amounting to Rs 62,64,973. These details have been given in Annexure 3 of the submissions dated 12. 09. 2013. Insofar as the 5 parties are concerned, all payments have been made by account payee cheques. It was also explained that confirmation of 4 of the parties (Smt Varsha Jain,Prem Impex,Smt Mamta Gupta & Smt Prakashwati)had been received by the AO and had been found to be available on records during the inspection taken at the tirrie of appellate proceedings. The balance 1 party was Jayanti Prasad Jeevan Lal Jwellers Pvt Ltd, a sister concern of the assessee company which was assessed to tax in the same circle where the assessee was assessed to tax i.e. ACIT, Circle 1, Meerut. These facts have been recorded on page 2 of the submissions dated 12.09-2013. It is noted that the Addl CIT,Range I, Meerut in his report dated 30.09.2013 on the said submission, has not controverted the contention made in the letter dated 12.09.2013. Never the" less, as a measure of abundant precaution, the assessee was required to file confirmation is of the parties out of the 22 parties in cases where the purchases from them was in excess of Rs 10 Jjjkhs. These were furnished and were forwarded to the AO for comments, if any. The AO required the assessee to produce three of these parties who have appeared and confirmed the transactions. A report in this regard has been furnished by the AQ in his letter dated 22.10.2013. 4.3 The haphazard manner in which the AO has proceeded with the assessment is evident from the fact [hat additions have been made' of substantial amount in respect of the purchases from, 4 parties whose confirmation is already available on record, apparently having been filed during the assessment, proceedings. As regards the purchases from 22 parties, these relate-to purchases of old jewellery and the verification carried out by the AO during the remand proceedings in respect of sample of such parties, have not resulted in any conclusion on which the addition can be Page 6 of 9 sustained. The AO has completely failed to analyse the facts of the case and has proceeded in summary manner without examining the nature of the transaction and/or the evidence is on record. Obviously, the assessee has also not beei? confronted before making the disallowances. It is also noted that the fact that assessee had made payment through account payee cheques in respect of 5 of the parties, from whom the bulk of the purchases have been made, has been completely overlooked by the AO. It is further noted that while the onus does lie on the assessee to prove the genuineness of the.purchases, the mere availability or lack of confirmation of the transaction from the counterparty is not determinant of the genuineness of the transaction. The genuineness of the transaction has to be analysed with reference to the nature of the business carried on by an assessee, the accepted trade practices, other evidences in the form" of purchase vouchers as also payments made through banking channels for such purchases. It is noted that payments through banking channels have been made not only for the purchases made from the 5 parties but also substantial amount through banking channels have been paid in respect of purchase of old jewellery. It cannot be denied that in the business of retail jewellery sale, the purchase of old jewellery and the remaking of such jewellery/sale of jewellery against such purchases, is a normal activity. If indeed the version of the AO is accepted, he ought to have specified how does he propose to deal -with the sales shown in the books of accounts, to have been made to the same parties from whom the old jewellery was purchased.”

The Ld. CIT appeal deleted the addition on the expression that all the such purchases were fully supported by purchase vouchers and the payments made substantially through account payee cheques. With respect to the 22 parties he has examined the details as furnished by the assessee wide Annexure 3 of the submission dated 12/09/2013 which was also put for the examination of the Ld. assessing officer also. He further obtained the conformation out of those 22 parties whereas the purchases from them were in excess of Rs. 10 Lacs and same was also forwarded to the Ld. assessing officer for his comments. In absence of specific comments from the Ld. assessing officer he deleted the addition. Ld. departmental representative could not submit that when the full purchases, which were objected to by the Ld. assessing officer, were confirmed and also put for remand report by the assessee what infirmity in the order of the Ld. CIT appeal contained. This question could not be replied except relying upon the order of Ld. assessing officer. In view of this we confirm the finding of the Ld. CIT appeal in deleting the above addition of Rs. 4 943 1314/– with respect to alleged bogus purchases. In the result ground No. 2 of the appeal of the revenue is dismissed.

Ground No. 4 of the revenue was with respect to deletion of the disallowance on account of expenditure of Rs. 4149068/- under the various head maintained by the assessee. The Ld. CIT appeal has dealt with this issue as under:- “6.1 Ground No 5 is that the total disallowance of Rs 41,49,068 in the various heads maintained was wrong, illegal, unwarranted and deserves to be deleted. 6.2 In the assessment order, the AO has recorded that the books of the assessee along with the bills and vouchers were produced and were examined; The AO has recorded that it was submitted on behalf of the assessee that bills for the heads of business promotion, printing and stationery, travelling and conveyance and manufacturing expenses were not available. According to the AO, 'such 'expenses were supported only by self made vouchers and the authenticity of such vouchers could not be verified. Thereafter, the AO has proceeded to make a sweeping remark that inflating expenses by booking not verifiable bogus expenses appears to be a strategy to simply suppress the profit of the assessee concern. The AO has thereafter remarked while only a random check of the bills and vouchers can be made and has stated that bills for a few expenses were, called for from the assessee concern but majority of these have not been verified by the production of bills. The AO has proceeded to disallow the entire expenses booked under these heads. In the submissions made under cover of letter dated 27.05.2013. it was explained that business promotion expenses are in the nature of refreshments and beverages served to customers as is usual in the business carried on by the assessee. The total expenses under this head is meagre amount of Rs 88,367. Expenses under the head printing and stationery of Rs 24,648 are Page 8 of 9 towards purchase of paper, photocopy expenses which are debited to the books in the usual course of business. Travelling and conveyance expenses of Rs 1,88,258 are towards expenses incurred by employees for the purposes of business. The assessee had want the signatures on these vouchers at the time of expenses. With regard to the manufacturing expenses amounting to Rs 38,47,795, it was explained that these were making charges of gold ornaments paid to karigars. the assessee issues old ornaments/gold to these persons for the manufacture of jewellery. At the time of issue of gold ornament/gold, issue vouchers prepared on which details of old ornaments/gold given with weight is mentioned. In case pure gold is issued to the person, the alloy which is to be mixed for the manufacture of jewellery is also mentioned and it is prepared in duplicate and the signature of the person is obtained. One copy is given to that person and one copy is by the assessee. At the time of receipt of the new jewellery, the receipt voucher in duplicate is prepared in which the weight of jewellery and the payment made to the person is mentioned and the signature of the person is opting. One copy of the receipt is kept by the assessee and duplicate copy of the receipt is given to that person. The address of the person is mentioned on the vouchers. The karigars do not keep Bill books and do not issue any bill to the assessee. At the time of the hearing of this case on 14/08.2013, when the. Addl. CIT, Range 1, Merrut was also present, the assessee was required to produce before the AO karigar wise amount of labour charges paid during the year and the AO was required to make such statement with the karigars identified/specified by him and such persons were to be produced for the examination. A report in this regard has been incorporated in the letter of the AO dated 13.09.2013. It has been stated that the perusal of the books of account reveals that the karigars do not issue any receipt. The assessee. company issues a set of two computer-generated vouchers when the item is issued to the person. When goods are received, another voucher is generated. Payment is made to the person on net weight basis. Signatures are obtained from the karigars on both the vouchers. All payments are in cash. It has also been stated that five karigars were asked to be produced by the AO out of which four had been produced. Apparently they have confirmed the transactions because there is no contrary/ad verse C9mment in this regard. In view of the above, the disallowance of the manufacturing and cannot be sustained. With regard to the disallowance made of expenses booked under other heads, the AO has not quantified the amount which are not covered by any voucher. It cannot be denied that there are certain expenses for which vouchers are not issued and obviously, in such cases, only self made vouchers can be maintained. Under the circumstances, the addition made cannot be sustained.”

The Ld. departmental representative could not point out any infirmity in the order of the Ld. CIT (A) in deleting the above addition. He also could not point out any instances reported by the Ld. assessing officer where the expense was not supported by proper vouchers. In view of this we confirm the finding of the Ld. CIT (A) in deleting the addition of Rs. 414 9068/– of