ITO, WD-29(1), KOLKATA, KOLKATA vs. M/S SPECIAL LEATHER INDUSTRIES, KOLKATA

The brief facts of the case are that the assessee is a firm engaged in the business of manufacturing of leather goods. The assessee conducts its business under the name and style M/s. Special Leather Industries. The assessee filed its return of income declaring total income at Rs.29,79,872/- on 28-09-08. The AO determined the total income at Rs.6,19,05,859/- as against Rs.29,79,872/- and made various disallowances for violation of section 40A(3) of the Act under the heads ‘Purchase of Raw materials’ of Rs.5,30,52,747/-, ‘Wage & Labour charges’ of Rs.11,11,329/-, ‘Bogus Liability’ of Rs. 46,54,648/- vide his order dt. 31-12-2010 passed u/s. 143(3) of the Act.

Ground no.1 relates to deletion of addition of Rs.5,30,52,747/- made u/s. 40A(3) of the Act.

A survey was conducted on 21-08-2007 U/Sec. 133A of the Act. Notices U/Sec 143(2) & 142(1) of the Act were issued. In response, the AR appeared and produced books of account, bills, vouchers and bank book. During the survey operation a statement u/s. 131 of the Act of the assessee was recorded, wherein according to AO the assessee admitted the purchase of raw materials was on cash basis and all such transactions found to be noted on small slips and small news paper, which were impounded also in the survey operations. To confirm the same the AO sent letters to the suppliers of raw hides and skins and all the letters returned unserved with an endorsement ‘unknown, not complete address’ etc. Thereby, the payment in cash to suppliers to the tune of Rs.5,30,52,747/- under the head ‘purchase of raw materials’ was disallowed for violation of section 40A(3) of the Act and accordingly, added the same to the total income of the assessee.

Aggrieved, in the first appellate proceedings before the CIT-A the assessee submitted that it purchased hides and skins from middlemen and payment thereof was not covered under Rule 6dd(f) & 6DD(h) of Income Tax Rules 1962 and question of violation of section 40A(3) does not arise. The assessee also submitted the details of dealers i.e VAT, bills along with ledger copies of the vendors and evidences. Further, the assessee stated that the purchases to an extent of Rs.4,50,09,654/- were from registered dealers. Out of which, Rs.3,28,37,420/- was paid by account payee cheque and the outstanding balance of Rs.1,21,72,234/- was carried forward to the next year.

Considering the submissions of assessee the CIT-A directed the AO to give the deduction of the entire purchases at Rs.5,30,52,747/- by stating as under:-

Before us the ld.DR submits that the CIT-A has erred in directing the AO to delete the addition of Rs.5,30,52,747/- without considering the statement U/Sec 131 of the Act admitting the payments were made in cash against the purchases. No evidence was brought on record to show that the suppliers are actually dealers of raw skins and hides. He opposed to the order of the CIT-A in directing the AO to give deduction and relied on the order of the AO.

On the other hand, the ld.AR submits that the assessee purchased raw skins and hides from registered dealers having VAT under bills. The payment of Rs.3,28,37,420 was made by a/c payee cheque. The amount of Rs.1,21,72,234/- and Rs.28,56,890/- is part of outstanding carried forward to the next year. The payment of Rs.51,86,203/- was paid by cash less than Rs.20,000. He also submits that the AO has mistakenly observed that the assessee

Heard rival submissions and perused the material available on record. We find that the CIT-A summarized the details of payment of Rs. 5,30,52,747/- in his order vide paras 6.1.4 at page 11 of his order, which clearly shows that the amount of Rs.3,28,37,420/- was paid by account payee cheque and the amount of Rs.1,21,72,234/- & Rs. 28,56,890/- were part of outstanding balance carried forward to the next year and the amount of Rs.51,86,203/- were paid in cash below Rs.20,000/- each. The purchases were made from dealers having VAT registration. We find no infirmity in the impugned order of the CIT-A and we uphold the same. The ground no.1 raised by the revenue is dismissed.

Ground no. 2 is relating to deletion of addition of Rs.11,11,329/- under the head ’Wage & labour charges’.

The AO found that the assessee paid wages and labour charges to the tune of Rs.55,56,643/- and produced self made vouchers in support of the claim. The AO was not satisfied with the submissions of the assessee and evidence thereon and made adhoc disallowance at 20% i.e Rs.11,11,329/- [ Rs.55,56,643 @ 20%].

Before the CIT-A the assessee contended that the payments were made to its own labour and the question of submitting the bills does not arise. The CIT-A found that the AO did not bring on record anything to show that the names, finger prints and handwriting etc

The ld.DR relied on the order of the AO. On the other hand, the ld.AR reiterated his submissions as made before the CIT-A.

Heard rival submissions and perused the material available on record. We agree with the finding of the CIT-A that the AO did not make any adverse remark in the books of account as filed by the assessee before him. The AO made an adhoc addition of Rs.11,11,329/-, which is not sustainable. The CIT-A examined the record and found satisfied that the assessee made payments towards labour charges to its own labour. Thus, we do not find any infirmity in the impugned order of the CIT-A and it is justified. Therefore, ground no.2 raised by the revenue is dismissed.

Ground no. 3 is relating to deletion of addition of Rs.2, 46,54,648/- made on account of sundry creditors.

The AO found that the assessee shown sundry creditors of Rs.2,46,54,648/-. The AO made this addition being bogus and for not producing the details of sundry creditors and postal address of the said creditors.

Before the CIT-A the assessee filed ledger copies of said creditors and submitted that the payments were made to 5 parties by a/c payee cheques. The said ledgers were filed before the AO. The purchases were made from the said creditors against way bills issued by the Sales Tax Authorities in their names and there was outstanding of about 1.50 crores from the purchase made during the year under consideration, which were held to be genuine by the AO.

Considering the submissions of the assessee the CIT-A deleted the impugned addition, which is reproduced herein below:-

The ld.DR relied on the order of the AO. On the other hand, the ld.AR of the assessee reiterated the same submissions as made before the CIT-A and referred to pages 15-16 of the order of the CIT- A.

Heard rival submissions and perused the material on record. We find that the assessee submitted a list of sundry creditors and debtors before the AO. But, AO made the addition only on the basis of that addresses of few creditors were not given by the assessee to him for verification. The CIT-A examined the details, names and addresses of the parties. We also find that the assessee filed ledger copies of the creditors and payment made thereof was by a/c payee cheque, which is not disputed by the AO in his remand report. Moreover, the purchases made from the parties was against the way bills issued by the Sales Tax Authorities in their names, in our opinion, the AO was not justified in treating the sundry creditors as ingenuine and the said transactions were bogus. In the remand report the AO has not controverted the submission of assessee. Thus, we agree with the finding of the CIT-A in deleting the addition. Thus, ground no.3 raised by the revenue is dismissed.

The appeal of the revenue in ITA No.1505/Kol/2015 for the A.Y 2008-09 is dismissed.

C.O No. 20/Kol/2016 arising out of ITA No. 1505/Kol/2015 for the A.Y 2008-09 by the assessee.

We find that the Cross Objection of the assessee was filed in support of the order of the CIT-A, which we have already upheld on the issues raised by the revenue. Therefore, the cross objection of the assessee is dismissed being infructuous. The C.O of the assessee is dismissed.

In the result, the appeal (ITA No. 1505/Kol/2015 and cross objection (C.O No. 02/Kol/2016) filed by the Revenue and Assessee for the A.Y 2008-09 both are dismissed. Order pronounced in the open court on 24-01-2018