M/S SARBARI SUPLIMENTARY C. S. SHOP,PURULIA vs. ITO, WD-3(4), KOLKATA, PURULIA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH ‘A’, KOLKATA [Before Shri P.M. Jagtap, AM and Shri S.S. Viswanethra Ravi, JM] I.T.A. No. 858 & 860/Kol/2016 Assessment Years: 2010-11 & 2011-12 M/s. Sarbari Supplimentary C.S. Shop..............................………………………...........Appellant At. Sarbari, P.O. Neturia, Purulia – 723 121 [PAN : ABJFS 8433 M] Income Tax Officer……………………………………………….............................................Respondent Ward 3(4), Asansol, Sahana Apartment, Lower Chelidanga, Asansol – 713 304 Appearances by: Shri U. Dasgupta, Advocate appearing on behalf of the Assessee. Shri Sallong Yaden, Addl. CIT appearing on behalf of the Revenue. Date of concluding the hearing : January 17, 2018 Date of pronouncing the order : January 19, 2018 ORDER PER P.M. JAGTAP, A.M. These two appeals filed by the assessee are directed against two separate orders passed by the Ld. CIT(Appeals), Asansol both dated 23.03.2016 for A.Y. 2010-11 and 2011-12 and since some of the issues involved therein are common, the same have been heard together and are being disposed of by a single consolidated order for the sake of convenience. 2. First we take up the appeal of the assessee for A.Y. 2010-11 being ITA No. 858/Kol/2016. Ground no 1 raised in this appeal is general in nature which does not call for any specific adjudication.

2 I.T.A. No. 858 & 860/Kol/2016 Assessment Years: 2010-11 & 2011-12 M/s. Sarbari Supplimentary C.S. Shop 3. The common issue involved in ground no 2 to 5 relates to the disallowance of Rs. 76,02,027/- made by the A.O. and confirmed by the Ld. CIT(A) under section 40A(3) of the Act on account of cash payments made against purchases from M/s. IFB Agro Industrial Ltd. 4. The assessee in the present case is a partnership firm which is engaged in the business of trading in country spirit. The return of income for the year under consideration i.e. 2010-11 was filed by it on 30.09.2010 declaring a total income of Rs. 13,684/-. As noticed by the Assessing Officer during the course of assessment proceedings, the assessee firm had made purchases of Rs. 76,02,027/- from M/s. IFB Agro Industries Ltd. and payments against the same were made by depositing cash directly in the account of M/s. IFB Agro Industrial Ltd. in the sums exceeding Rs. 20,000/-. According to the Assessing Officer, the said payments were made by the assessee in contravention of section 40(a)(iii) of the Act and since the assessee could not explain satisfactory any exceptional circumstances as specified under Rule 6DD of Income Tax Rules 1962 for making such payments, he made a disallowance of Rs. 76,02,027/- under section 40(a)(3) of the Act. On appeal, the Ld. CIT(A) confirmed the said disallowance made by the A.O. 5. We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that this issue involved in the case of the assessee relating to disallowance under section 40(a)(3) is squarely covered in favour of the assessee by the decision of this Tribunal rendered in assessee’s own case for

3 I.T.A. No. 858 & 860/Kol/2016 Assessment Years: 2010-11 & 2011-12 M/s. Sarbari Supplimentary C.S. Shop A.Y. 2008-09 vide its order dated September 16, 2016 passed in ITA No. 2858/Kol/2013 wherein a similar issue has been decided by the Tribunal vide paragraph no. 6 to 11 of its order as under: “6. At the outset, we may state that there is no dispute in respect of the genuineness of the transactions made by the assessee. So also the identity of the receiver of' the funds is not in dispute. Payments made into the Bank account of the wholesale licensee or the appointment of M/s. IFB Agro Industries Limited, Durgapur, Burdwan by the State Government Notification dated 04.09.2006, stands admitted. Now the whole issue revolves around the point whether the payments made into the account of M/s. IFB Agro Industries Limited. Durgapur in the State Bank of India ale hit by the provisions of section 40A(3) of the Act. 7. In this context. it is useful to refer to Rule 6(2) of the Income Tax Rules framed by the State Government in exercise of the power conferred by section 85 and section 86 of the Bengal Excise Act, 1909 regulating the issue and removal of country spirit on payment of duty in labelled and capsule bottles from country spirit bottling plants and in bulk from warehouses by licensed wholesale-vendors of the same for the purpose of selling country spirit by wholesale. This Rule 6(2) stipulates that no retail vendor of country spirit shall deposit duty direct into the local treasury for issue of country spirit to be taken by him from the warehouse concerned, duty, cost price, bottling charges, if there be any, at the prescribed rate and other imposition, as may be prescribed by law, shall be paid by the retail vendor to the credit of the wholesale licensee concerned. 8. Now coming to the application of section 40A(3) is concerned, we find from the CBDT Circular No. 6P dated 06.07.1968 that this provision under section 40A(3) was designed to counter evasion of tax through claims for expenditure shown to have been incurred in cash with a view to frustrating paper investigation by the department as to the identity of the payee and reasonableness of the payment. When this is the primary object of enacting section 40A(3), we will have to see whether the payments made by the assessee into the account of M/s. IFB Agro Industries Limited, Durgapur would frustrate the purpose of enactment of section 40A(3). By virtue of payment through cash dated 04.09.2006, the wholesale licensee with exclusive privilege for bottling and/or sale by wholesale country

4 I.T.A. No. 858 & 860/Kol/2016 Assessment Years: 2010-11 & 2011-12 M/s. Sarbari Supplimentary C.S. Shop spirit in sealed or capsule bottles and for manufacture and wholesale supply of country spirit in bulk litter enjoyed now by the holders of license in terms of section 22 of the Bengal Excise Act, 1909 and IFB Agro Industries Limited, Durgapur has become an arm of State Government. On this aspect, for all practical purposes, the relationship between the Government and wholesale licensee in so far as dealing with the country made liquor is concerned, i.e. the principal and agent, subject to the territorial limitation prescribed to such notification. We, therefore, can safely conclude that the payments made to M/s. IFB Agro Industries Ltd., Durgapur for all practical purposes are the payments to be reached to the State Government and once this is so, the said wholesale licensee shall be construed as an agent of the State Government. We, therefore, can safely conclude that once such payments are made to the credit of IFB Agro Industries Ltd., Durgapur, the source and destination of such funds cannot be doubted. Therefore, the provision of section 40A(3) is not frustrated by the assessee making payments into the account of M/s. IFB Agro Industries Ltd., Durgapur maintained in the State Bank. 9. Commercial expediency in relation to the application of section 40A(3) is well recognized by the various courts vide in the cases as under: (i) Attar Singh Gurmukh Singh vs ITO reported in (1991) 191 ITR 667 (SC) (ii) CIT vs CPL Tannery reported in (2009) 318 ITR 179 (Cal) (iii) CIT vs Crescent Export Syndicate in ITA No. 202 of 2008 dated 30.07.2008 (Calcutta High Court) (iv) Anupam Tele Services vs ITO reported in (2014) 43 taxman.com 199 (Guj) (v) Ashok Mondal vs ITO in ITA No. 873/Kol/2012 (Kolkata Tribunal’s order dated 06.02.2014 10. In the case of Ashok Mondal (supra), the Coordinate Bench of this Tribunal by way of an order dated 06.02.2014 considered the issue, which is identical to the facts of this case and after elaborating discussion reached a conclusion that the payments made by the assessee for the purchase of country liquor and country spirit from the territorial licensee bottling plant, IFB Agro Industries Limited, Durgapur is protected by the exemption in terms of Rule 6DD(b) of the Income Tax Rules, 1962. 11. In view of the above, we find that the assessee has commercial expediency under Rule 6(2) of the West Bengal Rules referred to above to

5 I.T.A. No. 858 & 860/Kol/2016 Assessment Years: 2010-11 & 2011-12 M/s. Sarbari Supplimentary C.S. Shop make payments to the credit of M/s. IFB Agro Industries Ltd., Durgapur who is deemed to be an agent of the State Government as such in terms of Rule 6DD(b) and Rule 6DD(k) of the Income Tax Rules, they are exempted and the disallowance made under section 40A(3) of the Act cannot be sustained. We, therefore, answer this issue in favour of the assessee and that the order of the authorities below cannot be sustained.” 6. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to A.Y. 2008-09, we respectfully follow the decision of the Coordinate Bench of this Tribunal for A.Y. 2008-09 and delete the disallowance made by the A.O. under section 40A(3) and confirmed by the Ld. CIT(A). Ground no 2 to 5 of the assessee’s appeal for A.Y. 2010-11 are accordingly allowed. 7. The issues involved in ground no 6 and 7 of the assessee’s appeal for 2010-11 relate to the additions of Rs. 1,55,742/- and Rs. 82,804/- made by the A.O. and confirmed by the Ld. CIT(A) on account of difference closing stock of 60UP and 80UP respectively by treating the same as unexplained under section 69B of the Act. 8. During the course of assessment proceedings, it was noted by the A.O. from the examination of stock record maintained by the assessee that it had opening stock of 2593.800 Ltrs. of 60UP category of country spirit. In the audit report, the assessee firm however had shown opening stock of 2200.000 Ltrs. of UP category of country spirit showing discrepancy of 393.800 Ltrs. It was also noted by the A.O. from the information received from M/s. IFB Agro Industries Ltd. that the assessee had purchased 114900 Ltrs. of 60UP category of country spirit from the said company but the quantity purchased in

6 I.T.A. No. 858 & 860/Kol/2016 Assessment Years: 2010-11 & 2011-12 M/s. Sarbari Supplimentary C.S. Shop the quantitative details was shown by the assessee only as 114900 Ltrs. showing a discrepancy of 2700 Ltrs. Since the assessee could not offer any satisfactory explanation in respect of these two discrepancies pointed out by the A.O. in the stock of 60UP category of country spirit aggregating to 3093.80 Ltrs., the A.O. treated the same as unexplained closing stock of the assessee of 60UP category of country spirit and added the value thereof amounting to Rs. 1,55,742/- to the total income of the assessee under section 69B of the Act. Similarly, further addition of Rs. 82,804/- was made by the A.O. on account of discrepancy of Rs. 5606.2 Ltrs. found in respect of 80UP country liquor by treating the same as unexplained stock of the assessee under section 69B. On appeal, the Ld. CIT(A) confirmed both these additions made by the A.O. 9. We have heard the arguments of both the sides and also perused the relevant material available on record. The learned counsel for the assessee has not disputed the fact that there are some discrepancies in the stock record maintained by the assessee in respect of 60UP and 80UP category of country liquor. He, however, has contended that stock record for both these items is regularly maintained by the assessee for excise purpose and the same duly checked by the concerned excise authorities is more reliable to ascertain the exact discrepancy. He has urged that since the said record maintained for excise purpose could not be produced by the assessee either before the A.O. or before the Ld. CIT(A), the matter may be sent back to the Assessing Officer for giving the assessee an opportunity to produce the same for verification. Since the learned

7 I.T.A. No. 858 & 860/Kol/2016 Assessment Years: 2010-11 & 2011-12 M/s. Sarbari Supplimentary C.S. Shop DR has not raised any objection in this regard, we set aside the impugned order of the Ld. CIT(A) on this issue and restore the matters to the file of the A.O. for deciding the same afresh after giving the assessee an opportunity to produce the relevant stock record maintained for excise purpose. The A.O. shall verify the said record and recompute the additions, if any, on the basis of discrepancies found on such verification. Ground no 6 and 7 of the assessee’s appeal for A.Y. 2010-11 are accordingly treated as allowed for statistical purpose. 10. Now, we take up the appeal of the assessee for A.Y. 2011-12 being ITA No. 860/Kol/2016. Ground no 1 raised in this appeal is general in nature which does not call for any specific adjudication. 11. As regards ground no 2 to 5, it is observed that the common issue raised therein relating to the addition of Rs. 47,57,240/- made by the A.O. and confirmed by the Ld. CIT(A) under section 40A(3) on account of cash payments made against purchases from IFB Agro Industries Ltd. exceeding Rs. 20,000/- is similar to the one involved in ground no 2 to 5 assessee’s appeal for A.Y. 2010-11 which has already been decided by us in the foregoing portion of this order. Following or conclusion drawn in A.Y. 2010-11, we delete the disallowance made by the A.O. under section 40A(3) and confirmed by the Ld. CIT(A) and allow ground no 2 to 5 of the assessee’s appeal for A.Y. 2011-12. 12. Ground no 6, 7, 9, 10 and 11 raised in the appeal of the assessee for A.Y. 2011-12 have not been pressed by the learned counsel for the

8 I.T.A. No. 858 & 860/Kol/2016 Assessment Years: 2010-11 & 2011-12 M/s. Sarbari Supplimentary C.S. Shop assessee at the time of hearing before the Tribunal. The same are accordingly dismissed as not pressed. 13. The issue involved in the remaining ground no 8 of the assessee’s appeal for A.Y. 2011-12 relates to the addition of Rs. 14,00,229/- made by the A.O. and confirmed by the Ld. CIT(A) on account of purchases made from M/s. IFB Agro Industries Ltd. outside the books of account by treating the same as undisclosed investment of the assessee under section 69B of the Act. 14. As per the information gathered directly by the Assessing Officer from M/s. IFB Agro Industries Ltd., Panagarh, Burdwan, the said party had made a total sale of Rs. 57,72,398/- to the assessee during the year under consideration. The assessee in its books of accounts however had shown purchases made from the said party only to the tune of Rs. 51,84,704/-. Similarly, it was also found by the A.O. that purchases made by the assessee from M/s. IFB Agro Industries Ltd., City Centre, Durgapur were not accounted for in its books of account to the extent of Rs. 8,12,535/-. Since the assessee could not offer any satisfactory explanation in this regard, the A.O. treated the unaccounted purchases made by the assessee aggregating to Rs. 14,00,229/- as its undisclosed stock and made the addition of Rs. 14,00,229/- to the total income of the assessee under section 69B of the Act. On appeal, the Ld. CIT(A) confirmed the said addition made by the A.O.

9 I.T.A. No. 858 & 860/Kol/2016 Assessment Years: 2010-11 & 2011-12 M/s. Sarbari Supplimentary C.S. Shop 15. We heard the arguments of both the sides and also perused the relevant material available on record. Although the learned counsel for the assessee has not disputed the fact that purchases of Rs. 14,00,229/- made by the assessee from M/s. IFB Agro Industries Ltd. had not been accounted for by the assessee in its books of accounts, he has contended that there was nothing brought on record by the A.O. to show that the said quantity purchased by the assessee outside the books of accounts was lying in the closing stock. As rightly contended by him, for making any addition on account of unexplained investment under section 69B of the Act, the onus is on the department to establish that such investment was actually made by the assessee. Although the assessee in the present case had made purchases outside the books of accounts, there was nothing brought on record to show that the quantity so purchases outside in the books of accounts was lying in the closing stock of the assessee as on 31.03.2011. In our opinion, the addition on account of unexplained investment in stock as made by the A.O. under section 69B thus is based on presumption and the same cannot be sustained. In our opinion, the only presumption that can be reasonably drawn in the absence of anything brought on record to show that the quantity purchased by the assessee outside the books of accounts was lying in the closing stock is that the said quantity was sold by the assessee outside the books of accounts and the addition that can justifiably made on this issue is only to the extent of gross profit on such unaccounted sales. We, therefore, modify the impugned order of the Ld. CIT(A) on this issue and direct the A.O. to recompute the addition to be made on this issue by applying GP rate of 8% on the undisclosed

10 I.T.A. No. 858 & 860/Kol/2016 Assessment Years: 2010-11 & 2011-12 M/s. Sarbari Supplimentary C.S. Shop sales made by the assessee out of unaccounted purchases. Ground no 8 of the assessee’s appeal is thus partly allowed. 16. In the result, the appeal of the assessee for A.Y. 2010-11 is treated as allowed while the appeal of the assessee for A.Y. 2011- 12 is partly allowed. Order Pronounced in the Open Court on 19th January, 2018. Sd/- Sd/- (S.S. Viswanethra Ravi) (P.M. Jagtap) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 19/01/2018 Biswajit, Sr. PS Copy of order forwarded to: 1. M/s. Sarbari Supplimentary C.S. Shop, Sarbari, Neturia, Purulia – 723 121. 2. I.T.O. Ward 3(4), Asansol, Sahana Apartment, Lower Chelidanga, Asansol – 713 304. 3. The CIT(A) 4. The CIT 5. DR True Copy, By order, Sr. P.S. / H.O.O. ITAT, Kolkata