DCIT 2(3)(1), MUMBAI vs. REFRIGERATED DISTRIBUTORS P.LTD, MUMBAI

PER MAHAVIR SINGH, JM:

“1. Confirming the addition of Rs. 51,04,095/- made by the AO on account of unproved purchases’(being 25% of the unproved purchases).”

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016

“5.7 The Gross profit ratio of the assessee is 10%. Further, the waste products of this processing is also sold and forms the income of the assessee. The assessee has not denied this fact, that it has derived any income from the sale of waste products. But has itself accepted that it is selling it in subsequent years. Also the factors like office overheads, extra labour cost, extra electricity cost, processing cost and other overheads when factored in and considered from point of view of determination from G.P. ratio. The G.P. is determined at 25%. The assessee’s purchase side is seen to be having bogus purchases but the sales side is not being questioned. Thus the books of account of the assessee are rejected and are termed as being manipulated.

5.8 The Gross profit addition at 25% of G.P. ratio is made to the income of the assessee on account of bogus purchases made from unidentified parties/ persons. This G.P addition is being made after rejecting the books of the assessee.

Aggrieved assessee preferred appeal before CIT(A).

“6.8 In the case of Vijay Proteins (supra), the Hon'ble ITAT was seized with a case of bogus suppliers of oil cakes where 33 parties were found to be bogus by the departmental authorities even though payments were made to the said parties by cross cheques and in fact the AO in that case had brought adequate material on record to prove that the cross cheques had not been given to parties from whom supplies were allegedly procured but these were encashed from a bank account in the name of another entity, possibly a hawala dealer. Subsequently, the money deposited in that account was withdrawn in cash almost on the same day. The Tribunal, however, held that if the purchases were made from open market without insisting for genuine bills, the suppliers may be willing to sell the product at a much less rate as compared to a rate which they may charge in which the dealer has to give genuine sate invoice in respect of that sale. Keeping all such factors in mind, the Tribunal estimated an element of profit

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 percentage of the overall purchase price accounted for in the books of account through fictitious invoices.

6.9 As narrated earlier, the AO in this case has himself held that the purchases made by the assesseewas found to be bogus and that is the reason for which parties were not produced during the assessment proceedings. The motive behind obtaining bogus bills, thus, appears to be inflation of purchase price so as to suppress true profits. In order to estimate as to what could be the GP, which the assesseehas suppressed, which was embedded in the alleged purchases, it is seen that the assesseehas shown different gross profit rates in different years, thus betraying any clear picture about the actual GP. Such a variation also points to the fact that the assesseehas manipulated its accounts though AO has not doubted the receipts from sale of goods. Thus, in the facts and circumstances of the case, the AO has rightly held that the profit element embedded and suppressed in the bogus purchases were to the extent of 25 per cent of such purchases. Hence, the gross profit addition to the extent of 25 per cent of bogus purchase by the AO is confirmed and the ground is dismissed.”

Aggrieved, now assessee is in second appeal before Tribunal.

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 place is correct. There can be a mistake at his end. Secondly, while sending the fish, it is cleaned with water and hence, fish does contain water. During the course of transportation (the time period of which is between 24 to 30 hours), such water evaporates naturally and hence, the loss in weight. Also, fish skin even otherwise contains water which evaporates during the course of transportation. Such weight loss varies between 5 to 7%. Hence, it was explained that while delivering the fish at the assessee's factory, the outstation seller cannot predict the actual weight of the fish that would reach assessee's factory at Pawne, Navi Mumbai and hence, the payment is always made by the assessee on the basis of the goods received on note cum challan prepared by the assessee at its factory at Pawne, Navi Mumbai indicating actual quantity of the fish received & weighed. Hence, it was explained that the delivery challans received from the fish suppliers at Malape, Udipi, Ratnagiri are not kept by assessee on its record since they do not serve any purpose as the payment is made on the basis of goods received and note prepared by assessee itself.

6. Ld. Counsel explained the procedure that after receiving the fish, it is weighed & washed in the machines and bones & meat are separated with the help of the machines. The resulting product is stirred in the tanks, bleached, refined, pressed & mixed. The final product Surimi is ready. The same is packed, sealed & frozen for further shipments. Hence, fish being a perishable commodity, nothing is kept in the stock & everything purchased is consumed & gets converted into finished goods (i.e fish paste). Finished goods not sold are in the stock of finished goods. During the year, assessee had purchased fish amounting to Rs.27.54 Cr. and not Rs.6.02 Cr. as mentioned by the AO in para 5.1 of the assessment order dated 26.03.2015. The said purchases of fish included purchases from the following parties:-

a. Best Seafoods Rs.2,13,01434 b. Suhana Seafoods Rs.2,69,51,940 c. Parker Fisheries Rs. 26,94,819 d. Riyaz K. AkbaraliRs. 92,77,665 Total: Rs.6,02,25,858 In respect of the above 4 parties, the assessee could not produce purchase bills & delivery challans but nonetheless, goods received on the basis of notes prepared at assessee's end, which were made available for verification of the AO. Ld. Counsel Page 5 of 28

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 stated that further in respect of the 2 parties mentioned at [c] & [d] of the above, the assessee had tendered the ledger account of the party, their PAN, address, their copy of return, CA Certificate & affidavit for the A.Y.2009-10 vide its letter dated 18.02.2015. But, in respect of other parties the assessee could give ledger account, PAN & Income tax return for the A.Y.2011-12, since they did not give their details for the A.Y.2009- 10. Since the purchase bills and delivery challans were not made available in respect of the above outstation suppliers of fish, the assessing officer issued notices u/s.133(6) of Act to the said parties but none of the notices attended before the AO though the notice of hearing was received by them. Ld Counsel explained that similar issue had come up in the assessment for the A.Y.2011-12 & addition of Rs.2,14,78,5391- was made by the AO, but the entire addition was deleted by the CIT(A)-6 vide his order dated 30.10.2014. The copy of the said order was placed on the record of the assessing officer by the assessee. Accordingly, it was explained that it was not possible to produce purchase bills and delivery challans for the abovementioned suppliers and further in addition to the above said suppliers, there were other suppliers as well from outside Mumbai wherein purchase bills & delivery challans were not available and few of them have even figured in the list of unproved purchases for the A.Y.2011-12. But possibly on account of their being accepted as genuine parties by the CIT(A)-6 in his order dated 30.10.2014, the AO deemed it fit not to treat purchases from them again as unproved purchases. But Inspite of the fact that all the above suppliers had figured in the list of unproved purchases for the A.Y.2011-12 which purchases were held to be genuine by the CIT(A)-6 vide his order dated 30.10.2014, the AO held the said purchases to be bogus. He explained that the AO rejected the books of account as some of the purchases were bogus. But at the same time he also stated that sales made were not being questioned & he rejected the books of accounts and made addition by estimating the gross profit ratio at 25% & applying the same to the unproved purchases and made addition of Rs.1,50,56,4651-.

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 purchases, if any, was made at the time of assessment completed subsequent to the survey. The copy of the assessment orders for A.Y.2005-o6 & 2006-07 are filed before us. Accordingly, Ld. Counsel stated that assessee’s books of account could not have been rejected by the AO when he had accepted the sales made in toto. When the books of accounts were rejected, they had to be rejected in full & thereafter the AO could not have relied upon the figure of bogus purchases for arriving at the income by applying the gross profit ratio of 25%. He stated that the gross profit ratio of 25% applied by the AO was totally baseless particularly, when the purchases were found to be bogus, by relying on the very said figure of bogus purchases. When the disallowance was restricted to 25% of the bogus purchases, balance 75% of the purchases were deemed to be genuine & this was in total contrast with the finding that the purchases were bogus.

9. Form the above, we find that in the present case, the bogus purchases accounted for 21.80% of the total purchases made during the year & on this basis AO rejected the books of accounts. The assessee relied only on the goods received notes, which were prepared by itself. Assessee was not able to produce purchase bills and delivery challans nor was it able to produce the sellers before AO to establish genuineness of the said purchases. Armed with the evidence of bogus purchase and non-appearance of the alleged sellers, the AO asked the assessee to discharge the onus cast on him, which it failed to do. In fact, it did not even respond to the show cause notices. Hence, it cannot claim that the disallowance be reversed. Accordingly, the lower authorities have rightly rejected books of account and we confirm the same. But after rejection of books of account only alternative left with is to assess a reasonable profit rate. Once the books of accounts were rejected, there was no option left for the AO except to estimate the gross profit rate. When the accounts of the assessee are rejected, the AO is duty bound to make a fair estimation of the profit & while doing so, he is required to 781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 give reasoning for adopting a particular rate of profit & in the absence of such reasoning, the order computing the profit on the basis of estimate becomes unjustified. In the present case, as can be seen the AO has not given any basis for arriving at the gross profit ratio of 25% except for making some irrelevant observations. Further, the AO has applied the gross profit ratio to the allegedly bogus purchases to arrive at the disallowance. The AO not having doubted the genuineness of sales could not have gone ahead and made addition in respect of the entire purchases of these parties especially when he himself accepted the purchases from other parties. Thus, the issue boils down to finding out the element of profit embedded in bogus purchases, which the assessee would have earned from such transactions. In this regard, it is apt to refer to decision of Gujarat High Court in the case of Bholanath Poly Fab Pvt. Ltd. 355 ITR 290 (Guj.) where the Hon'ble Court was bathing with the finding of Hon'ble ITAT that purchases were made from bogus parties since notice issued by the AO to these parties were allegedly received 'returned/unserved' and the assessee was unable to produce any confirmation from these parties. The Tribunal had held that though purchases were made from bogus parties, nevertheless, the purchases themselves were not bogus as the entire quantity of opening stock, purchases and states were tallying and hence, only the profit margin embedded in such amount would be subjected to tax. The Hon'ble Gujarat High Court taking cognizance of the fact held that whether purchases themselves were bogus or whether parties from whom such purchases were made were bogus, is essentially a question of fact and the Tribunal having examined the evidence on record and concluded that the assessee did produce cloth and sell finished goods, the entire amount covered under such purchase would not be subjected to tax and only the profit element embedded therein was to be taxed. While coming to the above conclusion, the Hon'ble High Court also relied on the decision in the case of Sanjay Oil Cake Ind. 316 ITR 274 (Guj). Similarly, in yet another decision of Hon'ble Gujarat High Court in the case of CIT(A) vs. Simit Sheth (2013) 38 Taxmann.com 385 (Guj), Hon'ble Court was seized with a similar issue where the AO had found that some of the alleged suppliers of steel to the assessee had not supplied any goods but had only provided sale bills and hence, purchases from the said parties were held to be bogus. The AO in that case added the entire amount of purchases to gross profit of the assessee but CIT(A) having found that the assessee had indeed purchased though not 781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 from named parties but other parties from grey market, partially sustained the addition as probable profit of the assessee. The Tribunal however, sustained the addition to the extent of 12.5 per cent. Taking into account the above facts, the Hon'ble Gujarat High Court held that since the purchases were not bogus, but were made from parties other than those mentioned in books of account, only the profit element embedded in such purchases could be added to the assessee's income and as such no question of Law arose in such estimation While arriving at the above conclusion, the Hon'ble Court also retied on the decision in the case of Vijay M. Mistry Construction Ltd. 355 ITR 498 (Guj) and further approved the decision of Ahmedabad Bench, ITAT in the case of Vijay Proteins (58 ITD 428).

A. ADDITIONS ON ACCOUNT OF UNPROVED PURCHASES APPEAL NO. A.Y. RS. 2984/M/16 2007-08 51,04,095/- 2985/M/16 2008-09 47,44,549/- 2986/ M/16 2009-10 1,50,56,465/- 2987/ M/16 2010-11 1,94,69,481/- 2988/ M/16 2012-13 42,07,685/- Total 4,85,82,274/- B. DELETION ON ACCOUNT OF UNPROVED PURCHASE DEPT. APPEAL APPEAL NO. A.Y. RS. 781/ M/15 2011-12 2,14,78,539/-

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016

IN THE MATTER OF REFRIGERATED DISTRIBUTORS PVT. LTD. COMPARATIVE GROSS PROFIT STATEMENT 2005 2006 2007 2008 2009 2010 2011 2012 Sales 29,14,42,074 32,87,17,330 24,17,16,431 23,17,16,431 36,39,33,769 33,36,65,714 31,67,62,268 35,08,62,604 Export incentive 1,05,88,093 1,44,56, 195 1,09,53,717 1,66,60,592 2,54,87,963 5,04,33,531 3,43,94,068 4,35,48,672 30,20,30167 34,31,73,526 25,80,32,575 24,83,77,024 38,94,21,731 38,40,99,245 35,11,56,336 39,44,11,276 Less: consumption 25,80,42,035 28,85,65,106 20,13,59,924 19,85,74,589 31,78,47,919 34,95,01,287 31,80,90,970 35,92,95,872 Gross profit 4,39,88,132 5,46,08,420 5,66,72,650 4,98,02,434 7,15,73,812 3,45,97,958 3,30,65,546 3,51,15,594 GP Ratio 14.56% 15.91% 21.96% 20.05% 18.38% 9.01% 9.42% 8.90% Purchase Qty(T) 8716.95 8894.084 6140.606 5981.715 6819.314 5984.72 6482.45 6390.849 Price per ton 26,063 28,860 26,918 30,300 40,392 44,809 41,398 47,165 Production (T) 4508.726 4362.96 35,4.54 2856.48 2970.34 2696.46 2709.88 2736.51 Production exp. 40,33,420 48,72,640 47,69,162 65,72,739 4,42,53,422 4,77,66,381 4,31,96,412 4,03,22,003 Production exp. Per 895 1,117 1,360 2,301 14,898 17,714 15,940 14,735 ton Yield 51.72 49.05 57.07 47.75 43.55 45.05 41.8 42.81 Note :-

1. 1. Price of the raw fish went up in the year 2010 compared to the price in the year 2009. Also production expenses per ton went up in the year 2010 compared to the year 2009. These two things coupled with lower production resulted in a substantial reduction in the gross profit margin. Thereafter, the situation has remained stagnant with minor variations.

2. Majority of the production of the company (approx..93%) comprises rani Fish Surimi. There are no other manufactures dealing exclusively (like us) in Rani Fish Surimi. Most of the companies dealing in fish have a different product mix. As such, there is no industry based general gross profit ratio.

3. All our production is exported.

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12. The next issue in these appeals of assessee is as regards to enhancement made by the CIT(A) by enhancing the assessment by taking the yield at 65%. For this assessee has raised following ground no.4: - “4. Enhancing the assessment by taking the yield of the finished product (i.e fish paste) at 65% as against 57.07% shown by the assessee without any proper basis & verification.”

13. Briefly stated facts are that the CIT(A) enhanced the assessment after going through wide variations in the yield shown by the assessee, by observing in Para 7.2 and 7.3 as under: - 7.2 I have carefully considered the facts of the case and the submission made by the Ld. AR. It is trite law that the appellate authority has all the powers which the original authority has in deciding the question before it and that the powers of the CIT(A) are co-terminus with the powers of AO. In doing so, he can call for additional evidence, can make enquiries or direct the AO to carry out requisite enquiries. There cannot be any restrictions or limits on his powers as held by the Bombay High Court in the case of CIT(A) Vs. Pruthvi Brokers and Shareholders Pvt. Ltd. (2012) 23 Taxman.com.23(Bom). In Jute Corporation of India Ltd. v. CIT [1990] 53 Taxman 85 (SC) referred to .by the Hon'ble Bombay High Court in Pruthvi Brokers (supra), Hon'ble Supreme Court observed that the appellate authority has all the powers which the original authority has in deciding the question before it subject to the restrictions and limitations prescribed by statutory provisions. The power of the first appellate authority is derived from the statute wherein section 251 empowers him to confirm, reduce, enhance or annul the assessment and to pass such orders Page 11 of 28

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 in the appeal as he thinks fit. The Explanation to section 251 empowers him to "consider and decide any matter arising out of the proceedings in which the order appealed against was passed notwithstanding that such matter was not raised before him by the appellant." The Hon'ble Apex Court in CIT v. Nirbheram Deluram [19971 91 Taxman 181 by following the decision in Jute Corporation of India Ltd. (supra) reiterated that the first appellate authority has wide powers "co-terminus with that of the Income-tax Officer", so that "he can do what the Income-tax Officer can do and can also direct him to do what he failed to do". Such vast powers are conceded to the first appellate authority for the reason that the Department has no right of appeal against the assessment order and, in the course of scrutiny of appeal filed by the assessee, the appellate authority can see whether, in the interests of the Revenue, the tax has to be enhanced. Thus, the CIT(A) has all powers to enhance the assessment. 7.3 Let us now consider the facts of the case against the above legal background. The assessee manufactures fish paste out of the fish purchased by it. It has submitted that it purchases only headless fish. Once the head is removed, the wastage will be substantially reduced. The assessee is purchasing fish from local suppliers as well as from suppliers of Udipi, Malpe, etc. So far as the outside suppliers are concerned, the transportation takes long time and the assessee has submitted that the weight is reduced by 5 to 7 per cent due to evaporation of water from the fish. The assessee purchases the fish from outsiders by weighing the fish at its factory gate. Therefore, I record a finding of fact that the yield of fish from outside suppliers would be more as compared to the local suppliers due to evaporation of water from outside fish. It is also seen from the manufacturing process that fish meat is diluted with chilled water through continuous agitation. Further, sugar and other ingredients are also added and mixed with the help of the mixture. Hence, I record a finding of fact that weight of the fish paste and its yield would certainty increase due to the addition of water, sugar and other ingredients during the manufacturing process. Therefore, the yield shown by the assessee is very tow. In fact, in the chart given by the assessee itself, there is wide variation in yield for different years. The maximum yield was 57.07 per cent whereas the lowest was 41.80 per cent. Another reason for the lower yield Page 12 of 28

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 is the bogus purchase, which has been proved and established earlier. Hence, considering the bogus purchases and the fact that headless fish is used on which sugar, water and other ingredients are mixed, it would be fair and reasonable if the yield is taken at 65 per cent. It may be noted that the books of account were rejected by the AO, which has been upheld by the undersigned. The assessee has shown yield of 57.07 per cent for the year under appeal. Hence, the AO is directed to adopt the yield at 65 per cent in lieu of 57.07 per cent and add the income resulting there from to the total income of the appellant. The assessment is enhanced as above.” Aggrieved, against the order of CIT(A) enhancing the assessment by adopting the yield at 65% in lieu of declared yield by assessee for and form A.Y. 2007-08 to 2012- 13 accept 2011-12, which was not the subject matter before CIT(A).

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per cent on account of water evaporation. Thereafter, the fish are processed and the wings, tail, and head are removed and only the pure flesh inside is used for making the paste. Hence, the yield of finished product varies between 40 to 50 per cent. It was explained by submitting a chart, which is part of the order of the CIT(A). The CIT(A) noted that there is wide variation in the yield shown by the assessee for different years. The range varies between 41.80 to 57.07 per cent. The assessee has stated that there is weight loss between 5 to 7 per cent on account of water evaporation of the fish received from Malpe, Udipi, etc. However, these fish are weighed by the assessee in its factory gate and, therefore, the question of weight toss during transportation is not relevant. As stated earlier, the assessee could not produce purchase bills and delivery challans from outstation suppliers. Similarly, headless fish are received from the suppliers. Hence, the yield shown by the assessee could not be so low. Therefore, enhancement notice u/s 251(2) was issued to the assessee on 15.03.2016 for A.Y.2007- 08. Similar notices were issued for the other assessment years as well. 16. The assessee before us now and even before CIT(A) explain that 'Surimi', i.e. fish paste is manufactured out of variety of fish, i.e. rani fish, lizard fish, ribbon fish and croaker fish. Depending upon the variety of fish used, the yield varies. It is 40-45 per cent for rani fish, 50-60 per cent for lizardfish, 43-45 per cent for ribbonfish and 35- 38 per cent for croaker fish. The assessee's Surimi is mainly produced out of rani fish. It was stated that the Surimi is manufactured with the help of Japanese machine purchased from Yanagiya Machinery Co. Ltd., Japan in 2003. The assessee submitted that headless fish is received from suppliers and temperature is maintained at below 5 degree centigrade. Chilled running water is used for washing the fish. The washing machine helps in descaling the fish and thorough washing. The debonair / meat separator machine is used to separate meat from skin and bones of fish. Thereafter, fish meat is diluted with chilled water through continuous agitation. The rotary screen helps in sieving small impurities. The bleaching tank helps in bleaching the minced meat. The screw press helps in dewatering the minced meat by straining method. At this stage, sugar and other ingredients are mixed with the help of mixture. Minced meat with added ingredients is taken out from the stuffer and weighing is done in 10 Kg. in HDPE bags. Freezing is done at -40 degree C. for 90 minutes. Two slabs of 10 Kgs. are packed in one master carton and stored at -18 degree C. Shipmentis done as per client Page 14 of 28

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 requirement. It was stated that the waste coming out of the above process is discarded with the help of effluent treatment plant. It was also explained that except minor variation, the yield has been 42-48 per cent. Finally, the learned Counsel for the assessee argued that the complete accounts were produced before the AO and even before the CIT(A) including the details of consumption, production and percentage of yield. The accounts of the assessee are audited. The assessee filed copy of a letter from Yanagiya Machinery Co. Ltd., Japan stating that production yield from headless fish will be around 40-50 per cent.

C. Additions on account of enhancement of yield of finished product on the higher side. Appeal No. A.Y As given by the As taken by Addition made appellant the CIT(A) 2984/M/16 2007-08 57.07% 65% 2,54,70,648 2985/M/16 2008-09 47.75% 65% 9,62,02,457 2986/M/16 2009-10 43.55% 65% 16,67,14,881 2987/M/16 2010-11 45.05% 65% 13,42,40,059 2988/M/16 2012-13 42.81% 65% 16,93,30,765 Total 59,19,58,810 As regards to the percentage of yield the assessee has produced an analytical report from Mumbai Research Centre of Central Institute of Fisheries Technology issued vide No. F.8-c/2016-17/Bby/13 dated 22-09-2016, on the instance of the assessee, which clarifies the percentage of yield, the report reads as under: - Weight(Kg) Yield(%) Rani Fish whole 50.0 ------ Rani Fish (head Less) 38.00 76 (from whole fish) Beheaded and eviscerated Rani Fish Minced meat 22.5 59.21 (From Head less) Rani Fish Surimi (final paste) 17.0 44.74 (from Head less fish) The general yield of Surinhi from Rani Fish harvested from southwest & northwest coast of India are in the range of 42-45% (on headless fish) depends on species size.

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 of percentage is described as low as 12% to 30%. The relevant portion of the details of yield reads as under :- “1.3.3 AMERICANIZATION OF SURIMI PRODUCTION The American Fisheries Act (AFA) of 1998, incorporated in the Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999 (Public Law 105-277), designated the Maritime Administration as the agency responsible for ensuring compliance with US citizen ownership and control requirements for US-flag fishing industry vessels of 100 ft and greater in registered length. The law eliminated exemptions for vessels that could not meet pre-AFA citizenship standards, phased out of operation many of the largest fishing vessels thought to be destructive to fishery resources, and placed restrictions on the types of entities that hold preferred mortgages on fishing industry vessels of 100 ft or greater. Foreign investment in the fisheries of the United States was limited by AFA, which increased the amount of US citizen ownership [8]. As a result, three mother- ships and 20 catching/processing vessels became eligible for harvesting, and processing. Since 1984, with the first Surimi production in the United States, a total of 17 land-based surimi plants were built and, as of 2012, only nine plants currently produce surimi from either pollock or Pacific whiting in North America. A total of 28 vessels were built or remodeled to produce surimi from pollock and/or Pacific whiting since 1988 and, as of 2012, only 15 vessels remain for surimi production (Figure 1.5). As US surimi production continued as a global leader, Americans were quick to learn processing technologies. They swiftly moved to improve production yield and surimi quality. The change of production yield was made from 12-15% before 1990, to 15-25% by 2000, and to 25-30% by 2010 This incredible yield increase was made through the adequate fishery management for pollock and whiting and the industry's efforts in adapting decanter technology and other mechanical innovations for fish cutting. Decanter technology was introduced in the mid-1990s and expanded to the entire industry by 2000. Decanter centrifuge is able to collect almost all insoluble particles from surimi wash water. Depending Page 16 of 28

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 on the quality of recovered meat, it can be added to medium- or low-grade surimi. This recovered meat can also be packed alone as recovery grade surimi. A new fishery management that made a significant impact to the yield was to shift from "Olympic fishing" to "individual transferrable quota (ITQ)." Using a given quota, fishermen carefully harvested fish that meet the quality and quantity of surimi using their own time control. Processors also paid attention on how to recover more meat from fish and how to use trimmings and backbone meat. Scalp cutter by American Sea foods and Toyo V-cutter by UniSea also made a significant contribution to yield improvement. It is interesting to review the change of fish portions that enter the deboning machine. It has evolved from skinless fillets to skin-on fillets and then to butterfly- shaped H&G fish. After approximately 30 years of surirni production in the United States, it is feasible that surimi production yield can exceed 30%. The yield increase from 12% to over 30% over the last 30 years had made a significant contribution to keeping our Alaska Pollock and pacific whiting healthy and sustainable. The efforts made by the US government and industry must be recognized for maintaining Alaska Pollock and pacific whiting as the most sustainable fisheries in the world.”

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 Accordingly, we delete this addition for all these five A.Ys and allow this issue of assessee’s appeals.

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 outstation parties. The AO's observations and conclusions in this regard can be summarized as under: a. In respect of the purchases from 7 parties amounting to Rs.2,14,78,539/-, the appellant had no purchase bills, delivery challans, transport bills or weight bridge slips or check post clearances. b. Although it was contended by the appellant then the fish is exempted from octroi, still the argument cannot be accepted because even if the fish is exempted, the same has to clear the interstate check post and clearance is not possible without a valid receipt of sale bill. c. So far as the affidavits filed by the 7 parties confirming the sales made to the appellant were concerned, all affidavits were similarly worded, indicating that these affidavits have been guided by the appellant. d. Since the rate of fish per kilogram claimed to be purchased from the above parties is admittedly higher than the amounts booked against the purchases made in Mumbai,, the payment of higher price per kilogram is not logical, when the fish was available at a cheaper rate at Mumbai. e. Although the appellant contended that the purchases from the above 7 parties were made at a higher price because there was a ban on fishing activities during monsoon months from June and the fishing activities restart from South India, the ledger accounts of the above parties show that fish purchases have been booked not only in the initial months of monsoon but at regular intervals throughout the year. f. Although the appellant contended that all the payments have been made through account page cheques to the above 7 parties, it does not prove that the payment has been made for purchase of fish and hence the expenditure incurred is towards business purpose.

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 of the fish. The reason for the same as given by the appellant is that it is not necessary that weight of the fish when weighed by the supplier at his place is correct and there can be a mistake at his end because, while sending the fish, it is cleaned with water and hence fish contains water. Further, during the course of transportation, the time period being between 24 to 30 hours, such water evaporates naturally and there is loss in weight. The fish skin, which also contains water, starts drying gradually and the water evaporates during the course of transportation. This reason given by the appellant is quite reasonable to support the argument that the outstation parties do not issue purchase bills.

7. The payment is made by the appellant on the basis of the goods received note cum challan prepared by the appellant at its factory at Pawne, Navi Mumbai indicating actual quantity of the fish received and weighed by the appellant.

8. Since, the actual quantity of fish received by the appellant is determined only at the time of receipt of such goods at its factory, it is also understandable that the appellant does not keep the copy of such delivery challans issued by the outstation suppliers (since they do not serve any purpose as the payment is made by the appellant on the basis of goods received note prepared by the appellant itself). Thereafter, the fish being a highly perishable commodity is immediately processed and is converted into finished goods (i.e. fish paste). Finished goods not sold are in the stock of finished goods. It is on account of this reason that the appellant could not produce the delivery challans in respect of the outstation suppliers. However, in the case of M/s Arabian Seafoods, the appellant could produce delivery challans as the said party had kept a copy and on this basis the AO has accepted the genuineness of purchases from M/s Arabian Seafoods.

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 a. The appellant has made payment to all the 7 outstation parties through account payee cross cheques, which have been deposed by them in their bank accounts. b. The appellant had furnished the affidavits from the 7 outstation parties which stated that only delivery challans were prepared to show the weight of the fish and that no bills were prepaed and the purchaser's receipt cum challan was treated as final and the same was duly accounted for by them in their books of account. c. These suppliers had filed their income tax returns. The zerox copy of acknowledgment of their Income tax returns as well ledger accounts in their books of account for the period 1.4,2010 to 31.3.2011 was also furnished by the appellant. Thus the appellant has furnished complete confirmation from the said parties in the form of i) their affidavits and ii) the ledger accounts of the appellant in their books of account. d. The appellants contention is that the same modus operandi is being followed by the aforesaid suppliers in respect of other Surimi factories as well. The AC has not at all contradicted this fact, by making any enquiries. e. The appellant had requested the AO to depute his staff to the factory premises of the sup pliers (at appellants cost) with a view to physically check their books of account to ascertain that all sales made by them to the appellant were duly accounted for by them and were accordingly included in the profit & loss account which was eventually filed by them with the Income Tax Department while filing their return of income. The appellant also suggested to the AC that the authenticity of the affidavits can be got verified by him from the assessing officers of the said parties through departmental enquiry. But inspite of appellant's repeated request, the AC did not do so and based on his own assumption, concluded that the purchases from the 7 outstation parties were bogus. f. The appellant also obtained the Chartered Accountant's Certificate from the respective suppliers stating that they had Page 21 of 28

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 checked their books of accounts i.e. sales wherein the sales made to the appellant were duly accounted for, that the sales made to the appellant were included in the total sales as reflected in their profit & loss account for the year ended 31.3.2011 which in turn was filed with the Income Tax department. The AG has not commented upon the same, rather he has not even referred to such Chartered Accountants' Certificates in the assessment order. g. Earlier, a survey operation u/s 133A was carried out at the appellant's premises on 27.12.2005 and in the statement of the Director recorded on 27.12.2005, the procedure for appellant's fish purchase was duly explained. During the course of the said survey operation, it was found that the facts and methodology relating to outstation purchases of fish during that period also were identical. The appellant had not made any disclosure on account of undisclosed purchases/income and the department also did not make any addition on account of unexplained purchases in assessment years 2005-06 & 2006-07. h. The appellant's case has been scrutinized in preceding few years also up to AY 2009-10 & 2010-11 and in all those years the methodology of accounting for purchases was the same, which has also been accepted in those preceding years. i. So far as the AO's observation that even the octroi receipts or check post clearances have not been filed by the appellant, it is contended by the appellant that the fish being a perishable commodity, the tempos carrying the same were not checked simply because it contained odour and no octroi was attracted in respect of the said commodity. It is seen that the AO has simply stated the absence of check post clearances and octroi receipts.,... without verifying these contentions of the appellant. j. Although the AO has observed that all the affidavits from the suppliers are similarly worded, he has not denied or disproved the contents of these affidavits. k. It can be appreciated that nothing prevented the AO from physically checking the books of accounts of the suppliers when Page 22 of 28

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 specific requests to that effect were made repeatedly by the appellant. l. It can also be appreciated that in fish business, the appellant could not have kept any stock of raw material, because the fish is a highly perishable commodity. The appellant's books show an opening stock of Rs. 2 crores (approximately) of the finished goods (221.45 tonnes) and closing stock of Rs. 2.91 crores (approximately) of finished goods (318.40 tonnes). The raw material consumption figures and the production figures have been mentioned in the accounts on the relevant pages of P&L account. The auditors' reports for the years ended 31 .3.2008 to 31.3.2011 has also been submitted. The opening stock, closing stock, purchase of raw material, manufactured finished product and sale of finished product, as per the books of account of the appellant can be catalogued as under: m. From the above it can be seen that the appellant's accounts are matching in terms of quantity of input and output and the same would not be possible, if bogus purchases have been booked. n. The purchases made by the appellant are also duly reflected in the VAT return filed by the appellant with Maharashtra Sales Tax Department (which has not been questioned by the Sales Tax Department). They were liable to NIL rate of VAT under MVAT Tax, 2002. The VAT return filed by the appellant was duly

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 furnished by the appellant before the AO. This also supports the contention of the appellant that the purchases were genuine. o. So far as the AO's observation in para 3.2(f) of the assessment order that "the explanation given by the appellant that fish was purchased from the said 8 parties in monsoon season was not acceptable since purchases were made throughout the year" is concerned, it is seen from the ledger accounts of the 7 parties that majority of the purchases were made from them during the months of April to September 2010 and only minor purchases were made in other months. The appellant has argued that in other months, such purchases were made from the outstation parties only when there was a shortage in the fish procured from Mumbai. p. Specifically, it is seen that the assessment of the appellant has been made under section 143(3) of the Act in assessment years 2005-06, 2006-07, 2009-10 and 201011, where the facts regarding the purchases made from outstation parties were identical and such purchases have been accepted by the Department to be genuine. Although the principle of consistency does not apply to the assessment proceedings, still the principle of res-judicata, as is applicable to income tax assessment proceedings cannot be discarded without any specific demonstration that the facts pleaded by the appellant a e without merit and the impugned purchases were established to be bogus by the AO beyond doubt, through independent enquiry. The AO could not have based his desion only on the basis of assumption, in spite of the fact that the concerned suppliers had given complete confirmation and they had also filed their return of income, wherein the sales made to the appellant were included in their profit and loss account. q. The genuineness of the purchases made by the appellant is supported by the statement of the director of the appellant company Mr Nisar S. H. Naik, who had repeatedly stated (before the AO), the above methodology and procedure for accounting of purchases and had also stated that this is the common practice

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 followed in the fish industry. He had emphasized that the actual purchase crystallizes only when the fish is weighed at his factory in the front of the supplier and the price is determined on the basis of the quality of the fish. The relevant part of his statement in answer to question No. 2 is as under:

"The outstation supplier (AY 2004-05 - Rosy Krupa Sea Foods – Porbandar and AY 2005-06 - Best Seafood, Malpe., Rosy Krupa Sea Foods – Porbandar and Rozi Sagar Seafood, Porbandar) issues the delivery challans at the time of dispatch from their godown. However, in the case of Mumbai suppliers, the weighment made at our factory in the presence of their personnel forms the basis of the weighment. However due to the various difference of the landing centres to our factory, the weight of the fish differs at the point of weighment at our factory. Our point of purchase is the weighment actually received in our factory. Our raw material receipt vouchers include the above weight, count (the approx No. offish in one Kg), the freshness of the fish as calibrated by an imported freshness meter. Based on the above parameters, the price is finalised after discussion with the supplier and the said rate is noted in the receipt voucher. The said raw material receipt voucher is the basis of our raw material purchase. All of the above can be established from our suppliers. All payments made to our supplier is through payee account cheque only. All manufactured products are exported and there are no local sale. Most of the product exported are done through letter of credit." r. Thereafter, in his statement, in answers to question Nos. 8 and 21, he again emphasised that the said procedure was the common industry practice, which can e verified by the AO, to whom, the complete list of suppliers along with addresses iad already been furnished. The AO, as already stated above, hasnot carried out ny further independent enquiries to establish the facturn of the purchases, being oguThéAO has completely ignored the documentary evidences furnished by the appellant for establishing the genuineness of the impugned purchases. Page 25 of 28

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10. In the light of above discussion, therefore it is evident that the AO's decision to hold purchases of Rs 2,14,78539/- to be bogus is not justified The appellant from its side had furnished complete proof regarding the genuineness of the purchases. The decision of the AO is obviously based on his own assumptions. The appellant has cited a number of decisions to support its case. These are being discussed in subsequent paragraphs.

11. In the case of R.M.P. Perianna Pillai Co (supra) cited by the appellant, the AO (in assessment years 1951-52 and 1952-53) had refused to accept the assessee's figures of purchases on the basis of self bought notes on the ground that there was no independent evidence in terms of suppliers' vouchers. In this case, the gross profit declared in the account books was also considered to be lower as compared to other dealers of similar goods. Hence the account books of the assessee were rejected. Since the Tribunal had upheld the decision of the AO and that of the AAC, the High Court observed that "when a similar question arose with reference to the 1949-50 assessment of the same assessee, the Tribunal pointed out 'when the bought notes as a rule show the names of the suppliers, variety of cloth, cloth price and suppliers' thumb impressions or signatures, it is not possible to brush them aside without making the slightest enquiry as the ITO has done' ". With these observations, Hon'ble High Court deleted the addition made by the AO, while setting aside the decision of the Tribunal.

"The main defect in the assessee's books is that the purchases are supported only by its own bought notes. No doubt, this is a common feature in this line of business as purchases are made

781/Mum/2015 ITA Nos.2984,2985,2986,2987,2988/Mum/2016 mostly from agriculturists who do not have their own vouchers. But the fact remains that it is not possible to verify the particulars mentioned in the bought notes as in most cases, the parties cannot be traced. The assessee's accounts are therefore such that the income, profits and gains cannot be properly deduced therefrom. This is sufficient for the application of the proviso to s. 13.

14. Similarly, in the other cases cited by the appellant namely Lakshmi Oil Company (supra) [In this case although the decision given by the High Court was against the assessee, the accounting of purchases through bought notes had not been doubted. The case was decided against the assessee only because the assessee had not maintained any manufacturing account.], Gajanana Agencies (supra), K. H. Dhamdhere (supra), Gupta Brothers India (supra), the genuineness of purchases on the basis of bought notes prepared by the assessee has been accepted. In yet another case of Sunrise Tooling System Pvt. Ltd (supra) cited by the appellant, in the context of alleged unproved purchases, it was held by the ITAT that the assessee had produced certain documents of the supplier which showed that sales were in fact made to the assessee and the primary evidence in the form of relevant documents was made available by the assessee in support of the genuiness of the claim of purchases. In these circumstances, it was held by the ITAT that the onus to establish otherwise was on the department. When the sales declared by the assessee were not doubted, it was not proper on the part of the assessing officer to deny the claimed purchases on the basis of which sales were made. The decision of the ITAT was confirmed by the Hon'ble High Court. Page 27 of 28

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15. In view of above discussion it is therefore abundantly clear that the AO has held the impugned purchases of fish to be bogus only on the basis of his own assumptions and presumptions. The AG has not carried out any independent enquiry to establish his finding, especially when the appellant had given all the evidence and complete confirmations along with affidavits, chartered accountant's certificates as well as the copies of the returns of income filed by the suppliers, wherein the sales made to the appellant have been declared. It is therefore evident that the AO was not justified in disallowing purchases to the extent of them to be bogus. The disallowance of Rs. 24,78,39/-is therefore deleted.".