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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI SANJAY ARORA, AM & SHRI PAWAN SINGH, JM
O R D E R Per Sanjay Arora, A. M.: This is a set of cross Appeals, i.e., by the Assessee and the Revenue, for two consecutive years, being Assessment Years (A.Ys.) 2004-05 and 2005-06, preferred u/s. 253 of the Income Tax Act, 1961 (‘the Act’ hereinafter). The issues arising being
2 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) common, the same were listed for hearing, and were accordingly heard together – the facts and circumstances as well as the respective cases of the parties being also the same, and are being disposed of vide a common, consolidated order.
The issue arising in these appeals is the maintainability of the disallowance of/addition qua the impugned purchases, i.e., as evidenced by bills issued (to the assessee) by and in the name of several concerns by one, Shri Rakesh Kumar Madanlal Gupta, in whole or in part, being alleged as ‘bogus’ by the Revenue.
3.1 The facts of the case are that a survey u/s. 133A of the Act was conducted by ITO-14(3)(2), Mumbai on 13.2.2009 on the following group concerns: 1. Shri Rakeshkumar M Gupta, Prop. of M/s. Manoj Mills 2. Smt. Hema R. Gupta(wife of Shri Rakeshkumar Gupta), Prop. of M/s. Shree Ram Sales & Synthetics 3. Shri Mohit R. Gupta(son of Shri Rakeshkumar Gupta), Prop. of M/s. Astha Silk Industries Shri Rakeshkumar Gupta was examined u/s. 133A of the Act on 13/14.02.2009. He named five proprietary concerns of himself and his family members (along with the name of the respective proprietor), i.e., including three concerns afore-mentioned (which were stated by him as old and main concerns) subject to survey, which were admitted to be involved in providing accommodation bills of purchases for consideration, called ‘commission’. The bills were issued as per the requirement of the parties, i.e., the ‘purchasers’ or the ‘buyers’. Payments (against such purchases) or purchase bills were received by cheque, i.e., through the banking channel; the amount withdrawn and returned in cash to the ‘buyer’ in cash after deducting commission @ 1%. To cover such ‘sales’, bogus purchase bills were entered in books. Blank purchase bills in the name of 16 parties (6 bundles each) were found during survey, which were admitted as printed
3 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) for booking such ‘purchases’. The purchases and sales being bogus, the opening and the closing ‘stock’, as well as the ‘debtors’ and ‘creditors’ as per the balance-sheet, were admitted as not reflecting actual assets and liabilities, even as no stock was actually found during survey. He, in fact, confirmed of keeping some goods in stock to give a veneer of genuineness, i.e., of being involved in trading in textiles – the assessee being in a business of trading and processing of interlining cloth. Bills for Rs.5 crores to Rs.7 crores were issued each year in each of these concerns, and which activity was being carried out since the year 2000, with the firm Sainath Textiles and Dev-Vani Industries being started in the year 2006. Extracts of the statement u/s. 133A of Shri Rakeshkumar M. Gupta dated 13/14.2.2009 stand reproduced in the assessment orders. These facts were subsequently confirmed by him vide statements on oath u/s. 131 on 23.2.2009 and 03.3.2009. The assessee’s books reflecting purchases from the three concerns afore- mentioned subject to survey u/s. 133A, at Rs.44,48,242/- and Rs.29,88,033/- for the two consecutive years under reference respectively, its assessments for the said two years were reopened u/s. 147 of the Act on 28.3.2011 and 27.3.2012 respectively after obtaining approval from the competent authority, duly conveying the reasons recorded to the assessee. In the assessment proceedings, it was found by the Assessing Officer (A.O.) that the purchases from these parties were not reflected in the stock register. There was, further, no evidence of transportation of goods to the assessee’s premises/godown. The assessee had merely booked ‘purchases’, inflating the ‘expenses’. The same was inferred to be a colorable device to cover up purchases made outside books, attracting section 69 of the Act. He accordingly effected addition to the returned income toward investment in the impugned purchases u/s. 69 of the Act.
3.2 In appeal, the assessee emphasized on having established day to day movement of stock ‘purchased’ from these parties, so that the A.O. was incorrect in stating that the 4 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) goods purchased from these parties were not reflected in the stock register, and which gets reflected in the assessment order per the use by him of the words ‘apparently nothing wrong was visible’. The A.O. per the remand report (dated 11.9.2013) reiterated his stand, relying on the findings in the assessment order/s. The statement as to: ‘nothing wrong being visible’ had been wrongly construed in-as-much as it meant just that, i.e., nothing wrong on the face of it. The absence of any purchase by the ‘seller’ firms, coupled with the statement on oath confirming no purchase and sale transactions having been actually made by the three firms, which were only providing accommodation entries, left one in no manner of any doubt as regards the non-genuineness of the purchases by the assessee-firm. When no sales had actually been made (by the seller firm), how could the assessee’s purchases be genuine? That is, the sales (of the seller firms) being bogus stood proved, so that by necessary implication the assessee’s purchases were also bogus. In view of the ld. CIT(A), the A.O. did not provide opportunity to the assessee to cross examine Shri Rakeshkumar M Gupta, despite specific request by the assessee. The statement/s u/s. 133A/131 of the Act could not be relied upon by the A.O., citing the decision by the apex court in Kishan Chand Chellaram vs. CIT [1980] 125 ITR 713 (SC). The assessee had exhibited day to day stock movement, even as the assessee’s accounts were audited. This fact could not be overlooked. The logical conclusion would be that the assessee had purchased the goods sold from the grey market. The A.O., he noticed, was also aware of this, mentioning that the assessee had made the purchases outside books, and the impugned purchases were made only to cover up the same. The fact of the goods being sold in the grey market, i.e., without bills, against cash, is a ground reality which could not be denied. The disallowance of the entire purchase was, therefore, not justified, and there was no justification in the stand of both the parties. He, accordingly, confirmed the addition at 10% of the impugned purchases. Aggrieved, both the assessee and the Revenue are in 5 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) appeal; the Revenue against the deletion qua the impugned purchases (to the extent of 90% thereof) and the assessee against its restriction at 10%.
Before us, the ld. AR relied on the orders by the Tribunal in Goolamally Hasanjee vs. ITO (in & 3741/Mum/2012 dated 10.6.2014) and Dy. CIT vs. Rajeev G. Kalathil (in ITA No. 6727/Mum/2012 & CO No. 06/Mum/2014 dated 20.8.2014), as well as by the Hon'ble jurisdictional High Court in CIT vs. Nikunj Eximp Enterprises Pvt. Ltd. [2015] 372 ITR 619 (Bom). The tribunal had clarified that though suspicion could be a good starting point (of investigation), it cannot itself substitute evidence, and no disallowance could be made on that basis. The very fact that the sales had been made implies that the purchases – from whatever source – had also been made. The availability of stock reconciliation excluded the possibility of inflation (in terms of quantity) in purchases. The Hon'ble jurisdictional High Court had, in fact, approved of this algorithm/rationale in Nikunj Eximp Enterprises Pvt. Ltd. (supra), wherein the question before the Hon’ble Court covered the instant fact-situation, further stating that in-as-much as the books of account had not been rejected, as in the instant case, no addition could be made and the books results were to be accepted. He, however, on it being pointed out by the ld. DR with reference to the case records, conceded that no request for cross examination of Shri Rakeshkumar M. Gupta or his family members had been made by the assessee at any stage. The ld. DR would, on the other hand, emphasize on the facts of the instant case being distinguishable in-as-much as the A.O. had given a categorical finding of non- reflection of the goods per the impugned purchases in the stock register. The entire such purchases were under the circumstances inadmissible, and the ld. CIT(A) had, by issuing a wrong finding of fact, inconsistent with and not borne out by the material on record, restricted the disallowance to 10% of that exigible. On a question by the Bench qua the assessee’s sales being not doubted by the Revenue, he conceded to it being so, with the 6 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) A.O. in fact pointing to the possibility of the goods having been purchased outside books, and to cover up which only the ‘purchase bills’ had been procured by the assessee. This, he would add was, however, without prejudice and in fact subject to his objection with regard to the stock register, availability of which constituted the principal reason for the theory of alternate purchases (from the grey market) prevailing with the tribunal and the hon’ble High Court.
We have heard the parties, and perused the material on record. The assessee’s case predicates on its entire sales being genuine, with no part of it being doubted by the Revenue. The corresponding purchases, thus, cannot be doubted, so that if the stated source is doubted and, considering as rightly so, the same have been to that extent made from an alternate source/s, to therefore no effect, i.e., on the income as disclosed in-as-much as the payment therefor stands effectively from its books of account. Toward the same, it furnishes a quantitative reconciliation of the traded goods, i.e., presumably in correspondence with its manufacturing/trading account, besides relying on the decisions in Nikunj Eximp Enterprises Pvt. Ltd. (supra) and Goolamally Hasanjee (supra) in confirmation of this hypothesis. The Revenue’s case is that that the impugned purchases are not genuine is well established. The assessee has not furnished a stock register, i.e., of actual goods bought and sold, in the absence of which the theory of goods being purchased from the grey market is only presumptuous, not backed by any material. Why should the assessee, in fact, engage in such an exercise, and which behavior is totally unexplained. Further, even assuming so, the same cannot be without motive or objective of gain. The assessment of the same by the ld. CIT(A) at 10% (of the purchases – taken at the same value) is without basis. Clearly, thus, the case has two components: a) Whether there is scope for any addition qua the impugned purchases u/s. 69/69A or, for that matter, u/s. 69C, toward unexplained source of payment for purchases in the facts and circumstances of the case; and 7 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) b) Whether there is any basis for restricting the allowance qua the impugned purchases to 90% thereof in the absence of any evidence on the rate at which the goods from the grey market, inferably made in lieu of the impugned purchases, have been made.
The first issue that therefore confronts us is whether section 69/69A of the Act is applicable in the facts and circumstances of the case, which aspect, despite being pointed out by the Bench during hearing, was not addressed by the parties. This is as while the A.O. has applied section 69, the ld. CIT(A) proceeds on the basis that the purchases stand disallowed u/s. 37(1) of the Act, i.e., without rebutting the AO’s case, which the Revenue continues to maintain and canvass before us; it’s Grounds reading as under: ‘1. The Ld. CIT(A) has erred in law as well as on fact by not sustaining addition u/s.69 after having accepted the finding in principle that the purchases were made from undisclosed/unverifiable/unidentifiable parties in the grey market by investing in cash and the purchases from the group concerns of Shri Rakesh Gupta & family were only accommodation entries and not actual purchases.
2. On the facts and circumstances of the case, the Ld.CIT(A) after having accepted the fact that the purchases made from or through Shri Rakeshkumar Gupta and his family members are bogus, erred in law in not confirming the addition at least to the extent of peak of the purchases made from such parties on account of bogus purchases made in cash from the open market out of unaccounted cash, in view of the decision held by the Hon'ble ITAT's C-Bench, Ahmedabad, in the case of Vijay Proteins Ltd. Vs. ACIT (58 ITD 428).
For the above mentioned reason and any other reasons that may be urged at the time of hearing, it is requested that the order of the CIT(A) be quashed and that of the Assessing Officer be restored.’ This aspect has also not been dealt with or otherwise considered in the decisions citied and relied upon before us, each of which was read out during hearing. We shall accordingly consider this aspect of the matter first. The fall-out of the purchases (to the 8 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) extent disallowed) being bogus or not genuine could be either of the corresponding sales being, equally, bogus, or, in the alternative, the goods sold being purchased outside books, with the ‘purchase bills’ from the impugned concerns providing a ‘justification’ or ‘substantiation’ towards booking (and claiming) the relevant expenditure (on purchases). The assessee admittedly not seeking cross examination of Sh. Rakeshkumar Gupta at any stage of the proceedings, despite the Revenue relying on his depositions, how we wonder can it question the Revenue’s reliance on the same. Admission, it may be noted, is the best form of evidence. The same, it is to be appreciated, is not removed from or de hors the other findings of survey, and is thus to be considered in conjunction therewith, viz., the absence of any incidents of business or trade being found during survey; the tell tale signs in the form of bank accounts of the seller firms exhibiting withdrawals of the sale proceeds in cash; the blank ‘purchase’ bill books of, again, non- existent and/or bogus parties, etc., found during survey. The same is thus not to be considered independent of or on a stand-alone basis, but as corroborative, to all of which the statutory presumption of truthfulness u/s. 292-C shall apply. However, even so, the question remains as to how the provision of s. 69, or s. 69A for that matter, the two being para materia, would apply. The money (cash) provided by the bill provider would go to finance such purchases - save to the extent of 1% not returned by the seller, to which extent, therefore, the addition becomes justified. In other words, the actual purchases are paid only out of the capital/sources per the assessee’s books, albeit indirectly in-as-much as the same are against cash provided (to the assessee) by the hawala operator on encashing the funds released (recorded in books) in his favour, ostensibly toward ‘payment’ of ‘purchases’ from him. How could then the source of the payment be said to be out of books and/or unexplained? On the other hand, if there are no actual (or genuine) sales corresponding to these purchases, there is no question of any payment there-against; the purchases and sales in fact cancelling or neutralizing each other, with in fact the profit (on sales) being disclosed/offered as 9 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) income. The cash received from the ‘seller’ is again brought in books on receipt (against corresponding book sales) from the buyer/s, paying them in cash. Such an arrangement, extremely unlikely, as it ostensibly provides no benefit to any party, with the assessee on the contrary incurring a loss (of 1%), which perhaps could be recouped on providing ‘sale bills’ to the customers. The same is nevertheless listed with a view to examine the transaction from all angels, so that in either case, section 69/69A is not attracted, save to the extent of one per cent of the purchases as booked and claimed. The ld. CIT(A), by accepting the assessee’s contention of the goods being purchased from an alternate source/s (grey market), has in fact only taken the assessee’s argument of no part of its sales being doubted by the Revenue to its logical conclusion. This is as sale of goods imply their purchase – the stated and the most obvious means of acquisition of goods by the assessee. In-as-much as the impugned purchases are not genuine – there being no actual purchase of goods to that extent, the same have been made good by the assessee by purchasing from another source/s (of supply). This is precisely what found acceptance by the tribunal as well as by the Hon’ble High Court, both emphasizing the need for a final finding – which is definitely one of fact, being delivered on a consideration of the entirety of the facts and circumstances of the case. Continuing further, the payment for the actual purchases is ostensibly only by investing the cash generated by booking bogus purchases, i.e., is sourced from the assessee’s books of account itself. This would however give rise to, and there is thus the question of the capital deployed in this exercise. Purchase of goods must precede their sale. The average inventory would give a measure of this precedence. The stock would again require being broken-up or segregated into two components, i.e., that pertaining to genuine purchases and that corresponding to the impugned (non-genuine) purchases – the assessee’s case being of having made, in lieu thereof, equivalent purchases from the grey market. This segregation may be done adopting a reasonable, as (say) FIFO, basis/method. To the 10 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) extent it relates to genuine purchases, it (the stock) could either be paid up or unpaid (i.e., financed by unpaid purchases/credit there-against), or even partly by one and partly by another. The same in fact is not in question. It is only the stock corresponding to the impugned (non-genuine) purchases that we are concerned with in-as-much as the same, being backed by, as claimed, purchases (of the same quantity) from the grey market, cannot be regarded as unpaid, particularly in the absence of any material being led toward financing the same. As such, the stock to that extent is only paid-up, and it is the source of capital invested (blocked) therein that is under question in-as-much as the same cannot, in view of the corresponding (stated) parties being bogus, explained with reference to the assessee’s books of account. To this extent the Revenue has a case for addition u/s. 69/69A toward unexplained source of (payment of) stock. The assessee could explain the same with reference to the cash received on account of bogus (non- genuine) purchases, and the same having been utilized to purchase goods (to that extent) from the grey market. A parallel statement in this respect would therefore have to be drawn, stating the date/s on which cash is withdrawn by the bogus supplier firms from their respective bank accounts (against the assessee’s payments). Assuming the availability of cash with the assessee (to that extent) on the same date/s, the same would then have to be matched with the purchase date/s. A difference between the date/s of purchase/s (of payment) and the availability of cash implies that the same would require being explained for source (of payment) in-as-much as there is no basis or reason to consider the purchase/s (from the grey market) as unpaid. Of course, in actual terms, it is only the peak such value, i.e., at any time during the relevant year, that alone would require being brought to tax u/s. 69/69A. The Revenue’s case for addition thereunder would be to this extent valid, even as it would have to be preceded by and subject to the result of an exercise in its respect being undertaken to ascertain the deficiency, if any, for and toward which the addition could be made. Further, lest one argues of even this addition; the purchase cost of goods sold being a permissible deduction in computing 11 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) business income, as being u/s. 69-C and not u/s. 69/69A, the same would be of little consequence in view of proviso to s. 69-C, so that no deduction in its respect would arise. The argument, in fact, is valid only for the goods sold and not that held in stock - in practice it being the same funds that find reflection as stock again and again, so that the argument does not address this aspect, and which in fact also explains why we have talked of addition, where exigible, as only for the peak value (of such stock) during the year. This answers limb (a) of the issue arising for our consideration. We may next visit the matter of the disallowance as made by the ld. CIT(A), i.e., as projected by second (b) component of the issue under reference. The same is u/s.37(1) and, further, made on the premise that the purchases from the grey market would yield or result in some benefit to the assessee. We have already opined that the purchases could not be added (except for 1% thereof, retained in cash by the ‘seller’). This is as the cash available with the assessee for alternate purchases (from the grey market) is only at 99% of the purchase value, so that to the extent of 1% the source of the alternate purchases, assuming so, is unexplained, and is accordingly liable to be added. In other words, the presumption of alternate purchase (from the grey market) is valid up to 99% of the purchases booked and claimed. The moot question in this regard, however, is: Why would the assessee indulge in such an exercise, suffering, rather, a loss of 1% in value, unless of course the same is remunerative, i.e., there is a concomitant benefit? That is, it gives rise to a strong inference of the assessee’s alternate purchase (from the grey market) being at a lower rate. One may be quick to castigate this as presumptuous. True, no disallowance (or addition) could be made without evidence, but the fact of the matter – and which forms the cornerstone of the assessee’s case, is that the goods have been purchased from the grey market, which are readily available in the open market as well, being in fact sold thus by the assessee itself. Only the assessee could explain this apparently contradictory behavior, and which it has not at any stage. There, then, has to be an impetus for such behavior, unless of course we proceed on the basis of the assessee 12 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) being an imprudent, rather a moron, financially self-destructive person. He being a businessman, undertaking business (for profit/gain), the exercise has to be with a purpose, as where it results in or gives rise to a financial gain. Why, the ostensible seller not making actual sales (to the assessee) also does so for a gain, stated at 1% of the bill amount. He may, further, not pay tax on his ‘sales’, while the assessee claims full deduction (in its’ VAT returns) for the purchases made from it. This tax component may then be shared equally between the assessee and the ‘seller’. The assessee’s sales tax assessments could throw light on this aspect, so that where the ostensible seller has not been allowed full credit for his purchases, or the assessee not allowed credit for the tax not paid by the ‘seller’, i.e., by the sales-tax department, the tax component could well be the gain referred to earlier. The book results are another indicator. If the assessee’s trading results are not in conformity with that of others in the trade (i.e., whose accounts are not similarly inflicted), this may be a serious pointer to the assessee’s purchases (as booked and claimed), being inflated to that extent, i.e., to the extent of the lower (than normative) trading profit. This, then, would form and constitute evidence or the material suggesting or, rather, exhibiting the financial gain accompanying the assessee’s behavior in preferring to purchase from the grey market goods that are readily available, and are in fact being sold in the open (regular) market, as it itself claims to do, the absence of which (gain) would rather make such behavior anomalous and inexplicable. It is toward such gain, estimated at 25% of the expenditure claimed thus, that the Tribunal in Vijay Proteins Ltd. vs. Asst. CIT [1996] 58 ITD 428 (Ahbd) upheld the disallowance. This, then, expresses the Revenue’s case per its Ground 2, referring to the said decision. We may though hasten to add that even though the assessee has not divulged the full story, explaining it’s behavior, that would not detract from the onus on the Revenue to demonstrate in some manner the gain for and toward which the assessee is being sought to be charged with, impugning his book results. The question then boils down to the 13 ITA Nos. 7644, 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) extent of such gain, which cannot be the matter of presumption, as at 10% (of the purchase amount) by the ld. CIT(A). Of course no standard could be laid down, and which (gain) may itself vary from year to year, and is to be based on the evidence/material on record. The matter, accordingly, would require being restored to the file of the AO for the purpose. This answers the question posted at (b) above.
In sum 6. The survey by the Revenue at the ‘business’ premises of firms, purchases from whom are under reference, and the consequent findings, including the admission by the proprietor, proves – there being not an iota of evidence of any actual transactions, the impugned purchases as not genuine. Why, the assessee itself makes no bones about it – choosing not to cross-examine the supplier firm/s, and it’s case rests on the purchases – its’ books reflecting actual sales as well as quantitative tally of goods bought and sold, being made from an equivalent source, so that it cannot be denied deduction for the full amount thereof, a premise accepted by the tribunal and since approved by the Hon’ble High Court. As a pre-requisite, however, would be required a finding of the trading/manufacturing account being balanced, i.e., in terms of quantity, so that only the cost of the same (equivalent) quantity of goods (as per books of account) is set off against the sale value (of the good sold) in arriving at the disclosed (book) trading profit. The source of payment for the purchases being the assessee’s books of account, no case for addition qua the unexplained source (of purchases) is made out, except to the extent of 1% retained (in cash) by the provider of accommodation bills on transmitting the purchase value - withdrawn in cash, back to the assessee, and which shall be u/s. 69C, proscribing, per proviso thereto, deduction in its’ respect, so that an addition to that extent shall, therefore, obtain. The assessee, however, has not explained its’ behavior, much less satisfactorily and/or with reference to any material, at any stage. Why should it purchase goods, 14 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) otherwise available, from the grey market, incurring a cost, if it is not accompanied by a gain, particularly considering its’ sales are actual and duly accounted? The inference of the assessee, a businessman, standing to gain by such a circuitous exercise, entailing risk of transfer of unaccounted cash on a regular basis, is unmistakable and, besides, supported by statutory presumptions under sections 102 and 114 (Illustration (g)) of the Evidence Act. To suggest that the assessee’s books of account warrant an unqualified approval, or can be fully relied upon for computing its income from business, cannot under the circumstances be accepted or countenanced. Deduction to the extent of 1% of the impugned purchases, which stand disproved; the books of account admittedly reflecting only an ostensible source of supply, is confirmed for disallowance, establishing their fallibility or unreliability. Further, there is the question of capital, if any, employed in the stock corresponding to the impugned purchases, which is to be regarded as paid-up, i.e., toward the source of investment therein. The source thereof shall be required to be explained/disclosed, except where and to the extent cash is shown as available against such purchases with reference to the bank accounts of the supplier firms. This is as there is no evidence or basis to consider the purchase of goods in lieu of the impugned purchases, i.e., from the grey market, as unpaid. This, rather, we consider as the only addition sustainable u/s. 69/69A qua the said purchases, which the Revenue extends to the entire such purchases, i.e., except where the stock register itself reflects negative stock (stock deficiency) on any date/s of the year, in-as-much as the same is a contradiction in terms. This, rather, is a species of the addition qua unexplained source of stock. In this regard, it may be clarified that while the ld. CIT(A) states of the assessee having furnished a quantitative reconciliation, the AO is categorical in stating that no stock register stands furnished. The two are not equivalent. A stock tally/quantitative reconciliation signifies a matching - on an aggregate, so that if ‘X’ quantity of goods is sold, it is only the cost of the said quantity that is set off there-against in arriving at the 15 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) trading profit. The assessee being engaged in, besides trading, processing (of cloth) as well, and which generally involves change of form as well as process loss, in practice it implies the equivalent input quantity worked out on the basis of appropriate conversion ratio. The stock register, on the other hand, which subsumes a quantitative reconciliation, would also signify that goods were available on the date of their (actual) sale, i.e., as per books of account. The goods purchased subsequent to the sale, which may get absorbed in the overall quantitative statement, will not be able to fill the void, where so, and would be relevant for the addition that may ensue u/s.69/69A (on account of unexplained stock). It is this document (stock register), profiling the purchases and sales date-wise, that is relevant. The stock register would reflect the stock on a day to day basis, though an addition, if any, shall arise only for the peak such capital, where unexplained. In this regard, we are conscious that it is the actual purchase, and not the book purchases (backed only by paper bills) that is material, so that a stock register culled out from the assessee’s books of account may not represent the true picture. But, then, it is only the assessee, whose case rests on alternate purchases (for the same value), who is to furnish the materials evidencing or toward the actual state of affairs. It is for this reason that we have, taking a broad and holistic view of the matter, required the AO to assess the capital deployed in the inventory of goods on the basis of the stock held (at different times during the year), taking guidance from and on the basis of the (book) stock register – which thus becomes a surrogate measure of the stock so held and, further, determine the addition u/s. 69/69A only to the extent it is not explained with reference to the books of account of the assessee and of the ostensible suppliers (in-as- much as they reveal the date/s of encashing the cheques issued by the assessee, giving thus the date-wise availability of cash which can be considered as utilized for making payment for the in lieu, actual purchases). He may, where the relevant details are not made available, estimate such capital on some reasonable basis.
16 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) The foregoing, however, are not the only infirmities in the assessee’s case in-as- much as the same, in effect, leads him to a position worse off than had he not engaged in the exercise, i.e., of procuring bills and purchasing goods from the grey market, which cannot be without a purpose; rather, without the objective of a gain or profit. This is as it militates against the basic notion of business and common sense. What is there, in any case, to show that the equivalent (grey market) purchases cost the same, i.e., as the impugned purchases? Then there could be tax considerations at play, yielding a pay off. This gain would though require being assessed, indica for which could be in terms of the tax benefit and/or the lower purchase price in the grey market, etc., which, however, do not limit the possibilities in which the gain could arise or manifest itself.
Conclusion 7. The issue, in view of the foregoing, would require a restoration to the file of the assessing authority for a consideration of these aspects of the matter, i.e., the stock availability on each date; the capital invested in such an exercise; and the profit associated with the procurement of goods from other than the established sources (euphemistically called ‘grey market’), while procuring ‘bills’ of ‘goods’. We direct accordingly. He shall decide by issuing definite findings of fact, and after allowing the assessee due opportunity to explain and substantiate its case. The onus for the gain associated with the procurement of bills (and purchase of goods from the grey market), we may add, is on the Revenue. A finding qua quantitative reconciliation shall, however, have to precede the same, being the factual basis for the application of the hypothesis of the purchase from an alternate source. He shall decide, in terms of his findings, in accordance with law, and after allowing a reasonable opportunity to the assessee to substantiate his case. The addition for 1% of the impugned purchases (u/s. 69C) is, in any case, confirmed. Further, lest one considers us as having travelled outside the scope of the appeal, we may advert to the decisions, inter alia, in the case of Kapurchand 17 7645, 6581 & 6582/M/13 (A.Ys. 2004-05 & 2005-06) Lachhmandas U Talreja (HUF) Shrimal v. CIT [1981] 131 ITR 451 (SC) and Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351 (Bom)(FB). We decide accordingly.