M/S INDIA FINANCE LTD,KOLKATA vs. D.C.I.T CC - VIII,KOLKATA, KOLKATA

ORDER Per Shri M. Balaganesh, AM:

This appeal by assessee is arising out of order of CIT(A), Central-1, Kolkata vide appeal No. 256/CC-VIII/CIT(A)C-1/11-12 dated 24.01.2013. Assessment was framed by DCIT, C.C-VIII, Kolkata u/s. 143(3) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2009-10 vide his order dated 30.12.2011.

India Finance Ltd., AY 2009-10 AO in the course of assessment proceedings observed that assessee had purchased as well as sold the fabric to M/s Visage Equipments Pvt. Ltd and M/s Coral Environment Pvt. Ltd. The assessee purchased 729062 Kgs of cotton knitted fabric from Coral Environment Pvt. Ltd for Rs. 27,67,94,909/- and the same was sold to M/s Visage Equipments Pvt. Ltd for Rs. 23,72,31,890/-. Again 2565837 Kgs of cotton knitted fabric was purchased from M/s Visage Equipments Pvt. ltd for Rs. 90,29,75,269/- and sold to M/s Coral Environment Pvt. Ltd for Rs. 81,78,86,533/-. In this manner, the assessee incurred loss of Rs. 12,46,51,755/- in cotton knitted fabric trading.

3.1. The ld AO made enquiries from M/s Visage Equipments Pvt. Ltd and M/s Coral Environment Pvt. Ltd. He called for the details of purchase and sale transaction carried out by them with the assessee in the year under consideration and he also asked the names and addresses of those parties from whom they purchased the fabric sold to the assessee and vice- versa. In response, M/s Coral Environment Pvt. Ltd submitted that the goods sold to assessee were purchased from M/s Godawari Electro Contractors Pvt. Ltd and the goods purchased from assessee were again sold to M/s Godawari Electro Contractors Pvt. Ltd. Similarly, M/s Visage Equipments Pvt. Ltd intimated that the goods sold to the assessee were purchased from M/s Vaishali Housing Pvt. Ltd and goods purchased from the assessee were again sold to M/s Vaishali Housing Pvt. Ltd. The ld AO opined that it is apparent that these transactions are not normal business transactions, but camouflaged as trading in cotton knitted fabrics to facilitate the assessee to create bogus loss so that the real income from interest can be set off.

3.2. The ld AO observed that assessee had purchased goods from M/s Coral Environment Pvt. Ltd during the period 4.4.2008 to 15.5.2008 mostly between price range of Rs. 375/- to Rs. 382/- per kg and sold these goods during the period 5.4.2008 to 28.6.2008 to M/s Visage Equipments Pvt. Ltd between the range of Rs. 321/- to Rs. 340/- per kg. The ld AO observed that the movement of goods is as under:- In case of purchase shown by the assessee Godawari – Coral – India Finance (assessee) – Visage – Vaishali

India Finance Ltd., AY 2009-10 In case of sales shown by the assessee Vaishali – Visage – India Finance (assessee) – Coral – Godawari 3.3. The ld AO called for the details of transportation charges and loading and unloading charges paid by it. In response to this, the assessee produced certain self made vouchers which show that the payment was made to the same person for coolie, cartage and freight. The ld AO observed that the total expenses debited under transportation charges was only Rs. 1,63,825/- which is not commensurate with the volume of trading activities carried out by the assessee. For this, the assessee took a different plea that in number of cases, the transportation arrangements had been made by the seller or buyer as per the arrangement and understanding and the relevant charges were included in the price of goods. However, he found that the copy of invoice cum challan does not speak so. Based on this, the ld AO observed that it is apparent that there is no actual movement of goods but only papers in the form of purchase and sale invoices were manufactured.

3.4. The ld CITA after going through the submissions of the assessee and the findings given by the ld AO in his order, upheld the order of the ld AO. Aggrieved, the assessee is in appeal before us on the following grounds:- “

1. That on the facts and in the circumstances of the case, the action of the Ld. CIT(A) to confirm the addition made by the Assessing Officer of the loss on account of trading in cotton knitted fabrics of Rs.124651755/- is contrary to the material evidences on record and the addition made is unjustifiable and unlawful.

2. That on the facts and in the circumstances of the case, the action of the Ld. CIT(A) to confirm the addition made by the Assessing Officer of Rs.124651755/- on account of business loss is without considering the submissions made and the material evidences on record and the addition made is bad in law.

3. That on the facts and in the circumstances of the case, the action of the Ld. CIT(A) to confirm the addition made by the Assessing Officer of Rs.124651755/- on account of business loss is by relying upon facts made by the Assessing Officer, negated by the assessee with evidences and therefore the addition confirmed by the Ld. CIT(A) is arbitrary, excessive and unlawful.

4. That on the facts and in the circumstances of the case, the action of the Ld. CIT(A) to rely upon the decision of the ITAT Kolkata Bench in the case of Smt. Indira Jalan to confirm the addition of Rs.124651755/- made by the Assessing Officer is unjustified and bad in law.

5. That the order passed by the Ld. CIT(A) is arbitrary, excessive and illegal.

India Finance Ltd., AY 2009-10 6. That the order passed by the Ld. CIT(A) is bad in law. 7. That the above grounds of appeal shall be argued in detail at the time of hearing and the appellant craves leave to submit, add, alter, modify, amend any grounds of appeal or submit any additional grounds of appeal at or before the time of hearing.”

3.5. We have heard the rival submissions. We find from the facts and circumstances that the assessee company has been managing its trading activity in such a manner that loss incurred in trading is almost equal to its interest income. When the interest income in Asst Year 2008- 09 compared to Asst Year 2007-08 had increased, its loss in trading activity had also increased. Similarly when the interest income in Asst Year 2009-10 compared to Asst Year 2008-09 had decreased, its loss in trading activity had also decreased. The following chart would depict the facts of the case in a better fashion:- Financial Year Trading loss Rs. Interest Income Rs. 2006-07 31702725 32051560 2007-08 136162256 132913163 2008-09 124651755 123851442 Hence, it is very clear that the assessee company had managed its transactions in such a way that its interest income could be set off with the loss and there would be no tax liability on its interest income.

3.6. We find from the miniscule portion of the transportation charges incurred in the sum of Rs. 1,63,825/- through matador vans which are supported only by self made vouchers but not with any evidences , and in all the cases, the payments made were within the statutory limits prescribed for deduction of tax at source u/s 194C of the Act, and applying the test of human probabilities , it could be safely concluded that there was no movement of goods for alleged purchase and sale of goods. It was also contended that the transportation is loaded in the purchase and sale bills. We find that no supporting bills were produced to support this argument. The assessee had only tried to create documents in the form of purchase and sale invoices. We don’t find force in the argument of the ld AR that the tax deductions to the tune of Rs 7.02 lacs and Rs. 6.22 lacs in the financial years ended 31.3.2008 and 31.3.2009 would have easily taken care of profits to the tune of about Rs 20 lacs and there was no India Finance Ltd., AY 2009-10 necessity to book a bogus loss equal to interest income. It was contended that the trader does business with a view to earn profit and sometimes there is profit and sometimes there is loss. Accordingly it was contended that it would be absurd and ridiculous to say that the loss is equal to the sum of interest received. We find that the assessee had consistently incurred losses in the immediately preceding two years in the trading of cotton knitted fabrics. The assessee should have stopped this business activity the moment it started incurring huge losses in the first year. The ld AR was not able to adduce proper reasoning for continuation of the same business incurring losses in the second year and third year. It would be relevant to understand the following facts at this juncture:- “13. As mentioned in this office letter dated 20.12.11, that the goods, which were originated from M/s Godwari Electro Contractors Pvt. Ltd again returned back to it after changing hands among M/s Coral Environments Pvt. Ltd, M/s India Finance Ltd, M/s. Visage Equipments Pvt. Ltd. and M/s Vaishali Housing Projects Pvt. Ltd. Names of directors and shareholders of these companies were downloaded from the ROC Site. From the documents downloaded, the following crucial information has been gathered. I) Mr. Partho Majumdar, who is a director of the assessee Coral Environments Pvt. Ltd and M/s. Godwari_Electro Contractor Pvt. Ltd and his address has been given as 9, Ezra Street, Kolkata - 700001, where office of M/s Coral Environments Pvt. Ltd is situated. ii) Mr. Sovan Sengupta, who is one of the directors of M/s Coral Environments Pvt. Ltd is also the director of M/s Visage Equipments and M/s Vaishali Housing Projects Pvt. Ltd. iii) Mr. Ramkrishna Das, who is a director of M/s Godwari Electro Contractor Pvt. Ltd is also a director of the assessee-company. iv) M/s Miller Traders Pvt. Ltd. is a common shareholder of M/s Vaishali Housing Projects Pvt. Ltd, Godwari Electro Contractor and M/s Visage Equipment and Coral Environments. v) M/s Mayank Services Pvt. Ltd is a common shareholder of M/s Coral Environments, M/s. Vaishali Housing Projects Pvt. Ltd and M/s Godwari Electro Contractor. vi) M/s Sheetal Exports Ltd is a common shareholder of M/s Coral Environments Pvt. Ltd and M/s Visage Equipments Pvt. Ltd. vii) M/s Tulip Machineries Pvt. Ltd is a common shareholder of M/s Visage Equipments and M/s Vaishali Housing Projects Pvt. Ltd. viii) M/s Coral Environment Pvt. Ltd, Ml/ Visage Equipment Pvt. Ltd, M/s Vaishali Housing Projects Pvt. Ltd. and M/s Godwari Electro Contractors Pvt. Ltd. have bank account with common bank i.e. Kotak Mahindra Bank, Rajendranagar Branch, New Delhi. ix) M/s. Coral Environments and M/s Vaishali Housing Projects Pvt. Ltd have same office at 9, Ezra Street, Kolkata.

India Finance Ltd., AY 2009-10

3.7. The ld AO observed that there was a circuit of companies and the goods were transferred from one to another without actual movement of goods thereon. It would be pertinent to note that the loss is self created and it had not occurred naturally to the assessee. All the transactions of purchase of goods being made at higher price is made from the group company having common shareholder / directorship and sold to a group company having common shareholder / directorship at a lesser price thereby incurring loss. All the entities involved in the purchase and sale of goods are group companies having common shareholders and common directorship and this fact is not disputed by the assessee. The ld AO had observed that goods sold to assessee by Coral Environments were purchased from Godawari Electro Contractors Pvt. Ltd and goods purchased from assessee were sold to Godawari Electro Contractors Pvt. Ltd. Similarly goods sold to assessee by Visage Equipments were purchased from Vaishali Holding Projects Ltd and goods purchased from assessee were sold to Vaishali Holding Projects Ltd. All these transactions with these entities by the assessee had resulted only in a loss. Though it is well settled that the businessman knows his interest best, in the present circumstances, the interest of the businessman does not seem to come to light at all, in view of periodic losses on the circuitous route chosen by the assessee for engaging in the transactions of incurring losses and profits were shifted to its group concerns. Hence on one hand the loss is getting adjusted with interest income in the hands of the assessee in the year under appeal and in the immediately preceding two assessment years, and on the other hand, the profits were shifted to another group concern through a circuitous route. In this circuit, the assessee was one of the company and benefitted by booking loss and not paying tax on the interest income. Even in the preceding two assessment years, similar losses were booked by the assessee for setting off against the interest income. One crucial factor which could not be believed in the assessee’s case is as to why the assessee repeatedly purchased the goods at a higher rate and immediately sold at a lower rate. The assessee had not chosen to keep the closing stock of goods to wait for the better marketing conditions. But instead it chose to immediately sell the goods at a lower price clearly

India Finance Ltd., AY 2009-10 knowing that it would only incur a loss. Since there was no real cash loss for the assessee as the assessee’s loss becomes the profit of another entity in the same group, the monies remain in the same group of the assessee. Having transactions with the same two companies and regularly booking only losses thereon is beyond human perception. The assessee’s version that the assessee had transacted the transactions at the prevailing market prices is beyond the test of human probabilities.

3.8. It would be relevant to address the decision of this tribunal in assessee’s own case for the Asst Year 2007-08, wherein this tribunal in dated 11.12.2014 had quashed the revisionary jurisdiction invoked u/s 263 by the ld CIT for probing the very same issue in Asst year 2007-08. This tribunal had held that the very same issue had been duly enquired and examined by the ld AO in the original assessment proceedings for the Asst year 2007-08 and though the same is not written in the assessment order elaborately, it does not amount to lack of enquiry on the part of the ld AO. Moreover, for the Asst Year 2007-08, the ld CIT had also not made any prima facie enquiry to come to a conclusion that the order passed by the ld AO as erroneous in sofaras it is prejudicial to the interests of the revenue. Instead, the ld CIT only had stated that the assessee very likely had tried to reduce its income by booking fictitious loss and that non-verification appeared to be highly suspicious. This tribunal held that the revisionary powers u/s 263 of the Act cannot be invoked on mere presumptions and surmises nor on suspicion. Based on these findings, the tribunal quashed the section 263 order of the ld CIT for the Asst Year 2007-08. We find that the ld AR placed heavy reliance on the said order of this tribunal in assessee’s own case. But from the above , it could be seen that this tribunal had not quashed the revisionary jurisdiction u/s 263 of the Act by adjudicating the transactions of loss incurred on trading in cotton knitted fabrics on merits of the case as was done by the ld AO in the asst year under appeal before us. We find that this tribunal had quashed the revisionary proceedings on technical grounds that the same cannot be invoked merely on presumptions and suspicion. Hence we hold that the tribunal order for Asst year 2007-08 does not support the case of the assessee on merits of the issue for the Asst Year 2009-10.

India Finance Ltd., AY 2009-10 3.9. The ld AR also placed reliance on the following decisions in support of his contentions:-

Diagonostics vs CIT & Anr reported in (2011) 334 ITR 111 (Cal) Addl CIT vs Bahri Brothers (P) Ltd reported in (1985) 154 ITR 244 (Pat) Nemi Chand Kothari vs CIT & Anr reported in (2003) 264 ITR 254 (Gau) ITO vs Sri Kalin Dutta in dated 10.6.2016 (Kolkata Tribunal) DCIT vs Sunita Khemka in ITA Nos. 714 to 718 /Kol/2011 dated 28.10.2015 (Kolkata Tribunal)

We find that in all the aforesaid decisions, it was only held that once the assessee had disclosed the identity of the parties and payments were made by account payee cheques and transactions were properly documented, no adverse inferences could be drawn against the assessee. In these cases, the transactions were carried out with non-related entities. But the most excruciating factor in the instant case before us which comes as a distinction is that, the assessee had carried out purchase and sale transactions with the parties who belong to the same group and it is very easy to prevail upon those parties for confirming the transactions before the ld AO. Moreover, the circuitous route of transactions carried out by the assessee in the instant case did not prevail in the case laws relied upon by the ld AR. Hence the same are factually distinguishable and cannot be applied to the instant case. We find that in the instant case, the ld AO had made extensive enquiries by bringing on record the price differences at various periods at which the assessee had transacted the purchase and sale of goods with a mala fide intent to book the loss by transacting with its group concerns. Hence the case laws relied upon by the ld AR are factually distinguishable with the facts of the instant case.

3.10. We also find that the reliance placed by the ld AO on the co-ordinate bench decision of this tribunal in the case of Smt Indra Jalan vs ITO in for Asst Year 2005-06 dated 13.4.2010 is very well founded. In the said case, the assessee in the business of trading in suiting and shirting, made purchases to the tune of Rs. 37,42,000/- and claimed to have sold at Rs. 24,86,121/- thereby incurring trading loss of Rs. 12,55,879/- and after claiming certain expenses, the assessee declared loss from business at Rs. 13,56,841/-. The India Finance Ltd., AY 2009-10 ld AR vehemently argued by distinguishing this tribunal decision in the case of Indra Jalan vs ITO supra by arguing that, firstly the business was carried on in that case only for few days and totally consisted of only purchases and sales on six occasions. In the instant case before us, the transactions were carried out throughout the year. Secondly, there was a clear cut finding in that case that the purchase transactions were made by Smt. Indra Jalan with non entities, whereas in the instant case before us, the ld AO had even made enquiries with the parties with whom assessee had transacted. Thirdly, the ld AO in that case had established that the payments made by the assessee to Ashok Sarogi & Sons , one of the parties from whom the assessee stated to have purchased materials and the said firm transferred to the account of Kapoorchand Puglia and the entire amount was withdrawn in cash from the account. No such evidence in the instant case have been brought on record by the ld AO. Fourthly, there was a common introducer for all the parties for opening the bank account with Federal Bank, Bhawanipur Branch, who was the real operator and under whose instructions, cheques were issued and deposited in the bank account to give the color of genuinity in the transactions. We find that the ld AR had only tried to distinguish the applicability of this tribunal decision to the facts of the instant case on flimsy grounds. We find that in the case of Smt Indra Jalan vs ITO supra , the ld AO observed that there was no claim of cost of transportation, loading and unloading charges evidencing the movement of goods for purchase and sale transactions. In the instant case, the assessee had debited a meager sum of Rs. 1,63,825/- (that too with self made vouchers not supported by freight bills) which is not at all commensurate with the volume of business transactions carried out by the assessee. It is very unlikely that the assessee who had transacted more than Rs 100 crores would have incurred only a paltry sum of Rs. 1,63,825/- towards transportation charges and that too by using matador vans which is the mode of transportation as claimed by the assessee. It is very unlikely that all the payments for transportation charges were below the prescribed tax deduction limits as per section 194C of the Act. The assessee though claimed that the transportation charges were loaded in the purchase and sales bills itself, but the evidences in this regard proved the contrary. The ld AR also argued that the assessee had taken a premises on rent used for storage of goods. But on verification carried out by the Inspector of Income

India Finance Ltd., AY 2009-10 Tax , the assessee was only occupying a small space between the stairs of first floor and second floor of the building , wherein, only one table could be occupied. The survey team could not find the books of accounts during the survey and it was stated that the building in which office of the assessee was situated was to be renovated and hence the assessee had taken away its books of account to the premises of M/s Dadar Properties & Finance Pvt. Ltd at Sarat Bose Road, Kolkata. But the survey team found that this fact to be untrue as Mr. Anil Pandey, an employee of the assessee, stated that he was there only to receive letters of the assessee and to attend telephone calls. The ld ITO TDS also did not find any renovation work being done in that office. Though the assessee had submitted rent receipt in respect of godown at 6th floor, 2/7, Sarat Bose Road, Kolkata, no such office could be located in the name of the assessee at 6th floor by the department on personal verification. These facts clearly prove that there was no space available for storing goods as claimed by the assessee. The ld AO and ld CITA had given a categorical finding that the goods were originated from Godawari Electro Contractors Pvt. Ltd and again returned back to it after changing hands amongst Coral Environment Pvt. Ltd, India Finance Ltd , Visage Equipments Pvt. Ltd and Vaishali Housing Pvt. Ltd. The directors and shareholders of various companies were connected with each other in one or other manner as per the information gathered from the ROC website which is also reproduced in para 13 of the assessment order. From the same, it could be safely concluded that that all the entities including the assessee belonged to one group. We also find that the inter connection between all the parties were also not disputed by the assessee.

3.11. We hold that in the facts and circumstances of the case, the trading loss claimed by the assessee is not a genuine trading loss and the entire transactions have been carried out in a circuitous route among the group concerns by doing paper work in the form of purchase and sales invoices only to give the colour of genuinity. We hold that the assessee had adopted merely a colourable device with an intent to evade payment of taxes. We find that the decision rendered by the co-ordinate bench of this tribunal in the case of Smt Indra Jalan vs ITO supra is squarely applicable to the facts of the instant case before us and respectfully

India Finance Ltd., AY 2009-10 following the same, we dismiss the grounds raised by the assessee and uphold the orders of the lower authorities.

Order is pronounced in the open court on 13.07.2016