ASSTT. COMMISSIONER OF INCOME TAX, RANGE-V, LUCKNOW vs. PATEL PAN PRODUCTS LTD., LUCKNOW

The brief facts of the case are that a search & seizure operation u/s 132A of the Income Tax Act,1961 was carried out on the Harsingar Gutkha/Patel Group of cases. Simultaneously, a survey proceeding u/s 133A of the Act was also carried out at many premises regarding to the assessee group and its business associates. The return of income was filed on 08/02/2010, declaring total income of Rs.1,76,55,380/-. Notices issued u/s 143(2) on 15/03/2010 and 142(1) of the Act were issued and served upon the assessee. The assessee company is engaged in the business of manufacturing and trading of Pan Masala and Gutkha. Total sales during the year have been shown at Rs.36.28 cr on which gross profit amounting to Rs.1.77 cr has been shown. During the year under consideration, the assessee company has raised fresh share capital of Rs.52,50,000/- and 29,50,000/- has been received as share security premium from CO. No.09/LKW/2019 Page 3 of 13 different persons. In addition share application money amounting to Rs.1,50,200/- has also been received by the assessee during the year. According to notice u/s 142(1) of the Act, the queries were made from the assessee company are mentioned in the assessment order dated 31/12/2010 at page no. 4 to 5. According to the AO, vide a subsequently reply, confirmatory documents in respect of some more persons have been furnished. However, in respect of the following cases, the confirmatory documents have not been provided as under: - 1 Shakir Ali Rs.3,00,000/- 2 Modh Idrees Rs.2,00,000/- 3 Subhash Chandra Agarwal Rs.5,00,000/- 4 Sujeet Kumar Gupta Rs.5,00,000/- 5 Sudha Gupta Rs.5,00,000/- 6 Ram Vardhan Mehrotra Rs.2,00,000/- 7 Ashok Kumar Chaurasia Rs.2,00,000/- 8 Arjun Kumar Rs.2,00,000/- 9 Vinod Agarwal Rs.1,00,000 10 Poonam Agarwal Rs.1,00,000/- Total Rs.28,00,000/-

During the assessment proceedings, in these cases neither the copy of the bank account is available nor the ITR of the persons are available. Only the copy of PAN Card and copy of cheques/demand draft is available only on few cases. According to the AO, these documents are insufficient to prove the creditworthiness of the person as well as the genuineness of the transaction. Accordingly, the balance amount of Rs.28,00,000/- was added to the total income of the assessee u/s 68 of the Act.

During the course of assessment proceedings, the premises of the assessee, certain stock of raw material and finished goods was found. Notice u/s 142(1) of the Act, the assessee was asked to provide valuation of this material and was also to provide details of sources of investment. In response to the notice, the CO. No.09/LKW/2019 Page 4 of 13 assessee has submitted the item-wise valuation and also the details of difference found in stock. The stock has been valued at the rate of last purchase bill to the date of search i.e. 19/11/2008. According to these details, there is excess stock found amounting to Rs.47,15,769/-. With regard to this excess stock found, the assessee has submitted that Shri K. N Singh Patel has already surrendered an amount of Rs.60,00,000/- in his income of the AY. 2009-10, the reply given by the assessee has been considered. It is contended that there are certain more evidences and documents which need to be considered to this issue. It is seen that the details of valuation prepared by assessee, there were two items which were actually found less than as per books. These are cardamom which was found 2090 Kg as against 2120Kg in the books i.e. lesser stock amounting to 30 Kg and menthol which was found 1225 Kg as against 1604 Kg in the books i.e. lesser stock amounting to 379 Kg. It is important that in the case of assessee information u/s 133(6) of the Act was called for from the Commercial Tax Department (CTD), Government of UP. The Joint Commissioner, information with regard to the assessee company. It has been stated that the business premises of the assessee was surveyed on 22/11/2007 and 27/10/2009 by the CTD. Several discrepancies in the stock, sale and purchases were found. As a result, the demand of entry tax/commercial tax amounting to Rs.4,15,31,172/- has been raised against the assessee the recovery of which has been stayed by the Hon'ble High Court. In response to the above, submitted by the assessee has been considered and was not found convincing. The assessee nowhere stated that it was not collecting the entry tax from the various parties. This is a trading receipt of the assessee and therefore has to be taxed in CO. No.09/LKW/2019 Page 5 of 13 accordance with the provisions in this regard. The order of Hon'ble High Court does not in any way indicate that it is applicable to income tax proceedings also. As such the provisions of section 43B of the Act are clearly applicable to this amount. According to the AO, the amount of entry tax payable as per the balance-sheet of the assessee is Rs.1,10,25,291/-. Accordingly, this total amount of Rs.1,10,25,291/- was also added to the total income of the assessee.

According to the AO, the stock belonging to the assessee company by Shri K.N Singh Patel is concerned, the same cannot be accepted. The assessee is a private limited company having its own separate identity and is recognized as such in various government departments. The stock of raw material is an essential ingredient without which the finished product cannot be manufactured. Similarly, it is not understood as to how the stock of finished product can be owned and surrendered by Shri K. N. Singh Patel. As such the explanation of assessee on this issue is rejected and the addition on account of difference in stock is being made in the hands of the assessee. Therefore, the total amount of undisclosed stock amounting to Rs.60,00,000/- is also added to the total income of the assessee u/s 69 of the Act.

In the case of the assessee, notices u/s 133(6) of the Act were sent to business associates in order to verify the genuineness of its transactions. According to the AO, during the course of search on 19/11/2008 and also by the CTD very clearly demonstrated the assessee is not maintaining its accounts properly. The record of production and sale has not been maintained by him correctly. The sales as well as profit earned on CO. No.09/LKW/2019 Page 6 of 13 the sales have to be estimated. It was seen that during the year under consideration the gross profit rate of assessee has dropped to 4.88% from 11.74% shown in the preceding year. The discrepancies in stock and production as pointed out very clearly indicate that the assessee is engaged in large scale evasion of sales and resultant profit. The sales of the assessee for the current year are being estimated at Rs.45cr on which gross profit rate of 6% is being applied. The figure of Rs.1,76,74,542/-. Therefore, the difference of Rs.93,25,458/- is being added to the total income of the assessee as extra earned during the year. According to the AO, the assessment u/s 143(3) of the Act, the total income of the assessee of Rs.4,68,06,129/-. Feeling aggrieved, the assessee preferred an appeal before the Ld. CIT(A) and the Ld. CIT(A) delete the addition made by AO, therefore, the revenue is not satisfied. Aggrieved by this appellate order of the Ld. CIT(A), the revenue has filed the present appeal before us.

Under this issue the Ld. CIT-DR for the revenue has argued that the Ld. CIT(A) has wrongly deleted the addition of Rs.28,00,000/- u/s 68 of the Act. The Ld. DR has contended that the AO held that the amount is credited in the books of accounts of the assessee has been considered but assessee had to satisfy three ingredients i.e. identity of person, creditworthiness of person and genuineness of the transaction. Further, it was held that as per seized documents these credits explained in respect of only few persons. Even that the AO held that confirmatory documents have not been provided in cases of ten (10) persons with share capital and also AO held that the only copy of PAN card, copies of cheques/DD etc were filed but copy of bank CO. No.09/LKW/2019 Page 7 of 13 account and copy of ITR of the concerns parties were not filed. According to the Ld. DR, the assessee received of Rs.28,00,000/- towards share application money comprising to subscription to share capital and share premium from may share applicants. In this regard, the assessee has not furnished the details/relevant documents to concerns three persons. Therefore, the AO has rightly added the income of the assessee of Rs.28,00,000/- u/s 68 of the Act.

On the other hand, the Ld. AR for the assessee has placed reliance upon the order passed by the Ld. CIT(A). The Ld. AR for the assessee has furnished all the necessary details/relevant documents regarding all concerns persons i.e. name, fathers name, occupation, address, PAN number of shares allotted and value of shares allotted before the AO. Further, in many cases the application forms, confirmation letters and copies of ITR’s etc were a part of the seized documents. Therefore, the AO wrongly added the income of the assessee on account of explained share capital u/s 68 of the Act.

We have heard both the parties and perused the record carefully. We find that in this case, the assessee company has been incorporated on 28.05.2004 and is engaged in manufacturing and trading of Pan Masala and Gutkha. During the year under consideration, the assessee company has raised the share capital of Rs.52,50,000/- and 29,50,000/- has been received as share security premium from various persons. According to the assessment proceedings, the seized documents from the assessee’s premises from the various persons are not justify the claim of the assessee from various persons. From a perusal of the all seized documents as well as the AO finding CO. No.09/LKW/2019 Page 8 of 13 from page no. 5 to 6 of the assessment order, the assessee has not provided the details/evidence/documents regarding three ingredients and these are identity of the persons, creditworthiness of the person and genuineness of the transaction are not proved. Therefore, the AO has rightly added the addition of Rs.28,00,000/-. This issue is allowed in favour of the revenue against the assessee.

Under these issues the Ld. DR has argued that the assessee company by Shri K. N. Singh Patel regarding to surrender of stock. The assessee is a private limited company having its own identity and is recognized as such in various government departments. And the Ld. DR contended that Shri K. N Singh Patel in his affidavit has not elaborated as to how the stock of M/s. Patel Pan Products was acquired by him. It is not clear to understand as to how the stock of finished product can be owned and surrendered by Shri K. N Singh Patel. According to the Ld. DR, the year-wise surrender of additional income, in forming part from page no. 2 to 4 of the assessment order. Therefore, the AO has rightly added the undisclosed income of the assessee of Rs.60,00,000/- u/s 69 of the Act.

The Ld. AR for the assessee has relied upon the decision of the Ld. CIT(A) and also placed reliance upon the submission of CO. No.09/LKW/2019 Page 9 of 13 the written submission. Reliance upon the order of the Ld. CIT(A)-III in the appeal order dated 22/02/2024. The extract of the order reproduced at page no18 of order are as under:-

At the time of hearing before us, we find that the AO has already explained that the assessee company (Shri K. N. Singh Patel) in his affidavit has not elaborated as to how the stock of M/s. Patel Pan Products was acquired by him. And also not explained as to how the stock of finished product can be owned and surrendered by Shri K. N. Singh Patel. Taking into account of all the facts and circumstances, we are of the view that the finding of the CIT(A) is not justifiable in this regard to the difference in stock. Hence, we decide these issues in favour of the revenue against the assessee.

Under this issue the Ld. CIT(A) has wrongly deleting the addition of Rs.1,10,25,291/- u/s 43B of the Act. The Ld. DR has argued that during the course of search proceedings at the premises of the assessee company certain stock of raw material and finished goods etc was found. During the assessment proceedings, vide notice u/s 142(1) of the Act, the assessee was asked to provide valuation of this material and was also asked to provide details of sources of investment. In response to the notice, the reply given by the assessee has been considered. However, there are certain more evidences and relevant CO. No.09/LKW/2019 Page 10 of 13 documents which needs to be considered with regard to this issue. It is seen that the details of valuation prepared by the assessee, there are two items which were actually found as per books. In the case of the assessee information u/s 133(6) of the Act was called for from the Commercial Tax Department (Government of U.P.) vide order dated 18/12/2010. It was stated that the business premises of the assessee company was surveyed on 22/11/2007 and 27/10/2009 by the Commercial Tax Department. Several discrepancies in the stock, sale and purchases were fund. According to the Ld. DR, the demand of entry tax/commercial tax amounting to Rs.4,15,31,172/- has been raised against the assessee, the recovery of which has been stayed by the Hon'ble High Court. Further, it is also contended that the assessee has not nowhere stated that it is not collecting the entry tax from the various parties. This is a trading receipt of the assessee and therefore, has to be taxed in accordance with the provisions in this regard. In this regard to the order of Hon'ble Allahabad High Court in the case of Indian Oil Corporation Ltd, it is not known whether the facts of assessee’s in the judgment that various appeals to the Hon'ble Supreme Court of India were pending on the same issue. Accordingly, the issue cannot be said to have reached the finality. Accordingly, the AO has rightly added the amount of Rs.1,10,25,291/- to the total income of the assessee u/s 43B of the Act. On the other hand, the Ld. AR for the assessee has placed reliance upon the decision of the Ld. CIT(A). In the course of appellate proceedings in ITAT, the assessee filed a paper book containing the following particulars: -

At the time of hearing before us, the Ld. AR for the assessee has submitted paper book and placed reliance upon the decision of the Hon'ble Allahabad High Court in the case of Indian Oil Corporation Ltd. We find that the Hon'ble Allahabad High Court order is an old judgment and is not applicable the facts of assessee’s case are in anyway relatable to this case. And also the various appeals are pending in the Hon'ble Supreme Court on the same issues. As such the provisions of section 43B of the Act are clearly applicable to this amount. Accordingly this amount of Rs.1,10,25,291/- is rightly added to the income of the assessee. In view of the foregoing, in the specific facts and circumstances of the present case before us, the finding of the Ld. CIT(A) is not justifiable in the facts and circumstances of the present appeal CO. No.09/LKW/2019 Page 12 of 13 before us having regard to the applicable law. Accordingly, the aforesaid addition is confirmed. As a result, this issue is decided in favour of the revenue against the assessee.

There is delay of 464 days in filing of cross objection by the assessee and the assessee has filed application for condonation of delay. The Ld. DR has no objection to the prayer made by the assessee for condonation of delay. During the appellate proceedings, the cross objection filed by the assessee has not been pressed before us, therefore, in the said circumstances, the matter of controversy raised in the present cross-objection has become infructuous, hence, is not required to be adjudicated and has dismissed.

In the result, the appeal of the revenue is allowed and cross objection of the assessee is dismissed.