M/S. MAA RAKLTDANTIKA CONTRACTORS AND SUPPLIERS PVT. LTD.,,LUCKNOW vs. THE DCIT/ACIT, RANGE-4, LUCKNOW

(A) These cross appeals have been filed by assessee and by Revenue against impugned appellate order dated 23/09/2020 passed by learned Commissioner of Income Tax [“CIT(A)” for short]. For the sake of convenience these two appeals are decided through this consolidated order.

(B) Vide assessment order dated 21/12/2019 passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (“IT Act” for short), the assessee’s total income was determined at Rs.23,59,63,420/- as against returned income of Rs.11,26,01,670/-. The assessee filed appeal in the office of the learned CIT(A) against the aforesaid assessment order. Vide impugned appellate order dated 23/09/2020, the assessee’s appeal was disposed of by the learned CIT(A) wherein the assessee’s appeal was partly allowed. The present two appeals before us have been filed by Revenue as well as assessee against the aforesaid impugned appellate order dated 23/09/2020 of the learned CIT(A). Although several grounds have been taken in the two appeals before us; in effect there are only two disputes in these appeals. The first dispute is regarding the addition of Rs.8,30,40,000/- and Rs.2,48,16,616/- u/s 68 of the IT Act. The addition of Rs.8,30,40,000/- pertains to higher quantity of sale shown by the assessee in books of account and the addition of Rs.2,48,16,616/- pertains to higher sale price shown by the assessee in the books of account. Vide impugned appellate order dated 23/09/2020 of the learned CIT(A), the aforesaid addition of Rs.2,48,16,616/- was deleted entirely and the aforesaid addition of Rs.8,30,40,000/- was deleted partly. Both Revenue and assessee are in appeal before us as regards the order of learned CIT(A) regarding the aforesaid addition of Rs.8,30,40,000/-. Revenue is in appeal against order of learned CIT(A) with regard to the aforesaid addition of Rs.2,48,16,616/-. In addition to the aforementioned dispute regarding addition u/s 68 of the IT Act, the other dispute is regarding the addition of Rs.81,28,260/- made in the assessment order and sustained by the learned CIT(A) in the impugned appellate order. This addition was made by the Assessing Officer, disbelieving the reimbursement made by the assessee to the persons from whom purchases were made. The assessee is in appeal before us against this addition, which was confirmed by the learned CIT(A).

(B.1) In the course of appellate proceedings in Income Tax Appellate Tribunal, a paper book containing 171 pages was filed from the assessee’s side containing the following particulars:

S.No. Particulars A.1 Written submissions A.2 Copy of Reply dated 27.12.2019 as filed before DCIT/ACIT-4, Lucknow in response to notice dated 27.12.2019 alongwith:– 1. List of Rate analysis of sale of Maurang for F.Y. 2016-17 2. Copy of data of Transportation Expenses paid. A.3 Copy of show cause notice issued by DCIT/ACIT-4 dated 27.12.2019 A.4 Copy of e-file reply dt. 10.01.2020 in response to notice dated 27.12.29019 A.5 Copy of Reply dt. 23.12.2019 as filed before DCIT/ACIT-4, Lucknow A.6 Copy of e-file reply dt. 06.01.2020 in response to notice dated 05.12.2019 Copy of Reply dt. 05.12.2019 A.7 Copy of reply dated 01/12/2019 as filed before DCIT/ACIT-4, Lucknow alongwith:-

1. 1. Daily cash summary. 2. Monthwise Sale & Purchase. 3. Monthwise cash sale and cash deposit. 4. Ration of cash sale to total sale Annexure-16. 5. Detail of cash deposit Annexure 17.

6. Detail of cash sale Annexure 18 7. Copy of FORM 1 [See rule 3(1)] A.8 Copy of challan alongwith subscription receipt. A.9 Copy of Trade Tax Order passed u/s.28(2)(i) dated 23.05.2019 for A.Y. 2016-17. A.10 Copy of e-file reply in response to notice dated 13.09.2019 A.11 Copy of Reply dated 11.11.2019 as filed before DCIT/ACIT-4, Lucknow. A.12 Copy of Acknowledgement of Income Tax Return along with computation of income for - 1. A.Y. 2016-17 2. A.Y. 2018-19 3. A.Y. 2019-20 A.13 Copy of order of Commercial Taxes for the A.Y. 2016-17 A.14 Copy of reply dt. 26.03.2019 as filed before DCIT/ACIT-4, Lucknow along with - 1. Copy of computation of income for A.Y. 2017-18 2. Copy of Form 26AS for AY 2017-18 A.15 Copy of reply dt. 26.09.2018 as filed before DCIT/ACIT-4, Lucknow along with - 1. Copy of ITR 2017-18 2. Copy of 3CD Report for A. Y. 2017-18 3. Copy of Audited Balance Sheet and Profit & Loss Account as at 31st March, 2017. B. Written submissions as filed before CIT(A), Lucknow-2 on 18/05/2020 along with enclosures C. Written submissions as filed before CIT(A), Lucknow-2 on 11/09/2020 alongwith enclosures D. Written submissions as filed before CIT(A), Lucknow-2 on 16/09/2020 alongwith enclosures (C) At the time of hearing before us, the learned CIT (D.R.) for Revenue relied on the assessment order passed by the Assessing Officer. The learned Counsel for the assessee relied on the submissions made by the assessee before the learned CIT(A) during appellate proceedings in the office of the learned CIT(A).

(D) The assessee is in the business of contractors and material suppliers. The aforesaid additions of Rs.8,30,40,000/- and Rs.2,48,16,616/- made u/s 68 of the IT Act by the Assessing Officer pertain to the assessee’s business of sale of Maurang. As regards the quantity of Maurang sold by the assessee, the following submissions were made by the assessee before the learned CIT(A) during appellate proceedings in the office of the learned CIT(A):-

Written submissions filed on 04/03/2020 “The Assessing Officer has added a sum of Rs.8,30,40,000/- on account of sale of excess quantity of maurang. The AO had asked for the quantitative details of the goods purchased and sold. The same was furnished. As per the Assessing Officer, the assessee had purchased 54198 cubic meter of maurang whereas, the assessee has sold 75028 cubic meters of maurang thereby, the assessee had sold 20930 cubic meters in excess. The value of which comes to Rs.8,30,40,000/-. The Assessing Officer has held, the assessee had declared excess quantity of sales to cover up the cash deposited in its bank during the demonetization period. The fact is, that the assessee has not sold any excess quantity of maurang. The Assessing Officer has failed to appreciate, that in respect of sale of maurang, there is no standard tool / method to measure exact quantity of maurang excavated from the river bed. Further, there is lack of tendency to measure the exact quantity due to availability of mineral / maurang in abundance at the source / river bed. Normally, a truck of 10 chakkas easily accommodates a volume of 1000 cubic i.e. 25 to 28 cubic meter of maurang. However, the maximum permissible royalty / transit pass issued is for 18 cubic meters. Thus, there always remains a possibility of over loading. Rather the extra capacity of the truck encourages the practice of over loading i.e. carrying / transporting more mineral as against issued royalty. In absence of there being any exact/accurate method of measurement, the measurement is always done on estimate basis, both while excavating the maurang from the river bed as well as dumping on the site and loading the same on the truck. In absence of any scientific method, there is always excess supply of maurang to the purchaser. The usual practice is that when the tender for excavating mineral / maurang from the river bed is floated, that too, is also done on estimate basis. The royalty on the same is also calculated and charged on the basis of the estimated excavation likely to take place. Further, normal practice is that the contractor, who undertakes the contract for excavating maurang from the river bed in all probability, excavates more than the estimated quantity. The reason being, that the excavation is done through excavators and dumped in the field or on the vehicle for transportation, as the case may be. The contractor in turn sells the bulk quantity so likely to be excavated to different purchasers. The modus operandi is that the moment the maurang is excavated, the same is transported on wholesale / bulk basis to the intending purchasers. The contractor calculates his profit only on the permissible quantity to be excavated, less expenses incurred. The excess stock sold by the assessee is the result of the overloading and excess supply of maurang from the site itself. Also, once when the maurang is transported from the river bed site to the delivery site of the purchaser, the purchaser dampens the same in order to avoid loss / erosion of the same by the wind. At the same time, when the purchaser sells the maurang to different persons, the quantity increases moisture contents due to dampness. In nutshell, it is submitted, that assessee has not sold, any excess stock but whatever has been sold is part of stock which got generated on account of overloading as well as moisture component. The market practices and moisture retained by mineral during monsoon, the assessee’s purchased quantity is not in accordance with the actual quantity dumped/received by assessee at the stock location, which was eventually discovered at the point of sale. This excess quantity has been billed and accounted for, as the assessee is license holder to stock and trade sand/maurang, in wholesale as well as retail. Thus, the excess quantity was also sold at the same time to meet out the shortage of maurang & benefit from high prevailing prices. The observation of the Assessing Officer that the sales have been made only during the period of demonetization is incorrect and coincidental to some extent, as the sales was made before demonetization and sale proceeds were already being deposited in bank on a regular basis. The sales have been made from the period 07/09/2016 to 06/11/2016.

Month Cash Sales Deposited in Bank September, 2016 Rs.7,07,20,900 October, 2016 Rs.3,37,34,209 November, 2016 Rs.13,57,68,200 Moreover, there can be no comparison of cash sales with that of the preceding years because of change in the nature of business. It was further explained, that the sales had concluded on 06.11.2016 and the cash received on account of such sales could not be deposited in the bank on account of critical illness of the Managing Director of the company Shri Vijay Shanker Gupta, which stands established from the medical records. As against the claims of the Assessing Officer to have not sold the stock for 2 months, it is interesting to mention, that the assessee did not want to sell off the stocked sand/maurang for another few months, as there was no supply in the market, resulting in price hike on a daily basis, which eventually would have maximized assessee’s profit margins substantially. However, the assessee was facing constant pressure from the DM and other administrative bodies to dispose off the mineral at the earliest to help meet out a largest crisis of sand/maurang in the State. Assessee was one of the first & only sand stock license holder issued on 22/02/2016 by DM – Lucknow. In the concerned period, wherein the mining of sand was completely banned in the State, allowing assessee to restore supply of sand in the city and at the same time have monopoly in the sand market and charging desired prices, as there was crisis of supply compared to demand. Thus, 52% profit margins are quite natural and should rather be encouraged/ appreciated. The assessee had submitted all the relevant documents/ records as required by your goodself. It includes sale records containing details of all the parties (Name, Truck Registration No., Mob. No.), that itself establishes the identity and genuineness of all parties. Both parties (Babu Lal & Chhakki Lal) from whom the sand/maurang has been purchased have recorded their statement on oath, that they have made their respective sales to the assessee in the concerned year 2016-17, which clearly validates assessee’s purchase. The oath statement as annexed in the order, confirms (of CHAKKI LAL) that the bills are, authentic and issued by him only. However, it is important to note, that oath statement of BABULAL has not been annexed. Also the same seems to be contradictory and taken under influence. Both parties are senior citizens and have later confessed to have been mentally harassed. Furthermore, with reference to no sale being made till Sept, the license is valid for 5 years and is hence, it is at assessee’s discretion to sell/not to sell, as per demand supply to gain maximum return/profit.With reference to payments made to parties from October onwards, the assessee and parties had already mutually agreed to avail a credit facility for 4 months, however, the payments were initiated well before as soon as the assessee commenced the sale of its stock. Further, the amount of Rs.8,30,40,000/- has already been included in the sales on which VAT and other taxes have been paid. The amount of Rs.8,30,40,000/- is part of the total turnover declared by the assessee forming part of trading account.

The amount of Rs.8,30,40,000/- added separately results into taxation of the same amount twice, firstly as a part of the total sales declared by the assessee and secondly on account of addition made by the Assessing Officer treating part of the sales as not genuine. Be it may, if the assumption of the Assessing Officer is taken to be correct, then too the total sales turnover declared by the assessee has first to be reduced by a similar amount of Rs.8,30,40,000/-. The recasted trading account is attached.

On recasting of the same, it would be found that there would be no difference, and the figure of Rs.8,30,40,000/- would be a case of double taxation.

The assessee had also declared a sum of Rs.1,00,00,000/- under the PMGKY Scheme and has paid tax on the same. The aforesaid amount of Rs.1,00,00,000/- is part of the total turnover as recorded in the books of account. The tax of Rs. 49,90,000/- has been paid.”

Written submissions filed on 18/05/2020 “With reference to the above mentioned appeal and further in continuation of our submissions dated 03.03.2020. It is submitted as under:

In the present case the AO has not rejected the books of account nor the system of accounting followed by the assessee. The AO has simply disbelieved the submissions of the assessee as advanced. The AO has failed to take into consideration the practical considerations and the practices as followed and adopted in this line of trade. Once the books of account as maintained, produced and examined have not been found to be defective nor have been rejected, no addition can be made merely on the basis of disbelieving the same on conjectures and surmises. Suspicion how so ever grave cannot be the form of prove. Their Lordships in the case of Lalchand Bhagat Ambica Ram vs. Commissioner of Income Tax- Civil Appeal No. 679 and 680 of 1957, order dt.14.05.1959 37 ITR 288 have held accordingly.

The latest pronouncement of this court in Omar Salay Mohamed Sait v. Commissioner of Income-tax [1959] 37 ITR 151summarises the position thus:

"We are aware that the Income-tax Appellate Tribunal is a fact finding tribunal and if it arrives at its own conclusions of fact after due consideration of the evidence before it this court will not interfere. It is necessary, however, that every fact for and against the assessee must have been considered with due care and the Tribunal must have given its finding in a manner which would clearly indicate what were the questions which arose for determination, what was the evidence pro and contra in regard to each one of them and what were the findings reached on the evidence on record before it. The conclusions reached by the Tribunal should not be coloured by any irrelevant considerations or matters of prejudice and if there are any circumstances which required to be explained by the assessee, the assessee should be given an opportunity of doing so. On no account whatever should the Tribunal base its findings on suspicions, conjectures or surmises nor should it act on no evidence at all or on improper rejection of material and relevant evidence or partly on evidence and partly on suspicions, conjectures or surmises and if it does anything of the sort, its findings, even though on questions of fact, will be liable to be set aside by this court."

Umacharan Shaw & Bros. v. Commissioner of Income-tax, Civil Appeal Nos. 40 and 41 of 1958, order dt. 15.05.1959[1959] 37 ITR 271 (SC):

“Taking into consideration the entire circumstances of the case, we are satisfied that there was no material on which the Income-tax Officer could come to the conclusion that the firm was not genuine. There are many surmises and conjectures, and the conclusion is the result of suspicion which cannot take the place of proof in these matters.”

There is no material on the record either to suggest that whatever has been declared is not part of sales but is income from some source other than business. The assessee company has no other source of income except "income from business". Admittedly this is the first year of assessee company doing any business. Prior to the year under consideration the assessee company did not have any major business activity. The profit and loss account of the earlier years are a testimony to this fact. If it is to be held for a moment that the sales are bogus and not genuine and the company did not have the requisite stock to make such sales, then in that circumstances it stands established that the said amount does not belong to the assessee company and thereby has to be out right deleted. Further, if it is held that the bogus sales represent the premium money charged over and above normal rates then also it shall be income from business only. A company is a separate legal entity. It operates and carries on its activities within the four corners of its objects. Whatever income a company has it has to have a source.

If the AO has to disbelieve the assessee submissions, the books of account have to be rejected and it has to be demonstrated/established that the assessee company has income from “other sources” also from which income has been generated. In absence of any such evidence the explanation advanced by the assessee cannot be delegated to waste paper basket.

There has to be a categorical finding that the books of account as maintained and produced are not correct and suffer from inherent defects and do not reflect the true profits from the business. This finding is to be supported by a further finding that the method of accounting followed by the assessee is not in accordance to the established practices of the business. The assessee company on its part has followed the accepted method of accounting. There are several similar nature of trades where there can be no exact measurement of quantity of goods handled. The factual position as returned by the assessee company has not been found to be false incorrect or untrue. The accounts have been audited both as per the provisions of Companies law as well income tax laws. There is no remark from the auditors. The auditors while auditing the accounts did not find any discrepancy in the stock, for had there been any discrepancy they were duty bound to point out the same in their report. Being conversant with the nature of the business and the manner in which it was being conducted were satisfied with the methodology and then only gave their report. In simple terms if the auditors were not satisfied with the affairs of the business or its methodology they would have declined to give the report. In other words the auditors too were satisfied that in a trade like that of ours there is bound to be cases of excess supply of the quantity of material purchased over that what is actually purchased. The purchase is in bulk whereas the sales are in retail.

That the addition of Rs.83040000/- has be made under section 68 of the income tax Act 1961 treating the same to be a case of bogus sales and thereafter invoking the provisions of section 115BBE. As submitted earlier the above amount of Rs.83040000/- already forms part of the total sales of Rs. 22,94,31,000/- declared in the trading account. It is out of the total sales of Rs. 22,94,31,000/- that sale to the extent of Rs.8,30,40,000/- has been treated as bogus sales. It is submitted that the sales are not bogus sales. Being part of the total sales it has already been included in the computation of income. It finds credited in the trading and profit and loss account. The moment it forms part of the total income returned it stands as income disclosed. Being part of the total sales, it falls under the head "business income". The AO has added the aforesaid amount treating it to be bogus sales, thereby holding it to be part of “business income” only, which according to the AO is not genuine. In simple words the amount in question is part of business income only and is to be taxed under the head "income from business" and "not income from other sources".

Amounts declared under the head sales cannot be taxed under section 68 of the income tax act 1961. Section 68 is applicable to only those amounts which have not been offered for tax. Reference to section 68 would make things self explanatory. For better understanding the section is reproduced herein under:

“CASH CREDITS

[Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—

(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:

Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.]”

The “head note” for section 68 is "cash credits". The fundamental intent of the section is that whatever amount credited in the books of account maintained which does not form part of the income returned/ declared by the assessee and is not explained to the satisfaction of the AO shall be treated to be the income of the assessee for the year. If the amount has already been declared as part of the total income forming income liable to tax there would be no occasion for the AO to tax, the same again, the reason being the same has already been included in the income declared by the assessee in its return. For this alone, the income declared would fall outside the frame of section 68. Addition in such circumstances shall result in double taxation of income meaning thereby the same income is taxed twice first, by way of part of sales and secondly by way of unexplained or bogus sales. This is not permissible by law.

The Delhi high court in the case of JW Wires has held as under:

"Whether on the facts and in the circumstances of the case, the Tribunal was correct in holding that the onus was on the assessee to establish the source of receipt of the amounts aggregating Rs. 3 lakhs shown to have been received as sales proceeds from M/s Sandeep Wire Industries and in upholding its assessment as assessee's income from the undisclosed sources?"

Trading Account (Declared By Assessee) Rs. Rs. Opening Balance 1000.00 Sales 6000.00 Purchases 3000.00 Closing stock 2000.00 Profit 4000.00 Total 8000.00 Total 8000.00

Trading Account (According To Revenue) Rs. Rs. Opening Balance 1000.00 Sales 5000.00* Purchases 3000.00 Closing stock 2000.00 Profit 3000.00 Total 7000.00 Total 7000.00 Add: Income by way of unexplained credit. It would be seen that income/profit remains to be the same Rs. 4000 i.e. 3000+1000 as was declared by the assessee and hence 1000.00 no impact on income and as such addition is wholly uncalled for and unwarranted on the facts of the case.

*Note: Sales reduced by a sum of Rs. 1000.00 as in opinion of revenue the amount credited in books of account is not by way of sales i.e. 6000-1000 = Rs. 5000.

This submission of Mr. Aggarwal is not without substance. Once the Assessing Officer took the view that M/s Sandeep Wire Industries is not traceable and a non-existing entity, therefore, no sale was made to the said firm. No doubt, the Assessing Officer could consider the aforesaid receipt as income from undisclosed sources. It was also necessary for the Assessing Officer to reduce the total sale figure. This is more so, when there is no dispute about the figures of opening balance and closing balance disclosed by the assessee as those figures are accepted by the AO.

The amount declared as sales but disbelieved by the AO cannot be taxed under section 68 as unexplained income has been discussed thread bare by the Gujarat Income tax Appellate Tribunal Ahmedabad Bench in the case Shree Sanand Textiles Industries Ltd. vs. Dy. CIT- order dt. 06.01.2020. The relevant part of the decision is as under:

“9.3 Admittedly, the amount of sale as claimed by the assessee was offered to tax by reflecting the same in the trading and profit and loss account. This fact has not been doubted by the authorities below. However, the existence of the parties was not proved by the assessee based on the documentary evidence during the proceedings. Accordingly, the learned CIT (A) treated the amount received from such parties as unexplained cash credit under section 68 of the Act. In this connection we note that the impugned amount has been taxed twice firstly the same was treated as sales and secondly the same was treated as unexplained cash credit under section 68 of the Act. Even if we assume that the action of the learned CIT (A) is correct i.e. the impugned amount is representing the cash credit as provided under section 68 of the Act. Then, the learned CIT (A) was duty-bound to reduce the same from the amount of sales as the same does not represent the sale but unexplained cash credit. As such, the same amount cannot be held taxable twice as per the wish of the learned CIT (A). In our considered view the action of the learned CIT(A) is erroneous to the extent of treating the same as sale proceeds andthe unexplained cash credit simultaneously.

9.4 However, we are also conscious to the fact that there is no allegation from the authorities below that the impugned amount represents the unexplained cash credit over and above the sale proceeds.

We also find important to refer the provisions of section 68 of the Act which reads as under: “Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year:

Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—

(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:

Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB)of section 10.

9.5 From the above, we note that the provisions of section 68 of the Act can be attracted where there is a credit found in the books of accounts and the assessee failed to offer any explanation or the offer made by the assessee is not satisfactory in the opinion of the assessing officer. The assessee has explained to the authorities below that the impugned amount represents the sale which has not been doubted by the authorities below. Thus in our considered view, the impugned amount cannot be treated as unexplained cash credit under section 68 of the Act merely on the ground that the assessee failed to furnish the details of the existence of the parties.

9.6We also note that the provisions of section 68 cannot be applied in relation to the sales receipt shown by the assessee in its books of accounts. It is because the sales receipt has already been shown in the books of accounts as income at the time of sale only.

9.7 We are also aware of the fact that there is no iota of evidence having any adverse remark on the purchase shown by the assessee in the books of accounts. Once the purchases have been accepted, then the corresponding sales cannot be disturbed without giving any conclusive evidence/finding. In view of the above we are not convinced with the finding of the learned CIT(A) and accordingly we set aside the same with the direction to the AO to delete the addition made by him.”

Quite recently the Hon'ble Jurisdictional High Court in the case of Kesharwani Sheetalaya Sahsaon vs. Commissioner of Income Tax of 2007 order dt. 24.04.2020 had the occasion once again to delve in section 68 to explore and analyse legislative intent of the same. The relevant part of the decision is as under:

In order to answer the questions of law upon whicht he present appeal has been admitted it would be necessary to advert to the provisions contained under Section 68 of the Act. For ease of reference, Section 68 of the Act, as it stood prior to the Finance Act, 2012, is being extracted below:

“68. Cash credits—Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income tax as the income of the Assessee of that previous year.”

On a plain reading of the aforesaid decision two things are abundantly clear one that section applies to cash credits and only to those credit entries which do not form part of total income.

Once it is clear that the provisions of section 68 are not applicable section 115BBE cannot be invoked for the reason that in order to apply section 115BBE, section 68 has to be applied first.

Kanpur Organics Pvt. Ltd. vs. Dy. CIT, Order dated 10.01.2020

“We find that provisions of section 115BBE are overriding provisions which provide for taxing the income referred to in section 68 and from section 69 to 69D at a flat rate of tax and do not allow any deduction in respect of expenditure or allowance under the provisions of the Act. Therefore, it is important for application of section 115BBE that the assessee should first fall in any of these sections. In our opinion, in the present case, the addition u/s 69A could have been made only if no explanation, regarding source of such income, was offered or he explanation offered by the assessee was not satisfactory in the opinion of the Assessing Officer. In the present case, as we have already noted that the assessee had given complete explanation regarding the source of entries recorded in the diary, which were explained to be part of unrecorded sales and Assessing Officer also did not object to the said explanation. Therefore, addition cannot be made u/s 69A of the Act and if the addition cannot be made u/s 69A, the provisions of section 115BBE will not be applicable.”

As regards the addition of Rs. 2,48,16,616/- made on account of charging of the excess rate over and above the prevailing market rate the said amount too, forms part of the total sales declared by the assessee, there should be no reason for the department to frown at. There arises no cause of grievance for there has taken place no loss to the revenue. By charging higher price the assessee company has declared higher income. The department would have been aggrieved if the sales were effected below the market rates. Even otherwise it would again be a case of double taxation.”

(D.1) The learned CIT(A), in the impugned appellate order, did consider the assessee’s claim that excess quantity of Maurang was received by the assessee because of overloading of trucks. Further, assessee’s claim that there was weight gain in Maurang because of bulking (as a result of gain of moisture) was also accepted by learned CIT(A). However, she gave credit to the assessee only to the extent of 30% over the recorded stock; and directed the Assessing Officer to give credit of excess stock to the extent of 30% and to rework the addition. On perusal of the impugned order of the learned CIT(A) we find that she has not given any justification for adopting the ad hoc and estimated rate of 30% as far as gain of weight due to bulking is concerned. The rate of 30%, decided by the learned CIT(A), is arbitrary, whimsical, without any basis and without any justification. The assessee furnished detailed explanation during appellate proceedings before learned CIT(A), regarding quantity of sale made; and the learned CIT(A) has not provided any justification regarding why the explanation of the assessee was not fully accepted. Therefore, the addition sustained by the learned CIT(A) on account of quantity of Maurang sold, has no legs to stand; and cannot be sustained.

(D.2) As regards the aforesaid addition of Rs.2,48,16,616/-, the same was deleted by learned CIT(A) in her impugned appellate order. The relevant portion of the order of the learned CIT(A) is reproduced as under:

“During the appellate proceedings it was submitted that the appellant was in a monopolistic state in with regards to the item sold by it and it was in a position to dictate the prices. Furthermore, there was no hard and fast rule for the prices and they kept on fluctuating as per the demand and supply position. It was also submitted that the addition made by the AO was already a part of the sales disclosed by the appellant, thus the addition resulted in double taxation of the same amount.

A perusal of the assessment order shows that the AO has compared the price of Morang sold by the appellant with that of some other suppliers who had sold their products at a much cheaper rate than that of appellant. It is a fact that there was a shortage of Morang in the early part of the year 2016 due to a blanket ban on mining of sand by the Hon'ble High Court. Thus, the prices of Morang had sky rocketed. The appellant was the only entity which was allowed the dumping rights in the district of Lucknow. Thus, it was in strong position to charge the price it so desired. The AO has not brought anything on record for forming the basis of the price, which according to her, was the prevailing market price. The bills of the other suppliers used by the AO, are not a cogent basis for adopting the average market price. It is a possibility that those suppliers may have suppressed and under estimated their sales. Since, there is no government authorized and controlled mechanism in this line of trade for the discovery of market price, it cannot be said with certainty that the price charged by one vendor is more or less than the other. The price also depends upon the quality of the product as well as moisture content in the same. In view of the above I find that the AO has computed the amount of inflected sale on her presumption only. There is no cogent basis for applying the average market rate of Rs.25,00 per cubic meter. Accordingly, the addition made on this account is directed to be deleted.”

(D.2.1) We are of the view that the order of the learned CIT(A) with regard to the aforesaid addition of Rs.2,48,16,616/- is just and fair and in accordance with law having regard to the specific facts and circumstances of the present case. No material has been brought for our consideration to persuade us to take a view different from view taken by the learned CIT(A) on this issue.

(D.3) In view of the foregoing, we are of the view that the aforesaid addition amounting to Rs. Rs.8,30,40,000/-, part of which was sustained by learned CIT(A); and the addition of Rs.2,48,16,616/-, made u/s 68 of the IT Act deserve to be entirely deleted. Accordingly, we direct the Assessing Officer to delete the aforesaid additions of Rs.8,30,40,000/- and Rs.2,48,16,616/- made u/s 68 of IT Act.

(E) As regards the addition of Rs.81,28,260/-, we find from the perusal of the impugned appellate order dated 23/09/2020 of the learned CIT(A), that it was contended before her by the assessee that the amount was the price differential payable to the seller of Maurang. The learned CIT(A) has also acknowledged that copies of ledger accounts of the sellers of Maurang were submitted by the assessee in support of the contention. However, learned CIT(A) did not accept the explanation given by the assessee on the ground that price differential payment was not supported by any documentary evidence; and further that the assessee failed to submit the reasoned or the basis on which the said payment was made. On perusal of records, we find that the following submissions were made by the assessee before the learned CIT(A) during appellate proceedings in the office of the learned CIT(A):-

The disallowance of Rs.81,28,260/- on account of royalty has been made for non deduction of TDS. The Assessing Officer has disallowed the payment primarily for the reason, that no TDS has been made at source and also the payment lacks genuineness. It is submitted, that the amount of Rs.81,28,260/- is the price differential payable to the sellers of the maurang. Copy of the ledger of the parties is attached. It is not a royalty, no TDS is applicable on the same. The expenditure has been incurred for the purpose of business, the same has to be viewed from the businessmen's point of view, the disallowance made be deleted.

(E.1) On perusal of records we find that there is nothing on record to suggest that the learned CIT(A) directed the assessee to present any documentary evidence or reason/basis on which payment of price differential was made. In the absence of any such requirement prescribed by the learned CIT(A), we are of the view, that furnishing of ledger account of the persons from whom Maurang was purchased, were sufficient compliance on the part of the assessee in the specific facts and circumstances of the present case before us. Therefore, we hold that the order of learned CIT(A) with regard to the aforesaid addition of Rs.81,28,260/- is whimsical, arbitrary and unjustified. Accordingly, we direct the Assessing Officer to delete this disallowance/addition amounting to Rs.81,28,260/-.

(F) In the result, the appeal filed by the Revenue is dismissed and the appeal filed by the assessee is allowed for statistical purposes.

(Order pronounced in the open court on 30/09/2024)