M/S BRONZE LOGISTICS PVT. LTD.,LUDHIANA vs. DCIT, LUDHIANA

PER DIVA SINGH

The present appeal has been filed by the assessee assailing the correctness of the order dated 29.03.2011 of CIT(A)-II Ludhiana pertaining to 2006-07 assessment year on the following grounds : 1. That order passed u/s 250(6) of the Income Tax Act, 1961 by the Ld. Commissioner of Income Tax (Appeals)-II, Ludhiana is against law and facts on the file in as much he was not justified to hold that the assessment framed was not barred by limitation as the very reference to the special auditor u/s 142(2A) was bad in law. 2. That the Ld. CIT(A) was not further justified to uphold the action of the Ld. Assessing Officer :-. (a) in making an addition of Rs. 4,22,74,454/- to the trading results by applying a higher G.P. rate. (b) in making an addition of Rs.90,595/- on account of alleged negative cash balance considering it as amount paid outside the books. (c) in making an addition of Rs. 16,384/- on account of 20% of the total cash payments exceeding Rs. 20,000/-. (d) in making an addition of Rs. 44,61,388/- on account of difference/fluctuation in foreign exchange rate. (e) in making an addition of Rs. 62,65,342/- on account of wrong interpretation of item sold. (f) in making an addition of Rs. 16,00,000/- on account of alleged under valuation of closing stock. (g) in making an addition of Rs. 28,792/- on account of freight recovered and not shown as income. (h) in making an addition of Rs. 1,79,018/- by arbitrarily adopting different method of valuation of closing stock instead of FIFO method being followed by the appellant. (f) in making an addition of? 1,53,440/- on account of non-production of freight bills / vouchers. (j) in making an addition of Rs.3,03,205/-on account of alleged delay in depositing TDS. (k) in making an addition of Rs. 2,82,520/- being expenses incurred on sample development. (1) in making an addition of Rs. 49,000/- on account of non-deduction of TDS on agency commission paid to C & F agents.

ITA- 611/CHD/2011 A.Y. 2006-2007 Page 2 of 32 (m) in making an addition of Rs. 12,96,621/- on account of non deduction of TDS on re-imbursement of clearing and forwarding expenses. (n) in making an addition of Rs. 2,212/- on account of previous year's expenses. 2. The ld. AR inviting attention to the grounds raised submitted that in the facts of the present case, the assessee is assailing the correctness of the order of the CIT(A) wherein primarily and at the outset the assesee had unsuccessfully challenged the action of the AO in making reference for a special Audit u/s 142(2A). The CIT(A) it was submitted has wrongly dismissed the assessee’s ground without caring to bring out what was the complexity in the accounts. The decision it was submitted has been arrived at ignoring the facts, the legal precedent and the statutory requirements. In the facts of the present case the power has been exercised by the AO arbitrarily as there was no factual or legal requirement for special Audit as there was no complexity in the accounts which is the consistent claim of the assesee which the department has not been able to upset and it has also been the assessee’s allegation that the power vested for a specific purpose was exercised by the AO solely to extend the time available to the AO which allegation the Ld. CIT(A) was duty bound to address by bringing out the facts which support the conclusion that the accounts were complex necessitating a Special Audit. 3. Before elaborating the specific grievances which arise out of the arbitrary exercise of power, it was his submission that he would first highlight certain salient points namely; that the assessee is deriving income from export of garments. This fact it was submitted is evident from the assessment order itself. The assessee it was submitted has done no manufacturing activity or value addition in the year under consideration. Accordingly, it was submitted that the accounts of the assessee are that simple. Consequently, it was submitted that the respective details of a manufacture namely purchases or consumption of raw materials etc. were not maintained. It was submitted the accounts clearly showed that the garments have been purchased by the assessee on an as is basis and that too only when orders for their supply were communicated to the assessee by M/s AlShree General Trading Company who has been called as a buyer by the tax authorities and the party to whom commission has been paid by the assessee. It was his submission that the assessee is not interested what the department wants to call. The sole objection of the assessee is that accounts of the assessee are simple. They show that commission or discount, call it what you may, has been deducted towards payment to M/s AlShree General Trading Company. The accounts it was

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submitted are very simple and made available to the AO. Audit Report of the assessee is placed on record despite this the AO deliberately complicates the issues for himself and refusing to address the bare facts on record has deliberately passed the order by passing the statutory requirements. Even otherwise it was submitted whether it is called a commission or discount, he would not want to debate the issue with the tax authorities and leave it to their wisdom as the assessee has a business to run and is not so particular or aware which definition is used or applied. The assessee merely argues that it is an amount which has to be deducted for the services performed. Supporting evidences have been made available to the AO who has not rebutted the same. Proceeding on conjectures ignoring facts he chooses to treat it as a complex case for reasons best left unaddressed. The undisputed fact on record which remains on record is that the said concern i.e; M/s Alshree General Trading Company is responsible for identifying markets/areas and parties where the garments are sought and on the requirements of the said concern the assessee buys the garments for onward sale which is directly sent to the customer identified by the assessee’s buyer/Agent i.e. M/s Alshree General Trading Company. For the said exercise commission has been charged which may be described as a discount given or a commission paid for the services of finding a market for the goods and procuring orders. The fact remains it was submitted that the efforts are of the buyer the purchase and sale is made at its behest and no value addition is done by the assessee. For the purpose of logistics and running around the assessee has been functioning. The business model of the assessee, it was submitted, is pure and simple, wherein there is no complexity in the accounts. Simply because the AO for reasons best known to himself chooses to harass the assessee and at the fag end realizing that the assessment proceedings may become time barred deliberately with a pre- determined mindset impounds the books of accounts and issues a show cause notice on the very same date and also makes a proposal for referring the matter for special audit also on the very same date only to extend the time line which is statutorily fixed. Such an action it was submitted may not be given judicial sanction. Referring to the record it was submitted the AO in order to justifying the action, proceeds to make random additions without correctly addressing the facts based entirely on suspicions referring to irrelevant facts namely comparing the assessee with manufacturers deliberately ignoring the fact that the assessee was not a manufacturer. The AO makes no effort to rebut the

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assessee's claim that the assessee was not a manufacturer. He proceeds to make comparison with unequals i.e. firstly manufacturers secondly established manufacturers who have a renowned name, reputation and brand in the market and thus can dictate their terms to their Agents as to what commission is to be paid to them. The terms can be dictated by them on account of their reputation in the market which would invite healthy competition amongst the commission agents to vie for the privilege / opportunity. In the case of the assessee since firstly the assessee is not a manufacturer and secondly does not have a brand name or any reputation of manufacturing garments thus there are no commission agents who are vying for rendering services to the assessee. In fact without M/s AlShree the assessee has no buyers or contacts in market. 4. The CIT(A) it was submitted has mechanically upheld the order. Carrying the Bench through the orders of the respective tax authorities it was his submission that no effort has been made by the tax authorities either to meet the legal requirements for supporting the decision of referring the matter to Special Audit nor any effort was made which can be considered to be justifiably for necessitating such an action. The AO discarded the objections of the assessee and proceeded to make the major addition by applying a GP rate and also rejecting the claim of the commission/discount paid to the buyer who was procuring the orders from different countries and different people and was entirely responsible for this business. The facts have not been rebutted. The conclusions are based entirely on suspicion. The rejection of assessee’s explanation supported by documents it was submitted is disbelieved merely on self created doubts and suspicion without caring to bring a shred of evidence or fact for rebuttal. The AO in the facts of the case has deliberately ignored the correct facts and the CIT (A) has blindly accepted the order of the AO. 5. The other additions made it was submitted, are as a result of the said action of the AO and though the amounts may be small apart from the G.P addition, however, it may not be considered that the assessee has not challenged those. These are challenged and reliance is placed on the written submissions filed qua each of the additions before the CIT(A). These detailed submissions made in writing available at pages 1 to 44 of the Paper Book, it was submitted, fully addresses the additions made on merits and heavy reliance is placed thereon. 5.1 It was submitted that it would be his endeavour not to repeat them in the course of the hearing and merely reiterate that they are sufficient and complete

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along with replies dated 9.7.2009, 17.07.2009, 29.07.2009; 06.08.2009 and 17.8.2009 filed before the AO and referred to and relied upon before the CIT(A) mentioned at para 4 page 15 of the written submissions before the CIT(A). 5.2 Without prejudice to the main argument advanced that the reference for special Audit was made arbitrarily only to extend time ; and the arguments assailing the maintainability of the addition on merits addressed before the AO and the CIT(A), it was his submission the rejection of the assessee's books of account it was submitted, cannot be upheld. 6. In the said background, the ld. AR sought permission to address certain relevant facts. Attention was invited to the order u/s 131(3) of the Income Tax Act dated 15/16.12.2008. Referring to the same, it was submitted that justification for impounding the assessee's books of account have ben set out therein. Carrying us through the said order attention was invited to the even dated order passed by the AO where he conveys his intention to refer the books of accounts to the Special Auditor. Copy of the said letter, it was submitted, is placed at pages 46 to 52 of the Paper Book. Emphasis was laid on the fact that the said order is also dated 15/16.12.2008. Accordingly, it was his submission that with a pre-determined mind, the books were impounded. No effort was made to go through the same by the AO and then on the very same date he concluded that the accounts were complex. No effort was made to show what was the complexity in the accounts. It was highlighted that both the orders had been signed on the very same date which by itself shows the pre-determined mind of the AO to resort to the said section solely to extend time. Inviting attention to the impounding order, it was submitted that this is also dated 15/16.12.2008 6.1 Assailing the decision for referring the case for special Audit, it was submitted, reasons available in the order as recorded by the AO would further throw light on this pre-determined arbitrary finding. Reading the said order, it was submitted, it would show that the AO in para 2 makes a reference therein to the fact that the GP rate in the year under consideration was 12.65% as against 12.58% declared in the immediately preceding assessment year. It was questioned that this increase in GP rate cannot be said to be a valid justification for referring the books of accounts to the Special Auditor it was his submission that had there been a decline it could have been an area of enquiry but by itself that also could not be a ground for making a reference for Special Audit.

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6.2 In para 3 of the same at page 47, it was his submission the AO makes a reference to the same facts as noted in para 1 of his impounding order of even date u/s 131(3) namely that in the case of Canon Group of Industries in which a survey u/s 133A was conducted, assessee's name was found which revealed that accommodation entries had been provided. It was his submission that he would file a copy of the order of ITAT in the case of Canon Group of Industries to show that the allegations were wrongly made and the entire addition, infact has been deleted. Copy of the said order dated 17.10.2014 in ITA 5410/Mum/2011 was filed to demonstrate the claim. Referring to the names and particulars mentioned at Paper Book page 47 para 3 sub-paras (iii) to (vii), which referred to statements some persons having been recorded in some proceedings for the Canon Group of Companies etc. and also in para 3.1 at page 48 of the Paper Book, the AO has concluded that accommodation entries to the company and other concerns were provided and routed. The order of the ITAT in the case of Canon Group, it was submitted, is available. The persons making the statements were not made available for cross-examination etc. and considering the legal position the additions were deleted holding as under : “Even otherwise, when the sales and all other quantitative figure regarding stock are accepted by the Assessing Officer then in the absence of any direct evidence showing the non genuineness of purchases in question, the addition is not sustainable on the basis of assumption and conjectures relying on the four statements recorded u/s 133Aand that too without affording an opportunity of cross examination to the assessee. In view of the facts and circumstances of the case, we are of the opinion that the addition in question on account of bogus purchase is not sustainable and accordingly the same is deleted.” 6.2.1 Referring the aforesaid findings it was submitted that in effect the addition was found by the ITAT having been made on assumptions and thus, stood deleted. 6.3 In the facts of the present case also it was submitted this would apply ipso-facto. Referring to the order it was submitted no addition is made ultimately relying on any statement. The assessee also is not seeking relief on the ground that statements of some unconnected persons have been relied upon which have not been confronted as there is no such allegation against the assessee. The said order of the ITAT is cited and placed on record and made available only to show that similar arbitrary action by the Department did not find favour with the ITAT and since a reference is made by the AO for justifying a reference for Special Audit the order of the ITAT has been referred to show that the said fact was completely irrelevant. The assessee in the facts of the case would vehemently assail the departmental action on the grounds of the unjustified arbitrary exercise of power by the AO. Thus, reverting back to the

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Paper Book pages 46 to 50 which is the reasons recorded by the AO for making a reference to the Special Audit u/s 142(2A) it was submitted, that after taking note of these facts which are presumptions, suspicions and most definitely not valid reasons for bringing out the so called complexity in the accounts; the AO in para 46 available at page 49 of the Paper Book concluded that, “Since the company has maintained the consistent G.P. ratio for last three years even the genuineness of sales or exports is open to doubt, and is required to be verified with reference to the purchase made genuinely or through the accommodation entries. This factor further adds to the complexity in the accounts in your case.” The said reasoning was strongly assailed as being biased and suspicious without any legal backing.

6.4 The AO thereafter it was submitted makes certain allegations in para 7 about Duty Draw Back which issues could have been considered by the AO within the statutorily available time. It was his vehement argument that it cannot be a justification for reference as there is no complexity. In para 8 it was submitted he makes allegations that there is no day-to-day consumption of raw material ignoring the fact that these details admittedly the assessee could not have maintained as the assessee is not a manufacturer. Thus the AO refers to incorrect facts to justify his actions. Similarly, in para 9, the AO again it was argued refers to irrelevant facts and faults the assessee on the ground that there is no separate trading or manufacturing account and proceeds to hold that, “therefore, in view of the apparent complexity of accounts in your case as discussed above, I intend to refer your case for special audit”. It was his submission that in the entire order, when read, it can be seen that there is no justification what-so-ever to show how the accounts can be said to be complicated or complex, the said exercise of deliberately referring to incorrect and irrelevant facts so as to garb his arbitrary actions in order to justify his actions with legitimacy only to extend the time limit, it was submitted, is completely against the letter and spirit of law. The power having been exercised arbitrarily, it was submitted, patently evident on record requires that the order may be quashed.

6.5 Before addressing the cases which justify such an action, it was re- iterated that it may be noted that the assessee has never claimed to be a manufacturer. Attention was invited to the assessment order wherein in Column-10 the AO describes the assessee as engaged in the business of

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“Export of garments” and there is no reference to any manufacturing activity either by the assessee or by the AO. The tax authorities it was submitted have deliberately ignored relevant facts and referred to irrelevant and incorrect facts to justify the stand taken. The assessee, it was re-iterated purchases the garments as it is. Whatever is required to be exported is picked up as per the requirements of the buyer these are sent without any value addition to the parties directly from whom payments are received the discount/commission is of M/s Alshree General Trading Company, the rest is paid to the assessee. Thus, it was submitted that it is an accepted fact that there was no manufacturing activity consequently there was no occasion to maintain accounts for the said non-existent activity. Thus, no consumption register of raw material etc. could be maintained or made available. In fact it was re- iterated, it was a very simple case of M/s Allshree General Trading Company getting orders from parties known to it / identified by it. These orders were conveyed to the assessee who procured the garment and sent it at time directly to destination communicated to the assessee. The garments were consequently purchased and dispatched and after deducting their commission/discount, the assessee received the payments. For reasons best known to the AO he deliberately failed to address the correct facts and sought to extend time by resorting to the statutory provisions arbitrarily. The exercise, it was submitted, was based on incorrect facts and the AO having failed to bring out anything in his order to show that it was a complex case deserving a special auditor, the order deserves to be quashed and the assessment order passed pursuant thereto also deserves to be quashed. All these facts were before the CIT(A) who mechanically upheld the action.

6.6 The complete details and vouchers, invoices etc in support of the audited books of accounts it was submitted have been produced before the AO as well as the Special Auditors. The Report of the Special Auditors dt. 23/06/2009 it was submitted is also available on record attached at Paper Book page no. 131 to 228. Thus it was submitted that infact there are two Audit Report available on record. One filed under section 44AB accompanied by Audit Report in the prescribed form in 3CA and the Report of the Special Auditor sought by the AO. It was argued that through the Report of the Special Auditor is without jurisdiction and thus invalid but even if the Report of the Special Auditor is considered it would show referring to page 131of the paper book that the Special Auditor records “paper books of accounts have been kept by the head

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office and the branches” that it appears on examination that paper books have been received for the purposes of audit; that the said accounts to the best of my information “give a true and fair view subject to the comments given. Thus it was submitted that patently the Special Auditor also does not assail any document or details for carrying out an audit. The observation “subject to comments” it was submitted has adequately been addressed in the detailed replies to the AO. Attention was invited to books maintained by the assessee which have been noted by the Special Auditor and refer to by him at page 137 as under: 1. Cash Book (Ludhiana & Delhi) 2. Ledger (Ludhiana & Delhi) 3. Bank Book 4. Journal 5. Stock Register (Ludhiana & Delhi) 6.7 Attention was also invited to the quantity details of goods in Delhi Bench and Ludhiana made available vide Annexure III and III-A at page 138 & 139 of the Paper Book. Thus it was his submission that the order of the assessing officer is dehors jurisdiction. Apart from the major addition made by tinkering with the G.P. rate which issue stands addressed elaborately the other addition has been made based on misunderstanding the description of the garments between scarves and polyester scarves (para F5(4) of Audit Report) which has been repeatedly clarified specific by various letters including letter dt. 24/07/2009 to the AO and evidences made available at the assessment stage. Without discrediting any documents the addition has been made and sustained which could have been considered with the statutory time limit available. Attention was invited to page 83 of the paper books which is the invoice available on record which depicts the name of the buyer, the consignee the rate of commission as 12.59%. Copies of the same it was submitted are placed alongwith letter dt. 29/07/2009 available at page 245 to 327. The documents referring to at Sl. No. 23 to 34 made available to the AO specifically explained the factual position. For ready reference it is reproduced hereunder:

Extract of letter dt. 29/07/2009 of page 247 & 248 of paper book 23. Al Shree General Trading buy goods from us and further sold to different parties. Instead of taking the delivery of material at his own. Al Shree General Trading order us directly delivered the material at the end of customers of Al Shree General Trading. invoices were made in the name of different customers (Consignee) while as per Shipping bills actual buyer was AL Shree General Trading (Buyer). All the payments were collected by Al Shree General Trading

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and remitted to us. Copy of Export Invoice is enclosed for your reference.

(b).ln this case M/s Jai Parkesh Trading was the customer of Al Shree General Trading. Material was directly delivered to him as per instruction of M/s Al Shree General Trading. During the year different invoices were issued showing M/s Jai Parkesh as Consignee and on Shipping Al Shree General Trading was shown as Actual Buyer.

(c). In this case also the name of Al Shree General Trading is appearing as buyer on Export Invoices

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specifically briefly encapsulated at pages 2 to 6. Thereafter, the assessee has objected to the other reasons to refer the case to a Special Auditor and the objections of the assessee were supported by the decisions of Courts and Tribunals. These arguments have been referred to from pages 6 onwards of the Paper Book, however, at this stage it was submitted he would not go into those and he would instead invite attention to the compilation of the judgements filed which are heavily relied upon. For this specific purpose, attention was invited to judgement of the jurisdictional High Court mentioned at Sr.No. 1 which is the judgement of the Hon'ble Punjab & Haryana High Court in the case of Hind Samachar Ltd. V ACIT 335 ITR 277 (P&H) available at Paper Book page 1 to 5. Referring to the same, it was submitted that the Hon'ble Court has very categorically held that the condition precedent for referring the matter to the SPECIAL AUDIT—UNDER SECTION 142(2A)DIRECTING a SPECIAL AUDIT should be that the —ASSESSING OFFICER SHOULD BE SATISFIED THAT the ACCOUNTS WERE COMPLEX AND SPECIAL AUDIT WAS NECESSARY. It was his submission that in the facts of the said decision, the Court found that the reasons for special audit were not mentioned. In the facts of the present case, it was submitted reasons are factually and deliberately incorrect and infact for justification of the order, there is also in fact no reason given by the AO.

Inviting attention to the decision mentioned at Sr.No. 2 which is a 6.9 decision of the Gujrat High Court in the case of Alidhara Textool Engineering P.Ltd. & ors V DCIT 332 ITR 115 (Guj) it was submitted that the Hon'ble Court was pleased to note that for justifying special audit, the AO must demonstrate that accounts were complex. The Court found that where no evidence had been placed by the AO demonstrating that the accounts were complex, the consequent assessment was held to be not valid. The said decision, it was submitted, fully applies to the present case also.

6.10 Similar was the position, it was submitted, which had been noted by the Hon'ble Delhi High Court in the case of Delhi Development Authority & another V Union of India & another 350 ITR 432 (Del). Attention was invited to pages 13 to 42 of the Paper Book which contains copy of the said decision. In the said decision also, it was submitted, the Court in unambiguous terms held that the condition precedent for direction for special Audit is the complexity of accounts and safeguarding interests of Revenue. The conditions it was submitted have been held to be cumulative. The Court held,

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where the books of account were maintained in accordance with law and were not examined and there was no evidence that accounts were complex, notice on basis of notes of accounts has been held to be not valid. In the facts of the present case also it was submitted that the impounding order and reference order of even date showed that the AO has concluded with pre determined mind to exercise the power sans facts. The reasons set out by the AO show that nothing has been brought on record to show either complexity in the accounts or the interest of Revenue being served. The exercise it was submitted was solely to extend time. It was his submission that the power is not vested to harass the assessee to circumvent the law and extend the time limit available to the AO.

6.11 Reliance was also placed upon the order of the Pune Bench of the Tribunal in the case of ITO V Vilsons Particle Board Industries Ltd., copy placed at pages 43 to 78 reported in 55 ITR 114 (Tribunal) (Pune).

6.12 Reliance was also placed on the decision of the Apex Court in Rajesh Kumar 287 ITR 91 (SC) and also the decision in the case of Sahara India (Firm) 300 ITR 403 (SC).

6.13 Thus, it was his submission that the direction for special Audit which has been assailed before the AO as well as the CIT(A) in the facts of the present case was not maintainable. The grant of approval by the higher authority, it was submitted mechanically given becomes meaningless. The approval should be granted having regard to the materials on record. Material available on record, it was submitted, would necessitate the explanation given by the assessee by way of objections etc. if any, as it would be a relevant factor. It was submitted that had this exercise been done with an open mind the approving authority would have been in a position to point out the defect in the AO’s approach and thus he would have been in a position to direct the AO to complete the process of the assessment within the specified time so as to save the Revenue from suffering any loss. It was submitted that while exercising his power, it is the Assessing Officer and only the AO who has to form an opinion. His reasons are final so far as he is concerned albeit subject to approval of the Chief Commissioner or the Pr. Commissioner, as the case may be. It is only at that stage that he is required to consider the matter and not at a subsequent stage i.e. after the grant of approval.

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Officer in the show cause notice issued itself. The assessee has replied to the notice. The reply of the assessee has been considered and it has not been accepted by the AO. The said conclusion has been affirmed in appeal by the CIT(A). Accordingly, heavily reliance was placed thereon. For supporting the conclusion, attention was invited to page 7 of the impugned order so as to point out that 23 specific defects were pointed out by the AO, thus, it was his submission that the CIT(A) has considered in para 3 the claim of the assessee of making payment to M/s Alshree General Trading Company which is described as a buyer of the assessee. The rate of commission being paid of 12.5% against a gross profit of 12.65% it was submitted was correctly questioned by the AO. The facts have been considered and the claim has been rejected. In the facts of the present case, it was submitted, not only the genuineness of the services rendered have been doubted but even the rate of commission paid has been doubted. The specific reasons have been set out in the order. It was his submission that even established houses like M/s Oswal Woolen Mills, Modgill Hoisery P. Ltd., Abhishek Industries etc, pay brokerage or commission from percentages ranging from 5% to 0.92%. Accordingly, the assessee having failed to address these issues, commission payment of 12.5% was not accepted and the addition was confirmed. 8.1 It was also his submission that the decisions relied upon by the Ld. AR are of no help in the face of the decision of the Supreme Court in the case of Shyamal Sarkar vs. CIT, Siliguddi (2017) 84 taxmann.com 167 (SC), wherein it has been clearly held as under: “SLP dismissed against High Court’s ruling that where audit had taken place, period of limitation for passing assessment order would be extended by time taken for special audit; mere irregularities in order of audit would not invalidate proceedings.” 8.2 Accordingly, it was his submission that the order passed by the AO is valid as in the aforesaid decision the Apex Court has upheld the decision of the Kolkata High Court that the 163 days which were consumed in the audit had to be excluded from the period of limitation. Accordingly, it was his submission that the decisions relied upon are of no help. 8.3 On the remaining issues, wherein the challenge is posed on the merits of the additions it was his submission that since the Ld. AR relies upon the written submissions on record before the AO and the CIT(A) he would also rely upon the orders of the authorities below wherein these submissions are dismissed.

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“On the invoices drawn on M/s Alshree commission of 12.50% of FOB Value is declared. While accounting the sales. A/c of Al Shree is debited by Invoice Value reduced by 12.50% & the balance amount is debited to Commission a/c. M/s Al Shree makes the payment of net amount only in this way the assessee is passing on the revenue of 12.50 to the buyer. This is very high payment against a GP of 12.65%. Actually looking into the very low NP of Rs. 17,50,265.32. It seems that commission is very high. Total commission of 219024454.08 has been debited to profit & loss account. The assessee is making en entry of credit in the sale account FOB Value of Invoice & debit the Commission a/c by 12.5% of FOB value & buyer a/c is debited by the balance amount. Buyer is making the payment to the amount debited to them. According to the assessee the buyer is making payment only after deducting the commission as stated in the shipping bill. However, the details of the services rendered by the agent have not been provided. Copy of the agency agreement has also not been provided.” (emphasis supplied) 9.2. Inviting attention to page 9 of the impugned order at page 14 and 15 of the assessment order, it was submitted, it would show that the AO castigates the assessee also on the reasoning that there is no actual remittance of the alleged commission payment through any banking channel ignoring the reply given, which is also reproduced in his order as well as of the CIT(A), that it had been reduced from the invoice value of the sale bills. Also noted by the Special Auditor. Attention was invited to reply dated 29.7.2009 addressed to the Assessing Officer extracted on the very same page which has also been extracted by the CIT(A) in his order and mechanically considered. Same is reproduced hereunder: “Commission 12.5% was paid to M/s Al Shree General Trading for procurement of export orders and realization of payment. Commission was paid only after realization of export bill No. Commission was paid for party realized bills. The company is not incorporated in India. The agent is non resident and has no representative based in India. Hence, no Tax was deducted at source on payment of commission.” 9.3 It was submitted that the replies have been extracted in part at times but either deliberately ignored or selectively ignoring the relevant facts the AO refusing to understand the simple facts arbitrarily held that the accounts were complicated. Which findings have been mechanically upheld by the Ld. CIT(A). For the said purpose attention was invited to para 3.2 & 3.3 of the CIT(A) is as under: “3.2 The Ld. Counsel in his reply has submitted that Alshree General Trading Company buys goods from the assessee and further sale to different parties instead of taking the delivery of material at his own. The statement of the Ld. Counsel itself proves that M/s Alshree General Trading Company is buyer of the assessee and not the agent. It is a usual practice in the export business to have different consignee at option of buyer. But for all practical purposes, the buyer is the one on whom the bill of exchange is drawn

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and who is responsible for meeting the other obligations under FEMA which in present case is M/s Alshree General Trading Company. Collecting the payment from the consignee is independent activity of the buyer and has no relation with his liabilities to make payment to the exporter. Copy of the fax message submitted at page no. 34 of the submissions of Ld. Counsel, is copy of order by M/s Alshree General Trading Company in the capacity of the buyer and not in the capacity of agent. So I agree with the AO that no services have been rendered by the buyer and in the absence of any written agreement and very excessive rate of commission being paid, the disallowance of Rs. 21,90,24,454/- is hereby confirmed. 3.3 Even the modus operandi of the while transaction puts it into the shadow of sham transaction. Because no remittance of commission is actually being made through banking channel.” (emphasis supplied) 9.4 On the other remaining issues addressing the various addition sustained submissions before the CIT(A) available on record were heavily relied upon. However, in order to highlight the submission that there has been complete non application of mind by the CIT(A) and the allegation that he has passed the order mechanically and deliberately ignoring the facts, attention was invited to para 6.1. It was submitted that relying on AS-II it had been brought to his notice that the amount has been duly accounted for in the next year and they cannot be added twice. Referring to para 6.2 of the impugned order it was his submission that no effort has been made by the CIT(A) to provided any independent justification for sustaining the addition and giving reasons why the arguments advanced on behalf of the assessee cannot be accepted. No discussion has been made as to why the argument did not find favour For ready reference the two paras are reproduced hereunder: “6.1 The counsel during appellate proceedings contended that “the amount has been duly accounted in the next year as per AS-11. Obviously the same cannot be added twice over. If the amount is however added in the year under appeal, it may directed be excluded in the succeeding year.” 6.2 Considering the facts and circumstances of the case and also above said counsel’s contention in this regard and AO’s observations and I find no reason to interfere with the findings of the AO. Therefore, this addition is also hereby confirmed.” (emphasis supplied) 9.5. It was his submission that in the face of the facts brought out and the prayer made, the CIT(A) ought to have addressed why he deemed it appropriate to hold that the amount still needed be added twice. The manner of passing the order in para 6.2 in the light of the submissions advanced in para 6.1, it was submitted, itself demonstrates complete non-application of mind by the CIT(A).

9.6 Similarly, the addition made on account of wrong interpretation of items attention was invited to the submissions extracted in para 7.1 and the conclusion of the CIT(A) in para 7.2 so as to argue that even the bare facts have

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not been considered necessary for addressing by the CIT(A) in the passing of his order. It was his submission that similar verbose conclusion without referring to even the bare facts of the issue being considered has identically been given by the CIT(A) even in para 8.2 where he pretends to consider the allowability of the claim of incorrect valuation of closing stock. The said issue submitted he shall address hereinafter. For ready reference, the relevant extract is reproduced hereunder: “7.1 The counsel contended that there is no purchase of 77480 pieces of scarves cutting and hence sale of such cuttings make the stocks register as non genuine and unreliable is, to say the least, without substance and contrary to logic. 7.2 I have gone through the contention of the assessee’s counsel and also perused the relevant assessment order as well as rival submissions filed in this regard. Though the AO has made said addition for the want of necessary documents in the shape of stock register. Considering the totality of the facts and circumstances of the case, I am of the opinion that the AO has rightly made an addition on this juncture as the assessee fails to produce required documentary evidence in support of its claim. Further, the discrepancy under consideration is sort out by the Auditor and it needs concrete evidence for quashing. Keeping in view the above factual position, the addition made by the AO on this account is hereby confirmed for the want of proper evidence from assessee’s side. Thus, this ground of assessee is dismissed.” (emphasis supplied) 9.7. It was his submission that the finding in paras 7.2 and 8.2 etc. is verbatim identical and the CIT(A) has merely paid lip service to passing a considered order without even caring to address the bare facts on the issues being decided for the said purpose attention was invited to page 24 & 25 para 8 & 8.1 of the impugned order. Addressing the relevant pages in the Paper Book supported by invoices which would show that the assessee vide letter dated 24.7.2009 had explained that it had purchased 5598 pieces of scarves and had accounted for said sale in the stock register under the head “scarf”. Apart from that, there were sale of scarf cuttings also under the head “polyster scarf”, thus, there was no purchase of 77480 scarfs. These were part of the very same garment, thus, this bare fact reproduced in the written submission supported by documentary evidences has remained deliberately ignored.

9.8. Similarly, the addition made on account of under valuation of closing stock has been again considered in a mechanical manner by the CIT(A) in para 8.2 verbatim to the finding in para 7.2 qua the scarfs cutting for ready reference the said paras are also reproduced:

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“8.1 The assessee’s counsel vide his submissions has contended that the auditor has wrongly calculated the valuation of closing stock by applying the sale rate of Rs. 855/- per piece whereas the closing stock has been rightly valued by the assessee by adopting the purchase price of Rs. 400/- per piece. 8.2 I have gone through the contention of the assessee’s counsel and also perused the relevant assessment order as well as rival submissions filed in this regard. Though the AO has made said addition for the want of necessary documents in the shape of sales bills or stock tally. Considering the totality of the facts and circumstances of the case, I am of the opinion that the AO has rightly made an addition on this juncture as the assessee fails to produce required documentary evidence in support of its claim. Further, the discrepancy in valuation of closing stock is sort out by the Auditor and it needs concrete evidence for quashing. Keeping in view the above factual position, the addition made by the AO on this account is hereby confirmed for the want of proper evidence from assessee’s side. Thus, this ground of the assessee is dismissed.” (emphasis supplied) 9.9. Addressing the legal position it was again submitted that the decision cited by the CIT-DR in the case of Shyamal Sarkar affirmed by the Apex Court by way of the dismissal of the assessee’s appeal, it was submitted, is not of any help to the Revenue as in the facts of the said decision, validity of the reference to Special Audit was not an issue. In the facts of the said decision and the decision of the High Court, as well as the ITAT which had been relied upon the validity of the direction was never an issue hence the decision is not applicable. The order passed consequent to the invalid order under section 142(2A) it was submitted is further supported by the decision of the Apex Court in the case of Rajesh Kumar and Sahara India which have not been rebutted or distinguished nor the orders of the ITAT or the decision of different Courts relied upon. It was his submission that in fact there are consistent orders of the Courts and the ITAT on the said issue and these decisions are being heavily relied upon. The following judgments being specially relied upon Hind Samachar Ltd. vs. ACIT and Another (2011) 335 ITR 277 (P&H) (HC), Alidhara Textool Engineering P. Ltd. & Others vs. DCIT (2011) 332 ITR 115 (Guj.), Delhi Development Authority & Another vs. Union of India and Another (2013) 350 ITR 432 (Delhi), ITO vs. Vilsons Particle Board Industries Ltd. (2017) 55 ITR (Trib.) 114 (Pune), Rajesh Kumar vs. DCIT (2006) 287 ITR 91 (SC) and Sahara India (Firm) vs. CIT (2008) 300 ITR 403 (SC).

9.10 Inviting attention to para 2.1 of the CIT(A) relied upon by the CIT (DR) it was his submission that it needs to be considered that the AO having set out the 23 so called short comings has not enhanced the sales. It was also his submission that it is also important to take note of the fact that the assessee is a 100% export oriented entity and the shipping bills relied upon qua the exports and the remittances are all available on record and the

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departmental exercise in the absence of any contrary evidence is an exercise in futility as it is arbitrary and perverse on facts. None of these documents are rebutted. It was submitted that merely because the tax authorities do not want to accept the commission/discount they cannot be allowed to proceed arbitrarily to discard the submission without rebutting the facts. They must first be called upon to upset the facts by hard evidences. Without referring to facts, arbitrarily ignoring the fact that the entire business model was being run by M/s Alshree and unlike the Raymonds; the Oswals etc. the assessee was not a renowned brand name in the market. There is no justification on record to support the suspicion that the commission/discount could have been lowered. The facts on record consistently are that the entire effort was of the buyer i.e. M/s Alshree General Trading Company, thus, the assessee cannot be considered to be comparable to entrenched and established garment manufacturers who can call the shots and dictate their terms to the commission agents. Accordingly it was his prayer that the appeal of the assessee may be allowed.

Section 142 (1)… 142(2)… 142 (2A) If, at any stage of the proceedings before him the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialized nature of business activity of the assessee, and the interest of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant, as defined in the Explanation below sub-section(2) of section 288, nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such other particulars as the Assessing Officer may require: Provided that the Assessing Officer shall not direct the assessee to get the accounts so audited unless the assessee has been given a reasonable opportunity of being heard.” (emphasis provided)

10.1 It is worth noting that the bold texted highlighted portion of the above was inserted by the Finance Act 2013, w.e.f 01/06/2013 and prior to the amendment the statutory mandate was “ the nature and complexity of the accounts of the asessee and.”

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10.2 In order to decide the correctness of the assessee’s claim that the directions of the assessing officer in the peculiar facts and circumstances of the present case for making a reference to the special audit was pre-mediated; without any application of mind; without setting out any reasons which would suggest that there is a complexity in the accounts which admittedly are the statutory requirements and was only and solely for the purposes of extending the time limit consequently the exercise of the power being arbitrary not supported by settled legal position thereon was to be quashed; and the assessment order passed pursuant thereto to be declared null and void, it is necessary to first and foremost to cull out the contents of the order under section 131 (3) dated 15/16 December 2008 passed by the assessing officer whereby books of accounts of the assessee were impounded. The allegation of the assessee referring to the said order of impounding the books of accounts as per record has been that the order passed under section 142 (2 A) also having been passed on the very same date available at paper book page 46 to 50 would show that the said exercise has been done by the assessing officer with a predetermined motive only to extend the limitation under the Act so as to pass the assessment order somehow in the extended time. It has been the consistent claim that infact the assessing officer before making a reference did not make any effort whatsoever to go through the accounts or the Objections of the assessee and has labelled the accounts as complex without bringing out any iota of fact or evidence to support the pre mediate conclusion. It was submitted that the time limitation for making the assessment was coming to an end on 31/12/2008. The claim of the assessee has been that the statutory limit having been provided under the Act can be extended only if the accounts of the assessee are found to be complex in nature that the conclusion that there has to be complexity in the accounts it has been urged is a sine-qua non. It has been argued that the assessing officer ignoring the detailed submissions of the assessee and the Objections of the asessee on record proceeded to refer the matter for special audit vide letter dated 30th December 2008 ignoring the fact that the statutory requirement mandating such an action was conspicuously missing. Thus where the time limit for making the assessment ended on 31/12/2008 the reference made under section 142 (2A) on 30/12/2008 it has been urged without satisfying the requisite conditions in terms of what has now been a well settled legal position it has been submitted may be held as invalid and the assessment order passed pursuant thereto on 21/08/2009 it

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has been submitted being time barred may consequently be quashed. Attention has been invited to the decisions cited in the course of the arguments for supporting the prayer that since Reference under section 142 (2 A) is invalid provisions of Explanation 1 (iii) of section 153 would not apply for extending the period of limitation.

10.3 In order to decide the correctness of the claims so made it would be appropriate at the outset to first cull out the contents of the order under section 131(3) dated 15/16/12/2008 whereby books of accounts were impounded

Order Under Section 131(3) of Income Tax Act, 1961 “A survey under section 133A of Income Tax Act, 1961 was conducted at the business premises of the Cannon group of Industries having its offices at Delhi, Bombay and Ludhiana. The assessee is one of the concerns of this group of Industries and is engaged in manufacturing and trading of hosiery goods and woolen synthetic items. The registered office of the flagship concern of this group is at Mumbai and Head Office is at Ludhiana. 2. During the course of survey operation conducted in this group of industries on 31.03.2006, large numbers of books of accounts and incriminating documents were found and impounded. The main allegation against the group is suppression of its profits by taking entries for bogus purchases from dummy concerns. The assessee is also showing consistent GP rate which clearly shows that even the exports made are open to doubt. Therefore, in order to verify purchases and the sales, the books of accounts and documents as per Annexure “A” are hereby impounded.”

10.4. Before we address the arguments advanced on behalf of the Ld. AR in the context of the above it would also be appropriate to extract the contents of the letter dated 15/16 /12/2008 passed by the assessing officer for making a reference for special audit. Copy of the same is available at page 46 to 50 of the paper book and is reproduced hereunder:

The assessment record in your case for the assessment year 2006-07 shows that you have filed return declaring income of Rs. 17,55,265/- on 30.11.2006. Subsequently the case was been selected for scrutiny. In response to the statutory notices and the questionnaire Shri Hardeep Singh CA A.R., attended the proceedings and filed the information called for from time to time which has been examined.

2 , As per Profit and Loss account accompanying the return, you are doing trading and export of Hosiery goods. For the accounting year relevant for the Asstt. Year 2006-07, you have declared export sale of Rs. 180,27,08,454/-giving in G.P, rate of 12.65% against export of Rs.85,66,39,645/- showing G.P. rate of 12.58% in the immediate preceding year. The net profit shown for the year under consideration is Rs. 17,50,265 against Rs.4,59,978/- in the immediate preceding year. 3. The assessment record shows that the company is one of the Concerns of the Cannon group of Industries, in which survey u/s 133A of the Income Tax Act, was conducted on 31.3.2006 along with other associated concerns. During the course of survey a large number of Books of Account and incriminating documents were found and impounded. The statements of various persons controlling different concerns, were recorded, which revealed that they have been providing accommodation entries to you as also to the other concerns in Cannon Group of Industries, in respect of purchases as discussed below:

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i) Shri Sri Chand Gulati resident of H. No. 3493, St. No.7, A-Block, Faridabad, in his statement recorded on 31.02.08 and 12.04.08 admitted to have given you accommodation entry of amounting to Rs. 1.3 Crore from his concern namely M/s Sri Enterprises. He also admitted that I he has given the accommodation entries through other concerns namely M/s S.S. Enterprises, Ekta Enterprises, Gaurav Enterprises, Gitanjali Enterprises, S.K. Traders, Kumar International, and L.G. Enterprises. It was also categorically admitted by him in his statement recorded on oath that no actual work is being done by the said firms except to provide the accommodation entries to Cannon Group of Industries. Shri Sajal Aggarwal, resident of 639, 2nd Floor, Gali NO. 18, Joshi Road, Karol Bagh, ii) Delhi in his statement recorded on 31.3.2006 also stated to have provided the accommodation entries through its concerns namely M/s Nath Enterprises, Aggarwal Traders and Kala Ratnam Exim. iii) Sh. Vijay Kumar Sharma S/o Sh. Narain Chand Sharma resident of RZC-77, Vishwa Park, Uttam Nagar, New Delhi in his statement dated 12.4.2006 also stated to have provided accommodation entries to the Cannon Group of Industries through its concerns namely i) S.P.S. Enterprises ii) Renu & Co. ii)New Apex Enterprises iii) Anurag Service Delhi iv) P.P. Enterprises v) Vishnu Overseas vi) Satyam Overseas and vii) Jupiter Overseas. iv) Md Syorhab Ali s/o Mohammad Ismail r/o B-174 Avantika Sector - lVohini, New Delhi in his statement recorded on 12.4.2006 further admitted to have given accommodation entries to the Canon group of industries. v) Sh. Vijay Gulati S/o Sh. N.C. Gulati resident of 8-2/13, Ground Floor Paschhim Vihar in his statement dated 1.5.2006 has also admitted to have given accommodation entries to Cannon Group of Industries after charging commission. vi) Shri Akash Bansal resident of 5382, Lado Ghatti, Pharganj, Delhi has admitted during his statement recorded on 2.5.2006 having provided accommodation entries through its concerns namely M/s Bharat Overseas. vii) Sh. Satinder Soni S/o Sh. Sunderpal Soni resident of R-102/103 Vijay Vihar, Phase-I, Rohini, New Delhi in his statement recorded on 13.4.2006 has admitted to have given accommodation entries to the Cannon group of industries through its firm Sony Apex. 3.1 All aforesaid persons who have admitted to have provided accommodation entries to the company or other concerns in this group, have routed their bogus transactions through numerous Bank accounts maintained in the name of numerous dummy concerns which gave the accommodation entries. This establishes the fact that all the concerns in Cannon Group of Industries are indulging in accommodation entries. 4. As per the balance sheet the company is stated to have advanced following sums against the supplies. i) Canon Industries (P) Ltd. (Export Unit) Rs. 8,81,71,660/- ii) Canon Industries (P) Ltd. (Trading) Rs. 1,51,37,558/- iii) Canon Industries (P) Ltd. (Delhi) Rs. 2,35,00,000/- iii) Compact Logistics Rs. 24,04,669/- iv) Brown Textile processor Rs. 8,88,78,531/- 4.1. From the above, it is clear that substantial purchases are being made from the above concerns. Since all the concerns of Canon Group of Industries, indulged in taking accommodation entries, it remains to be traced out as to how many of the accommodation entries has finally found it way to your company. The fact however remains that the company is intimately connected with the other concerns of the Cannon group of industries and also doing business transactions with the concerns providing accommodation entries to your company. 6. Since the company has maintained the consistent G.P. ratio for last three years even the genuineness of sales or exports is open to doubt, and is required to be verified with reference to the purchase made genuinely or through the accommodation entries. This factor further adds to the complexity in the accounts in your case. 7. The company has received Duty Draw Back to the tune of Rs. 15,58,82,068/-for the year under consideration against Rs. 4,89,14,555/- in the immediate preceding year. Thus, there is an increase of more than Rs.10 crore of DEPB entitlement alone, during the year under consideration as compared to the last year without any corresponding increase in the net profit which has only increased from Rs.4,59,978/- to 17,50,265/- in the year under consideration. This facts establishes beyond doubt that purchases are highly inflated with the accommodation entries to neutralize the profits out of the DEPB entitlements. 8. In the profit and loss accompanying the return you have shown closing stock of Rs. 2,94,26,565/-. However in the absence of day to day consumption of raw material or the purchases and sale, the books results are not subject to verification. 9. The company is manufacturing as also trading in the hosiery goods. However there is no separate trading or manufacturing account attached with the return of income making it impossible to know as to which expenses relate o trading or manufacturing.

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10.5 We find that the first of the replies of the assessee thereto is placed at paper book pages 51-53. On behalf of the Canon Group of Industries knowledge of the assessee with the companies of Sh. Shree Chand Gulati or the other companies namely M/s Luckly Sales, M/s SPS Enterprises, M/s Satyam Enterprises, Jupitor Overseas, Sanam Impex, and Sundram Overseas etc has been denied.

10.6 It is further seen that with regard to Vijay Kumar Sharma it has been mention that out of the 11 companies the assessee has interactions with 5 companies. The Invoices of the said companies in support of the export made by way of shipping bills etc were enclosed. Qua the statement of Md. Sohrab Ali it is seen it has been stated as per the reply that some of the companies have been interacted with however Md. Sohrab Ali was claimed to be not known. Further goods it has been stated had been exported and the exports were supported by copies of export invoices; shipping bills payments received through cheques etc. Similarly qua the alleged statement of Mr. Satender Soni it has been stated that the person is not known and no purchases have been made from his stated company. The concern as per record it is seen had sought permission to cross-examine the persons and requested for making their statements available for further clarification etc. Although based on these statements no additions were made. However since reference has been made to the case of Canon group of industries and presumably the very same statements apparently aroused suspicion in the case of the present assessee also to the alleged scam of bogus purchases/accommodation entries etc. we deem it appropriate to refer here to the said order dated 17.10.2014 in ITA No. 5410/Mum/2011 and others in the case of M/s Cannon Industries P. Ltd. vs. DCIT. Copy of this order has been filed in the course of the hearing by the Ld. AR and the department has conspicuously remained silent qua the impact thereon if any in the case of the Revenue. We find on a consideration of the issues which came up for consideration before the Co-ordinate Bench that the

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identical claim of alleged bogus purchases from various concerns on the basis of the statements of those four persons including Sh. Shree Chand Gulati has been a subject matter for consideration of the Coordinate Bench at Mumbai. These facts submissions and conclusions have been addressed by the coordinate Bench in para 3 to 3.6 from pages 3 to 9 of the said order,. A perusal of the said decision shows that considering and relying upon the decision of the Apex Court in the case of CIT Vs. Kadhar Khan 300 ITR 157 (Mad.) (HC) confirmed by the Supreme Court (2010) taxman 248 the coordinate Bench concluded that the statements recorded during the survey proceedings u/s 133A of the Act have no evidentiary value since the opportunity to cross examine the parties could not be made available. The departmental claim that notices sent to the parties returned with the postal remarks “left/no such person” it has been held would not obliterate the necessity of the opportunity of cross examination in the remand proceedings. The coordinate Bench further found that the assesse’s claim was found to have been supported by necessary details by way of purchase bills, export sale wherein the quantitative details were not disputed by the tax authorities. It is seen that the relevant facts taken into consideration by the AO and the CIT(A) were summed up by the coordinate bench in the following manner: “3.1 The assessee is an export house exporting hosiery goods, woolens, synthetics and readymade to CIS countries and Middle East. A survey u/s 133 was conducted in the case of assessee group and other parties on 31.03.2006, wherein the statement of some of the parties (suppliers) were recorded. The Assessing Officer disallowed a sum of Rs. 24,73,00,784/- out of the total purchase of Rs. 2,20,57,67,965/- on the basis of the statements given by four persons during the course of survey proceedings on 31.03.2006 as well as supplementary statements recorded on 12/13.04.2006. The main basis for disallowance of purchases by the Assessing Officer, is the statement given by these four persons that they are engaged giving accommodation bills to the parties and returning cash after charging their commission at the specified rates. The AO stated in the assessment order that the assessee failed to justify these purchases to his satisfaction and only at the fag end of the assessment proceedings asked for cross examination of these four parties whose statements were recorded. Thus, the Assessing Officer under these circumstances, held the purchases of Rs. 24,73,00,784/- as bogus purchases and added the same to the total income of the assessee. 3.2 Before the CIT(A), the assessee contended that the assessee was not given proper time and opportunity for filing the details and proofs and to cross examine these parties. The CIT(A) issued a remand order directing the Assessing Officer to grant an opportunity to the assessee to cross examine the four parties and then submit his report. The Assessing officer submitted the remand report on 12.01.2011 and stated that summons issued to four parties for cross examination during the remand proceedings, were returned by the postal authorities with the remark “Left/No such Persons” and accordingly the assessee could not be allowed the opportunity for cross examination. After considering the remand report, the CIT(A) confirmed the addition made by the Assessing Officer.” 10.7 the Ld. AR in the without prejudice arguments without giving up the main issue wherein the assessee prays for quashing the assessment order has also

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canvassed that in the facts of the present case the quantitative details of the assessee have not been upset and the addition has been based purely on the basis of suspicions and biases ignoring the correct facts. It has been emphasized that in the facts of the present case also the turnover of the assessee has been accepted. These facts it has been argued were specifically addressed so as to support the argument that these facts taken into consideration by the Mumbai Bench in the case of Canon industries wherein also the coordinate Bench took note of the fact that the tax authorities had not enhanced the sales etc and the quantitative details and figures regarding stock stood accepted which it was submitted is identical to the facts the present case also. We note that in rebuttal of these stated claims the Revenue has not advanced any arguments. For ready reference the relevant extract from the said order is reduced hereunder: “…………Even otherwise, when the sales and all other quantitative details and figure regarding stock are accepted by the Assessing Officer then in the absence of any direct evidence showing the non genuineness of purchases in question, the addition is not sustainable on the basis of assumption and conjectures relying on the four statements recorded u/s 133A and that too without affording an opportunity of cross examination to the assessee. In view of the facts and circumstances of the case, we are of the opinion that the addition in question on account of bogus purchase is not sustainable and accordingly the same is deleted.” 10.8 Reverting to the letter dated 15/16/12/2008 of the AO which sets out the reasons it is seen that the first reason is addressed in para-2 that there was increase in net profit in the year under consideration. We find that this cannot be said to be a reason for making a reference to a special audit. It is noticed that the assessing officer in fact on perusal of the profit and loss account of the assessee company has duly noted in the said para that “you are doing trading and export of” thus it is evident that the assessing officer was aware that the assessee was a Trader and exporter and definitely not a manufacturer. Para 3 of the said letter shows that the assessing officer takes note of the fact that the assessee company is one of the concerns of the Canon group of industries in which survey under section 133A had been conducted on 31/03/2006 wherein the books of accounts of the said concern were impounded and statements of various persons controlling the different concerns were recorded on the basis of which it was concluded that accommodation entries were being passed. In sub para i) to vii) of para-3 the statement of Sh. Chand Gulati, Sajal Aggarwal, Vijay Kumar Sharma, Mohammed Sohrab Ali, Vijay Gulati, Akash Bansal, Satinder Soni etc are taken note of on the basis of which it has been concluded that since the said persons

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admitted having provided accommodation entries to the company or other companies in this group hence the additions were made. We have taken into consideration the order passed by the coordinate Bench in the case of Canon group industries and find that the allegation of the Department did not stand the scrutiny of law. At this point it needs to be highlighted that the concerns of the AO that these may be bogus accommodation entries could have very well have been dealt in the statutory time limit fixed by law these concerns by themselves in the facts and the material available on record and specifically on a careful reading of the reasons recorded by the AO himself do not bring out whatsoever any complexity in the accounts which admittedly was the sine qua non for such an action. On going through the merits of the additions made by the assessing officer also we note on giving our consideration and also careful consideration to the submissions of the Departmental Representative we find the major additions made and sustained are dehors supporting facts based on suspicions and incorrect appreciation of facts. As noted we find no complexity in the books of accounts of the assessee which has been brought to our notice. Similarly the issues canvassing justification for the reference expressed in paragraph 4, 5, 7 do not bring out any complexity in the accounts whatsoever. The observations made in para 6 that the company is maintaining a consistent GP rate for the last 3 years leading to the conclusion that the genuineness of sales and exports is open to doubt is dehors facts and evidences as even after carrying out the statutory Audit in the orders passed by the respective authorities we find that no evidences or documents have been filed to considered or upset the claim of the assessee. The department has made the additions purely on suspicious. Even after expressing concerns that these were required to be verified with reference to the purchase made genuinely or through accommodation entries which is stated to be justification holding that there was complexity in the accounts we find ultimately only suspicion on incorrect facts has been the basis for the whimsical and arbitrary action. The matter of genuineness of purchases could very well have been considered while passing an order within the statutory time limit and the suspicion that the transactions may be bogus does not warrant reference being made to a statutory audit. As noted even after utilizing the extended time period genuineness of the documents has not been upset. Similarly the observations made in para 9 of the aforesaid letter of the assessing officer namely that the company is manufacturing and also trading in the hosiery goods is contrary to

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para 2 of the page same letter and shows the carelessness of the exercise. The concern that there was no separate manufacturing account attached to the return of income was thus mischievous and dehors facts. The fact that it runs directly in conflict to the correct facts noted in para-2 by the assessing officer himself in the self same letter wherein he had initially referred to correct facts by stating you are doing trading and export of hosiery goods. Consequently the conclusions drawn in para-10 it is seen are blatantly biased and prejudiced. When these are seen along with the contents of the impounding order of even date and the reasons for reference to the special auditor alongwith the order of the coordinate Bench in the Canon group of companies it is seen that the assessing officer in the facts of the present case has proceeded deliberately on incorrect facts and has attempted to clothe his actions by resorting to statutory provisions which were legitimately on the facts as they stand were not available to him.

10.9 We have gone through the record including the letter/notice issued by the assessing officer etc. along with the various letters addressed by the assessee to the assessing officer the findings of the assessing officer and the CIT(A) on a consideration thereof we find that though the specific defects noted by the assessing officer have been summarized by the CIT(A) at pages 7 and 8 of his order however nothing therein also brings out the complexity in the accounts which is the limited issue for consideration to address the primary claim of the assesee. For the sake of completeness we reproduce the relevant extract from the impugned order which read as under: 2.1 The perusal of above findings glaring shortcomings in the maintenance of the books and other records summarized as per following. i) There is difference in the opening balances ii) There is difference in trial balance. iii) There are many accounts which are not reflected in the ledger. (iv) There is difference in the descriptions of narrations in the books of Assessee as compared to the account statement of the other parties. v) There is negative cash in hand vi) There is huge withdrawal of cash amounting to Rs.13.1288087/- from the bank account and deposit of Rs.78970000/- in cash in bank accounts. vii) Payment to various suppliers are being made in cash amounting in crore of rupees. To avoid the attraction of provision of section 40A(3), cash payments are being made to various parties multiple times in a day. viii) Payment to suppliers are being made months before, mostly in cash, before the purchases are made. ix) To many suppliers, no payment are made during the year or very less payment are made. x) Many of the purchase bills are photocopies only. xi) There is defect in chronological recording of the bills,

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xii) There are calculation mistakes in the bills. xiii) Letter written to the suppliers by the department received back without any confirmation. xiv) The assessee is mainly selling to one buyer only i.e. Alshree General Trading Company. Even the payment being received from other parties are being credited in the account of Alshree. xv) There is a difference between the items purchased and items sold, xvi) The sale bills are being issued with the serial number more than once. xvii) There are many bills for which copies are not available, xviii) The assessee is using third party account for making payments to the suppliers. xix) There is a difference in the description of the item purchased as per the bill and as per the stock ledger.

xx) The very basic expenses like telephone, salary, rent, stationery, traveling electricity, vehicle maintenance and so on, are negligible or not incurred for running the business of this magnitude. xxi) The assessee is not having any fixed asset. To run the business of this magnitude without any fixed asset is unimaginable, xxii) The purchase bills of many suppliers are of many huge amount, but there are no transportation details given on these bills. xxiii) The Ld. Counsel while submitting his reply has mainly rely upon the submission that the defects pointed out by the assessing officer were mainly of trivial nature. However I do not agree with the submission of the Ld. Counsel that when huge numbers of duplicate bills are being issued or there is difference in opening and closing, there is difference in trial balance or when the purchases cannot be verified, these can be accepted as minor clerical errors. I find no merits in the contention of the Ld. Counsel whenever there is rejection of accounts, there is always a certain degree of guess work. The assessing officer has increased the gross profit rate by 2.35% only. While doing so, taken into account the very low the net profit as well. Therefore I agree with the rate adopted by A.O. and addition of Rs.42274450/- is confirmed.

10.10 We have taken into consideration the decisions relied upon by the parties before us. We find that the reliance placed by the Revenue on the case of Shyamal Sarkar is misplaced as the validity of the reference to the Special Auditor was not an issue for consideration either before the Apex court or the Hon’ble High Court. The decisions / orders relied upon by the ld. AR have not been specifically referred however the proposition of law laid down by the Courts have fully been taken into consideration. On a perusal of the relevant provision of the Act which has been extracted in the earlier part of this order when read alongwith the decisions cited it is well-settled that the direction for special audit can be issued by the AO only if after taking into consideration the nature and complexity of the accounts he is of the opinion that special audit is necessary. We find on going through the reasons as well as the terms of reference which have been extracted in the order and hold that the reference so made is a perverse nonspeaking order. Nothing set out therein or in the record brings out how the accounts can be considered to be complex

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and on what considerations the mechanical approval has been given. The reasons set out are conspicuous by their absence and what has been set out are infact farcical reasons like increase in G.P. over the years from the very same activity cannot be a justification for the accounts being complex etc. Thus we find that the decisions relied upon fully supports the prayer of the assessee. In the facts of the present case we find that the extended period was taken under the guise of special audit referring to incorrect facts and making no attempts to justify the action by either rebutting or upsetting any of the evidences and documents filed and purely on the basis of suspicions which may have been aroused. It goes without saying that the AO has to necessarily apply his mind to the issue of nature and complexity of the accounts before issuing order under the said provision. This requirement of law is sine qua non. It is equally well settled that the power to direct special audit cannot be exercised lightly and whimsically. The satisfaction of the assessing officer should not be a subjective satisfaction and it goes without saying that it must necessarily be based on objective assessment of the accounts keeping the statutory mandate which is “the nature and complexity of the accounts”. Thus considering the judicial position we note that it is no longer a debatable issue that the AO before directing a special audit must apply his mind and make an honest attempt to understand the accounts of the assessee. A mechanical and perfunctory order directing special audit would lay the order open to the challenge of being perverse on facts which is the position in the present facts of the case. The mere usage of the term that there is complexity in the accounts by the AO without carrying to bring out supporting reasons will not bring the action within the ambit of the requirements of the said section. The assessing officer is required to demonstrate the complexity in the accounts.It cannot be overemphasized that the assessing officer by the very nature of the duty entrusted upon him is expected to have a workable knowledge, skill and idea of accounts and accounting principles. By virtue of the training, skill and experience imparted to him the assessing officer is not a layman or one with no experience in dealing with the accounts . The powers vested upon the said Authority are based on his expertise and knowledge and are expected to be exercised in a bonafide manner in order to sub serve his statutory duties and responsibilities. The power is to be exercised for the underlying purpose for which the statute has vested the authority and it cannot be accepted or expected to be used for circumventing the statutory time limit which was

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expiring on 31/12/2008. It is equally well-settled that the approval granted mechanically is contrary to the settled legal principles. The exercise of the power and its mechanical approval is not expected to be utilised for unauthorised purpose of extension of limitation to complete the assessment. In the facts of the present case the departmental action fails on this primary threshold itself. It is well settled that the reasons should be objectively supporting the reference a subjective satisfaction does not entitle the assessing officer to pass the buck to the Special Auditor as it is the responsibility of the assessing officer to scrutinise the accounts. It has been judicially noted that section 142 (2 A) was not a provision which enabled the assessing officer to delegate his powers and functions to the Special Auditor which he is expected to perform himself. The provision has been enacted to enable the assessing officer to take the help of a specialist who understood accounts and accountancy practices when the accounts were demonstrated to be complex. In the absence of any such supporting reasons the conclusions have been drawn by the AO as well as the CIT(A) sans reasons. 10.11 Thus although in the course of the hearing we have noticed that qua the major additions sustained in the present appeal the issues are fully covered in favour of the assessee however since on considering the primary objection of the assessee itself we find that the departmental action fails. We find that there is no purpose in deliberating on these issues. 11. Accordingly for the detailed reasons given hereinabove we hold that the impugned order in the absence of supporting reasons addressing the nature and complexity of the accounts for special audit is bad in law. We find that the exercise has been undertaken only to extend the time as the time statutorily available to the AO was expiring on 31/12/2008. There being no complexity in the nature of accounts which has been brought out by the revenue either in the reasons set out by the assessing officer or for that matter on going through the material available on record in the assessment proceedings or the appellate proceedings the action is held to be bad in law as the order is bereft of any reason justifying the action. 12. Before parting we deem it appropriate to observe that we have arrived at the conclusion ongoing through the reasons as well as the terms of reference given and the submissions of the respective parties including the case law relied upon by the parties even though specific reference to the decisions cited

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has not been made. The legal position is well-settled and the decision arrived at proceeds on facts peculiar to its own. 13. Accordingly the appeal of the assessee is allowed. Order pronounced in the Open Court on 29th June, 2018.

Sd/- Sd/- (ANNAPURNA GUPTA) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER ‘Poonam’ Copy to: 1. The Appellant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR

Asstt. Registrar - ITAT,Chandigarh.