Income Tax Appellate Tribunal - Cochin
M/S.Diamond Food Products, Ernakulam vs The Acit, Aluva on 28 April, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
COCHIN BENCH, COCHIN
Before Shri Sanjay Arora, Accountant Member &
Shri Sandeep Gosain, Judicial Member
ITA No. 51/Coch/2017
(Assessment Year: 2013-14)
Asst. CIT, Diamond Food Products
Circle - 1 Pavizham Building
KAP Complex vs. Koovapady P.O.
Railway Station Road Perumbavoor
Aluva Ernakulam-683544
[PAN:AAEFD2458P]
(Appellant) (Respondent)
CO No. 21/Coch/2017
(Assessment Year: 2013-14)
Diamond Food Products Asst. CIT,
Pavizham Building Circle - 1
Koovapady P.O. vs. KAP Complex
Perumbavoor Railway Station Road
Ernakulam - 683544 Aluva
[PAN:AAEFD2458P]
(Cross Objector) (Appellant)
Appellant by: S/s. K.M.V. Pandalai, Advocate &
K.K. Chandra Sekharan, Advocate
Respondent by: Smt. J.M. Jamuna Devi, Sr. D.R.
Date of Hearing: 30.01.2023
Date of Pronouncement: 28.04.2023
ORDER
PER BENCH This is an Appeal by the Revenue and Cross Objection (CO) by the Assessee, directed against the Order by the Commissioner of Income Tax (Appeals)-2, Kochi ('CIT(A)' for short) dated 14/12/2016, partly allowing the assessee's appeal 1 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) contesting it's assessment under section 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) dated 13/03/2016 for Assessment Year (AY) 2013-14.
2. The assessee is a partnership firm running a rice mill, i.e., milling paddy for rice, by the name 'Pavizham Mill'. For the relevant year, against a returned income of Rs. 71,15,290 on 30/9/2013, it was assessed at Rs. 624.35 lacs. The sole adjustment in assessment is for the impugned disallowance of Rs. 553.20 lacs in respect of paddy purchase, upheld in first appeal to the extent of Rs. 16.14 lacs, so that both the assessee and the Revenue are in second appeal, i.e., qua Rs. 16.14 lacs (per Cross Objection - CO) and Rs. 537.06 lacs respectively.
3.1 Before us, the Revenue's case, reading out the relevant part of the assessment and the appellate order, reading as under, was that the assessee's case remains wholly unsubstantiated, and the relief allowed by the first appellate authority is, in the facts and circumstances of the case, wholly unwarranted:
The assessment order:
'3. The following points emerge from the above discussions. 3.1. The list of purchase furnished by the assessee does not conclusively prove that the contents in them represent the actual purchases made by the assessee during the Previous Year. The number of letters returned un-served raises serious doubts over the correctness of the list furnished as the purchase details. 3.2. The assessee has a contract with the Kerala State Civil Supplies Corporation, commonly known as Supplyco. According to this contract the assessee has to receive paddy from farmers as per allotment, transport, store, parboil, mill pack and deliver to the AWD as a part of the Paddy Procurement Scheme. The assessee procures paddy from farmers under this contract and the payment is made by the Corporation to the farmers. Fourteen of the fifty one persons who have responded have stated that they make supply only to Supplyco and not to the assessee. Most of them have stated that they receive the payment through bank only which goes on to show that the payments they received were for the paddy supplied to the KSCSC and not to the assessee Obviously the assessee has access to this data of farmers and the inference that could be drawn is that it has conveniently filed the list of persons from whom paddy was procured for Supplyco contract as persons who have supplied paddy to it in the list furnished for this assessment. In fact one of the respondents, Shri Biju K A has furnished a paddy receipt sheet issued to him by the KSCSC mentioning the name of the Mill as that of the assessee. 3.3. The respondents who claim to have received payments through banks 2 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) only, are also not the persons who could have made sale to the assessee as the assessee has made the entire purchase from unregistered purchasers in cash. 3.4. The assessee has made purchases from Adat farmers SCB during the Financial Year 2013-14 only. However it has furnished in its list of purchases made in F.Y. 2012-13, the names and addresses of farmers who supplied to the SCB as seen from seven responses stating that they made sales to the Adat farmers SCB.
3.5. The fact is that the assessee claims that it does not issue Form 8E though it mandated by the Kerala State VAT Law. This goes to prove that the details furnished by the assessee with regard to the purchases are not trustworthy and are not backed by proper supporting evidences.
3.6. The assessee's contention that it effected purchases through Padasekhara Samathies either in its name or through the name of Pavizham Mills is also not supported by facts.
3.7. By furnishing list of large number of names and addresses the assessee feels that it could thwart any verification of the genuineness of the purchases.
The assessee on the whole has failed to provide evidence supporting its claim for purchase of paddy from unregistered dealers. To sum up, the assessee initially started by stating that the most of the purchases were made from the farmers directly by its agents. When the process of verification with the farmers did not help the assessee's stand it took the stand that the purchases were made with the assistance of Padasekhara Samathies and Societies. 3.8. The assessee has made cash payments for the purchases and claims that the money was paid through the Padasekhara Samathies and Societies. Three of the Padasekhara Samathies i.e. M/s Nandyattukari Padasekhara Samathi, Thenkarapacha Padasekhara Samathi and Thengupallikkarii Padasekhara Samathi, with whom verifications were made, have denied having made any supplies to the assessee or having assisted the assessee in procuring paddy through its members. One of the Societies M/s. Adat Farmers SBC with whom the assessee claimed to have made purchases have also denied making any sales to the assessee. A registered Co-op. society cannot accept cash unrecorded in its books. With the three Padasekhara Samathies and one society denying having made the sale or assisting the assessee making the purchase from its members the assessee has failed to identify from whom these purchases were made, nor could produce any receipt for having made the payment. The assessee also could not furnish details of society wise purchase to the extent of Rs. 3,27,49,659. The assessee offered no explanation to the three Padasekhara Samithi's Statement that they neither sold nor arranged through their members sale of paddy to the assessee.
3.9. In view of the above the assessee has failed to furnish proof with regard to the genuineness of the following claims of purchases 1 Purchase claimed to have-been made from Rs. 3,27,49,659 Societies.
3ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) 2 Purchases claimed to have been made from Rs.1,05, 03,560 Nandyattukari Padasekhara Samathy 3 Purchases claimed to have been made from Rs. 45,45,950 Thenkanripacha Padasekhara Samathy 4 Purchases claimed to have been made from Rs. 75,20,900 Thengupallikari Padasekra Samathy Rs.5,53,20,069 The assessee failed to identify the persons to whom payment of cash to the extent of Rs. 5,53,20,069 was made during the year for purchase of paddy. Therefore, the purchases are treated as not genuine and the claim of expenses of Rs. 5,53,20,069/- is disallowed.
4.1 Without prejudice to the above position that the purchases were not genuine assuming without conceding that there were purchases to the extent disallowed above, the fact was that letters issued to farmers were returned in most of the cases as discussed above. Majority of the replies from farmers stated that they did not sell paddy to the assessee. Three Padasekhara Samathies informed that it did not co-ordinate purchase or supply of paddy from its members by the assessee. Adat Farmers SBC, a Co-op. society stated that it did not sell the paddy from its members to the assessee during the year. The assessee could not produce confirmation for purchases in respect of societies to the extent of Rs3,27,49,659/- and prove that any payment was made to them. These would prove that assessee's purchase if real could not have been from farmers or societies but from unidentified sources. The payments are by cash and the benefit of Rule 6DD could be extended only if the payments were made to the cultivator or a Primary Agricultural Credit Society. Hence the above claim of deduction ofRs.5,52,20,069/- warrants disallowance u/s. 40A(3) of the Income Tax Act,1961.' (emphasis, supplied) The Appellate order:
'9. I have gone through the assessment order, facts of the case and submission of the appellant. The appellant is a partnership firm and operates a rice mill. Its main business is to procure paddy and convert it to rice, before selling them. Just after the harvest, procurement of paddy is started. During the year under consideration, the appellant showed purchase worth Rs.68,01,32,694/- and out of this purchase worth Rs.15,95,46,806/- was claimed to have been made from unregistered dealers. During the course of assessment proceedings, the A.O. decided to investigate purchases from unregistered dealers. The AO directed the assessee to furnish details of purchases made from unregistered dealers. According to the AO, the assessee furnished details running into 514 pages containing names of 8503 persons. On random basis, the AO sent letters to 200 people out of the list. The letters came back unserved in respect of 78 of such people. Out of the balance, 39 people responded and only five of them confirmed to have made sale to the assessee. The AO has mentioned the 4 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) responses of the people in the assessment order. Subsequently, another 12 people responded. The AO forwarded the detail of his inquiry to the assessee for assessee's response. In reply, the assessee submitted as under:
" The peak harvesting season had started and the farmers were busy in the paddy fields during the whole day and nobody was available in the houses to receive the letters. The Postman will deliver the letters only at the addresses and not to any other person. Some has refused to accept as the letter was from the Income Tax Department. The assessee is known by the name of Pavizam Mill and not known by the firm's name.
Farmers supply paddy to Supplyco which is also through the same Padasekhara Samathies and the paddy is delivered to rice millers as per their quota stipulated by Supplyco. Supplyco is insisting on some conditions like moisture content in paddy, presence of impurity, etc. and any paddy which is below the standard are not accepted by the millers on Supplyco account. In these cases, the Padasekhara Samathies negotiate with the rice millers for accepting for their own case. The millers pay cash to the farmers through the Padasekhara Samathies. The Padasekhara Samathies consist of some of the farmers in the area and are only facilitators and not agents. Assessee's aim is to purchase paddy at a competitive rate and they do not know the name and address of the farmers. Since the assessee is making payment of. such purchases by ready cash, they need not require maintaining their ledger or accounts in their books of accounts. The assessee relies on Padasekhara Samathies for names and addresses of the farmers as the mill owner is not directly interacting with the famers."
Subsequent to this, the AO also conducted inquiries with the Padasekhara Samathies and they replied that they facilitate sale by farmers, help them in paper work, but do not make any sale themselves.
Based on the inquiry conducted, the AO reached the following conclusion:
"In view of the above, the assessee has failed to furnish the proof with regard to genuineness of the following claims of purchases.
1 Purchase claimed to have-been made Rs. 3,27,49,659.00 from Societies.
2 Purchases claimed to have been made Rs.1,05, 03,560.00
from Nandyattukari Padasekhara
Samathy
3 Purchases claimed to have been made Rs. 45,45,950.00
from Thenkanripacha Padasekhara
Samathy
4 Purchases claimed to have been made Rs. 75,20,900.00
from Thengupallikari Padasekra
Samathy
Rs.5,53,20,069.00
The assessee failed to identify the persons to whom payment of cash to the 5 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) extent of Rs. 5,53,20,069/- was. made during the year for purchase of paddy. "Therefore the purchases are treated as not genuine and the claim of expenses of Rs. 5,53,20,069/- is disallowed ."
On going through the assessment order and submission of the appellant, I realise that the AO has not understood the nature of assessee's business, nature of purchase of transaction carried on by him and therefore conducted incorrect investigation, received irrelevant information and ultimately reached untenable conclusion.
The assessee operates a rice mill. The assessee is a partnership firm by the name M/s. Diamond Food Products, but the name of the rice mill is "Pavizham Mill". Most of the farmers known the assessee by the name of the Mill and not by the name of firm. Obviously, on being asked, whether the farmers have done any transaction with M/s. Diamond Food products, their reply would be in negative. At or towards the end of the harvesting season, the employees or agents of the assessee set out to procure paddy for the Mill. They come to the designated place of sale controlled by Padasekhara Samathies. Farmers also do not sit at home, waiting for the buyers to come. They also bring their produce to Padasekhara Samathies, which is nothing but an association of farmers. The mill owners want to purchase paddy at a competitive rate, i.e., the least price, whereas, the farmers endeavour to sell their product at the highest possible price. The Padasekhara Samathies is the meeting point for opposing aspirations. It segregates paddy on the basis of its quality and price is negotiated between the farmers and the Mills. These Padasekhara Samathies give a little edge to the farmers in terms of bargaining power. Farmers coming in with relatively small quantity of paddy, sell their product, receive the consideration in cash and go back home. For the farmers, the transaction is full and final and its over for good. Normally, the farmers are neither required, nor do they maintain any books of accounts. On the other hand, the mills have to maintain books of accounts and therefore they are dependent on these Padasekhara Samathies for taking the names and addresses of the farmers, who transact and sell their paddy through a particular Padasekhara Samathy. Since the Mill has procured its paddy and settled the transaction through payment in cash there and then, it also does not require to maintain any ledger of these parties. The payment is made to farmers directly by the employees or agents of the mill and it is not made to the Padasekhara Samathies. Because of this unique system, opined that the direction of investigation by the AO was not correct.
In the instant case, the assessee has made a total purchases of Rs.68,01,32,694/-. Out of the above, purchases worth Rs.66,51,505/- have been made directly from the farmers. Rs.12,01,45,642/- have been made through Samathies and Rs.3,27,49,659/- have been made through Societies. The appellant has maintained complete quantitative details of purchases. It has also maintained Day book, Ledger, Stock-register, Cash purchase Register, etc. which were produced before the AO for verification. When the AO has not found any defect in the audited books of accounts of the assessee including Stock-register and cash purchase register. Since the AO has not found any defect in the stock- register, it cannot be said that purchases were not genuine. In my opinion, since 6 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) the investigation conducted by the AO was based on wrong premise, he also reached on wrong conclusion. The AO further drew wrong conclusion by saying on one hand that purchases amounting to Rs. 5,53,20,069/- are not genuine and then making disallowance u/s. 40A(3). Disallowance u/s. 40A(3) is made when payments in excess of Rs.20,000/- is made. These two statements are contradictory to each other. If the payments are not genuine and the purchases are fictitious, no question for disallowance u/s. 40A(3) arises. This fact displays the confused state of mind of the AO. The cash book was produced before the AO during assessment proceedings, but the AO has not pointed to a single instance where payment of more than Rs.20,000/- was made in cash to any of the individual seller/farmer. Clearly, the AO has assured that payment of Rs.20,000/- or more has been made in cash to individual farmers in respect of amount of Rs.5,53,20,069/-. Additions, based on wrong premises, wrong facts, assumptions and presumptions cannot be sustained.
Having said this, this is also a fact that wherein cash payment is involved, in absence of any third-party evidence, the authenticity of purchase pricing cannot be vouched for. During the course of appellate proceedings, the purchase price claimed by the appellant were analyzed. On analysis, it is seen that the assessee has shown purchases from the unregistered farmers @14.92 per kg, compare to the average price of Rs.14.82 per kg. On discussion, the learned counsel of the appellant agreed for a disallowance @ 0.15 rupees per kg purchased from unregistered dealers, vide order-sheet entry dated 04.10.2016. The disallowance is worked out as under:
Quantity purchased - 1,07,62,741/- x Rs.16,14,411/-
Thus addition of Rs.16,14,411/- is confirmed and balance is deleted.' (emphasis, ours) 2.2 The assessee's case, on the other hand, making reference to the Revenue's Ground 2, reproduced as under, was that the Tribunal had wrongly regarded it as a case of disallowance u/s. 40A(3) of the Act:
"The learned Commissioner of Income Tax (Appeals) in considering that the disallowance has been made under section 40A(3) whereas the addition made by the Assessing Officer was on the grounds of purchases not proved genuine (para 3.9) of the order. In para 4.1 of the assessment order, the A.O merely states 'without prejudice to the above position that the purchases were not genuine, addition u/s 40A(3) is also warranted.' Though there is reference to sec. 40A(3) in para 4.1 of the assessment order, the disallowance, in the final analysis, has been only u/s. 37(1) of the Act. In any case, even as pointed out by the ld. CIT(A), there is nothing on record to suggest that any payment has been made in excess of Rs.20,000, for section 40A(3) of the Act to be attracted. There is no mention of a single such payment by the Assessing Officer 7 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) (AO). As regards section 37(1), it needs to be appreciated that the assessee's books of account, particularly stock register, have not been assailed by the AO. Assuming non-purchase, if that is what is meant by the purchases being not genuine, it would disturb the quantity equilibrium as well as the yield ratio, which has not been.
Wherefrom, one may ask, then, has paddy, to that extent, been sourced? There is therefore no basis to hold or presume that paddy has not been purchased, or as having been at a rate lower than that booked, and which forms the basis of part sustenance of the disallowance, i.e., to the extent of Rs. 0.15 per kg, and which therefore forms the basis of or explains the assessee's CO. The denial of purchase transactions by the Samithies and Societies, relied upon by the AO, is for the reason that the purchases have not been routed through their books. There is, as such, no basis for them to have endorsed the transactions carried through their agency. They are in fact only facilitators, representing essentially the interest of farmers, enabling them to fetch good bargain for their produce. The sale by the farmers is only against cash. The non-identified sellers, referred to by the AO, are therefore only the farmers. There is, therefore, nothing to doubt the purchases. The part confirmation thereof by the ld. CIT(A), is, thus, also without merit and, in any case, be restricted to Rs. 0.10 per kg, i.e., the average price differential between the registered and unregistered purchasers.
2.3 On being queried by the Bench as to the absence of any evidence, Shri Pandalai would submit that the same is perforce the circumstances of the case. The transactions attract no tax under the Kerala Sales Tax Law. No bills are raised or expected from the farmers, who merely receives payment in cash against the paddy sold, which is, accordingly, duly recorded through internal vouchers prepared by the assessee-firm. On being asked about some such sample vouchers, he admitted to the same being not made a part of the Tribunal's record. Further, on being queried about the weighment slips, as indeed the receipt from the farmer/payee, inasmuch as the same would in any case be generated, he could not furnish any satisfactory answer.
8ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) 2.4 The ld. Sr. D.R., Smt. J.M. Jamuna Devi, would, in response, state that the disallowance to that extent (i.e., 0.15 per kg.), stands accepted by the assessee in first appeal through it's counsel.
2.5 Shri K.M.V. Pandalai, Advocate, the ld. counsel for the assessee, would, in rejoinder, state that the position had since altered in view of the Revenue having appealed against the impugned order.
3. We have heard the parties, and perused the material on record. 3.1 This is the second round before the Tribunal. In the first round, the Tribunal, vide it's order dated 13.11.2018, restored the matter back to the assessing authority to, in its words, "examine whether each purchase is from the farmers and each payment is more than Rs.20,000/- so as to attract section 40A(3) of the Act."This, it may be noted, is in conformity with the orders by the Tribunal relied upon by the ld. CIT(A), also making reference to decisions by the Hon'ble High Court. This order was, however, challenged by the assessee in appeal before the Hon'ble High Court who, set aside the said order, holding as under: -
"In the result, appeals are allowed and the order of the Tribunal in I.T.A.No. 51/Coch/2017 and CO No.21/Coch/2017 are set aside and the Tribunal is directed to dispose of the same afresh, after giving opportunity to the revenue and the assessee, not only to file additional materials but also to raise additional grounds available to them in support of their contentions. The Tribunal shall take all steps to dispose of the same at any rate, within a period of six months from the date of receipt of the certificate copy of the judgment."
In other words, for being heard afresh, with a liberty to either side to raise and plead any ground as available to it, supporting it with material. In short, it is an open set aside for fresh adjudication.
3.2 Our first observation in the matter is the assessee's ambivalent stand before us vis-à-vis the first appellate authority, raising the following grounds before him:
'1. The order of the assessing authority insofar as it is prejudicial to the appellant is opposed to law, facts and circumstances of the case.9
ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14)
2. The A.O. erred in disallowing a sum of Rs. 5,53,20,069 under section 40A(3) of the I.T. Act, 1961. The disallowance is arbitrary, illegal and against the fact and law. Hence the addition is liable to be deleted, and pray for the same.' Gd. 1 being general in nature, the disallowance was thus objected principally on, contrary to facts, the ground of invocation and application of s. 40A(3) of the Act, claiming the AO to be in two minds, i.e., as to the applicable provision of law.
Having accepted the genuineness of the cash purchases, it was argued, he applied s. 40A(3), without the conditions for the same being satisfied. That is, before the ld. CIT(A), the assessee's case rested largely on the non-applicability of section 40A(3), reading as under:
'(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.
(3A) Where an allowance has been made in the assessment for any year ....' The ld. CIT(A) found the AO having misled himself as once he finds the purchase as not genuine, there is no question of applicability of sec. 40A(3). The argument is unexceptional. However, a close reading of the assessment order would remove any doubt in the matter. The AO's principal case is as to the expenditure being not genuine and, in any case, not proved on the anvil of s. 37(1). Reference to s. 40A(3) by him is without prejudice. It was, in fact, in this view of the matter; observing the ld. CIT(A) to have however not issued any finding qua s.40A(3), that led the Tribunal in the first round to remit the matter back for verification as to applicability of section 40A(3), which was assailed in further appeal, claiming it to be not a ground before it. Sure, but the same was admittedly before the ld. CIT(A); rather, the sole ground, and found as part of his adjudication. Before us, the assessee's claim is of the impugned disallowance, made u/s. 37(1),as not sustainable in law.
The Hon'ble High Court has, however, as afore-noted, restored the matter for a de novo consideration. No fresh grounds or plea was though taken before us in the second round. It therefore becomes incumbent on us to understand the Revenue's caseper the assessment order inasmuch as the same furnishes the cause of grievance 10 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) to the assessee in the first instance and, accordingly, forms the basis of it's case before the ld. CIT(A) and, thus, the relief allowed to it. This becomes also relevant as the ld. CIT(A) also finds the AO's stand as internally consistent as there is no question of disallowance u/s. 40A(3) if the purchase itself is not genuine, so that it stands to be disallowed u/s. 37(1) itself. It is only a claim for expenditure admissible u/s. 37(1) of the Act to which the non obstante clause of section 40A(3), where the conditions are satisfied, would apply.
3.3 Having cleared the cobwebs, i.e., the apparently conflicting claims by the assessee and the Revenue, the ground is clear for our fresh adjudication, as directed by the Hon'ble Court. The assessee's case, which found favour with the ld. CIT(A), is the 'acceptance' of the assessee's books of account, particularly stock records, so that there could be in law no disallowance u/s. 37(1). We find the argument as mistaken, both on facts and in law. There is, firstly, nothing in law that prevents the assessing authority to disallow a claim of deductibility of business expenditure on account of it being not proved unless, as stated, he also rejects the books of account of the assessee as unreliable, so that the operating results of the assessee's business for the relevant year are to be itself, rejecting the books results, estimated on the basis of the material gathered by the AO, of course, upon duly confronting the assessee therewith where, as in the instant case, he joins the proceedings. The present is a case of, in contradistinction, a specific disallowance qua the assessee's purchases of paddy for the year at Rs. 6801.33 lacs, at Rs. 553.20 lacs.
3.4 The burden in law to prove it's return, as well as the claims preferred thereby, is on the assessee (CIT v. Calcutta Agency Ltd. [1951] 19 ITR 191 (SC); Lakshmiratan Cotton Mills Co. v. CIT [1969] 73 ITR 634 (SC)). It cannot be otherwise, as it is only the assessee who has 'incurred' the expenditure, i.e., as claimed, and is in the intimate know of it's affairs. The law postulates the admissibility of an expenditure where the same is shown as incurred wholly and exclusively for the purpose of the business. It is trite law that the word 'wholly' 11 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) denotes the quantum, and the word 'exclusively' refers to the purpose or the object of the expenditure. The deduction is thus subject to both being satisfactorily proved. The same of course is only on the basis of evidence/s led or material adduced by the assessee, which could be subject to verification by the assessing authority. The law in the matter is well-settled, toward which we cite some decisions, as under, with, in fact, the Hon'ble jurisdictional High Court enumerating the principles laid down by the Apex Court in the matter in Ram Bhadhur Thakur [2003] 261 ITR 390 (Ker)(FB):
Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277 (SC) CIT v. Radha Kishan Nandlal [1975] 99 ITR 143 (SC) Udhavdas Kewalram v. CIT [1967] 66 ITR 462 (SC) Omar Salay Mohamed Sait v. CIT [1959] 37 ITR 151 (SC) CIT v. R. Venkataswamy Naidu [1956] 29 ITR 529 (SC) Dhiraj Lal Girdharilal v. CIT [1954] 26 ITR 736 (SC) The question, thus, in each case is one of fact, as to whether the expenditure, on the basis of the material on record, stands shown as incurred wholly and exclusively for the purposes of the business by the assessee.
3.5 The law having been clarified, the matter before us is essentially factual, even as held by the Hon'ble Court, i.e., whether the assessee can be, in the facts and circumstances of the case, said to have satisfactorily proved the impugned expenditure on the anvil of s. 37(1)? In our view, the answer to the question aforesaid is an emphatic 'No'. All that the assessee furnishes, after seeking time, stating of it as not having the details of the farmers, who are paid by and through the Samathies, from whom therefore the details would have to be sought, is a list of farmers, found by the AO - who has issued detailed findings at para 2 of his order, capsuling the same at para 3, reproduced above, to be in fact those who had supplied paddy to Supplyco, receiving payment through bank. The 'farmers' it needs to be appreciated, are the suppliers, the unregistered dealers, so that it does not lie in the 12 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) mouth of the assessee to say that it does not have or maintain details thereof. In fact, even here, it, while explaining it's modus operandi qua purchase, clearly states, in contradistinction, of its employees and agents- without of course specifying of their names, contacting the farmers to purchase their produce, also negotiating the rate/s.
This is a clear contradiction, nowhere explained, in respect of the manner of purchase, i.e., a primary fact; quizzical to say the least, with, further, neither claim being substantiated. (refer para 3.7 of the assessment order) 3.6 We shall, nevertheless, consider either scenario. If the payment is made direct to the Samathies, even if in cash, for the purchases made over a period, the daily amount remitted or disbursed would be duly reported by it's office bearers/ representatives, with, rather, the details of the farmers and the respective amounts (if not also along with quantity and rate), bearing also their (farmer's) signatures, as also retaining a copy thereof, with the original being with the assessee-firm, for and whose behalf it is. This is as only this would discharge the assessee of the obligation in respect of the said purchases and, further, enable it to meet any adverse claim, if any, on it at any time later, i.e., from the seller/s, in respect thereof. This, then, constitutes the basic record, inexplicably missing, with, in fact, both the assessee (as the purchaser) and the Samathy (for and on behalf of seller). Why? How, in its absence, could the assessee, as a purchaser, claim to have incurred a particular cost in respect of the quantity purchased? Rather, rate is inextricably related to quality, so that both would also require being specified, the cost being for a specific quantity and quality. A transaction necessarily involves an agreement on both, requiring the presence and concurrence of the assessee's personnel, watching it's interest, as of the Samathy representatives for the farmers.
This, i.e., the purchases from the farmers through the Padasekhara Samathies, then, represents a happy reconciliation between the contrary claims of direct purchases from farmers by contacting them through it's personnel, on one hand, and of purchases therefrom through the Samathies representing the farmers, on the other. Sure, the assessee states so before the ld. CIT(A), but the same was, firstly, without 13 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) any material in support and, two, negated by the contrary claims, justifying the non- availability of details with it on that basis. In fact, acceptance of this state of affairs makes the absence of basic details -arising spontaneously in the normal course of business, with, as well as the raising of pleas justifying the said absence by, the assessee, all the more flummoxing, raising serious doubts in the matter.
3.7 The basic document afore-said would thus stand to arise in any case, i.e., even assuming, as stated, absence of any charge on the transaction. This only would vouch the transaction, i.e., purchase of paddy at the stated quantity, rate, and time from a farmer, whose identity as such is relevant from the stand-point of s. 40A(3). Though only a matter of nomenclature, with no bearing on its evidentiary value, the same is not an 'internal voucher' - through which the purchases are stated before us as booked, inasmuch as it would bear the signature of both, the farmer (seller-payee) as well as the representative/s of the Samathy managing the transaction, as witness/es thereto. Rather, even as observed by the Bench during hearing, we have serious reservation on the claim of the transaction attracting no charge. We state so as the Samathy, admittedly involved in the transaction, would have costs associated with it, which would stand to be recovered only from the parties to the transaction. The same are akin to the Agricultural Market Committees (AMCs), prevalent through-out the country. Be that as it may, weighment slip, and test report, determining the quantity and quality respectively of the goods being traded in, besides entailing incidental costs of the transaction, would surely stand to be generated. How else, one may ask, is the paddy quantified? To no answer by Sh. Pandalai, on being queried in the matter during hearing. Both the claim of no transaction cost as well as absence of any document being generated, is incorrect. No query was made during hearing in respect of test report, as it is only now, while perusing the material on record, that it transpires that the purchase directly from the farmers, i.e., as against through the State Agency, Supplyco, is made only in respect of paddy which does not conform to the prescribed moisture; impurity and chaff levels. The same would therefore necessarily require being determined, only 14 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) whereupon would the rate thereof be negotiated and finalized. Weighment slip, as indeed analysis report, besides receipt of cash by the seller, are thus a concomitant, essential accompainments, to the transaction, enabling and evidencing the same.
3.8 There is accordingly sufficient material and data incident to a transaction carried out in the normal course of business, i.e., even assuming that the transaction involves no levy or other charges, as claimed, by the State, local authority, or even the Samathy. It is also not that the assessee has either explained any reason for the said absence, or produced the record which is, in the alternative, generated; rather, clearly states of no record being generated in view of the transaction not attracting any levy/charge. The aforesaid in fact represents the basic minimum, and it may well be that further material stands to arise; each trade having its own peculiarities. The absence of basic material evidencing the transaction, absence of which remains unexplained throughout, thoroughly impugns the assessee's claim. No wonder, then, the Samathies deny the transactions, i.e., of being undertaken through them. Not only this, the farmers being obliged to supply to Supplyco, which gives them a better price for their produce, it is admittedly only the produce which does not meet the moisture and other purity standards, that is sold by the farmers to the Mills, whether through the Samathies, which enable them securing a better rate, or directly upon being approached by them. Why, a transaction, to avoid any dispute or mis- understanding arising, would, given the fact of the farmers being organized and, in any case, in the interest of both the parties, be mediated or at least witnessed by an independent party. This would eliminate, particularly considering the payment is in cash, any scope of any issue arising while concluding the transaction or, even later.
The transactions, however, are sans any evidence whatsoever, except, as stated before us - without though bringing it on record, the self-made vouchers. The claim of purchases from cooperative societies is in fact at an even lower footing inasmuch as the assessee, again inexplicably, fails to provide the society-wise details of purchases. All that it, on being called upon to, furnishes, is the names of 13 societies from whom purchases are claimed to have been made during the relevant previous 15 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) year, being fy 2012-13, at an aggregate of rs.327.50 lacs. Now, how could that be inasmuch as the purchases, duly recorded in the assessee's accounts - stated by it to be old record, would simultaneously reveal the quantum from each, i.e., as in the case of Samathies? Rather, all that it was required to, was to produce confirmations therefrom, validating the information culled from it's accounts; again, not furnished, seeking time on the plea of it being 'old records'. Needless to add, no improvement in it's case stands made at the appellate stage. Coming back to self-made vouchers
- not produced at any stage, on the strength of which the claim of purchases is made, we doubt, and neither is there any claim that the same contain the name and address and signature of the 'farmer', leave alone his identity verified. We state so as the assessee would not have, in that case, stated of it not maintaining any details inasmuch as the purchases are through the samathies and societies. Not only is the assessee's claim without any record, much less reliable, it fails to explain its absence. It is only where record is made available that the same could be subject to verification by the assessing authority, with a view to satisfy himself as to its veracity. Each of the details afore-stated, it needs to be appreciated, forms an essential ingredient of the purchase transaction arising or being generated in the normal course of business. How, one wonders, could then the Revenue be faulted with for doubting the genuineness of the assessee's claim? The denial by the Samathies is categorical, with they expressly stating of no purchase having been made through them. Qua Societies, even the break-up stands not provided, i.e., their names and purchase made during the relevant year(also see para 3.10). The two, aggregating to the impugned sum, is tabulated below:
Purchase claimed to have-been made from Rs. 3,27,49,659
Societies.
Purchases claimed to have been made from Rs.1,05, 03,560
Nandyattukari Padasekhara Samathy
Purchases claimed to have been made from Rs. 45,45,950
Thenkanripacha Padasekhara Samathy
Purchases claimed to have been made from Rs. 75,20,900
16
ITA No. 51& CO 21/Coch/2017
Diamond Food Products (AY 2013-14)
Thengupallikari Padasekra Samathy
Rs.5,53,20,069
3.9 We emphasize the non-production of any material and details, even basic and incidental to the transaction, arising in its normal course, and, thus, non- substantiation of it's claim by the assessee, for the reason that the same is the basic postulate of s. 37(1); nay, for that matter, any claim, and for that reason is by itself sufficient for disallowance of a claim thereunder, in whole or in part, by the assessing authority. We have already clarified that the Tribunal as the final fact finding authority, as indeed any authority issuing a finding of fact/s, has to necessarily base it's case on the material on record. Further, it is clearly permissible for it to, for the purpose, assess the amount claimed in excess or unexplained (refer:
Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 57 (SC); Lakshmiratan Cotton Mills Co. Ltd. (supra); Lachminarayan Madan Lal v. CIT [1972] 86 ITR 439 (SC)).
3.10 The matter does not end here. Even the preliminary investigation, in wake of the limited information furnished by the assessee, by the AO, is revealing. The Adat Farmer's SCB, the only Society inquired with due to availability of it's particulars, denied having made sales to the assessee-firm during the relevant previous year (i.e., fy 2012-13), but only during fy 2013-14 (corresponding to AY 2014-15). How, one wonders, is the same relevant, even as questioned by the AO? This denial remains unrebutted. The assessee's claim that there were two administrative committees of the said Society, and the purchases may have been made from the one other than who disclaimed, is neither here nor there. There is, firstly, nothing to exhibit the fact of two Committees, which is paradoxical. There is no mention of the names of the two Committees and, in any case, the explanation would make sense if the Society had confirmed the sales, clarifying the earlier denial as wrong; having been given by another Committee. The same in fact is not understood as, even as the AO states, the Society would nevertheless be maintaining a single set of accounts, only w.r.t. which the sales, if any, could be confirmed, which has been not. There is thus no evidence 17 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) on record qua the purchases from the Societies, even the break-up of which, much less confirmations therefrom, is not furnished at any stage. As regards Samathies, there is again a specific denial, as against an absence of any positive material evidences the purchases therefrom - which extends to all, by each of the 3 Samathies. Again, the same remains unrebutted, with no improvement in its case by the assessee at any stage. In fact, the specific finding by the AO in the matter, not denied, much less disproved, is of the Samathies acting as facilitators only in respect of purchases by Supplyco, the State agency purchasing the farmer's produce.
3.11 We, next, refer to the impugned order. As afore-stated, none of the findings by the AO stand rebutted or dislodged, with we in fact finding even the basic incidents, viz. weighment slip; impurity level; receipt of payment, etc. as inexplicably missing.
The first argument that appeals the ld. CIT(A) is that the AO has not rejected the books of account of the assessee for the relevant year, disabling him to make the disallowance. We find the same as completely misplaced, both on facts and in law. The impugned purchases are unproved; nay, disproved, finding them as not genuine. Where, then, is the question of acceptance of the assessee's accounts, i.e., to that extent? There is no obligation in law for the AO to, before effecting a disallowance of any claim of expenditure, for the reason of the same not satisfying the mandate of the relevant provision of law; sec. 37(1) in the instant case, to reject the book-results and proceed to estimate the same. That is, to throw the baby with the bath-water, as it were. It is a case of a specific disallowance of a specific claim - nothing more and nothing less, and is to regarded as such. The second limb of the ld. CIT(A)'s argument is w.r.t. the quantitative details of the purchases and sales, duly reconciled, with the assessee maintaining a stock register, forming part of it's books of account, duly audited. But, then, so, i.e., audited, are the unregistered dealer purchases, or the impugned purchases for that matter! Quantity, representing the said purchases, stand duly processed, yielding output, either sold or in stock, both of which have not been doubted or adversely commented upon, runs the argument. Firstly, once the purchases, as claimed, are found as not proved; rather, ungenuine, the Revenue is 18 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) under no obligation to undertake an inquiry, and tell as to what the assessee did with the money thus syphoned off. That is, whether the assessee made purchases thereof from another, as being imputed, or not. In CIT v. La Medica [2001] 250 ITR 575 (Del), the Hon'ble Court clarified that the Tribunal is necessarily to go by, and base its findings of fact/s on, the material on record. In that case, a similar argument, on the purchase being disproved and the claim in its respect found not genuine, found, in view of the quantity reconciliation, favour with the Tribunal, which opined that if not from the parties from whom it is so claimed, purchases would have been made by the assessee from others, for whatever reasons. This was squarely rejected by the Hon'ble Court as impermissible, stating that it was not open for the Tribunal to speculate qua matters not borne out by the record. The said decision, as its reading would show, is an application of several decisions by the Apex Court, which also find reference herein while discussing the law in the matter (para 3.4), exhorting the Tribunal as the final fact-finding authority, to necessarily base it's factual findings on the relevant material on record and, further, by considering the entirety of facts and circumstances of the case. Reliance by the assessee, not specifically made before us, though we find as included in it's compilation, on Steel Line (India) (in ITA Nos. 880-882, 1321-1323/Mum/2016, dated 29/8/2017), would thus be to no moment. There is, to begin with, no discussion of the law in the matter. Then, again, there is nothing therein to show as to how the disallowance has been worked out at 2% of the bogus purchases, absence of which attracts the charge of arbitrariness. The argument is self-contradictory inasmuch as it seeks allowance in respect of purchases that are bogus, i.e., do not represent actual purchases. There have been instances of disallowances, varying over a range, up to 25%, of such purchases. The same were accompanied by a finding by the Tribunal of the assessee having actually made those purchases, though could not be properly substantiated for the reasons specified therein, principally evasion of tax incident on the transaction, and which forms the basis of the extent of disallowance. No such case has been made out, with, rather, no tax admittedly incident on the transaction. At the same time, there have 19 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) been decisions by the Tribunal where the entire such purchase is disallowed. The argument of the sales being not doubted is again misplaced. The same, representing admitted income, has not been examined at all - nothing more and, nothing less.
The argument as to the quantity imbalance that would ensue, is, again, misplaced. It fails to appreciate that the impugned purchases have been found to have been not made, i.e., on the basis of the evidences led in substantiation, and, in the least, found as unproved and, thus, not eligible for deduction in computing income inasmuch as the pre-requisite condition therefor is not met. No doubt the assessment under the Act is to be of real income, but the same is further subject to the provisions of law (Poona Electric Supply Co. Ltd. v CIT [965] 57 ITR 521 (SC); Southern Technologies Ltd. v. Jt. CIT [2010] 320 ITR 577 (SC)). A ready example is a disallowance u/s. 40A(3)/(3A), to which we may include even that u/s. 37(1), where the relevant expense is either unproved or, even worse, disproved. The argument does not hold for another reason. Would it therefore, by extension, mean that the disallowance would be justified if the yield, claimed at 77%, can increase from that shown?
The only implication, we can think of, as regards the disallowance of the impugned purchases, is that the assessee's gross profit for the year, at rs. 754.79 lacs on a turnover of rs. 8004.15 lacs, i.e., at 9.43%, would stand to increase by rs. 553.20 lacs, i.e., to rs. 1308 lacs, or to 16.34%, i.e., increases by 6.91%. This inference is, again, only with a view to complete the argument, and no further. The source of the funds, if any, involved in the purchases made in lieu of the impugned purchases, assuming so, i.e., going by the logic of the argument presented, may not necessarily be the funds debited in accounts by way of cash purchases for the year, and neither is the Revenue under an obligation to locate the same. We have also stated that the correspondence with sales is, again, not warranted in wake of purchases being found not genuine; it only signifying an admitted income, and it is for the assessee to exhibit circulation of funds. It is for this reason that even where the book results are completely rejected, estimating the profit of the business, if not 20 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) also its turnover, an addition for unexplained credit u/s. 68 would survive unless the source of the funds is shown by the assessee to be the secreted profits of the business, kept outside books, since estimated and being brought to tax (refer: Kale Khan Mohd. Hanif vs. CIT [1963] 50 ITR 1 (SC); CIT v. (M.) Ganpathi Mudaliar [1964] 53 ITR 623 (SC); CIT vs. Devi Prasad Vishwanath Prasad [1969] 72 ITR 194 (SC)).The inference as to the said increase in gross profit, which is the maximum to which we are prepared to go, also thus comes with a caveat/s. The argument is thus legally not tenable.
3.12 In as much as we have found no merit in the impugned order, and have restored that of the AO; the assessee's CO, arising out of part relief to the assessee, contested by it thereby, survives no longer.
In sum
4. The disallowance in the instant case is for rs. 553.20 lacs, representing purchases from Societies (rs. 327.50 lacs) and Samathies (Rs. 225.70 lacs; out of a total of rs. 1201.46 lacs therefrom). The same fall under the category of unregistered purchases, at a total of rs. 1595.47 lacs, working to 23.45% of the total purchases of rs. 6801.33 lacs, including rs. 66.51 lacs directly from the farmers.
The disallowance being u/s. 37(1), the law in the matter was, to begin with, visited. To summarise, it is, in each case a matter of fact, with the law, in principle, having been laid down by the higher courts of law, the ingredients whereof are as under:
- burden to prove its return and claims is on the assessee;
- onus to prove the claim of expenditure is, again, squarely on the assessee;
- the assessing authority, as indeed any Tribunal issuing a finding of fact is to base it's findings on the material on record, and not de hors the same, or by speculating as to what the state of affairs would be;
- the assessing authority, once he proceeds to make a disallowance of a claim of expenditure, is empowered, nay, duty bound, to make an estimate - which is integral to assessment, as to the extent the claim is excessive.21
ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) In the facts of the instant case, not only there is nothing on record to substantiate, much less prove, the assessee's claim, so that the same is unproved, there is in fact no explanation for the absence thereof. The AO made an inquiry into the details, howsoever sparse, by the assessee, and issued his findings in considerable detail at para 2 of his order, capsuling them at para 3 thereof, reproduced at para 3 of this order. The same are unequivocal, and thoroughly impugn the assessee's claims. None of them, based on facts, as indeed in law, as r. 58(10) of the Kerala Vat Rules, obliging the seller, where an unregistered dealer, to issue Form 8E in respect of sales by him, copy of which is to be retained by the purchaser, admittedly not issued (refer para 2.17(d) of the assessment order), stand rebutted. The same, to our mind, has two consequences. One, it effectively disproves the assessee's claim, i.e., in contradistinction to it being unproved, even as the latter is itself sufficient in law to effect a disallowance. Two, it clarifies the extent to which the disallowance is made. That is, even as the broad findings qua the purchases from unregistered dealers, not dislodged, are definite and appropriate, the disallowance finally made is in respect of purchases from Societies and Samathies, in face of specific denial by them, supported by denial by majority of the responding farmers themselves. The plea of the absence of accounts with them as the reason for denial, is again a false plea inasmuch as they have denied any purchases through them. The assessee, who does not have even the basic documents of the purchase; it failing to furnish even the date-wise detail of purchases, has misled at every stage, furnishing the farmer details of supplies to Supplyco, as well as of purchases for the following year.
The plea of the AO having not rejected the assessee's accounts, or of the quantity equilibrium being disturbed, is not relevant. No rejection of accounts is in law required to effect a disallowance of an expenditure on the basis of it being not proved; in fact, disproved. As regards the 'quantity' being balanced, it is, rather, for the assessee, in the complete know of it's affairs, to explain the same, i.e., as to how, in the absence of any evidence being led, it claims to have purchased the goods. For all one knows, the profit ratio or the yield may be higher, or the excess stock a 22 ITA No. 51& CO 21/Coch/2017 Diamond Food Products (AY 2013-14) carryover from an earlier year, or a combination of any of them, or any other. This is not for the Revenue to speculate, which is to go by the material on record, and the burden to show a recycling of funds - to whatever extent, is on an assessee. The same represents the settled law in the matter. The assessee, in the instant case, has, despite abundant opportunity, abysmally failed to prove the incurring of the impugned expenditure, with, rather, there being material on record disproving the same. It is under the circumstances not considered necessary to travel to the question as to whether the same is merited u/s. 40A(3) as well. The same, even as noted by the ld. CIT(A), does not in fact arise for consideration when the expenditure itself is held by the Revenue as not incurred; it being a non-obstante clause providing further stipulation for allowance of an expenditure incurred in cash or other than by way of legal tender. A bogus purchase implies no purchase, while verification w.r.t. s. 40A(3) necessarily implies a seller and a purchaser, i.e., a payer and payee, both of whom coalesce into one in case of a bogus claim. The AO, as indeed the Tribunal, referring thereto is only as, without prejudice. The same, not unprecedented, is misplaced in the facts of the case where the basic record is missing; the assessee admitting to the sourcing details from Samathies - who are stated to be not maintaining the records, where the supplier is abroad and/or does not have agricultural land. Continuing further, in this view of the matter, the part- relief allowed by the ld. CIT(A), being contested by the assessee per it's CO, also fails. The same, it may be appreciated, forming part of the question arising for determination in appeal, does not entail any separate examination and adjudication.
We decide accordingly.
5. In the result, Revenue's appeal is allowed, and the assessee's CO is dismissed. Order pronounced under Rule 34 (3) of The Income Tax (Appellate Tribunal) Rules, 1963 Sd/- Sd/-
(Sandeep Gosain) (Sanjay Arora)
Judicial Member Accountant Member
Dated: April 28, 2023
23
ITA No. 51& CO 21/Coch/2017
Diamond Food Products (AY 2013-14)
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(Judicial)
4. The Pr. CIT, Kochi
5. The Sr. DR, ITAT, Cochin
6. Guard File
By Order
Assistant Registrar
ITAT, Cochin
vkr/-
24