Income Tax Appellate Tribunal - Ahmedabad
Arman Fashion Pvt.Ltd., Surat vs Department Of Income Tax on 4 March, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH - AHMEDABAD
(BEFORE SHRI G. C. GUPTA, VP AND SHRI A. MOHAN ALANKAMONY, AM)
ITA No.2400 and 2407/Ahd/2012
A. Y.: 2009-10
M/s. Arman Fashion Pvt. Ltd., Vs The Income Tax Officer,
128D, Sanghvi Tower, Building Ward -1 (1), Surat,
No.2, Adajan Road, Aayakar Bhavan, Majura
Surat 395009 Gate, Surat
P. A. No. AAGCA 7474 H
The Income Tax Officer, Vs M/s. Arman Fashion Pvt. Ltd.,
Ward -1 (1), Surat, 128D, Sanghvi Tower,
Aayakar Bhavan, Majura Gate, Building No.2, Adajan Road,
Surat Surat 395009
P. A. No. AAGCA 7474 H
(Appellant) (Respondent)
Assessee by: None
Department by: Shri Shelley Jindal, Sr. DR
Date of hearing: 04-03-2013
Date of pronouncement: 10-05-2013
ORDER
PER A. MOHAN ALANKAMONY: These two cross appeals one by the assessee and the other by the revenue are preferred aggrieved by the common order of the learned CIT (A)-I, Surat dated 22-08-2012 in appeal No. CAS.I/242/11-12 for the assessment year 2009-10 u/s 250 read with section 143(3) of the I. T. Act. These cross appeals were heard together and the same are disposed off by this common and consolidated order for the sake of convenience. ITA Nos. 2400 and 2407/Ahd/2012(AY- 2009-10) 2 M/s. Arman Fashion Pvt. Ltd.
ITA No.2400/Ahd/2012(Assessee's appeal for AY 2009-10)
2. The assessee in its appeal has raised three grounds wherein grounds No.2 and 3 are general in nature and do not survive for adjudication. The lone ground No.1 surviving for adjudication is reproduced herein under for reference:
"1. On the facts and in the circumstances of the case as well as on the subject, the learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the assessing officer in sustaining addition extent to Rs.9.12 lakhs on estimating net profit at 0.5% on turnover."ITA No.2407/Ahd/2012
(Revenue's appeal for AY: 2009-10)
3. The revenue has raised four grounds in its appeal wherein ground Nos. 3 and 4 are general in nature and do not survive for adjudication. Grounds No.1 and 2 are reproduced herein under for reference:
"1. On the facts and circumstances of the case and in law, the Ld. CIT(A)-I, Surat has erred in restricting the addition of Rs.2,73,09,640/- made by disallowing 25% of total purchases by the assessee to Rs.9.12 lakhs as he has ignored the fact that the assessee never admitted before the A. O. that all the transactions were made only for bank finance and no proof of receipt of goods were produced by the assessee.
2. On the facts and circumstances of the case and in law, the Ld. CIT(A)-I, Surat has erred in admitting the assessee's submission that it was a case of circular ITA Nos. 2400 and 2407/Ahd/2012(AY- 2009-10) 3 M/s. Arman Fashion Pvt. Ltd.
transactions to fulfill turnover criteria of banks for getting finance, without calling for a remand report under Rule 46A."
4. The brief facts of the case are that the assessee is a Private Limited Company engaged in the business of trading of fabrics filed its return of income declaring income of Rs.28,860/- on 27-09-2009 showing gross profit at 0.04% amounting to Rs.81,214/- and net profit at 0.02% amounting to Rs.28,855 against total turnover of Rs.18,23,44,070/-. Subsequently, the case was selected for scrutiny under CASS u/s 143(2) and assessment order was passed u/s 143(3) of the Act on 29-11-2011 determining the total income of the assessee at Rs.2,73,38,500/- wherein the learned AO made an addition of Rs.2,73,09,640/- by treating 25% of bogus purchases of Rs.10,92,38,563/- as profit of the assessee following the decision of the case Vijay Protein Ltd. reported in 58 ITD 428 (Ahd).
5. During the course of assessment proceedings on verification of the profit & loss account of the assessee, the learned AO noticed that the assessee had debited Rs.18,22,62,856/- on account of purchase of fabrics against sales of Rs.18,23,44,070/-. The learned AO on further examination of the case, various queries were raised for which the assessee neither cooperated nor furnished the details. Finally, the learned AO summarized the discrepancies as follows:
(i) The assessee did not furnish the details of month wise purchase and sales according to the format furnished by the revenue.
ITA Nos. 2400 and 2407/Ahd/2012(AY- 2009-10) 4 M/s. Arman Fashion Pvt. Ltd.
(ii) For the various summons issued there was lack of cooperation by the assessee and often failed to appear before the AO.
(iii) Notice issued u/s 133 (6) of the Act to the creditors and debtors were also returned un-served with the remarks 'incomplete'.
(iv) From the copy of the accounts of the creditors and debtors furnished by the authorized representative of the assessee, it was revealed that the total purchases during the period 05-04-2008 to 23-04-2008 from M/s. Raman Fabrics Pvt. Ltd. shows an amount of Rs.7,49,92,911/- while as the confirmation statement from M/s. Raman Fabrics Pvt. Ltd. shows that the above stated amount represents loan to subsidy company. The above fact establishes that the assessee had not made any purchases from M/s. Raman Fabrics Pvt. Ltd.
(v) Similarly, on verifying the confirmation statement of Kalaniketan Syntex Pvt. Ltd. an amount shown as purchases by the assessee for Rs.3,42,45,652/- proved to be book entry in the similar fashion and did not represent the purchases made by the assessee.
(vi) The assessee had failed to furnish purchase bills, registers etc. in support of its expenses.
(vii) Since, the assessee could not substantiate the above purchases with any cogent evidence to prove its claim of purchases after affording sufficient opportunity, the learned AO held the same to be bogus purchases totaling to Rs.10,92,38,563/- and held as under:
"13. Hence, it is proved beyond doubt that though the entries in the books as claimed by the assessee is made as purchases, the assessee has completely failed to produce any material evidence in respect of actual purchase made as well as receipt of goods in the form purchase bills, delivery challan, inward ITA Nos. 2400 and 2407/Ahd/2012(AY- 2009-10) 5 M/s. Arman Fashion Pvt. Ltd.
records, payments by account payee cheques etc. for verification.
14. In view of the above position of the case, and also the following facts which come across during the course of assessment proceedings, it is clear that the purchases amounting to Rs.7,49,911 plus Rs.3,42,45,652/- totaling to Rs.10,92,38,563/- from M/s.Raman Fabrics P. Ltd. and Kalaniketan Syntex P. Ltd., respectively claimed to have been made were bogus and not genuine in the absence of documents such as purchase invoices, vouchers stock book etc. during the course of assessment proceedings despite repeated notices and summons as detailed above. Therefore, the assessee failed to prove that ht goods were actually purchased. The Directors of the assessee Company was given an opportunity to explain the matter by issuing summons on 5- 9-2011, which was not availed by them:-
a). The bank statement furnished in respect of Canara bank shows only opening balance of Rs.5748/- and no other entry is shown;
b) The assessee is not having any evidence incidental to the sale/purchase in this line of business except 'administrative expenses' of Rs.52,359/- which would be glaringly obvious that no business can be carried out without any such expenses;
c) As mentioned in the show cause notice at para 1, the address of the assessee is shown at 128D, Building No.2, Sanghvi Tower, Adajan Surat. The notices issued in these address are never delivered in the address given, but later received by the Authorised Representatives office;
d) The copy of return of income filed by M/s. Raman Fabrics P. Ltd., and M/s. Kalaniketan Syntex, P. Ltd. shows their sale figure as 'loan to subsidiary company', which were shown to the Authorized Representative during the course of assessment proceedings as demanded by its letter, but there is not satisfactory explanation thereon furnished by him later on;
ITA Nos. 2400 and 2407/Ahd/2012(AY- 2009-10) 6 M/s. Arman Fashion Pvt. Ltd.
e) These sales by these Companies to the assessee are shown in their books of accounts against the loans given;
15. It is also imperative to mention here that non maintenance of day to day stock records is a defect within the meaning of section 145(3) of the Act. The Hon'ble Apex court has also interpreted so in the case of S. N. Namasivayam Chettiar (SC) 38 ITR 579, wherein, it was held as follows:
"keeping of stock register is of great importance because that is a means of verifying assessee's account by having a "quantitative tally". If, after taking into account all the materials including the want of a stock register, it is found that from the method of accounting the correct profits of the business are not deductible, the operation of the proviso to section 13 of the Income Tax Act would be attracted. The Income Tax Officer even if he accept the assessee's method of accounting is not bound by the figure of profits shown in the accounts. It is for the Income Tax authorities to consider the material which is placed before them and, if , after taking into account in any case the opinion that correct profits and gains cannot be deduced, then they would be justified in applying the proviso to section 13."
In the case of British Paints (SC) 186 ITR 44 also, the Hon'ble Supreme Court has held that, if, after taking into account the absence of stock register coupled with other materials, the Assessing Officer is of the view that correct profits and gains of the business of the assessee cannot be arrived at, then the Assessing Officer would be justified in invoking the provisions of section 145 of the Act. In the circumstances, the book results disclosed by the assessee are rejected under section 145(3) of the I. T. Act.
16. Keeping all these factors in mind after duly considering all the documents/reply furnished by the assessee' representative during the course of assessment proceedings, 25% of the total purchases as shown in the ledger account through such bogus/fictitious purchase by the assessee from two parties i.e. ITA Nos. 2400 and 2407/Ahd/2012(AY- 2009-10) 7 M/s. Arman Fashion Pvt. Ltd.
M/s. Raman Fabrics P. Ltd., and M/s. Kalaniketan Syntex P. Ltd. totaling to Rs.10,92,38,563/- is disallowed and added to the total income of the assessee. Reliance is placed on the decision of the Hon'ble I. T.A. T., Ahmedabad Bench 'C' in the case of Vijay Protins Ltd. [1996] 48 ITD 428 (AHD). Penalty proceedings are initiated for default u/s 271 (1) (c ) of the I. T. Act."
6. The learned CIT(A) after thoroughly examining the issue arrived at the following decision:-
"9. DECISION:
It is an undisputed fact that all purchase parties are assessed to tax and sale appellant has been shown in their trading accounts. Wrong classification of debit balance in their books as loan instead of debtors cannot be a ground for disallowance in the case of appellant. Moreover, if A. O. doubted purchases from two parties, than the entire purchases should have been disallowed. There is no basis for accepting 75% of amount as genuine and treating 25% of the amount as bogus purchases in respect of the same party.
Besides doubting the purchases, the A. O. also doubted the sales made by the appellant as mentioned on page -7 (6th line) of the assessment order, reproduced on page 8 of this order. Moreover it is noticed that M/s. Raman Fabrics Pvt. Ltd., a purchase party has similar address as the sale party M/s. Bani Thani Fashions Pvt. Ltd. The only difference is in Shop NO. which is 128E, Sanghvi Tower in the case of purchase party and 128B, Sanghvi Tower in the case of sale party. Another sale party M/s. Nakoda Textile Industries Ltd. has the address 128D, Sanghvi Tower. The appellant's address relate to few parties and almost the entire amount of purchase as well as sales is outstanding nor only on 31.03.2009 but also on 31.03.2010. Both the Sundry debtors and creditors on 31.03.2009 are Rs.10.92 crores each. There are only two parties in Sundry creditors. In respect of both these parties 25% ITA Nos. 2400 and 2407/Ahd/2012(AY- 2009-10) 8 M/s. Arman Fashion Pvt. Ltd.
disallowance has been made by A.O. There are five parties in Sundry debtors. The appellant has claimed that payments have been made/received in respect of these creditors/debtors in A. Y. 2012-13. Therefore, it is not a case where purchase parties don't exist or have denied having transactions with appellant.
10. The appellant vide letter filed on 09.08.2012 admitted that it was a case of circular transactions. The said letter is reproduced herein under:
"................ The assessee is doing business of trading in fabrics. In addition to our previous reply we would like to submit as under:
The transactions are as shown in the books of accounts of purchases and sales were made by the assessee to fulfill "turnover" criteria of banks of for getting finance. It is pertinent to note that the same was to create a turnover by internal sales and purchases to have a reasonable turnover which in return would facilitate a respectable project report for bank finance. The fact of FDR of specific amount was kept with bank added force to our submission as FDR were put so that the same shall fulfill the criteria of collateral security.
Hence the turnover as mentioned in the trading and profit and loss account of the assessee was in fact not a actual turnover in common business parlance and hence the question of taxing any hypothetical profit out of such structured turnover does not arise..........."
11. In this back ground when we see facts like a turnover 18.23 crores with gross profit of 0.4% and net profit of 0.02%, no sales in subsequent year i.e. A. Y. 2010-11, negligible administrative expenses of Rs.46,187/- and outstanding Debtor/Creditor, it is apparent that both the purchases and sales in this case are bogus and only book entries for purchase/sale have been made. Such transactions may be for the purpose of giving bogus entries to other concerns to ITA Nos. 2400 and 2407/Ahd/2012(AY- 2009-10) 9 M/s. Arman Fashion Pvt. Ltd.
help them evade tax or just circular transaction whether the group to generate a fake healthy balance sheet to deceive financial institutions or for some other purpose.
12. Ethical aspects of such an exercise can be debated and there may be adverse consequences under other acts/rules for such conduct. However, as for Income Tax Act is concerned, what is required to be seen is the correct amount of taxable income generated from such transaction. As noticed (supra) the total sales of appellant are on Rs.18.23 crores. Since GP is only 0.04%, purchases are also of almost equal amount. If the appellant has given bogus entries to others, appropriate commission income for giving bogus entries need to be estimated as taxable income of the appellant. In case appellant has only indulged in circular transactions, then there may not be any taxable income in the hands of appellant except what has been shown in the return of income. However, if AO's view is accepted that purchases are not verifiable, even then it will be a case of net profit estimation.
13. Appellants declared business is trading in textiles. In the case of M/s. Opulent Jewels Pvt. Ltd., A. Y. 2007-08, wherein 25% of unverifiable purchases were added my predecessor held that it was a case of giving bogus entries and estimated a net profit of 1.5% on purchases as income for giving accommodation entries or purchases/sales. The said estimation was made on the basis of various decision of ITAT discussed in the appellate order No. CAS-I/273/2009- 10 dated 31.03.2010. Following the said order similar estimation was made in A. Y. 2008-09 in the case of M/s. Opulent Jewels Pvt. Ltd. in the appellate Order CAS- I/208/2010-11 dated 02.04.2012. In the said case bogus purchase/sale entries was given for diamonds and not for textiles. In the case of textile business appellant has furnished following decision for estimation of commission for giving accommodation entries, without prejudice to its claim that its purchases and sales are genuine.
ITA Nos. 2400 and 2407/Ahd/2012(AY- 2009-10) 10 M/s. Arman Fashion Pvt. Ltd.
Decision Details of the case Percentage
date estimation
51/05/11 IT(SS)A No.608 to 0.125%
612/AHD/2010
14. Considering the facts of the case and the decisions relied upon by appellant, the estimation of income in this case may be between what is shown in the return of income to 1.5% of turnover depending upon whether it is a case of circular transactions, unverifiable purchase or bogus entries. In case of giving accommodation entries the profit estimation in diamond cases referred to supra has been at 1.5% while for textile case the ITAT Ahmedabad has taken a percentage of 0.125%. Since rate of commission for giving entries in textile trade are bound to be lower than the rates for diamond trade, estimate has to be closer to 0.125% and not 1.5%. Alternatively, if it is case of unverifiable purchases in textile business, then the estimate of net profit for a turnover of this size may be between 0.5% to 1%. The present case falls in neither of the categories. It is a case of circular transactions to show a fake healthy balance sheet. However, the appellant cannot escape the provisions of Section 40A(2)a/40A(2)b even in case of circular transactions within group concerns. Therefore a reasonable estimate of profit is required even in that case in view of Section 40A(2)a/40A(2)b. Considering all these facts a net profit of 0.5% is estimated on turnover of Rs.18.23 crores. Therefore, addition is sustained to extent of Rs.9.12 lakhs."
7. None appeared on behalf of the assessee while as the learned DR vehemently supported the order of the learned AO and prayed that the same may be sustained.
8. We have carefully perused the materials placed before us and also heard the arguments advanced by the learned DR. Further, perusing the order of the learned CIT(A) we find that the learned CIT(A) after deliberating the issue has made the following findings:-
ITA Nos. 2400 and 2407/Ahd/2012(AY- 2009-10) 11 M/s. Arman Fashion Pvt. Ltd.
(i) All the parties from whom the assessee had made purchases were assessed to tax and were disclosed in their trading account.
(ii) The parties from whom the assessee had made purchases had only wrongly classified in their books of accounts as loan instead of showing the balance due to the assessee as receivable from the assessee as debtors.
(iii) In such circumstances, the transactions of the purchases and sales made by the assessee need not be doubted.
(iv) However, during the year the assessee had a turnover of Rs.18.23 Crores with gross profit at 0.04% and net profit at 0.02%. During the subsequent assessment year, the turnover declared was nil and had shown negligible administrative expenses of Rs.46,187/- and had outstanding debtors and creditors. From these facts it could be inferred that both the purchases and sales are bogus and only book entries. Such transactions are generally made to extend bogus entries to other concerns in order to help them to evade tax or it could be a circular transaction to generate a healthy balance sheet to deceive financial institutions or for other purposes.
(v) From the above facts, the income of the assessee could not be to the extent of 25% of unverifiable purchases.
Further, drawing support from the other decisions of the ITAT Ahmedabad Benches, net profit could be estimated at 0.05% on the total turnover of Rs.18.23 Crores.
9. The above findings of the learned CIT(A) is quite reasonable. Further, either parties did not produce any materials on record to dislodge the findings of the learned CIT(A). In these circumstances, we do not have any hesitation to confirm the order of the learned ITA Nos. 2400 and 2407/Ahd/2012(AY- 2009-10) 12 M/s. Arman Fashion Pvt. Ltd.
CIT(A). Consequently, the appeal of the revenue as well as the cross appeal of the assessee, both are dismissed.
10. In the result, the appeal of the assessee as well as the appeal of the revenue, both are dismissed.
Order pronounced in the open Court on 10-05-2013 Sd/- Sd/-
(G. C. GUPTA) (A. MOHAN ALANKAMONY)
VICE PRESIDENT ACCOUNTANT MEMBER
Deka/--
Lakshmikant Deka/
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Dy. Registrar, ITAT, Ahmedabad
1. Date of Dictation: direct on computer: 04-03-13/01-05-13
2. Date on which the typed draft is placed before the Dictating Member: 01-05-13 other Member:
3. Date on which approved draft comes to the Sr. P. S./P.S.:
4. Date on which the fair order is placed before the Dictating Member for pronouncement:
5. Date on which the fair order comes back to the Sr. P.S./P.S.:
6. Date on which the file goes to the Bench Clerk:
7. Date on which the file goes to the Head Clerk:
8. The date on which the file goes to the Assistant Registrar for signature on the order:
9. Date of Despatch of the Order: