Income Tax Appellate Tribunal - Cochin
Bafakyh Export House vs Income Tax Officer; (Ito V. Bafakyh ... on 26 May, 1995
Equivalent citations: (1995)53TTJ(COCH)293
ORDER
G. SANTHANAM, A.M. :
The first two appeals and the cross-objection are by the assessee. ITA No. 226/Coch/1988 is an appeal by the Revenue. As common issues are involved a consolidated order is passed for the sake of convenience.
2. The assessee is a partnership firm engaged in the manufacture and export of Huqqas. Financial year is the previous year. For the asst. yr. 1983-84, the Assessing Officer noticed that sundry creditors were shown at Rs. 3,52,441. When asked to furnish the break up of the sundry creditors, the assessee explained that it used to purchase Huqqas from various blacksmiths and other persons on credit and furnished the name of blacksmiths with their addresses. The total number of persons as per this list came to 85 and the total of the amount came to Rs. 2 lakhs. In order to verify the genuineness of these creditors, the Assessing Officer issued letters to the 85 parties. According to the Assessing Officer 5 persons have disowned the credit transactions. The total amount involved in this type of transaction is Rs. 6,800. Letters sent to 3 persons were returned. The total amount involved in this type of cases is Rs. 5,740. Though the assessee had furnished addresses in respect of 20 persons, according to the Assessing Officer, the full addresses were not available in relation to these persons. The total amount involved in this type of transaction is Rs. 28,015. One of the creditors was examined and he confirmed that he used to get payments within a few months after the supply of Huqqas. On the above basis, the Assessing Officer held that the credits to the extent of Rs. 2 lakhs was not explained to his satisfaction and, therefore, he made an addition under S. 68 of the IT Act. The addition was confirmed in appeal. The assessee is on further appeal.
3. There is force in the contention of Sri C.K. Nair, the learned counsel for the assessee, that the addition, if at all it is necessary in the facts of the case, could be only under S. 69 of the IT Act and not under S. 68. This is because the credits are not mere cash credits, standing in the name of suppliers of Huqqas purchased by the assessee. The purchases have been accepted, as a matter of fact, by the Revenue, as the purchases are recorded in the books of accounts and taken into account in the computation of net profits for the year. Therefore, only the source for the purchase is being doubted. While the assessees case is that these purchases are credit purchases, the Departments case in effect is that the assessee had paid for such purchases, but recorded them in the books as though they are credit purchases. In other words, the cost of purchases was outside the books of accounts. This is in effect the case of the Revenue. Therefore, the addition should properly fall under S. 69 of the IT Act and not under S. 68. There is a material difference on the question of onus between S. 68 and S. 69. If the case falls under S. 68 of the Act, the onus is on the assessee to adduce evidence that the credits in the accounts are genuine. In a case under S. 69, the onus is on the Revenue to show that the payments had been made outside the books of accounts. The issue before us is whether the Revenue has discharged this onus. The assessee has furnished a list containing the names and addresses of the blacksmiths from whom it has purchased Huqqas. The Assessing Officer addressed letters to the persons found in the list. Three persons could not be contacted at the addresses given by the assessee. The assessees explanation is that it has taken down the address as given by the blacksmiths and if they could not be contacted by the Assessing Officer, no adverse inference can be drawn against the assessee. We have considered this submission carefully. The overall purchases from these persons is only Rs. 5,740 and individually they are below Rs. 2,000. Further, the Assessing Officer has not asked the assessee to produce these persons whom he could not contact. Therefore, merely because the Assessing Officer was unable to contact these three persons, in whose name credits in very small sums stood, an adverse inference of the magnitude cannot be drawn. It is stated that the following five persons have disowned the credits :
Rs.
1.
Sri K.T. Sashi 1,450
2. Sri M.V. Imbichutty 380
3. Sri P.T. Balan 1,400
4. Sri N.K. Vasu 1,890
5. Sri P.K. Balakrishnan 1,680 6,800 The assessee vehemently objects that it is not known to it when these persons were contacted, what enquiries were made with them and above all the statements taken from them were not put to the assessee. We uphold the objection for the reason that the material collected by the Assessing Officer beside the back of the assessee cannot be used to its detriment. The third grievance of the Assessing Officer was that in respect of 20 persons full addresses have not been given. The assessees contention is that it has supplied the addresses as given to it by the blacksmiths and these blacksmiths are living in villages where they could be easily identified. Further, it is contended that the blacksmiths in the villages are afraid of appearing before Government authorities. Secondly, the blacksmiths in the villages are not educated enough to give the door numbers which is one of the requisites for full address. There is some force in such contentions. The credit in their names are only in small sums and at any rate the Assessing Officer did not call upon the assessee to produce those blacksmiths. Same is the position with regard to the 49 persons in respect of whom the postal authorities have returned the letters with the remark "insufficient address". In our considered opinion, if an assessee wanted to introduce cash credits normally it would be in a few names and in round sums. On the other hand, the credits are in the names of several parties in small sums and in odd figures. Therefore, it cannot be held that the impugned credits represented cash credits; nor can it be held that the assessee has paid them then and there is respect of all these purchases. In fact, one of the blacksmiths Sri Peedikandy Achuthan appeared before the Assessing Officer and stated that "some times the company would have amount pending for payment to me. I make 10 to 15 Huqqas a month. It costs about Rs. 100. The amounts to be paid to me by the company is cleared within two-three weeks or at the most a month. Even before they used to pay. The company will be short of funds some times, when they purchase Huqqas from different persons. Only on such occasion, the amounts due to me will be kept pending by the company". This statement of Sri Peedikandy Achuthan indicates that some times payments are deferred. Therefore, it cannot be concluded that the assessee had paid cash then and there in respect of all its purchases. However, the Assessing Officer has not put to the above deponent any particular transaction shown in his account in the books of the assessee and not questioned him on such particular transaction. Therefore, the statement given by one of the blacksmiths cannot be said to be wholly against the assessee. In the statement the credit policy is admitted. Further, this is a case where purchases are held to be genuine. Only the mode of purchase whether cash of credit is questioned. The allegation is that all the purchases were for cash and cash was paid outside the books. At the same time, it is admitted that the purchases and sales are recorded in the books and profit is ascertained. Even, if it is held that the purchase of Huqqas was for cash, the payment of which was not recorded in the books of accounts, only the first purchase can be outside the books of accounts because with the sale proceeds therefrom payments can be made for the second purchase and so on. Therefore, it would not be reasonable to make an addition of Rs. 2,00,000 for the asst. yr. 1983-84 or to make an addition of Rs. 54,960 for the asst. yr. 1984-85 towards the cost of purchase. Taking into account that the only outlet for the village artisans was the assessee and the smallness of the individual cost of Huqqas purchased, we sustain an addition of Rs. 10,000 for the asst. yr. 1983-84 and Rs. 5,000 for the asst. yr. 1984-85, on estimate basis. The balance of the additions for each year is deleted.
4. The next point in the appeal of the assessee for the asst. yr. 1983-84 is against the disallowance of a portion of the expenses under the head Onam and Vishu Presents amounting to Rs. 11,795. Onam an Vishu presents to blacksmiths who are not the employees of the assessee amounted to Rs. 26,795. As there were no verifiable vouchers, the Assessing Officer disallowed the entire amount. The learned CIT(A) held that it was customary to make presents to persons who are doing business with the assessee on the occasions of Onam and Vishu festivals in order to facilitate the smooth running of the business and in the absence of vouchers there is possibility of such expenses being inflated and in this view of the matter, he reduced the disallowance of Rs. 11,795. The assessee is on further appeal.
5. Having heard rival submissions we find no justification to interfere with the order of the learned CIT(A).
6. The next ground in the appeal of the assessee for the asst. yr. 1983-84 is against the disallowance of foreign travel expenses amounting to Rs. 12,500. The total expenditure was in a sum of Rs. 25,009. The entire amount was disallowed by the Assessing Officer. On appeal, the learned CIT(A) found from the correspondence that the object of the visit of the managing partner to Singapore was to get new business for the assessee, but since the managing partner was also accompanied by his wife and children, he sustained the disallowance in an extent of Rs. 12,500.
7. Having heard rival submissions, we decline to interfere with the order of the learned CIT(A).
8. The next point at dispute is about the computation of relief under S. 80HHC of the IT Act, 1961. According to the assessee, the export turnover for 31st March, 1983, was Rs. 57,16,368. 1% on Rs. 57,16,368 was Rs. 57,164 - 5% on Rs. 15,10,529 was Rs. 75,526. The assessee claimed relief under S. 80HHC to the extent of Rs. 1,32,690. In view of the Expln. to S. 80HHC, the Assessing Officer excluded freight or insurance attributable to the transfer of goods beyond customs station and computed the relief at Rs. 1,20,832. The learned CIT(A) upheld the computation.
9. Having heard the submissions before us and the facts on record, we have no reason to interfere with the order of the learned CIT(A).
10. In the appeal of the assessee for the asst. yr. 1984-85, the first issue is against the addition towards the stock of Huqqas valued at Rs. 5,50,000. The Assessing Officer made an addition of Rs. 10,00,000 towards unaccounted sale of Huqqas for the following reasons :
"As per trading account of the assessee, the closing stock as on 31st March, 1984, amounted to Rs. 8,57,733. The total purchases during the month of March, 1984 as per the books were for Rs. 3,77,770 and it is noticed that no sales were accounted during that month. Hence, as per the books of the assessee the stock as on 29th Feb., 1984, amounted to Rs. 4,55,510.
4. However, on the basis of information received from banks, it is noticed that the assessee had pledged stock worth Rs. 8,41,025 with the Vysya Bank as on 29th Feb., 1984. It is also noticed that the assessee had stock worth Rs. 5,37,850 hypothecated to the Union Bank of India. Hence, the total stock pledged and hypothecated would amount to Rs. 13,77,875 as against the amount of Rs. 4,55,505 disclosed by the assessees books of account.
5. By this office letter dt. 30th Jan., 1987, the assessee was requested to explain how the stock worth Rs. 9,22,370 was disposed of after 29th Feb., 1984, and before 31st March, 1984."
The assessee carried the matter in appeal and contended before the learned CIT(A) that the assessee had declared excess value of stock for getting larger loan facility from bank and there were goods in transit in the month of March, 1984, and further all its sales are export sales. Therefore, the addition towards unaccounted sales was totally uncalled for. The learned CIT(A) held that the assessee has declared its stock to Vysya Bank Ltd. and Union Bank totalling Rs. 13,77,875; so that stock is to be taken as correct. He also noticed that there were no local sales but only exports. Exports were made through the port of Bombay and in the month of March, there was strike in the Bombay port. He also took notice of the photostat copies of the bills of lading bearing invoice Nos. 370 and 371 which proved that the goods covered by these two invoices were accounted for as sales in the month of April, 1984 and they were lying in transit in Bombay port in the month of March, 1984 and were finally shipped out of India only on 17th April, 1984. He noticed that there was no definite evidence against the assessee to show that there was local sales and export sales through other ports in the month of March, 1984. He also noticed that the sale prices of Invoice No. 370 and Invoice No. 371 in respect of Huqqas lying in the port were duly accounted for in April, 1984. In this view of the matter, he held that an addition towards unaccounted sales was not called for. However, he held that an addition towards closing stock was necessary in the facts and circumstances of the case and thus he sustained as addition of Rs. 5,50,000 as follows :
Rs.
Total value of stock of 5869 Huqqas declared to the banks 13,77,875 Less : Value of stock of 1,256 Huqqas in transit in March, 1984 3,72,465 10,05,410 Value of stock in trade as per books 4,56,505 Balance of stock that should be lying with the assessee 5,49,905 or say 5,50,000 The assessee is in appeal against the addition sustained by the learned CIT(A).
11. The assessee has furnished a paper book consisting of the following :
INDEX S. No. Description Page No.
1.
Details of stock hypothecated to banks 1
2. Copy of stock statement furnished to Union Bank of India 2
3. Copy of stock statement furnished to Vysya Bank Ltd.
34. Particulars of closing stock as on 31st March, 1983 4
5. Particulars of loans and overdrafts from banks as on 31 st March, 1983 5 The Department has furnished a paper book consisting of the following :
INDEX S. No. Items Page No.
1.
Copy of letter dt. 29th Dec., 1986, from Vysya Bank Ltd.
12. Copy of letter dt. 15th Jan., 1987, from Vysya Bank Ltd. and enclosure 2-3
3. Copy of letter dt. 7th Jan., 1987, from Union Bank of India with enclosure 4-5
4. Month-wise break up of purchase and sale of Huqqas 6
5. Assessees letter dt. 22nd Nov., 1986 7-8
6. Assessees letter dt. 10th Feb., 1987 9
7. Details of packing material, commission paid, etc. 10
8. Letter dt. 18th Dec., 1986, from ITO 11
9. Statement dt. 30th Dec., 1986, Malayalam from M.M. Kumaran 12
10. English translation of the statement 13-14
12. We have heard rival submissions and perused the materials placed before us. Vysya Bank Ltd., in its letter dt. 15th Jan., 1987, has stated that Huqqas of different specifications pledged with it as on 29th Feb., 1984, were 3,483 cartons of the value of Rs. 8,41,025 and the date of pledge was 29th Dec., 1982. Union Bank of India in its letter dt. 7th Jan., 1987, has certified that assorted Huqqas made of brass were hypothecated to it in 2,386 pieces valued at Rs. 5,36,850 as on 29th Feb., 1984. Thus, the total number of Huqqas pledged and hypothecated came to 3,483 plus 2,386 = 5,869 Nos. The total value of stock under pledge as well as hypothecation amounted to Rs. 13,77,875. From the above value, the learned CIT(A) gave credit for 1,256 Huqqas in transit at a value of Rs. 3,72,465 and held that the assessee must be having stock of Huqqas of the value of Rs. 10,05,410, but as per the assessees books the value of stock was only Rs. 4,46,505. Therefore, the CIT(A) held that the difference represented the value of excess stock held by the assessee. The case of the assessee is that it had 1,600 pieces of damaged Huqqas which were written off in the earlier assessment years, the weight of which amounted to 2,000 kgs. and for this proposition it relied on the report of its auditor under S. 44AB of the IT Act, 1961. The assessee for getting higher overdraft facilities had included the defective or damaged Huqqas and, therefore, there was no case for making any addition. Further, it is submitted that the assessee is free to adopt cost or market price, whichever is lower, for purpose of income-tax, while, at the same time, it can adopt the higher of the two values for purpose of bank and the assessee cannot be defaulted if it had adopted different methods of valuation for different purposes. The learned senior Departmental Representative vehemently contended that the assessee should not be permitted to adopt different types of valuations and, at any rate, its story that some of the Huqqas were damaged should not be accepted.
13. We have considered the submissions made before us very carefully. The question before us is whether the assessees explanation that it had damaged Huqqas which it included in the stock statement can be accepted or not. First it has to be seen whether it had damaged Huqqas. The assessee has written off in its accounts a sum of Rs. 48,625 being the value of damaged Huqqas in the earlier assessment years as detailed below :
Rs.
31st March, 1978 17,165 31st March, 1980 20,525 31st March, 1981 10,935 48,625 Assessee also had dismantled Huqqas during the year ended 31st March, 1985. This is clear from the audit report under S. 44AB which reads as follows :
"Value of 2,000 Nos. of dismantled Huqqas has not been considered in the accounts for the year ended 31st March, 1984. The value of above items amounting to Rs. 50,972 has been included in the value of closing stock as on 31st March, 1985."
Therefore, the existence of damaged Huqqas either carried forward from the preceding assessment years and during the assessment year cannot be doubted. The stock statement filed by the assessee with Vysya Bank Ltd., does not have any reference to the quality of Huqqas. From the stock statement it is seen that the value of each piece of Huqqas has been differently valued (page 3 of the Departments paper book). In respect of the stock statement hypothecated with Union of Bank of India reference is made to assorted Huqqas at the average price per piece. Therefore, it can be concluded that the Huqqas lying with the bank either under pledge or under hypothecation are of different qualities and different sizes and it is quite probable that the damaged stock also was given either by way of pledge or shown as having been hypothecated to avail greater loan facilities. The number of damaged Huqqas, according to the assessee, is about 1,600 pieces. The damaged Huqqas also included dismantled Huqqas. Therefore, making allowance for dismantled items we estimate the damaged Huqqas at 1,200 pieces over the years. Considering the total weight of damaged and dismantled Huqqas in 2,000 kgs. the number of such damaged Huqqas as estimated by us is, in our opinion, reasonable. Therefore, the stock of Huqqas as on 31st March, 1984 can be arrived at as follows :
Total number of Huqqas under pledge as per CIT(A)s order and as per bank certificates 5,869 Nos.
Less : Huqqas in transit in March, 1984 as per CIT(A)s order and invoice 1,256 Nos.
4,613 Nos.
Less : Damaged Huqqas 1,200 Nos.
3,413 Nos.
Number of Huqqas held in stock and included in the account 2,920 Nos.
Balance to be accounted for 493 Nos. The learned CIT(A) has not given credit for the damaged Huqqas that might have been included in the stock statement furnished to the bank. He has arrived at the number of Huqqas on stock at 4,613 Nos. as against the book stock of 2,920 Nos. and ascertained the excess stock in 1,693 pieces of Huqqas. According to our estimate, it would come to only 493 Huqqas. In this view of the matter, we sustain an addition of Rs. 1,00,000 towards the value of damaged Huqqas lying in stock with the assessee and included in the bank statements.
14. The Revenues argument that the assessee should not adopt different methods of valuation for purpose of loan facilities with banks and for purpose of income-tax cannot be accepted. Normally, the method of valuing the stock is always at cost or at market price but the IT Act permits the assessee to value the stock at cost or market price whichever is lower when the concern is a going concern. Therefore, even if the assessee had adopted the market value for its stock for purpose of bank facilities, the assessee is still entitled to adopt the method of cost or market price whichever is lower for income-tax purposes. Legally there is no impediment to such a course of action.
15. The next ground in the assessees appeal for the asst. yr. 1984-85 is against the repair charges of Huqqas amounting to Rs. 42,000. The assessee produced one M.K. Karunan who had stated that he used to repair damaged Huqqas but did not receive any payment. In the circumstances the expenditure was disallowed. Having regard to rival submissions, we decline to interfere with the order of the learned CIT(A).
16. In the Revenues appeal for the asst. yr. 1984-85 the only point at issue is against the deletion of Rs. 3,03,833 treated as unexplained credits. There were credits in the partners accounts as follows :
Rs.
Smt. Shereefa Mariyam 36,000.00 Sri B.M. Zainul Abdeen 40,000.00 Smt. Shereefa Nafeesa 55,506.84 Sri Syed Hamza Bafakyh 1,47,327.29 The Assessing Officer held that the assessee has not satisfactorily explained the credits and, hence, made the impugned addition. Before the learned CIT(A) it was contended that the partners have made periodical advances to another firm called Taj International for the construction of the total building. Such amounts were debited to the partners current accounts in the earlier years. All such drawings were transferred to Taj Internationals account for the purpose of ascertaining the cost of construction. The assessee furnished the dates on which the drawings were made from the firm and contended that all the partners were separately assessed to income-tax and, if at all, an addition was to be made, it should be only in the individual assessment of the partners. The learned CIT(A) held that it is now well settled law that for taxation purposes firm and its partners are separate entities. The credits and debits are appearing in the accounts of the above four partners. The partners are separately assessed to tax. The same ITO is having jurisdiction over the assessment of the partners. Necessary enquiries as to the nature and source of these credits should be made in the individual assessments of the concerned partners. Accordingly, the learned CIT(A) deleted the addition. The Revenue is in appeal.
17. We have heard rival submissions. It is not as if there was no explanation in respect of the credits found in the accounts of the partners. The credits are explained as representing the advances made to another firm from out of the drawings, viz., Taj Internationals and the transactions between the partners and the other concern. The Assessing Officer held that the firm had not submitted its return of income but, in our opinion, that can be no ground for making addition in the hands of the assessee-firm. The credits are in the accounts of the partners. So far as the assessee is concerned, the identity of the creditor is established. The partners have admitted the credits. Further, there are no local sales apart from export sales and the case of the Assessing Officer that there were unaccounted sales was not accepted by the learned CIT(A). The Revenue is not on appeal against that order of the CIT(A). In the circumstances, we hold that the addition of the impugned credits in the hands of the assessee-firm was not justified and the learned CIT(A) had rightly cancelled the same.
18. The cross-objection filed by the assessee is only in support of the order of the learned CIT(A)(for the asst. yr. 1984-85) in deleting the addition of Rs. 3,03,833 and for the reasons stated in the preceding paras we allow the cross-objection.
19. In the result, the assessees appeals are partly allowed. The cross-objection by the assessee is allowed. The Departmental appeal is dismissed.