Income Tax Appellate Tribunal - Jaipur
Khandelwal Trading Co. vs Assistant Commissioner Of Income Tax on 24 January, 1996
ORDER
Pradeep Parikh, A. M.
1. This appeal by the assessee is against the order of the learned CIT(A) dt. 20th Sept., 1991 for asst. yr. 1986-87. As many as four grounds have been raised in the appeal, but in substance, the only dispute relates to the addition of Rs. 86,500 in respect of certain purchases.
2. The assessee is an unregistered firm. In the course of assessment proceedings the Assessing Officer (AO) came across certain purchase transactions entered into on different dates involving three parties, amounting in all to Rs. 86,500. The AO enquired into these transactions and found that except M/s Marwal Traders, the other two parties, viz., M/s New Rai Enterprises and M/s Shimla Traders, were not assessed to sales-tax and their addresses were also incomplete, moreover, the payments to these parties were also shown in cash. The assessee was asked to produce these parties, but it was informed by the assessee that the said parties were not traceable. The AO went ahead with the enquiry and requested the Dy. Director of Income-tax, Investigation, Jaipur, to conduct a survey under s. 133A of the Act. The survey revealed that M/s New Rai Enterprises and M/s Shimla Traders did not exist at all. In case of M/s Marwal Traders, its sales-bill book for the month of March, 1985 were impounded under s. 131 and the statement of its proprietor Shri Hukam Chand was also recorded. The sales-bills did not reveal any sale to the assessee firm. The proprietor Shri Hukamchand denied of having made any sale to the assessee firm and further stated that the alleged bill of Rs. 17,100 produced by the assessee firm is not a genuine one but is fabricated by the assessee. The assessee was requested by the AO vide his letter No. 540 dt. 10th March, 1989 to furnish explanation in respect of the results of the investigation and also to show cause as to why the 'alleged' purchases may not be treated as bogus purchases. No reply was furnished and hence the AO invoked the provisions of s. 145(2) of the Act. In doing so, he disturbed the trading results only to the tune of Rs. 86,500, that is, to the extent of purchases not found to be genuine and added the said amount to the total income.
3. On appeal, the learned CIT(A) observed that the assessee had failed to discharge his burden by not proving the genuineness of the purchases. He also took note of the results of the investigation carried out by the assessee (sic) and also of the silence maintained by it in spite of being given an opportunity to explain the results of the investigations. On account of these circumstances, the learned CIT(A) concluded that the transactions were of a spurious nature. Over and above these findings, the learned CIT(A) further observed as follows :
"Apart from this, it may be seen that out of the 6 transactions, 5 transactions were through cash. So far as the cash transactions are concerned, it was in violation of the provisions of s. 40A(3) and even the identity of the receipient was not established. So far as the transaction through cheque is concerned, a copy of the cheque indicates that it was a bearer cheque and not a crossed cheque. As such, even the payment through one cheque was on the footing of cash payment and the provisions of s. 40A(3) were applicable. Hence, even if it is viewed otherwise, by taking into consideration the provisions of s. 40A(3), the addition of Rs. 86,500 appears to be well in order. In view of all these, the addition in question, being in order, stands confirmed."
Thus, the addition of Rs. 86,500 was confirmed by the learned CIT(A).
4. Shri H. M. Singhvi, the learned counsel appearing for the assessee, submitted that by invoking the provisions of s. 145, the AO could have intended to increase the gross profit only. Thus, if at all the purchases were considered to be bogus, he should have made addition only to the extent of the gross profit thereon and not of the entire alleged bogus purchases. It was further submitted that when the AO has accepted the quantities purchased and sold, there was no reason for him to treat the purchases as bogus. The learned CIT(A), Shri Singhvi contended, relied more on the provisions of s. 40A(3) than on s. 145. In order to invoke the provisions of s. 40A(3), which the AO had not at all considered about, it was imperative on the part of the learned CIT(A) to give a show-cause notice to the assessee. Hence his order, it was contended, was bad in law. Moreover, the statement of Shri Hukamchand, the proprietor of M/s Marwal Traders, was also recorded at the back of the assessee. Thus, it was strongly urged by Shri Singhvi that the impugned addition be deleted.
5. Shri A. K. Singh, the learned Departmental Representative, contended that the enquiries conducted by the AO were in the right direction and even a layman would have arrived at the same conclusion as that of the AO. Shri Singh's stress was on the silence maintained by the assessee in spite of an opportunity given to it by the AO to explain the revelations of the enquiry conducted by him and hence he strongly supported the orders of both the lower authorities. As regards not invoking the provisions of s. 40A(3) by the AO, Shri Singh had nothing to say in particular.
6. We have heard the parties and considered the material before us. Apparently it may seem to be a simple case of trading addition. However, in view of certain submissions made on behalf of both the sides, the matter gives rise to some pertinent issues.
7. We take up the first contention of Shri Singhvi. It was contended that only gross profit rate should have been applied and the addition should have been to that extent only.
8. Let us assume that the impugned purchases in this case are bogus - what can be the causes and effects ? Either corresponding bogus sales have to be accounted for, or, the closing stock to that extent have to be increased. But if either is done, the very purpose of entering 'bogus' purchases is defeated. What can be the purpose to enter a bogus purchase in the books, obviously to show lesser profit than actually earned. This in turn could be to bring the gross profit rate to near about the earlier years' performance in order to avoid a deeper probe by the taxing authorities and/or to avoid paying higher taxes. Thus, when once bogus purchase is entered in the books without a corresponding sales or increase in stocks, the obvious result would be lowering of g. p. rate. If these bogus purchases are removed, the g. p. rate would automatically go up. Under the assumption that the purchases are bogus, one situation visualised is that there are no corresponding sales, then addition at what rate can be more justifiable than by the bogus purchase itself ?
9. Likewise, there can be another situation also. The purchase may be bogus and correspondingly there may be a bogus sales also, and since both are bogus, the g. p. rate is obviously manipulated to affect the overall result. Then, accepting Shri Singhvi's contention would further make the accounts bogus. Similarly, there may be many such situations because, accountancy is essentially an art and not a science.
10. The point we are trying to drive home is that when a bogus entry is found in accounts, there cannot be a better solution than to remove that entry. The legitimate way of removing the entry would be, as every student of accountancy would agree, is to do what has been omitted to be done or undo what has been wrongly done.
11. Now, so far we were only assuming that the purchases are bogus. Coming to the facts of the case, were the purchases worth Rs. 86,500 really bogus ? There is no doubt about it. The investigations got done by the AO leave hardly any doubt about it. The failure on the part of the assessee to show cause strengthens the Department's case. This stoic silence of the assessee also blunts the assessee's argument that Shri Hukamchand's statement was recorded at its back. It may have been recorded at its back, but the results thereof were informed to the assessee and that is what the assessee was asked to explain and failed to do so. Thus, now we are not assuming but are concluding that the purchases of Rs. 86,500 were in fact bogus. In case of bogus entries, in our opinion, what could be the best remedy, has been discussed above. The AO has simply done that. We are unable to appreciate Shri Singhvi's contention. Had there been suppression of sales, probably, depending on the facts of the case, the addition to the extent of g. p. rate would have been sufficient. But in case of bogus purchases we do not see a better solution than the one adopted by the AO.
12. But what about the quantitative record which is said to have tallied ? In the instant case the assessee has maintained the stock register but the same has been test-checked by the AO. There is no specific discussion or finding as regards quantitative tally. However, when in substance the transactions have been proved to be bogus the unverified quantitative tally cannot lead us to conclude otherwise. Under the circumstances of this case, we are not inclined to give much weightage to this contention of the assessee.
13. Now, coming to the last contention of the assessee that the learned CIT(A) should have given a show-cause notice before invoking the provisions of s. 40A(3). As per s. 251(2), the appellate authority has to issue a show-cause notice only if he wishes to enhance the assessment or penalty or to reduce the amount of refund. In the instant case, the AO had already added the sum of Rs. 86,500 by invoking the provisions of s. 145(2). On appeal, the learned CIT(A) discussed in detail and confirmed the findings of the AO with respect to the spurious character of the transactions. On these findings at the first instance he confirmed the addition. This is evident from the very opening sentences of the operative part of his order in para 3.2 which are as follows :
"After due consideration, it appears that the plea of the appellant cannot succeed in as much as the initial burden in regard to proving the genuineness of the purchases was on the appellant. The same was not discharged".
14. Then he goes on to discuss the various findings of the AO. After discussing the findings, the learned CIT(A) refers to s. 40A(3) and this reference starts with the words "Apart from this..... ". finally, while concluding the discussion about the applicability of s. 40A(3), he concludes it by the words hence, even if its viewed otherwise, by taking into consideration, the provisions of s. 40A(3), the addition of Rs. 86,500 appears to be well in order".
15. Thus, from the above discussion, it would be clear that even if the learned CIT(A) had not referred to s. 40A(3), the addition of Rs. 86,500 was confirmed. Reference to s. 40A(3) was merely an additional reason to sustain the addition. As a matter of fact, it can also be said that by referring to s. 40A(3), the learned CIT(A) wanted to emphasize the spurious character of the transactions. It was neither a case of enhancing the assessment, nor a case of reducing the refund where he could have been under an obligation to give a show-cause notice. Hence, the contentions of the learned counsel on this aspect are not acceptable.
16. Under the facts and circumstances of the case, the addition of Rs. 86,500 on account of bogus purchases, is sustained. The order of the learned CIT(A) is upheld.
17. In the result, the appeal is dismissed.