Income Tax Appellate Tribunal - Chennai
Handloom Heritage Ltd., Chennai vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
CHENNAI BENCH 'B'
BEFORE DR.O.K.NARAYANAN, VICE PRESIDENT AND
SHRI HARI OM MARATHA, JUDICIAL MEMBER
I.T.A. Nos. 1792 to 1803/Mds/2010
Assessment Years 1999-2000 to 2005-06
M/s Handloom Heritage Ltd The ACIT
No. 37, Rajamannar Street Vs Central Circle II(5)
T. Nagar, Chennai 600 017. Chennai-34
PAN : AACH 0890 A
(Appellant) (Respondent)
I.T.A. Nos. 1761 to 1767/Mds/2010
Assessment Years 1999-2000 to 2005-06
The ACIT Vs. M/s Handloom Heritage Ltd
Central Circle II(5) No. 37, Rajamannar Street
Chennai-34 T. Nagar, Chennai 600 017.
PAN : AACH 0890 A
Assessee by Shri T. Banusekar
Department by : Shri Anirudh Rai
ORDER
:- 2 -: M/s Handloom Heritage Ltd
PER HARI OM MARATHA, JUDICIAL MEMBER:
This is a bunch of nineteen appeals; for seven Assessment Years there are cross appeals pertaining to same assessee which arise out of a common appellate order dated 21.6.2010 passed for Assessment Years 1999-2000 to 2005-06 [i.e. seven Assessment Years]. The assessee is in appeal for five years against revisional order passed u/s 263 of the Income-tax Act, 1961 [in short, the Act] for Assessment Years 1999-2000 to 2005- 06and these are also dealt with by the Commissioner of Income- tax [Appeals] arising out of effective five assessment orders simultaneously. Therefore, it will be convenient to dispose of all these appeals by a common order as we will be able to cull out full and final facts by articulating issues between the parties.
2. Briefly stated the facts, in nutshell, leading to all these appeals are that a search u/s 132 of the 1961 was conducted at the business premises of the assessee company situated at 37, Rajamannar Street, T.Nagar, Chennai 600 017 and also at the residential premises of its director at No. 16A, Lakshmanan Street, T. Nagar, Chennai 600 017 on 15.7.2004 and the search was concluded finally on 14.9.2004. Subsequently, assessments for Assessment Years 1999-2000 to 2005-06 were completed u/s :- 3 -: M/s Handloom Heritage Ltd 153A r.w.s. 143(3) of the Act. In these assessments, various additions were made which can be summarized by stating as to what undisclosed income was added by the Assessing Officer as under:
i) The total amount deposited in the current account in the name of various weavers of the appellant company amounting to ` 18,79,27,560/-
ii) Total amount of FDRs in Tamilnadu Mercantile Bank at TTK Road and T. Nagar in the name of various weavers amounting to ` 2,79,57,165/-
iii) unaccounted stock of ` 3,65,32,442/-
3. Year wise break up of the additions made in these Assessment Years as per original assessment order passed u/s 153A are as under:
F.Y A.Y. Undisclose Total Balance Unaccount d income - amount of treated as ed stock total FDs with M/s undisclose amount of Tamilnad d income deposits in Mercantile and current Bank and brought accounts ING Vysya of M/s considered to tax Tamilnad for Mercantile telescoping Bank, TTK Road & T. Nagar 1998-99 1999- 7,103,500 Nil 7,103,500 Nil :- 4 -: M/s Handloom Heritage Ltd 2000 1999-00 15,704,709 5,704,672 10,000,037 Nil 2000-01 2000-01 9,901,918 20,000 9,881,918 Nil 2001-02 28,772,923 5,551,330 23,221,593 Nil 2001-02 2002-03 23,180,960 13,513,000 9,667,960 Nil 2002-03 2003-04 94,114,815 Nil 94,114,815 Nil 2003-04 2004-05 4,148,735 3,168,163 980,572 Nil 2004-05 2005-06
----- ---- ---- 36132442 2005-06 ---
4. The Assessing Officer, while passing the original assessment order dated 27/12/2006 u/s 153A of the Act reduced the amount of FDRs of Rs. 2,79,57,165/- from the total amount of deposits amounting to Rs. 18,79,27,560/-. The Commissioner of Income Tax, Central-II, Chennai passed an order u/s 263 treating the earlier order as erroneous and prejudicial to the interest of the revenue on the ground that telescoping of unaccounted FDRs from the total deposit in the bank account was erroneous. As a result, the A.O. passed the order u/s 153A r.w.s. 263 of the Act for various Assessment Years nullifying the effect of telescoping of FDRs amount from the total deposit in the weavers account by adding the FDR amount to the total income :- 5 -: M/s Handloom Heritage Ltd determined in the original order u/s 153A of the Act. In the revised order passed consequent to order u/s 263 of the Act, the Assessing Officer has also added proportionate interest for various years as under:
Assessment Year Proportionate interest 2000-01 7,64,426.00 2001-02 2,680.00 2002-03 7,43,878.00 2003-04 18,17,788.00 2005-06 4,24,533.00
5. Aggrieved, the assessee preferred appeal before the CIT(A), who has granted part relief to the assessee. Now the Revenue is in appeal against the relief granted and the assessee is in appeal against the additions sustained. In addition to that, the assessee has also filed appeals against the order passed u/s 263 by the Commissioner of Income-tax [Admn.].
6. We have heard the rival submissions and have carefully perused entire material available before us. A perusal of the record establishes that M/s Handloom Heritage Limited is one of the leading manufacturers and dealers in Handloom sarees and :- 6 -: M/s Handloom Heritage Ltd designer sarees both in wholesale as well as retail basis. The company has four directors including Shri L. Dharmichand, Smt. Prakash Devi w/o Shri L. Dharmichand and Shri Sunil Kumar, Son of Shri L. Dharmichand. The following assets of the appellant were seized during the course of search:
i. cash seizure of ` 3,83,140/- from the business premises at No. 37, Rajamannar Salai, T. Nagar, Chennai ii. cash seizure of ` 50,000/- from the HDFC Bank Account, T. Nagar, Chennai iii. Fixed deposits ` 2,92,60,165/- seized from Tamilnad Mercantile Bank, TTK Road branch and ING Vysya Bank, T. Nagar
7. After post search enquiries conducted, it was found that fixed deposits to the tune of ` 2,90,50,002/- was deposited in the names of various weavers in the bank, namely Tamilnad Mercantile Bank, TTK Road branch. It was found that interest to the tune of ` 31,68,156/- accrued to these deposits. Similarly, fixed deposits amounting to ` 34,84,149/- were also found deposited with ING Vysya Bank, T.Nagar, Chennai. Further :- 7 -: M/s Handloom Heritage Ltd enquiries revealed that there were savings bank/current accounts with Tamilnad Mercantile Bank, TTK Road Branch and Tamilnad Mercantile Bank, T. Nagar Branch which were in the names of various weavers, but in effect these accounts were operated by the assessee company only. The total amount in such accounts as mentioned above was ` 18,29,27,560/-. Prima facie opinion of the Assessing Officer was that, in fact, these accounts belonged to the assessee company only. As a sequel to the search, assessee was directed to file return of income for Assessment Year 2000-01 to 2004-05. In compliance thereof, the assessee requested to treat the return of income already filed for these years as returns filed in compliance of the notice issued u/s 153A of the Act. The assessee enclosed copied of acknowledgements of the returns already filed.
8. The common issue is regarding treating of the FDRs in the names of various weavers which were noticed during post search enquiries made from Tamilnad Mercantile Bank, TTK Road branch and ING Vysya Bank, T. Nagar, as unaccounted FDRs of the assessee.
:- 8 -: M/s Handloom Heritage Ltd
9. The Assessing Officer has dealt with this issue in detail in his order. These FDRs were found to have been made in the names of various weavers out of withdrawals made from SB account/current account maintained in the names of weavers in these two banks. The Assessing Officer recorded the statements of some of the weavers as well as some officials of these banks. FDRs with Tamilnad Mercantile Bank
10. While scrutinizing the seized document Ann//VP/ Stock/ Cut pieces, etc/NS dated 15.7.2004, which is a computerised statement, it was noticed that the directors of the company had availed loans from this bank. The Assessing Officer called for the entire details like bank accounts maintained by the assessee company and by its directors besides calling for details of loans availed by the company and its directors along with securities available in the loan facility. In response to the summons issued u/s 131 of the Act, the bank authorities responded and furnished requisite details. This bank is assessee's main banker. Its branch manager appeared in person and produced copies of these statements. When these were verified, it was noticed that loans were sanctioned to the assessee and its directors on the strength :- 9 -: M/s Handloom Heritage Ltd of fixed deposits, which, ostensibly belonged to various weavers. The FDRs were either in the names of persons from Nellore District of Andhra Pradesh or from Chennai. On enquiry, it was found that many so called weavers were non-existent and some of the addresses were found to be not correct. The entire details of these weavers are given in pages 32 to 35 of the assessment order for Assessment Year 2005-06. Regarding Andhra Pradesh weavers, enquiries were made at Nellore and statements of various weavers were recorded wherein nine such weavers have denied of making any FDRs in any of the banks in Chennai. During the course of such enquiry, Shri Dharmichand, Director of the appellant company furnished a letter dated 17.8.2004 offering the amount involved in FDR as their income. The contents of the letter, as reproduced in the assessment order at page 53 for Assessment Year 2005-06 is reproduced below for ready reference:
"At this point of time, we may not be able to produce the required particulars and details, as we-have to contact hundreds of weavers spread over number of villages and get the confirmation letter for the following :- 10 -: M/s Handloom Heritage Ltd reasons:
(a) These weavers are very small manufacturers and do not maintain proper records
(b) Most of them are assessed to tax
(c) As mentioned above, they change their place of operations depending upon the availability of the labourers.
(d) I do not have present addresses for some weavers because many them come to Chennai and our contact is limited to the business purposes only.
(e) I am a patient of Hypertension and Diabetes and I do not have supporting hands.
(f) My wife has undergone a major surgery recently. ten, I have to accompany her to doctors.
(g) It is time consuming process and it may take very long time to trace out the whereabouts of all the weavers and manufacturers.
One more thing we want to state that, some weavers have being paid cash in lieu of their FDRs lying with us. We are not in a position to segregate the quantum of FDRs belonging to the weavers and us.
In view of the above mentioned difficulties we are not in a position to produce before you at :- 11 -: M/s Handloom Heritage Ltd present the necessary evidences and confirmations and to purchase peace with the department and to avoid protracted litigation, we hereby agree to offer the entire amount of fixed deposits as our undisclosed income and offer to pay the taxes thereon in the respective years.
For your reference, we are furnishing separately the list of FDRs and the list of pay orders which have being taken out by encashing the FDs for meeting financial commitments to· the weavers as our bank account were placed under prohibitory orders.
I request this submission of ours, may be taken on record and a lenient view be taken by not initiating proceedings on penalty and prosecution as a concealment of income for which will be extremely grateful to your kind authority.'
11. Thereafter, his statement was also recorded on 24.08.2004 wherein he confirmed the disclosure of ` 2,72,33,239/- [being FDR amounts of Tamilnad Mercantile Bank, TTK Road branch]. Based on these evidences, the Assessing Officer concluded that the investment in FDrs is made by the company and not by the director of the company.
:- 12 -: M/s Handloom Heritage Ltd FDRs with ING Vysya Bank, T.Nagar
12. Apart from FDRs in the names of weavers in Tamilnad Mercantile Bank, TTK Road branch, Chennai, various FDrs in the names of weavers were found with ING Vysya Bank, T. Nagar totalling ` 34,85,149/- including interest. On maturity, letters were sent to the FDR holders, but all letters were returned unserved. Statements of bank officials in this case were also recorded to confirm that money for these FDrs were paid in cash by Shri Sunil Kumar and the FDR receipts were given to Shri Dharmichand. Further investigation on who signed the application forms, copies of deposit renewal forms and names and addresses were also enquired into. Statement of bank officials were recorded u/s 131 of the Act who stated that Shri Sunil Kumar S/o Shri Dharmichand had paid ` 30 lakhs in cash at the time of making these FDRs. Against the proposed addition of these amounts in the hands of the company, following objections were made on behalf of the assessee company:
:- 13 -: M/s Handloom Heritage Ltd
1. The disclosure of FDR vide letter dt 17.8.04 in respect of FDR.
at TMB, TTK Road. Chennai· was -made by· the Director to buy peace and to avoid harassment and negative impact on business
2. The disclosure was made only as confirmation could not be produced from weavers
3. The weavers were small manufacturers and do not maintain proper records and most of them were not assessed to tax
4. The appellant's Director is a patient of hypertension.
Subsequently vide letter dt.27.11.06 the appellant company submitted before the AO and contended that the views have since filed Return of Income and owned thes FDRs in their return of income :- 14 -: M/s Handloom Heritage Ltd
13. After considering the Assessing Officer's objections, the Assessing Officer held that the FDRs are the unaccounted investment of the assessee company. At the appellate stage, assessee made following written submissions:
2.
"The appellant Company had Cash Credit (CC) account no.
500057 with Tamilnad Mercantile. Bank and the 0D facility was Rs. 1.50 crores during the relevant period. All the payments were made through this CC account. The cheques issued to the said weavers were also prepared and paid from this CC cheques account. These cheques are only deposited by the weavers in these bank accounts. If it is treated, as the department alleges; as the benami accounts of Company then the source of money of these benami deposits is the withdrawal of money by the Appellant Company from the CC account at TMB. Consequently, the source of all these deposits is the CC account at TMB, which is not only accounted but are also disclosed. Once the source is explained posits the question of treating them as undisclosed Fixed Deposits done and sustained. Therefore, the addition on account of benami FDs is frivolous.
:- 15 -: M/s Handloom Heritage Ltd If this submission of ours is accepted, we do not propose to make any other for time being in this regard. As stated earlier the coerced y the Directors of the Appellant Company relating to these FDs before the DDIT [Inv]. as because of the pressure tactics and incomplete the IT proceedings, also because of shortage of time and because the 'weavers could not be contacted who have already declared these respective Returns of Income. Hence this issue needs to be and judicially in all fairness.
Only one issue which we would like to highlight to these FDs is as under:
"Few weavers together have kept 72 FDs amounting to Rs. 29,58,000.00. As far are concerned they have neither surrendered these FDs to the authorities (DDIT) nor were they encashed by the department. We have not included those FDs in our admission. In spite of this while arriving at the total FDs value, the Assessing Officer has included the value of thse FDs in arriving the final figure of FDs as `. 2,79,57,165.00. Actually, this figure should have been less by `. 29,58,000.00. Hence it is requested that this amount may be reduced to Rs. 2,49,99,165.00 (Rs. 2,79,57,165.00
- Rs. 29,58,000.00).
In this regard, it is further submitted that in the Returns of Income filed by the weavers the value of these FDs have :- 16 -: M/s Handloom Heritage Ltd been declared and interest income earned Os is also offered to tax by· the respective weavers. Copies of e of few weavers have already been submitted with your kind authority.
Specific submission for Appeal No. /2009-10 In the revised assessment uls. 263, the AO has added an amount of ` 2,79,57,165.00 pertaining to benami accounts and Rs. 37,53,305.00 as interest on FDs.
i. With regard to the first addition towards benami accounts and the submissions made earlier may please be considered for this addition as it is of identical nature.
Interest income. With regard to the addition if accrued interest of `. 37,53,305.00, it is humbly submitted that the interest income of `. 31,68,163.00 as on the date of search was already included in the total fixed deposit amount of `. 2,79,57,165.00 and assessed to tax in the original assessment order dated 27.12.2006. But the learned Assessing Officer has once again added the accrued interest as `. 37,53,305.00 in his revised assessment order u/s 263 dated 23.12.2009. In the following table we make a humble attempt to clarify the contentions:
:- 17 -: M/s Handloom Heritage Ltd
FDs in ING TOTAL AMOUNT
FDs in TMB INTEREST
A.Ys Bank OF
(TTK Road) ON FDs T.Nagar FDs
99.00 0.00 0.00 0.00 0.00
00-01 5,704,672.00 0.00 0.00 5,704,672.00
01.02 20,000.00 0.00 0.00 20,000.00
02.03 5,551,330.00 0.00 0.00 5,551,330.00
03-04 0.00 0.00 0.00 0.00
04-05 10,555,000.00 0.00 2,958,000.00 13,513,000.00
05.06 0.00 3,168,163.00I 0.00 3,168,163.00
26,092,002.00 3,168,163.00 2,958,000.00 27,957,165.00
The amount of `. 27,957,165,00 showing in the assessment order dated 27.12.2006 included interest amount of `. 31,68,163.00 shown in Assessment Year 2005-06. In the new revision order dated 23.12.2009, the Assessing Officer has added `. 37,53,305.00 towards interest which is incorrect and wrong."
14. After considering the rival submissions, the Commissioner of Income-tax [Appeals] found that these FDRs were made out of cash withdrawals from weavers bank account and the source of deposit in the weavers bank account is the assessee's current bank account. Therefore, he held that the source of these FDRs is apparently unaccounted income of the appellant company through inflation of expenses. After considering the assessment order for Assessment Year 2005-06 and revised order u/s 263 of the Act where the Assessing Officer has mentioned that accrued interest on these FDRs worked out to ` 31,68,156/-, being :- 18 -: M/s Handloom Heritage Ltd interest amount included for Assessment Year 2004-05 has found total unaccounted investment in FDR in respect of the assessee company as under:
F.Y. A.Y. Total amount of FDs with
Tamilnadu Mercantile Bank
and ING Vysya considering for
telescoping
1998-99 1999-00 Nil
1999-2000 2000-01 5,704,672
2000-2001 2001-02 20,000
2001-2002 2002-03 5,551,330
2002-2003 2003-04 13,513,000
2003-2004 2004-05 nil
2004-2005 2005-06 nil
and the interest on these FDRs as determined in the revised assessment u/s 263 will also be modified. The amount involved for Rs.3168163/- for Assessment Year 2005-06 for computing interest will be there. This interest income will be additional undisclosed income of the appellant, year wise which is as under:
Asstt. Year Interest
2000-02 Rs. 764426
2002-03 Rs. 2680
2003-04 Rs. 743878
2004-05 Rs. 1817788
2005-06 Rs 4,24,533 '
Total Rs. 37,53,255
15. But holding that investment in FDR is out of undisclosed income from the transactions in the bank account of ht weaves, :- 19 -: M/s Handloom Heritage Ltd no separate addition was made qua these unaccounted FDrs as these unaccounted investment was the application of unaccounted income. But interest on these FDrs year-wise was added separately.
16. Before we come to our finding on this issue, let us discuss the connecting issue of deposit in the bank accounts held in the name of various weavers of the assessee company in these banks which goes to an addition of ` 18,29,27,560/- for Assessment Years 1998-99 to 2004-05. Assessing Officer has discussed this issue at pages 75 to 131 of the assessment order for Assessment Year 2005-06. Similar finding has been given on other Assessment Years also. As discussed above, source of FDRs was found to be withdrawals from cash found transferred from the account maintained in the names of weavers in Tamilnad Mercantile Bank, TTK Road branch and ING Vysya Bank, T.Nagar, Chennai. On an analysis of the bank account revealed that the source of the deposits in the accounts of the weavers was transfer of funds from the account of the assessee company from A/c No. 500057. Funds were transferred from this account of 34 SB/current accounts held in the name of weavers in Tamilnad Mercantile :- 20 -: M/s Handloom Heritage Ltd Bank, T.Nagar branch and 5 current accounts in the name of master weavers. Details of account holders are given in Pages 75 and 76 of the assessment order for Assessment Year 2005-06. The Assessing Officer examined the original discharged cheque leaves of the assessee company, original pay in slops in respect of deposits in weavers account and original discharged cheque leaves presented by the weavers for cash withdrawals. It was noticed that these bank accounts were introduced by Shri Dharmichand or Shri Sunil Surendra Kumar, Ex-Manager of the company. The receipt of cheque book was acknowledged by the employees of the assessee company. It was also noticed that the cheques were deposits made by Shri Pandian, driver of the appellant company in weavers account. Likewise, cash withdrawals were also made by him. Statements of weavers in whose names bank accounts were found, bank employees, employees of the company, director were examined during post search enquiry. After ascertaining these facts, the statements have been summarised at pages 26 to 30.
17. Similar accounts were opened in the names of master weavers in Tamilnad Mercantile Bank, T.Nagar. These accounts :- 21 -: M/s Handloom Heritage Ltd were also introduced by his wife Smt. Prakash Devi. Against treating the amount of deposits in weavers account in the hands of the company, the main points in the reply dated 12.12.2006 in the name of the assessee company are as under:
"We understand that the statements of Mr. Batturu Yeddalaiah, aged 50 years, was recorded in his residence at Vinjamur Village, NeIlore dist, Andhra Pradesh on 14th October, 2004, when he was not well. (Assuming extra territorial jurisdiction may be illegal?). This fact was conveyed to the department by Mrs. Ramasubbamma w/o. Mr. B. Yeddalaiah vide a Letter dated 16th Oct 2004 because Mr. B. Yeddataiah was hospitalized.
We further understand that on 5th Nov 2004 when he was alighting from the train at Chennai Central Railway station, he was taken away by Income Tax authorities, detailed illegally in a room and once again a statement was recorded from him. This was totally illegal and exercise of coercion of the highest order. In this regard a police compliant was also filed by his colleagues who traveled with him because they did not know as to why and where this gentleman was :- 22 -: M/s Handloom Heritage Ltd detailed.
Even in his statements taken again on 5th Nov 2004, during the alleged illegal detention, in answer to Q no. 8, revealed that he was not well on 14th Oct 2004 and he had not even taken any food.
It is learnt that Mr. B. Yeddalaiah has filed a writ petition in Madras High Court pleading that his statement was taken under duress and the Income Tax authorities may be directed to ignore his statement.
We do not know what pressure tactics the Income Tax Officers have exercised while recording other statements. Therefore we have to cross examine all these weavers. Hence kindly give us an opportunity for this purpose.
Statement from unknown persons One statement of Mr. Palla Chennaiah has been recorded. He is no way connected with us and we do know him. This one case will show that there is a deliberate attempt to only comer us in the fact of an inability to establish any wrong doing on our part.
3. Favourable and semi-favourable statements remain unsigned:
Statements of Mr. Kandala Ramanaiah & Mr. Chavadam Hari recorded have not been signed by the deposers.
:- 23 -: M/s Handloom Heritage Ltd Most probably they were asked to sign on the dotted lines which they have refused to sign that department must explain this position.
In the statements of Mr. Kandala Ramanaiah & Mr. Chavadam Hari recorded on 2nd Dec 2004, many of the answers are favourable to us partly or fully. Most probably, therefore no signature of theirs was obtained on the statements, is this by design or by accident is not known.
4. Various statements recorded from Directors:
As stated earlier our staff may have assisted the weavers in their banking operations by directly going to the bank and completing the transaction. Our staff went to the bank for company's banking operations in the same banks; at the same time they may have helped the weavers to do their banking operations. This by no stretch of imagination means that they are our benami accounts. Many senior officers of Government Departments open their bank account without going to the bank. Thereafter their peons & drivers only attend to the banking operations for years. If the logic of the DDIT is correct, then such accounts will be treated as benami accounts of peons I drivers and deposits made therein will be treated as income of peons I drivers.
:- 24 -: M/s Handloom Heritage Ltd While recording the sworn statements of our director Shri L. Dharmichand the investigating officer showed the statements of certain persons, most of them in Telugu & in Tamil language which is not known to him and asked for our director to go through the same then and there itself and offer his comments. Our Directors specifically objected to the same on the ground that he cannot comment. On statements of various persons unless a copy is furnished with reasonable time to reply on the same particularly in the background of the fact that he did not know to read or write Tamil or Telugu language. Not withstanding his request. the DDIT continued the same procedure and recorded the replies wherein our Director pleaded continuously for furnishing the copies of the statements made by the 3rd parties and for adequate time and reasonable opportunity to be given to read the same fully and comment on the same but no opportunity was given to him at all. As such it is unfair to say that no proper explanation has been furnished with regard to statement shown to Mr.L. Dharmichand during the recording of statements in Dec 2004.
:- 25 -: M/s Handloom Heritage Ltd One Mr. G. Ravichandran was appointed one & half months before the date of search. His job was to record calculation check done by other staffs. He has stated in his statement recorded on 19th Nov 2004 that he has entered all the purchases & payments till the date of search. This statement is totally wrong. As a matter of fact no data was entered in computer from 1 st April 2004 till the date of search with regard to the cheque payments made from the TMB bank account. Even in computer feeding, he has left several bills un-entered in most of the purchase bill files. Most of the answers are framed and not relevant to the fact.
This can be verified. from the CD which has been seized at the time of search. This contemporaneous evidence suggests that the statement of G. Ravichandran may be factually incorrect and may lead to wrong inference.
Therefore no adverse inference may be taken relying on these statements which appears to be taken under duress and threat. We request your kind authority to I give us an opportunity to cross examine the deposer as he I has left our services after one year from the date of search.
:- 26 -: M/s Handloom Heritage Ltd It appears that the statement of Mr. N. Soloman Jebakumar, Manager, Tamilnad Mercantile Bank, TTK Road branch taken on 11th Aug 2004 was recorded under duress and threat that it will cost his job if he does not give the statement the way the DDIT wanted. There are many factual errors and allegations. Therefore we request your kind authority to provide us the opportunity to cross examine him in interest of finding out the truth".
18. But the Assessing Officer was not agreeable. After discussing various objections raised by the assessee including one raised regarding statement behind the back of the assessee and not allowing cross examination, the Assessing Officer has finally held that the entire deposits in weavers account is inflation for various Assessment Years as per finding given in para 22 of the assessment order for Assessment Year 2005-06 is reproduced at page 19 to 21 of the order.
19. The Assessing Officer has mentioned the modus operandi of the fund transfer:
"Modus Operandi of Fund Transfer:
When the Bank Accounts pertaining to the Master Weavers :- 27 -: M/s Handloom Heritage Ltd were analysed during the course of post search investigation, it came to light that the cheques 'transferred to the parties accounts were debited in the assessee's Books towards purchase of materials from them. As discussed earlier, it has been stated by many of the weavers that their normal practice is to deposit the cheques received from the assessee with their accounts maintained with Tamil Nadu Mercantile Bank at Nellore Branch. When that is the case, it would appear that all amounts deposited in their Bank Accounts at Chennai in Tamil Nadu Mercantile Bank were nothing but cheques issued as if purchases had taken place. In other words, it is clear that the assessee by inflating the purchases has issued several Cheques in the names of weavers which were deposited in their accounts by the employees of the assessee- company and subsequently, these were all withdrawn. Therefore, in order to ascertain the total amount of such inflated amounts towards purchases, the Weavers' accounts with Tamil Nadu Mercantile :~ Bank, both at Nellore and also at Chennai were analyzed by the Investigation J~ Wing. This analysis shows that the total amounts actually paid by the Company far exceeds the actual purchases made and thereby clearly proving the point that the assessee has resorted to inflation of purchases and has issued cheques, which were deposited in various accounts and subsequently, the withdrawals were made from these accounts."
:- 28 -: M/s Handloom Heritage Ltd
20. Before the Commissioner of Income-tax [Appeals], written submissions were filed. The gist of the written submissions coupled with oral submissions of the authorised representative of the company is as under:
1. Sh.L. Dharmichand during the statement on 30.11.04 has stated that weavers accounts were opened for the convenience of weavers.
2. Mr.C. Pandian, helped the weavers in depositing the cheque and withdrawing cash does not mean the account belongs to company
3. The payment for purchases was made by cross cheque. Each cheque tallies with the invoice. These cheques have either gone to TMB account at Chennai or weavers' home town. AO has accepted total purchase as genuine.
4. Total purchase from weavers is Rs.45 crores for last 7 years. Out of which approximately Rs.18 crores cheques are deposited In TMB, Chennai and balance with other bank.
5. At the time of search within the office premises nor at the residence of director any paper like cheque book, pay-in-slips or pass book was found or seized :- 29 -: M/s Handloom Heritage Ltd
6. The appellant company has issued thousand of cheques to these weavers in these 34 accounts against supply of goods. Therefore, only on this basis of few cheques having Initial of Pandian It would be Improper to conclude that all these bank accounts are benami of appellant company.
7. During statement Sh. M. Krishnaiah vide answer to question No.8 and 11 has accepted that the cheques were either paid to yarn seller Or discounted at Mint St., Chennai. Further, he has stated that In answer to Qn.No.25 that he used cheque books earlier almost 3 years back.
8. Statement of Shri.B.L Yeddalaiah, weaver was challenged In H.C. on' the basis that the statement was recorded In duress.
9. Sh. P. Bhaskar weaver has accepted the turnover and stated that he discounts the cheque with Chennai financiers :- 30 -: M/s Handloom Heritage Ltd
10. None of, the weavers have accepted that they have received payment in cash. The cheque deposited and encashed in alleged benaml accounts at TMB, TTK Road and TMB, T.Nagar branch are the same cheques which weavers have discounted with- private financiers.
11. Many of the weavers have given details of-
their sales turnover with appellant company which tallies entrywise.
12. None of the weavers have stated that cash was paid back to appellant company
13. It is learnt that these weavers have filed return of Income disclosing turnover with appellant company but also FDRs in their names
14. Bank Manager and employee of bank might not be knowing full transaction. They only stated that certain transaction In weavers accounts were carried out by Sh.C.Pandian, employee of the company 15 Ld. AR relied Chennai Tribunal in the case of T.Kailash Chand Chordia IT(SS) A.No.156/Mds/2005 where Hon'ble Tribunal has held that statement cannot itself be the sole basis for addition.
16. Learned AR has relied upon the decision of Green View Restaurant 263 ITR 169 :- 31 -: M/s Handloom Heritage Ltd
17. Learned AR has emphasized that all transactions in alleged benami account are financial transactions of discounting cheque. Therefore, at the most peak credit from all such bank account can be added which is zero in this case
21. Finally, the Commissioner of Income-tax [Appeals] found that the bank accounts were operated only for inflating expenses by the assessee company. But he has estimated inflation of expenses in the range of 20 to 25% of the total turnover in weavers' bank account. He has made a table for year wise generation of unaccounted income through inflation of expenses as under:
Assessment Year Year wise bank Rate of Income Deposit in TMB in Profit generated TTK Road Margin through bank T. Nagar Branch deposit 1999-2000 71,03,500 25% 17,75,875 2000-01 1,57,04,709 25% 39,26,177 2001-02 99,01,918 25% 4,75,480 2002-03 2,87,72,923 20% 57,54,585 2003-04 2,31,80.960 20% 46,36,192 2004-05 9,41,14,8015 20% 1,88,22,963 2005-06 41,48,735 25% 10,37,184 3,84,28.452
22. Under these circumstances, he has confirmed the above addition for various Assessment Years and balance addition has been deleted. Therefore, both the parties are aggrieved and have come in appeals before us.
:- 32 -: M/s Handloom Heritage Ltd UNACCOUNTED FDRS AND DEPOSITS IN CURRENT / SAVINGS ACCOUNT:
23. The issue is agitated by both the Appellant as well as by the Department. The Appellant has taken up the issue in Appeal Nos. 1792/Chny/2010 to 1803/Mds/2010 with a prayer that these FDs do not belong to the appellant and the owners of these are various weavers who supply handloom cloth. Hence this addition is unjust and may please be deleted. And the department has taken up the issues in Appeal Nos. 1761/Chny/2010 to 1767/Chny/2010 with a plea that the allowance made by CIT (Appeals) is not justified and the order of the A.O. to be restored.
24. The Appellant gets manufactured handloom dress materials from more than 500 weavers / suppliers who are mainly located in Tamilnadu & Andhra Pradesh. Out of them only 48 weavers from Andhra Pradesh had their bank accounts in TMB (TTK Road branch) and 11 weavers in TMB (T.Nagar branch) totalling 32 such accounts out of which 5 accounts were closed in 2003. Most of them have SB accounts and few have Current accounts.
:- 33 -: M/s Handloom Heritage Ltd
25. In the Assessment order, for the reasons mentioned therein, it was held that the deposits in these accounts amounting to Rs. 18,79,27,560/- actually belonged to the appellant and consequently was treated as its undisclosed income. All the withdrawals in these accounts were ignored. After analysing the facts the CIT (Appeals) held that the accounts of the weavers might have been utilised by the appellant. However keeping in view the following facts, CIT (Appeals) concluded that all the deposits in current accounts cannot be treated as undisclosed income:-
a. The payments are made by crossed cheques. Most of which were discounted by the weavers themselves.
b. Many weavers have admitted that these cheques were deposited by themselves.
c. Many deposits are supported by the invoices raised by the weavers and hence they are accounted.
26. Hence there was only a possibility of inflating the purchases etc through these accounts. Consequently he sustained the disallowance to the extent of 20% - 25% of the year wise deposited amount representing likely inflation of purchases by :- 34 -: M/s Handloom Heritage Ltd the appellant. The basis of as to how these percentages have been arrived at is not forthcoming.
27. As regards the FDs with TMB, TTK road branch and ING Vysya Bank, T.Nagar branch in the names of the weavers, he held that the FDs belong to the appellant which were opened in the benami names of the weavers and therefore, the same was rightly treated as undisclosed income of the appellant company. However this amount was telescoped with the estimated addition towards inflated purchases amounting to Rs. 3,84,28,456.00 and no separate addition was made on this account. Only interest thereon was confirmed separately.
28. During the course of the hearing, the AR of the appellant vehemently argued that the deposits of cheques made in the account of the outstation weavers do not represent the deposits of the appellant. The weavers deposited post-dated crossed cheques issued by the appellant in the accounts at TMB, T.Nagar and TTK Road branches, were received towards the sales made by them to the appellant. To avoid collection delays and charges, the weavers either discounted the cheques with private financiers or deposited in the bank account. Therefore, the :- 35 -: M/s Handloom Heritage Ltd weavers preferred to open the bank account at Chennai. Merely because the Directors or the employees of the appellant had assisted the weavers in their banking transactions, it would not tantamount to the fact that they are benami accounts of the appellant and have been used to inflate the purchases. The A.O. had not disputed the purchase figures anytime. A copy of the detailed written submissions that was filed before the CIT (Appeals), wherein he had highlighted to the statements given by some of the weavers wherein they had confirmed having their bank accounts with TMB, TTK road and T. Nagar branch and the turnover with the appellant and which tally entry-wise with the accounts. Therefore, the deposits of cheques made in the accounts of the weavers are only towards the genuine purchases made by the appellant duly supported by invoices and vouchers. The entire set of vouchers tallied entry-wise.
29. Merely helping in operating the account or the driver occasionally depositing the cheques or withdrawing the amounts for the weavers does not conclusively prove that the benami accounts are of the company. Further the payments for purchases were made by crossed cheques. Each cheque tallies :- 36 -: M/s Handloom Heritage Ltd with the invoice. These cheques have either gone to the TMB account at Chennai or the weaver's bank at his hometown. The A.O. also had not disputed the purchases made and treated the same as genuine. Again at the time of search no documents like the cheque books, pay-in slips or pass books of weavers were found or seized. The appellant issued thousands of cheques to these weavers in these 34 accounts against the supply of goods. Therefore, only on the basis of few cheques having initial of a driver, it would be improper to conclude that all these bank accounts are benami of the appellant. Many of the weavers have accepted the bank accounts and the turnover figures in their statements and stated that they discounted the cheques with the financiers at Chennai.
30. None of the weavers had accepted that they had received or paid the payments in cash. The cheque deposited and encashed in the alleged benami accounts at TMB, TTK Road and T. Nagar Branch, are the same cheques which the weavers had discounted with private financiers. Many of the weavers have given details of their sales turnover with the appellant which tallied entry-wise. None of the weavers had stated that the cash :- 37 -: M/s Handloom Heritage Ltd was paid back to the appellant. The weavers have also filed the returns of their income disclosing turnover with the appellant and also disclosed the FDs as their assets. No opportunity was given to the appellant to cross-examine the witnesses who had testified against the appellant. Bank manager and the employee of the bank might not be knowing the full transaction. They only stated that certain transaction in weavers accounts were carried out by Mr.C. Pandian, employee of the company and they did not say that the amount actually belonged to the appellant.
31. It was further submitted that the estimated percentage disallowance of alleged inflation of purchases etc is arbitrary and has no basis. Further not even a single purchase has been proved to be bogus. There is no material whatsoever to hold that purchases or expenses have been inflated. Hence this allowance is based on unfounded presumption and surmises without any material or evidence. Hence it may please be deleted.
32. As regards the issue of Fixed Deposits with TMB and ING Vysya Bank in the names of more than 250 weavers, he submitted that before the purchases are made from the weavers, appellant at times supplies the raw materials on advance and also the :- 38 -: M/s Handloom Heritage Ltd designs which are valuable, to the weavers so that they can use the same while manufacturing the handlooms for the orders made by the appellant and the weavers being small time businessman may not return the produced handloom cloth or may not take proper care of the designs and raw materials, which could result in huge business losses for the appellant. The appellant had to receive a security from these weavers to ensure that there is no loss on account of the negligence of the weavers. Hence these FDs formed a security cover and nothing else. Consequently, the weavers deposited the monies with the Bank as FDs and handed over the deposit receipts to the appellant as a security deposit. Therefore, the appellant instead of keeping the cash as security kept the FDRs as security and the interest thereon will be the income of the weavers. It was also submitted that the FDRs were not encashed at all by the appellant and this proves that the no amount was received back by the appellant. The FDRs with the TMB and ING Vysya Bank and the consequent interest thereon do not in any way represent the fixed deposits of the company. In the post search proceedings the appellant handed over the FD receipts standing in the names of the weavers, which were deposited with the appellant as security to :- 39 -: M/s Handloom Heritage Ltd the Investigating Officer at his request. Therefore, it cannot be said that the FDRs belong to the appellant. Further, the weavers had disclosed these Fixed Deposits in their returns of income as their assets, which was also accepted by the Department at Tirupati on protective basis. Further, if they really belonged to the appellant, it would have encashed and would not have given as a collateral with the consent of the weavers to borrow money on interest from bank. In so far as the Fixed Deposits are concerned, the Banking Regulations Act will apply which would clearly establish a contract between the Fixed Deposit Holder and the banker. Unless that contract is proven to be a sham and that those monies came from the appellant, the addition on account of the alleged unaccounted fixed deposits made by the A.O. is not sustainable.
33. On the other hand, the DR referred to the modus operandi of the fund transfer, in Page No.106 of the Assessment Order for the AY 2005-06. He also referred to various statements of the weavers, who stated that they did not know about the existence of the bank accounts and said about the bogus bills etc. He also relied on the various findings of the A.O. Consequently it was :- 40 -: M/s Handloom Heritage Ltd pleaded that the CIT (Appeals) erred in allowing major portion of the additions in the form of the deposits in the current account and estimated percentage for inflation of purchases. Hence this order of the A.O. may be restored.
34. We have heard the submissions of the AR and the Department. We have perused the orders of the A.O. and that of the CIT (Appeals) and other materials on record. It is an undisputed fact that there are number of weavers who supply handlooms to the appellant. The deposits of crossed cheques were made in the accounts of few of the weavers at the TMB, T. Nagar and TTK Road branches towards the purchases made by the appellant from the weavers. If the crossed cheques are deposited in banks outside Chennai, it takes around 5 - 10 days for the cheques to be cleared in those days. Therefore, there is merit in the contention of the AR that the weavers had no other choice rather than to open the bank account at Chennai so that, the post-dated cheques will be deposited in their account at TMB, T. Nagar and TTK Road branches. The weavers, at times discount the cheques with private financiers as said in the statement of all the weavers. Merely because the directors and the employees of :- 41 -: M/s Handloom Heritage Ltd the appellant had assisted the weavers in depositing the cheques in their accounts as an additional service, it would not tantamount to the fact that the appellant had inflated the purchases by preparing the bogus bills and vouchers. The A.O. has not disputed any of the purchase figures. In the statements given by some of the weavers, they have also confirmed the turnover with the appellant. Therefore the only finding can be that the deposits made in the accounts of the weavers are only towards the genuine purchases made by the appellant duly supported by invoices and vouchers. It is also not disputed that the entire set of vouchers tallied entry-wise. No evidence to the contrary has been placed by the Department before us. Therefore, there is no case for the CIT (Appeals) to hold that there is an inflated purchase. This inference is without any basis and not supported by any evidence or material. There are around 500 weavers operating with the appellant out of which only about 50 or so are from the Nellore District (AP) whose bank accounts are being operated in Chennai merely for the reason of facilitating the payments. As demonstrated by the appellant, the total purchases made by the appellant from these weavers during the 7 years period is close to 45 crores (approx) out of which the :- 42 -: M/s Handloom Heritage Ltd weavers have deposited cheques of Rs. 18 crores (approx) in TMB and the balance in other Bank accounts.
35. To many of the points raised by the AR, there are no satisfactory answers from the Department. Further the logic that these deposits in the bank accounts represented inflation of purchases etc., is not borne out of facts and is only a conjecture. Not a single instance of inflation of purchases was found or brought out by the A.O. or the CIT (Appeals).
36. Further, taking one side of the account and ignoring the withdrawals and treating as inflated purchases without considering the accounted turnover, invoices, vouchers, tallying of turnover figures of both the parties, their return of income, discounting of cheques with financiers, etc is arbitrary and unjust. Therefore the CIT (Appeals) was right in rejecting such an addition made by the A.O. However the methodology of CIT (Appeals) in estimating the percentages of these deposits as alleged inflation of purchases is not only illogical but also not based on any facts.
:- 43 -: M/s Handloom Heritage Ltd
37. Therefore, our finding based on the facts before us is that the cheques deposited in the T. Nagar and the TTK Road branches of the TMB represent the payments made for genuine purchases of the appellant. Consequently we hold that there cannot be a case for disallowance on the basis of estimation. Therefore, we hold that sustaining of disallowances to the extent of 20% - 25% of the deposits made by the CIT (Appeals) is unwarranted and hence deleted.
38. With regards to the addition on account of FDRs as undisclosed income, the DR relied on the findings of the CIT (Appeals) and argued that they have been rightly treated as undisclosed income of the appellant. On the other hand the AR has argued that this is an erroneous inference because of the fact that these FDRs in the names of more than 250 weavers are in the nature of security deposits to protect against the business loss if the weavers who do not return the handloom cloth after weaving or loses the designs given by the appellant. It was a business necessity to secure the appellant from losses. This is nothing but an interest bearing security deposit and to ensure that the interest is earned and accrued. This amount is kept as a :- 44 -: M/s Handloom Heritage Ltd FD with the interest going to the owner of the FD. This is a normal business practice which is prevalent everywhere. Therefore nothing much turns on it. Further, once FDRs are taken as a security, the FD receipts have to be with the secured. In this case also the FDs were with the appellant. No instance has been produced by the Department to indicate that these FDRs were encashed by the appellant. Further, it is seen that whatever interest which accrued was getting accumulated with the principal and even that was not withdrawn. These FDs have also been declared by the weavers as their assets in their Income Tax returns and was also accepted by the Income Tax Department at Tirupati though on protective basis, which in many cases were filed subsequent to the date of search. Small time weavers in villages, not filing their returns on time cannot be perceived adversely against the appellant. The fact that the FDs are their assets has been admitted by the weavers. In so far as the Fixed Deposits as concerned, the Banking Regulations Act will apply which would clearly establish a contract between the Fixed Deposit holder and the banker. Unless this contract is proven to be a sham and that those monies came from the appellant, the addition on account of the alleged unaccounted Fixed deposits :- 45 -: M/s Handloom Heritage Ltd made by the A.O. is not sustainable. Again it is not categorically proved that the money came from the appellant only and also not proven that it is the appellant only which encashed the FDs on maturity also. Therefore, we are of the view that these Fixed Deposits do not belong to the appellant. Hence, this addition is deleted. Consequently the addition on account of interest also stands deleted.
39. Further, if one looks at the evidences and materials based on which the Department had concluded that the Fixed deposits belong to the appellant and the purchases shown by the appellant are inflated, it is only based on the statements given by few weavers and the findings that the weavers had signed blank cheques and the driver of the appellant coming to the bank and operating the accounts of the weavers. Apart from this, the Department had not been able to categorically establish whether the amount claimed as purchases by the appellant has been received back by the appellant on encashment of fixed deposits. When such is the case, by no stretch of imagination can one come to a conclusion that the fixed deposits and the deposits in the TMB belong to the appellant merely because the driver of the :- 46 -: M/s Handloom Heritage Ltd appellant comes to deposit the cheques in the account of the weavers and the pay-in slips are signed by the driver or the director of the appellant. No evidence was led in at any stage apart from the averments made in the statements that the deposits made in the accounts of the weavers are bogus purchases and the Fixed Deposits belong to the appellant. Further, as set by many judicial decisions, it is a well laid principle that the addition cannot be merely on the basis of statements recorded. For this, reliance is placed in the decision of this Bench of the Tribunal in the case of T.Kailash Chand Chordia in IT(SS)A No.156Mds/2005, decision of the Hon'ble Gauhati High Court in the case of Green View Restaurant, reported in 263 ITR 169. Therefore, since the Revenue is not able to establish a direct link between the deposits and the payments made and whether the same has been received back by the appellant with evidences and for the other reasons discussed above, additions on account of deposits made in the accounts of the weavers cannot be sustained. Hence, we direct the Assessing Officer to delete the additions made on account of deposits in the various current / savings accounts of the weavers with TMB Bank, TTK road and T. Nagar branch and the Fixed Deposits made :- 47 -: M/s Handloom Heritage Ltd by the weavers in TMB, TTK road branch and ING Vysya Bank, T. Nagar branch and also consequential interest thereon. UNACCOUNTED STOCK FOUND DURING THE COURSE OF THE SEARCH:
40. On the basis of the findings in the search on 14/07/2004, in the assessment order u/s 143(3) dated 27/12/2006 for the AY 2005-06 the entire value of the stocks amounting to Rs. 3,71,44,442/- found, was added to the income of the appellant as unaccounted stock, ignoring the reconciliation figures given by the appellant. The CIT (Appeals) after considering the explanations and the reconciliation, gave a partial relief to the extent of Rs. 2,42,21,504/- and estimated the value of unaccounted stock at Rs. 1,29,22,938/- as under:
S.No Particulars Amount
1 On account of unreconciled stock 6,04,262
2 Unreconciled stock on account of GP margin 6,03,884
Unreconciled stock on account of defective 17,76,528
3
stock
Unreconciled stock on account of unentered 99,37,724
4
purchase
Total unreconciled stock 1,29,22,938
:- 48 -: M/s Handloom Heritage Ltd
41. Aggrieved by this order of the CIT (appeals), both the appellant as well as the Department are in appeal before us. The DR reiterated the reasons given by the A.O. by arriving at the closing stock figures and submitted that the items of stock which were subject matter of reconciliation were already considered in the report of the Investigating Officer and therefore no further deduction was warranted.
42. However the AR contended that the submissions of ld. DR were not correct. He furnished stock working as per which physical stock amounted to Rs. 2,94,19,666.00 as against the working of the department as per which the stock figure was Rs. 3,71,44,442/-. This difference arose because of the difference in sale price, difference in valuation of defective and damaged stocks, higher GP percentage, double inventorisation of Dupattas and non consideration of differences of stock lying with job workers while valuing the stock. It was further submitted that the A.O. relied on few convenient statements of weavers ignoring majority of the statements which were in favour of the appellant. He also highlighted the issue raised by the appellant at the time of the assessment and appellate proceedings. The :- 49 -: M/s Handloom Heritage Ltd copies of submissions placed before them have also been furnished to us. The grievance of the appellant is that it had reconciled all the figures and there was no unreconciled stock which the appellant failed to reconcile during the course of assessment as well as the appellate proceedings. Therefore, even the addition of Rs.1,29,22,938 cannot be sustained. Whereas, it is the grievance of the Department that even the partial relief cannot be granted to the appellant since, the entire stock found during the course of search represented unaccounted stock. However, the Department had not furnished the report, nor was anything shown that the items that were subject matter of reconciliation as submitted by the appellant were considered by the Investigation Department while valuing the stock and the final figure arrived at by the A.O. is after considering the items that were a subject matter of reconciliation.
43. We have heard both the sides and have perused the order of assessment and that of the CIT (Appeals). The main points of differences in the stock figure are discussed as under:-
a. Double inventorisation of duppatas to the tune of Rs.11,38,312/-. This issue was elaborately discussed and :- 50 -: M/s Handloom Heritage Ltd the relief was given by the CIT (Appeals), as discussed in Para No. 40 in Page No.90 of the order. Except for the averment that the same was considered for valuation in the assessment order, no other explanation was offered. The stand of the DR cannot be considered without any evidence being let in, on the same. We are in complete agreement with the discussion and finding of the CIT (Appeals) on this matter and no interference is called for. Therefore, we uphold the stand of the CIT (Appeals) in this regard.
b. There is a difference in the value of the stock lying with the outside parties for job work to the tune of Rs.5,69,862/-. These represent the value of the stock which were received back by the appellant whose delivery challans and packing slips were seized by the Department and no cancellation entries were made in the approval book indicating the receipt of the goods back. This issue was discussed and the relief was given by the CIT (Appeals), as discussed in Para No. 40 in Page No.91 of the order. Except stating that the same was considered for valuation in the assessment order, no other explanation was offered. The stand of the DR cannot be considered without any evidence on the same. Hence, we are in complete agreement with the reasoning given in the Appellate order on the addition made by A.O. in respect of stock lying with outside parties for the job work and deleting the addition.
:- 51 -: M/s Handloom Heritage Ltd Therefore, we uphold the order of the CIT (Appeals) in this regard.
c. After considering the above figures while computing the difference in sale price, the difference of Rs.6,04,262/- was treated as undisclosed by the CIT (Appeals). As per the AR, the statement of valuation of stock as per the sale price by the Department was not furnished at all, whereas the AR had furnished the details for his working. We are inclined to set aside this aspect of the valuation of stock alone, since the appellant does not know the basis of the values adopted by the department. We direct the A.O. to furnish the copy of the valuation adopted while computing the closing stock at sale price and give reasonable opportunity to the appellant to reconcile if there is any other discrepancy on excess valuation of Rs. 6,04,262/- and subject to the satisfaction of the A.O., the relief can be granted by the A.O. while giving effect to this order. We make it clear that it is for this limited purpose and on this limited issue that this direction is given.
d. In the valuation of dead, defective, damaged and rejected goods the appellant has claimed 50% discount in the valuation. This worked out to Rs. 35,53,055/-. This was not considered by the A.O. in the assessment order. The CIT (Appeals) directed to value these defective stocks at 75% of the cost. Aggrieved by this :- 52 -: M/s Handloom Heritage Ltd both the appellant and the department are in appeal. After hearing rival submissions we are inclined to agree with the claim of the appellant. The appellant deals in handloom textiles, which is manufactured on customer specifications. If the goods are not woven as per specifications there is hardly market for it and has to be sold at heavy discounts. Further the merchandise of the appellant is made from cotton yarn on handlooms and is subject to heavy weaving defects and shop soiling. It gets de-coloured fast. Due to starch in cotton fabrics, it gets eaten by rodents and pests and if kept for long time, the starch chemicals destroy the fabric itself. It is also seen that such goods were found in premises during the search operations and also such goods are sold at heavy discounts by the appellant in lots on as is where is basis. Keeping in view these peculiar facts since defective goods do not have a high realisable value. Therefore, following the concept of prudence, we feel that 50% discount claimed by the appellant is reasonable and direct the A.O. to value the same at 50% accordingly.
e. The gross profit rate was adopted by the A.O. at 5% based on average gross profit rate shown in the earlier years. It is the contention of the appellant that while computing the value of the stock it is only the mark up price should be taken into consideration in the reverse working and not the price at which the goods are sold to :- 53 -: M/s Handloom Heritage Ltd the customers and they are two different concepts. The gross profit shown in the trading account is after taking into account the sales returns and the discount given to the customers for prompt payment. While calculating the cost price of the closing stock, the actual mark up on the cost price should have been deducted to arrive at the cost price of the stock on hand. But the A.O. had deducted the net GP of 5% while arriving at the stock in hand which is wrong. In the table reproduced by the appellant in the submissions filed, for the AY 2003-04, the appellant claims that the prompt payment discount allowed comes to 2.49% and sales returns of defective goods comes to around 3.5%. and for the AY 2004-05, the prompt payment comes to 2.43% and the sales returns comes to around 3%. After considering both, the mark up comes to around 12%. The estimated GP reduced by the A.O. from the sale price has been computed at Rs. 17,44,599/- which is at 5%, whereas, the appellant has deducted the GP at Rs. 36,03,884/- which is at 12%. The CIT (Appeals) allowed the GP at Rs.30 lakhs, without adopting any percentage. However, this cannot be held so, since the GP should be as a percentage of sales. Therefore, we are inclined to hold that a GP of 12% on an average should be taken into consideration since the AR in the submissions had clearly proved that the average mark up is 12% and not 5%. Hence, we direct the A.O. to adopt the GP rate at 12% while valuing the stock. Accordingly, the addition of :- 54 -: M/s Handloom Heritage Ltd Rs.6,03,884/- on account of unreconciled stock for GP is hereby deleted.
f. On the issue of the opening stock as on 01/04/2004, the A.O. had adopted a figure of Rs. 1,63,11,620/-, whereas the appellant's contention is that the figure pertains to the opening stock as on 01/04/2003 and not as on 01/04/2004 and that the value of the stock as on 01/04/2004 is Rs. 2,22,40,590/-. After perusing the materials on record, the CIT (Appeals) had confirmed that the figure adopted by the A.O. pertains to the stock as on 01/04/2003 and not as on 01/04/2004. The DR had no material to counter the same. Hence, the findings of the CIT (Appeals) is sustained.
g. The next issue to be considered while working out the stock figures is regarding the value of unentered purchase invoices of goods, which have been physically inventorised or sold, which have been seized but not considered by the A.O. amounting to Rs. 4,96,88,618/-. As recorded in the order of the CIT (Appeals), the total purchases entered upto the date of search i.e. 14/07/2004 was Rs. 8,39,98,795/-. During the course of search proceedings, there were unentered purchases invoices seized which were pending to be entered in the books, to the tune of Rs. 4,16,82,283/- as per the seized materials mentioned in the reconciliation of purchase account. And the bills received against the copies of :- 55 -: M/s Handloom Heritage Ltd seized packing slips handed over to the DDIT vide letter dated 13/12/2004 was for Rs. 80,06,335/-. Therefore, the appellant claimed before the A.O. that the purchase invoices were for Rs. 4,96,88,618/- (Rs. 4,16,82,283 + Rs. 80,06,335.00) which were to be entered into the books for which goods were already received. The A.O. did not consider these items treating them as bogus while computing the purchase figures. He went by only purchases entered in the system as on 14/07/2004 amounting to Rs. 8,39,98,795/-. So he arrived at negative stock figures because of the omissions of the above purchases. The CIT (Appeals), though had accepted the contention of the appellant that there were bills for which entries were to be made in the books, yet he sustained an addition of Rs. 99,37,724/- which is 20% of the value of the unentered purchase on the premise that they might represent inflated purchase. However, since we have already in the discussion under Para 5 of this order had held that there is no inflated purchase and all the purchases are genuine. Therefore, as found and estimated by the CIT (Appeals), there is no case of inflated purchases being recorded in the books of accounts, all the purchases are genuine for which records were properly maintained. Therefore, the addition of Rs.99,37,724/- as sustained by the CIT (Appeals) is hereby deleted.
:- 56 -: M/s Handloom Heritage Ltd
44. After considering all the issues discussed above, we prima facie find that the reconciled figures worked out by the appellant and other contentions pointed out by it contains grains of truth and no addition may be required.
45. However in the submissions filed by the appellant, the appellant has stated that in order to purchase peace with the department, it has agreed to an estimated addition of Rs. 1,11,59,125/-. However, since it is found that all the stocks are reconciled and there is no stock which is found unaccounted after the reconciliations are made, the agreed addition to the tune of Rs.1,11,59,125/- merely in order to purchase peace with the Department need not be sustained. However, we find that the appellant has agreed to this addition in the filed return of income and has paid tax on it and has explained during assessment proceedings as to where this addition is reflected. In view of this we are of the opinion that this figure of Rs. 1,11,59,125/- needs no disturbance and is upheld.
46. In the result, the appeals filed by the Department in Appeal Nos. 1761 to 1767/Mds/2010 are dismissed. All the :- 57 -: M/s Handloom Heritage Ltd appeals filed by the assessee are allowed except ITA No.1802/Mds/2010 for the AY 2005-06 which is partly allowed.
47. In view of our above finding, the appeals of the assessee filed against revisional orders passed u/s 263 of the Act for five years stand dismissed, having become infructuous in our above finding on merits.
Order pronounced in the court 20th May 2011.
Sd/- Sd/-
( DR.O.K.NARAYANAN) (HARI OM MARATHA)
Vice-President Judicial Member
Chennai : 20th May, 2011
Vl.
Copy to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR