Income Tax Appellate Tribunal - Pune
Ghodawat Foods International Pvt. ... vs Assessee on 10 October, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
BEFORE SHRI SHAILENDRA KUMAR YADAV,
JUDICIAL MEMBER, AND
SHRI R.K. PANDA, ACCOUNTANT MEMBER
ITA No.866/PN/2009
A.Y. 2004-05
Ghodawat Foods International Pvt. Ltd.,
437, A/P Chipri,
Tal. Shirol, Dist. Kolhapur
PAN AABCG7301E Appellant
Vs.
ACIT, Ichalkaranji Circle,
Ichalkaranji Respondent
ITA No.882/PN/2009
A.Y. 2004-05
ACIT, Ichalkaranji Circle,
Ichalkaranji Appellant
Vs.
Ghodawat Foods International Pvt. Ltd.,
437, A/P Chipri,
Tal. Shirol, Dist. Kolhapur
PAN AABCG7301E Respondent
Appellant by : Shri Mahendra Mehta
Respondent by : Smt. M.S. Verma
Date of Hearing : 10.10.2013
Date of order : 30.10.2013
ORDER
PER SHAILENDRA KUMAR YADAV, JM
These cross appeals filed by the appellant and revenue are arising from the order passed by Commissioner of Income Tax (Appeals) [(hereinafter called as CIT(A)], Kolhapur, dated 25.03.2009 for A.Y. 2004-05. So, both are being decided by 2 consolidated order. Assessee has filed its appeal on following grounds.
1) The learned CIT(A) has erred in law as well as on facts and circumstances of the case in not holding that the assessment was liable to be annulled inspite of giving a finding that the assessing officer has made the addition u/s 68 of the Income Tax Act which was contrary to the statutory direction issued u/s 144A by the Addl. Commissioner of Income Tax of not making addition u/s 68 of the Income Tax Act.
2) Without prejudice to ground no. 1 the learned CIT(A) has erred in law as well as on facts and circumstances of the case in confirming the addition u/s 68, on estimate basis, to the extent of Rs.8,87,03,901/- (out of Rs.18,68,90,938/- addition made in the assessment order). The addition so confirmed be deleted.
3) The authorities below erred in law as well as on facts and circumstances of the case in making a disallowance u/s 40A(3) of Rs.71,28,196/- being 20% of the payments to suppliers of Rs.3,56,40,982/-. The payments so made are covered by the exceptions provided in rule 6DD and hence the addition so made be deleted.
4. The appellant prays to be allowed to add, amend, modify, rectify, delete, raise any ground of appeal before or at the time of hearing.
2. Revenue has filed its appeal on following grounds.
1. The Ld. CIT(A) erred in holding that A.O. has not examined the addition made on account of sundry creditors, discharged outside the books of accounts but shown as outstanding in the regular books of a/c as on 31/03/2004, from the point of the view of sec. 69 in spite of specific directions issued by the Addl. CIT u/s.144A.
2. The Ld. CIT(A) ought to have appreciated that vide para 7.7 of the assessment order, the impugned addition was made u/s 69 of the I.T.Act. It is clearly stated in paragraph 7.6 of the assessment order that the addition is made under section 69 and not under sec. 68 of, the I.T.Act following the directions of Addl. CIT under section 144A.
33. The Ld. CIT(A) has erred in deleting the addition of Rs.9,81,87,037/- made on account of discharged creditors but shown as outstanding in the books of accounts of the assessee as on 31/3/2004.
4. The Ld. CIT(A) has failed to appreciate the fact that in case of outstanding creditors that the burden lies on the assessee to prove the genuineness of the liability and the identity of the creditors, but the assessee to discharge the onus.
5. The Ld. CIT(A) has erred in adopting formula of weighted average credit period of 3 months to hold that the credits arising during the period of 3 months from 1st January 2004 to 31st March 2004 are genuine, which is logically incorrect and inapplicable to the facts of the present case.
6. The Ld.CIT(A) has failed to appreciate the fact that A.O. has proved that assessee was making payment in cash to the suppliers outside the books of accounts and then showing the same liability as outstanding creditors in books of account.
7. The Ld.CIT(A) ought to have appreciated that the evidences brought on record by the A.O. to establish that creditors shown as outstanding in the books of accounts were squared up later by encashment of bearer cheques drawn in the name of the suppliers by the employees of the assessee.
8. The Ld. CIT(A) has erred in deleting the addition of Rs.12,47,20,000/- made on account of deemed dividend u/s 2(22)(e) of the I.T. Act. 1961.
9. The learned CIT(A) has failed to appreciate the fact that Shri Sanjay Ghodawat is a share holder of more than 20% holding in the shares of assessee and also holds more than 10% shares of Ghodawat Industries Pvt. Ltd. and hence the A.O. has correctly invoked the provisions of section 2(22)(e) of the I.T.Act, 1961.
10. The Ld.CIT(A) has erred in not appreciating insertion of a new category of payment by the Finance Act, 1987 w.e.f. 01/04/1988 viz., payment by a company "to any concern in which such shareholder is a member or a partner and in which he has a substantial interest" which does not say in whose hands the dividend has to be brought to tax, whether in the hands of the "concern" or the "shareholder".
411. The Ld.CIT(A) also erred in ignoring the clarification issued by the Board circular No.495 of 1987 which are clearly applicable to the present case.
12. The Ld.CIT(A) erred in excluding the provisions of luxury tax amounting to Rs.50,42,48,892/- as ascertained liability though it is contingent in nature from accumulated profit for the purpose of section 2(22)(e) of the Act.
13. The Ld.CIT(A) erred in holding that the quantum of deemed dividend has to be worked out on the basis of total credits and debits in the accounts instead of working of each loan or advance on entry basis.
14. The Ld. CIT(A) has erred in deleting addition Rs.4,10,21,320/- made on account of disallowance made u/s. 40A(3) of I.T. Act, 1961.
15. The Ld.CIT(A) has failed to appreciate the fact that A.O. has not challenged the genuineness of expenditure i.e. purchases debited in the P & L A/c, but held that the liability shown as outstanding as on 31/03/2004 towards purchases made during the year was already discharged prior to 31/3/2004 by making payment in cash outside the books of accounts.
16. The Ld.CIT(A) ought to have sustained the addition as the payment towards purchases was made in cash outside the books of accounts in contravention of the provisions of section 40 A(3).
17. The order of the CIT(A) be vacated and that the assessing officer be restored.
18. The appellant craves leave to add, alter, amend, and modify any of the above grounds of appeal.
3. First issue in assessee's appeal is with regard to not following the directions U/S.144A given by the Addl.CIT, Ichalkaranji Range. In this regard in appeal, CIT(A) observed that the directions given were given in a consolidated order dt. 19/12/2006 for all the group companies being assessed by the AO viz. Ghodawat Industries P. Ltd., Ghodawat Foods International P.Ltd., Sanjay Ghodawat (HUF), Star Flexi Pack Industries P. Ltd. In the case of the 5 appellant i.e. Ghodawat Foods International, directions are given on the following issues.
1) Addition on account of unproved credits to be txed u/s.68.
2) Disallowance u/s.40A(3).
3) Addition as per provisions of section 2(22)(e).
3.1 CIT(A) observed that the directions given on account of deemed dividend u/s.2(22)(e) has been examined and discussed in the order in the case of Star Flexi Pack Industries. Regarding disallowance u/s.40A(3), the directions were only that the claim of the appellant for rule 6DD(1) should be examined and adjudicated by a speaking order. It was found from the assessment order that the Assessing Officer has examined the claim of examination under rule 6DD and adjudicated the issue by a speaking order. So, CIT(A) was justified in holding that it cannot be said that the directions were not complied with.
3.2 Coming to the directions u/s. 144A with regard to addition u/s.68, the question is whether the assessment can be annulled as the Assessing Officer did not comply fully with the directions U/S.144A. In this regard, CIT(A) observed that in the case of Star Flexi Pack Industries, wherein it was held that similar procedural irregularities cannot annulled the asst order, although it could be declared irregular. So, it cannot be held as null and void. The distinction between section 68, 69 and 69C are more technical in nature, meant to apply to different situations. The allegation of the Assessing Officer is that money has been paid while the credits in the books had not been cancelled. From this point of view, the addition on account of unexplained credit is not erroneous. Seen from another angle, addition could also be made u/s.69 on account of unexplained investment in as much as payments had been made to suppliers which were not recorded in the books. The distinction is therefore more of a technical nature. In view of the 6 above discussion CIT(A) was justified in rejecting contention of assessee on this point. We uphold the same.
4. On merit first we take up the issue with regard to addition of Rs.18,68,90,938/- by the Assessing Officer. The appellant is a private limited company situated at Chipri in Sangli District and is a part of Ghodawat group of industries substantially owned by Shri Sanjay Ghodawat. The appellant is a manufacturer of Star Refined Oil under the 'Star' Brand. Total turnover for the year was Rs.80.33 crores with gross profit of Rs.9.28 crores at 11.5% of the turnover. The turnover of the appellant increased substantially in the subsequent year from Rs.80 cores to Rs.142 crores in 2005-06 and Rs.125 crores in A.Y.2006-07.
4.1 The Assessing Officer made addition of Rs.18,68,90,938/- for following reasons:
a) The aggregate amount of sundry creditors in the balance sheet was Rs.26.3 crores on a turnover of Rs.80 crores for the year whereas in subsequent year, the total creditors were only Rs.7.3 crores on turnover of Rs.142 crores in A.Y.2005-06 and Rs.2.11 crores on turnover of Rs.125 crores in A.Y2006-07. The above amount was in the name of 315 individual creditors. The number and the total amount of creditors were found abnormally high for the year under consideration.
b) In many cases, the creditors were carried in the books for more than 3 months from October and November onwards.
The creditors were mainly for the purchase of Soyabeen. On enquiry with Rajaram Solvex, a firm in the same business, it-was revealed that the credit period, was 15 to 30 days normally and 3 to 5 days in case immediate payment was insisted. Various discrepancies were noticed in the amount of the creditors by Assessing Officer. Stand of 7 assessee has been that most of the credits had been paid in the earlier part of the next financial year by cheque. Enquiry with the banks however, revealed that payments were mostly by bearer cheques. Further, the cheques bore the signature of one of the appellant's employees on the reverse which showed that the amount was actually paid to him. In some, batches, it was found that on the back of one cheque the amount represented by the other cheques was added and the total amount paid to an employee Shri Anil Chaugule whose signature was taken on the cheque.
c) The modus operandi of the appellant' was found to make the payments by cash, while at the same time, show bogus credit balance in the name of the party. At a later date, when cash was available in the books, bearer cheque was issued in the supplier's name but the amount was collected by one of the employees on encashment.
d) The onus was on the appellant to establish the identity of the creditors, the genuineness of the transaction and the creditworthiness of the creditors. The appellant however could not discharge the onus satisfactorily. The signature on the confirmatory letter did not match with the signature of the same person on the reverse of the bearer cheque. The photo copies of the confirmation letters and the bearer cheques have been made part of the assessment order.
e) The appellant gave names and addresses of the creditors to whom letters u/s. 133(6) were issued. Most of these letters were returned unserved due to incomplete address. Some letters were served but none attended. A very few persons attended in response to the letters. The appellant requested for summons to be issued. Finally, summons were issued in case of 226 creditors, out of which 188 were returned unserved due to incomplete address. 37 persons appeared and furnished written replies.
8f) Most of the above 37 persons denied any amount outstanding to be received from the appellant as on 31/03/04. They stated that they had been paid in cash within few days of delivery of goods.
g) The appellant was found to have created bogus creditors on the basis of enquiries with bank by Assessing Officer. Accordingly, addition of Rs.18,68,90,938/- was made by Assessing Officer for reasons discussed above.
4.2 In appeal, CIT(A) having perused the assessment order, the comments of the Assessing Officer in the remand report and the submission made by the appellant from time to time observed that the purchases of Soyabeen made by the appellant was primarily made through commission agents. The commission agent works as a middle man between the appellant and the farmers. The farmers who are the actual suppliers are known only to the brokers. Before making the payment, the identity of the parties is confirmed with the brokers. The brokerage register gives details of the voucher number, name of the party, quantify in bags, purchase amount and brokerage thereon. In such; situation, it cannot be accepted that the appellant would be in direct touch or contact or have knowledge of the actual suppliers. The appellant has given copies of letters received from' various suppliers interalia the supplier has stated that goods should be credited in the books in a particular name other than the supplier's name. In one such letter filed by the appellant, the letter head is that of Om Trading Co. with the address simply mentioned as 'Parbhani'. The letter mention the truck number, quantity of goods and requested that the goods should be credited to the account of 'Bhimashankar Dhule'. The appellant has issued a goods receipt note mentioning supplier's name as Bhimashankar Dhule and the broker's name as Dinesh Trading Co. Another bill issued by Om Trading Co. is for 10.0 bags. There were several such bills for material from Om Trading Co.
9credited to Bhimashankar Dhule. Similarly, there is a letter from Komal Trading Co, commission agent of Parbhani who sent 100 bags with a request that the credit should be made in the name of Bhimashankar Dhule. The goods receipt note has been issued in that name. Another instance has been given where goods have been supplied with an instruction, that credit to give in the name of Bajirao Barku. There is no address of Bajiraos Barku mentioned in the letter or bills. It reveals that the commission agent sent the material which they have collected from the various farmers to the appellant. In many instances, the invoices raised by the actual suppliers carry the instruction that credit should be shown in the name of another person. The address etc. of such person were not given. The appellant, in such situation would not be in a position to furnish the address of the suppliers.
4.2.1 In the remand report, 37 witnesses have been categorized into 4 categories I,II,III,IV. The first category consists of the persons who have confirmed their statement given to the Assessing Officer at the time of assessment stating that no amount was receivable from the appellant on 31/03/04. However, these persons have not been able to produce any documents except in the case of Shankar Uttarwar to support their version. Neither of them has given details of the dates and the amounts actually received in cash or bearer cheque. As regards payments by bearer cheques, the Assessing Officer had concluded that the system of bearer cheques was used by the appellant to show bogus book entries. According to the books, creditors as on 31/3/04 had been paid mostly during the next financial year. The Assessing Officer found that payments were mostly by bearer cheques. The signature of an employee Shri Anil Chaugule was found on the back of the bearer cheque. It was inferred by the Assessing Officer that the money which had been withdrawn from the bank through the bearer cheque had actually not been paid to the farmers but collected by the employee of the company. The allegation of the Assessing Officer is that the so 10 called creditor had already been paid of by cash after supply of goods. The bogus credit in their name had however been allowed to continue in the books and squared up by issue of bearer cheques in their names in the next year. This conclusion failed in the face of the statement of the witnesses that they have received money in the form of cash or bearer cheque. The conclusion is further weakened by the lack of any evidence or details of payments received by the persons who had deposed that there was no outstanding as on 31/3/04. The Assessing Officer in the remand report has specifically mentioned two cases i.e. Shri Shankar Uttarwar and Shri Sharad Dilwale. It is mentioned that Shri Uttarwar had filed a copy of the acknowledgement showing receipt of amount of Rs.1000/- as advance to goods supplied on 26/10/03. The paper also showed that the balance payment of Rs.33,560/- was received on.1/11/03. In the books however, Shri Shankar Uttarwar remained a creditor as on 31/3/04 and the credit was paid by issue of bearer cheque dtd.22/05/04. This paper was found as the only evidence of bogus creditors carried in the books on account of purchases. The above evidence has one defect i.e. it does not bear the name or signature of any authorized person or employee of the company. It only bears signature of Shri Pradip Uttarwar himself who has filed copy of the receipt. Secondly, the letter has been filed by Shri Shankar Uttarwar, father of Pradip Uttarwar. Signature of Shri Pradip Uttarwar has not been verified. It is not explained why Shri Shankar Uttarwar has appeared twice before the Assessing Officer on behalf of Shri Pradip Uttarwar. It was particularly noted that at page 11 of the remand report dealing with witnesses in category-4, the name of Pradip Shankar. Uttarwar and Pradip Trading Co. have been dealt with. It is stated therein that Shri Shankar Uttarwar appeared on behalf of the above two entities. He was however not examined in connection with the transactions in the name of Shri Pr:adip Uttarwar and Pradip Trading Co. for the 11 reason that he was not holding any authority from his son Shri Pradip Uttarwar. According to the Assessing Officer, Shri Shankar Uttarwar was not entitled to discuss the transactions of appellant company with Pradip Uttarwar and Pradip Trading Co., the above receipt filed by Shri Shankar Uttarwar diminishes its evidentiary value. The receipt is of a transaction of the appellant with Shri Pradip Shankar Uttarwar and not Shri Shankar Uttarwar. While the AO has relied greatly on this piece of evidence, he has refrained from questioning Shri Shankar Uttarwar on the transactions of Shri Pradip Uttarwar and Pradip Trading Co. So no credibility could be attached to rightly observed by CIT(A).
4.2.2 The other witness relied by Assessing Officer is Shri Sharad Dilwale who had stated that he had received payment within 10 days and mode of payment was usually cash or bearer cheque. Shri Dilwale had changed his stand time and again. In this background it was concluded that the witness was not telling the truth. Moreover, he had simply given a statement without giving any details of the mode in which the payment was received, the date of receipt of amount, amount received etc. As stated above the witness has changed his stand three times for which he should be treated as unreliable, observed by CIT(A).
4.2.3 Category 2 consisted of witnesses who according to the Assessing Officer confirmed their earlier statements filed in December,06 but were found confused about the dates of transaction, goods supplied, payment received etc. Accordingly the Assessing Officer concluded that the payments were received immediately after the transaction and therefore it could be assumed that as on 31/03/04, there was nothing outstanding. Above witnesses had given letters to the Assessing Officer in December,06 interalia stating that there was nothing outstanding on 31/03/04 but in the course of remand proceedings they could not establish that there was no amount outstanding as on 12 31/03/04. Shri Dale, one of the witness stated that goods were supplied in December, and payments received within 2-3 month. Since the supply was in Dec.,2003, it could not be said with certainty that there was no balance outstanding as on 31/03/04. The other two witnesses Shri Teli and Mane had stated that payment of goods was made within 8-10 days but in cross examination, it could not established that there was no balance outstanding at the end of the year. One Shri Durgule, had stated in cross examination that he had not attended on 12/12/06 and letter dtd. 12/ 12/06 was neither signed nor written by him. In this background, CIT(A) concluded that the Assessing Officer is not correct in concluding that witness had confirmed that the statement filed in December,06 was correct. In short, it could not be said that the persons in category-2 had confirmed their letters filed in December,06. While one had stated that he had not filed such statement, the others had subsequently in the remand proceedings not confirmed the statements filed before the Assessing Officer. These four witnesses have neither deposed in favour nor against the appellant. So no credibility could be attached to it; observed by CIT(A).
4.2.4 Category-3 consists of six witnesses who have deposed in favour of the appellant. The Assessing Officer has accepted three of them such as Shri Ranjitsingh Patil, Shri Chandrakant Dudhal and Shri Ramdas Mane as reliable witnesses. Regarding the other three, the Assessing Officer has stated that Shri Sanjay Takale appeared without summons being served on him and therefore he was a tutored witness. As regards Shri Satyawan Shete, it is stated that no records were maintained by him to substantiate his statement and therefore it could not be treated as reliable. For above reasons, Assessing Officer did not believed their version which was not found justified according to CIT(A).
134.2.5 Category-4 consists of seven parties who _did not appear despite summons being served. This includes Shri Pradip Uttarwar and Pradip Trading Co. which parties were discussed earlier in this order. One party i.e. Vyankatesh Trading Co. had filed a letter interalia stating that during the year there was no transaction with the appellant. In above background, CIT(A) found that there are 19 witnesses who had confirmed earlier statements before him that there was no amount outstanding and six persons who deposed in favour of the assessee by retracting from their earlier statements before the Assessing Officer. The witnesses at category-2 and 4 could not be taken into account. According to the Assessing Officer, the witnesses who did not appear had in any case filed letters confirming that there was no balance outstanding before the Assessing Officer earlier. These letters could not be taken as evidence since the signature on the letters was not confirmed. The appellant was not given an opportunity to defend itself against the allegation. As regards reliability and quality of evidence, the parties in category-1 as well as in category-3 are at the same level except that view of the persons in category-3 are admittedly reputed persons, according to the Assessing Officer. None of the witnesses have given any evidence to support their statements. The addition is primarily based on the letters obtained from 37 creditors discussed above. After detailed investigation into the matter, only 19 creditors could be said to have 'stood by their statements. Even these 19 creditors do not have any evidence to support their statements. They have given a lame excuse that whatever documents they had have been destroyed after the year was over. The summons served on these persons and they were directed to produce specific details viz. proof of identity and capacity to advance the sum of money, details of sources of income, cash book, ledger, sale bills and bank pass book, account extract in their books of the appellant company. There is no mention whether any of the 37 creditors, who appeared have produced, any one or 14 all of the above documents. There is no discussion of source of income. Assuming that books have not been maintained they should have atleast produced bills of sale, proof of receipt, bank pass book, or any other document to prove their contention. In this background, CIT(A) observed that the above documents were neither insisted upon nor produced.
4.2.6 The addition has been made in respect of 283 creditors comprising of 315 credit entries. It was clarified by the Assessing Officer in the remand report that the addition has been made in respect of creditors falling in the following categories.
Category A: No address had been provided by the assessee.
Aggregate credit amount Rs.7,26,12,137/-
Categorv B: Number of accounts : 58.
Aggregate credit amount Rs.3,26,66,860/-
Category C: Incomplete addresses. Letters returned by postal
authorities.
Number of accounts : 56.
Aggregate credit amount Rs.3,11,60,832/-
Category D: Reply received stating no outstanding as on
31/03/04.
Number of accounts : 09.
Aggregate credit amount Rs.1,41,83,970/-
Category E: Summons served, no response.
Number of accounts : 72.
Aggregate credit amount Rs.3,55,13,391/-
Category F: Creditors verified in remand proceedings.
Number of accounts : 45.
Aggregate credit amount Rs.1,70,70,397/-
15
4.2.7 In addition to the above categories, there is another category at page-17 of the remand report under the heading 'creditors confirmed amount outstanding'. Entries-7, Amount credited:
18,99,014/-. The appellant pointed out certain mistakes in each category in the charts annexed to the remand report. These are as under:
Category Name Amt. (lacs) Remarks
A G.Baheti 4.24
G.Baheti 1.92
B G.Baheti 2.05 It is mentioned that person
dead
C Sunil Shah 57.12 Incomplete address
D S. Patil 24.61 Died
S.P. Patil 1.85 Paid by bearer cheque
Suiyakant Patil 0.74 Creditwor thine ss riot
proved
Sainath Traders 45.04 Genuineness of
transaction doubtful.
S.S.Vitthal 1.75 Did not confirm credit
balance
4.2.8 Category B comprises of persons in whose cases summons were returned on the ground that no person was residing at the given address. In the case of Govindprasad Baheti it is mentioned that the person had expired and his successor attended before the Assessing Officer and therefore this creditor cannot be placed in category: B. 4.2.9 Category C: In the case of Sunil Shah, the address is mentioned as Market Yard, Islampur. Shri Sunil Shah has given a statement that the credit against him was outstanding on 31/03/04. Shri Sunil Shah had filed return of income in Sangli.
His case had been taken up for scrutiny. Shri Sunil Shah procured soyabeen from the farmers in the nearby area of Sangli and supplied to the appellant. Purchases, dispatches and payments to 16 the suppliers were made through him. In the scrutiny assessment in his case, the-ITO,Wd.2(2), Sangli examined him as well as 18 farmers who had supplied goods to appellant. The farmers confirmed that they received payments through Shri Sunil Shah after 4-5 months. The AO has accepted the income, by way of commission, declared by Shri Sunil Shah in the order u/s.147.
4.2.10 Category D consists of persons from whom replies were received that they had no outstanding balance with the company as on 31/03/04. In the case of Shripati Patil however, the person had expired. In the case of S.P.Patil, it is mentioned that the payment was through bearer cheque. In the case of Surayakant Patil it was stated that creditworthiness was not proved. In case of Sainath traders, it is mentioned that genuineness of transaction was doubtful. In case of persons listed above under category-D, it is not clear from the remarks above reply that no amounts outstanding as on 31/03/04. Therefore they were wrongly placed in the category. In the case of Sainath traders, it is mentioned that genuineness of transaction is doubtful. It was observed that the word used is 'doubtful' which means there is no definite finding on the genuineness of the transaction. Secondly, it has been pointed out by the appellant that the party had been paid the amount by way of crossed cheque issued on HDFC bank. Copy of the cheque has been submitted. In addition to the above, in the case of Natraj Tin Manufacturing Co. also, the payment is also by way of crossed cheque drawn on HDFC Bank.
4.3 In view of above analysis, CIT(A) observed that the addition in the case of the following creditors was not justified.
Name Amt.(lacs)
Shri Sunil Shah Rs.57.12
Sainath Traders Rs.45.04
Natraj Tin manufacturing Co. Rs. 7.64 .
S.Patil Rs.24.61
17
S.P.Patil Rs. 1.85
Suryakant Patil Rs. 0.74
Vitthal Rs. 1.75
G.S.Baheti Rs. 4.24
G.S.Baheti Rs. 2.05
Rs.146.97
Persons confirmed credit Rs.18.99
Rs.165.96
4.3.1 Category A, B and C are similar in as much as in these cases addition has been made as; the appellant could not furnish the complete and correct address and therefore summons could not be served. Category E is where summons was served but there was no compliance. Category D is stated to be of those persons who replied that there was no credit balance outstanding as on 31/03/04. The total amount of credit in this category is of Rs.1.41 crores out of which Rs.1.23 crores has been wrongly placed in this category as discussed above. There are only 4 persons in category D who have actually replied interalia stating that there was no amount outstanding. They are as under:
D. Bedage Rs. 32,968/-
K.Raghunath & Sons Rs.1,28,426/-
Ketki Trading Rs.3,87,388/-
Sanjay S. Patil Rs. 78.300/-
Rs.17,82,925/-
4.3.2 Other persons who have confirmed the credit entries out
of 37 persons in category F are as under:
1) J.G.Baheti Rs.1,84,438/-
2) D.D.Shete Rs.1,72,444/-
3) S.Bharadia Rs.2,05,764/-
4) K.Pawar Rs.3,83,434/-
5) G.Kotalwar Rs.7,86,344/-
6) E.Dhonde Rs.2,22,544/-
18
7) Rahatkar Vithal B. Rs.3,94,601/-
8) Motarwar Kiran N. Rs.1,93,171/-
9) ShaikhMoinuddin Rs.2,04,393/-
of Asha Trading.
10)Wadamwar Murlidhar G. Rs.7,38,139/-
11) Shankar, Venkati Uttarwar Rs.2,08,442/-
12)Suryakant V.Palimkar Rs.2,10,000/-
13)Kalpesh D. Shah Shah & Co. Rs.3,47,711/-
14)SunilB. patil Rs.3,59,412/-
15)Sharad Dilwale Rs.3,39,538/-
16)Duttatraya M.Nishandar Rs. 35,963/-
17)Maruti K.Kshirsagar Rs. 27,428/-
18)Gajanan V. Patil Rs.1,46,780/-
19)Vilas Shete Rs.3.84.543/-
Rs.55,45,089/-
4.3.3 It was observed by CIT(A) that the creditors involving total credit amounting to Rs.73,28,014/- (5545089+1782925) have confirmed that no credit was outstanding as on 31/03/04. This amount of credit is fictitious. In comparison, the following persons have deposed that amounts were actually outstanding as on 31/03/04.
1) Sanjay.Takale Rs. 60,035/-
2) Ranjitsingh Patil Rs.3,36,376/-
3) Satyawan Shete Rs.1,30,664/-
4) Chandrakant Dudhal Rs.7,03,823/-
5) RamdasMane Rs. 42,430/-
6)Nivrutti Bhise Rs.
12.184/-
7) Bhikaji Tukaram patil Rs.1,63,778/-
8) Faiyaz Bagwan Rs.5,47,143/-
9) GaneshTrading Rs.1,90,871/-
10)Omkar Khurape Rs.1,65,687/-
19
11) Vijayalaxmi Traders Rs. 33,379/-
12) Vijayalaxmi Traders Rs. 33,242/-
13) Natraj Tin Manufacturing Co, Rs.7,64,916/-
14) Sunil Shah Rs. 57.12 lacs
Rs.88,96,526/-
4.3.4 The amount of credit that has been confirmed is actually
slightly more than the amount of credit which has been denied, although the number of creditors that have confirmed credits is slightly lower at 14 against (19+4) 23.
4.3.5 The aggregate additions made by treating the credits as bogus has been categorized from A to F by the Assessing Officer in the remand report. Category A, B and C which account for almost 14 crores out of total 18 crores of creditors treated as bogus, were found similar by the Assessing Officer in remand report. The appellant could not provide proper and updated addresses of the persons in these categories. It is an established principle that the burden is on the appellant to prove the genuineness of the credit, genuineness of transaction, identity and the creditworthiness of the creditors. According to this principle, the burden was on the appellant to satisfy above conditions with regard to each creditor being carried in its books. Inability of the appellant to do so could result in the credit being treated as unexplained cash credit u/s.68.
4.3.6 In the case of the appellant, the situation was found by CIT(A) a little different in as much as these creditors are mostly small farmers. The appellant has no actual contract with the creditors themselves. The material is arranged through brokers. The brokers of the commission agent procure the material from the farmers and supervise the delivery of the same to the appellant. Although the payments according to the appellant, are done directly to the suppliers for the material purchase, the agent or the 20 broker is required to identify the supplier. This is in the case of the cash as well as credit purchases. The appellant has produced a number of letters sent by the suppliers requesting that the billing should be made in some other name, for reasons not understood. The material is sent by a particular party for instance, Om Trading Co. but the billing is made in the name of another party e.g. Bhimashankar Dhule on the request of the party sending the goods. The appellant has produced number of letters from the suppliers to this effect. The creditor as per the books is Bhimashankar Dhule. The address of the party in the appellant's books is what was given in the letter. In such cases, it would be unreasonable to expect the appellant to furnish complete and correct addresses of each and every creditor. The appellant has discharged its burden by providing the address written in the books. It cannot be held responsible in all cases where letters have been returned due to incomplete address. Assumption that all the creditors listed in category A, B and C are bogus was not found justified by CIT(A).
4.3.7 Category F consists of 37 creditors who have been subject to detailed examination and category D consists of persons who have deposed in favour of the appellant. The creditors in these categories have been discussed in detail in earlier part of this order. Category E consists of creditors who have been with the summons but have not bothered to comply with the same. This category consists of total credit of Rs.3.55 crores. In this background CIT(A) observed that the appellant has provided correct addresses and summons have been served. CIT(A) also observed that the summons had been issued on the request of the appellant apprehending that the creditors will not attend unless forced by the Department. It is also observed that most of these creditors were from Parbhani/Nanded area. The appellant had some difference with the suppliers of this area regarding the 21 payment issues. According to the provisions of section 131, there is a penalty for non compliance which is imposed under section 272A of the Act. There is nothing on record that penalty u/s.272A has been initiated against any of the creditors. A summons u/s.131 has a legal force and is potent weapon in the hands of the Assessing officer. Once, this power has not been exercised, the Assessing Officer should not blame the appellant for non appearance of the creditors or non compliance to the summons. The burden has been placed on the appellant for the non appearance of the creditors and the credit has been treated as bogus. CIT(A) observed that once the summons has been issued by the Assessing Officer who has sufficient powers to enforce compliance, the appellant should not be held responsible if the creditor does not appear and depose before the Assessing Officer. In this background CIT(A) observed that the wholesale disallowance of all the creditors to -whom payment was made in cash treating them as bogus creditors was not justifiable. CIT(A) further observed that the appellant however did not deserve clean chit in this matter in view of certain other pieces of evidence which have come to light. A number of creditors have deposed before the Assessing Officer at different times denying any credit outstanding to be received from the company.
4.3.8 Taking all facts and circumstances into consideration, CIT(A) observed that while the wholesale addition of all the creditors which 'have been shown in the books as outstanding on 31/03/04 and paid in cash subsequently is not justified, it is unmistakable that the appellant has in certain cases "made payments in cash while the credit amount shown against the suppliers in the books has not been squared up and allowed to continue. The illustrations given by the Assessing Officer in the assessment order which have been shown that in several cases the modus operandi stated by the Assessing Officer could not be doubted. After arriving at the above 22 decision, the next step was to reasonably quantify the amount of such bogus credits. It is obvious that there has to be some estimation in arriving at this figure. The addition made by the Assessing Officer is also based on estimation relying on statement of few creditors. The estimate, of the Assessing Officer now having been proved erroneous on the basis of facts and circumstances narrated in the earlier pages, there was a need to make an estimate in a more rational manner observed by CIT(A).
4.3.9 In certain circumstances an estimation of undisclosed income could be made. The estimation is only way out in such cases which have inherent guess work. At the same time guess work must have reasonable nexus with material on record. In such situation, department was entitled to take into account certain estimates when documentary evidence was not forthcoming, but an arbitrary method could not be applied. The estimate which has been made by the Assessing Officer was fund arbitrary by CIT(A) for the reasons discussed in the foregoing paragraphs.
4.3.10 The assessment order contains a list of creditors whose accounts has been squared up during the previous year itself. This contains 33 creditors involving total credit amount of Rs.2.25 crores. No addition has been made with regard to these creditors. Since no addition has been made it was presumed that the Assessing Officer was satisfied with the genuineness of the above creditors and the credit amount and accepted that the creditors had actually been paid on the dates mentioned. These payments could therefore form a basis for estimating the average period of credit offered by the appellant to its suppliers. The appellant was asked to submit the list of these creditors along with the credit period enjoyed by each creditor. The average credit period worked out to roughly 5 months. The appellant was then asked to submit the same list with the average credit period 23 calculated by the weighted average method. The weighted average credit period according to the revised list worked out to little about 3 months. Other evidence of period of credit offered by the appellant could be gathered from the various statements recorded of the creditors. In the letters submitted to the Assessing Officer by 37 creditors at the assessment stage, the period of credit as stated by the creditors ranges from 2-15 days. At the remand stage, the credit period as mentioned in the statement by certain creditors was as under:
Shankar Uttarwar 4-5 days
Sharad Dilwale 10 days
Madan Dhale 2-3 days
Pandurang Teli 8-10 days
Uday Mane 8-10 days
Ranjit Patil 10-12 days
S.R.Shete 3 months
C.Dudhal 10-12 days
Ramdas Mane 10-12 days
Nivrutti Bhise 10-12 days
Sunil Shah 4-5 months
Vilas Shete 5 months
Kalpesh Shah 5 months
4.3.11 The circumstances were found such that the creditors
who have given statements ; mentioned different credit periods. The period ranges between one week to 5 months. Considering the evidence at hand, a maximum period of 3 months was found to be sufficient and a reasonable credit period offered by the appellant observed by CIT(A).
4.3.12 The purchases on credit made by the appellant month wise is as under:
August 464142
24
September 119184
October 27312901
November 33255289
December 25414330
January 14774363
February 7803575
March 75609099
4.3.13 The aggregate credit for purchase made during the months of January to march,2004 and which was outstanding as on 31/03/04 was worked out to Rs.9,81,87,037/- by CIT(A), If the average credit period is taken as 3 months, it was found that the credits which arose after January,2004 would not have been squared up and outstanding as on 31/03/04. In this background, CIT(A) estimated that credits arising during this period are genuine credits which have been squared up. The list of creditors squared up during the year provided a good indicator of the average credit period. The weighted average credit period worked out to 3 months. Credits occurred after January 01, 2004 were therefore held as genuine. Such credit amount aggregates to Rs.9,81,87,037/-. The Assessing Officer was accordingly directed to reduce the above amount from the addition made u/s.68 of the Act.
4.4 Both parties are before us. Department is against deletion of Rs.9,81,87,037/- and assessee is against sustaining remaining amount of Rs.8.87 crores. Before us, the learned Departmental Representative submitted that the addition has been made to the extent of Rs 8.87 Crores giving relief of Rs 9.81 Crores. The relief has been given on the basis of average credit period of 3 months and thus holding that credits after Jan, 2004 were held as genuine. These credits amount to Rs 9.81 Crores. This is an absolutely arbitrary approach of CIT(A). It may be appreciated that this exercise of identifying parties to whom payments have been made 25 out of books has been made thrice, once by the Assessing Officer, then at the remand stage and again by the CIT(A) himself. There are following categories of creditors where the additions have been made:
S.No Category Description no Amount
of
1. A No address provided by party Rs7.26Cr
2. B Summons returned as no 58 Rs 3.26 Cr
such person residing at the given
address
3. C Letters returned by postal 56 Rs3.11Cr
authorities with remarks having
incomplete address
4. D Reply received stating no 09 Rs 1.41 Cr
outstanding as on 31.03.2004
5. E Summons served but no response 72 Rs3.55Cr
6. F Creditors verified in the remand 45 Rs. 1.70
proceedings Cr
7. G Creditors confirmed amount 07 Rs 18.99
outstanding lakhs
4.4.1 Out of the above it may be seen that some assertions
regarding specific cases made by the assessee were accepted by the CIT(A). Ld. Departmental Representative submitted that the creditors at Category A-E remained suspect and unproved. Ld. Departmental Representative drew our attention to the Rajasthan High Court's decision as reported in (1995) 212 ITR 390 (Raj) where it was held that "While explaining the various credits and investments, it may be possible that the assessee may be successful in explaining some of them but that does not by itself mean that the entire investments has to be considered as explained. Even lapse of time or inability of the assessee would not make the unexplained investment an explained one. It is each and every individual entry on which the mind has to be applied by the taxing authority when an explanation is offered by the assessee. If no explanation has been offered in respect of a particular entry, the 26 taxing authority will be justified in coming to the conclusion that the said investment is unexplained. It is not the totality of the credit entries which are to be allowed or to be disallowed. This work has to be done on the basis of explanation offered for different entries and if the explanation of the assessee is acceptable on the basis of the evidence produced before the taxing authority, the Tribunal can come to the conclusion that such investment is fully explained."
4.4.2 Similar view has been claimed to be taken by ITAT Ahmedabad in Cas Card Finance vs ACIT in (2003) 84 ITD 1 (AHD) (THIRD Member decision), wherein share application forms were found by the search party to have been filled in by the two of the employees of the appellants and that the managing director of the company and head of the other concerns had admitted having introduced money purported to be share application money and deposits in benami names, the Assessing Officer was justified in asking the appellant to establish the genuineness of the entries made in the books of account regarding the other entries. Moreover, ADI had found on investigation that the persons shown as shareholders / depositors were not genuine. Some shareholders/depositors were not found to exist. The assessee having failed to establish the genuineness of the entries, the Assessing Officer was justified to treat the entries as income from undisclosed sources in view of the material on record to establish that the part of the same was not genuine." Therefore the CIT(A) should have upheld the total addition made by the Assessing Officer as it is seen that the assessee has not been unable to discharge the onus placed upon him in respect of Categories A-C amounting nearly Rs 16 Cr. And has been found to have made payments out of books in respect of at least 38 persons. According to us every case is decided in its facts and circumstances. CIT(A) 27 has considered the issue of credit period which is subject matter before us.
4.4.3 S.68, 69, 69A, 69B,69C AND 69D are all examples of deemed income. A deeming fiction is a supposition of law that a thing is true without enquiring whether it is so or not and that it may have the effect of truth so far as it is consistent with the justice. A deeming provision is made to include what is uncertain or to impose for the purpose of statute and ordinary construction of a word or phrase. Thus, a deeming provision enlarges the meaning of a particular word or to include matters which otherwise may or may not fall within that provision.
4.4.4 Ld. Departmental Representative also submitted that it is certain that assessee did make payments out of books to creditors and carried over the sundry creditors to the next year when the cheques issued in their names were encashed by its own accountant. It is nobody's case that this sequence of events did not happen. Even before the CIT(A) the assessee despite being given ample opportunity could not establish the payments. In the end even the CIT(A) was constrained to uphold the part addition. Reliance is placed upon decisions laid down by hon. SC IN (1971) 82 ITR 540 (SC) & (1995) 214 ITR 801 (SC) where the theory of human probabilities and sorrounding circumstances have been emphasized. In this background, Ld. Departmental Representative submitted that Tribunal is entitled to disbelieve any story which is prima-facie fantastic and which does not accord with human probabilities.
4.5 On other hand, learned Authorized Representative has raised various contentions which will be taken care by us in preceding para.
4.6 After going through the rival submissions and material on record including case laws relied by both the parties, we find that 28 assessee is a private limited company, situated at Chimpri in Sangli district and is a manufacturer of star refined oil under the brand 'Star'. The total turnover for the year was Rs.80.33 crores with gross profit of Rs.9.28 crores at 11.5% of the turnover. It was observed by revenue authorities that turnover of assessee increased substantially in subsequent years from Rs.80.00 crores to Rs.142.00 crores in A.Y.2005-06 and Rs.125.00 crores in A.Y. 2006-07. Assessing Officer made addition of Rs.18,68,90,938/- on account of bogus trade creditors. Assessing Officer observed that creditors were carried on in books of accounts for more than 3 months from October and November onwards. The creditors were mainly for purchase of soya been. On enquiry with the firm engaged in similar business, it was found that credit period was 15-30 days normally and in 3-5 days in case immediate payment was insisted. Apart from this, Assessing Officer found various discrepancies with regard to banking transactions and ultimately made the above said addition.
4.6.1 In appeal, CIT(A) after calling for a remand report found that purchases of soya been were made mainly through commission agents but payment was made directly. In this situation, it was found that assessee was not in a position to give credit details of suppliers. It was also found that assessee was requested to mentioned different names of suppliers for reasons best known to the suppliers. The conclusion of Assessing Officer was based on 37 witnesses, which again categorized into 4 categories. First category consist of persons, who have confirmed their statements given to Assessing Officer at the time of assessment, inter alia stating that no amount was receivable from assessee as on 31.03.2004. However, these persons have not been able to produce any documentary evidence except in case of Shri Shankar Uttarwar to support their stand. Neither of them has given details of dates and amount actually received in cash or 29 through bear cheques. According to Assessing Officer, the creditors as on 31.03.2004 in books of accounts were mostly paid during the financial year. This finding is based on certain discrepancies in the banking transactions with regard to payments to the suppliers. In other categories consisting of witnesses who according to Assessing Officer confirmed their earlier statements filed in December, 2006, were found confused about dates of transaction, goods supplied, payments received, etc., through the above witnesses of second category had given letter to the Assessing Officer in December, 2006, inter alia stating that there was nothing outstanding as on 31.03.2004 but in course of remand proceedings, they could not establish that there was any amount outstanding as on 31.03.2004. Mr. Dhale, one of the witnesses is stated that the goods were supplied in December and payments were received within 2-3 months. Since supply was in December, 2003, it could not be said with certainty that there was no balance outstanding as on 31.03.2004. Other two witnesses Shri Dale, one of the witness stated that goods were supplied in December, and payments received within 2-3 month. Since the supply was in Dec.,2003, it could not be said with certainty that there was no balance outstanding as on 31/03/04. The other two witnesses Shri Teli and Mane had stated that payment of goods was made within 8-10 days but in cross examination, it could not establish that there was no balance outstanding at the end of the year. One Shri Durgule, had stated in cross examination that he had not attended on 12/12/06 and letter dt. 12/12/06 was neither signed nor written by him. In this background, Assessing Officer was not correct in stating that witness had confirmed that the statement filed in December,06 was correct. CIT(A) found that it could not be said that the persons in category-2 had confirmed their letters filed in December,06 because one had stated that he had not filed such statement, the others had subsequently in the remand proceedings not confirmed the statements filed before the 30 Assessing Officer. So no credibility could be attached to it as rightly observed by CIT(A).
4.6.2 Category-3 consists of six witnesses who have deposed in favour of the assessee. The Assessing Officer has accepted three of them such as Shri Ranjitsingh Patil, Shri Chandrakant Dudhal and Shri Ramdas Mane as reliable witnesses. Regarding the other three, the Assessing Officer has stated that Shri Sanjay Takale appeared without summons being served on him and therefore he was a tutored witness. As regards Shri Satyawan Shete, it was stated that no records were maintained by him to establish his statement and therefore it could not be treated as reliable. For above reasons, Assessing Officer did not believed their version. This conclusion of Assessing Officer is not based on cogent reasoning, so CIT(A) was justified in rejecting the same.
4.6.3 Category-4 consists of seven parties who did not appear despite summons being served. This includes Shri Pradip Uttarwar and Pradip Trading Co. which parties were discussed earlier in preceding para. One party i.e. Vyankatesh Trading Co. had filed a letter interalia stating that during the year there was no transaction with the assessee.
4.6.4 In this background it was found that there were 19 witnesses who had confirmed their earlier statements before him that there was no amount outstanding and six persons who deposed in favour of the assessee by retracting from their earlier statements before the Assessing Officer. According to Assessing Officer, the witnesses who did not appear in any case filed letters confirming that there was no balance outstanding before the Assessing Officer earlier. CIT(A) observed that these letters could not be taken as concrete evidence since the signature on the letters were not confirmed. Moreover, assessee was not given an opportunity to defend itself against the said allegation. As regards 31 reliability and quality of evidence, the parties in category-1 as well as in category-3. None of the witnesses have given evidence to support their statements. The addition is primarily based on the letters obtained from 37 creditors discussed above. After detailed investigation into the mater, only 19 creditors could be said to have 'stood by their statements. Even these 19 creditors do not have any evidence to support their statements. They have given a lame excuse that whatever documents they had have been destroyed after the year was over. The summons served on these persons had directed them specifically to produce details viz. proof of identity and capacity to advance the sum of money, details of sources of income, cash book, ledger, sale bills and bank pass book, account extract in their books of the assessee company. There is nothing on record to suggest whether any of the 37 creditors, who appeared have produced, any one or all of the above documents. In this background, CIT(A) rightly observed that the above documents were neither insisted upon nor produced. We find that above documents were neither insisted nor produced, so, finding of Assessing Officer for making addition in question has not been found sound footing.
4.6.5 Having considered all facts and circumstances of the case, the CIT(A) having discussed all aspects of genuineness of the transactions at remand stage observed that the credit period as mentioned in the statement by certain creditors was between 4-5 to 5 months as discussed in preceding para of this order. Thus, the creditors have given different credit periods. Considering the evidence at hand, the maximum period of 3 months was found to be sufficient and reasonable credit period offered by assessee. The purchases on credit made by assessee monthwise are as under:
Shankar Uttarwar 4-5 days
Sharad Dilwale 10 days
Madan Dhale 2-3 days
32
Pandurang Teli 8-10 days
Uday Mane 8-10 days
Ranjit Patil 10-12 days
S.R.Shete 3 months
C.Dudhal 10-12 days
Ramdas Mane 10-12 days
Nivrutti Bhise 10-12 days
Sunil Shah 4-5 months
Vilas Shete 5 months
Kalpesh Shah 5 months
4.6.6 The aggregate credit for purchases made during the month
of January to March and which was outstanding as on 31.03.2004 was rightly worked out Rs.9,81,87,037/-. The average credit period was taken as 3 months and it was found credit which arise after January, 2004 would not have been squared up and would have been outstanding as on 31.03.2004. In this background CIT(A) was justified in estimating that credits arising this period were genuine credits which could have been squared up subsequently. The list of creditors squared up during the year provided a good indicator of average credit period. The average period was rightly worked out to 3 months. Such credit amount aggregated to Rs.9,81,87,037/-. So, Assessing Officer was rightly directed to reduce the above amount of addition made u/s. 68 of I.T Act. We uphold the same.
4.6.7 So far as the balance amount of Rs.8,87,03,901/- sustained by the Ld. CIT(A) is concerned, we find that he sustained the same by holding that maximum period of 3 months credit is sufficient and reasonable. In the instant case, we find the AO/CIT(A) have not disputed the purchases made by the assessee. The G.P. rate is also not disputed. The books of accounts have not been rejected. The whole exercise has been done on the basis of statement of some of the creditors and comparable cases. It is the 33 submission of the Ld. Counsel for the assessee that the provisions of section 68/69 are not applicable, that the profit shown by the assessee is more than the comparable case taken by the AO i.e. in the case of Rajaram Solvex Ltd. and that the assessee was not allowed to remain present during the examination of witnesses and that none of the witnesses were examined on oath. Since this is the first year of operation and the assessee purchases its raw materials from farmers through brokers in some cases and that most of the farmers / brokers do not maintain books of account, therefore, the credibility of their statements regarding the exact time gap between the date of sale and date of payment cannot be taken as absolutely correct therefore, some guess work has to be done. We find the revenue in the instant case has not conclusively proved with any cogent evidence that assessee's unaccounted money has been paid towards purchases and subsequently, the same has been regularized when cash is available in the bank. The whole exercise is on guess work. Similarly, the contention of the Ld. Counsel for the assessee that no addition is required to be made u/s.68/69 under the facts and circumstances of the case also cannot be accepted in view of the detailed finding given by the Ld. CIT(A) in the preceding paras. Considering the totality of the facts of the case, we are of the considered opinion that disallowance of 20% of Rs.8,87,03,901/- [(out of the amount sustained by Ld.CIT(A)] in our opinion, will meet the ends of justice. We hold and direct accordingly. The grounds raised by the assessee on this issue are accordingly partly allowed and ground raised by revenue is dismissed.
5. Disallowance u/s.40A(3);
5.1 Firstly, the Assessing Officer found that the assessee has made cash payments for purchase of Soyabeen amounting to Rs.3,56,40,982/-. The individual payments were above the 34 limit prescribed in sec.40A(3) of Act. The appellant explained before the AO that the payments had been made to agriculturists or their agents. The assessee's case was covered under clause (h) and (1) under Rule 6DD of the Income-tax Rules. The Assessing Officer has held that the exception was not applicable to the assessee because the appellant had not proved by way of documentary evidence that the payments were made to agriculturists.
5.2 The Assessing Officer made the second disallowance u/s.40A(3) of an amount of Rs.4,10,21,320/-. This disallowance made @20% of the amount of credits which in the asst order were treated as bogus credits. The total amount of such credits which were added u/s.68 of the Act was Rs.18,68,90,938/-. According to the AO, these credits were left lying in the books while the suppliers of Soyabeen and other items had been paid in cash. It is stated in the assessment order that a show cause notice was issued to the appellant vide letter dtd. 15/12/06. The appellant was asked to submit its reply on 18/12/06. The appellant did not submit any reply to the above letter. It was therefore concluded that the appellant had nothing to say.
5.3 The appellant on this submitted before CIT(A) that it was a settled issue that a double addition cannot be made in respect of the same amount. The alleged bogus creditors had already been added u/s.69. No further addition u/s.40A(3) could be made on this account. The appellant relied on the decision in the case of Kejriwal Industries 169,ITR 12( Raj) where it was held that one ground is good enough and sufficient to consider addition u/s.40A(3) and it is not necessary, therefore to consider the other aspect of the matter as to whether the same amount could also be added u/s.69.
355.4 On the issue of other cash payment, the appellant submitted a list of payment stating that the payments were made to commission agent who supplied material procured from the agriculturists. The appellant relied on clause (h) and (1) fo the Rule 6DD of the I.T.Rules.
5.5 The CIT(A) partly allowed the claim of the assessee by holding as under:
"90. I have considered the submissions. The contention of the appellant with regard to the cash, payments which forms the first limb of the addition made u/s.40A(3) is not Acceptable. The appellant has relied on clause (h) and (1) of Rule 6DD. Clause (h) is as under:
(h) Where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town;
91. The appellant's contention is that the persons to whom payments was made were agents and the payments was made in Chipri where the appellant's factory was located. Chipri is a village which is not served by any bank. A certificate from the local authority was submitted to support the contention. The appellant could thus satisfy only a part of condition in clause
(h). Acording to the clause (h), not only should the place where payment is made be without a bank, the person to whom the payment is made should ordinarily be residing in that village or carrying on his profession there. The appellant could not give any documents to prove that payments had been made to persons who ordinarily resided or carried business or profession in the village.
92. Clause (1) of Rule 6DD is as under:
(I) Where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such persons.
93. The requirement here is that the payment has to be made by the appellant to his agent who is required to make payment in cash for goods and services on behalf of such person. The payment does not satisfy this clause. There is no documentary evidence that payments have been made to agents appointed by the appellant. Further, there is no 36 evidence also that the agents to whom payment( was made had to make further payment for goods and services on behalf of the appellant and in cash.
94. In view of the fact that the appellant has not been able to satisfy either clause (h) or (1), the disallowance u/s.40A(3) of Rs.71,28,196/- is confirmed.
95. As regards the second limb of disallowance, which is for an amount of Rs.4,10,21,320/-, the appellant's contention has considerable force. The decision cited by the appellant is on the same facts and circumstances as that of the appellant. Certain creditors have been treated as bogus and the entire amount of Credit in the books standing in the name of that creditor has been added u/s.68. Once, the entire expenditure has been disallowed under one or other provisions of the Act, further disallowance cannot be made as it will result in disallowance which is more than the expenditure itself. The provisions of section 40A(3) earlier provided for disallowance of the entire amount which has been paid otherwise than by cheque or draft. Subsequently, the disallowance was restricted to 20% of the expenditure or the payment. It can never be the case that the disallowance u/s.40A(3) exceed the expenditure or the payment itself.
96. The second aspect is that there is no payment which has been debited to the books of accounts of the appellant. The AO has come to the conclusion based on circumstantial evidence and the statement of some creditors that they had been paid during the year and no amount was outstanding against the appellant company. Even if, it is accepted that the credits were bogus and the amounts were paid in cash, there is absolutely no evidence whether the amounts were paid in lumpsum or in instalments. The creditors whose statements were recorded had simply stated that nothing was outstanding to them at the end of, the year. None of them had given any details of payment in cash received by them. There is therefore, no evidence that the payments which were received in cash on each occasion is more than Rs.20000/-. The provisions of section 40A(3) apply to each single payment if it is more than the prescribed limit.
97. It was held in the case of CIT Vs. Banwarilal Bansidhar that the of section 40A(3) apply only to a case of genuine payment. Where is computed' by applying gross profit rate and deduction in respect of is neither claimed nor allowed, the provisions of section 40A(3) have application. In the case of CIT Vs.Chemifme 270 ITR 305, the M.P.High Court 37 similarly decided that where a net profit rate is applied, section 40A(3) can have no application.
98. The issue of bogus creditors has been discussed and decided in the earlier part of this order. It will be seen from that discussion that the disallowance is based on the statement of a few creditors and on an adverse inference drawn in cases where the appellant could not provide the correct and complete addresses for service of summons. There is no evidence of actual payments being done in cash and that to above the prescribed limit u/s.40A(3) for the provisions of the section to apply.
99. The disallowance of Rs. 4,10,21,320/- u/s.40A(3) was deleted."
5.6 With regard to disallowance u/s 40A(3), the stand of learned Authorized Representative is that in the absence of banking facilities in the village where the business was carried out creating genuine difficulties in payment being made by crossed cheques or drafts, which were also not acceptable to the payee, who had genuine difficulties in accepting payments by that mode it was held that the disallowance u/s 40(A)(3) was not justified in view of rule 6DD(h)and (j). CIT Vs. Ashish Coal Coke Traders 163 ITR 174 (MP). In this case the payments are made in Village Chipri, which is not served by any bank, A letter of the Gram Panchayat to this effect is already submitted. Payments made to small time vendors, who came from surrounding villages to sell the skin and the process of dressing the skin was done without aid of power. The Tribunal noted from the order of CIT(A), that considering the fact that the purchases were made from unorganized sector cash payment were indispensable. Section 40(A)(3) constitutionally upheld even after amendment in rule 6DD(j). As clause 6DD(h) read with clause (k) itself provide sufficient liberation of the rigors of section 40A(3) which entitles the parties to claim full deduction on cash payment over Rs 20000/- where banking transactions are not available in the place where expenses is incurred or on the date on which the expenses is incurred. Clause (h) and (k) are sufficient liberation to 38 get over the practical difficulties of section 40(A)(3) Kamate Marbles Vs ITO 260 ITR 475 (Kar) Also as already submitted the payments were made to the farmers or to the agents on their behalf. Such payments are also covered by rule 6 DD (f) and 6 DD(I) of the rule as it then existed. On the other hand learned Departmental Representative supported the order of authorities below.
5.7 After going through rival submission and material on record, we find that according to the Assessing Officer, the assessee made cash payment for purchase of Soyabeen amounting to Rs.3,56,40,982/-, individual payments were made above the limit prescribed u/s.40A(3). Accordingly, the addition of Rs.71,28,196/- was made by the Assessing Officer which has been confirmed by the CIT(A). The stand of the assessee has been that payment had been made to the agriculturists or their agents, the assessee was covered under (h) and (i) under Rule 6DD of I.T Rules. The Assessing Officer held that exception was not applicable to the assessee because the assessee could not prove by way of documentary evidence that payments were made to the agriculturists. This aspect has not been looked in the light of objections raised by the assessee before the authorities below, so in the interest of justice, we set aside the order of CIT(A) and restore this issue to the Assessing Officer with a direction to decide the same as per fact and law after providing due opportunity of hearing to the assessee.
5.8 With regard to deletion of addition of Rs.4,10,21,320/-, the stand of Departmental Representative as regards the addition made under Section 40A(3), it has been held by the CIT(A) that since addition has already been made w.r.t. the creditors u/S 69, no further addition is possible under S40A(3). In this context our attention is drawn to the case of Ganesh Foundry and Casting Ltd. Vs. ITAT (2010) 328 ITR 202 (Pat) where the Patna High Court has held that in respect of amounts which were found to be paid out by 39 bearer cheques and later returned to the assessee, that not only were such amounts undisclosed income of the assessee, they were additionally hit by the bar of section 40A(3). The High Court has further opined:
"There is yet another aspect of the matter. Law is well settled that fraud unravels everything. We are satisfied that the materials on record disclose that the appellant engaged itself in acts of fraud indicated hereinabove and the same by itself will defeat the appellant's claim for deduction. Reference may be made to the judgment of the Court of Appeal in England reported in Lazarus Estates Ltd. v. Beasley [1956] 1 All ER 341 (CA). Speaking for the court Lord Denning observed as follows (page 345):
"If this argument is correct, the landlords would profit greatly from their fraud. The increase in rent would pay the fine many times over. I cannot accede to this argument for a moment. No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved it vitiates judgments, contracts and all transactions whatsoever;"
Therefore the CIT(A) is incorrect in holding that the addition in respect of S 40A(3) Amounts to double addition. So, she submitted that the order of the Assessing Officer may be restored. On the other hand, learned Authorized Representative supported the order of CIT(A) who has deleted the addition made by way of disallowance u/s.40A(3) of Act of Rs.4,10,21,320/-.
405.9 After going through the rival submission and material on record, we find that the addition by way of disallowance of Rs.4,10,21,320/- u/s.40A(3) was made @ 20% of the amount of credit which in the assessment order was treated as bogus. The total amount of such credit was added u/s.68/69 of Act at Rs.18,68,90,938/-. According to the Assessing Officer, these credits were left lying in books while supplies of Soyabeen and other items had been paid in cash. The assessee was asked to submit his reply in this regard and since he did not submit reply in response to the letter of the Assessing Officer dated 15.12.2006, addition in question was made. Before the CIT(A), the stand of the assessee was that once the entire expenditure has been disallowed under one or the other provisions of the Act, further disallowance could not be made as it would result in disallowance which is more than expenditure itself. The provisions of section 40A(3) earlier provided for disallowance of entire amount which would have been paid otherwise than the cheque or draft subsequently the disallowance was restricted to 20% of expenditure of the payment. The disallowance u/s.40A(3) cannot exceed expenditure of payment itself. The CIT(A) has observed that the disallowance was based on statement of few creditors and on adverse inference drawn in case where the assessee was not provided correct and complete address. There is no evidence of actual payment being done in cash and that too above the prescribed limit u/s.40A(3) for application of provisions of section 40A(3). Accordingly, the disallowance of Rs.4,10,21,320/- u/s.40A(3) was deleted. The stand of the revenue before us is that in the case of Ganesh Foundry and Casting Ltd. Vs. ITAT (supra) the Hon'ble High Court of Patna has held that in respect of amounts which were found to be paid out by bear cheque and later returned to the assessee with only such amounts undisclosed income of the assessee and they were additional hit by bar of provisions of section 40A(3) of Act. In case 41 before us there is no case of payment made by cheque and routing said amount back to the assessee in any manner. So, this ratio is not applicable to the facts of the assessee's case. It is not in dispute that certain creditors have been treated as bogus and entire amount of credit in books stands in the name of that creditor has been added u/s.68/69 of Act. Once the entire expenditure has been disallowed under one or the other provisions of that, further disallowance cannot be made as it will result in disallowance which is more than expenditure itself. In the facts and circumstances the CIT(A) was justified to delete the addition in question, so the order of CIT(A) needs no interference from our side. We uphold the same.
6. Next issue in revenue's appeal is with regard to addition made by the Assessing Officer on account of deemed dividend under the provisions of section 2(22)(e) of Act of Rs.12,47,20,000/-.
6.1 Assessing Officer had decided the issue against the appellant on the applicability of provisions of section 2(22)(e) of Act following an appeal in the case of one of the group companies of the same (Ghodawat) group, namely Star flexi Pack Industries, appeal No.Ich/534/06-07,A.Y.2004-05. In second appeal in the case of Star Flexi Pack Industries the Pune Bench of the ITAT has recently decided similar issue vide ITA No.731/PN/07 and ITA No.787/PN/07 dtd.30th January,09. The Tribunal has held in Star Flexi Pack Industries (supra) following special bench decision in the case of ACIT Vs. Bhaumik Colour P. Ltd., ITA No.5030/Mum/04 has held as under:
The expression shareholder referred to in sec.2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder than the provisions of sec.2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the provisions ofsec.2(22)(e) will not apply.42
6.28 In view of the aforementioned finding judicial precedent, which is deemed to be attached to and forming part of this order, and having regard to the undisputed fact that the assessee before us is not a registered shareholder in GIPL, we have to hold that very taxability of deemed dividend u/s.2(22)(e) in the hands of the assessee fails. The assessee succeeds .on this fundamental issue. In this view of the matter, all other issues raised in the cross appeals, which deal with the merits and quantum of addition have been rendered infructuous. These grievances are dismissed as such.
6.29 In the result, while the assessee's appeal is allowed in the term indicated above, the appeal filed by the revenue is dismissed. Pronounced in the open court today on 30th January, 2009."
6.2 As stated, the Tribunal in coming to the above conclusion has followed the decision in the case of Bhaumik Colour P. Ltd., where the questions raised before the Tribunal were as under:
1) Whether deemed dividend u/s.2(22)(e) of the Income Tax Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender?
2) Whether the words "such shareholder" occurring in section 2(22)(e) refer to a shareholder who is both the 'registered' shareholder and the beneficial shareholder?
6.3 The above questions were answered as under in the case of Bhaumik Colour P Ltd as under:
On the first question: Deemed dividend can be as assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder.
On the second question: The expression shareholder in Sec.2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder than the provisions of sec.2(22)(e) will not 'apply.43
Similarly if a person is a beneficial shareholder but not a registered shareholder then also the provisions ofsec.2(22)(e) will not apply.
6.4 The facts are identical in the case of the appellant company.
Deemed dividend arises in the transaction of the appellant company with Ghodawat Industries P. Ltd as in the case of Star Flexi Pack Industries. Star Flexi Pack was not a shareholder. Shri Sanjay Ghodawat, a partner with substantial holding in Star Flexi Pack Industries was also a shareholder with substantial holding in Ghodawat Industries P. Ltd. Therefore Star Flexi Pack Industries was held to be a beneficial shareholder in" Ghodawat Industries P. Ltd by the CIT (A) ,Kolhapur, relying on the CBDT circular no 495 dt 22-09-1987 wherein it was mentioned that dedmed dividend could be taxed in the hands of a concern ( non shareholder) also if the conditions mentioned in the section were satisfied.
6.5 In the case of the appellant also, the facts and circumstances are identical. Shri Sanjay Ghodawat, is a registered shareholder with substantial holding in both Ghodawat Industries P. Ltd as well as the appellant company. However, the appellant company is not a registered shareholder of Ghodawat Industries P. Ltd. The provisions of Sec 2(22) (e) of Act regarding Deemed dividend, according to the decision of the Hon'ble Tribunal in the case of the other group company , Star Flexi Pack Industries , cannot apply to a beneficial shareholder which is not also a registered shareholder. The facts and circumstances in both the appellant company and Star Flexi Pack are identical. The transactions on which deemed dividend is determined are with Ghodawat Industries P ltd as in the case of Star Flexi Pack. The decision in Star Flexi Pack Industries therefore applies with equal measure to the appellant's case. Following the decision in Star Fexi Pack Industries, it is held that the provisions of sec.2(22)(e) are not attracted in the case of the appellant, as the essential condition of the appellant being a registered share holder of Ghodawat Industries P. Ltd. is not 44 satisfied. Thus, addition on account of deemed dividend u/s 2(22)(e) was deleted by the CIT(A) following the decision of the Special Bench of ITAT in CIT vs Bhaumik Color 313 ITR(AT)146 Mum. Now Hon.Bombay High Court has also approved this decision in CIT vs Universal Medicare Pvt Ltd (2010) 324 ITR 263 (Bom). In view of above, the CIT(A) has rightly deleted addition made on account of deemed dividend u/s.2(22)(e) of Act and the same is upheld.
7. In the result, the appeal of revenue is dismissed and that of the assessee is partly allowed as indicated above.
Pronounced in the open Court on the day of 30th October 2013.
Sd/- Sd/-
(R.K. PANDA) (SHAILENDRA KUMAR YADAV)
Accountant Member Judicial Member
Pune, Dated: 30th October 2013
GCVSR
Copy to:-
1) Assessee
2) Department
3) The CIT-(A), Kolhapur
4) The CIT, Kolhapur
5) The DR, "A" Bench, I.T.A.T., Pune.
6) Guard File
By Order
//True Copy//
Senior Private Secretary,
I.T.A.T., Pune