Income Tax Appellate Tribunal - Pune
Rajdeep Marketing Pvt. Ltd.,, Pune vs Assessee on 24 April, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
BEFORE SHRI SHAILENDRA KUMAR YADAV,
JUDICIAL MEMBER, AND
SHRI G.S. PANNU, ACCOUNTANT MEMBER
ITA No.256/PN/2013
(A.Y: 2009-10)
M/s. Rajdeep Marketing Pvt. Ltd.,
202, The Anchorage,
Boat Club Road,
Pune - 411001
PAN: AACCR5970K Appellant
Vs.
ITO, Ward-1(1), Sholapur Respondent
Appellant by : Shri S.C. Tiwari
Respondent by : Smt. M.S. Verma and
Shri P.L. Pathade
Date of Hearing: 24.04.2014
Date of order : 05.05.2014
ORDER
PER SHAILENDRA KUMAR YADAV, J.M:
This appeal has been filed by the assessee against the order of Commissioner of Income Tax(Appeal)-III, [in short CIT(A)] Pune, dated 07.12.2012 for A.Y. 2009-10 on the following grounds.
1. That on the facts and in the circumstances of the case of the appellant and in law Ld. CIT(A) has erred in holding that the entire trading activity in rice claimed to have been carried on by the appellant during the year is 'sham' and evidence furnished thereof is fabricated, self-serving and the loss claimed from alleged trading activity is fictitious loss with a view to set-off the same against positive income earned by the appellant from other activities as to defraud the revenue.
2. That on the facts and in the circumstances of the case of the appellant and in law Ld. CIT(A) has erred in holding that even presuming for a while that the loss claimed is 2 genuine, the same is speculation loss and cannot be set- off against the other profits of the appellant as laid down u/s. 73 of the Act.
3. 3) That on the facts and in the circumstances of the case of the appellant and in law Id. CIT(A) has erred in not directing the AO to allow the appellant full deduction of the donation of Rs.20 Lacs made by it to the political party MNS during the year.
4. That the impugned order being contrary to law, evidence and facts of the case may kindly be set aside, amended and modified in the light of the grounds of appeal enumerated above and the appellant be granted such relief as is called for on the facts and in the circumstances of the case of the appellant and in law.
5. That each of the grounds of appeal enumerated above is without prejudice to and independent of one another.
6. That the appellant craves leave to reserve to himself the right to add, to alter or amend any of the grounds of appeal before or at the end of the hearing and to produce such further evidence, documents and papers as may be necessary.
2. The assessee is stated to be a company carrying out various business activities namely, insurance agency for Chola MS General Insurance, Chennai, marketing of Lifts manufactured by Thyssenkrupp Elevator (India) Pvt. Ltd., New Delhi and trading in commodities i.e. Rice & Nifty Future Sales. For the assessment year under consideration, a gross revenue of ₹ 6,43,91,988/- was shown to have been earned from insurance commission (₹ 11,36,607/-), commission on marketing of lift (₹ 6,28,12,121/-) and other income of (₹ 42,448/-) while loss was reported from other activities (Nifty Future sales - loss of ₹ 2,11,60,817/-, Commodity trading - Rice - loss of ₹ 3,80,77,164/-).
2.1 On examination of the details of trading activities carried out in commodities i.e. Rice from which the assessee reported to have been sustained loss of ₹ 3,80,77,164/-, it was noted by the 3 Assessing Officer that the assessee effected purchases of Rice at a higher rate (being in the range of ₹ 5300/- to ₹ 7150/- per quintal) while the sales were made at lower rate (ranging from ₹ 3577 to ₹ 5695/-). The value of the total purchases during the year were shown to be ₹ 14,68,67,267/- against which total sales were shown at ₹ 10,87,90,103/-. In response to the query with regard to the loss, the assessee explained before the Assessing Officer that the purchase rates were verbally agreed and sales were effected at a pre-agreed rate which were lower than the purchase rates, which resulted in losses. The Assessing Officer observed that the purchases and sales were carried out with a small group of traders in the same area. The names of the traders are stated to be as under:-
Parties from whom Purchases were made:
i) Shiv Agro India, Naya Bazar, New Delhi
ii) Manish Kumar Sunit Kumar, Naya Bazar, New Delhi
Vats Foods, New Delhi
iii) Sushil Kumar & Sons, Naya Bazar, New Delhi
iv) Jai Ambe Trading Co., Naya Bazar, New Delhi Parties to whom sales were made:
i) Arihant Sales Corporation, Naya Bazar, New Delhi
ii) Singhal enterprises, Naya Bazar, New Delhi
iii) Shri Sai Nath Agro India, Naya Bazar, New Delhi
iv) Premchand Deepakkumar, Naya Bazar, New Delhi
v) Bajrang Traders, Naya Bazar, New Delhi
vi) Sunitkumar Navinkumar, Naya Bazar, New Delhi 2.2 Further, the Assessing Officer called upon the assessee to furnish the details of order placed for purchases, transportation details along with bills, delivery challans, etc. The stand of the assessee has been that before the Assessing Officer that the 4 orders for sale of rice were taken before hand depending upon the future market. It was claimed that the rate of commodities was highly fluctuating and in honour of the order already taken, the assessee had to buy rice from the market at the existing rate on the date pre-agreed for delivery at the pre-decided price. It was also claimed that the transactions were carried out on delivery basis where the goods remained in the go-down of the supplier till the time the same was lifted by the buyer and therefore, there was no question of dispatch, transportation of goods, etc. The assessee also sought to justify the adjustment of loss claimed to be sustained in business against the income from other activities, inter alia, stating that the assessee has carried out trading activities and not speculative one. The Assessing Officer did not agree with the contention of assessee. Seeking clarifications of the assessee that the sales were effected on a pre-agreed price.
The assessee was called upon to furnish sale contract rate agreement in support of the arrangement entered into with the buyers as according to the Assessing Officer, without such a valid and legally enforceable contract, the assessee would not have sold the goods at lower rate which it had purchased at a higher rate. The assessee stated before the Assessing Officer that there were no such contracts. Noting that in the absence of such an agreement, the assessee was under no legal obligation to supply, goods at rates lower than the market rates sustaining heavy loss, the Assessing Officer inferred that the sales shown to be made at lower rates deliberately in order to book losses to set off the profit earned in other areas. The Assessing Officer also observed that the assessee failed to produce such details supporting the movement of the goods. The Assessing Officer also noted that the claim of the assessee that such requirements were done away by virtue of the terms of agreement could not be given any credence in the absence of any valid agreement entered into between the assessee and the so-called purchasers. In 5 order to verify the genuineness of the transactions, the Assessing Officer also issued letters seeking confirmation of genuineness of the transactions. In the following cases, the letters sent by the Assessing Officer were stated to be returned by the postal authorities citing reason that the addressee did not exist on the address mentioned:
Sushil Kumar & Sons (Supplier) Singhal enterprises (Buyer) Bajrang Traders (Buyer) Vats Goods (Supplier) Jai Ambe Traders (Supplier) Manishkumar Sunitkumar (Supplier) 2.3 The Assessing Officer also did not believe the confirmation on the ground that the same were posted from Solapur. In a couple of other cases, namely, Arihant Sales Corporation, Naya bazaar, New Delhi and Premchand Deepak kumar, New Delhi, though they have admitted having sold Rice to the assessee in the confirmation received in their name, the relevant records in the books of the assessee showed that the transactions were in fact for 'sales' effected by the assessee to the above parties as against 'purchases' confirmed by the said parties. It was also noted by the Assessing Officer that all the confirmation received in the name of the various parties had striking similarities in their format, content, structure, font and other attributes. The Assessing Officer was of the view that this clearly indicated that the assessee tried to fabricate evidence and which cast doubt on the genuineness of the transactions. The Assessing Officer also stated that the confirmation letters furnished by the assessee on behalf of other parties to support its case that the purchases were effected pursuant to pre-agreed terms, did not bear other vital details like purchase rate, quantity and quality agreed, delivery schedule etc. and some of them were even undated.6
Countering the pre-decided purchase price theory, it was also highlighted by the Assessing Officer that the relevant purchase bills clearly showed that the goods were purchased just one or two days before those were sold by the assessee company. The various defects noted/observations made by the Assessing Officer which, according to him, put the entire arrangement under a shadow, are summarized by the Assessing Officer as under:-
"The auditor of the appellant has also reported that the company was never involved in any trading activity like trading in rice;
Trading activity started from August 2008 immediately after receiving commission income as this line of business was not there in the preceding year and thus, this was a pre- plan to avoid taxes.
The bills produced in respect of purchases and sales did not contain details like quality of rice being purchased/sold but simply mentioned 'Basmati Rice'. As per the Assessing Officer, there were many varieties and species of basmati rice which carries different price tag. As per the Assessing Officer, non-furnishing such details was a deliberate attempt on the part of the appellant to pre-empt comparison of rates shown with the then prevailing market rates. The bills furnished sans the quality details had no authenticity and the same could be fabricated ones.
All the purchases and sales are routed through a small group of persons having business address situated in the same locality i.e. Naya Bazar, New Delhi. Though the transactions of purchases and sales are recorded in the books, there was no documentary proof of its delivery by the seller to buyer or its storage, transportation etc. In all the transactions, the goods were sold at rates much lower than the purchases. In certain cases, more than one bill is prepared for sale to the same party on the same date at the same rate. As per the Assessing Officer, those are accommodation entries to show purchases at higher rates. Details of the transactions are enumerated at pages No.17 to 20 of the assessment order.
The appellant could not furnish any agreement entered into in support of the sale at pre-decided rates. In a few cases 7 where letter from the parties concerned was produced, the same did not contain details such as quantity, quality, rate, exact period of delivery of goods and also did not contain any consent granted by the appellant to the terms mentioned therein. Scanned copy of such letters received in the case of a) Vats Foods b) Manish Kumar Sumeet Kumar
c) Sushilkumar & Sons, are placed at pages No.22 to 24 of the assessment order. The Assessing Officer found that even the signature contained in the said letters did not match with the signature contained in the account confirmation statements claimed to have been issued by the above parties. Copies of statements in the above cases are scanned and put up at pages No.26 to 28 of the assessment order. As per the Assessing Officer, all these clearly indicated that there did not exist any pre-decided agreement to supply Rice as had been claimed by the appellant and the evidence furnished appeared to be fake and fabricated.
Verification of purchases bills of different parties indicated that there bear same handwriting and more or less similar formatting. Some of such bills, namely in the case of Sushil Kumar & Sons, Shiv Agro India, Manish Kumar Sumit Kumar are scanned and placed at page No.30 to 33 of the assessment order. As per the Assessing Officer, this clearly indicated that the bills could be fabricated which in turn, questions the very genuineness of the transactions.
The appellant could produce none of the parties for examination by the Assessing Officer despite summons u/s.131 of the IT. Act having been issued. Thus, the appellant failed to substantiate the existence of the parties and the transactions."
2.4 The Assessing Officer has also observed that the assessee changed its stand during the course of the assessment proceedings with regard to the transactions in question. The director of the assessee company was confronted on the issue by the Assessing Officer while recording his statement u/s.131 of the IT. Act in response to which he reportedly claimed that the purchases rates were agreed upon at the time of finalization of verbal contract which usually took place 2 to 3 months prior to the sale transactions, though the purchase bills were raised at the time of delivery and not at the time of placing order. It was claimed that by the time sales took place, the market had come 8 down substantially leading to losses. The Assessing Officer did not agree with the propositions put forward on behalf of assessee. The Assessing Officer observed that no reasonable person would purchase goods at much higher rates than the prevailing market rate and sell at lower rates thereby sustaining heavy losses, merely going by the verbal agreement which was not supported by any legally enforceable agreement.
2.5 With a view to ascertain the genuineness of the parties with whom the assessee claimed to have entered into the impugned transactions, a reference was also made by the Assessing Officer to the Addl. Director of Income Tax (Inv.), New Delhi, through the Jt. Commissioner of Income Tax, Range-1, Solapur. In response, the Addl. DIT (Inv.), New Delhi is reported to have informed that out of the eleven parties referred to by the Assessing Officer; following six parties were not found to be on the address provided:
1) M/s.Vat Foods
2) M/s. Jay Ambey Trading Co.
3) M/s. Singhal Enterprises
4) Shri Raj Kumar, Prop. Of M/s. Manishkumar & Sunitkurnar
5) Shri Sushil Goel, prop: M/s. Sushilkumar & Sons
6) M/s. Bajrang Traders 2.6 Local enquires conducted by the concerned Assessing Officer at New Delhi have reportedly failed to establish the identities of the parties at the given addresses. It was also stated that none of the parties responded to the Summons issued by the ITO directly, but four parties furnished a preliminary reports through messengers. However, in none of the case, the parties personally attended before the concerned Assessing Officer.
However certain parties reportedly furnished certain details 9 which were stated to be not in response to the summons actually issued by the ITO(Inv.), Unit-V(3), New Delhi.
2.7 Citing the various discrepancies as discussed hereinabove, the Assessing Officer held that the concept advanced by the assessee that the sales were effected on pre-decided rates and the goods were sold on delivery basis etc. were entirely vague and misleading and without any substance or supported by any documentary evidence and according to him, the entire arrangement was a sham ostensibly invented with a purpose to set off the profit of the assessee had gained from its other business. He further held that the transactions claimed to have entered into with the various parties found to be not genuine in the light of the enquiries conducted by the Investigation Wing of the Department at New Delhi. The Assessing Officer, thus, holding that the entire trading activity in Rice claimed to have been done by the assessee was not genuine and the evidence furnished thereof were fabricated, the loss claimed of ₹ 3,80,77,164/- from the said activity was disallowed by the Assessing Officer.
2.8 The matter was carried before first appellate authority, wherein the various contentions were raised on behalf of assessee and having considered the same, the CIT(A) concluded as under:
"2.3.1 In view of the above, the Assessing Officer is perfectly justified in holding that the transactions in question are only accommodation entries and sham transactions entered into by the appellant in collusion with the said Delhi parties for the purpose of creating and booking fictitious loss on the basis of fabricated documents in the form of purchase invoices, sale bills etc. The conclusions / observations drawn by the Assessing Officer regarding genuineness of impugned transactions are not based on suspicion, conjectures and surmises. The well reasoned conclusions are based on the detailed examination of the claim made by the Assessing Officer.10
2.3.2 To sum up, on a careful consideration of all the evidences placed on record cumulatively and submissions of the appellant, it is amply clear that the entire trading activity in Rice claimed to have been carried on by the appellant during the year is sham and the evidence furnished thereof was fabricated, self-serving and the loss claimed from alleged trading activity is fictitious loss. It is only collusive device or arrangement for creating and booking fictitious loss in the books of account of the appellant in connivance with said Delhi parties with a view to set off the same against positive income earned by the appellant from other activities and to defraud the revenue. In such circumstances, the loss claimed of Rs.3,80,77,164/- from the said rice trading activity was rightly disallowed by the Assessing Officer. Accordingly, the disallowance of alleged loss 3,80,77,164/- made by the Assessing Officer does not warrant any interference and the same is upheld. Ground of appeal No. I fails.
2.3.3 Without prejudice to the above finding that the transactions in question are sham transactions and the loss claimed is fictitious loss, even presuming for a while that they are genuine transactions as claimed by the appellant, the losses were speculation losses as the alleged transactions for purchase and sale of a commodity are ultimately settled otherwise than by the actual delivery. As discussed hereinabove, the appellant failed to prove with any evidence that there was physical movement or transfer of delivery of commodity from supplier to the appellant or from the appellant to the buyer or from the supplier directly to the buyer. For taking out the transaction from the ambit of speculative transaction, actual delivery of goods was essential. As held by the ITAT, Delhi, constructive or symbolic delivery of goods even if it were established was of no consequence (47 ITD 476). In these circumstances, the loss claimed constitutes speculation loss as per the definition of speculative transaction provided under sec. 43(5) of the Income Tax Act and the case of the appellant is not covered by any of the exceptions in the proviso to the section. This speculation loss, even presuming to be genuine for a while, cannot be set off against the other profits of the appellant as laid down under sec. 73 of the Income Tax Act."
3. Before us, it was submitted on behalf of assessee as under:
"1. The main dispute in this appeal, represented by Grounds of appeal no. 1 & 2, is against disallowance of the claim of the Appellant of set-off of loss incurred from trading 11 in rice. During the year the Appellant indulged into rice trading and for that purpose entered into agreements to purchase rice at a pre-determined rate for deliveries to be executed at a future date from following parties :-
1. Shiv Agro India, Naya Bazar, New Delhi -110006
2. Manish Kumar Sumit Kumar, Naya Bazar, New Delhi -
110006
3. Vats Foods, S. P. Mukherjee Marg, New Delhi -110006
4. Sushil Kumar & Sons, Naya Bazar, New Delhi -
110006
5. Jai Ambe Trading Co., Naya Bazar, New Delhi - 110006 Unfortunately, the price of rice had considerably reduced in the intervening period prior to the contracted date of delivery and therefore the appellant decided to sell the same immediately. Thus as against the agreed purchase consideration of Rs.146,867,267/- the Appellant could fetch on sale Rs.108,790,103/- only resulting into trading loss of Rs.38,077,164/-. The Appellant carried out its sale of rice to the following parties:-
1. Arihant Sales Corporation, Naya Bazar, New Delhi -
110006
2. Singhal Enterprises, Naya Bazar, New Delhi - 110006
3. Shri Sai Nath Agro India, Naya Bazar, New Delhi -
110006
4. Premchand Deepakkumar, Naya Bazar, New Delhi -
110006
5. Bajrang Traders, Naya Bazar, New Delhi -110006
6. Sumitkumar Navinkumar, Naya Bazar, New Delhi -
110006
2. The Appellant submits that the transactions of purchase and sale have been carried out through banking channels and are reflected not only in the bank account of the Appellant but in the bank account of concerned parties also having been paid & received on RTGS transfer. Therefore the authenticity of the transactions cannot be doubted. Furthermore, the Appellant's transactions are supported by purchase and sale bills. All these bills contain detailed name and address of the party, TIN No., telephone no. and in most cases mobile no. also. During the course of assessment proceedings the appellant furnished all these documents, bank accounts, PAN of each one of the 11 12 parties and much more as would be seen from the appellant's submissions to learned Assessing Officer placed in the voluminous paper-book. In this manner, the Appellant discharged his burden of proof and substantiated his claim of deduction of the loss incurred by him in rice trading. But the learned Assessing Officer instead disallowed the Appellant's claim based on suspicion, conjectures and surmises as follows:-
1. There was no agreement in writing as regards the Appellant's contract of supply of rice at a future date.
2. According to the Assessing Officer because there was no agreement in writing the Appellant should have disregarded the oral contract and saved the huge loss.
3. The Appellant himself did not take delivery of rice and instead after purchase of corresponding quantity of rice it requested the suppliers to allow the Appellant's buyers to take physical delivery.
4. The suppliers of rice and the buyers were all located in Naya Bazar, New Delhi.
5. The Appellant himself did not take any delivery of rice and therefore could not produce the particulars of transportation, storage, freight bills, delivery challans etc.
6. According to the Assessing Officer though there was not much difference between the date of purchase and date of sale, there was huge difference in the rate at which rice was purchased and sold.
7. According to the Assessing Officer the Appellant's transactions resulted into loss which is not normal incidence of business.
8. Trading in rice was not there in the preceding year.
9. According to the Assessing Officer confirmation letters received from the parties were identically worded and appeared to have been typed simultaneously.13
10. According to the Assessing Officer mere confirmation letters were not sufficient. There should have been agreement in writing.
11. According to the Assessing Officer some of the parties who confirmed the transactions with the Appellant sent letters to the Assessing Officer by speed post from Solapur post office and not New Delhi.
12. According to the Assessing Officer there is variation in signature of the same person between the bill and the letter of confirmation of transaction.
13. According to the Assessing Officer certain bills of different parties got same handwriting.
14. The bills of sale and purchase mentioned quality of rice as 'Basmati' but those bills did not specify what type of Basmati rice.
15. The Appellant's Authorised Representative stated on 18.10.2011 that sales order preceded purchase order which stand was subsequently modified and it was stated that purchase orders preceded sales order.
16. The Appellant himself did not produce any party in spite of notice u/s. 131 served upon it.
17. According to the Assessing Officer the letters issued by him to some of the parties from whom the Appellant purchased or to whom the Appellant sold rice were received back from postal authorities with the remark "No Such Firm in this Number".
18. According to the Assessing Officer the enquiry conducted by the Inspectors at New Delhi reflected that out of eleven parties six parties were not found at given address. Only four parties confirmed the transactions through messengers but nobody appeared in person.
19. According to the Assessing Officer the Auditor of the Appellant Company had agreed that the Appellant Company never involved in any trading activities.
3.1 Based upon the above reasoning learned Assessing Officer has given his findings in Para 8.3 of the assessment order in the following words:-
"Considering the facts as regards to non-service of letters issued to the parties in question, which is 14 authenticated by the Postal Authority and realistic information gathered by the ITO (Inv.), Unit V(3), New Delhi, it is confirmed the transactions are not genuine and so called evidences put forth before me is sale bills, purchase bills, account extracts are liable to be treated as fabricated and I hold that the transactions of the assessee-company in trading of rice are not genuine in nature and losses are booked to merge the positive income and to avoid the tax liability arises."
3.2 During the course of hearing before Id. CIT(A) the appellant met all the aforesaid objections and arguments of Id. Assessing Officer. Reference in this behalf maybe made to the appellant's written submissions dated 23.10.2012 and 27.11.2012 placed in the appellant's paper-book from pages 185 to 249. Ld. CIT(A) has in the impugned order held that the loss in question was fictitious loss booked to offset the positive income earned by the appellant from other activities. For this proposition Id. CIT(A) has given the following reasons:-
1. The appellant was never involved in rice trading in the earlier years.
2. The bills placed on record by the appellant only mentioned 'Basmati Rice' in number of bags. In the absence of further details as to which quality of Basmati Rice, it was not possible to compare the rates shown in the purchase invoices and sales bills with the then prevailing market rates.
3. There was no documentary proof like dispatch notes, freight receipts, delivery challans, etc. for storage, transportation, delivery of goods by sellers to the appellant or by the appellant to buyers or by the sellers directly to the buyers.
4. In all the cases the goods were shown to have been sold at rates much lower than the purchase unlike normal trading activity where there would be profit in some transactions and loss in other transactions.
5. The appellant had no previous experience, infrastructure and holding capacity for such huge quantity of rice and therefore it was 15 inconceivable that the appellant entered into huge transactions on credit and at predetermined rates on the strength of so called oral agreements.
6. The assessing officer did receive in a few cases letters from the parties concerned but the same did not contain details such as quantity, quality, rate, exact period of delivery of goods and also did not contain any consent of the appellant to any terms and conditions.
7. The assessing officer found that even the signatures contained in the letters of parties received by him did not match with the signature contained in the account confirmation statements.
8. It was noticed that the appellant kept on changing his stand during the assessment proceedings. It was first stated that sales were effected at predetermined prices but later on it was stated that purchases were effected at predetermined prices. There was no evidence that there were any agreements at predetermined prices. A few letters from some of the parties which did not contain details such as quantity, quality, rate, exact period of delivery of goods did not suffice.
9. All the payments made or received were in the last week of March. Except firing copies of accounts, the appellant failed to produce delivery challans and transportation receipts to prove actual delivery of goods. Hence, payments made through banking channels did not establish genuineness of transactions.
10. Letters of enquiry sent by the Assessing Officer were received back from the postal authorities in six cases citing reason that the addressee did not exist on the address mentioned, in the case of Sushil Kumar & Sons, New Delhi, the confirmation letter purportedly sent by the party to the assessing officer was found to have been posted from Solapur.
11. The confirmations received from the parties had striking similarities in their format, content, structure, font and other attributes.16
12. The assessing officer attempted to make spot enquiries by making reference to the Addl.
Director of Income-tax, the same however did not yield much result as out of 11 parties 6 were not found to be on the address provided. Moreover, none of the parties attended before the ITO (Inv.) in response to the summons issued by him nor furnished details asked for.
13. The assessing officer asked the appellant to produce the parties in question for examination but the appellant failed to do so.
Based on reasoning as above-mentioned Id. CIT(A) held that on the facts of the case it was necessary for the appellant to produce cogent evidence or the parties involved to dispel the suspicion of the assessing officer but that was not done The only evidence produced by the appellant was a few bills and stereo-type confirmations which did not establish conclusively that the transactions were genuine. Ld. CIT(A) held that the Judgment of Hon'ble Supreme Court in the case of Kishinchand Chellaram Vs. CIT 125 ITR 713 (SC) did not Advance the case of the appellant because in the case of the appellant only local inquiries were conducted by IT. Offices to ascertain the existence and identity of the parties and no material was collected behind the back of the appellant.
3.3 The appellant submits that the insistence of Assessing Officer and learned CIT(A) upon the requirement of written agreements is unjustified. In business oral contracts are often made and executed. Transactions worth millions of rupees take place every day by word of mouth. For example, in diamond trade goods worth millions of rupees are handled, exchange hands, kept in possession for several days without any record in writing most of the time. There is no prescription in any law including Income-tax Act, in this respect and it is left to the parties to transact in the manner they deem fit. Not an iota of material has been relied upon by the authorities below to signify that there was anything unusual about the absence of written agreement in the appellant's case. The observation of the Assessing Officer that 17 the Appellant should have merrily dishonoured his commitment because the contract was oral and not in writing is startling.
3.4 Both learned Assessing Officer and learned CIT(A) have argued that there was no rice trading in earlier years and the appellant had no infrastructure to keep huge quantity of rice after purchase and sale and that goods were immediately sold. These arguments show that both authorities were not familiar with contract trades in agricultural commodities. The Appellant submits that like him there are hundreds of traders who indulge in the business of purchase and sale of agricultural commodities relying upon the easy availability of required logistics on payment of requisite charges. It was not needed that the appellant should have first bought godown, trucks and such like things before taking a plunge in rice trading. The appellant could have arranged to take delivery himself and keep the goods in storage, at certain cost, as long as considered prudent. The Appellant sold the goods immediately after purchase as in his view there was going to be further loss otherwise in the falling market. As regards the objection that the trading in rice was not there in the preceding year, nothing turns upon it. If something has not been done earlier that does not preclude the businessman from doing it later. The fact of the matter is that the stated quantities of rice were indeed purchased and were indeed sold. It would have been senseless for the appellant to take delivery first and then give it to buyers when all the parties were situate at Naya Bazar New Delhi and the appellant at Solapur. All the parties with whom the Appellant traded were situate at Naya Bazar New Delhi because that is a big Mandi or market for rice trading. The objection of the learned Assessing Officer that there was not much gap between date of purchase and date of sale is again based on the Assessing Officer not being able to grasp the factual matrix of the Appellant's transactions. As submitted to learned 18 Assessing Officer time and again there were two dates in relation to the purchase of rice - one being the date on which purchase was contracted and the second being the date on which purchase was executed. Therefore there is no substance in the objection of the Assessing Officer that such huge difference in the rate could not have occurred within little time difference between purchase and sale. For this purpose he should have borne in mind that the contract had been made between the Appellant and its suppliers much before the execution of trade. The Appellant further submits that the rates at which the purchase and sale were made are supported by the Certificate of market rates issued by All India Rice Exporters Association and that certificate was furnished to the Assessing Officer. As regards the observations of learned CIT(A) that the appellant could not have reached oral agreements for purchase of huge quantity of rice, the appellant submits that these are unilateral conjectures of learned CIT(A) without having been based on any material at all.
3.5 The objections of both the authorities that because everyone looks for profits the Appellant's transactions should not have resulted into loss are surprising. They are correct that everyone looks for profit but not so in their assumption that everyone must succeed in making profit. Some parties fail and make loss in spite of their best intention. Equally mindless is the statement of the Assessing Officer that the appellant's auditor had agreed that the appellant did not indulge in rice trading. Merely because one column in the prescribed format was blank such inference could not be drawn when the same auditor has signed the annual accounts and given the certificate of the correctness and completeness of books of account.
3.6 As regards the arguments of both authorities that confirmation letters received from the parties were identically worded and appeared to have been typed on the same printing 19 machine etc. the appellant states and submits that he was never supplied with any material whatsoever relied upon by the Assessing Officer. This was so in spite of the appellant's repeated requests during the course of assessment proceedings. Kind attention is invited to the appellant's letter dated 30th November 2011 placed at page 15 to 17 of the Paper-book. The appellant is therefore handicapped but disagrees that there are striking similarities in the format, content, structure, font and other attributes in all the papers sent by Delhi parties. Secondly, these doubts were best put to the parties in question. Learned Assessing Officer hardly did anything meaningful in that regard. However, it is submitted that all the parties with whom the Appellant entered into rice trading are situated at Naya Bazar, New Delhi. It is quite possible that these traders might have interacted before sending replies to the Assessing Officer and that resulted into certain similarities. At any rate, not much significance can be attached to such arguments unless it is established that the letters did not emanate from the purported signatories. As regards the statements and arguments of learned Assessing Officer and CIT(A) regarding the A.O's letters to some officer(s) in Delhi the appellant is in no position to know or verify the assertions of the Assessing Officer. The entire proceedings, if any have been carried out by the Assessing Officer behind the back of the appellant Worse still, in spite of repeated requests during the course of assessment proceedings learned Assessing Officer did not confront the Appellant with any material. The appellant submits that during the course of assessment proceedings the appellant had submitted PAN of each one of 11 parties. It was therefore mandatory for the Assessing Officer to refer to the assessment records and the assessing officers of these parties. By its letter dated 30th November 2011 (PB 15-17) the appellant requested the assessing officer to do so but learned Assessing Officer chose to ignore that. Instead the 20 Assessing Officer ordered the parties all situate in Delhi and not under any control or supervision of the appellant be produced before him in Solapur. No efforts were made to enforce the attendance of the parties upon whom allegedly notices were served. There is hardly any enquiry worth credibility as regards the parties upon whom allegedly notices could not be served. The appellant does not know even whether any proper steps had been taken for service of summons upon such parties.
3.7 Both authorities have raised the issue that the bills do not indicate what quality of Basmati rice. This shows the intensity of their bias. It is not the general market practice to mention further specifications of rice beyond the broad description, if at all, such as Basmati, Parmal, Kamod, Indrayani, Pusa etc. Any further identification of quality is done based on samples and not on any written description. The objections in this regard by both authorities are unrealistic, hence unwarranted. The appellant states and submits that the mention of word Basmati or Rice in the bills meets the requirement or expectation in relation to any bill issued in the ordinary course. Beyond this the quality would be determined on the basis of visual inspection or cooking and not by any description on paper. It is not explained as to how the bills in question thwarted comparison and verification when such details are by and large are not to be found in other bills as well.
3.8 The appellant submits that there is only one instance where erroneously it was mentioned that the appellant had entered into contracts to sale rice at predetermined subsequent date. This error was promptly corrected. In all other communications it has been consistently mentioned that appellant had entered into contracts to purchase rice at predetermined subsequent date. Both the Assessing Officer and CIT(A) have very unfairly tried to capitalize on this error and leveled the allegation that the appellant keeps on changing his stand. Both of them 21 conveniently forget that the appellant has kept regular books of account which are duly audited under section 44AB of the Act and that the transactions are backed by supporting bills and bank transfers of equivalent money. Where is the question of changing stand from time to time when the facts are conclusively encapsulated in contemporaneous documentation?
3.9 As regards the issue of summons to the parties and so called efforts made in Delhi the appellant submits that the entire proceedings have been, if at all, enacted behind the back of the appellant and at no stage the appellant has been confronted with any material or evidence in that respect. The appellant has been kept in dark all along beyond one-sided narration in the assessment order. The appellant states and submits that during the course of assessment proceedings it had requested learned Assessing Officer to inform it and furnish it with the material, if any, gathered by him so that proper reply may be given to him. But he simply ignored the appellant's request and therefore no reliance can be placed on the material gathered, if any. The appellant submits that it had discharged the initial onus to state facts with supporting evidence and it was for the Assessing Officer to carry out proper service of notices and summons on the parties.
3.10 The appellant states and submits that from the detailed discussion in the foregoing paragraphs it would be seen that both the authorities have grossly misdirected themselves on the facts of the case. The Assessing Officer alleges that the parties with whom the appellant had carried out purchase and sale of rice did not exist after overlooking and ignoring the essential facts such A. All the 11 parties have issued their bills or vouchers which contain detailed address, TIN no., telephone no. and in most cases mobile no. also.
22B. All payments have been made or received through RTGS and thus transactions are from Bank Account to Bank Account.
C. Each of 11 parties have PAN that were furnished
to Assessing Officer
D. Notices and summons were indeed served
upon and responded to by many parties.
On these facts the finding that the parties did not exist and that the documents relied upon by the appellant are fabricated is entirely unsustainable. Thus the very basis on which the Assessing Officer has disallowed the deduction of loss is contrary to the facts of the case. Learned CIT(A) also has severely misdirected himself on the facts of the appellant's case. He alleges that there were strange features in bank accounts whereas none has been pointed out in the assessment order or impugned order of learned CIT(A). The fact of the matter is that both authorities shunned the powerful evidence of bank transfers as they had no answer thereto. CIT(A) finds baseless defects in the bills contrary to the general practice in the trade. He belittles the letters of confirmation as they were not drafted as legal documents. Both authorities have severely commented upon the appellant not producing delivery challans whereas time and again they were told that delivery of rice was taken and given by way of the request made to the suppliers to deliver directly to the appellant's buyers; that all the parties were located at Naya Bazar Delhi; there was no question of the appellant first taking delivery in Solapur and then resend it to Naya Bazar Delhi and that such documentation if any would be available with the parties in Delhi and not the appellant. Above all, neither the Assessing Officer nor CIT(A) have made any attempt to make cross-verification with reference to the accounts and assessment records of the parties. There is lame reference to so called letter to ADIT (Inv.) Delhi for which it is alleged he sent his inspector. All this, if at all, was carried out behind the back of the appellant and without furnishing any material to the appellant. In spite of repeated requests not an iota of such material was furnished to the appellant. The fact of the matter is that there is not even a remote denial from any of the parties.
3.11 Both authorities have grievously misdirected themselves in law also. They have made wrongful assumption in law that the appellant was required to prove the genuineness of 23 the transactions beyond any shadow of their suspicion and if that required production of 11 parties in Solapur the appellant ought to have done that. The impugned order is categorical, "it is all the more necessary for the appellant to produce cogent evidence or the parties involved to dispel the suspicion of the Assessing Officer and to show that the impugned transactions are genuine. The only evidence produced by the appellant is a few bills and stereotype confirmations, which as discussed hereinabove do not establish conclusively that the transactions are genuine and the appellant has actually carried out such activity in rice trading." In other words the law propounded by CIT(A) is that there is duty cast upon the taxpayer to dispel all suspicions of the Assessing Officer and do whatever it takes; that it is open to the Assessing Officer to leave out the cogent evidence furnished by the assessee if the same does not fall in line of the objective of disallowance and that even then there is duty of the assessee to prove its transactions conclusively. Thus according to CIT(A) their suspicion is enough and the appellant must rule out the suspicion conclusively. The appellant states and submits that this is not the law of the land. Law is that the apparent state is real and the onus to prove that the apparent is not the real is on the party who claims it to be so. If it is revenue which claims that the apparent is not the real the onus is on revenue. Reference in this respect is invited to CIT v. U. M. Shah 90 ITR 396 (Bom); CIT v. Daulat Ram Rawatmull 87 ITR 349 (SC); CIT v. Bedi & Co. Pvt. Ltd. 230 ITR 580 (SC) and a host of other cases where this dictum has been applied. This burden of proof is onerous and it cannot be discharged by suspicion. Suspicion howsoever strong cannot take place of evidence - Mehta Farikh & Co. v. CIT 30 ITR 181 (SC); Umacharan Shaw & Bros v. CIT 37 ITR 271 (SC); Lalchand Bhagat Ambica Ram v. CIT 37 ITR 288 (SC); Sona Electric Co. V. CIT 152 ITR 507 (Del); Sukhdayal Rambilas v. CIT 24 136 ITR 414 (Bom); R. Y. Durlabhji v. CIT 211 ITR 178 (Raj.); CIT v. Bedi & Co. Pvt. Ltd 230 ITR 580 (SC) etc. 3.12 The major part of the assessment and CIT(A) order is based on fault finding with the reply received from parties and the so called signature variations etc. None of this material constitutes evidence or material to refute the appellant's transactions that are well supported by documentary and external evidence. None of these doubts were put to the parties who wrote those letters and who issued those bills. Apart from issuance of summons no steps were taken to enforce the attendance of the parties. On the top of it both authorities have decided against the appellant because the appellant did not produce these parties for examination by the Assessing Officer at Solapur. In these circumstances the authorities cannot unilaterally raise some questions and then themselves answer against the appellant. The assessee cannot be faulted, nor can any adverse inference be drawn against the appellant if the parties did not appear in response to the summons issued - Nathu Ram Premchand v. CIT 49 ITR 561 (All.); CIT v. Orissa Corporation (P) Ltd. 159 ITR 78 (SC); CIT v. U. M. Shah 90 ITR 396 (Bom) etc. 3.13 As the matter stands, both the assessment order and impugned order of learned CIT(A) are based on no material against the appellant. After leaving out material evidence furnished by the appellant the Assessing Officer states that he carried out some enquiry. Even this so called enquiry has not brought out any material or evidence against the appellant. The entire assessment order is strewn with suspicion, conjectures and surmises. Such an assessment is legally unsustainable. Reliance in this behalf is placed on Nagulakonda Venkata Subba Rao 31 ITR 781 (AP); Kishinchand Chellaram v. CIT 125 ITR 713 25 (SC); CIT v. Biju Patnaik 190 ITR 396 (Ori); Sunita Singhal v. ADI 220 ITR 605 (Del) and a host of other cases.
3.14 The appellant states and submits that most of the case law enumerated in the foregoing paragraphs have arisen under the provisions of s. 68, 69, 69A etc. which are special rules of evidence for the purpose of I. T. Act and by legal fiction additional burden of proof is cast upon the assessee. In the case of the appellant transactions are of purchases and sales made in the course of trading. These transactions are not covered by the provisions of s. 68, 69, 69A to 69D. There is no special or additional burden of proof cast upon the appellant. Hence, the case of the appellant is far stronger than the case law relied upon in the foregoing paragraphs.
3.15 Learned CIT(A) has raised a new issue in Para 2.3.3 of the impugned order that in any case the loss incurred by the appellant being speculation loss cannot be set off against the appellant's income from sources other than speculation. For this purpose he alleges that in the case of the appellant the transactions for purchase and sale of commodity are ultimately settled otherwise than by actual delivery. In the same vein he argues, relying upon ITAT decision in the case of Bishwanath Traders and Investors Co. Ltd. v. DCIT 47 ITD 476 (Del) that constructive or symbolic delivery of goods is of no consequence. That decision has been based on the peculiar facts and circumstances of that case and by virtue of distinguished facts of the appellant is in favour of the appellant. Hon'bie Delhi bench has decided the case against the assessee before them in the following words:-
"Considering the facts and circumstances of this case, we are of the view that assessee has failed to establish that the goods had in fact been purchased by it from others and that the five parties had acted merely as its 26 intermediaries. Since assessee has not taken or given the actual delivery of goods and since the transactions between the assessee and the five parties had been settled other than by way of actual delivery of goods, the same, in our view, were speculative transactions within the meaning of s. 43(5). We, therefore, uphold the finding of the Revenue authorities that the loss suffered by the assessee is a speculative loss and not a business loss."
In that case the assessing officer found that there was no evidence that goods were actually acquired and subsequently sold to others by the parties named by the appellant. In the case of the appellant the purchase and sales have been independently made by the appellant himself and there is complete documentation and confirmation of the transactions. As all the parties were situate at Naya Bazar only, at the request of the appellant goods were actually delivered to the appellant's buyers and that clearly amounted to delivery taken by the appellant, the supplier parties otherwise having no transaction or connection with the buying parties. In this manner the appellant has taken and given delivery of goods and correspondingly made separately full payment to the suppliers and received full payment from the buyers. The facts of the case of the appellant are vastly different from that of the assessee in the decision relied upon by learned CIT(A). In the case of the appellant neither the contract of purchase nor the contract of sale has been settled otherwise than by actual delivery. There is no settlement based on difference in price payable and receivable. The loss claimed is difference between the purchase consideration paid and sale consideration received.
18. In view of the discussion in the foregoing paragraphs the appellant states and submits that there is no force in the reasons given by the Assessing Officer for disallowing the loss claimed by the appellant or by CIT(A) for sustaining the disallowance as made by the Assessing Officer. The appellant therefore prays that its grounds of appeal 1 & 2 be allowed and the Assessing Officer be directed to allow the appellant the deduction of the loss claimed by the appellant."
4. In this background, the learned Authorized Representative submitted that the order of authorities below be set aside and the Assessing Officer be directed to allow the assessee's deduction of loss as claimed by him. On the other hand, learned 27 Departmental Representative has strongly supported the order of CIT(A) the order of authorities below. With regard to set off of losses being no genuine and the learned Departmental Representative drew our attention to the various parts of authorities below to justify their order.
5. After going through the rival submissions and material on record, we find that the Assessing Officer has held that the parties from whom the assessee purchased rice and parties to whom the assessee sold the rice did not exists, therefore, both purchases and sales are bogus. The Assessing Officer has based his finding on assertion that notices issued by him in respect of 6 out of 11 parties were returned undelivered by postal authorities and similarly, the notices could not be served on those 6 parties by the concerned ITO, New Delhi as well. The Assessing Officer observed that the assessee could not produce Delhi businessmen for examination by the Assessing Officer at Solapur. The stand of the assessee has been that these findings of Assessing Officer were not justified that the reason of the Assessing Officer was not justified in its finding in relation to 5 parties on whom the notices were served on both occasions. The stand of the assessee has been that in spite of written requests during the course of assessment proceedings, the Assessing Officer did not furnish the assessee any so called material of non-service of 6 parties. As regards non-production of the parties by the assessee before the Assessing Officer, no adverse inference could be drawn that the parties do not exist because
(i) the Assessing Officer exceeded his powers in calling upon the assessee to do so in violation of provisions of section 131 of the Act and
(ii) the Assessing Officer must have appreciated that those Delhi parties would not attend at Solapur merely at the request of the assessee because they were under no obligation to do so.
28The CIT(A) at page 24 of its order had appreciated that there was no adverse inference against the assessee for non-service of notice on 6 parties. The stand of the assessee has been that the observation of lower authorities was not justified with regard to non-existence of parties because
(i) transactions of assessee are from bank account to bank through RTGS transfer. There were 11 bank accounts of parties at Delhi duly reflected in bank statements of assessee,
(ii) the bills issued by the assessee parties mentioned their telephone numbers in most cases mobile numbers also,
(iii) TIN numbers are mentioned in every bill and
(iv) each of the parties is assessed to Income-tax and have permanent account numbers which have been furnished to the Assessing Officer in the course of assessment proceedings.
5.1 According to the learned Authorized Representative that the observations made by the Assessing Officer on suspicion, conjectures and surmises. There is no consideration of vital and clinching evidences filed by the assessee. In the entire assessment order there is not even a word about the fact that the assessee's transactions are from his bank account to 11 bank accounts of different traders situated in Delhi. There is no follow up to the information about PAN and TIN of the parties, which is not justified.
5.2 Apart from the alleged non-service of notices on some of the parties as a result of some exercise stated to have been carried out behind the back of the assessee and the same could not be used against the assessee while the same has not been corroborated by clinching evidence. Both the authorities below have raised doubt about the transactions which they did not put 29 to the assessee or parties with whom the assessee has transacted. The various questions which are basis for order by authorities below have not been confronted to the assessee. For example :-
a) In absence of any contract in writing, the assessee company was not under obligation to honour the contracts and make losses. This shows that the Assessing Officer has scant knowledge of commercial practice.
b) For any transaction to be held on 'Delivery basis' there has to be Quantity Inward physically to its storage, its transportation through lorries, maintaining delivery details, freight bills, delivery challans, dispatch notes.
These arguments have been raised while the Assessing Officer knew all the time that the delivery was given by the Appellant's suppliers on the instructions of the Appellant to the Appellant's buyers all situated at Naya Bazar, Delhi.
c) The Appellant failed to produce any agreements in absence of which there cannot be inferred pre-agreed rates. How could any agreement be produced when the agreements were oral, in accordance with market practice?
d) A letter from Sushilkumar & Sons, Delhi and from Manishkumar Sushilkumar & Sons, Delhi were posted from Solapur. These statements need factual verification in light of merit of case.
e) Confirmation letter of Arihant Sales Corporation, Naya Bazar, New Delhi stated that the Appellant purchased rice from him whereas as per the Appellant rice was sold to and not purchased from Arihant Sales Corporation. Without seeking any clarification from Arihant Sales Corporation the Assessing Officer cannot draw adverse inference against the Appellant from what seems to be merely an inadvertent error.
f) On perusal of confirmation letters of Arihant Sales Corporation, Premchand Deepakkumar and Sainath Agro India it appeared that these confirmations were commonly drafted and printed. These observations of Id. Assessing Officer and CIT(A) are on their own 30 without seeking any explanation from the parties concerned and ignoring that these were direct correspondence between Assessing Officer and parties without appellant being told about it.
g) The letters received from the parties do not give purchase rate, quantity and quality agreed, delivery schedule etc. How this can be held out against the Appellant?
h) The purchase bills showed that purchases have been made just one or two days before those were sold and not well in advance as explained by the appellant. This was explained time and again. The fact of the matter is that purchase bills were issued not on the date of contract but on the date of delivery. The Appellant immediately sold goods when the appointed date of delivery arrived because the market had heavily come down. The chart of dates of purchase and dates of sale given by the Assessing Officer at pages 17 to 20 of the Assessment order prove the appellant's case; otherwise there is no which way that such huge difference would arise.
i) As mentioned in Para 3 the auditor of the assessee company has also agreed that the company never involved in any trading activities like trading in rice. This is patently perverse statement. In the same para 3 the Assessing Officer himself observes that sale bills, purchase bills of rice were furnished. The auditors have signed the Balance Sheet and Profit and Loss Account which are based on the Appellant's transactions in rice during the year.
j) The bills of sales and purchase nowhere mention the quality or specie of rice. Bills or Invoices without quality or type are actually no bills. Assessing Officer or CIT(A) do not rely on any material to indicate that it was mandatory to mention quality of rice in the bills. The Appellant stated and submitted that these bills are issued in ordinary course as per the market practice at Naya Bazar, Delhi at the relevant time.
k) Not a single party was produced in-spite of requisition. The Assessing Officer's requisition is illegal. U/s 131 the personal attendance of a person has to be enforced by the Assessing Officer himself and no adverse 31 inference can be drawn if the Assessee does not produce any party for examination by him.
l) The appellant modified its stand as to whether sales were contracted in advance or purchases were contracted in advance. There was an error only once in the letter of CA that was promptly corrected. Otherwise there has been the consistent stand of the Appellant that it had contracted purchases well in advance and later on the goods thus purchased were sold at loss.
5.3 From the above, it may be inferred that even the authorities below have not been confronted, the material relied by them for rejecting the claim of the assessee which is not justified. It amounts in violation of principles of natural justice. We find that the Assessing Officer has power u/s.131 of the Act for enforcing the attendance of the person who could not be produced before the Assessing Officer on behalf of assessee. In such a situation, no adverse inference should be drawn if the assessee does not produce any party for examination. The Assessing Officer has mainly based his finding on assertion that the notices were issued by him in respect of 6 out of 11 parties were return un- delivered by postal authorities. Similarly, notices could not be served on 6 parties by the concerned ITO, New Delhi as well. As stated above, the stand of the assessee has been that in spite of written requests during the assessment proceedings, the Assessing Officer did not furnish the assessee any material of non-service of 6 parties. In such situation, no adverse inference could be drawn that parties in question do not exists because the Assessing Officer has option for calling the attendance of parties under the provisions of section 131 of the Act. The observation of authorities below was premature with regard to their finding of non-existence of the above parties because the transaction of assessee was through banking channel. The details of all parties including telephone, PAN, TIN number were available on record. In view of above and in the interest of justice, we set aside the 32 order of CIT(A) and restore the matter to the Assessing Officer with a direction to decide the issue as per fact and law after providing due opportunity of hearing to the assessee. Since we are restoring the matter on broad proportion of violation of principles of natural justice, we are refraining from commenting on the merit of the issue at hand. As a result, this ground of appeal is allowed for statistical purpose.
6. The next issue is with regard to allowability of donation of ₹ 19,94,790/- out of ₹ 20,00,000/- made to MNS (a Political Party) by the assessee. The relevant facts in this regard are that the return of income was filed on 26.09.2009 declaring total income of ₹ 75,910/- which was subsequently revised, wherein the total income was shown at Nil, to claim deduction under Chapter VIA on account of Donation paid to a political party, namely, Maharashtra Navnirman Sena. It was noted by the Assessing Officer that in the revised computation filed in the course of the assessment proceedings, the gross total income of the assessee stated to be ₹ 20,75,908/- from which deduction for an amount of ₹ 20,00,000/- was claimed under Chapter VIA, though in the revised return filed, such deduction was claimed to the extent of gross total income of ₹ 75,908/- declared therein. The Assessing Officer further found that deduction of ₹ 20,00,000/- was claimed in the books of accounts under the major head 'Establishment Expenses' under the nomenclature 'Donation to Political party' as revenue expenses. However, the Assessing Officer held that donations to political parties are admissible as deduction u/s.80GGB subject to the provisions of sec.293A of the Companies Act, 1956 r.w.s. 349 & 350 which restrict the quantum of such deduction equal to 5% of the 'average profits' of three immediately preceding financial years of a company. Accordingly, the deduction allowable in respect of donations 33 made to Maharashtra Navnirman Sena by the assessee was worked out by the Assessing Officer as under:-
"Profits of the appellant in the immediate preceding three years:
31/3/2006 : Rs.Nil
31/3/2007 : Rs.57,689/-
31/3/2008 : Rs.2,55,170/-
The profit for immediately
Preceding years : Rs.3,12,859/-
Average profit for the last three
Finance years : Rs.1,04,286/-
5% of average profit : Rs.5,214/-"
Accordingly, the deduction claimed by the assessee
u/s.80GGB in respect of donation made was restricted to ₹ 5,214/- as against claimed by the assessee at ₹ 20,00,000/- and the remaining amount of ₹ 19,94,790/- was disallowed. The CIT(A) has confirmed the same by observing as under:
"3.3 The submissions of the appellant are carefully considered with reference to the relevant provisions of sec.80GGB and Sec.293A of the Companies Act, 1956. Explanation to Sec.80GGB provides that for the purpose of the section, the word 'contribute' with its grammatical variation has the meaning assigned to it under section 293A of the Companies Act. To decide the issue, it is necessary to examine the provisions of sec.293A of the Companies Act, 1956, which is extracted as under: -
293A. Prohibitions and restrictions regarding political contributions Political contributions 293A. Prohibitions and restrictions regarding political contributions (1) Notwithstanding anything contained in any other provision of this Act:-
(a) no government company; and 34
(b) no other company which has been in existence for less than three financial years, shall contribute any amount or amounts, directly or indirectly,-
(i) to any political party; or
(ii) for any political purpose to any person. (2) A company, not being a company referred to in clause
(a) or clause (b) of sub section (I), may contribute any amount or amounts, directly or indirectly,-
(a)to any political party; or
(b)for any political purpose to any person:
Provided that the amount or, as the case may be, the aggregate of the amounts which may be so contributed by a company in any financial year shall not exceed five per cent of its average net profits determined in accordance with the provisions of sections 349 and 350 during the three immediately preceding financial years:
Provided further that no such contribution shall be made by a company unless a resolution authorising the making of such contribution is passed at a meeting of the Board of Directors and such resolution shall, subject to the other provisions of this section, be deemed to be justification in law for the making and the acceptance of the contribution authorised by it.
Explanation.-Where a portion of a financial year of the company falls before the commencement of the Companies (Amendment) Act, 1985, and a portion falls after such commencement, the latter portion shall be deemed to be a financial year within the meaning and for the purposes, of this sub-section.
(3) Without prejudice to the generality of the provisions of sub-sections (1) and (2)-
(a) a donation or subscription or payment caused to be given by a company on its behalf or on its account to a person who, to its knowledge, is carrying on any activity which, at the lime at which such donation or subscription or payment was given or made, can reasonably be regarded as likely to effect public support for a political party shall also be deemed to be contribution of the amount of such nation, subscription or payment to such person for a political purpose;
(b) the amount of expenditure incurred, directly or indirectly .........35
(ii) where such publication is ..........
(4) Every company shall disclose in its profit and loss account any amount or amounts contributed by it to any political party or for any political purpose to any person during the financial year to which that account relates, giving particulars of the total amount contributed and the name of the party or person to which or to whom such amount has been contributed.
(5) If a company makes any contribution in contravention of the provisions of this section ........
3.3.1 The heading of Section 293A of the Companies Act itself clearly indicates that the section has been introduced to restrict the scope of contributions that can be made to political parties. As, per proviso to the said section, in case of a company which has been in existence for not less than three financial years, the aggregate of the contribution made, directly or indirectly in any financial year shall not exceed five per cent of its average net profits determined in accordance with the provisions of sections 349 and 350 during the three immediately preceding financial years. Thus, the word 'contribute' or its grammatical variation used in the section denotes the amount which a company can legally contribute to a political party or trade union. Consequently, the Explanation to sec.80GGB is intended to restrict the quantum of such contribution eligible for deduction only to the extent that is admissible under sec.293A of the Companies Act. Therefore, the contention of the appellant that the explanation provided to the said section which refers to Section 293A of the Companies Act, 1956 is limited to the grammatical meaning of the word used in the body of the section 'Contribute' and in no way defines the admissibility of deduction with reference to quantum of the contribution has no merit. Accordingly, the action of the Assessing Officer in restricting the admissible deduction u/s.80GGB to the extent of 5% of the average profit of the appellant for the three immediately preceding three years is held to be in accordance with the law and the same is, therefore, upheld. Ground of appeal No.2 also fails."
6.1 Before us, the learned Authorized Representative has submitted that the authorities below were not justified in not allowing the deduction of ₹ 20,00,000/- made by the assessee to 36 the political party during the year, accordingly, the same should be allowed. On the other hand, the learned Departmental Representative has strongly opposed the same and supported the order of authorities below on the issue.
6.2 After going through the rival submissions and material on record, we find that with reference to the relevant provisions of section 80GGB and section 293A of the Companies Act, 1956, the explanation to section 80GGB provides that for the purpose of section, the word contribute with its grammatical variation has the meaning assigned to it u/s.293A of the Companies Act. The heading of Section 293A of the Companies Act clearly indicates that the section has been introduced to restrict the scope of contributions that can be made to political parties. As, per proviso to the said section, in case of a company which has been in existence for not less than three financial years, the aggregate of the contribution made, directly or indirectly in any financial year shall not exceed five per cent of its average net profits determined in accordance with the provisions of sections 349 and 350 during the three immediately preceding financial years. Thus, the word 'contribute' or its grammatical variation used in the section denotes the amount which a company can legally contribute to a political party or trade union. Consequently, the Explanation to sec.80GGB was intended to restrict the quantum of such contribution eligible for deduction only to the extent that is admissible under sec.293A of the Companies Act. Therefore, the contention of the assessee that the explanation provided to the said section which refers to Section 293A of the Companies Act, 1956 was limited to the grammatical meaning of the word used in the body of the section 'Contribute' and in no way defines the admissibility of deduction with reference to quantum of the contribution has no merit. Accordingly, the Assessing Officer was justified in restricting the admissible deduction u/s.80GGB to 37 the extent of 5% of the average profit of the assessee for the three immediately preceding three years. We uphold the same.
7. In the result, appeal filed by the assessee is partly allowed.
Pronounced in the open Court on this the day 5th of May, 2014.
Sd/- Sd/-
(G.S. PANNU) (SHAILENDRA KUMAR YADAV)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Pune, Dated: 5th May, 2014
GCVSR
Copy to:-
1) Assessee
2) Department
3) The CIT(A)-III, Pune
4) The CIT-III, Pune
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