TaxTMI 
TaxTMI 
2018 (10) TMI 237
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.... transportation charges paid to two parties in connection with said transaction. The assessee also has taken a ground challenging the action of the Ld.AO in disallowing depreciation on plant & machinery for AY 2003-04. The revenue for AY 2002-03 has taken a ground challenging the action of the Ld.CIT(A) in allowing relief on account of sales returns on the basis of remand report of the AO without discussing the issues on merit. The revenue also challenged the action of the Ld.CIT(A) in allowing partial relief towards disallowance of transportation expenses in connection with said sales returns. For the sake of brevity, the grounds of appeal taken by relevant parties for AY 2002-03 are extracted below:- Assessee: The following grounds of appeal are without prejudice to one another. 1. On the facts and the circumstances of the appellant's case and in law, the Ld.CIT(A) erred to hold that sales return of Rs. 3,41,53,476/- from 13 parties are not genuine and consequently erred in confirming the addition of Rs. 3,41,53,476/-. 2. On the facts and the circumstances of the appellant's case and in law, the Ld.CIT(A) erred to hold that the sales of slow ....
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....e given the decision on merit of the case". 3. The brief facts of the case extracted from ITA No.7416/Mum/2011 are that the assessee company is engaged in the business of manufacturing cotton yarn, circular knitted hosiery cloth and also in processing of cloth, filed its return of income for AY2002-03 declaring total loss of Rs. 144,76,18,197. The case has been selected for scrutiny and accordingly notices u/s 143(2) and 142(1) of the Act, were issued. The assessee neither appeared nor filed any adjournment application. Therefore, the AO issued further notices on 13-02-2004, 21-06-2004 and 22-07-2004. Again there was no response from the assessee. Therefore, summons u/s 131 was issued to the Managing Director, Shri Navish K Dayal. Since the assessee did not appear on the dates of hearing, even though number of opportunities have been given to the assessee to file the details, the AO, on the basis of information available on record observed that the assessee has declared huge losses on account of claim of sales returns amounting to Rs. 151,36,56,000 was of the opinion that having regard to the nature and complexity of the accounts of the assessee and in the interest of r....
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....ial year relevant to AY 2002-03. The assessee further explained that the goods returned from the customers have been subsequently sold for a much lesser value on the basis of report of sales, General Manager, who had valued the goods considering the type and pattern of the goods sold to the customers and accordingly, the company has sold said returned goods for a amount of Rs. 38.88 crores resulting in loss of Rs. 128.48 crores. The assessee has also filed quotations, which are part of Exhibit A of the audit report on the basis of which the assessee has claimed that the sale price was fixed for the returned goods. To examine the genuineness of the claim of the assessee, the AO issued notices u/s 133(6) to few parties. The notices issued to parties were returned by the postal authorities in case of certain parties, as listed by the AO in assessment order at para 8. But, certain parties have filed details before the AO. However, the AO observed that the parties have filed incomplete submissions. The details of notices issued by the AO, notices returned, replies received from the parties, have been narrated by the AO in his order at para 8 on pages 23 & 24. Those facts were conf....
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....uch as octroi clearance/passing was produced to prove the movement of the goods. j) The quotations produced by the assessee for arriving at the sale value of Returned goods are also incomplete. k) No other supporting evidences ,vas submitted to substantiate the claim of change in fashion and shifting of the preference of fabrics by the customers. I) Though the goods are said to be lying with the alleged purchasers for more than a year and that too without receiving the payment it is surprising that no documents are available with the assessee showing the efforts made for recovery of sales consideration. m) The confirmations of parties which allegedly returned sales and transporters are either not submitted or were vague or did not bear any date and addresses or were incomplete. n) The notices u/s 133(6) were returned back, in majority of the cases, by the postal authorities with the remark 'not known/incomplete address'. This only indicates that such parties do not exist; however, the assessee was given an opportunity to produce such parties. But, the assessee failed to do so. o) The details filed by certain parties were incomple....
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....count of alleged return of goods by various debtors and valued at lower rate and sold subsequently in the next year is held to be a fraudulent claim and is not acceptable. Therefore, the said amount of loss of R. 11248.31 lakhs is added to the total income of the assessee and assessed accordingly. Penalty proceedings u/s 271(1)(c) is also initiated on this account." 5. Similarly, in respect of loss claimed on account of sale of slow moving stocks for Rs. 2,016.41 lakhs, the AO observed that there was no mention of outward entry number on the stamps fixed on the delibiery challans, outward registers were not produced on the ground that they were damaged and destroyed during the flood, no documentary evidence such as FIR was filed in support of the claim. No documentary evidence such as octroi clearance / passing was produced to prove the movement of goods. The assessee has sought to justify the claim of loss on the basis of the approval note of the sales personnel of the assessee company and the quotations stated to have been received from the market. Therefore, he opined that the loss claimed by the assessee on account of slow moving stock is not genuine and accordingly made add....
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....ham" and assessed accordingly. Penalty under sec.271(1)(c ) is initiated separately. 14 Without prejudice to the above observation, the fact that the Special auditor has found specific defect in the accounts of the assessee in that the valuation of the stock-intrade has been undervalued without any proper maintenance of relevant records in support of the allegations made by the assessee against the debtors. As per clause 22 of AS2 relating to the valuation of inventories (Stock), the estimates of net realizable value are to be based on the most reliable evidence available at the time the estimates are made as to the amount the inventories are expected to realise. The mere report by some sales personnel and a fact finding report not supported by authenticated evidences cannot form a reliable evidence as per AS2. The fact finding report has been established to be unacceptable for the reasons elaborately discussed in para 7 of this order. This is a clear case warranting the rejection of accounts u/s.145(2) of the I.T.Act. In view of the particular findings recorded by the Special Auditor and in the light of the specific facts mentioned in sub paras 12 & 13 above, the....
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....the assessment beyond the time limit u/s 153A of the Act. The assessee also taken a ground challenging the action of the AO in rejecting books u/s 145(2) of the Income-tax Act, 1961 by stating that the AO has rejected books of account without pointing out any specific instances of irregularities in the books of account maintained by the assessee only on wrong premise of interpreting the facts because there was no need for that at all. The assessee also filed elaborate written submissions on the issue of disallowance of loss claimed on account of sales returns which has been reproduced by the Ld.CIT(A) in his order at para 5.2 on pages 7 to 9. The assessee has explained the observations made by the AO in the light of Special Audit report to argue that it has made sales to its regular customers in the normal course of business. However, such goods have been returned by the customers stating reasons which is beyond the control of the assessee. The assessee after putting in all the efforts to collect the dues from the customers has accepted the goods back. The AO without appreciating the facts, on wrong interpretation of facts has come to the conclusion that sales return claimed by ....
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....e after obtaining necessary approval from the competent authority, who ordered for special audit, therefore, there is no lapse on the part of the AO ordering special audit. Insofar as allegation of the assessee regarding time barring of the case, it is baseless because as per the provisions of section 153(1)(a), the time limit has been increased and the AO has rightly passed the assessment order within the limitation. Accordingly, ground raised by the assessee has been rejected. Insofar as second legal ground taken by the assessee challenging rejection of books of account, the Ld.CIT(A) observed that the AO has given number of opportunities to the assessee to submit complete details, but only partial details were submitted. Secondly, the Special Auditors have raised objection that books of account, bills and vouchers were not maintained properly. In view of these facts, the AO has given an opportunity to the assessee to explain why the books of account shall not be rejected as per the provisions of section 145(2) of the Act. Since the AO has given due opportunity to the assessee before rejection of books of account and also the fact that books of account are complex in nature wh....
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....the form of confirmation from certain parties and also the AO has recorded statement from certain parties, wherein they have confirmed of having done transactions with the assessee and also return of goods. The Ld.CIT(A) further observed that out of the 39 parties, who were asked to be produced before the AO, assessee was able to produce only 26 parties and has failed to produce 13 parties with whom transactions of Rws.3,41,53,476 was shown by the assessee company. Therefore, out of total addition of Rs. 112,48,31,000, an amount of Rs. 3,41,53,476 has been sustained and balance amount of Rs. 109,06,77,524 is deleted. 11. As regards addition made by the AO towards loss incurred on slow moving items of Rs. 20,16,41,000, the Ld.CIT(A) observed that the assessee has filed various additional evidences including confirmation from the parties which has been sent to the AO for his comments. The AO, vide his remand report, examined the confirmations filed by the parties and submitted that the transactions with those parties appeared to be genuine. This fact establishes that the genuineness of transactions is no more in doubt. However, out of the 5 parties called for by the AO, assessee h....
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....r, justification for downward valuation of sales. In response to the notice, the assessee has filed incomplete details which was reproduced by the AO on pages 17 to 19 of his assessment order. On the basis of information furnished by the assessee, the AO observed that in almost all confirmation letters filed by the assessee, no proper address was given. The AO further observed that the assessee has not followed the general system of control regarding the movement of goods at the factory. Since the assessee has failed to furnish necessary evidence to justify loss claimed on sales returns, the AO referred the matter for special audit of accounts of the assessee u/s 142(2A) of the Income-tax Act, 1961. The Special Auditors M/s Malpani & Associates, Chartered Accountants has conducted special audit of accounts of the assessee and issued a report with certain comments. The basic observations of the special auditors regarding non co-operation of the assessee to file necessary books of account and other documents. The Auditors also commented on books of account and other documents maintained by the assessee in respect of sales returns of Rs. 15,136.56 lakhs. The AO, based on observatio....
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....that the AO has categorised the details in 3 categories as per which the assessee was asked to produce certain parties. The AO also listed out the names of parties, who were produced / filed details in respect of sales returns. The AO also listed out parties from whom statement on oath was recorded. Likewise, the AO has examined parties in respect of transportation of goods and sale of slow moving goods and held that on the basis of details and supporting evidences filed by various parties and statement given by parties, it appeared that the transactions with those parties were genuine. When the AO himself has categorically admitted that these transactions are genuine in nature, there is no reason for the Ld.CIT(A) to sustain addition made by the AO in respect of 13 parties. 14. The Ld.DR, on the other hand, submitted that the Ld.CIT(A) was completely erred in allowing relief only on the basis of remand report of the AO without appreciating the fact that in the said remand report, the AO has only expressed the opinion that part of the claim appears to be genuine and hence, the Ld.CIT(A) should have given the decision on merits of the case. The Ld.DR further submitted that the....
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....ral control system prevailing on that particular point of time regarding the movement of goods at the factory. For this, the AO has brought out certain examples of shortcoming in goods, inward and outward documentation and lorry receipts filed by the assessee. The AO also taken support from the report of the Auditor, which re-iterates observations made by the AO in his assessment order. On perusal of the observations made by the AO in his assessment order and the observations made by the Auditors in their report, we find that there is no substantive comments made by the Special Auditors on sales returns claimed by the assessee, The Special Auditors, rather, went on to comment on documentation maintained by the assessee. Further, the Special Auditors never gave any adverse comments on sales returns claimed by the assessee. They have only commented on shortcoming in the documentation. These observations made by the AO in his assessment order and the Special Auditors have been fully negated by the AO in the remand proceedings which is evident from the fact that the AO has given clean chit to the assessee in respect of sales returns on the basis of enquiries conducted in respect of cer....
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....t even during the special audit, the desired.arguments were not submitted by the assessee. Again during the assessment proceedings, the AO has given a number of opportunities for the submissions of details and also issued notices u/s, 133(6) to the parties which were not complied with. On the basis of the conclusion drawn by the AO mentioned above, the AO has held the claim of loss of Rs. 11248.31 lacs as bogus claim, hence disallowed the same and added back to the taxable income. On the other hand, the appellant has submitted that AO has not fully appreciated the facts and submissions made by the company during the assessment proceedings as given above. During the appellate proceedings some other additional evidences were submitted before my predecessor who has admitted the same and again the case was remanded back to the AO for verification and investigation. The AO has submitted the remand reports dated 05.06.2009, 19.06.2009 and 10.07.2009. The gist of these remand reports are reproduced as under : "On 23.02.2009, the assessee produced some of the parties concerned and out of the same, statetrfent on oath of two parties was recorded. Thereafter, on 10.04.2009,....
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....ssessee's factories andgodowns are located) in 2004". "With regard to the observations made by your goodself at para no.3 of the aforementioned letter dated 12.06.2009, it may be reiterated that on 23.02.2009, the assessee had produced some of the aprties concerned and out of the same, statement on oath of two parties was recorded and the other parties submitted the requisite details as required in the questionnaire issue, which are available on record. Thereafter, on 10.04.2009, the assessee's representative appeared alongwith few more parties and filed details in respect of these parties. On that date also, statement of 2 parties were recorded. The details filed by all these parties and The stefsmsat. recorded are available in the file named 'Remand Report', which is being forwarded In the case, the CIT(A), C-VIII had, vide letter dated 06.11.2007, directed the AO to allow one more reasonable opportunity to produce the requisite parties relating to the transaction under consideration and examine them. Accordingly, the assessee was asked to produce the parties, whose names were intimated to the authorized representative during the course of hearing on 10.0....
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.... Sale on slow moving goods : The assesses was asked to produce the following aprties : • Archana Cotspin P. Ltd. • Asha Trading Co. • Chirag Corporation • Maheshji Zhunshunwala • V. V. Enterprises Out of the above listed parties, the assesses has produced/filed details in respect of the following parties : • Archana Cotspin P. Ltd. • Asha Trading Co. Transporters of goods The assessee's representative was asked to produce the following parties in relation to transport of goods : • Agarwal Transport • Fatima Transport • Hiranandani Transport • Mahalaxmi Transport • Radha Krishna Transport • Narshi Nenshi & Sons • Shivam Roadways Out of the above listed parties, the assessee has produced/filed details in respect of the following parties: • Agarwal Transport • Fatima Transport • Hiranandani Transport • Mahalaxmi Transport • Radha Krishna Transport List of parties to whom notice ....
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....ese parties even during the appellate proceedings. Since it is well established fact and position of law, the onus is always on the assessee to prove the. genuineness of transaction before the AO before claiming any deduction. However, in the present case, the assessee has failed to prove the genuineness of transaction for the above said 13 parties amounting to Rs. 3,41,53,476/-. Therefore, the addition made by the AO to the extent of Rs. 3,41,53,476/- is confirmed and the balance addition.of Rs. 109,06,77,524/- is deleted. The ground of appeal is partly allowed." 17. The fact remains unchanged. The revenue failed to bring on record any further evidence to controvert the findings of facts recorded by the Ld.CIT(A) in the light of remand report furnished by the AO. Therefore, we are of the considered view that there is no error or infirmity in the findings of Ld.CIT(A) and hence, we are inclined to uphold findings of the Ld.CIT(A) and reject grounds taken by the assessee as well as the revenue. 18. The next issue that came up for our consideration from assessee as well as revenue appeal is disallowance of losses claimed on account of slow moving stocks of Rs. 2016.41 lakhs. Th....
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....ared before the AO in response to notices. The AO has brought out various deficiencies in documentation maintained by the assessee in the light of observations of Special Auditors which holds good whereas the Ld.CIT(A) without any comments on observations made by the AO simply deleted addition on the basis of one line finding given by the AO in his remand report. 21. We have heard both the parties and perused the material available on record. The AO has made addition towards loss claimed on slow moving stock on the ground that the assessee has failed to file necessary evidence to discharge its onus. The AO has never disputed existence of slow moving stocks in the previous financial year. The AO also never disputed the fact that the quotations were called for from various buyers to determine the price of slow moving stocks. The AO is only on the point that proper documentation was not maintained in respect of movement of goods and the parties neither furnished the details nor appeared before the AO. The observations made by the AO has been negated in remand report, where the AO has categorically admitted that the transactions in respect of sale of slow moving stocks is genuine on....
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..... The revenue fails to bring on record any evidence to controvert the findings of fact recorded by the Ld.CIT(A). Hence, we are inclined to uphold findings of Ld.CIT(A) and reject ground taken by the assessee as well as the revenue. 23. In the result, appeal filed by the assessee as well as the revenue for AY 2002-03 are dismissed. ITA No.6817/Mum/2011 & ITA No.7417/Mum/2011 (AY 2003-04) 24. The first issue that came up for our consideration from assessee as well as revenue appeal is with regard to addition made by the AO towards alleged unproved purchases of Rs. 38,90,01,259. This issue is inter-connected with the issue of addition made on account of loss claimed from sales returns in AY 2002-03. The assessee claims to have received sales returns of Rs. 15136.56 lakhs in the AY 2002-03 which was valued at Rs. 3888.25 lakhs on net realisable value by claiming loss of Rs. 11,248.31 lakhs for the assessment year 2002-03. Further, the downward valued stock of returned goods were subsequently sold at Rs. 38,90,01,259 for AY 2003-04. The AO has made addition towards loss claimed on downward valuation of sales returns for AY 2002-03 for the detailed reasons stated in his assessm....
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.... reject ground taken by the assessee as well as the revenue. 25. The next issue that came up for our consideration is disallowance of depreciation claimed on texturised unit amounting to Rs. 10,69,212. The AO has disallowed depreciation on the ground that the unit had not shown any activity during the year under consideration. Accordingly he opined that the assessee failed to fulfil the conditions laid down in section 32(1) of the I.T. Act, 1961; hence, the claim of depreciation on such machinery cannot be allowed. It is the contention of the assessee that the AO has arrived at a conclusion that the unit is not functioning for the year under consideration on the basis of no sales / income has been shown under this unit, but the fact remains that the unit was functioning in the previous year relevant to the assessment year under consideration and the asset was used for the purpose of business, therefore merely for the reason that there was no sales from the unit for the year under consideration, depreciation cannot be disallowed. 26. We have heard both the parties and perused material available on record. The AO has denied depreciation on texturised unit only on the ground tha....