TaxTMI 
TaxTMI 
2013 (10) TMI 1530
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....sing officer has made the addition u/s 68 of the Income Tax Act which was contrary to the statutory direction issued u/s 144A by the Addl. Commissioner of Income Tax of not making addition u/s 68 of the Income Tax Act. 2) Without prejudice to ground no. 1 the learned CIT(A) has erred in law as well as on facts and circumstances of the case in confirming the addition u/s 68, on estimate basis, to the extent of Rs. 8,87,03,901/- (out of Rs. 18,68,90,938/- addition made in the assessment order). The addition so confirmed be deleted. 3) The authorities below erred in law as well as on facts and circumstances of the case in making a disallowance u/s 40A(3) of Rs. 71,28,196/- being 20% of the payments to suppliers of Rs. 3,56,40,982/-. The payments so made are covered by the exceptions provided in rule 6DD and hence the addition so made be deleted. 4. The appellant prays to be allowed to add, amend, modify, rectify, delete, raise any ground of appeal before or at the time of hearing. 2. Re....
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....rned CIT(A) has failed to appreciate the fact that Shri Sanjay Ghodawat is a share holder of more than 20% holding in the shares of assessee and also holds more than 10% shares of Ghodawat Industries Pvt. Ltd. and hence the A.O. has correctly invoked the provisions of section 2(22)(e) of the I.T.Act, 1961. 10. The Ld.CIT(A) has erred in not appreciating insertion of a new category of payment by the Finance Act, 1987 w.e.f. 01/04/1988 viz., payment by a company "to any concern in which such shareholder is a member or a partner and in which he has a substantial interest" which does not say in whose hands the dividend has to be brought to tax, whether in the hands of the "concern" or the "shareholder". 11. The Ld.CIT(A) also erred in ignoring the clarification issued by the Board circular No.495 of 1987 which are clearly applicable to the present case. 12. The Ld.CIT(A) erred in excluding the provisions of luxury tax amounting to Rs. 50,42,48,892/- as ascertained liability though it is contingent in nature from accumulated profit for the purpose of section 2(22)(e) of the Act. 13. The Ld.CIT(A) erred in holding that....
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....ng order. So, CIT(A) was justified in holding that it cannot be said that the directions were not complied with. 3.2 Coming to the directions u/s. 144A with regard to addition u/s.68, the question is whether the assessment can be annulled as the Assessing Officer did not comply fully with the directions U/S.144A. In this regard, CIT(A) observed that in the case of Star Flexi Pack Industries, wherein it was held that similar procedural irregularities cannot annulled the asst order, although it could be declared irregular. So, it cannot be held as null and void. The distinction between section 68, 69 and 69C are more technical in nature, meant to apply to different situations. The allegation of the Assessing Officer is that money has been paid while the credits in the books had not been cancelled. From this point of view, the addition on account of unexplained credit is not erroneous. Seen from another angle, addition could also be made u/s.69 on account of unexplained investment in as much as payments had been made to suppliers which were not recorded in the books. The distinction is therefore more of a tech....
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....owed that the amount was actually paid to him. In some, batches, it was found that on the back of one cheque the amount represented by the other cheques was added and the total amount paid to an employee Shri Anil Chaugule whose signature was taken on the cheque. c) The modus operandi of the appellant' was found to make the payments by cash, while at the same time, show bogus credit balance in the name of the party. At a later date, when cash was available in the books, bearer cheque was issued in the supplier's name but the amount was collected by one of the employees on encashment. d) The onus was on the appellant to establish the identity of the creditors, the genuineness of the transaction and the creditworthiness of the creditors. The appellant however could not discharge the onus satisfactorily. The signature on the confirmatory letter did not match with the signature of the same person on the reverse of the bearer cheque. The photo copies of the confirmation letters and the bearer cheques have been made part of the assessment order. e) The appellant gave names and addresses of the creditors to whom ....
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.... Om Trading Co. is for 10.0 bags. There were several such bills for material from Om Trading Co. credited to Bhimashankar Dhule. Similarly, there is a letter from Komal Trading Co, commission agent of Parbhani who sent 100 bags with a request that the credit should be made in the name of Bhimashankar Dhule. The goods receipt note has been issued in that name. Another instance has been given where goods have been supplied with an instruction, that credit to give in the name of Bajirao Barku. There is no address of Bajiraos Barku mentioned in the letter or bills. It reveals that the commission agent sent the material which they have collected from the various farmers to the appellant. In many instances, the invoices raised by the actual suppliers carry the instruction that credit should be shown in the name of another person. The address etc. of such person were not given. The appellant, in such situation would not be in a position to furnish the address of the suppliers. 4.2.1 In the remand report, 37 witnesses have been categorized into 4 categories I,II,III,IV. The first categ....
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....rson or employee of the company. It only bears signature of Shri Pradip Uttarwar himself who has filed copy of the receipt. Secondly, the letter has been filed by Shri Shankar Uttarwar, father of Pradip Uttarwar. Signature of Shri Pradip Uttarwar has not been verified. It is not explained why Shri Shankar Uttarwar has appeared twice before the Assessing Officer on behalf of Shri Pradip Uttarwar. It was particularly noted that at page 11 of the remand report dealing with witnesses in category-4, the name of Pradip Shankar. Uttarwar and Pradip Trading Co. have been dealt with. It is stated therein that Shri Shankar Uttarwar appeared on behalf of the above two entities. He was however not examined in connection with the transactions in the name of Shri Pr:adip Uttarwar and Pradip Trading Co. for the reason that he was not holding any authority from his son Shri Pradip Uttarwar. According to the Assessing Officer, Shri Shankar Uttarwar was not entitled to discuss the transactions of ap....
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....ination that he had not attended on 12/12/06 and letter dtd. 12/ 12/06 was neither signed nor written by him. In this background, CIT(A) concluded that the Assessing Officer is not correct in concluding that witness had confirmed that the statement filed in December,06 was correct. In short, it could not be said that the persons in category-2 had confirmed their letters filed in December,06. While one had stated that he had not filed such statement, the others had subsequently in the remand proceedings not confirmed the statements filed before the Assessing Officer. These four witnesses have neither deposed in favour nor against the appellant. So no credibility could be attached to it; observed by CIT(A). 4.2.4 Category-3 consists of six witnesses who have deposed in favour of the appellant. The Assessing Officer has accepted three of them such as Shri Ranjitsingh Patil, Shri Chandrakant Dudhal and Shri Ramdas Mane as reliable witnesses. Regarding the other three, the Assessing Officer has stated that Shri Sanjay Takale appeared without summons being served on him and therefore he was a tutored witness. As regards Shri Satyawan Shete, it is s....
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....ared have produced, any one or all of the above documents. There is no discussion of source of income. Assuming that books have not been maintained they should have atleast produced bills of sale, proof of receipt, bank pass book, or any other document to prove their contention. In this background, CIT(A) observed that the above documents were neither insisted upon nor produced. 4.2.6 The addition has been made in respect of 283 creditors comprising of 315 credit entries. It was clarified by the Assessing Officer in the remand report that the addition has been made in respect of creditors falling in the following categories. Category A: No address had been provided by the assessee. Aggregate credit amount Rs. 7,26,12,137/- Categorv B: Number of accounts : 58. Aggregate credit amount Rs. 3,26,66,860/- Category C: Incomplete addresses. Letters returned by postal authorities. Number of accounts : 56. Aggregate credit amount Rs. 3,11,60,832/- Category D: Reply received stating no outstanding as on 31/03/04. Number of accounts : 0....
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....s through Shri Sunil Shah after 4-5 months. The AO has accepted the income, by way of commission, declared by Shri Sunil Shah in the order u/s.147. 4.2.10 Category D consists of persons from whom replies were received that they had no outstanding balance with the company as on 31/03/04. In the case of Shripati Patil however, the person had expired. In the case of S.P.Patil, it is mentioned that the payment was through bearer cheque. In the case of Surayakant Patil it was stated that creditworthiness was not proved. In case of Sainath traders, it is mentioned that genuineness of transaction was doubtful. In case of persons listed above under category-D, it is not clear from the remarks above reply that no amounts outstanding as on 31/03/04. Therefore they were wrongly placed in the category. In the case of Sainath traders, it is mentioned that genuineness of transaction is doubtful. It was observed that the word used is 'doubtful' which means there is no definite finding on the genuineness of the transaction. Secondly, it has been pointed out by the appellant that the party had been paid the amount by way of crossed cheque issued on HDFC bank. Copy of t....
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....Rs. 2,08,442/- 12)Suryakant V.Palimkar Rs. 2,10,000/- 13)Kalpesh D. Shah Shah & Co. Rs. 3,47,711/- 14)SunilB. patil Rs. 3,59,412/- 15)Sharad Dilwale Rs. 3,39,538/- 16)Duttatraya M.Nishandar Rs. 35,963/- 17)Maruti K.Kshirsagar Rs. 27,428/- 18)Gajanan V. Patil Rs. 1,46,780/- 19)Vilas Shete Rs. 3.84.543/- Rs. 55,45,089/- 4.3.3 It was observed by CIT(A) that the creditors involving total credit amounting to Rs. 73,28,014/- (5545089+1782925) have confirmed that no credit was outstanding as on 31/03/04. This amount of credit is fictitious. In comparison, the following persons have deposed that amounts were actually outstanding as on 31/03/04. 1) Sanjay.Takale Rs. 60,035/- 2) Ranjitsingh Patil Rs. 3,36,376/- 3) Satyawan Shete Rs. 1,30,664/- 4) Chandrakant Dudhal Rs. 7,03,823/- 5) RamdasMane Rs. 42,430/- 6)Nivrutti Bhise Rs. 12.184/- 7) Bhikaji Tukaram patil Rs. 1,....
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.... produced a should be made in some other name, for reasons not understood. The material is sent by a particular party for instance, Om Trading Co. but the billing is made in the name of another party e.g. Bhimashankar Dhule on the request of the party sending the goods. The appellant has produced number of letters from the suppliers to this effect. The creditor as per the books is Bhimashankar Dhule. The address of the party in the appellant's books is what was given in the letter. In such cases, it would be unreasonable to expect the appellant to furnish complete and correct addresses of each and every creditor. The appellant has discharged its burden by providing the address written in the books. It cannot be held responsible in all cases where letters have been returned due to incomplete address. Assumption that all the creditors listed in category A, B and C are bogus was not found justified by CIT(A). 4.3.7 Category F consists of 37 creditors who have been subject to detailed exam....
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....04 and paid in cash subsequently is not justified, it is unmistakable that the appellant has in certain cases "made payments in cash while the credit amount shown against the suppliers in the books has not been squared up and allowed to continue. The illustrations given by the Assessing Officer in the assessment order which have been shown that in several cases the modus operandi stated by the Assessing Officer could not be doubted. After arriving at the above such bogus credits. It is obvious that there has to be some 2 decision, the next step was to reasonably quantify the amount of estimation in arriving at this figure. The addition made by the Assessing Officer is also based on estimation relying on statement of few creditors. The estimate, of the Assessing Officer now having been proved erroneous on the basis of facts and circumstances narrated in the earlier pages, there was a need to make an estimate in a more rational manner observed by CIT(A). 4.3.9 In certain circumstances an estimation of undisclosed income could be made. The estimation is only way out in such cases which have inherent guess work. At the same time....
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.... 10-12 days Sunil Shah 4-5 months Vilas Shete 5 months Kalpesh Shah 5 months 4.3.11 The circumstances were found such that the creditors who have given statements ; mentioned different credit periods. The period ranges between one week to 5 months. Considering the evidence at hand, a maximum period of 3 months was found to be sufficient and a reasonable credit period offered by the appellant observed by CIT(A). 4.3.12 The purchases on credit made by the appellant month wise is as under: August 464142 September 119184 October 27312901 November 33255289 December 25414330 January 14774363 February 7803575 March 75609099 4.3.13 The aggregate credit for purchase made during the months of January to march,2004 and which was outstanding as on 31/03/04 was worked out to Rs. 9,81,87,037/- by CIT(A), If the average credit period is taken as 3 months, it was found that the credits which arose after January,2004 would not have been squared up and outstanding as on ....
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.... CIT(A). Ld. Departmental Representative submitted that the creditors at Category A-E remained suspect and unproved. Ld. Departmental Representative drew our attention to the Rajasthan High Court's decision as reported in (1995) 212 ITR 390 (Raj) where it was held that "While explaining the various credits and investments, it may be possible that the assessee may be successful in explaining some of them but that does not by itself mean that the entire investments has to be considered as explained. Even lapse of time or inability of the assessee would not make the unexplained investment an explained one. It is each and every individual entry on which the mind has to be applied by the taxing authority when an explanation is offered by the assessee. If no explanation has been offered in respect of a particular entry, the credit entries which are to be allowed or to be disallowed. This taxing authority will be justified in coming to the conclusion that the said investment is unexplained. It is not the totality of the work has to be done on the basis of explanation offered for different entries and if the explanation of the assessee is acceptable on the basis....
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.... out of books to creditors and carried over the sundry creditors to the next year when the cheques issued in their names were encashed by its own accountant. It is nobody's case that this sequence of events did not happen. Even before the CIT(A) the assessee despite being given ample opportunity could not establish the payments. In the end even the CIT(A) was constrained to uphold the part addition. Reliance is placed upon decisions laid down by hon. SC IN (1971) 82 ITR 540 (SC) & (1995) 214 ITR 801 (SC) where the theory of human probabilities and sorrounding circumstances have been emphasized. In this background, Ld. Departmental Representative submitted that Tribunal is entitled to disbelieve any story which is prima-facie fantastic and which does not accord with human probabilities. 4.5 On other hand, learned Authorized Representative has raised various contentions which will be taken care by us in preceding para. 4.6 After going through the rival submissions and material on record including case laws relied by both the parties, we find that brand 'Star'. The total turnover for the year was Rs. 80.33 crores assessee is ....
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....ements filed in December, 2006, were found confused about dates of transaction, goods supplied, payments received, etc., through the above witnesses of second category had given letter to the Assessing Officer in December, 2006, inter alia stating that there was nothing outstanding as on 31.03.2004 but in course of remand proceedings, they could not establish that there was any amount outstanding as on 31.03.2004. Mr. Dhale, one of the witnesses is stated that the goods were supplied in December and payments were received within 2-3 months. Since supply was in December, 2003, it could not be said with certainty that there was no balance outstanding as on 31.03.2004. Other two witnesses Shri Dale, one of the witness stated that goods were supplied in December, and payments received within 2-3 month. Since the supply was in Dec.,2003, it could not be said with certainty that there was no balance outstanding as on 31/03/04. The other two witnesses Shri Teli and Mane had stated that payment of goods was made within 8-10 days but in cross examination, it could not establish that there was no balance outstanding at the end of the year. One Shri Durgule, had ....
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.... as concrete evidence since the signature on the letters were not confirmed. Moreover, assessee was not given an opportunity to defend itself against the said allegation. As regards support their statements. The addition is primarily based on the reliability and quality of evidence, the parties in category-1 as well as in category-3. None of the witnesses have given evidence to letters obtained from 37 creditors discussed above. After detailed investigation into the mater, only 19 creditors could be said to have 'stood by their statements. Even these 19 creditors do not have any evidence to support their statements. They have given a lame excuse that whatever documents they had have been destroyed after the year was over. The summons served on these persons had directed them specifically to produce details viz. proof of identity and capacity to advance the sum of money, details of sources of income, cash book, ledger, sale bills and bank pass book, account extract in their books of the assessee company. There is nothing on record to suggest whether any of the 37 creditors, who appeared have produced, any one or all of ....
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....r as the balance amount of Rs. 8,87,03,901/- sustained by the Ld. CIT(A) is concerned, we find that he sustained the same by holding that maximum period of 3 months credit is sufficient and reasonable. In the instant case, we find the AO/CIT(A) have not disputed the purchases made by the assessee. The G.P. rate is also not disputed. The books of accounts have not been rejected. The whole exercise has been done on the basis of statement of some of the creditors and comparable cases. It is the of section 68/69 are not applicable, that the profit shown by the 3 submission of the Ld. Counsel for the assessee that the provisions assessee is more than the comparable case taken by the AO i.e. in the case of Rajaram Solvex Ltd. and that the assessee was not allowed to remain present during the examination of witnesses and that none of the witnesses were examined on oath. Since this is the first year of operation and the assessee purchases its raw materials from farmers through brokers in some cases and that most of the farmers / brokers do not maintain books of account, therefore, the credibility of their statements regarding the exact time gap bet....
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....sp; It is stated in the assessment order that a show cause notice was issued to the appellant vide letter dtd. 15/12/06. The appellant was asked to submit its reply on 18/12/06. The appellant did not submit any reply to the above letter. It was therefore concluded that the appellant had nothing to say. 5.3 The appellant on this submitted before CIT(A) that it was a settled issue that a double addition cannot be made in respect of the same amount. The alleged bogus creditors had already been added u/s.69. No further addition u/s.40A(3) could be made on this account. The appellant relied on the decision in the case of Kejriwal Industries 169,ITR 12( Raj) where it was held that one ground is good enough and sufficient to consider addition u/s.40A(3) and it is not necessary, therefore to consider the other aspect of the matter as to whether the same amount could also be added u/s.69. 5.4 On the issue of other cash payment, the appellant submitted a list of payment stating that the pay....
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.... 94. In view of the fact that the appellant has not been able to satisfy either clause (h) or (1), the disallowance u/s.40A(3) of Rs. 71,28,196/- is confirmed. 95. As regards the second limb of disallowance, which is for an amount of Rs. 4,10,21,320/-, the appellant's contention has considerable force. The decision cited by the appellant is on the same facts and circumstances as that of the appellant. Certain creditors have been treated as bogus and the entire amount of Credit in the books standing in the name of that creditor has been added u/s.68. Once, the entire expenditure has been disallowed under one or other provisions of the Act, further disallowance cannot be made as it will result in disallowance which is more than the expenditure itself. The provisions of section 40A(3) earlier provided for disallowance of the entire amount which has been paid otherwise than by cheque or draft. Subsequently, the disallowance was restricted to 20% of the expenditure or the payment. It can never be the case that the disallowance u/s.40A(3) exceed t....
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....which were also not acceptable to the payee, who had genuine difficulties in accepting payments by that mode it was held that the disallowance u/s 40(A)(3) was not justified in view of rule 6DD(h)and (j). CIT Vs. Ashish Coal Coke Traders. 163 ITR 174 (MP). In this case the payments are made in Village Chipri, which is not served by any bank, A letter of the Gram Panchayat to this effect is already submitted. Payments made to small time vendors, who came from surrounding villages to sell the skin and the process of dressing the skin was done without aid of power. The Tribunal noted from the order of CIT(A), that considering the fact that the purchases were made from unorganized sector cash payment were indispensable. Section 40(A)(3) constitutionally upheld even after amendment in rule 6DD(j). As clause 6DD(h) read with clause (k) itself provide sufficient liberation of the rigors of section 40A(3) which entitles the parties to claim full deduction on cash payment over Rs. 20000/- where banking transactions are not available in the place where expenses is incurred or on the date on which the expenses is incurred. Clause (h) and (k) are sufficient liberation to &nbs....
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....s everything. We are satisfied that the materials on record disclose that the appellant engaged itself in acts of fraud indicated hereinabove and the same by itself will defeat the appellant's claim for deduction. Reference may be made to the judgment of the Court of Appeal in England reported in Lazarus Estates Ltd. v. Beasley [1956] 1 All ER 341 (CA). Speaking for the court Lord Denning observed as follows (page 345): "If this argument is correct, the landlords would profit greatly from their fraud. The increase in rent would pay the fine many times over. I cannot accede to this argument for a moment. No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved it vitiates judgments, contracts and all transactions whatsoever;" Therefore the CIT(A) is incorrect in holding that the addition in respect of S 40A(3) Amounts to double addition. So, she submitted that the order of the Assess....
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....in before us there is no case of payment made by cheque and routing said amount back to the assessee in any manner. So, this ratio is dispute that certain creditors have been treated as bogus and entire amount of credit in books stands in the name of that creditor has been added u/s.68/69 of Act. Once the entire expenditure has been disallowed under one or the other provisions of that, further disallowance cannot be made as it will result in disallowance which is more than expenditure itself. In the facts and circumstances the CIT(A) was justified to delete the addition in question, so the order of CIT(A) needs no interference from our side. We uphold the same. 6. Next issue in revenue's appeal is with regard to addition made by the Assessing Officer on account of deemed dividend under the provisions of section 2(22)(e) of Act of Rs. 12,47,20,000/-. 6.1 Assessing Officer had decided the issue against the appellant on the applicability of provisions of section 2(22)(e) of Act following an appeal in the case of one of the group companies of the same (Ghodawat) group, namely Star flexi Pack Industries, appeal No.Ich/534/06-07,A.Y.2004-....
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....n who is a shareholder of the lender company and not in the hands of a person other than a shareholder. On the second question: The expression shareholder in Sec.2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder than the provisions of sec.2(22)(e) will not 'apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the provisions ofsec.2(22)(e) will not apply. 6.4 The facts are identical in the case of the appellant company. Deemed dividend arises in the transaction of the appellant company with Ghodawat Industries P. Ltd as in the case of Star Flexi Pack Industries. Star Flexi Pack was not a shareholder. Shri Sanjay Ghodawat, a partner with substantial holding in Star Flexi Pack Industries was also a shareholder with substantial holding in Ghodawat Industries P. Ltd. Therefore Star Flexi Pack Industries was held to be a beneficial shareholder in" Ghodawat Industries P. Ltd by the CIT (A) ,Kolhapur, relying on the CBDT circular no 495 dt 22-09-1987 wherein it was mentioned that dedmed dividend could ....