TaxTMI 
TaxTMI 
2023 (6) TMI 429
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....ent of Rs. 16.14 lacs, so that both the assessee and the Revenue are in second appeal, i.e., qua Rs. 16.14 lacs (per Cross Objection - CO) and Rs. 537.06 lacs respectively. 3.1 Before us, the Revenue's case, reading out the relevant part of the assessment and the appellate order, reading as under, was that the assessee's case remains wholly unsubstantiated, and the relief allowed by the first appellate authority is, in the facts and circumstances of the case, wholly unwarranted: The assessment order: '3. The following points emerge from the above discussions. 3.1. The list of purchase furnished by the assessee does not conclusively prove that the contents in them represent the actual purchases made by the assessee during the Previous Year. The number of letters returned un-served raises serious doubts over the correctness of the list furnished as the purchase details. 3.2. The assessee has a contract with the Kerala State Civil Supplies Corporation, commonly known as Supplyco. According to this contract the assessee has to receive paddy from farmers as per allotment, transport, store, parboil, mill pack and deliver to the AWD as a part of the Paddy Procurement Scheme. The....
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....;s stand it took the stand that the purchases were made with the assistance of Padasekhara Samathies and Societies. 3.8. The assessee has made cash payments for the purchases and claims that the money was paid through the Padasekhara Samathies and Societies. Three of the Padasekhara Samathies i.e. M/s Nandyattukari Padasekhara Samathi, Thenkarapacha Padasekhara Samathi and Thengupallikkarii Padasekhara Samathi, with whom verifications were made, have denied having made any supplies to the assessee or having assisted the assessee in procuring paddy through its members. One of the Societies M/s. Adat Farmers SBC with whom the assessee claimed to have made purchases have also denied making any sales to the assessee. A registered Co-op. society cannot accept cash unrecorded in its books. With the three Padasekhara Samathies and one society denying having made the sale or assisting the assessee making the purchase from its members the assessee has failed to identify from whom these purchases were made, nor could produce any receipt for having made the payment. The assessee also could not furnish details of society wise purchase to the extent of Rs. 3,27,49,659. The assessee offered no....
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....Just after the harvest, procurement of paddy is started. During the year under consideration, the appellant showed purchase worth Rs.68,01,32,694/- and out of this purchase worth Rs.15,95,46,806/- was claimed to have been made from unregistered dealers. During the course of assessment proceedings, the A.O. decided to investigate purchases from unregistered dealers. The AO directed the assessee to furnish details of purchases made from unregistered dealers. According to the AO, the assessee furnished details running into 514 pages containing names of 8503 persons. On random basis, the AO sent letters to 200 people out of the list. The letters came back unserved in respect of 78 of such people. Out of the balance, 39 people responded and only five of them confirmed to have made sale to the assessee. The AO has mentioned the responses of the people in the assessment order. Subsequently, another 12 people responded. The AO forwarded the detail of his inquiry to the assessee for assessee's response. In reply, the assessee submitted as under: "The peak harvesting season had started and the farmers were busy in the paddy fields during the whole day and nobody was available in the ho....
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.... claim of expenses of Rs. 5,53,20,069/- is disallowed ." On going through the assessment order and submission of the appellant, I realise that the AO has not understood the nature of assessee's business, nature of purchase of transaction carried on by him and therefore conducted incorrect investigation, received irrelevant information and ultimately reached untenable conclusion. The assessee operates a rice mill. The assessee is a partnership firm by the name M/s. Diamond Food Products, but the name of the rice mill is "Pavizham Mill". Most of the farmers known the assessee by the name of the Mill and not by the name of firm. Obviously, on being asked, whether the farmers have done any transaction with M/s. Diamond Food products, their reply would be in negative. At or towards the end of the harvesting season, the employees or agents of the assessee set out to procure paddy for the Mill. They come to the designated place of sale controlled by Padasekhara Samathies. Farmers also do not sit at home, waiting for the buyers to come. They also bring their produce to Padasekhara Samathies, which is nothing but an association of farmers. The mill owners want to purchase paddy at a....
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....) is made when payments in excess of Rs.20,000/- is made. These two statements are contradictory to each other. If the payments are not genuine and the purchases are fictitious, no question for disallowance u/s. 40A(3) arises. This fact displays the confused state of mind of the AO. The cash book was produced before the AO during assessment proceedings, but the AO has not pointed to a single instance where payment of more than Rs.20,000/- was made in cash to any of the individual seller/farmer. Clearly, the AO has assured that payment of Rs.20,000/- or more has been made in cash to individual farmers in respect of amount of Rs.5,53,20,069/-. Additions, based on wrong premises, wrong facts, assumptions and presumptions cannot be sustained. Having said this, this is also a fact that wherein cash payment is involved, in absence of any third-party evidence, the authenticity of purchase pricing cannot be vouched for. During the course of appellate proceedings, the purchase price claimed by the appellant were analyzed. On analysis, it is seen that the assessee has shown purchases from the unregistered farmers @14.92 per kg, compare to the average price of Rs.14.82 per kg. On discussion....
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....e in fact only facilitators, representing essentially the interest of farmers, enabling them to fetch good bargain for their produce. The sale by the farmers is only against cash. The non-identified sellers, referred to by the AO, are therefore only the farmers. There is, therefore, nothing to doubt the purchases. The part confirmation thereof by the ld. CIT(A), is, thus, also without merit and, in any case, be restricted to Rs. 0.10 per kg, i.e., the average price differential between the registered and unregistered purchasers. 2.3 On being queried by the Bench as to the absence of any evidence, Shri Pandalai would submit that the same is perforce the circumstances of the case. The transactions attract no tax under the Kerala Sales Tax Law. No bills are raised or expected from the farmers, who merely receives payment in cash against the paddy sold, which is, accordingly, duly recorded through internal vouchers prepared by the assessee-firm. On being asked about some such sample vouchers, he admitted to the same being not made a part of the Tribunal's record. Further, on being queried about the weighment slips, as indeed the receipt from the farmer/payee, inasmuch as the same wou....
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....l and against the fact and law. Hence the addition is liable to be deleted, and pray for the same.' Gd. 1 being general in nature, the disallowance was thus objected principally on, contrary to facts, the ground of invocation and application of s. 40A(3) of the Act, claiming the AO to be in two minds, i.e., as to the applicable provision of law. Having accepted the genuineness of the cash purchases, it was argued, he applied s. 40A(3), without the conditions for the same being satisfied. That is, before the ld. CIT(A), the assessee's case rested largely on the non-applicability of section 40A(3), reading as under: '(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure. (3A) Where an allowance has been made in the assessment for any year ....' The ld. CIT(A) found the AO having misled himself as once he finds the purchase as not genuine, there is no question of applicability of sec. 40A(3). The argument is unexceptional. Howe....
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....le, so that the operating results of the assessee's business for the relevant year are to be itself, rejecting the books results, estimated on the basis of the material gathered by the AO, of course, upon duly confronting the assessee therewith where, as in the instant case, he joins the proceedings. The present is a case of, in contradistinction, a specific disallowance qua the assessee's purchases of paddy for the year at Rs. 6801.33 lacs, at Rs. 553.20 lacs. 3.4 The burden in law to prove it's return, as well as the claims preferred thereby, is on the assessee (CIT v. Calcutta Agency Ltd. [1951] 19 ITR 191 (SC); Lakshmiratan Cotton Mills Co. v. CIT [1969] 73 ITR 634 (SC)). It cannot be otherwise, as it is only the assessee who has 'incurred' the expenditure, i.e., as claimed, and is in the intimate know of it's affairs. The law postulates the admissibility of an expenditure where the same is shown as incurred wholly and exclusively for the purpose of the business. It is trite law that the word 'wholly' denotes the quantum, and the word 'exclusively' refers to the purpose or the object of the expenditure. The deduction is thus subject to both being satisfactorily proved. The sa....
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....claim being substantiated. (refer para 3.7 of the assessment order) 3.6 We shall, nevertheless, consider either scenario. If the payment is made direct to the Samathies, even if in cash, for the purchases made over a period, the daily amount remitted or disbursed would be duly reported by it's office bearers/ representatives, with, rather, the details of the farmers and the respective amounts (if not also along with quantity and rate), bearing also their (farmer's) signatures, as also retaining a copy thereof, with the original being with the assessee-firm, for and whose behalf it is. This is as only this would discharge the assessee of the obligation in respect of the said purchases and, further, enable it to meet any adverse claim, if any, on it at any time later, i.e., from the seller/s, in respect thereof. This, then, constitutes the basic record, inexplicably missing, with, in fact, both the assessee (as the purchaser) and the Samathy (for and on behalf of seller). Why? How, in its absence, could the assessee, as a purchaser, claim to have incurred a particular cost in respect of the quantity purchased? Rather, rate is inextricably related to quality, so that both would als....
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....ld surely stand to be generated. How else, one may ask, is the paddy quantified? To no answer by Sh. Pandalai, on being queried in the matter during hearing. Both the claim of no transaction cost as well as absence of any document being generated, is incorrect. No query was made during hearing in respect of test report, as it is only now, while perusing the material on record, that it transpires that the purchase directly from the farmers, i.e., as against through the State Agency, Supplyco, is made only in respect of paddy which does not conform to the prescribed moisture; impurity and chaff levels. The same would therefore necessarily require being determined, only whereupon would the rate thereof be negotiated and finalized. Weighment slip, as indeed analysis report, besides receipt of cash by the seller, are thus a concomitant, essential accompainments, to the transaction, enabling and evidencing the same. 3.8 There is accordingly sufficient material and data incident to a transaction carried out in the normal course of business, i.e., even assuming that the transaction involves no levy or other charges, as claimed, by the State, local authority, or even the Samathy. It is al....
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....rovement in it's case stands made at the appellate stage. Coming back to self-made vouchers - not produced at any stage, on the strength of which the claim of purchases is made, we doubt, and neither is there any claim that the same contain the name and address and signature of the 'farmer', leave alone his identity verified. We state so as the assessee would not have, in that case, stated of it not maintaining any details inasmuch as the purchases are through the samathies and societies. Not only is the assessee's claim without any record, much less reliable, it fails to explain its absence. It is only where record is made available that the same could be subject to verification by the assessing authority, with a view to satisfy himself as to its veracity. Each of the details afore-stated, it needs to be appreciated, forms an essential ingredient of the purchase transaction arising or being generated in the normal course of business. How, one wonders, could then the Revenue be faulted with for doubting the genuineness of the assessee's claim? The denial by the Samathies is categorical, with they expressly stating of no purchase having been made through them. Qua Societies, even th....
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....ng the earlier denial as wrong; having been given by another Committee. The same in fact is not understood as, even as the AO states, the Society would nevertheless be maintaining a single set of accounts, only w.r.t. which the sales, if any, could be confirmed, which has been not. There is thus no evidence on record qua the purchases from the Societies, even the break-up of which, much less confirmations therefrom, is not furnished at any stage. As regards Samathies, there is again a specific denial, as against an absence of any positive material evidences the purchases therefrom - which extends to all, by each of the 3 Samathies. Again, the same remains unrebutted, with no improvement in its case by the assessee at any stage. In fact, the specific finding by the AO in the matter, not denied, much less disproved, is of the Samathies acting as facilitators only in respect of purchases by Supplyco, the State agency purchasing the farmer's produce. 3.11 We, next, refer to the impugned order. As afore-stated, none of the findings by the AO stand rebutted or dislodged, with we in fact finding even the basic incidents, viz. weighment slip; impurity level; receipt of payment, etc. as i....
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....a matters not borne out by the record. The said decision, as its reading would show, is an application of several decisions by the Apex Court, which also find reference herein while discussing the law in the matter (para 3.4), exhorting the Tribunal as the final fact-finding authority, to necessarily base it's factual findings on the relevant material on record and, further, by considering the entirety of facts and circumstances of the case. Reliance by the assessee, not specifically made before us, though we find as included in it's compilation, on Steel Line (India) (in ITA Nos. 880-882, 1321-1323/Mum/2016, dated 29/8/2017), would thus be to no moment. There is, to begin with, no discussion of the law in the matter. Then, again, there is nothing therein to show as to how the disallowance has been worked out at 2% of the bogus purchases, absence of which attracts the charge of arbitrariness. The argument is self-contradictory inasmuch as it seeks allowance in respect of purchases that are bogus, i.e., do not represent actual purchases. There have been instances of disallowances, varying over a range, up to 25%, of such purchases. The same were accompanied by a finding by the Tribu....
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....gain, not warranted in wake of purchases being found not genuine; it only signifying an admitted income, and it is for the assessee to exhibit circulation of funds. It is for this reason that even where the book results are completely rejected, estimating the profit of the business, if not also its turnover, an addition for unexplained credit u/s. 68 would survive unless the source of the funds is shown by the assessee to be the secreted profits of the business, kept outside books, since estimated and being brought to tax (refer: Kale Khan Mohd. Hanif vs. CIT [1963] 50 ITR 1 (SC); CIT v. (M.) Ganpathi Mudaliar [1964] 53 ITR 623 (SC); CIT vs. Devi Prasad Vishwanath Prasad [1969] 72 ITR 194 (SC)).The inference as to the said increase in gross profit, which is the maximum to which we are prepared to go, also thus comes with a caveat/s. The argument is thus legally not tenable. 3.12 In as much as we have found no merit in the impugned order, and have restored that of the AO; the assessee's CO, arising out of part relief to the assessee, contested by it thereby, survives no longer. In sum 4. The disallowance in the instant case is for rs. 553.20 lacs, representing purchases from So....
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....made is in respect of purchases from Societies and Samathies, in face of specific denial by them, supported by denial by majority of the responding farmers themselves. The plea of the absence of accounts with them as the reason for denial, is again a false plea inasmuch as they have denied any purchases through them. The assessee, who does not have even the basic documents of the purchase; it failing to furnish even the date-wise detail of purchases, has misled at every stage, furnishing the farmer details of supplies to Supplyco, as well as of purchases for the following year. The plea of the AO having not rejected the assessee's accounts, or of the quantity equilibrium being disturbed, is not relevant. No rejection of accounts is in law required to effect a disallowance of an expenditure on the basis of it being not proved; in fact, disproved. As regards the 'quantity' being balanced, it is, rather, for the assessee, in the complete know of it's affairs, to explain the same, i.e., as to how, in the absence of any evidence being led, it claims to have purchased the goods. For all one knows, the profit ratio or the yield may be higher, or the excess stock a carryover from an earli....