TaxTMI 
TaxTMI 
2006 (3) TMI 193
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....led to appreciate the trade practice as well as the legal aspects put forward during the proceedings before him. 4. That CIT(A) has also not considered detailed submissions and arguments which were advanced before him and summarily rejected the submissions without going into the facts that the purchases from agriculturist is strictly controlled and regulated by the Market Committee officials. 5. That CIT(A) has also erred in holding that Inspector was legally authorized to record statement and reliance of the Assessing Officer and CIT(A) in this regard is totally misleading". 3. As regards the first issue relating to sustaining of an addition of Rs. 60,87,326, the facts of the case are that the assessee filed the return declaring therein income of Rs. 2,01,570. The assessee earned income from Dami being commission agent for sale of agricultural produce like cotton and Narma. The Assessing Officer observed that the assessee had capital of Rs. 64,032 for the assessment year under consideration and meagre capital of Rs. 72,260 and Rs. 43,218 for the subsequent assessment years 2002-03 and 2003-04 respectively. On scrutiny of the balance sheet, the Assessing Office....
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....ukand Singh of this village was found living. His statement was recorded who denied having sold any agricultural produce through the assessee. He stated that he sold his crops through M/s. Kundan Lal Sarvan Kumar 'Arhtias' of Raman Mandi for the last so many years. (c) Smt. Krishna Devi, Sarpanch Gram Panchayat, Village Khane Ki Dhaban, Block Malout stated that no person by the names (5 in numbers) were living in the village. (d) The assessee had shown credit of Rs. 1,58,195 in the name of Sh. Tej Ram S/o Manjit Ram of Vili. Bariwala. An enquiry was made from that place which revealed that there was no person by the name of Shri Tej Ram. But there was a firm in the name of M/s. Tej Ram Manjit Ram instead of an individual. The partner of the firm denied having any dealing with Sh. Davinder Singh Ahuja and having sold any Narma through the assessee: 3.1 Thereafter, the Assessing Officer confronted the assessee with all the material gathered through the Inspectors, and furnished copies of the Inspectors reports along with the statements of the aforesaid persons. He was asked to produce the creditors. However, the assessee could not produce the parties exce....
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....d in the subsequent assessment years i.e., 2002-03 and 2003-04 respectively. The Assessing Officer also observed that the assessee's sister concerns, namely, M/s. Maya Cotton & General Mills, M/s. Gee Ess Ahuja Cotton and General Mills and M/s. Ahuja Gift House were carrying on substantial business where huge funds were needed for their business. All these funds have been manipulated through the assessee otherwise, the assessee had meagre capital and could have not advanced such amounts to sister concerns. The assessee also failed to produce any receipts or acknowledgements when amounts had been paid to these creditors in cash in subsequent assessment years by making cash entries in cash book. Thus, he observed that it was only a devise for manipulating funds for the sister concerns as whenever they needed money, the same was provided in the guise of credits of agricultural produce. He also observed that in the subsequent assessment years i.e., 2002-03 and 2003-04, out of amounts shown as sundry creditors amounting to Rs. 35,72,114 and Rs.1,03,00,198, the amounts due from sister concerns in the form of sundry debtors aggregated to Rs. 32,26,965 and Rs. 1,02,17,053 respectively.....
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....ity of the creditors, creditworthiness and genuineness of the transactions and in the present case, this onus has not been discharged. Thus, he rejected the plea that the provisions of section 68 were not applicable to the sale/purchase of agricultural produce. He also observed that it was not necessary for the Assessing Officer to reject the books of account before applying the provisions of section 68 of the Act. He observed that the provisions of section 68 could be applied independently without rejecting the books of account. He also observed that it was not necessary that the entire entries appearing in the accounting year under reference should have been disallowed for the purpose of section 68. Ultimately, the net addition called for was only in respect of amounts outstanding at the end of the year. He also observed that the requirement of Market Committee and other State Government authorities does not absolve the assessee from the provisions of section 68 of the Income-tax. He also rejected the submissions of the assessee that the assessee was not confronted with the material in the form of statements of persons recorded by the Inspectors. The ld. CIT(A) observed that the ....
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....d under section 24 of the said Act. As per the procedure laid down under the Act, the assessee was required to maintain accounts and registers about the transactions of purchases and sales routed through the Kacha Arhatia. The transactions of purchase and sale are also subject-matter of levy of fee by the Market Committee. He also drew our attention to pages 37 to 39 of the paper book which prescribes the manner in which the accounts have to be maintained. He also stated that any violation on the part of the assessee attracts stringent penalty under sections 37 and 39 of the aforesaid Act. The various agriculturists located in Punjab and in the adjoining areas of Haryana and Rajasthan brought their agricultural produce to the assessee and the sales were made as per Market Committee bye-laws. The goods brought by the farmers are entered into 'Heap register' maintained by the assessee which was authenticated by the Market Committee. He drew our attention to pages 30 to 35 of the paper book which is a copy of the Heap register which contained details of the name and address of the purchaser/seller, name of the produce, weight, units, date of auction, date of weighment, name of....
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.... have ever been pointed out by such authorities. He further stated that all transactions of purchase and sale from farmers to the concerns have been accepted both by the Assessing Officer and CIT(A) and they are subject to payment of market fees. The commission earned on such transactions has also been disclosed by the assessee and assessed to tax. Out of 52 parties in whose names amounts standing to their credit were noticed by the Assessing Officer representing sale proceeds of their produce, one Shri Gurmail Singh S/o Sh. Kishan Singh appeared and his statement was recorded. He confirmed the sale made through the assessee for which payment was received on a latter date. He submitted that the assessee had maintained regular books of account which have been accepted by the Assessing Officer. Such books bears stamps of Market Committee. No defects have been pointed out in the books of account. He also submitted that sometimes 2 to 3 farmers join together and brought their agricultural produce together and the assessee had no means of verifying their antecedents arid identity. He argued that the Assessing Officer had cast impossible burden on the assessee to produce the farmers and ....
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.... no exports without their being purchases. This case related to trading addition and not addition under section 68 of the Act. (iv) The ITAT, Indore Bench in the case of Alia Hussain Abdeali Lokhandwala v. ITO [1991] 36 ITD 247, where addition made under section 68 on account of unexplained cash credits was deleted for the reason that the assessee had fully established the creditworthiness and genuineness of the transactions. (v) ITAT Amritsar (SB) in the case of Shanker Rice Co. v. ITO [2000] 72 ITD 539, where it was held that in a case where accounts and registers maintained by the assessee were subject to check and scrutiny by the officials of the District Food and Supplies Authorities and no defects in the maintenance of books of account have been pointed out, no addition on account of low yield of rice and other byproducts could be made. It was stated before us that since books of account have not been rejected by the Assessing Officer, no addition under section 68 could have been made. But the issue before Amritsar Bench related to trading addition made on account of low yield and not under section 68 of the Act. (vi) ITAT, Delhi Bench, in the case ....
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....see had introduced its own money in lieu of sale proceeds of shares, addition under section 68 could not be made. (x) He further submitted that the Inspector was not authorized to record statement of the parties and, therefore, statement could not have relied upon by the Assessing Officer. He relied on the decision of ITAT, Jaipur Bench in the case of Kamal & Co. v. Asstt. CIT [1998] 62 TTJ 527. (xi) ITAT, Indore Bench in the case of ITO v. Jewells Emporium [1994] 48 ITD 168 where it was held that Inspector could not record the statement of a partner on oath. (xii) ITAT, Amritsar Bench in the case of Dr. K.C. Khosla v. ITO, Phagwara [1985] 18 TLR 300 where it was held that ITO and Inspector could not record the statement of persons under section 131 outside the court premises. He further submitted that without rejecting the book results, the Assessing Officer could not have made any addition under section 68. He relied on the following judgments. (xiii) CM. Francis & Co. (P.) Ltd. v. CIT [1970] 77 ITR 449 (Kerala) where the issue before the Hon'ble High Court was whether the Tribunal was justified in applying the proviso to section 1....
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....' on these transactions which was duly reflected in the books of account. The payments to the farmers were made in the subsequent assessment year and all these transactions were entered during the normal conduct of the business. Therefore, no addition under section 68 was called for simply because the assessee failed to furnish confirmation from the parties concerned or to produce the parties. He further submitted : that this issue was taken up at the fag end of the period when the assessment was getting time barred and therefore, sufficient opportunity was not allowed. Besides, he contended that Assessing Officer could have not relied on the statements of persons recorded by the Inspectors as they were not competent to do so. 6. The Ld. DR, on the other hand, heavily relied on the orders of the authorities below. He submitted that the submission of the ld. Counsel that provisions of section 68 were not applicable to a case where credits in the books represented purchases made from the farmers and not cash credits was contrary to the provisions of the Act. He submitted that the expression used in section 68 is where any sum is found credited in the books of account of the as....
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....d on the decision of Hon'ble Calcutta High Court in the case of CIT v. Precision Finance (P.) Ltd. [1994] 208 ITR 465, where it was held that the assessee must prove the identity of the creditors and their creditworthiness. The Hon'ble Calcutta High Court also held that the fact that the transactions were through bank, was not conclusive. Since the assessee failed to produce any material to establish identity of the creditors and their creditworthiness, the addition made was held to be justified even though the amounts were received by cheques. He further stated that in this case, credits aggregating to Rs. 62,55,097 appeared in the names of 52 parties mentioned on page 8 of the assessment order. He submitted that out of these parties, the assessee could produce only one party, namely Sh. Gurmail Singh S/o Sh. Kishan Singh mentioned at Sl. No. 29 of the list, who confirmed having sold the goods and received the amounts shown in his name. He submitted that in regard to 51 persons, the assessee failed to establish the identity of such persons despite full opportunity allowed to him. In fact, the Assessing Officer co-operated with the assessee to such extent that he on his own....
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....submitted that whole exercise of not disclosing the names of the actual sellers of the produce in the Heap Register, J-Forms, 'GH' forms and weekly returns submitted to the Market Committee was only with an intent to show bogus liability in the books of account of the assessee. He further submitted that the present case could be decided having regard to the human probability. He relied on the judgment of Hon'ble Supreme Court in the case of Macdowell & Co. Ltd. v. CTO [1985] 154 ITR 148, where it was held that colourable devices could not be part of tax planning and it was wrong to encourage or entertain belief that it was honourable to avoid the payment of tax by resorting to dubious methods. He further relied on the judgment of Twinstar Holdings Ltd. v. Anand Kedia, Deputy CIT [2003] 260 ITR 6 (Bom.) where by relying on the judgment of Hon'ble Supreme Court in the case of Macdowell & Co. Ltd., it was held that the transaction even if genuine but that motive to evade tax can be struck down. He further relied on the judgment of Delhi High Court in the case of Bhagat Construction CO. (P.) Ltd. v. ACIT [2001] 250 ITR 291, where it was held that a "colourable device" i....
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....r to answer this question, it would be appropriate to reproduce hereunder the provisions of section 68, which read as under: "Section 68: Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year." A bare reading of section 68 of the Act shows that the expression used in the section is 'any sum' and it does not say that credit should be only in the nature of cash receipt. The expression 'any sum' is very wide and general in nature. It covers all credits including loan, receipts and any other amount of similar nature. The credits shall also include both loans and trade credits and also other receipts, be that of cash or kind. These maybe in the name of the assessee i.e., capital account or in the name a of third party. In the case of Gumani Ram Siri Ram v. CIT [1975] 98 ITR 337, the Hon'ble Punjab & Haryana High Court has held that section 68 of th....
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.... undisclosed sources. This matter was subject-matter of further appeal before the AAC, the Tribunal and the High Court, where addition was reduced to Rs. 2,33,414 by the Tribunal and the High Court. When the matter came up before the Hon'ble Supreme Court, it was observed that the Tribunal and the High Court ought to have taken into account the fact the utter improbability amounting almost to impossibility of the assessee having earned such a large amount of Rs. 3,33,414 as profit within a few months in the disturbed conditions which then prevailed in India. It was also held that where the name and source of a receipt, whether it be of money or of other property, cannot be satisfactorily explained by the assessee, it is open to the revenue to hold that it is the income of the assessee and no further burden lies on the revenue to show that that income is from any particular source. The relevant findings of the Hon'ble Supreme Court on page 940 are as under: "The law is well settled that the onus of proving the source of a sum of money found to have been received by an assessee is on him. If he disputes the liability for tax, it is for him to show either that the rec....
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....presence of officials of the Market Committee. The receipt of Kapas and Narma on the respective dates is supported by entries in Heap register maintained by the assessee under the Punjab Agricultural Produce Markets Act, 1961. Copies of the same are placed at pages 30 to 35 of the paper book. The auction is supported by form 'J' which contained details of the name of the seller, rate at which sold, the person who purchased the goods, rate, total amount etc. Specimen copies of the same have been placed at pages 36, 38, 40 and 42 of the paper book. Besides, sale of such produce is also supported by weekly returns submitted to the Market Committee and duly certified by the Secretary, Market Committee. Besides, purchases of these items are also supported "GH" forms issued to the purchaser of the crop as per Market Committee Regulations. Further, these transactions have also been subjected to payment of Market fees. The assessee has received "Dami" on these transactions which is accounted for in the books of account. Besides, these purchases have been duly accounted for by the concerns owned by the assessee's father and brother in their own books of account. The quantity pur....
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....oduce any documentary evidence in the form of stamped receipts/simple receipts when amounts covered by the purchase of agricultural produce were paid to the parties in the subsequent assessment year. The payments for purchases have not been made by cheques/through banking channels. Besides, the assessee was duly confronted with the fact of non-existence of the parties at the given villages. The statements of the Sarpanches and other material gathered during the course of enquiry in the assessment proceedings was duly confronted to the assessee. It is clear from discussion of page 11 of the assessment order. In fact, on the same page the Assessing Officer has also mentioned that the assessee conceded before him that he would not be able to produce or even identify the persons because most of the transactions were not frequent and regular. In fact, neither during the course of assessment proceedings and before the CIT(A) nor before us, the assessee has produced any evidence or placed any materials to show that these parties/farmers existed in the respective villages. The assessee has not filed any affidavit of any of the persons about their existence in the respective villages or eve....
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....n the light of the questions which were before the court. The Apex Court further observed that a decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, courts must carefully try to ascertain the true principle laid down by the decision. Now in many cases relied upon by the ld. counsel, the ratio was that until books of account were rejected, no addition could have been made on account of unverifiable purchases. The facts of those cases are distinguishable. In those cases, the purchases and sales made were assessee's own trading sales. The Assessing Officer made additions on account of unverifiable purchases because the parties from whom these purchases have been made were not found in existence. However, the Assessing Officer did not doubt the corresponding sales made against the purchases. The view taken by the Benches was that since the Assessing Officer had not doubted the sales, there was no question of making any addition on account of unverifiable purchases. This point can be illustrated by giving an example. Let us say that the assessee is engaged in the business of ....
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....me. The facts detailed above clearly show that when enquiry letters were sent by Regd. Post to 12 parties at the addresses given by the assessee, these were returned 'unserved' with the remarks of the Postal Authority 'Not known'. Thereafter, the Assessing Officer deputed Inspectors to serve summons under section 131 of the Income-tax Act and make enquiries about the transactions shown in their names in the books of account of the assessee. Such enquiries revealed that except two parties, none of the other were found existing in the respective villages. The Inspectors recorded the statements of two persons who were found existing at the given villages. Out of the two persons, the Inspector found that Sh. Harminder Singh had not sold any agricultural produce through the assessee. He also stated that he sold his crops through Kundan Kumar Sarswan Kumar of Raman Mandi for the last many years. His statement was recorded in support of the fact that Inspector had made such enquiry. Similarly, credit was shown in the name of one Sh. Tej Ram S/o Manjit Ram of village Bariwala. On enquiry, it was found that there was no person by name of Sh. Tej Ram, but there was a firm of ....
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....e on the part of the assessee in establishing the identity of the creditors could equally apply to the facts of the present case, when the factum of purchases made through the assessee has been established. The failure of the assessee is only to prove that purchases were made from persons in whose names these were shown. Similar issue where purchases of raw materials made from non-existing party were treated by Assessing Officer as "income from other sources" came to be considered by the Hon'ble Delhi High Court in the case of CIT v. LA Medica [2001] 250 ITR 575. The facts of that case were that assessee had shown purchases of raw materials worth Rs. 3,82,750 from a party. On a enquiry, the Assessing Officer found that party did not exist at the given address. Thereafter, summons were issued to the agent of the Bank through whom the payments were made for the purchases. It was found from the Bank records that the bank accounts were opened by 'C' on introduction by 'S' giving another fictitious address at Delhi. Therefore, on the basis of the material available on the record, the I.T.O. treated the sum of Rs. 3,82,750 as income from undisclosed sources. On app....
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....e of La Medica the payment for purchase of raw materials had been made through bank account. In the present case, the payments to the parties were made in cash by way of entries in the cash book which are not supported by any receipts or any other independent documentary evidence. In any case, it is established that persons to whom payments have been shown had not indeed received the same. Thus, the ratio of the judgment of Delhi High Court in the case of La Medica "that once it was accepted that the supplies were not made by 'K' to whom payments were alleged to have been made, the question whether the purchases were made from some other source could not have weighed with the Tribunal as a factor in favour of the assessee" would equally hold good and apply to the present case. 7.7 Similar issue also came to be considered by the Gujarat High Court in the case of CIT v. M.K. Brothers [1987] 163 ITR 249. The facts of the case were that assessee had shown purchases of pig iron, scrap and steels amounting to Rs. 52,254 from four parties. The assessee was asked to produce the parties with their books of account and passbooks etc., for examination and adduce all evidence which ....
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....hing feature of the facts of the present case is that in none of these cases, persons from whom the assessee had shown the purchases had been found in exising and also the payments have not been made by cheques. In fact, there is no evidence that payments were made to these parties to whom these had been shown in the books by way of entries in the cash book. Further, addition in the case before Gujrat High Court was made on account of bogus purchases and the addition in the present case has been made on account of unexplained credits. Thus, it is clear from the ratio of these decisions that the matter has to be decided on the basis of its own facts and the assessee is required to establish the factum of existence and identity of the parties and the fact that these persons had actually sold the produce to assessee. These are the peculiar facts of the present case and the reality of these transactions need to be established by the assessee. 7.8 However, we find substantial force in the grievance of the assessee that Assessing Officer took up the issue at the fag end when the same was getting time barred. The Assessing Officer asked the assessee to produce these persons by his l....
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....of alleged diversion of income under the head 'DAMI'. The facts of the case are that in the profit & loss account, the assessee had shown receipt from DAMI at Rs. 1,48,923. After adjusting shop expenses and depreciation, net profit from DAMI was shown at Rs. 46,893. However, during the course of assessment proceedings, the Assessing Officer noticed that actual receipt of DAMI was Rs. 5,35,486 whereas in the profit & loss account, only an amount of Rs. 1,48,923 was shown. When the assessee was asked to explain the discrepancy, the assessee explained that out of gross Dami received, the assessee had refunded 75 per cent of the same to its sister concerns namely, M/s. Maya Cotton & General Mills, Kotkapura, the proprietary concern of Sh. Baljit Singh brother of the assessee and M/s. Gee Ess Ahuja Cotton & General Mills, Kotkapura, the proprietary concern of assessee's father. The Assessing Officer thereafter, verified the Income-tax records of the two sister concerns and noticed that they had not shown any Dami receipt in their own returns. When the Assessing Officer pursued the enquiry further, the assessee furnished self made copies of trading account in the case of both....
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.... Officer made an addition of Rs. 3,86,563. 9. Aggrieved, the assessee filed an appeal before the CIT(A). The written submissions filed before him were considered. The ld. CIT(A) upheld the disallowance on the ground that it was clear from the statement of Sh. Baljit Singh that he did not even know the names and addresses of the persons who were sent to M/s. Ahuja Bros. The date when verbal agreement was entered into was also not known to the parties. He also took notice of the fact that the party had concealed the payment and receipt of commission in their trading and profit & loss account. Even the position regarding payment made to persons covered under section 40A(2)(b) was not reported despite required to do so under the Act. He also observed similar position in the case of Sh. Gurcharan Singh. Thus, he upheld the addition. The assessee is aggrieved with the order of the CIT(A). Hence, this appeal before us. 10. The ld. counsel for the assessee Sh. Sudhir Sehgal, reiterated the submissions which were made before the authorities below. He submitted that the assessee being a katcha arhatia, was not required to get its accounts audited under section 44AB of the Act. He submi....
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....he Revenue is confined to decide the reality of the expenditure namely, whether the amount claimed for deduction was factually expended or not, and whether it was wholly or exclusively incurred for the purpose of business. (vi) CIT v. Jain Engineering [1988] 172 ITR 341 (Delhi), where it was held that whether expenditure was incurred wholly and exclusively for the purpose of business was essentially a question of fact. (vii) Sassoon 1 David & Co. v. CIT [1979] 118 ITR 261, where the fact is that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under the Income-tax Act. (viii) Jamshedpur Motor Accessories Stores v. CIT [1974] 95 ITR 664 (Pat.), where commission on sale of motor trucks to employees in addition to salary because of commercial expediency was held to be justified. (ix) Narsingdas Surajmal Properties (P.) Ltd. [1981] 127 ITR 221 (Gauhati), where it was held that it matters little whether expenditure has been incurred on the basis of valid or invalid agreement/document. If it was incurred for the purpose of business, the assessee would be....
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.... copies of the statements of Sh. Gurcharan Singh and Sh. Baljit Singh to whom commission was paid. They were not able to show any record or evidence about the names of persons who were sent/recommended for selling their produce through the assessee. In fact, they simply stated that such parties were not known to them. Now if these parties were not known to them and they have no record of the persons who were sent to the assessee, how it could be presumed that those parties who sold the produce through the assessee were sent by them. As regards increase in the 'DAMI' receipts over the years, there is nothing on record to show that the increase was due to the efforts made by the assessee's two sister concerns. In other words, there is no evidence whatsoever to support the claim of the assessee that they had rendered any services for which commission was paid when they did not even know them. As regards the payments assured by the sister concerns there is also no evidence for the same. In any case, when they had made purchases, they were duty bound to make the payments. In fact substantial amounts of purchases made in the months of November, December 2000 and January 2001 ....