TAX DEPARTMENTS SHOULD SEEK RECONCILIATIONS OF FIGURES INSTEAD OF SCRUTINY AND REASSESSMENT TO AVOID UNNECESSARY PROCEEDINGS AND HARASSMENT OF PUBLIC.

[DEV KUMAR KOTHARI]

Earlier article on related subject:

SCRUTINY AND ROVING ENQUIRY SHOULD BE AVOIDED INSTEAD RECONCILIATION OF FIGURES IN DOCUMENT CAN BE SOUGHT FOR MANY SORT OF DIFFERENCES. By: - CA DEV KUMAR KOTHARI  

dt. January 13, 2020

Earlier article

In earlier articles matter relating to requirement of reconciliation for figures in ITR and profit and loss account and balance sheets and some information or data provided by another party were discussed when it was noticed that just because of confusions or need of reconciliation, roving enquiries were started by way of scrutiny and other proceedings.

Recently we have come across tax departments issuing notices for scrutiny and also reassessment due to differences in amount reported at two places being different due to composition of figures like amount of sales only and amount of sales plus GST.

SMS sent by department:

SMS have been sent on the following lines to assesse:

Attention  Assessee  (PAN  XXXXXxx  xxX)

Income Tax Department has identified certain high value information which does not appear to be in line with the Income Tax Return filed for Assessment Year 2021-22 (relating to FY 2020-21). You can view the information on compliance portal. Please revise ITR / submit online response under e-Campaign tab on Compliance Portal. If the information has been correctly accounted for in ITR, you may ignore this message. Access Compliance Portal after login to the e-filing Portal (https://www.incometax.gov.in), go to "Pending Actions" tab, click on "Compliance Portal" and select "e-Campaign (AY 2021-22 onwards)". On Compliance Portal, under e-Campaign list, view campaign type 'High Value Transactions'. - ITD

It is pertinent to note that in  AIS and TIS  information have been provided by different parties and in accounts there can be difference in amount period of holding etc. due to different time of purchases or dematerialization of securities, NSDL and CSDL have worked out amounts based on average transaction value on the day of settlement of securities whereas accounting is based on actual transaction value. Many banks  and mutual funds have reported amounts  in case of all joint account holders whereas in accounts of assesse it is shown in one account. Due to this there will be large number of differences which tax authorities will not be able to understands or will not understand just to initiate proceedings.

For  another  example,  as per information provided by NeAC, one party had sold goods to other party at for say ₹ 15 lakh. Based on this information AO start proceeding against one of party - buyer  and seek information from seller for condfirmation. At this stage amount is not informed to any party. Rather roving enquiry was made for entire sales, sales on credit, salces against cash and party wise sales for sales exceeding ₹ 5,00,000/-

At his stage amount of sales of ₹ 15lakh collected and reported by NeAC is not mentioned  by AO in communication to any party.

Buyer and sellers both confirm transactions by invoices of ₹ 1575000/- and provide ledge copies, bank statement about payments made / received totaling ₹ 15,75,000/- being total of invoices.

The AO develops suspicion and issues notices to  seller and buyer   and both parties confirm there dealing for selling of goods by seller and purchases by buyer equal to ₹ 15.75lakh that is inclusive of ₹ 75 K   account of GST.

After perusal of information the AO  of seller has developed doubts and suspicions.  He had issued show cause notice  under clause(b) of section 148A of the Income-tax Act,1961 .With following information in annexure ( names and amount changed for secrecy)

  To quote from notice to seller of goods

“ Credible . information has been received from NeAC that assessee company of this charge M/s seller  Ltd  has sold goods  amounting to ₹ 15 lakh  to M/s  Buyer Ltd  during F.Y. 2017-18. On perusal of information, a letter u/s 133(6) of the IT Act was sent to the assessee on 16.02.2022. And its reply was received on 04.03.2022. On scrutinizing the facts, it was found that the assessee in its submission stated that it has made transaction with M/s Buyer Ltd but there is difference in these two sales figures and it is not realistic to ascertain the amount involved.

Hence, it is revealed that the transaction amount of sale seems to be bogus. To sum up, the above transaction is being done in such a way to accommodate bogus sale benefit to itself. On the basis of above information, proceedings u/s. 148A of the Income Tax Act, 1961 has been taken up in your case with the prior approval of Specified Authority. On verification, it is found that you have taken the benefit to the tune of ₹ 15 lakh  in the form of bogus sale. In view of the above, you are now provided with an opportunity of being heard. You are required to show cause as to why a notice under section 148 should not be issued on the basis of information suggesting escapement of chargeable income and results of enquiry conducted by the Department, within a period of seven (07) days from the receipt of this letter. Please remember, your compliance should be sent through electronic mode only and it should be accompanied with sufficient and suitable corroborative evidence in support of your arguments, if any.”

What should have been done by AO:

In this case AO should have first of all applied his mind and tried to ascertain reasons of difference – this being apparently difference of 5% of sales could be imagined as GST instead of imagining assesse as a bogus seller.

What is reported by NeAC  is amount of sales only that is ₹ 15 lakh and what is reported by buyer and seller are amount of invoices that is inclusive of GST of ₹ 75K total ₹ 15.75 lakh.

If AO was unable to guess this , he could have simply asked seller and buyer both to clarify  and reconcile amounts of ₹ 15 lakh reported by NeAC and amount  of ₹ 15.75 lakh  reported in ledgers.

Instead of this, he developed doubts of bogus sales and sought permission from Pr. CIT to initiate proceeding u/s 148A. Pr CIT has also given his permission.

It seems that both AO and Pr. CIT had not applied any mind and initiated proceedings  u/s 148A and it may ultimately culminate into reassessment and complete scrutiny, causing harassment of both parties.

Before this SCN u/s 148A the AO had issued notice us 133.6 which was replied but AO still did not ask to explain reason of difference of ₹ 75000/- instead of that he developed doubts.

Suggestion:

 in reply to SCN u/s 148A, seller can boldly  include following statements in his reply:

It appears that working for issuing notices including approval of PR CIT are taken in very hasty and casual manner without even minimal application of mind for analysis of information.

We have very serious objection to your statement in annexure  to the notice, on the following lines:

      “… But there is difference in these two sales figures and it is not realistic to ascertain the amount involved. Hence, it is revealed that the transaction amount of sale seems to be bogus. To sum up, the above transaction is being done in such a way to accommodate bogus sale benefit to itself.

It seems that tax officers, for example in this case,  NeAC, your good self and the Pr.CIT  all have a preset mind to consider tax payer as doing bogus activities. Or just take it lightly to doubt tax payers and presume assesse  to be tax evaders involved in escapement of income.

This is not expected from concept of “minimum government maximum governance”.

This has caused us lot of insult , mental shock and pain of serious allegations made in a very irresponsible manner.

Now coming to your communication we submit that:

We request  you to consider our earlier submissions.

You have not provided:

1. information received from NeAC, based on which you have  apprehension of escapement of income in our case.
2. result of enquiry made by you, we feel that enquiry is a precondition so enquiry result should be conveyed.
3. the information  from which you got  suggestion  or even apprehension  that the income chargeable to tax has escaped assessment in our case
4. Reason to apprehend a case of bogus sale and making serious allegation 
5. Working notes , order sheets and order and approval  of authority in this matter.

Kindly provide us the same to enable us to file full reply to show cause notice.

Without prejudice to above and in absence of above we give our submission based on our attempt to reading suspicion in your mind:

Two figures:

 As per your notice, which is based on information from NeAc you have figure of ₹ 15 lakh  for sales from assesse to  the other party  buyer Ltd  

As per copy of ledger of  Buyer Ltd   duly confirmed by them amount debited to their account is ₹ 15.75 lakh  which has been realized through banking channel in due course.

Difference is ₹ 75K

Due to this difference, it seems that you have apprehended sales of ₹ 15 lakh  as bogus and leveled serious allegations on assesse for escapement of income.

Before such apprehension, it would have been better if you have simply tried to explore reasons of differences. There can be difference in amount of total of  bills/ invoices and amount of sales turnover. There can be additional charges on account of packing and forwarding, freight, insurance and most importantly GST  on sales.

GST is accounted for separately for payments to be made in case of GST on sales and ITC to be availed in case of GST on purchases.

In case before your good self the difference is only of GST.

 GST is @ 5%  in bills for sales of goods   ₹ 15lakh   that is ₹ 75K  have been charged  over and above sales amount. GST in different bills @ 5% comes to ₹ 75K.  A minor  difference of 0.21 P may be  due to rounding off in different bills.  

Therefore, there is no discrepancy or difference as apprehended and used to level serious  allegations.

Your apprehension expressed in concluding words that “ To sum up, the above transaction is being done in such a way to accommodate bogus sale benefit to itself”

is nothing but due to non application of mind, suspicious mind and may be just  due to wrong practices to threaten and  harass assesse in any possible manner.

We are sorry to use some unpleasant words, apprehending harassment, but we say that we have learned this from tax authorities only who use words like bogus, bogus purchases, bogus sales, bogus documents etc. in a very casual manner.

Another questions which tax authority must have considered are

1. as to why an assessee will show bogus sales and how he will benefit from it?
2.  and how there can be escapement of income by accounting for bogus sales, as alleged. Bogus sales if at all will increase  income and tax liability of direct and indirect taxes. So why one will dare to  show bogus sales?

These have not been considered by any authority in this case merely because   information is collected, spread or shared and SCN is issued even after approval of PCIT but only because of doubt and conjecture and without application of mind at any stage.

Further documents:

We are enclosing copy of bills/ invoices and also evidence of dispatch / delivery of goods (transport consignment notes/ Eway bill etc. ) to show that there was real sales of goods made by us to Buyer Ltd  

In view of above we hope you will find it  a fit case not to issue notice us 148.

For seller Ltd

Collection of information by tax departments from other agencies:

Tax departments are collectin5g information from various sources in different manners like:

1. Annual information returns in which high value specified transactions are reported.
2. TDS and TCS returns.
3. Data collected from large organizations like banks, mutual funds, insurance companies, credit card issuers, stock exchanges etc.  in different manner of direct and indirect enquiry and reportings.
4. Information from direct and indirect tax departments.
5.  Information collected from other assesses in course of proceedings related to them or on specific enquiry or data collection exercise of tax department.

Need of reconciliation:

There are different manner of reporting to different agencies even in relation to same items of reporting, for example at some places gross amount or net amount can be reported. Sales can be inclusive or exclusive of other charges and taxes.

Even in ITR certain figures appearing in ITR, PLBS and other sources of information may be compiled and presented in different manner and composition of figures can be different. For example, amount of turnover, inventory, import and export, bank balances, balances in books of two parties having dealing can be different for many reasons.

Difference can be due to variety of reasons like:

Different definition and compilation of figures for any specific item reported for example amount of Sales can be inclusive of taxes or without including taxes. This can be a major reason of difference of amount reported to two agencies.

Difference due to timing factors – one party accounting in one year or reporting period  and another party  accounting it in next year or period.

Differences due to different method of accounting followed by parties.

Difference in bank balance as per bank and as per customer can be  due to several reasons  which get removed over a  period of few months on clearing of all instruments issued or deposited by customer of bank.

All such differences can be reconciled and reasons can be found. Over a period of more than one year there can be reconciliation and clearing of differences by further documents.

Roving enquiry:

However, for such simple differences, and figure composition differences  can be reconciled, in case of scrutiny assessment the Assessing Officers insist not only for reconciliation statements but also bank statement and bank account  of entire period, and  start roving enquiry which are generally not result oriented from the point of view of revenue, but causes lot of wastage of time.

Additions based on difference:

Examples have come across that merely because balance shown by other party is different ignoring reason for difference explained by parties.

Import Export Data:

Roving enquiry for difference in amount of purchase and amount of import in import / export data is not uncommon:

In case amount of import and export data as per assesse and as per custom department there can be difference for several reasons. However, instead of asking a reconciliation long questionnaires are issued causing lot of futile enquiry, compilation of documents and examination by tax authorities and enquiry from third parties also. This   only cause wastage of valuable time of tax authorities, representatives of assesse  and most costly time of assesse who carry business and provide opportunities of jobs to others and pays huge taxes to exchequer. Unfortunately tax authorities are in habit of doubting business men on most of occasions and for various transactions. That is why attempts are made to brand everything bogus.

Cases of difference in amount of purchase and Imports:

In case of such difference, though case is selected for limited scrutiny, yet roving enquiry is made by tax officers and that too without mentioning the source of information and amount of import found  in such record.

The content of notice are on following lines:

Your return of Income for Assessment Year 2018-19 has been selected for Limited scrutiny for the following issue(s):

1. Purchases shown in the ITR is less than the Invoice value of Imports shown in the Export Import Data

With respect to the purchases made by imports, kindly submit the below specified details:

1) Document of registration with regional licensing authority and import export code.

2) Details of goods Imported by you.

3) Please provide below details regarding imports:

Copy of ledger of purchase account highlighting import purchase.

 Details of import made during the year in the following format-.

Invoice no. and date      

Name of the party, email address and country 

 Description of item

Invoice value and Quantity imported

 Assessable value for custom Duty paid (Rs.)

TDS paid

Mode of Transportation and

 amount paid for transportation

4)  Please provide details of Customs duty, integrated goods and service tax return filed for relevant year and social welfare surcharge paid.

5)  Details of the party [Name of the party, email address and country]  from which imports have been made and payment details along with supporting documentary evidences.

 Unquote:

From the contents of the notice it is clear that it is for limited scrutiny and reason for scrutiny is difference between amount of import, which AO might have from some reports or source of information in his possession.

But such amount has not been mentioned. The amount looked in by AO in ITR for purchases and import has not been compared and difference is not pointed out.

Furthermore, in this case the amount of purchases has been shown as less than import figure, this can be for many reasons.

In such cases tax authorities should first of all call for reconciliation, then only if reconciliation is not found satisfactory, further enquiry should be launched. Merely for difference first of all selection of case for scrutiny is not proper and roving enquiries are not at all desirable.

On consideration of entire notice, and DIN and information available with reference to DIN preliminary reply as part compilation  is suggested on following lines:

From:  assesse 

To, AO , Additional / Joint / Deputy / Assistant Commissioner of Income Tax,

National e-Assessment Centre, Delhi.

Online submission through my account in e-proceeding. Note  dates are  written in DDMMYYYY manner for easy data entry. We can promote this style with help of government departments.

Sirs,

PAN:          AY: 2018-19.  DIN & Notice No : ITBA/AST/F/142(1)/2019-20/   ………  Dated:  …… date of compliance fixed  ……

Thank you very much for providing opportunity of hearing. We have to depend on many persons for making compliance of long details asked by you. Therefore, real working time allowed is very short.

We are unable to understand what is DIN no. in the above mentioned DIN & Notice no. We would like to learn more about DIN, because persons associated with us find it difficult to check DIN on website. In search with our PAN, AY, and date of notice we could not find document because, the result is as follows:

Thus no document was found with PAN, AY, and date for  notice

We preferred to search with above criterion so that we can get information about DIN specific to us because with DIN this assurance cannot be ascertained- DIN may belong to someone else.

We suppose there may be teething problems but we are also curious about it. Because unless a valid document is available with search facility specific for assesse that is by   PAN, assessment  year and date of document received, it may not belong to us and as per statement of honourable FM it may be non est  or void.

We suggest that DIN can be combination of PAN number and date of issue or simply with PAN and can be made available through a link in my account so that assesse is also fully satisfied about genuineness of DIN.

Coming to your notice, assuming it to be valid one,  we submit that as per your notice read with annexure thereto we find that our return of Income for Assessment Year 2018-19 has been selected for Limited scrutiny for the following issue(s):

     “1. Purchases shown in the ITR is less than the Invoice value of Imports shown in the Export Import Data”

Therefore, we understand that reconciliation of two amounts referred in above sentence should meet requirement of limited scrutiny.

We request you to kindly inform us amount of Invoice value of Import referred in above sentence in your notice, and source thereof with which you are comparing the amount of purchases shown in the ITR .  This we need because this amount can be computed in different manner for different purposes. Difference can be due to many reasons  like including or excluding items like:

(a)  custom duty,

(b)  face value or cost of import licence used ,

(c)  Foreign Exchange  valuation on different dates like date of invoice, or date of actual import or deemed import,

(d)  or date of payment or date of foreign exchange purchase or forward  booked etc.,

and also

 valuation of imported material by Custom Authorities on the day of invoice , date of  import or deemed import or  clearance or some other date and also timing differences in consideration of purchase and import in accounts and in import export data

The amount of purchases shown in ITR and P.L. Account can also be different due above reasons and also due to different methods of grouping costs as indicated above and also because some more costs like transportation, clearing and forwarding cost, brokerage etc. included or shown separately. 

On receipt of information from you about amount of import considered by you we will be able to reconcile the two figures. Kindly inform us the same as soon as possible so that we can undertake exercise of reconciliation to your utmost satisfaction.

In view of above we request you to kindly re-fix the case allowing us 30 days’ time after you inform us the amount of import value as considered by you with which we need to reconcile figure of purchase  mentioned in ITR.

Yours faithfully ,

 Assesse

Result orientation in enquiry and scrutiny:

To save valuable time of all concerned and more particularly of tax authorities only relevant enquiry should be made and relevant documents should be asked. It is practice of many officers to call for unrelated documents which causes loss of time of all and also damages to environment because papers are lost un-necessarily. Each small contribution of saving of anything and service  can be helpful in saving environment because water and energy is required at all stages from production to consumption.