TMI Blog2015 (4) TMI 747X X X X Extracts X X X X X X X X Extracts X X X X ..... ct could not be attracted in the present case. We fully agree with the view taken by the Tribunal on this issue. The case of Kachwala Gems [2006 (12) TMI 83 - SUPREME COURT] primarily supports the asessee's case that income cannot be determined at astronomical figures unless assessee's explanation has been proved to be false. Following the decision of Pancham Das Jain [2006 (8) TMI 582 - ALLAHABAD HIGH COURT], the matter will now go back to the Division bench for passing the order in accordance with majority view. ORDER UNDER SECTION 255(4) OF THE INCOME TAX ACT, 1961 - Pursuant to the order of the Third Member relating to addition of ₹ 10,78,71,656/- made on account of sundry creditors under section 68 of the Income tax Act, 1961, the majority View of the Tribunal is that the aforesaid addition made under section 68 of the Act is not sustainable in the eyes of law and, therefore, the order of the ld. CIT(A) deleting the aforesaid addition is confirmed. - Decided against the revenue. - ITA No. 219/LKW/2009 - - - Dated:- 25-4-2014 - S.V. MEHROTRA, (AS A THIRD MEMBER), SUNIL KUMAR YADAV AND AND A.K. GARODIA, JJ. Manoj Kumar Gupta, CIT (DR) for the Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oat and cow and converting it into finished leather and also by purchasing of finished leathers and converting it in manufacturing of shoe uppers and shoes, etc. Most of the finished leathers produced by the assessee had been exported to various countries. The assessee had filed its return of income declaring a net income of ₹ 35,77,635/- and the assessment was completed at a total income of ₹ 11,96,23,430/- as under: After discussion, the income of the assessee is computed as under: Net Business income as per Computation of Income 36,27,635/ - ADD: 1. On account of suppressed value of closing stock as discussed 48,51,384/ - 2. On account of unexplained cash credit u/s 68 as discussed 10,18,71,656 - 3. On account of interest on the advances made as discussed 12,14,949/ - 4. On account of ESIC penalty as discussed 245/ - 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,86,540/- Raw Hides Supplier ₹ 10,78,71,656/- 4. The AO has observed that assessee had provided complete names and postal addresses in respect of various sundry creditors other than raw hide/ leather suppliers for which assessee could not furnish the complete address and names of any of the supplier except the name of M/s Zaz Leather Compex Pvt. Ltd. against which the amount of ₹ 7,38,766/- had been shown as outstanding. He pointed out that in respect of other creditors the assessee had only given the details of the names of market of a particular city e.g. as under: 1. Malerkotla Marti Various suppliers of Mandi ₹ 5,48,206/ - 2. Agra Mandi -do- ₹ 84,33,227/ - 3 Amroha Mandi -do- ₹ 33,42,386/ - 4. Faizabad Mandi -do- ₹ 95,46,033/ - 5. The AO, therefore, pointed out that assessee had not been able ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt on the spot. However, in case of purchase of larger quantity from such vendors, the payments were made in instalments, either at the time of next visit for purchases or they collect the payments from factory, which is made on presentation of slip for outstanding amount. According to the assessee, since these persons resided in the city or nearby places, where these weekly markets were held, the assessee purchased hides from them and recorded the outstanding balance in the name of that person against the mandies. It was, therefore, submitted that the question of creditworthiness of such vendors for supply of raw hide was undoubted and unquestioned. As per the assessee, it was due to confidence and trust of these vendors that they supplied raw hides of goats on credit as they were assured to get their payment as and when demanded. 6.1 The assessee further submitted that the purchase transaction in relation to raw hide of goat was quite different from the purchase of raw hide of buffalo and cow, as in both the cases there were regular dealers having permanent establishments, at different places and buyers of buffalo and cow hides are also spread all over the country. 6.2 Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as having credit of more than 20 months was not correct. 7.1 From these facts, the AO concluded that assessee was introducing the names of fictitious persons as and when required and was itself introducing unaccounted money in its books of account against the names of various persons, whereabouts of which and identity in respect of which was neither verifiable nor available. He, accordingly, made an addition of ₹ 10,78,71,656/-, inter-alia, observing that the assessee failed to give postal address, whereabouts, creditworthiness of vendors and also could not prove the genuineness of the transaction. 8. Before ld. CIT(A) the assessee had submitted as noted in para 22, as under: An amount of ₹ 10,78,71,656/- was outstanding and payable to around 600 to 700 vendors spread over 24 Mandies. Complete list of persons against whom amount is payable for supply of goat hide was furnished during the course of assessment proceedings. On being asked to furnish complete postal address together with to prove identity and creditworthiness of those vendors and a notice u/s 142(1) was issued to show cause as to why said outstanding of ₹ 10,78,71,656/- be trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained in cash or kind or any other manner any amount in respect of such loss, expenditure or liability by way of remission or cessation thereof. 4. The addition could not be made even u/s 68. This section applies to cases 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 of thereof or the explanation offered by the assessee is in the opinion of the AO is not satisfactory. 5. It is relevant to point out that sec. 68 has been introduced to check induction of unaccounted cash into the business in order to raise the corpus of the assessee. These provisions apply to receipts and not expenses, since expenses do not result in induction of cash into the business. 6. The section does not apply to those credits which are the result of liability payable for expenses or purchases which form part of the Profit Loss Account and hence amenable to scrutiny and examination by the AO about their genuineness and reasonableness. 7. It is relevant to point out that the entire purchases, which have corresponding credit entries in the suppliers' accounts, are shown in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m whom purchases were made and copies of complete set of audited accounts. Thereafter, again ld. CIT(A) in para 26 to 28 has noted assessee's contentions, which are reproduced hereunder: 26. In respect of above appeal we wish to state that during the course of assessment proceedings for the A.Y. 2006-07 ld. Dy. Commissioner of Income-tax 6, Kanpur we have filed confirmations from 1478 vendors of 11 Mandies confirming outstanding balance appearing as on 31.03.2006 as a part of verification/confirmation of sundry creditors (goat hide). Apart from the above there has been personal attendance of 105 vendors from different Mandies who have come before Dy. Commissioner of Income Tax-1 confirming the transaction and balance payable as on 31.3.2006. Most of the vendors were also raw hide supplier in the A.Y. 2005-06 (Appeal pending). We have highlighted the green Ink on whose names are common in the list of A. Y. 2005-06 and whose confirmations have been filed. Most the vendors are making supply since a long time. It is further submitted that we have highlighted only those suppliers from whom transactions were made in a big volume only those suppliers from whom transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue, was that the credits were liabilities and dues relating to purchase/procurement of raw hide. Once these credits were accepted as debtors (creditors) against purchases of raw materials, some did not fall within the purview of unexplained credit within the meaning of section 68. Once the AO had accepted the trading results including the purchases made during the year, the credits could not be treated as bogus/not existent, in-as-much as that the goods to the extent of these amounts were accepted to be reasoned, purchased and credited/manufactured by the assessee during the year. (b) The AO had himself noted that these credits were part of current year only and perhaps he intended to hold that the purchased to the extent of ₹ 10,78,71,656/- were bogus. In that case, the addition could be made only in the trading account and gross profit if such purchases were found and treated as bogus. However, the trading results of the assessee during the year were accepted. The relevant books of account and supporting vouches/bills of manufacturing and trading account had been placed before AO and there was no infirmity or contradiction recorded by AO of such records. (c) Gross pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision in the case of K.S. Kannan Kunhi v. CIT [1969] 72 ITR 757 (Ker.), where it was held that the explanation of the assessee should not be summarily rejected without further examination and where such examination is possible and not undertaken and the ITO adds to the assessment on the basis of the mere rejection of the explanation, the Court will set-aside the assessment. (f) He also referred to the decision in the case of Jaisa Ram v. CIT, 75 ITR wherein it has been observed that AO cannot reject the account books merely because the address of the purchasers in respect of cash transactions were not entered. (g) The AO had not questioned the correctness and the completeness of the books of account. The account books were duly added and auditor's report was also filed. The audit report prima facie did not show any infirmity and Column 13 of 3CD report giving quantum details of raw material, closing stock consumption etc. were also noted in the said report. Thus, proper records in respect of production consumption purchases etc. were available with the assessee which had been duly audited and there was no adverse finding available on them. Thus, the trading results d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he creditors against the purchases and made the addition of the entire amount outstanding against the purchases, however, he did not point out any mistake in the books of account maintained by the assessee in regular course of business and also not doubted method of accounting employed regularly. (b) The AO did not point out any suppressed sale and inflated purchase. Gross profit rate which was at 12.09% in comparison to the gross profit rate of 9.92% in the preceding year had not been doubted. (c) The AO did not rebut the contention of assessee that liability against the purchase had been paid in the succeeding year. (d) The ld. CIT(A) categorically stated that during the assessment proceedings for the A.Y. 2006-07, the assessee filed the confirmation from 8,478 vendors of 11 mandies, so there was no occasion to doubt the supplier/creditor against the purchases when the trading results had not been disturbed (e) When the AO did not doubt the purchases and the gross profit rate, there was no occasion to doubt the corresponding characters of the purchases. 11. Ld. J.M. has summarized the submissions of both the parties as under: 6. The submissions of the revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of account either on cash basis or on mercantile basis regularly employed by him and while doing so has to follow the accounting standard (sub-section (2) of section 145 of the Act) as notified by the Central Government in the official gadget from time to lime. As per section 145(3) AO has power to reject the books of account if he is not satisfied about the correctness or completeness of the account of the assessee or if the method of accounting provided in sub-section (1) or accounting standard as envisaged under sub-section (2) have not been regularly followed by the assessee and in that situation the AO has power to make assessment u/s 144. Therefore, if assessee succeeds in substantiating its books of account with authenticated evidence, then the assessee's accounts can be said to be complete and correct unless and until the evidence supporting the entries in the books of account is found or is held to be manipulated, fabricated, false or bogus; or otherwise not. Therefore, if an assessee fails to establish the correctness and completeness of the entries in the books of account the revenue has power to deal with such an entry in accordance with the provisions of law; ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al and, therefore, the starting point of CIT(Appeals) findings itself was based on mistaken/distorted facts. (f) Ld. J.M. further pointed out that it is not correct that AO had accepted the trading results because he had not only disputed the valuation of closing stock for want of evidence but had made the addition also meaning thereby that observation of the CIT(A) and the AO having accepted the trading results including purchases was absolutely founded and unsustainable in law. (g) As regards reliance placed on the decision of Allahabad High Court in the case of CIT v. Puncham Dass Jain (2006) 156 Taxmann 507, Ld. JM observed that the said decision was not applicable to the facts of the case because in that case, the Revenue as well as the Tribunal had accepted the liabilities to be on account of credit purchases. But in the present case from the very beginning the liability in question was not on account of credit purchases and this stands supported as a result of failure of the assessee to establish its claim that the liability in question was on account of credit purchases. Ld. J.M. further observed that assessee failed to establish the genuineness of the liability as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR relied on following judgments: (A) Grover Fabrics (India) (P.). Ltd. v. CIT [2011] 332 ITR 312(Punj Har.) (B) CIT v. Smt. Annamkuty Jose [2008] 174 Taxman 328 (Ker); (C) Jai Prakash Sahu v. CIT 2007] 295 ITR 268 (All.); (D) Kachwala Gems v. Jt. CIT [2007] 288 ITR 10 12.2 Ld. DR further submitted that purchases shown in the credit account were actually made against cash payment and assessee failed to establish that the liability was a trade liability on account of credit purchase. In further submissions dated 19th August, 2010, Id. DR referred to the decision relied by assessee in the case of Visisth Chay Vyapar Ltd. v. ITO, decided by Delhi 'G' Bench in ITA No. 2835, 2838, 2836 2837/Del/2003 for A.Ys. 1996-97, 1998-99, 1999-2000 vide order dated 19th October, 2004 and pointed out that in the said decision the assessee had furnished details of distinctive number of shares and certificate of broker Mr. N.C Jain confirming the amount due from the assessee. But in the present case, the assessee could not give details of postal addresses of vendors and stated that company was not concerned about their identity. In sum and substance, it was submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raw hides from mandies particularly for the want of time, which had been explained by the assessee vide its reply dated 17/12/2007. Ld. Counsel pointed out that at pages 245 to 248 of paper book details of payment made in subsequent year, in respect of un-paid sundry creditors, is contained. Further, records of 20 vendors in respect of purchases of raw hide, payment made and un-paid amount is contained in paper book IIA at pages 533 to 553. Ld. Counsel further submitted that the Ld. J.M. has observed and recorded a finding that AO did not accept trading results since he had not only disputed valuation of closing stock for want of evidence but had made addition also in order to demolish findings of ld. CIT(A) that after having accepted trading results including purchases during the year, creditors cannot be treated as bogus. 13.2 Ld. Counsel pointed out that as regards the addition on account of valuation of closing stock ld. J.M. has agreed with the findings of ld. A.M. that deletion of addition on account of valuation of closing stock by ld. CIT(A) was justified. Ld. Counsel submitted that this factor vitiates the order of ld. J.M. since after having agreed with the deletion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent further submits as under: (a) Identity of vendors is well established by the fact that petty vendors assessable at Mandi on Mandi day and pay charges to place their product in Mandi. Their names and addresses are recorded by Mandi committee who regulate this trade and settle dispute between buyers and vendors. That is why address of vendors have been shown careof Mandi and are made available as and when required. (b) In so far as creditworthiness of vendors are concerned, those vendors operate their business with small capital and carry on their business by collecting hides from butchers and mutton shop even from shops of remote places during the week by paying token amount and balance on credit and place them in Mandi for its sale. On receipt of payment from customers they make payment for purchases in instalments. It is their regular business and not a stray transaction. Therefore, their creditworthiness cannot be questioned. Further, it is creditworthiness and repute of assessee company which is evident of the fact that such large member of vendors do have faith in assessee company to supply hide on credit. (c) In so far as genuineness of transactions concerned, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT in the earlier round, it is evident that the trading results have been accepted. Despite this, for the sake of analysis, if it is considered that the assessee has failed to prove the genuineness of the creditors and consequently, the purchases to that extent are not genuine, then the declared gross profit of ₹ 32,16,564/- will get further enhanced by ₹ 37,99,907/-i.e., a GP of ₹ 70,16,471/- on a total turnover of ₹ 2,51,55,930/- giving an exorbitant gross profit rate of 27.89%, which is not the case. It is also important to note that the assessee is in the business of exports and its entire income is exempt. There is, as such, no reason for the assessee to suppress the profit as its income. 13.8 In regard to the reliance placed by ld. DR on the decision of Hon'ble Punjab Haryana High Court in the case of Grover Fabrics India (P.) Ltd.'s case (supra) and P. Mohanakala's case (supra), ld Counsel submitted as under: In the context of reliance upon Judicial Pronouncement of Punjab and Haryana High Court respondent submits that in that case, there was addition on account of Trading Results after rejecting books of accounts and also ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction has to be kept in mind while making addition u/s 68 in respect of loan creditors and trade creditors. Whereas trade creditors are linked to the trading results of assessee, loan creditors are not. Therefore, the reasonableness of explanation of assessee in regard to sundry creditors cannot be judged on the touchstone of the credibility of explanation to be judged with regard to loan creditors. The reason is simple. In case of loan creditors cash is received but in case of sundry creditors the assessee's claim is regarding purchases in normal course of business. In this regard I may also refer to Section 34 of the Evidence Act as per which books kept in normal course of business on day to day basis are relevant though not sufficient evidence on stand alonge basis. Therefore, if assessee was maintaining its books of account in accordance with the trade practice then the assessee's explanation regarding purchases has to be examined on the touchstone of prevalent trade practice. 14.2.1 There is no dispute that assessee company continued to carry on the business of export of finished leather and shoe upper and shoe as in the past by tanning the hide of goat and cow and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hide suppliers under consideration by Hon'ble Third Member; (e) The credit balance on any date consists of outstanding for the current purchase made on a particular day and sometimes part of old outstanding. However, entire purchase price is cleared in 3-5 months time in instalments; (f) The purchase of with holding part purchase consideration is to minimize the bargain power of the Butcher/Supplier and ensuring continuity of supplies by them. 14.3 It is pertinent to observe at this stage that AO did not dispute the modus operandi of purchase of raw hide of goats from Mandi. He did not dispute that in normal course of trade practice the purchases were made from petty suppliers. However, after considering the modus operandi of assessee regarding purchase of raw hides of goat and the records maintained in that regard, the AO did not accept only the valuation of closing stock of raw hide on account of non-verifiability of rate of purchase of raw hide. However, purchase of raw hide per se was not disputed for obvious reasons viz. consumption, manufacture of leather and export being not disputed. This aspect needs proper elucidation because, as rightly pointed out by ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .95.307 in number. As such, the average cost of raw hide shown in the opening stock is @ ₹ 101.52 per raw hide. As against this, the closing stock of rawhides have been shown at ₹ 6,25,23,278/- in Schedule-15 in respect of 6,63,659 pieces of raw hides as per Annexure-4 to the Tax Audit Report. This gives the average cost per goal skin appearing in the closing stock at ₹ 94.21. The assessee could not explain the reason for such a reduced rates of raw hides of goats at the end of the Financial Year as against the cost of raw hide appearing in the opening stock. This clearly shows that the assessee has been inflating its purchases and expenses by maneuvering and manipulating the figures pertaining to the purchases of raw hides. It has already been stated in the previous paras that the rates of raw hides were being disclosed at the rates which could suit the assessee and which are not verifiable from any independent agency. Hence, keeping in view all the facts and circumstances of the case and also in view of the submission made by the assessee during the assessment proceedings, the value of closing stock of raw hides of goals would be taken @ 101.52 in place of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of next visit question of adding such outstanding u/s 41(1) of the IT. Act, 1961 is unwarranted. This outstanding is normal outstanding and arrived at in the normal course of business and as per business practice. All the purchases are fully vouched and verifiable and properly recorded in the books of account. 14.9 After examining the assessee's contentions in para 10, the AO, inter- alia, observed that the assessee had been introducing the names of fictitious persons as and when required and was itself introducing unaccounted money in its books of account against the names and various persons, whereabouts of which and identity in support of which was neither verifiable nor available. Therefore, there was clear charge of AO that assessee had only shown fictitious creditors and actually met the liability by introducing its unaccounted money. Ld. Counsel's submissions to this extent are, therefore, not correct. 14.10 I find that there is not an iota of evidence on record to suggest that cash was actually introduced by the assessee in the garb of sundry creditors. The AO had primarily drawn a conclusion on account of non-verifiability of sundry creditors rejecting the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment for purchase of property attributed to the amount left by the assessee's stepfather, which could not be established by the assessee. Considering her age and the circumstances in which she was placed, the Tribunal held that the mere fact that she was unable to establish the source did not justify addition. The assumption that the only course for the Assessing Officer in such cases is to make an addition is incorrect as pointed out by the High Court, while endorsing the Tribunal's decision. Satisfaction in the opinion of the Assessing officer certainly involves an element of discretion in drawing an inference from the facts and circumstances of a particular case. It was this view of the High Court, which was endorsed by the Supreme Court, when it affirmed the decision of the High Court. In other words, the inference should rest upon the credibility of the explanation rather than the materiality of evidence. 14.11 Further, as regards verification of sundry creditors, I find that assessee in its written submission has pointed out that initially AO proposed the addition with reference to Section 41(1) but, subsequently realizing the fact that ingredients of sec. 41(1) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 68 on these trading liabilities which in first place is legally incorrect and secondly no proceedings are taken to further verification of the creditors and fiction of section 68 has been utilized to hold those credits unverifiable and unexplained. From the submissions made before me in the paper book, it is seen that the appellant has given the names and place of business with the creditors and if purchases were required to be verified, the proceedings could have been directed towards such verification without taking help of deeming provisions in this behalf. As noted above, the appellant has furnished explanation and details on this issue and same cannot be rejected summarily by help of deeming provisions as far as purchases and such credits relating to such purchases are concerned. The decision in the case of Jessaram v. CIT, 75 ITR supports the observation more specifically applicable to this case where it was held that the AO cannot reject the account books merely because the address of the purchasers in respect of cash transactions are not entered . This legal position is reiterated in the case of Durairaj v. CIT 83 ITR. 14.12 Thus, the verification part of the sundry c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the assessee failed to give satisfactory explanation with regard to nature and source of aforesaid deposits, the ITO made addition u/s 68. On appeal, the assessee contended that the credits appearing in the name of the said two persons did not represent deposit of cash by them with the assessee and that they represented the value of goods supplied by them to the assessee and, therefore, the addition in question u/s 68 was not warranted. The assessee's contentions were accepted by ld. CIT(A) and the Tribunal which were confirmed by the Hon'ble Allahabad High Court observing as under: 8. The submission is misconceived. The Tribunal has recorded a categorical finding of fact based on appreciation of materials and evidence on record that the Assessing Officer had accepted the purchases, sales as also the trading result disclosed by the respondent-assessee. It had recorded a finding that the aforesaid two amounts represented the purchases made by the assessee on credit and, therefore, the provisions of section 68 of the Act could not be attracted in the present case. We fully agree with the view taken by the Tribunal on this issue, inasmuch as, on the basis of the findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the additions made for unexplained cash credits or not. Hon'ble P H High Court held that it would depend on facts of each case as to whether nexus with sundry creditors had been established or not. This decision was rendered on entirely different set of facts where AO had recorded a finding that the credit entries were from bogus entities. In the present case, there is no finding by AO that the sundry creditors were bogus. Here AO had only drawn an adverse conclusion only on account of non-verifiability of sundry creditors but no finding was given that creditors were bogus. On the contrary the AO had accepted assessee's contention regarding payment of opening creditors during the year. Therefore, this decision is of little assistance to the Department. (B) Smt. Annamkuty Jose's case (supra) In this case main issue before Hon'ble Kerala High Court was as to on whom the onus to prove the sundry creditors shown in the books lay - whether on assessee or department. It was held that burden lies on assessee to establish the genuineness of sundry creditors, with which there cannot be any dispute, and not on AO to prove that sundry credits represent income of ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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