TMI Blog2017 (5) TMI 1207X X X X Extracts X X X X X X X X Extracts X X X X ..... y of ledger account placed in the paper book. A perusal of computation of income of assessee, we further find that the amount of ₹ 1,00,000/- paid in cash already stood disallowed by the assessee itself in its computation of income u/s. 40A(3) of the Act. Therefore, in our considered opinion, the disallowance of this amount of compensation, as made by the AO, would amount to double addition not permissible in the facts and circumstances of the case - Decided against revenue Disallowance of excess interest paid on unsecured loans - Held that:- Assessee stands supported by several documentary evidences such as copy of ITR, computation of income and relevant bank statement of the directors Sh. Anand Prakash and Sh. Ravi Prakash, Confirmatory certificate issued by M/s. Dynamic Weaving Pvt. Ltd., the original lender, copy of account of both the directors in the books of M/s. Dynamic Weaving Pvt., Ltd. along with its PAN and ITR, comparative chart of interest paid to directors @ 20% for A.Yrs. 2011-12 to 2013-13 toward reimbursement of interest on loan raised by them from M/s. Dynamic Weaving Pvt. Ltd. and so on. Moreover, the Department itself has accepted the claim of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f raw material consumed of ₹ 27,89,56,500/- and manufacturing expenses of ₹ 23,84,34,176/-, which after considering the other income of ₹ 9,88,021/- declared by assessee, gives gross profit of ₹ 11,47,41,082/- representing to 18.79% with increase in stock of ₹ 1,43,95,123/-. We, therefore, find substance in the observations of the ld. CIT(A) that if the purchases made from said supplier company worth ₹ 20,42,24,661/- are deducted from the cost of raw material consumed, it will given GP of 50.8% which is not at all feasible in the trade of assessee. It is also not the case of Revenue that the ratio of raw material consumed to sale by the assessee during the year does not commensurate to such ratio declared by the assessee in preceding assessment years, rather it stands parallel to the material consumed in preceding years. Not only this, the trading results of the assessee company was also found parallel to other paper mills during the year under consideration as examined by the ld. CIT(A) in the impugned order, against which there is nothing from the side of Revenue. The Revenue has utterly failed to rebut the reasonable analysis made by the ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the order of ld. CIT(A), Meerut dated 11.05.2015 Date of Hearing 11.04.2017 Date of Pronouncement 12.05.2017 for the assessment year 2011-12. Both the parties have raised following grounds in their respective appeals : Grounds raised by Revenue: 1.Whether in the facts and circumstances of the case, the Ld. Commissioner of Income tax (Appeals) has erred in deleting the additions of ₹ 1,00,000/- under the head 'medical expenses' and ₹ 1,00,000/- under the head 'workman compensation' ignoring the fact that these additions had been made by the A.O due to lack of documentary evidence in support of these expenses. 2.Whether in the facts and circumstances of the case, the Ld. Commissioner of Income tax (Appeals) has erred in restricting the addition of ₹ 14,18,666/- to ₹ 8,10,666/- inspite of the fact that this addition had been made by the A.O as the assessee had paid excess interest to two lenders at a rate that was much above the rate at which the assessee paid interest to other persons. 3-Whether in the facts and circumstances of the case, the Ld. Commissioner of Income tax (Appeals) is correct in deleting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve thereof. 2. That the Id. CIT(A) has erred in law as well as on the facts of the case by confirming an addition of ₹ 1,00,00,000/- being the amount of insurance claim written off by the appellant to the debit of the profit loss account and the various findings made and inferences drawn are based on incomplete and incorrect appreciation of facts on records and the observation of the Id. CIT(A) that the loss of stock, which can be claimed as deduction had to be limited to ₹ 3,40,338/- being the amount of claim approved by the insurance company is incorrect and ill founded and the submissions of the appellant have not been considered in the right perspective thereof. 2. Briefly stated, the facts of the case are that the assessee company is engaged in the business of manufacturing and trading of paper. The assessee filed its return of income on 28.09.2011, declaring a net taxable income of ₹ 30,63,770/-. The case was selected for scrutiny and statutory notices were issued to the assessee. The assessment was completed vide order dated 28.03.2014 after making following additions to the total income of the assessee : (i). Addition on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,837/- between the amount claimed by assessee and the amount confirmed by the parties, was added to the total income of the assessee. The details of such sundry creditors are mentioned at page 3 4 of the assessment order. 6. Similar was the position with respect to difference found in purchases. The assessee filed reconciliation of difference, but for want of confirmation with respect to the balances, the details of which are given at page 4 of the assessment order, addition of ₹ 34,95,471/-, being the amount of purchases not confirmed by the parties, was made u/s. 69C of the Act. 7. With respect to addition of ₹ 20,42,24,661/- on account of bogus purchases, the AO noticed that the assessee had made maximum purchases of the aforesaid amount from M/s. Prakash Marketing Pvt. Ltd. with credit balance of ₹ 1,46,70,433/-. In response to notice u/s. 133(6) sent to the above party at its new address furnished by assessee, the confirmation was received by AO whereby two confirmed copy of loan account and sale account were received, according to which sales have been shown to the assessee amounting to ₹ 20,69,44,661/- and the loan receivable from the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al income of the assessee. 9. The assessee challenged all the above additions in appeal before the ld. CIT(A), who after considering the facts of the case, detailed submissions of the assessee, observations of the AO and verdicts of various higher courts, deleted the following additions: (i). Addition on account of medical expenses workman compensation . Rs.2,00,000 (ii). Addition on account of difference in sundry creditors. Rs.17,15,837 (iii). Addition on account of difference in purchases. Rs.34,95,471 (iv). Addition on a/c of bogus purchases u/s. 69C. Rs.20,42,24,461 (v) Addition on a/c of unexplained cash credit u/s. 68. Rs.89,72,748 The ld. CIT(A), however, restricted the disallowance of excess interest paid on unsecured loans, from 14,18,666/- to ₹ 8,10,666/-, thereby giving a relief of ₹ 6,08,000/- to the assessee on this account. He also sustained the addition of ₹ 1,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed by the assessee itself in its computation of income u/s. 40A(3) of the Act. Therefore, in our considered opinion, the disallowance of this amount of compensation, as made by the AO, would amount to double addition not permissible in the facts and circumstances of the case. Accordingly, ground No. 1 raised by Revenue deserves to be dismissed. 13. On the disallowance of excess interest paid on unsecured loans, amounting to ₹ 14,18,666/- the contention of the ld. DR is that the ld. CIT(A) was not justified to restrict the addition to ₹ 8,10,666/- without appreciating the fact that the payment of interest allegedly made to the two directors of the assessee company was at exorbitant rate of 20% if viewed from the rate of interest paid on other unsecured loans @ 6%. Therefore, the ld. AO was justified to disallow the interest paid in excess of 6%. 14. On the other hand, the contention of the ld. AR has been that the ld. CIT(A) was not justified in sustaining the disallowance to ₹ 8,10,666/- towards interest paid in excess of 12%, thereby giving part relief of ₹ 6,08,000/- vide impugned order. On this issue, the ld. AR has filed before us a written syno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y refer to certificate of M/s Dynamic Weaving Pvt. Ltd. placed at page 61 of the paper book. As interest has been allowed by the Dept. itself in the subsequent years, therefore, Rules of consistency also apply for which reliance is placed on the following case laws: 193 ITR 321-323 Radhasoami Satsang Vs. CIT, (Supreme Court) also followed by P H High Court in 278 ITR 262: We are aware of the fact that, strictly speaking, resjudicata does not apply to income-tax proceedings Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year . 264 ITR 276, CIT VS. ARC Securities Printers (Delhi High Court) relevant portion from page 279 is reproduced below: In the aforesaid factual background, we fail to appreciate as to how, when there is no change in the business of the assessee, relief under section 80-1 of the Act can be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred. As the Assessee Co. did not have any security of its own to pledge with the bank for availing loans, therefore, it had no alternative but to raise loan through its Directors. In this connection, reliance is placed on Delhi High Court judgment in the case of CIT vs. Shiv Kumar reported in 354 ITR 19 at page 20, in which submission of the assessee was accepted viz. that banks would not lend money without security and if unsecured loans are raised in the market, the rate of interest would be much higher than 18%. In view of the above, the Ld. CIT(A) was not justified in allowing/restricting the interest paid @ 12% instead of 20%. Therefore, balance interest of ₹ 8,10,6667- may kindly be allowed. 15. Having considered the rival submissions in the light of findings of the authorities below, submissions of the assessee and various decisions relied on, we find considerable substance in the contentions of the assessee. It is worthwhile to point out that the ld. CIT(A) has restricted the disallowance based on his assumptions only and not on any cogent material on record. Such a disallowance, in our opinion, would amount to adhoc disallowance, not permissible under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be much higher than 18%. 17. Apart from the above the version of the assessee stands supported by several documentary evidences such as copy of ITR, computation of income and relevant bank statement of the directors Sh. Anand Prakash and Sh. Ravi Prakash, placed at paper book page 5-59, Confirmatory certificate issued by M/s. Dynamic Weaving Pvt. Ltd., the original lender, placed at page 60 61, copy of account of both the directors in the books of M/s. Dynamic Weaving Pvt., Ltd. along with its PAN and ITR placed at pages 62-64, comparative chart of interest paid to directors @ 20% for A.Yrs. 2011-12 to 2013-13 toward reimbursement of interest on loan raised by them from M/s. Dynamic Weaving Pvt. Ltd. and so on. Moreover, the Department itself has accepted the claim of interest paid @ 20% to the same directors in A.Y. 2012-13 and 2013-14 as is evident from the respective assessment orders of the assessee company. The ld. DR utterly failed to repudiate the contention of the assessee that the interest @ 20% amounting to ₹ 10,00,000/- each was paid to its directors in 2012-13 as the loan was repaid by the assessee on 01.10.2012 the directors in turn repaid the same to M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the explanations of the assessee observing that the Assessing officer has not given any reason for not accepting the veracity of reconciliation statement and that the payments to the sundry creditors and the alleged sellers were made through banking channels. However, the ld. CIT(A) has not recorded any finding that the reconciliation statements furnished by the assessee regarding the impugned differences, were found verifiable from the books of accounts of assessee and that of sundry creditors as well as the sellers. It is no doubt true that the assessee had submitted reconciliation statements before the AO and the AO did not make thorough enquiry with reference to the books of account of the assessee as well as the books of sundry creditors and sellers, so as to verify the same before rejecting the explanation of the assessee. The crucial fact to be ascertained for adjudication of this issue is that the amounts claimed by the assessee should be cross-tallied with the accounts of sundry creditors and the sellers of goods. We, therefore think is appropriate to remit both these issues back to the file of Assessing Officer to properly examine the reconciliation statement filed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission of the AR. The copy of entire set of submissions made by the AR was forwarded to the AO for his comments. The AO vide his letter dated 07.05.2015 repeated the same arguments which were made in the assessment order. It is important to note here that the AO has not rejected the books of account nor has he cast any doubt about the genuineness of sales made by the appellant, it is only the purchases which have been held as bogus. The appellant is a manufacturing company. In order to produce finished goods the manufacturer will have to purchase raw materials. This is a fact which no reasonable person can dispute. But suppose, for argument's sake, it is accepted that the AO is right in treating a part of purchases as bogus. What would be the consequence of such an assertion ? What would be the impact of such assertion on the trading account of the appellant company ? We can understand this by doing the following analysis. For the A.Y 2011-12 the appellant company has shown the following trading figures in its audited trading account. Cost of raw material consumed = 27,89,56,500/- Sales- 62,17,48,614/- Manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If we compare the result of the appellant company with the result of the above mentioned concerns, we can see that the result shown by the appellant is comparable with others. However if the assertion of the AO that purchases worth ₹ 20,42,24,661/- is bogus is taken to be true the ratio of value of raw material consumed to sales in the case of the appellant would become almost 1:8. This ratio is again unbelievable. 8.9 In the assessment order, the entire focus of the AO was to discredit the state of affairs of the supplier company. But the moot question here is, even if the state of affairs of the supplier company is doubtful, what impact does it make on the books of the appellant. The appellant has debited the purchases in its books of accounts. It books were examined by the AO. It is an undisputed fact that the payment for purchases were made through account payee cheques. The appellant is a company which is subject to multiple audit test checks. Its accounts are audited under the provision of company law as well as under the provision of income tax law. The appellant is a manufacturing concern and consequently it has to submit its trading result be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The supplier company is regularly filing its return of income. 3. The supplier company has supplied goods to parties other than the appellant company. 4. The appellant company has made payment for purchase through cheques. 5. The suppliers company has shown corresponding sales in its books and corresponding credit in its bank account. 6. The raw material have been transported from outside Uttar Pradesh. The necessary details as contained in form xxxviii issued by the commercial taxes department has been submitted before the AO. From a perusal of these forms it can be seen that the supplier company has transported paper waste for the use of appellant company. Considering the totality of above points the genuineness of transaction between the appellant company and the supplier company is established. 8.12 In the above paras we have seen, step by step that - 1. There cannot be any manufacturing without purchase of raw materials. 2. If purchases of raw material worth ₹ 20,42,24,661/- is treated as bogus the G.P. of appellant company will shoot to more than 50%. 3. If purchases of raw material worth ₹ 20,42,24,661/- is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es placed before the authorities below : (i). M/s Prakash Marketing Pvt. Ltd. is dealing in waste paper, which is one of the basic raw materials of the assessee company, and has sold waste paper to many other paper mills, which proves that it is dealing in waste paper. The copies of the sales account and ledger accounts of all the parties to whom goods were sold by the said company during the relevant year, as appearing in the books of the said company were placed before the authorities below. (ii). Copies of the audited balance sheet of the said supplier company for the FY 2010-11 2011-12 were placed before the lower authority. (iii). Copies of the sales tax returns of the M/s Prakash Marketing Pvt. Ltd. for FY 2010-11 were placed wherein the total sales as shown in the profit loss account has been declared. (iv). Copies of Form 38 which is the declaration Form issued by commercial tax department of U.P. for import of goods from outside the state. These declaration forms for import of goods are issued by the U.P. Purchaser to the Ex. U.P. supplier in advance to ascertain the supply of goods after filling in all the details of the consignments including the bills an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of ₹ 23,84,34,176/-, which after considering the other income of ₹ 9,88,021/- declared by assessee, gives gross profit of ₹ 11,47,41,082/- representing to 18.79% with increase in stock of ₹ 1,43,95,123/-. We, therefore, find substance in the observations of the ld. CIT(A) that if the purchases made from said supplier company worth ₹ 20,42,24,661/- are deducted from the cost of raw material consumed, it will given GP of 50.8% which is not at all feasible in the trade of assessee. It is also not the case of Revenue that the ratio of raw material consumed to sale by the assessee during the year does not commensurate to such ratio declared by the assessee in preceding assessment years, rather it stands parallel to the material consumed in preceding years. Not only this, the trading results of the assessee company was also found parallel to other paper mills during the year under consideration as examined by the ld. CIT(A) in the impugned order, against which there is nothing from the side of Revenue. The Revenue has utterly failed to rebut the reasonable analysis made by the ld. CIT(A) while accepting the impugned purchases as genuine. 28. A perusal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidences to suggest that the appellant has genuinely purchased material from the supplier company. On the other hand the queries raised by the AO in the assessment order has been sufficiently answered by the appellant both during the assessment and the appeal proceeding. The starting point of the ACTs enquiry is from the fact that the notice issued by the AO was not served at the supplier company's address at Delhi. However the AO has not made any comment as to how notice issued by JCIT, Range-1, Meerut, was served at the same address in Delhi. Purchases being the basic component in any trading and manufacturing activity can not be held to be bogus on the basis of circumstantial evidence. 29. In the totality of facts and circumstances and in view of the above discussion, we, therefore, find no justification to interfere with the well reasoned order of the ld. CIT(A), deleting the addition on this count. Accordingly ground No. 5 of the Revenue s appeal is dismissed. 30. Similarly with respect to deletion of addition of ₹ 89,72,748/- on a/c of unexplained cash credit u/s. 68, the ld. DR relied on the order of the AO and the ld. AR of the assessee relied on the submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emerge from the impugned order and is accordingly not maintainable. However, the assessee vide ground No. 2 of its appeal has challenged the sustenance of this addition and contended that the written explanations offered by the assessee on this issue have not been considered by the ld. CIT(A) in right perspective. 33. We have heard the rival submissions on this issue. On perusal of the record, we find that the assessee has submitted before us copies of following documents with respect to loss of stock claimed in fire accident : (i). Communication between assessee and Excise Deptt. Regarding reversal of the input excise credit on the raw material destroyed in fire and documentary evidences regarding reversal of CENVAT credit and payment of custom duty on imported waste paper destroyed in fire at pages 553-559 of the paper book. (ii). Quantitative stock register as prescribed by the Excise Dept. showing loss of quantity and verification by Excise Deptt. Placed at pages 560-565. (ii). Copy of stock statement of the Assessee showing loss due to fire for the assessment year 2009-10 placed at page 547 of the paper book. (iii). Copy of CST, VAT and Entry tax assessment orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explanation by assessee, we fail to understand as to why and how the assessee has written off partial claim of insurance amounting to ₹ 1 crore in the year under consideration before final settlement of such claim by the Insurance company which was allowed at ₹ 3,40,388/- in the subsequent year 2012-13 on 02.03.2012. The assessee is also required to clarify this position. In presence of these facts, we think it expedient in the interest of justice to restore this issue to the file of the AO to make thorough examination/enquiries in the matter and to decide the issue afresh in the light of observations made in the body of this order above. The assessee is directed to furnish all the books of accounts or evidences to support its claim before the AO and to cooperate with him in the matter. Needless to say, the assessee shall be given reasonable opportunity of being heard before deciding the issue afresh. As a result, ground No. 2 of assessee s appeal deserves to be allowed for statistical purposes. 35. In the result, the both the appeals of assessee and Revenue are partly allowed for statistical purposes. Order pronounced in the open court on 12.05.2017. - - TaxT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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