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TMI Blog2017 (5) TMI 1207X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the case, the Ld. Commissioner of Income tax (Appeals) has erred in restricting the addition of Rs. 14,18,666/- to Rs. 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 addition of Rs. 17,15,837/- that had been made by the A.O on account of difference between the balance confirmations received from sundry creditors and balances as shown in the books of account of the assessee. 4.Whether in the facts and circumstances of the case, the Ld. Commissioner of Income tax (Appeals) is correct in deleting the addition of Rs. 34,95,471/- that had been made by the A.O on account of difference between the amount of purchases as confirmed by various parties and that reflected in the books of account of the assessee. 5 Whether in the facts and circumstances of the case, the CIT(A) has erred in law in deleting the addition of Rs. 20,42,24,661/- that had been made by the A.O on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 account of 'medical expenses' & 'workman compensation'. Rs.2,00,000 (ii). Disallowance of excess interest paid on unsecured loans Rs.14,18,666 (iii). Addition on account of difference in sundry creditors. Rs.17,15,837 (iv). Addition on account of difference in purchases. Rs.34,95,471 (v). Addition on a/c of bogus purchases u/s. 69C. Rs.20,42,24,461 (vi) Addition on a/c of unexplained cash credit u/s. 68. Rs.89,72,748 (vii). Addition on a/c of Insurance claim written off. Rs.1,00,00,000 3. The addition of Rs. 1,00,000/- each on account of medical expenses and on account of workman compensation out of total such expenses of Rs. 16,60,862/- and Rs. 8,50,000/- respectively have been made by the AO on the premise that some of the bills for medical expenses produced were not prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee amounting to Rs. 20,69,44,661/- and the loan receivable from the assessee company of Rs. 89,72,748/- as on 01.04.2010.. The AO also observed that M/s. Prakash Marketing Pvt. Ltd. has filed return of income of Rs. 1,02,994/- against his total sales of Rs. 21,79,51,836/- and the assessee alone has shown purchase of Rs. 20,69,44,661/- representing 94.95% of the total sale of Prakash Marketing Pvt. Ltd. The AO also observed that the Inspector was again sent to enquire the office and other details of the above company at the new address given by assessee, who vide his report informed that no such company was found in existence at the given address. The AO, thereafter, visited the place where he met one of the directors of the assessee company. The assessee was directed to produce principal officer of the supplier company along with their books of accounts and the books of account of the assessee company. In response, the assessee filed written submissions, which the AO did not accept. The director of the supplier company appeared before the AO who recorded his statements and after considering the same along with replies of assessee and other attending facts of the case c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce, both the parties are in these cross appeals before the Tribunal. 10. We have heard the rival submissions and have carefully gone through the entire material available on record and we decide the issues involved in both these cross appeals as under : 11. Assailing the deletion of disallowance of Rs. 1,00,000/- on account of medical expenses, the ld. DR reiterated the observations made by the AO on this count that some of the bills were found not proper. The ld. AR of the assessee, on the other hand, relied on the submissions made before the first appellate authority (A) and findings of the ld. CIT(A) recorded on this issue. On perusal of the records, we observe that the assessee had produced audited books of account before the authorities below and the AO has utterly failed to specify any defect either in the books of accounts or the relevant bills/vouchers of medical expenses placed before him. The learned CIT(A), therefore, has rightly deleted this addition after considering reasonableness of such medical expenditure in the backdrop of total medical expenditure claimed, i.e., 16,60,682/- against total turnover of Rs. 62.17 crores. We, therefore, are not inclined to interfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant para 15 at page 48) of the paper book in which it was submitted that Directors of the Assessee Co. Sh. Anand Prakash and Sh. Ravi Prakash had raised loan from M/s Dynamic Weaving Pvt. Ltd. against their personal properties and advanced the same loan simultaneously to the Assessee Co. to fulfill the fund requirement of the Assessee Co. In other words, the Directors were paying interest @20% to M/s Dynamic Weaving Pvt. Ltd and were getting reimbursement from the Assessee Co. and in effect the total interest earned by them from the Assessee Co. was reimbursed to the lender Co. To prove, the same, copy of ITR, computation of income and relevant bank statement of the Directors Sh. Anand Prakash and Sh. Ravi Prakash as filed before the authorities below are placed at pages 50-59 of the paper book. 3. Confirmatory certificate issued by M/s Dynamic Weaving Pvt. Ltd. placed at pages 60 & 61 confirming that loan of Rs. 2,00,00,000/- had been advanced to Sh. Ravi Prakash and Sh. Anand Prakash @20% p.a. against equitable mortgage of their land. 4. Copy of A/c of Ravi Prakash and Anand Prakash in the books of M/s Dynamic Weaving Pvt. Ltd., PAN Number and ITR of M/s Dynamic Weaving Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed to now turn around and contend that deduction under the said section is not available to them in respect of the present assessment years. In Union of India vs. Satish Panalal Shah [2001] 249 ITR 221, apex court has also deprecated the practice of the Department in accepting the correctness of a judgment on a particular issue in one case and challenging its correctness in another case". 6. It is also trite law that Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of Directors and assume the role to decide as to how the business is to be run. In this connection, reliance is placed on 288 ITR page 1, S.A. Builders ltd. Vs. CIT (SC) which approved Delhi High Court judgment in 254 ITR 377. Relevant portion of the judgment 2nd para page 8 is reproduced hereunder- "The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency". The court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmercial banks at the rate lower than 20%. (iii). The lender company is not engaged in the primary business of advancing loans. (iv). If the assessee has managed unsecured loans at the rate of 6% from other lenders, the loan with interest rate of 20% would be unreasonable from the point of view of a prudent businessman. (v). All unsecured loans from different lenders would not bear uniform rate of interest. 16. We observe that the aforesaid reasons considered by the ld. CIT(A) for disallowance of assessee's claim of interest are not tenable in view of the submissions made on behalf of the assessee duly supported by documentary evidence. The constraining factors to borrow the amount from/through directors is well explained by the assessee that the rate of interest being charged by the banks during the year under consideration was in the range of 15.75 to 18.25% on clean loans. This fact is evident from the clean from the interest rate chart enclosed filed with its written synopsis. There is also nothing on record to rebut the contention of the assessee that the banks also charge processing fee, documentation fee, insurance charges of properties etc. in the range of 1% to 1.5% P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the decision of Hon'ble Supreme Court in SA Builders Ltd. vs. CIT(supra) and of Hon'ble Delhi High Court reported in 254 ITR 377. 19. In view of above discussion, we are not inclined to endorse the conclusion reached by the ld. CIT(A) and the addition sustained by him on this account deserves to be deleted. Accordingly, ground No. 1 of the assessee's appeal deserves to be allowed and ground No. 2 of revenue's appeal is dismissed. 20. Regarding the addition of Rs. 17,15,837/- on account of difference in sundry creditors, and Rs. 34,95,471/- on account of difference in purchases, the ld. DR submitted that the AO found a difference between the amounts claimed by the assessee as sundry creditors and as purchases and the amount confirmed by some of the sundry creditors and sellers. Some of the confirmations were not received. Therefore, the AO was justified to add the difference of Rs. 17,15,837/- in sundry creditors and of Rs. 34,95,471/- in purchases to the total income of the assessee, which have wrongly been deleted by the ld. CIT(A). 21. On the other hand, the ld. AR of the assessee relied on the submissions made before the ld. CIT(A) and the findings reached by him on this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deletion of addition of Rs. 20,42,24,661/- made by AO on account of bogus purchases u/s. 69C, the ld. DR relied on the findings reached by the Assessing Officer and submitted that the ld. CIT(A) was not justified in deleting the addition ignoring the fact that the assessee failed to prove the genuineness of the purchase transactions. 24. On the other hand, the ld. AR relied on the submissions made before both the authorities below and the conclusions reached by the ld. CIT(A). 25. We have considered the rival submissions and have gone through the entire material available on record and we find no justification to interfere with the order of the ld. CIT(A) on this count. A perusal of the assessment order reveals that the Assessing Officer has treated the impugned purchases as bogus on the basis of discrepancies noted by him that the letter issued to M/s. Prakash Marketing Pvt. Ltd. u/s. 133(6) at his registered officer returned back un-served; that the supplier M/s. Prakash Marketing Pvt. Ltd. failed to produce the freight bills for transportation of goods from Delhi to Meerut and there was vast difference between the amount of freight charges debited to the P&L Account, i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales = 62,17,48,614/- Manufacturing expenses = 23,84,34,176/- Other income = 9,88,02 1/- Gross profit = 32,39,65,743/- Increase in stock 1,43,95,123/- From the above analysis it can be seen that if purchases worth Rs. 20,42,24,661/- is treated as bogus the G.P. of the appellant company shoots to 50.8% which in my opinion is extremely unlikely. 8.7 It is also to be kept in mind that the appellant has followed the same method of accounting consistently year after year and there is no change in its method of accounting during the concerned previous year. The PBDIT of the appellant has been in the range of 10 to 12% during the last two previous years. The ratio of raw material consumed to sales has been in the range of 1 to 2.25 during last two years. In others words there is nothing new in the accounts of the appellant during the concerned year. 8.8. There is another important point which is to be kept in mind. This is, as to what should be reasonable ratio between cost of raw material consumed and sales. For this purpose study of trading accounts of some paper manufacturing companies was made. A sample result of three such company is as follows:- (Figure in Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een made through banking channels. 5. Doubted that bank account of the appellant is not debited by issue of cheques in favour of the supplier company. 6. Doubted that bank account of the supplier cortfpany has not shown matching credit entries. Instead of above points the AO has focused his entire attention to discredit the supplier company on circumstantial evidences. The AO seems to have lost sight of the fact that he was making an assessment of the appellant company and not of the supplier company. 8.11. It is interesting to note that the AO has quoted appellant's submissions that it is not possible to manufacture finished papers without there being the corresponding purchases of waste paper. However, he has brushed aside the submissions of the appellant by saying that that there are many possibility to make purchases by other means. Thus the AO has not denied that purchases per se have not been made, his only contention is that purchases made from the supplier company is unverifiable. However the hard facts of the transaction between the appellant and the supplier company are - 1. The supplier is a company incorporated as per the provision of companies act, 1956. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by cheques and are reflected in the books of account of the assessee, no adverse inference can be drawn. In a judgment given by the Calcutta High Court in the case of Diagnostics Vs CIT 334 ITR 111 on a similar question, it has been held by the Hon'ble Court that ''if an assessee took care to purchase material by way of account payee cheques from a third party and subsequently, three years after the purchase, the said third party does not appear before the AO pursuant to the notice or even has stopped business, the claim of the assessee on that account cannot be discarded as non-existence ". 8.14 Considering the totality of facts and judicial pronouncements, I have come to a conclusion that there is enough material on record to suggest that the purchases made by the appellant from the supplier company are genuine. The grounds of appeal no, 7 is allowed and accordingly addition of Rs. 20,42,24,661/- is deleted." 26. As far as the doubt of the Assessing Officer on the existence of the supplier company and other objections which led the AO to term the impugned purchases as bogus stand perfectly rebutted by the assessee and genuineness of the purchases made by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record. (viii).The notice u/s 133(6) issued to the said company on second occasion were duly replied. Copies of the said notice and the reply filed are placed on record. (ix). The director of the said company, namely Sh. Vineet Aggarwal, appeared before the Id. A.O. and confirmed the sale of goods to the appellant. Copy of the statement on oath of Sh. Vineet Aggarwal are available on record. (x). Copies of sales tax and excise return of the assessee company as filed with the concerned departments for the period FY 2010-11, as filed during the course of the assessment proceedings vide submission dated 18.11.2013 and 29.11.2013 are placed on record. 27. It is also borne out on record that the AO has not doubted the genuineness of sales; that the assessee is a manufacturing company and consumption of raw material is an essential ingredients of finished products sale. A perusal of impugned order will reveal that the ld. CIT(A) has also tested the conclusions of the AO on the anvil of trading account declared by the assessee giving profit rate of 18.79%. He has also observed that the assessee during the year under consideration has declared sales at Rs. 62,17,48,614/- against cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en that the supplier company has transported paper waste for the use of appellant company. The ld. CIT(A) has further observed that the Assessing Officer has not - 1. Made any purchases to sales ratio analysis. 2. Doubted the sales, manufacturing expenses and other major expenses, 3. Doubted that finished goods have not been produced by the appellant 4. Doubted that payment for purchases have not been made through banking channels. 5. Doubted that bank account of the appellant is not debited by issue of cheques in favour of the supplier company. 6. Doubted that bank account of the supplier cortfpany has not shown matching credit entries. Following facts emerged in the instant case also could not be rebutted on behalf of the Revenue : 1. There cannot be any manufacturing without purchase of raw materials. 2. If purchases of raw material worth Rs. 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 Rs. 20,42,24,661/- is treated as bogus the ratio of cost of raw material to sales would become 1:8 which is highly unlikely and unprecedented. 4. Lastly as per para 8.11 above there are enough hard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there is no fresh credit of Rs. 89,72,748/- in the books of account of the appellant company during the concerned previous year and for this reason alone no addition can be made u/s 68 of the IT Act, 1961 because it is a necessary condition for the application of section 68 that an amount should be found credited in the previous year(emphasis given). Based on above discussion, the grounds of appeal no. 8 is allowed and the addition of Rs. 89,72,748/- is deleted." We do not find any material available on record to counter the findings reached by the ld. CIT(A) on this issue. The ld. DR failed to controvert the reasonings recorded by the ld. CIT(A) based on books of accounts of both the assessee company and the supplier company. Therefore, the deletion of addition u/s. 68 of Rs. 89,72,748/- also deserves to be sustained. Accordingly, ground No. 6 of the Revenue's appeal is also dismissed. 32. Ground No. 7 raised in Revenue's appeal challenging the deletion of addition of Rs. 1,00,00,000/- on account of insurance claim, is misconceived, as the ld. CIT(A) has sustained this addition in the impugned order. Hence, this ground of appeal does not emerge from the impugned order and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s written off Rs. 1,00,00,000/-during the year under appeal and remaining Rs. 1,22,315/- during A.Y.2012-13 and the loss claimed during A.Y.2012-13 stands allowed u/s 143(1). It is no doubt true that the assessee has made this claim by making an entry under the wrong nomenclature as "excess claim written off", but in our opinion, nomenclature of an entry would not change the actual characteristics of the actual claim made by the assessee. In fact, the authorities below were required first to ascertain as to how much stock was available with the appellant on the date of fire accident, what was the insurance cover with respect to loss of stock, what was the actual loss of stock in fire and under what circumstances, the part of the loss claimed by assessee was accepted in the subsequent assessment year 2012-13. No exercise appears to have been made by the authorities below first to ascertain these facts with reference to the books of accounts & evidences furnished by assessee or by way of other inquires from the respective competent authorities before deciding the claim of the assessee. Besides, for want of any explanation by assessee, we fail to understand as to why and how the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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