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TMI Blog2018 (10) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... in connection with said transaction. The assessee also has taken a ground challenging the action of the Ld.AO in disallowing depreciation on plant & machinery for AY 2003-04. The revenue for AY 2002-03 has taken a ground challenging the action of the Ld.CIT(A) in allowing relief on account of sales returns on the basis of remand report of the AO without discussing the issues on merit. The revenue also challenged the action of the Ld.CIT(A) in allowing partial relief towards disallowance of transportation expenses in connection with said sales returns. For the sake of brevity, the grounds of appeal taken by relevant parties for AY 2002-03 are extracted below:- Assessee: The following grounds of appeal are without prejudice to one another. 1. On the facts and the circumstances of the appellant's case and in law, the Ld.CIT(A) erred to hold that sales return of Rs. 3,41,53,476/- from 13 parties are not genuine and consequently erred in confirming the addition of Rs. 3,41,53,476/-. 2. On the facts and the circumstances of the appellant's case and in law, the Ld.CIT(A) erred to hold that the sales of slow moving items made to 3 parties are not genuine and consequently err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee company is engaged in the business of manufacturing cotton yarn, circular knitted hosiery cloth and also in processing of cloth, filed its return of income for AY2002-03 declaring total loss of Rs. 144,76,18,197. The case has been selected for scrutiny and accordingly notices u/s 143(2) and 142(1) of the Act, were issued. The assessee neither appeared nor filed any adjournment application. Therefore, the AO issued further notices on 13-02-2004, 21-06-2004 and 22-07-2004. Again there was no response from the assessee. Therefore, summons u/s 131 was issued to the Managing Director, Shri Navish K Dayal. Since the assessee did not appear on the dates of hearing, even though number of opportunities have been given to the assessee to file the details, the AO, on the basis of information available on record observed that the assessee has declared huge losses on account of claim of sales returns amounting to Rs. 151,36,56,000 was of the opinion that having regard to the nature and complexity of the accounts of the assessee and in the interest of revenue it was necessary to direct the assessee to get the accounts audited as per provisions of section 142(2A) of the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y sold for a much lesser value on the basis of report of sales, General Manager, who had valued the goods considering the type and pattern of the goods sold to the customers and accordingly, the company has sold said returned goods for a amount of Rs. 38.88 crores resulting in loss of Rs. 128.48 crores. The assessee has also filed quotations, which are part of Exhibit A of the audit report on the basis of which the assessee has claimed that the sale price was fixed for the returned goods. To examine the genuineness of the claim of the assessee, the AO issued notices u/s 133(6) to few parties. The notices issued to parties were returned by the postal authorities in case of certain parties, as listed by the AO in assessment order at para 8. But, certain parties have filed details before the AO. However, the AO observed that the parties have filed incomplete submissions. The details of notices issued by the AO, notices returned, replies received from the parties, have been narrated by the AO in his order at para 8 on pages 23 & 24. Those facts were confronted to the assessee to explain with necessary evidence. Though, opportunity was given to the assessee to produce few parties with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o other supporting evidences ,vas submitted to substantiate the claim of change in fashion and shifting of the preference of fabrics by the customers. I) Though the goods are said to be lying with the alleged purchasers for more than a year and that too without receiving the payment it is surprising that no documents are available with the assessee showing the efforts made for recovery of sales consideration. m) The confirmations of parties which allegedly returned sales and transporters are either not submitted or were vague or did not bear any date and addresses or were incomplete. n) The notices u/s 133(6) were returned back, in majority of the cases, by the postal authorities with the remark 'not known/incomplete address'. This only indicates that such parties do not exist; however, the assessee was given an opportunity to produce such parties. But, the assessee failed to do so. o) The details filed by certain parties were incomplete and not supported by any documentary evidences and, therefore, cannot be accepted as genuine. Moreover the assessee has failed to produce the parties for crossexamination. p) Non-corporation of the assessee with the Department and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(c) is also initiated on this account." 5. Similarly, in respect of loss claimed on account of sale of slow moving stocks for Rs. 2,016.41 lakhs, the AO observed that there was no mention of outward entry number on the stamps fixed on the delibiery challans, outward registers were not produced on the ground that they were damaged and destroyed during the flood, no documentary evidence such as FIR was filed in support of the claim. No documentary evidence such as octroi clearance / passing was produced to prove the movement of goods. The assessee has sought to justify the claim of loss on the basis of the approval note of the sales personnel of the assessee company and the quotations stated to have been received from the market. Therefore, he opined that the loss claimed by the assessee on account of slow moving stock is not genuine and accordingly made additions to the returned income. The relevant portion of the order is extracted below:- 13. In respect of loss claimed claimed of Rs. 2016.41 lakhs on account of sale of slow moving stocks, the facts emerged are that there was no mention of outward entry number on the stamps affixed on the delivery challans. The outward register ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support of the allegations made by the assessee against the debtors. As per clause 22 of AS2 relating to the valuation of inventories (Stock), the estimates of net realizable value are to be based on the most reliable evidence available at the time the estimates are made as to the amount the inventories are expected to realise. The mere report by some sales personnel and a fact finding report not supported by authenticated evidences cannot form a reliable evidence as per AS2. The fact finding report has been established to be unacceptable for the reasons elaborately discussed in para 7 of this order. This is a clear case warranting the rejection of accounts u/s.145(2) of the I.T.Act. In view of the particular findings recorded by the Special Auditor and in the light of the specific facts mentioned in sub paras 12 & 13 above, the book results are hereby rejected and the claim of excessive loss & hereby rejected, Reliance is placed on the below mentioned decisions wherein the right of the Assessing Officer to reject the books of account based on his findings of the material placed before him and to invoke the provisions of section 145(2) has been upheld. Dhondiram Dalichand v. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the facts because there was no need for that at all. The assessee also filed elaborate written submissions on the issue of disallowance of loss claimed on account of sales returns which has been reproduced by the Ld.CIT(A) in his order at para 5.2 on pages 7 to 9. The assessee has explained the observations made by the AO in the light of Special Audit report to argue that it has made sales to its regular customers in the normal course of business. However, such goods have been returned by the customers stating reasons which is beyond the control of the assessee. The assessee after putting in all the efforts to collect the dues from the customers has accepted the goods back. The AO without appreciating the facts, on wrong interpretation of facts has come to the conclusion that sales return claimed by the assessee is not genuine in nature only on flimsy grounds such as there was no proper documentation kept ts monitor / account sales returns ignoring the fact that such sales returned has been subsequently sold in next financial year for an amount of Rs. 38.85 crores on the basis of quotations received from bidders and also valuation done by sales team. The assessee also filed var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t order within the limitation. Accordingly, ground raised by the assessee has been rejected. Insofar as second legal ground taken by the assessee challenging rejection of books of account, the Ld.CIT(A) observed that the AO has given number of opportunities to the assessee to submit complete details, but only partial details were submitted. Secondly, the Special Auditors have raised objection that books of account, bills and vouchers were not maintained properly. In view of these facts, the AO has given an opportunity to the assessee to explain why the books of account shall not be rejected as per the provisions of section 145(2) of the Act. Since the AO has given due opportunity to the assessee before rejection of books of account and also the fact that books of account are complex in nature which is further supported by the findings of the Special Auditor in the report, there is no merit in the arguments of the assessee that the AO was erred in rejecting books of account u/s 145(2) of the Act. The relevant portion of the order is extracted below:- "4.3 I have considered the submissions of the appellant, order of the AO and facts of the case carefully. It is noticed that during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions of Rws.3,41,53,476 was shown by the assessee company. Therefore, out of total addition of Rs. 112,48,31,000, an amount of Rs. 3,41,53,476 has been sustained and balance amount of Rs. 109,06,77,524 is deleted. 11. As regards addition made by the AO towards loss incurred on slow moving items of Rs. 20,16,41,000, the Ld.CIT(A) observed that the assessee has filed various additional evidences including confirmation from the parties which has been sent to the AO for his comments. The AO, vide his remand report, examined the confirmations filed by the parties and submitted that the transactions with those parties appeared to be genuine. This fact establishes that the genuineness of transactions is no more in doubt. However, out of the 5 parties called for by the AO, assessee has produced two parties and the remaining 3 parties were not produced nor did file any documentary evidences even during the remand proceedings. It showed that the assessee has not discharged its onus by submitting any documentary evidence or producing any party before the AOs examination. Therefore he opined that the genuineness of transactions has been proved relating to the loss claimed on sale of slow mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he general system of control regarding the movement of goods at the factory. Since the assessee has failed to furnish necessary evidence to justify loss claimed on sales returns, the AO referred the matter for special audit of accounts of the assessee u/s 142(2A) of the Income-tax Act, 1961. The Special Auditors M/s Malpani & Associates, Chartered Accountants has conducted special audit of accounts of the assessee and issued a report with certain comments. The basic observations of the special auditors regarding non co-operation of the assessee to file necessary books of account and other documents. The Auditors also commented on books of account and other documents maintained by the assessee in respect of sales returns of Rs. 15,136.56 lakhs. The AO, based on observations made by the Special Auditors in the report and also on the basis of information furnished by the assessee observed that the assessee has not followed the general system of control regarding the movement of goods at the factory. There was no mention of outward entry No. on the outward stamps affixed on the delivery challans, etc. The AO also commented on lorry receipts, copy of sales returns, invoices furnished by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the basis of details and supporting evidences filed by various parties and statement given by parties, it appeared that the transactions with those parties were genuine. When the AO himself has categorically admitted that these transactions are genuine in nature, there is no reason for the Ld.CIT(A) to sustain addition made by the AO in respect of 13 parties. 14. The Ld.DR, on the other hand, submitted that the Ld.CIT(A) was completely erred in allowing relief only on the basis of remand report of the AO without appreciating the fact that in the said remand report, the AO has only expressed the opinion that part of the claim appears to be genuine and hence, the Ld.CIT(A) should have given the decision on merits of the case. The Ld.DR further submitted that the AO has brought out clear facts in his assessment order in respect of various discrepancies in books of account and other documents filed by the assessee. The Ld.CIT(A) has never commented on observations made by the AO on various aspects of the case including the history of the assessee. The Ld.DR further submitted that the assessee group has history of inflating expenditure by bogus bills and diversion of bank funds for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO in his assessment order and the observations made by the Auditors in their report, we find that there is no substantive comments made by the Special Auditors on sales returns claimed by the assessee, The Special Auditors, rather, went on to comment on documentation maintained by the assessee. Further, the Special Auditors never gave any adverse comments on sales returns claimed by the assessee. They have only commented on shortcoming in the documentation. These observations made by the AO in his assessment order and the Special Auditors have been fully negated by the AO in the remand proceedings which is evident from the fact that the AO has given clean chit to the assessee in respect of sales returns on the basis of enquiries conducted in respect of certain parties where he has given a categorical finding that those parties, who appeared before the AO stated that they have done transactions with the assessee in respect of sales and such sales have been returned in subsequent financial year. The AO also called for parties, who transported goods. The transporters, who appeared before the AO have categorically stated that they have transported goods. Although certain parties have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same and added back to the taxable income. On the other hand, the appellant has submitted that AO has not fully appreciated the facts and submissions made by the company during the assessment proceedings as given above. During the appellate proceedings some other additional evidences were submitted before my predecessor who has admitted the same and again the case was remanded back to the AO for verification and investigation. The AO has submitted the remand reports dated 05.06.2009, 19.06.2009 and 10.07.2009. The gist of these remand reports are reproduced as under : "On 23.02.2009, the assessee produced some of the parties concerned and out of the same, statetrfent on oath of two parties was recorded. Thereafter, on 10.04.2009, the assessee's representative appeared and filed details in respect of a few more parties. On that date also, statement of 2 parties was recorded. The details filed by all these aprties and the statement recorded are forwarded to yout goodself for kind perusal. It is noticed that these parties have confirmed the transactions and have furnished proof of their identity and filed certain details in support of the transactions. Meanwhile, notices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eafter, on 10.04.2009, the assessee's representative appeared alongwith few more parties and filed details in respect of these parties. On that date also, statement of 2 parties were recorded. The details filed by all these parties and The stefsmsat. recorded are available in the file named 'Remand Report', which is being forwarded In the case, the CIT(A), C-VIII had, vide letter dated 06.11.2007, directed the AO to allow one more reasonable opportunity to produce the requisite parties relating to the transaction under consideration and examine them. Accordingly, the assessee was asked to produce the parties, whose names were intimated to the authorized representative during the course of hearing on 10.02.2009. As stated in the earlier remand report dated 15,06.2009, the parties who were produced have confirmed the transactions and have furnished proof of their identity and filed details in support of the transactions. As stated earlier, the statements of 4 parties have been recorded and they have confirmed transaction. After considering the details and supporting filed by various parties and statement given by the parties the transactions appears to be genuine". "Ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... * Narshi Nenshi & Sons * Arpit Roadlines Notices u/s. 133(6) were served on the following parties : * lyer Creations * Narshi Nenshi & Sons * Arpit Raodlines However, there has been no compliance from the respective parties. All the balance notices issued u/s. 133(6) were returned back unserved by the postal authorities". From the perusal of the remand reports submitted by the AO, it is clear in the remand report dated 19.06.2009 in which it was stated that parties who were produced have confirmed the confirmations and have furnished the proof of their identity and filed certain details in support of the transactions. The statements of four parties were recorded and they have confirmed the transactions. After considering the details and supporting evidences filed by the various parties and the statements given by the parties, the AO has held that the transaction appears to be genuine. From the detailed examination report made by the AO by summoning parties and issuing notices u/s. 133(6), it is clear that the AO has held that the transactions were genuine although out of the 39 parties who were asked to be produced before the AO, the assessee was able to produce only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O, documentary evidence such as octroi clearance was produced to prove the movement of goods. The notices issued u/s 133(6) to the parties were returned unserved. Therefore, he opined that non production of the parties coupled with the fact that the assessee has failed to furnish necessary evidence to justify loss claimed on slow moving goods, therefore, he came to the conclusion that the loss claimed on account of slow moving stock is a sham transaction and accordingly made addition of Rs. 2,016.41 lakhs. 19. The Ld.AR for the assessee, at the time of hearing submitted that the assessee has furnished necessary evidences including facts finding report submitted by the sales department which has been approved by the managing director to under value the goods. Therefore, the AO was completely erred in ignoring all evidences filed by the assessee only on the basis of few super hypothetic and hyper technical deficiencies noticed by the Special Auditor. The Ld.AR further submitted that all observations made by the AO in the light of special Auditors' report has been negated by the AO in remand proceedings, where the parties have appeared before the AO and admitted that the transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings of fact recorded by the Ld.CIT(A) in the light of remand report issued by the AO. Therefore, we are of the considered view that when the parties, who appeared before the AO confirmed the transactions, merely for the reason that few parties did not appear before the AO, there is no reason to suspect total transactions made by the assessee in respect of slow moving stocks. We further notice that the assessee has filed necessary evidences including fact finding report of sales team manager and also the quotations received from prospective buyers of the goods which prove the real valuation of slow moving items. Hence, we are of the considered view that there is no error or infirmity in the findings given by the AO and accordingly we confirm the findings of Ld.CIT(A) and reject ground taken by the revenue as well as the assessee. 22. The next issue that came up for our consideration is addition towards transportation charges paid by the assessee which is consequential to the loss on sales returns claimed for the year. The AO has disallowed transportation charges incurred by the assessee for the same reasons, on which he has disallowed loss claimed on sales returns. The observati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has filed various details in respect of sales made to parties before the Ld.CIT(A). The Ld.CIT(A) during appellate proceedings has forwarded evidence filed by the assessee to the AO for his comments. The AO during remand proceedings issued notices to parties u/s 133(6) for which certain parties appeared and deposed before the AO and stated that the transactions with the parties are genuine. Based on the evidence filed by the parties and also on the basis of statement recorded from them, the AO came to the conclusion that the transactions with those parties appeared to be genuine. The Ld.CIT(A) on the basis of evidence filed by the assessee and also taking into account the remand report of the AO allowed relief towards addition made in respect of loss claimed on slow moving stocks, except to the extent of Rs. 9,85,76,986 in respect of 3 parties from whom no information has been received. No further evidence has been brought on record by the revenue to controvert the findings of fact recorded by the Ld.CIT(A) in the light of remand report of the AO. We find that the AO has examined the issue by calling for various details for which the parties have appeared before the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion or not is irrelevant for the purpose of claiming depreciation. This position has been clarified by various courts including Hon'ble Delhi High Court in the case of CIT vs Oswal Agro Mills Ltd (2012) 341 ITR 467 (Del) where it was held that depreciation is allowed on block of asset and the revenue cannot segregate a particular asset therefrom on the ground that it was not put to use. In this case, on perusal of facts it is clear that the texturised unit is part of the textile plant of the assessee and the unit was functioning in the earlier years. Therefore, we are of the considered view that once a particular machinery has been put to use for the purpose of business, it is immaterial whether such plant & machinery has been used in the year under consideration and any revenue has been generated from such unit. The expression used "for the purpose of business" includes user of assets in the earlier years. Once, the machinery was available for use, though not actually used, falls within the expression used "for the purpose of business of the assessee" and claim the benefit of depreciation. The lower authorities without appreciating the fact, disallowed depreciation claimed on tex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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