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TMI Blog2019 (2) TMI 1791X X X X Extracts X X X X X X X X Extracts X X X X ..... given by the Jt. Commissioner of Income Tax, Range 1, Bathinda who had issued the directions to the AO without affording any opportunity to the assessee, which is in total violation of the provisions of the Act and against the principles of natural justice.' The basis of the same is the office note, at the foot note to the assessment order, which reads as under: '(i) The directions u/s. 144A of the Income Tax, 1961 by the Joint Commissioner of Income Tax Range-1, Bathinda have duly been complied with and he has conveyed his approval vide letter No. 1409 dated 20.12.2011.' The Joint/Addl. CIT, it was submitted by the ld. counsel for the assessee, Sh. Kalia, had not been moved by the assessee u/s. 144A. The directions issued by him there-under are at the instance of, or on being approached by the Assessing Officer (AO). The law is clear that no such direction prejudicial to the assessee could be passed by him without affording the assessee an opportunity of being heard. This is particularly so as these directions are binding on the AO. There is, thus, denial of the principle of nature justice, vitiating the assessment proceedings, rendering them as void ab initio. The ensuing ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal ground supra. Adverting to letter No. 1409 dated 20.12.2011 (copy on record), referred to in the office note, he would continue, that the same only states that the assessment be completed as per the provisions of law, ensuring that the issues mentioned in the directions issued from time to time have been properly examined. Nothing less, and nothing more. How could this be said to be prejudicial to the assessee, which contention is purely a surmise? This in fact stands again confirmed by the Jt. CIT, upon a perusal of his record, vide his letter dated 22.03.2018 (copy on record). The assessee's ground, taken before the Tribunal for the first time, is clearly an afterthought, even otherwise not admissible, as explained by the Hon'ble Apex Court in Sanghvi Reconditioners Pvt. Ltd. v Union of India (in civil appeal no. 1435 of 2003, dated 05.02.2010), besides other decisions, as under: 1. Manji Dana vs. CIT [1966] 60 ITR 582 (SC) 2. Ultratech Cement Ltd. vs. Addl. CIT (in ITA No. 1060/2014, dated 18/04/2017)(Bom) 3. Mukti Properties (P.) Ltd. v. CIT [2012] 344 ITR 177 (Cal) [50 DTR 273] 4. Goodfaith Construction (P) Ltd. vs. ACIT [2013] (Amritsar ITAT). , placing copies of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvisory support or advisory to the Assessing Officer to pursue or adopt a particular line of investigation in verifying the facts or the assessee's case, or an issue that may need to be examined in assessing the assessee's correct total income under the Act. The same by itself cannot prejudice the assessee who in fact cannot possibly be heard thereon. It is only where an investigation is carried on, or some fact or material or a particular legal position, upon such investigation or examination, is to be confronted to the assessee, seeking his explanation/s thereon, that the assessee needs to be heard in the matter. All that the letter No. 1409 dated 20.12.2011, referred to in the office note (to the assessment order), states is for the completion of the assessment in accordance with law after properly examining the issues mentioned in the directions issued from time to time. How, pray, could that be regarded as prejudicial to the assessee, or as not covered by the Explanation to section 144A, so as to preclude application of proviso thereto which makes it incumbent on the competent authority to, prior to the issue of such directions, hear the assessee thereon, absence of which, vit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, no enquiry at the back of the assessee, or one which is not consonant with the concept of justice has been shown, which is the premise of the decisions cited by Sh. Kalia. The decisions in the case of Paramjit Singh (supra) or, as the case may be, Binapni De (supra), shall therefore not apply. Next, though not required to in view of our foregoing opinion, we consider the legal impact of the directions u/s. 144A, prejudicial to the assessee, having been issued, assuming so, without hearing the assessee, i.e., whether would be fatal to the assessment or render it as defective warranting a restoration back to the file of the competent authority for hearing the assessee in the matter. A decision in its respect, in our view, shall have to be with regard to the basic postulate governing the same, i.e., lack of opportunity to the assessee during the course of assessment proceedings. The law in the matter is well-settled. In Guduthur Bros. (supra), a decision by it's larger bench, the Apex Court explained that the proceedings shall go back to the stage where the irregularity had set in. Reference in this regard be also made to Supdt., Central Excise v. Pratap Rai [1978] 114 ITR 231 (SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e genuineness of the said agreement/s. The assessee failing to do so, summons u/s. 131 of the Act were issued thereto, calling for production of the books of account and copy of the agreement. Only Sham Cotton & General Mills attended the proceedings, stating that there was no such written agreement. The other two parties though did not attend, sent the documents per post, i.e., sans the copy of the agreement, implying, as per the AO, absence of such an agreement. The assessee was accordingly confronted on 05.12.2011, to, however, no reply/explanation. The agreements furnished by the assessee were accordingly regarded by the AO as fake and not genuine, entered into only the reduce the incidence of tax. And the loss claimed, resultantly, disallowed. The assessee failing to improve his case in appeal, the same stood confirmed, so that, aggrieved, the assessee is in second appeal. 5. We have heard the parties, and perused the material on record. 5.1 The assessee's case is that each of the three parties had furnished a copy of the assessee's account in their books of account, no discrepancy in which has been pointed out by the AO, so that his action of disallowance is based only on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, rather, exhibit, together with the trade results, positive or negative, of such forward contracts, profit (or hedging against loss) being the driving force of any business/business transaction; the assessee, rather, furnishing no explanation before the AO on being confronted in the matter. There would be instances aplenty, if it is indeed a trade norm, of the assessee having entered into such contracts in the past. None such stands brought even to our notice. Why, even in the current year, the assessee has neither claimed nor shown that such forward contracts were entered into for the other items traded, i.e., qua the balance turnover of Rs. 1555.61 lacs, i.e., excluding narma sale of Rs. 74.50 lacs. Our second observation in the matter, impinging directly on the genuineness of the agreement/contract/s, is that the same do not stipulate the quantity to be supplied over the four (4) month (season) period, i.e., from August 16, 2008 to December 15, 2008, the delivery period under the contract/s. That is, how much is to be supplied during each month of the said period. Rather, a regular business contract would break this down into even smaller intervals of time, as on weekly or for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... freight carrier, i.e., in addition to the delivery note (and the weighment slip) of the consignment, i.e., even if the freight is at the cost and risk of the buyer. Rather, we observe the assessee to have claimed before the ld. CIT(A) that it had paid freight on the supplies, which had in fact been allowed by the AO, thus contradicting his own stand of no supplies (at the stated rates) having been made (para 2.2 of the assessment order). It is in fact not the AO but the assessee who contradicts himself when he makes the claim of freight on these consignments, no evidence qua which though has been led at any stage, including before us. This is as the contract/s clearly stipulate all the supplies to be made exfactory, so that there is no question of the assessee having incurred any freight expenditure on these consignments. In other words, the delivery of the relevant goods is completely unevidenced, lending credence to the Revenue's claim of the entries recording the sale transactions to these parties as being merely paper entries, which charge remains, in any case, unrebutted by any positive evidence. At this stage it may be relevant to clarify that even if the assessee were to de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus, a better margin than may otherwise obtain. That the same though did not materialize for the current year is a different matter, and in fact precisely the reason why the loss came to be suffered. No such case stands made out at any stage, including before us. Such an exercise would rather be one of risk management, i.e., an attempt to minimize risk, even if at a lower, assured profit. In fact, in the instant case, the sale rate/s does not, as it appears, correspond even with the opening rate; the lowest rate for the season, as stated - and not contradicted, being Rs. 2850 per quintal, as against the sale rate of Rs. 2700/2750 per quintal, with the average being at Rs. 2987 per quintal (Rs. 81,58,993/2731.49 Qtls.). Add to this the fact that the said contracts have been found wanting on several basic aspects by us. Further, there are no penal/compensatory clauses, as where the terms of the contract are not adhered to. We have already noted the absence of any stipulation as to payment, i.e., whether it would stand to be received in advance, in which case the obligation to supply would be within a fixed period thereof, or the credit period after which the consideration shall fal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ? What is the information or the data, acting on the basis of which the assessee, as a business man, with a business purpose and, rather, in the interest of his business, enters into these contracts covering the entire sale of Narma for the season 2008-09. It is this basis, based on objective material, that shall provide the economic justification for entering into the agreement/s. It is this, and this alone, that would justify the genuineness thereof. We say so as the absence of any such basis implies self-infliction of loss, which cannot be regarded as incurred in the normal course of business. Further, that the arrangement finally results in a loss is though a matter subsequent. Rather, the normal course for a business man, in the absence of any such basis, would be to enter into, similarly, forward contracts for purchase, hedging his business (price) risk. Such an arrangement is missing for cotton, sold ten times in quantity, whose price would again move in sympathy with narma. We say so as the assessee, much more active in the cotton trade, i.e., in comparison with narma, would ordinarily had, given such an informed basis, enter into similar arrangement/s for the sale of cotto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding thus the profit (of Rs. 2.73 lacs) for the year, as the same stands credited only at the year-end, even as the impugned advances stand made during the year. Even so, the capital is at a mere Rs. 7.07 lacs. The fixed assets are at Rs. 28.14 lacs. Deducting from this figure Rs. 22.75 lacs, i.e., the term loans as on 31.03.2009, leaves a balance of Rs. 5.39 lacs which (along with the non-current assets in the form of electric security at Rs. 0.85 lacs), is thus financed from own capital, leaving thus the paltry balance of Rs. 0.83 lacs (Rs. 7.07 - Rs. 5.39 - Rs. 0.85) lacs toward working capital. The assessee's entire current assets (Rs. 240.78 lacs) as well as the advance (Rs. 16.50 lacs) are thus, save to the extent of Rs. 0.83 lacs, financed from borrowed capital and trade liabilities, outstanding at Rs. 13.22 lacs and Rs. 243.23 lacs respectively as at the year-end. In the working capital cycle (cash to cash), the stock, which carries with it a spontaneous credit on purchases, gets converted on sale into a trade debt before being converted into cash on realization, which is utilized for discharging the trade liability. As the trade liability exceeds the current assets, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . at a cost of Rs. 2,40,072, also deducting tax at source thereon. The same would also justify the claim of depreciation on machinery, brought forward from the earlier periods. 8. We have heard the parties, and perused the material on record. As it appears to us, it is the lack of proper articulation of his case, substantiating his claims by the assessee, that has led to the impugned disallowance. Why did, for instance, the assessee prepare a trading account of cotton, suggesting it of being sold as it is, when, as claimed before us, ginning was done to convert cotton and cotton waste into standard quality, also incurring expenditure on power and labour. The assessee should have, accordingly, prepared a manufacturing account, debiting the ginning and pressing charges, besides the said two expenses to this account. Even as the same is a matter of presentation, by itself not decisive, it does raise a question which, given his own accounts, duly audited, requires explanation. Further, why, one wonders, the explanation/facts being now stated were not furnished before the Revenue authorities? The electricity charges, debited in accounts, as we observe, are for Rs. 3.74 lacs and not fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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