2022 (1) TMI 848 - HC - Income Tax

Addition u/s 68 - investment in the form of share capital/share premium in the assessee had no resources of their own - whether the statement made by Mr Arpesh Garg, Managing Director of the assessee under Section 132(4) of the Act and the photocopies of the documents found during the search and seizure action constituted incriminating material? - HELD THAT - In this case, insofar as the assessee is concerned, it placed the evidence on record, which established the trail of the money, the mode through which the money had travelled from the assessee to the investor entities and back to the assessee, and the fact that each of the investor entities was in existence. Therefore, once the assessee claimed (and it was found as a fact) that it was its own money which was routed back to it in the form of share capital/share premium, the traditional test which is sought to be applied by the revenue, for triggering the provisions of Section 68 of the Act, which is, that the assessee had to establish the creditworthiness, genuineness and identity of the transactions would have to adapt to the circumstances obtaining in the present case. As noticed in the instant matter, the Tribunal found that it was the assessee s money which was routed back to it, albeit, through banking channels. The director of the assessee i.e., Mr Arpesh Garg retracted his statement, within 48 hours - there is no finding by the Tribunal that the money which was received by the assessee in form of share capital/share premium constituted the assessee s unaccounted income. As noted by the AO in the deviation report, in AY 2012-13, the revenue attempted to make an addition on account of share capital/share premium which was reversed by the CIT(A). The revenue did not carry the matter further, and, therefore, what is important to underscore in this case is the finding of fact returned by the Tribunal that it was the assessee s own money which was routed back to it, and not that these were paper entries, where there was no banking trail. In the context of M/s Mahalaxmi Traders, the submission advanced on behalf of the revenue that because Mr Manoj Gupta had, in his statement, said that he had not made any investment, and, therefore the addition made under Section 68 of the Act needed to be sustained is untenable, in view of the following finding recorded by the Tribunal, in this behalf. None of these findings have been assailed in the appeal preferred by the revenue as held it is not clear from the Orders of the authorities below whether copy of such statement was supplied to assessee for rebuttal or whether he was produced before A.O. for cross-examination on behalf of the assessee. Since nothing is clear from the assessment order, therefore, any statement recorded at the back of the assessee, cannot be read in evidence against the assessee unless it is confronted to assessee and right of cross-examination have been provided by the A.O. to assessee to cross-examine that statement - Decided in favour of assessee. Bogus purchases - Tribunal held that the books of accounts were rejected without crystalizing the defect in the books of accounts, which could have been done only after examining the same - HELD THAT - According to us, the observations made by the Tribunal are pure findings of fact, which cannot be interdicted by us in appeal. The inconsistency in the approach adopted by the A.O., while preparing the deviation report and framing the assessment order with regard to purported bogus purchases is an aspect, which cannot be ignored and has been correctly highlighted by the Tribunal. If the revenue chooses to disallow bogus purchases, it would necessarily have to, in our view, ignore the corresponding sales recorded against the very same parties. As pointed out by the Tribunal, the CIT(A) could have rejected the books of accounts only, after it had examined and come to the conclusion that he was not satisfied as regards their correctness or completeness. The finding of fact returned by the Tribunal is that books of accounts were not examined by the CIT(A). If that be so, then, Section 145(3) of the Act could not have been triggered by the CIT(A), based on the mere statement of the Managing Director of the assessee. Besides this, as noted by the Tribunal, the CIT(A) had attempted to quantify the profit by resorting to a methodology, which was incomprehensible - AO has incorrectly disallowed 25% of the purchases from the alleged bogus parties without finding any evidence and ignoring the sales paid by them to the assessee. Further, the learned CIT A applied the provisions of section 145 (3) of the income tax act by rejecting the books of accounts of the assessee partially, without even looking at the books of accounts is also incorrect. Cash deposits made post demonetization represented unaccounted income of the assessee qua AY 2017-2018 - Tribunal held that it could not be said that the assessee had booked non-existing sales in its books post demonetization - HELD THAT - In sum, it was the Tribunal s assessment of the material placed on record that cash deposits made by the assessee with its bankers, as noticed above, more or less compared with the cash sale transactions entered into by it with its customers. The Tribunal s view was that given the fact that there was no allegation made by the revenue that the assessee had backdated its entries to enhance its cash sale figures, one could only conclude that there was a growth in the assessee s business. Tribunal also took note of the fact that one of the reasons furnished by the A.O., in support of the impugned addition, was that physical stock was short by ₹ 450 crores - the stock register represented a higher figure, as against that which was found physically. This conclusion arrived at by the A.O. was found by the Tribunal to be erroneous, inasmuch as the A.O. had failed to notice the fact that part of the stock was available at the assessee s godown at Sonipat, Haryana, which had not been covered during the search action. Insofar as short-term borrowings Tribunal appears to have accepted the assessee s explanation that most of these were liabilities that were outstanding against bills payable under the letter of undertaking and cash credit, which were secured by closing stock maintained by the assessee. According to the assessee, these were available at a lesser rate of interest. Besides this, certain funds were secured by a hundred per cent margin, supported by fixed deposits. These funds bore a small rate of interest. In addition, thereto, certain advances were received also in the form of packing credit, which again bore a small rate of interest. In a nutshell, the explanation of the assessee, which found favour with the Tribunal, was that outstanding loan liabilities had no relationship with the cash held in hand by the assessee. Having regard to the extensive material which has been examined by the Tribunal, in particular, the trend of cash sales and corresponding cash deposited by the assessee with earlier years, we are of the view that there was nothing placed on record-which could have persuaded the Tribunal to conclude that the assessee had, in fact, earned unaccounted income i.e., made cash deposits which were not represented by cash sales. Therefore, in our opinion, the Tribunal correctly found in favour of the assessee and deleted the addition made by CIT(A) under Section 68 - Decided in favour of assessee.

Summary

Issues Involved:
1. Additions under Section 68 of the Income Tax Act, 1961 related to share capital/share premium.
2. Deletions related to alleged bogus purchase transactions.
3. Addition under Section 68 concerning cash deposits during the demonetization period.

Detailed Analysis:

First Issue: Additions under Section 68 Related to Share Capital/Share Premium

The Tribunal dealt with whether the statement made by the Managing Director of the assessee and the photocopies of documents found during the search constituted incriminating material. The Tribunal concluded that the statement did not allude to unaccounted income being introduced as share capital/share premium. The retraction letter also did not mention such an introduction of funds. The Tribunal noted that photocopies of blank share transfer forms and other documents did not constitute incriminating material. Consequently, for AYs 2012-2013, 2013-2014, and 2014-2015, no incriminating material was found, and thus, no additions could be made.

On merits, the Tribunal found that the assessee had provided sufficient documentary evidence to prove the identity, creditworthiness, and genuineness of the transactions, establishing that the money routed back to the assessee was its own. The Tribunal observed that the AO failed to verify the trail of funds and did not conduct further inquiries on the documentary evidence provided by the assessee.

The Tribunal also noted that the deviation report prepared by the AO indicated that the source of the share capital/share premium could be traced directly to the assessee’s bank accounts, and thus, the addition of the entire share capital/premium was not justified.

Second Issue: Deletions Related to Alleged Bogus Purchase Transactions

The Tribunal examined the remand report submitted by the AO, which verified 50% of the purchases from third parties and found no variation. The Tribunal noted that the entire purchase and sales transactions were recorded in the regular books of accounts, routed through banking channels, and supported by quantitative details. No incriminating documents were found during the search.

The Tribunal criticized the CIT(A)’s inconsistent approach in applying the gross profit ratio for non-related parties to transactions involving related parties. The Tribunal held that the books of accounts could not be rejected without examining them and finding defects. The Tribunal found that the revenue did not provide any material to justify the disallowance of 25% of the purchases as bogus without conducting any inquiry or investigation.

Third Issue: Addition Concerning Cash Deposits During the Demonetization Period

The Tribunal analyzed the data of cash sales and deposits for FY 2016-2017 compared to earlier years and found that the cash deposits corresponded with cash sales. The Tribunal noted that the increase in sales during the demonetization period was in line with the growth in previous years and did not indicate non-existing sales.

The Tribunal accepted the assessee’s explanation that the cash deposits were made from cash sales, supported by audited books of accounts, bank statements, and other documentary evidence. The Tribunal found that there was no substantial variation in the gross profit or net profit ratios for AY 2017-2018 compared to previous years.

The Tribunal also addressed the issue of purported stock shortage and concluded that the AO’s finding was erroneous as it failed to consider stock at the assessee’s Sonipat godown. The Tribunal found that the stock reconciled with the books of accounts, and there was no discrepancy.

Conclusion:

The Tribunal’s findings were based on the appreciation of evidence, and the revenue failed to demonstrate any perversity in these findings. The Tribunal correctly concluded that no substantial question of law arose for consideration. The appeals were dismissed, and the Tribunal's decision was upheld, emphasizing that the AO’s assessment should be independent and not influenced by the investigation wing’s directions.