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TMI Blog2013 (10) TMI 1530X X X X Extracts X X X X X X X X Extracts X X X X ..... prejudice to ground no. 1 the learned CIT(A) has erred in law as well as on facts and circumstances of the case in confirming the addition u/s 68, on estimate basis, to the extent of ₹ 8,87,03,901/- (out of ₹ 18,68,90,938/- addition made in the assessment order). The addition so confirmed be deleted. 3) The authorities below erred in law as well as on facts and circumstances of the case in making a disallowance u/s 40A(3) of ₹ 71,28,196/- being 20% of the payments to suppliers of ₹ 3,56,40,982/-. The payments so made are covered by the exceptions provided in rule 6DD and hence the addition so made be deleted. 4. The appellant prays to be allowed to add, amend, modify, rectify, delete, raise any ground of appeal before or at the time of hearing. 2. Revenue has filed its appeal on following grounds. 1. The Ld. CIT(A) erred in holding that A.O. has not examined the addition made on account of sundry creditors, discharged outside the books of accounts but shown as outstanding in the regular books of a/c as on 31/03/2004, from the point of the view of sec. 69 in spite of specific directions issued by the Addl. CIT u/s.144A. 2. The Ld. CIT(A) ought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be brought to tax, whether in the hands of the "concern" or the "shareholder". 11. The Ld.CIT(A) also erred in ignoring the clarification issued by the Board circular No.495 of 1987 which are clearly applicable to the present case. 12. The Ld.CIT(A) erred in excluding the provisions of luxury tax amounting to ₹ 50,42,48,892/- as ascertained liability though it is contingent in nature from accumulated profit for the purpose of section 2(22)(e) of the Act. 13. The Ld.CIT(A) erred in holding that the quantum of deemed dividend has to be worked out on the basis of total credits and debits in the accounts instead of working of each loan or advance on entry basis. 14. The Ld. CIT(A) has erred in deleting addition ₹ 4,10,21,320/- made on account of disallowance made u/s. 40A(3) of I.T. Act, 1961. 15. The Ld.CIT(A) has failed to appreciate the fact that A.O. has not challenged the genuineness of expenditure i.e. purchases debited in the P & L A/c, but held that the liability shown as outstanding as on 31/03/2004 towards purchases made during the year was already discharged prior to 31/3/2004 by making payment in cash outside the books of accounts. 16. The Ld.C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition on account of unexplained credit is not erroneous. Seen from another angle, addition could also be made u/s.69 on account of unexplained investment in as much as payments had been made to suppliers which were not recorded in the books. The distinction is therefore more of a technical nature. In view of the above discussion CIT(A) was justified in rejecting contention of assessee on this point. We uphold the same. 4. On merit first we take up the issue with regard to addition of ₹ 18,68,90,938/- by the Assessing Officer. The appellant is a private limited company situated at Chipri in Sangli District and is a part of Ghodawat group of industries substantially owned by Shri Sanjay Ghodawat. The appellant is a manufacturer of Star Refined Oil under the 'Star' Brand. Total turnover for the year was ₹ 80.33 crores with gross profit of ₹ 9.28 crores at 11.5% of the turnover. The turnover of the appellant increased substantially in the subsequent year from ₹ 80 cores to ₹ 142 crores in 2005-06 and ₹ 125 crores in A.Y.2006-07. 4.1 The Assessing Officer made addition of ₹ 18,68,90,938/- for following reasons: a) The aggregate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (6) were issued. Most of these letters were returned unserved due to incomplete address. Some letters were served but none attended. A very few persons attended in response to the letters. The appellant requested for summons to be issued. Finally, summons were issued in case of 226 creditors, out of which 188 were returned unserved due to incomplete address. 37 persons appeared and furnished written replies. f) Most of the above 37 persons denied any amount outstanding to be received from the appellant as on 31/03/04. They stated that they had been paid in cash within few days of delivery of goods. g) The appellant was found to have created bogus creditors on the basis of enquiries with bank by Assessing Officer. Accordingly, addition of ₹ 18,68,90,938/- was made by Assessing Officer for reasons discussed above. 4.2 In appeal, CIT(A) having perused the assessment order, the comments of the Assessing Officer in the remand report and the submission made by the appellant from time to time observed that the purchases of Soyabeen made by the appellant was primarily made through commission agents. The commission agent works as a middle man between the appellant and the farmer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, these persons have not been able to produce any documents except in the case of Shankar Uttarwar to support their version. Neither of them has given details of the dates and the amounts actually received in cash or bearer cheque. As regards payments by bearer cheques, the Assessing Officer had concluded that the system of bearer cheques was used by the appellant to show bogus book entries. According to the books, creditors as on 31/3/04 had been paid mostly during the next financial year. The Assessing Officer found that payments were mostly by bearer cheques. The signature of an employee Shri Anil Chaugule was found on the back of the bearer cheque. It was inferred by the Assessing Officer that the money which had been withdrawn from the bank through the bearer cheque had actually not been paid to the farmers but collected by the employee of the company. The allegation of the Assessing Officer is that the so called creditor had already been paid of by cash after supply of goods. The bogus credit in their name had however been allowed to continue in the books and squared up by issue of bearer cheques in their names in the next year. This conclusion failed in the face of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p Uttarwar and Pradip Trading Co. So no credibility could be attached to rightly observed by CIT(A). 4.2.2 The other witness relied by Assessing Officer is Shri Sharad Dilwale who had stated that he had received payment within 10 days and mode of payment was usually cash or bearer cheque. Shri Dilwale had changed his stand time and again. In this background it was concluded that the witness was not telling the truth. Moreover, he had simply given a statement without giving any details of the mode in which the payment was received, the date of receipt of amount, amount received etc. As stated above the witness has changed his stand three times for which he should be treated as unreliable, observed by CIT(A). 4.2.3 Category 2 consisted of witnesses who according to the Assessing Officer confirmed their earlier statements filed in December,06 but were found confused about the dates of transaction, goods supplied, payment received etc. Accordingly the Assessing Officer concluded that the payments were received immediately after the transaction and therefore it could be assumed that as on 31/03/04, there was nothing outstanding. Above witnesses had given letters to the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year there was no transaction with the appellant. In above background, CIT(A) found that there are 19 witnesses who had confirmed earlier statements before him that there was no amount outstanding and six persons who deposed in favour of the assessee by retracting from their earlier statements before the Assessing Officer. The witnesses at category-2 and 4 could not be taken into account. According to the Assessing Officer, the witnesses who did not appear had in any case filed letters confirming that there was no balance outstanding before the Assessing Officer earlier. These letters could not be taken as evidence since the signature on the letters was not confirmed. The appellant was not given an opportunity to defend itself against the allegation. As regards reliability and quality of evidence, the parties in category-1 as well as in category-3 are at the same level except that view of the persons in category-3 are admittedly reputed persons, according to the Assessing Officer. None of the witnesses have given any evidence to support their statements. The addition is primarily based on the letters obtained from 37 creditors discussed above. After detailed investigation into t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.24 G.Baheti 1.92 B G.Baheti 2.05 It is mentioned that person dead C Sunil Shah 57.12 Incomplete address D S. Patil 24.61 Died S.P. Patil 1.85 Paid by bearer cheque Suiyakant Patil 0.74 Creditwor thine ss riot proved Sainath Traders 45.04 Genuineness of transaction doubtful. S.S.Vitthal 1.75 Did not confirm credit balance 4.2.8 Category B comprises of persons in whose cases summons were returned on the ground that no person was residing at the given address. In the case of Govindprasad Baheti it is mentioned that the person had expired and his successor attended before the Assessing Officer and therefore this creditor cannot be placed in category: B. 4.2.9 Category C: In the case of Sunil Shah, the address is mentioned as Market Yard, Islampur. Shri Sunil Shah has given a statement that the credit against him was outstanding on 31/03/04. Shri Sunil Shah had filed return of income in Sangli. His case had been taken up for scrutiny. Shri Sunil Shah procured soyabeen from the farmers in the nearby area of Sangli and supplied to the appellant. Purchases, dispatches and payments to farmers who had supplied goods to appellant. The f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. The total amount of credit in this category is of ₹ 1.41 crores out of which ₹ 1.23 crores has been wrongly placed in this category as discussed above. There are only 4 persons in category D who have actually replied interalia stating that there was no amount outstanding. They are as under: D. Bedage ₹ 32,968/- K.Raghunath & Sons ₹ 1,28,426/- Ketki Trading ₹ 3,87,388/- Sanjay S. Patil Rs. 78.300/- ₹ 17,82,925/- 4.3.2 Other persons who have confirmed the credit entries out of 37 persons in category F are as under: 1) J.G.Baheti ₹ 1,84,438/- 2) D.D.Shete ₹ 1,72,444/- 3) S.Bharadia ₹ 2,05,764/- 4) K.Pawar ₹ 3,83,434/- 5) G.Kotalwar ₹ 7,86,344/- 6) E.Dhonde ₹ 2,22,544/- 7) Rahatkar Vithal B. ₹ 3,94,601/- 8) Motarwar Kiran N. ₹ 1,93,171/- 9) ShaikhMoinuddin of Asha Trading. ₹ 2,04,393/- 10)Wadamwar Murlidhar G. ₹ 7,38,139/- 11) Shankar, Venkati Uttarwar ₹ 2,08,442/- 12)Suryakant V.Palimkar ₹ 2,10,000/- 13)Kalpesh D. Shah Shah & Co. ₹ 3,47,711/- 14)SunilB. patil ₹ 3,59,412/- 15)Sharad Dilwale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual contract with the creditors themselves. The material is arranged through brokers. The brokers of the commission agent procure the material from the farmers and supervise the delivery of the same to the appellant. Although the payments according to the appellant, are done directly to the suppliers for the material purchase, the agent or the number of letters sent by the suppliers requesting that the billing broker is required to identify the supplier. This is in the case of the cash as well as credit purchases. The appellant has produced a should be made in some other name, for reasons not understood. The material is sent by a particular party for instance, Om Trading Co. but the billing is made in the name of another party e.g. Bhimashankar Dhule on the request of the party sending the goods. The appellant has produced number of letters from the suppliers to this effect. The creditor as per the books is Bhimashankar Dhule. The address of the party in the appellant's books is what was given in the letter. In such cases, it would be unreasonable to expect the appellant to furnish complete and correct addresses of each and every creditor. The appellant has discharged its b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the Assessing Officer at different times denying any credit outstanding to be received from the company. 4.3.8 Taking all facts and circumstances into consideration, CIT(A) observed that while the wholesale addition of all the creditors which 'have been shown in the books as outstanding on 31/03/04 and paid in cash subsequently is not justified, it is unmistakable that the appellant has in certain cases "made payments in cash while the credit amount shown against the suppliers in the books has not been squared up and allowed to continue. The illustrations given by the Assessing Officer in the assessment order which have been shown that in several cases the modus operandi stated by the Assessing Officer could not be doubted. After arriving at the above such bogus credits. It is obvious that there has to be some 2 decision, the next step was to reasonably quantify the amount of estimation in arriving at this figure. The addition made by the Assessing Officer is also based on estimation relying on statement of few creditors. The estimate, of the Assessing Officer now having been proved erroneous on the basis of facts and circumstances narrated in the earlier pages, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alpesh Shah 5 months 4.3.11 The circumstances were found such that the creditors who have given statements ; mentioned different credit periods. The period ranges between one week to 5 months. Considering the evidence at hand, a maximum period of 3 months was found to be sufficient and a reasonable credit period offered by the appellant observed by CIT(A). 4.3.12 The purchases on credit made by the appellant month wise is as under: August 464142 September 119184 October 27312901 November 33255289 December 25414330 January 14774363 February 7803575 March 75609099 4.3.13 The aggregate credit for purchase made during the months of January to march,2004 and which was outstanding as on 31/03/04 was worked out to ₹ 9,81,87,037/- by CIT(A), If the average credit period is taken as 3 months, it was found that the credits which arose after January,2004 would not have been squared up and outstanding as on 31/03/04. In this background, CIT(A) estimated that credits arising during this period are genuine credits which have been squared up. The list of creditors squared up during the year provided a good indicator of the average credit period. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be considered as explained. Even lapse of time or inability of the assessee would not make the unexplained investment an explained one. It is each and every individual entry on which the mind has to be applied by the taxing authority when an explanation is offered by the assessee. If no explanation has been offered in respect of a particular entry, the credit entries which are to be allowed or to be disallowed. This taxing authority will be justified in coming to the conclusion that the said investment is unexplained. It is not the totality of the work has to be done on the basis of explanation offered for different entries and if the explanation of the assessee is acceptable on the basis of the evidence produced before the taxing authority, the Tribunal can come to the conclusion that such investment is fully explained." 4.4.2 Similar view has been claimed to be taken by ITAT Ahmedabad in Cas Card Finance vs ACIT in (2003) 84 ITD 1 (AHD) (THIRD Member decision), wherein share application forms were found by the search party to have been filled in by the two of the employees of the appellants and that the managing director of the company and head of the other concerns had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unding circumstances have been emphasized. In this background, Ld. Departmental Representative submitted that Tribunal is entitled to disbelieve any story which is prima-facie fantastic and which does not accord with human probabilities. 4.5 On other hand, learned Authorized Representative has raised various contentions which will be taken care by us in preceding para. 4.6 After going through the rival submissions and material on record including case laws relied by both the parties, we find that brand 'Star'. The total turnover for the year was ₹ 80.33 crores assessee is a private limited company, situated at Chimpri in Sangli district and is a manufacturer of star refined oil under the with gross profit of ₹ 9.28 crores at 11.5% of the turnover. It was observed by revenue authorities that turnover of assessee increased substantially in subsequent years from ₹ 80.00 crores to ₹ 142.00 crores in A.Y.2005-06 and ₹ 125.00 crores in A.Y. 2006-07. Assessing Officer made addition of ₹ 18,68,90,938/- on account of bogus trade creditors. Assessing Officer observed that creditors were carried on in books of accounts for more than 3 months from Octobe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dale, one of the witness stated that goods were supplied in December, and payments received within 2-3 month. Since the supply was in Dec.,2003, it could not be said with certainty that there was no balance outstanding as on 31/03/04. The other two witnesses Shri Teli and Mane had stated that payment of goods was made within 8-10 days but in cross examination, it could not establish that there was no balance outstanding at the end of the year. One Shri Durgule, had stated in cross examination that he had not attended on 12/12/06 and letter dt. 12/12/06 was neither signed nor written by him. In this background, Assessing Officer was not correct in stating that witness had confirmed that the statement filed in December,06 was correct. CIT(A) found that it could not be said that the persons in category-2 had confirmed their letters filed in December,06 because one had stated that he had not filed such statement, the others had subsequently in the remand proceedings not confirmed the statements filed before the Assessing Officer. So no credibility could be attached to it as rightly observed by CIT(A). 4.6.2 Category-3 consists of six witnesses who have deposed in favour of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advance the sum of money, details of sources of income, cash book, ledger, sale bills and bank pass book, account extract in their books of the assessee company. There is nothing on record to suggest whether any of the 37 creditors, who appeared have produced, any one or all of the above documents. In this background, CIT(A) rightly observed that the above documents were neither insisted upon nor produced. We find that above documents were neither insisted nor produced, so, finding of Assessing Officer for making addition in question has not been found sound footing. 4.6.5 Having considered all facts and circumstances of the case, the CIT(A) having discussed all aspects of genuineness of the transactions at remand stage observed that the credit period as mentioned in the statement by certain creditors was between 4-5 to 5 months as discussed in preceding para of this order. Thus, the creditors have given different credit periods. Considering the evidence at hand, the maximum period of 3 months was found to be sufficient and reasonable credit period offered by assessee. The purchases on credit made by assessee monthwise are as under: Shankar Uttarwar 4-5 days Sharad Dilwale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrect therefore, some guess work has to be done. We find the revenue in the instant case has not conclusively proved with any cogent evidence that assessee's unaccounted money has been paid towards purchases and subsequently, the same has been regularized when cash is available in the bank. The whole exercise is on guess work. Similarly, the contention of the Ld. Counsel for the assessee that no addition is required to be made u/s.68/69 under the facts and circumstances of the case also cannot be accepted in view of the detailed finding given by the Ld. CIT(A) in the preceding paras. Considering the totality of the facts of the case, we are of the considered opinion that disallowance of 20% of ₹ 8,87,03,901/- [(out of the amount sustained by Ld.CIT(A)] in our opinion, will meet the ends of justice. We hold and direct accordingly. The grounds raised by the assessee on this issue are accordingly partly allowed and ground raised by revenue is dismissed. 5. Disallowance u/s.40A(3); 5.1 Firstly, the Assessing Officer found that the assessee has made cash payments for purchase of Soyabeen amounting to ₹ 3,56,40,982/-. The individual payments were above the agriculturists ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town; 91. The appellant's contention is that the persons to whom payments was made were agents and the payments was made in Chipri where the appellant's factory was located. Chipri is a village which is not served by any bank. A certificate from the local authority was submitted to support the contention. The appellant could thus satisfy only a part of condition in clause (h). Acording to the clause (h), not only should the place where payment is made be without a bank, the person to whom the payment is made should ordinarily be residing in that village or carrying on his profession there. The appellant could not give any documents to prove that payments had been made to persons who ordinarily resided or carried business or profession in the village. 92. Clause (1) of Rule 6DD is as under: (I) Where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such persons. 93. The r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 20000/-. The provisions of section 40A(3) apply to each single payment if it is more than the prescribed limit. 97. It was held in the case of CIT Vs. Banwarilal Bansidhar that the of section 40A(3) apply only to a case of genuine payment. Where is computed' by applying gross profit rate and deduction in respect of is neither claimed nor allowed, the provisions of section 40A(3) have application. In the case of CIT Vs.Chemifme 270 ITR 305, the M.P.High Court similarly decided that where a net profit rate is applied, section 40A(3) can have no application. 98. The issue of bogus creditors has been discussed and decided in the earlier part of this order. It will be seen from that discussion that the disallowance is based on the statement of a few creditors and on an adverse inference drawn in cases where the appellant could not provide the correct and complete addresses for service of summons. There is no evidence of actual payments being done in cash and that to above the prescribed limit u/s.40A(3) for the provisions of the section to apply. 99. The disallowance of ₹ 4,10,21,320/- u/s.40A(3) was deleted." 5.6 With regard to disallowance u/s 40A(3), the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not applicable to the assessee because the assessee could not prove by way of documentary evidence that payments were made to the agriculturists. This aspect has not been looked in the light of objections raised by the assessee before the authorities below, so in the interest of justice, we set aside the order of CIT(A) and restore this issue to the Assessing Officer with a direction to decide the same as per fact and law after providing due opportunity of hearing to the assessee. 5.8 With regard to deletion of addition of ₹ 4,10,21,320/-, the stand of Departmental Representative as regards the addition made under Section 40A(3), it has been held by the CIT(A) that since addition has already been made w.r.t. the creditors u/S 69, no further addition is possible under S40A(3). In this context our attention is drawn to the case of Ganesh Foundry and Casting Ltd. Vs. ITAT (2010) 328 ITR 202 (Pat) where the Patna High Court has held that in respect of amounts which were found to be paid out by additionally hit by the bar of section 40A(3). The High Court has bearer cheques and later returned to the assessee, that not only were such amounts undisclosed income of the assessee, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance which is more than expenditure itself. The provisions of section 40A(3) earlier provided for disallowance of entire amount which would have been paid otherwise than the cheque or draft subsequently the disallowance was restricted to 20% of expenditure of the payment. The disallowance u/s.40A(3) cannot exceed expenditure of payment itself. The CIT(A) has observed that the disallowance was based on statement of few creditors and on adverse inference drawn in case where the assessee was not provided correct and complete address. There is no evidence of actual payment being done in cash and that too above the prescribed limit u/s.40A(3) for application of provisions of section 40A(3). Accordingly, the disallowance of ₹ 4,10,21,320/- u/s.40A(3) was deleted. The stand of the revenue before us is that in the case of Ganesh Foundry and Casting Ltd. Vs. ITAT (supra) the Hon'ble High Court of Patna has held that in respect of amounts which were found to be paid out by bear cheque and later returned to the assessee with only such amounts undisclosed income of the assessee and they were additional hit by bar of provisions of section 40A(3) of Act. In case not applicable to the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the cross appeals, which deal with the merits and quantum of addition have been rendered infructuous. These grievances are dismissed as such. 6.29 In the result, while the assessee's appeal is allowed in the term indicated above, the appeal filed by the revenue is dismissed. Pronounced in the open court today on 30th January, 2009." 6.2 As stated, the Tribunal in coming to the above conclusion has followed the decision in the case of Bhaumik Colour P. Ltd., where the questions raised before the Tribunal were as under: 1) Whether deemed dividend u/s.2(22)(e) of the Income Tax Act, 1961 can be assessed in the hands of a person other than a shareholder of the lender? 2) Whether the words "such shareholder" occurring in section 2(22)(e) refer to a shareholder who is both the 'registered' shareholder and the beneficial shareholder? 6.3 The above questions were answered as under in the case of Bhaumik Colour P Ltd as under: On the first question: Deemed dividend can be as assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. On the second question: The exp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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