9911796707
TMI Blog2013 (10) TMI 1530X X X X Extracts X X X X X X X X Extracts X X X X ..... s 68 of the Income Tax Act. 2) Without 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 v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4/1988 viz., payment by a company to any concern in which such shareholder is a member or a partner and in which he has a substantial interest which does not say in whose hands the dividend has to 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 debit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lared irregular. So, it cannot be held as null and void. The distinction between section 68, 69 and 69C are more technical in nature, meant to apply to different situations. The allegation of the Assessing Officer is that money has been paid while the credits in the books had not been cancelled. From this point of view, the 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 wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the creditworthiness of the creditors. The appellant however could not discharge the onus satisfactorily. The signature on the confirmatory letter did not match with the signature of the same person on the reverse of the bearer cheque. The photo copies of the confirmation letters and the bearer cheques have been made part of the assessment order. e) The appellant gave names and addresses of the creditors to whom letters u/s. 133(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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be shown in the name of another person. The address etc. of such person were not given. The appellant, in such situation would not be in a position to furnish the address of the suppliers. 4.2.1 In the remand report, 37 witnesses have been categorized into 4 categories I,II,III,IV. The first category consists of the persons who have confirmed their statement given to the Assessing Officer at the time of assessment stating that no amount was receivable from the appellant on 31/03/04. However, 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 Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s son Shri Pradip Uttarwar. According to the Assessing Officer, Shri Shankar Uttarwar was not entitled to discuss the transactions of appellant company with Pradip Uttarwar and Pradip Trading Co., the above receipt filed by Shri Shankar Uttarwar diminishes its evidentiary value. The receipt is of a transaction of the appellant with Shri Pradip Shankar Uttarwar and not Shri Shankar Uttarwar. While the AO has relied greatly on this piece of evidence, he has refrained from questioning Shri Shankar Uttarwar on the transactions of Shri Pradip 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed witness. As regards Shri Satyawan Shete, it is stated that no records were maintained by him to substantiate his statement and therefore it could not be treated as reliable. For above reasons, Assessing Officer did not believed their version which was not found justified according to CIT(A). 4.2.5 Category-4 consists of seven parties who _did not appear despite summons being served. This includes Shri Pradip Uttarwar and Pradip Trading Co. which parties were discussed earlier in this order. One party i.e. Vyankatesh Trading Co. had filed a letter interalia stating that during the 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 cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of accounts : 56. Aggregate credit amount ₹ 3,11,60,832/- Category D: Reply received stating no outstanding as on 31/03/04. Number of accounts : 09. Aggregate credit amount ₹ 1,41,83,970/- Category E: Summons served, no response. Number of accounts : 72. Aggregate credit amount ₹ 3,55,13,391/- Category F: Creditors verified in remand proceedings. Number of accounts : 45. Aggregate credit amount ₹ 1,70,70,397/- 4.2.7 In addition to the above categories, there is another category at page-17 of the remand report under the heading 'creditors confirmed amount outstanding'. Entries-7, Amount credited: 18,99,014/-. The ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Shri Sunil Shah after 4-5 months. The AO has accepted the income, by way of commission, declared by Shri Sunil Shah in the order u/s.147. 4.2.10 Category D consists of persons from whom replies were received that they had no outstanding balance with the company as on 31/03/04. In the case of Shripati Patil however, the person had expired. In the case of S.P.Patil, it is mentioned that the payment was through bearer cheque. In the case of Surayakant Patil it was stated that creditworthiness was not proved. In case of Sainath traders, it is mentioned that genuineness of transaction was doubtful. In case of persons listed above under category-D, it is not clear from the remarks above reply that no amounts outstanding as on 31/03/04. Therefore they were wrongly placed in the category. In the case of Sainath traders, it is mentioned that genuineness of transaction is doubtful. It was observed that the word used is 'doubtful' which means there is no definite finding on the genuineness of the transaction. Secondly, it has been pointed out by the appellant that the party had been paid the amount by way of crossed cheque issued on HDFC bank. Copy of the cheque has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 88,96,526/- 4.3.4 The amount of credit that has been confirmed is actually slightly more than the amount of credit which has been denied, although the number of creditors that have confirmed credits is slightly lower at 14 against (19+4) 23. 4.3.5 The aggregate additions made by treating the credits as bogus has been categorized from A to F by the Assessing Officer in the remand report. Category A, B and C which account for almost 14 crores out of total 18 crores of creditors treated as bogus, were found similar by the Assessing Officer in remand report. The appellant could not provide proper and updated addresses of the persons in these categories. It is an established principle that the burden is on the appellant to prove the genuineness of the credit, genuineness of transaction, identity and the creditworthiness of the creditors. According to this principle, the burden was on the appellant to satisfy above conditions with regard to each creditor being carried in its books. Inability of the appellant to do so could result in the credit being treated as unexplained cash credit u/s.68 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Department. It is also observed that most of these creditors were from Parbhani/Nanded area. The appellant had some difference with the suppliers of this area regarding the of the Act. There is nothing on record that penalty u/s.272A has payment issues. According to the provisions of section 131, there is a penalty for non compliance which is imposed under section 272A been initiated against any of the creditors. A summons u/s.131 has a legal force and is potent weapon in the hands of the Assessing officer. Once, this power has not been exercised, the Assessing Officer should not blame the appellant for non appearance of the creditors or non compliance to the summons. The burden has been placed on the appellant for the non appearance of the creditors and the credit has been treated as bogus. CIT(A) observed that once the summons has been issued by the Assessing Officer who has sufficient powers to enforce compliance, the appellant should not be held responsible if the creditor does not appear and depose before the Assessing Officer. In this background CIT(A) observed that the wholesale disallowance of all the creditors to -whom payment was made in cash treating them as bogus c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been made it was presumed that the Assessing Officer was satisfied with the genuineness of the above creditors and the credit amount and accepted that the creditors had actually been paid on the dates mentioned. These payments could therefore form a basis for estimating the average period of credit offered by the appellant to its suppliers. The appellant was asked to submit the list of these creditors along with the credit period enjoyed by each creditor. The average credit period worked out to roughly 5 months. The appellant was then asked to submit the same list with the average credit period 3 months. Other evidence of period of credit offered by the calculated by the weighted average method. The weighted average credit period according to the revised list worked out to little about appellant could be gathered from the various statements recorded of the creditors. In the letters submitted to the Assessing Officer by 37 creditors at the assessment stage, the period of credit as stated by the creditors ranges from 2-15 days. At the remand stage, the credit period as mentioned in the statement by certain creditors was as under: Shankar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising 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 weighted average credit period worked out to 3 months. Credits occurred after January 01, 2004 were therefore held as genuine. Such credit amount aggregates to ₹ 9,81,87,037/-. The Assessing Officer was accordingly directed to reduce the above amount from the addition made u/s.68 of the Act. 4.4 Both parties are before us. Department is against deletion of ₹ 9,81,87,037/- and assessee is against sustaining remaining amount of ₹ 8.87 crores. Before us, the learned Departmental Representative submitted that the addition has been made to the extent of ₹ 8.87 Crores giving relief of ₹ 9.81 Crores. The relief has been given on the basis of average credit period of 3 months and thus holding that credits after Jan, 2004 were held as genuine. These credits amount to ₹ 9.81 Crores. This is an absolutely arbitrary approach of CIT(A). It may be appreciated that this exercise of identifying parties to whom payments have been made are following categories of credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 admitted having introduced money purported to be share application money and deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 October and November onwards. The creditors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails viz. proof of identity and capacity to 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases. It is the of section 68/69 are not applicable, that the profit shown by the 3 submission of the Ld. Counsel for the assessee that the provisions assessee is more than the comparable case taken by the AO i.e. in the case of Rajaram Solvex Ltd. and that the assessee was not allowed to remain present during the examination of witnesses and that none of the witnesses were examined on oath. Since this is the first year of operation and the assessee purchases its raw materials from farmers through brokers in some cases and that most of the farmers / brokers do not maintain books of account, therefore, the credibility of their statements regarding the exact time gap between the date of sale and date of payment cannot be taken as absolutely correct 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that one ground is good enough and sufficient to consider addition u/s.40A(3) and it is not necessary, therefore to consider the other aspect of the matter as to whether the same amount could also be added u/s.69. 5.4 On the issue of other cash payment, the appellant submitted a list of payment stating that the payments were made to commission agent who supplied material procured from the agriculturists. The appellant relied on clause (h) and (1) fo the Rule 6DD of the I.T.Rules. 5.5 The CIT(A) partly allowed the claim of the assessee by holding as under: 90. I have considered the submissions. The contention of the appellant with regard to the cash, payments which forms the first limb of the addition made u/s.40A(3) is not Acceptable. The appellant has relied on clause (h) and (1) of Rule 6DD. Clause (h) is as under: (h) Where 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 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance was restricted to 20% of the expenditure or the payment. It can never be the case that the disallowance u/s.40A(3) exceed the expenditure or the payment itself. 96. The second aspect is that there is no payment which has been debited to the books of accounts of the appellant. The AO has come to the conclusion based on circumstantial evidence and the statement of some creditors that they had been paid during the year and no amount was outstanding against the appellant company. Even if, it is accepted that the credits were bogus and the amounts were paid in cash, there is absolutely no evidence whether the amounts were paid in lumpsum or in instalments. The creditors whose statements were recorded had simply stated that nothing was outstanding to them at the end of, the year. None of them had given any details of payment in cash received by them. There is therefore, no evidence that the payments which were received in cash on each occasion is more than ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and (k) are sufficient liberation to get over the practical difficulties of section 40(A)(3) Kamate Marbles Vs ITO 260 ITR 475 (Kar) Also as already submitted the payments were made to the farmers or to the agents on their behalf. Such payments are also covered by rule 6 DD (f) and 6 DD(I) of the rule as it then existed. On the other hand learned Departmental Representative supported the order of authorities below. 5.7 After going through rival submission and material on record, we find that according to the Assessing Officer, the assessee made cash payment for purchase of Soyabeen amounting to ₹ 3,56,40,982/-, individual payments were made above the limit prescribed u/s.40A(3). Accordingly, the addition of ₹ 71,28,196/- was made by the Assessing Officer which has been confirmed by the CIT(A). The stand of the assessee has been that payment had been made to the agriculturists or their agents, the assessee was covered under (h) and (i) under Rule 6DD of I.T Rules. The Assessing Officer held that exception was not applicable to the assessee because the assessee could not prove by way of documentary evidence that payments were made to the agriculturist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be restored. On the other hand, learned Authorized Representative supported the order of CIT(A) who has deleted the addition made by way of disallowance u/s.40A(3) of Act of ₹ 4,10,21,320/-. 5.9 After going through the rival submission and material on record, we find that the addition by way of disallowance of ₹ 4,10,21,320/- u/s.40A(3) was made @ 20% of the amount of credit which in the assessment order was treated as bogus. The total amount of such credit was added u/s.68/69 of Act at ₹ 18,68,90,938/-. According to the Assessing Officer, these credits were left lying in books while supplies of Soyabeen and other items had been paid in cash. The assessee was asked to submit his reply in this regard and since he did not submit reply in response to the letter of the Assessing Officer dated 15.12.2006, addition in question was made. Before the CIT(A), the stand of the assessee was that once the entire expenditure has been disallowed under one or the other provisions of the Act, further disallowance could not be made as it would result in disallowance which is more than expenditure itself. The provisions of section 40A(3) earlier provided for disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ITAT has recently decided similar issue vide ITA No.731/PN/07 and ITA No.787/PN/07 dtd.30th January,09. The Tribunal has held in Star Flexi Pack Industries (supra) following special bench decision in the case of ACIT Vs. Bhaumik Colour P. Ltd., ITA No.5030/Mum/04 has held as under: The expression shareholder referred to in sec.2(22)(e) refers to both a registered shareholder and beneficial shareholder. If a person is a registered shareholder but not the beneficial shareholder than the provisions of sec.2(22)(e) will not apply. Similarly if a person is a beneficial shareholder but not a registered shareholder then also the provisions ofsec.2(22)(e) will not apply. 6.28 In view of the aforementioned finding judicial precedent, which is deemed to be attached to and forming part of this order, and having regard to the undisputed fact that the assessee before us is not a registered shareholder in GIPL, we have to hold that very taxability of deemed dividend u/s.2(22)(e) in the hands of the assessee fails. The assessee succeeds .on this fundamental issue. In this view of the matter, all other issues raised in the cross appeals, which deal with the merits and qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so, the facts and circumstances are identical. Shri Sanjay Ghodawat, is a registered shareholder with substantial holding in both Ghodawat Industries P. Ltd as well as the appellant company. However, the appellant company is not a registered shareholder of Ghodawat Industries P. Ltd. The provisions of Sec 2(22) (e) of Act regarding Deemed dividend, according to the decision of the Hon ble Tribunal in the case of the other group company , Star Flexi Pack Industries , cannot apply to a beneficial shareholder which is not also a registered shareholder. The facts and circumstances in both the appellant company and Star Flexi Pack are identical. The transactions on which deemed dividend is determined are with Ghodawat Industries P ltd as in the case of Star Flexi Pack. The decision in Star Flexi Pack Industries therefore applies with equal measure to the appellant's case. Following the decision in Star Fexi Pack Industries, it is held that the provisions of sec.2(22)(e) are not attracted in the case of the appellant, as the essential condition of the appellant being a registered share holder of Ghodawat Industries P. Ltd. is not 2(22)(e) was deleted by the CIT(A) following the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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