Delhi High Court

Vivek Ispat Udyog vs Ito on 22 September, 2004

Equivalent citations: 2005 2 SOT 65 NULL

ORDER

S.C. Tiwari, A.M.

This appeal has been filed by the assessed on 18-3-1997 against the order of learned CIT(A), Muzaffarnagar dated 15-1-1997 in the case of the assessed in relation to assessment order under section 143(3) for assessment year 1990-91.

2. The main dispute in this appeal relates to the addition of Rs. 6,20,461 made by the assessing officer and confirmed by the learned CIT(A) in relation to the trading results declared by the assessed.

3. The facts of the case leading to this ground of appeal which is ground of appeal No. 4, briefly are that the assessed was engaged in the business of trading in iron and steel items mainly cold rolled and hot rolled sheets. The assessing officer noticed that this year the assessed has disclosed a gross profit of Rs. 2,49,899 @ 1.584% as against 2.2% in the immediately preceding assessment year 3.15% in the immediately succeeding assessment year. During the course of assessment proceedings the assessing officer asked the assessed to substantiate the declared trading results. The assessed submitted that the entire purchases and sales were open to verification. The rate of g.p. was dependent upon market conditions. The assessing officer noticed that bulk of assessed's purchases were from a single party viz., M/s. Shanti Traders, Kanpur from whom purchases to the extent of Rs. 67,18,175 were made. assessing officer further noticed that the purchases made by the assessed were on credit basis and only small payments had been made to the party. The assessing officer, therefore, considered it necessary to ascertain the genuineness of this party and its ability to sell goods to the assessed on credit at such magnitude. The assessed claimed that the payments to the party had been made by cheques. However, on enquiry from the bank it was noticed that the amount of cheques credited in the account of M/s. Shanti Traders had been withdrawn on the very date of deposit. The assessing officer also found that it was the assessed who had introduced M/s. Shanti Traders for opening of bank account. Enquiries made at Kanpur revealed that no person was available at the given address. The assessed was asked to produce a responsible person from M/s. Shanti Traders but the assessed avoided doing the same. From the Sales Tax Regn. No. given of M/s. Shanti Traders the assessing officer found that registration had been made in the name of one Smt. Rekha Jain as proprietor of M/s. Shanti Traders. assessing officer addressed letters at the business premises of M/s. Shanti Traders and at the residential address of the proprietor as available in the documents furnished by the assessed. According to the assessing officer these letters could not be served. The assessed produced one Shri Anil Kumar, whose statement was recorded. Shri Anil Kumar stated that he had never met the proprietor of M/s. Shanti Traders. He could not give any satisfactory explanation as to on what basis he had introduced M/s. Shanti Traders for the purpose of opening of the bank account. Assessing officer further noticed that the assessed had not debited cartage expenses in the cash book nor any payment of cartage was shown to M/s. Shanti Traders. On these facts the learned assessing officer held that the assessed had not really purchased goods from M/s. Shanti Traders and had probably purchased it from other parties. assessed had not filed any evidence like challan, weighment slip, sales tax receipt etc. in support of purchase of goods. assessed had not given the name of the transport company on the ground that the goods had been supplied on FOB basis.

4. The learned assessing officer found that the assessed had made agreement during the year with M/s. Wheels India Ltd. at a contract rate of Rs. 13,000 per MT. On the date when the assessed had filed tenders the prevailing rate in the market was Rs. 11,500 as admitted by the assessed itself. The assessed had purchased on 29-7-1989 goods from M/s. B.K. Steel Corpn. @ Rs. 10,200 per MT. assessed had sold its entire purchases from M/s. Shanti Traders to M/s. Wheels India Ltd. The assessed had shown the purchase rate from M/s. Shanti Traders at the price ranging from Rs. 12,000 per MT to Rs. 12,600 per MT as compared to the price of Rs. 10,200 per MT paid to M/s. B.Y. Steel Corpn. The assessed had made excess payment of Rs. 2,000 per MT. The genuineness of M/s. Shanti Traders had been proved or established. The assessing officer, therefore, held that M/s. Shanti Traders was a sham party and the name was used by the party to inflate its actual purchase price so as to reduce profits chargeable to income-tax. Assessing officer held that the assessed must have earned at least Rs. 1,500 per MT on average in its supply to M/s. Wheels India Ltd. Thus the assessing officer held that the assessed earned a g.p. of Rs. 8,70,360 on its sales to M/s. Wheels India Ltd. However, the assessed had shown g.p. of Rs. 2,49,899 only on total sales of Rs. 1,57,68,535. He, therefore, made an addition of Rs. 6,20,461 to the declared g.p.

5. During the course of hearing before the learned CIT(A) the assessed made a written submission dated 10-1-1997. The assessed argued that at the time when the purchases were made M/s. Shanti Traders was in existence. Assessing officer was not justified in working out the profit of the entire year on the basis of a single instance of purchase. The price of the material fluctuated throughout the year from Rs. 10,000 to Rs. 14,000 per MT. At any rate average rate of purchase from M/s. B.K. Steel was Rs. 11,548 per MT and from M/s. Shanti Traders, at Rs. 12,062 per MT. Hence there was no such difference of Rs. 2,000 or Rs. 1,500 as estimated by the assessing officer. Some difference in rates had arisen on account of difference in size of material. The assessed had done better business during the year and fallen rate of g.p. was on account of supply of goods at competitive rates. The learned CIT(A) held that the assessed had not furnished any detailed explanation before the assessing officer in respect of fall in g.p. rate. The assessed had also failed to establish genuineness of purchases made from M/s. Shanti Traders at a higher rate. In these circumstances the assessing officer was justified in making additions to the declared trading results. Still aggrieved the assessed is in appeal before us.

6. During the course of hearing before us the learned authorised representative of the assessed referred to details of purchases from M/s. Shanti Traders and pointed out that the total purchases were of 556.95 MT for Rs. 67,18,179 and thus average purchase price was Rs. 12,062 per MT. He then pointed out the details of purchase from M/s. B.K. Steel Corpn. and pointed out that total purchases during the year were Rs. 294.25 MT for Rs. 34,00,174 giving an average purchase rate of Rs. 11,548 per MT. The learned authorised representative pointed out that the difference was Rs. 514 per MT only. The assessing officer had ignored this aspect and based his assessment only on the basis of rate prevalent on a particular date i.e., 29-7-1989. The assessed had not made any purchase from M/s. Shanti Traders on 29-7-1989. The rate of steel fluctuated daily, according to the demand and supply position in the market. There was no fixed rate. The rate of steel sheet also depended upon the size of the sheet. As the assessed had entered into a supply contract the delivery was to be made within the scheduled time. The customer had no concern with rate of fluctuation in the market during the delivery period. assessed had made purchases from M/s. Shanti Traders as well as other firms. At the time when the purchases were made Shanti Traders was existing in Kanpur. It had taken the business premises on rent at Kanpur. A statement of the landlord had been recorded by the Income Tax Inspector which showed that the firm was in existence and subsequently the said supplier had closed its business. Even from M/s. B.K. Steel the rate of purchase of the assessed varied from Rs. 10,000 to Rs. 14,000 per MT for the whole year. assessed's sales and purchases were fully vouched and the assessed had kept quantitative details in the stock register. Though the rate of g.p. was lower the amount of g.p. was much higher as compared to other years. In the earlier years the trading results as disclosed by the assessed had been accepted. The assessed had maintained regular books of account and its account had been audited.

7. The learned counsel for the assessed argued that both during the course of assessment proceedings as well as during the course of proceedings before the learned CIT(A) detailed explanations had been given in relation to the rate of g.p. CIT(A) was not justified in his observations that the reasons for fall in g.p. rate had not been explained. The fact of the matter was that there was no fixed rate of g.p. because the rates in the market fluctuated on daily basis.

8. The learned authorised representative of the assessed argued that the assessed was not concerned as to what was done by M/s. Shanti Traders in its bank account. There was no evidence to suggest that the payments made by the assessed had returned back to the assessed. It was not as if M/s. Shanti Traders was not in existence. Enquiries had been made by the Inspector which established existence of the party but the same were not referred to by the assessing officer in the assessment order. On these facts the learned authorised representative of the assessed argued that there was no justification for huge addition made by the assessing officer.

9. The learned Departmental Representative argued that in this case the assessing officer had made fairly detailed enquiry and given elaborate reasons for making additions to the declared trading results. The assessing officer could establish that the name of M/s. Shanti Traders had been utilized by the assessed to inflate cost of purchases. The assessed failed to produce the party or furnish the present whereabouts of the party. It was the assessed's employee who had introduced M/s. Shanti Traders for the purpose of opening of bank account. That being so, the assessed should have been in a position to produce the party or at best inform the assessing officer about the person's whereabouts. Thus it was more or less evident that M/s. Shanti Traders either did not exist or the account of that party in the book of the assessed had been manipulated. The learned Departmental Representative argued that no other incidental expenses had been debited. The assessed was carrying on business at Ghaziabad whereas M/s. Shanti Traders situated in Kanpur. There should have been evidence of purchase of goods. No such evidence was furnished. The assessed only relied on payment by cheques which were credited in the bank account of the party. The Honble Calcutta High Court held in their judgment in CIT v. Precision Finance (P.) Ltd. (1994) 208 ITR 465 that payment by account-payee cheques was not a conclusive evidence of genuineness of the transaction. In the case of the assessed the account had been introduced by the assessed itself and, therefore, the value of such evidence was much less.

10. We have carefully considered the rival submissions. The assessing officer has pointed out that declared rate of gross profit this year has been lower than the immediately preceding assessment year and immediately succeeding assessment year. However, no addition has been made by the assessing officer on account of rate of g.p. The assessing officer has not been able to point out any defect in the accounts as maintained by the assessed so as to invoke the provisions of first proviso to section 145(1) as applicable to assessment year 1990-91. The only basis on which the account maintained by the assessed have been held to be unreliable is on the ground that M/s. Shanti Traders could not be contacted at the given address. However, the assessing officer has not carried out any exercise to determine the quantum of inflation of cost of purchase in that account, if any. The learned authorised representative of the assessed pointed out that the rates of purchase in the account of M/s. Shanti Traders fluctuated from time to time. These purchases ranged from Rs. 11,000 to Rs. 14,000. The price of goods fluctuated in the case of purchases from M/s. B.K. Steel Traders as well as the price fluctuated from Rs. 9,650 to Rs. 18,000. Hence unless any inflation in the account of Shanti Traders could be noticed on the basis of the price prevalent on the particular dates of transaction, the assessing officer was not justified in assuming that the assessed had resorted to inflation of purchase price in the account of M/s. Shanti Traders. As to the existence of M/s. Shanti Traders there is no categorical finding in the assessment order that it was a bogus party. The assessing officer only says that at the time when he made the enquiry the party was not available at that address. The argument of the assessed is that during the relevant accounting period M/s. Shanti Traders was carrying on the business from the address as given in the bills or vouchers of M/s. Shanti Traders. Whether or not the party existed at that address during the relevant time should have been a matter which could be ascertained or enquired e.g. by recording the statement of the owner of the premises and various other parties who were carrying on business in the vicinity of the premises. No such enquiry had been referred to by the assessing officer in the assessment order. According to the authorised representative of the assessed such enquiries were conducted but as results of the same were in favor of the assessed the same have not been mentioned in the assessment order. Be that as it may the assessing officer has not established that M/s. Shanti Traders was not in existence at the given address at the relevant point of time. From the mere fact that the account was introduced by the assessed's employee and that amounts of cheques issued by the assessed were withdrawn immediately on the date of deposit it cannot be concluded that M/s. Shanti Traders was not a genuine party. The addition has been worked out by the assessing officer on suspicion and without any sustained enquiry. Even the case of inflated purchases had not been made out on any reliable basis. The assessing officer has simply taken the instances of a particular day of purchase from M/s. B.K. Steel Corpn. The case of the assessed is that no purchases were made from M/s. Shanti Traders on that date. Unless the prices of the same day and same material were compared it could not be concluded that there was any inflation in the purchase price as recorded by Shanti Traders. As the matter stands the addition has been made on suspicion, conjectures and surmises.

11. Coming now to the question of fall in the rate of g.p. the comparative position has been that this year the assessed disclosed g.p. at Rs. 2,49,899 as against g.p. of Rs. 1,03,884 in assessment year 1989-90 and Rs. 2,18,748 in assessment year 1991-92. Hence in so far as the quantum of g.p. is concerned the same is much higher as compared to the immediately preceding year or immediately succeeding assessment year. Hence on the basis of decline in the rate of g.p. alone adverse inference cannot be drawn against the assessed more so when the assessed was dealing in a commodity which was subject to volatile fluctuation on daily basis. We, therefore, direct deletion of the addition of Rs. 6,20,461 made by the assessing officer.

12. Ground of appeal Nos. 1 to 3 are directed against refusal to grant continuation of registration to the assessed. Facts of the case in this regard are that the assessing officer found that the return of income had not been signed by a partner of the firm. The assessing officer, therefore, held that the assessed was not entitled the benefit of registration. During the course of hearing before us the learned authorised representative of the assessed argued that the assessed had been duly applied for continuation of registration. That application had duly signed by all the partners. The assessed firm had been granted registration in the earlier assessment years. Hence the assessing officer was bound to grant continuation of registration to the assessed as all the requirements had been satisfied. If he had entertained any doubts about the genuineness of the firm, the assessing officer should have passed a separate order of cancellation of registration. The learned authorised representative of the assessed argued that the same return of income which was signed by Anil Kumar who had power of attorney on behalf of the partners was accepted by the assessing officer for the purpose of making assessment order. After having acted upon the return of income the assessing officer could not object the same for the purpose of grant of registration. The assessed had submitted before the learned CIT(A) that if the assessing officer did not find the return of income to be proper and justified he should have taken action under section 139(9). The learned CIT(A) has not gone into that aspect at all. On consideration of the matter we see considerable force in these contentions of the assessed. We, therefore, direct that the assessed may be granted continuation of registration under section 184(7) and thereafter the assessing officer may take such action as he ma be advised, in case any doubts are entertained in relation to the genuineness of the firm.

13. Ground of appeal No. 5 relating to disallowance out of staff welfare expenses was not pressed. Hence the same is rejected.

14. In the result, this appeal is partly allowed.