C.S.Garments, Tiruppur V. DCIT, Tiruppur

ITA 583/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8729 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 02-06-2016
• Assessment Year: 2012-2013
• Appeal Filed On: 11-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR U ANJANEYALU
• Assessee Lawyers: T BANUSEKAR
• Keywords: Bogus purchase; Business expenditure
• Section: 40A(3); 131

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI . . . , . !'# ! , % !& BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ ITA NO.583/MDS/2016 ( )( / ASSESSMENT YEAR : 2012-13 M/S C.S. GARMENTS, 42, KARUMARAMPALAYAM MANNARAI, TIRUPUR 641 607. PAN : AACFC 0719 J V. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1, TIRUPUR. (+,/ APPELLANT) (-.+,/ RESPONDENT) +, / 0 / APPELLANT BY : SH. T. BANUSEKAR, CA -.+, / 0 / RESPONDENT BY : DR. U. ANJANEYALU, CIT 1 / 2% / DATE OF HEARING : 02.06.2016 3') / 2% / DATE OF PRONOUNCEMENT : 31.08.2016 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) 3, COIMB ATORE, DATED 18.12.2015 AND PERTAINS TO ASSESSMENT YEAR 2012-13. 2. SH. T. BANUSEKAR, THE LD. REPRESENTATIVE FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE IS A PARTNERSHIP FIRM E NGAGED IN THE 2 I.T.A. NO.583/MDS/16 BUSINESS OF EXPORT OF GARMENTS. THE ISSUE ARISES F OR CONSIDERATION IS WITH REGARD TO DISALLOWANCE OF ` 3,01,04,150/- BEING THE EXPENDITURE CLAIMED BY THE ASSESSEE TOWARDS PURCHAS ES. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSES SEE ON THE GROUND THAT THESE ARE ALL BOGUS CREDITS / PURCHASES . DURING THE YEAR UNDER CONSIDERATION, ACCORDING TO THE LD. REPRESENT ATIVE, THE ASSESSEE WAS DOING BUSINESS WITH ITS OWN FUNDS TO T HE EXTENT OF ` 2,30,00,000/-, OUT OF WHICH AROUND ` 68,00,000/- WAS INVESTED IN FIXED ASSETS AND THE ASSESSEE WAS HAVING LIQUID CAS H OF ` 1,60,00,000/- FOR WORKING CAPITAL. THE ASSESSEE DI D NOT AVAIL ANY LOAN FROM BANK OR FINANCIAL INSTITUTION. THE ASSES SEE HAS EARNED AN INCOME OF 7 .20%. EVEN THOUGH THE AVERAGE NET INCOME FOR THE ASSESSMENT YEAR 2011-12 WAS 0.89% AND FOR THE ASSES SMENT YEAR 2010-11 WAS 0.62%, DUE TO DISALLOWANCE OF ` 3,01,04,150/-, THE NET PROFIT GOES TO 32.07% WHICH IS IMPOSSIBLE IN THIS L INE OF BUSINESS. THE AVERAGE GROSS INCOME RETURNED BY THE ASSESSEE R EGULARLY WAS RANGING FROM 0.32% TO 9.15%. IN FACT, THE GROSS IN COME RETURNED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2013-14 WAS 5. 97% AND FOR THE ASSESSMENT YEAR 2011-12, IT WAS ONLY 1.32%. SI MILARLY, FOR THE ASSESSMENT YEAR 2010-11, THE RETURNED INCOME WAS ON LY 4.24%. THEREFORE, ACCORDING TO THE LD. REPRESENTATIVE, IF THE DISALLOWANCE 3 I.T.A. NO.583/MDS/16 WAS MADE BY THE ASSESSING OFFICER TOWARDS EXPENSES, THE GROSS PROFIT RATIO WILL GO TO 28.60% AND NET PROFIT WOULD BE 32.07%. THIS KIND OF PROFIT IS IMPOSSIBLE TO EARN. HENCE, ACCOR DING TO THE LD. REPRESENTATIVE, THE DISALLOWANCE MADE BY THE ASSESS ING OFFICER IS HIGHLY ARBITRARY, THEREFORE, IT NEEDS TO BE DELETED . 3. SHRI T. BANUSEKAR, THE LD. REPRESENTATIVE FOR TH E ASSESSEE, FURTHER SUBMITTED THAT THE ASSESSEE HAS TO PURCHASE RAW MATERIALS LIKE YARN AND FABRICS FROM MANUFACTURERS, DEALERS A ND THROUGH BROKERS IN THE OPEN MARKET. THE RAW MATERIALS ARE SOURCED FROM GREY MARKET. WHEN THE ASSESSEE PURCHASED RAW MATER IAL FROM GREY MARKET, THE SUPPORTING INVOICES MAY NOT BE AVAILABL E. ACCORDING TO THE LD. REPRESENTATIVE, PURCHASING RAW MATERIAL FRO M GREY MARKET WILL HAVE AN ADVANTAGE OF COST TO THE ASSESSEE. TH ERE WAS A SUBSTANTIAL DIFFERENCE IN THE PRICE OF GOODS PURCHA SED IN THE GREY MARKET AND FROM THE REGULAR MARKET. DUE TO STATUTO RY RESTRICTIONS, THE LEGITIMATE BUSINESS EXPENDITURE WAS NOT BOOKED IN THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE. MOREOVER, THE MATERIAL PURCHASED THROUGH GREY MARKET WAS ALSO NOT BROUGHT IN THE BOOKS. ACCORDING TO THE LD. REPRESENTATIVE, THE ASSESSEE H AS ENOUGH IN- HOUSE MANPOWER AND HUMAN RESOURCES TO CARRY OUT MAN UFACTURING 4 I.T.A. NO.583/MDS/16 ACTIVITY. THE PAYMENT AS PER THE TRADING ACCOUNT S HOWN IN THE BOOKS OF ACCOUNT IS ONLY TO THE EXTENT OF ` 18.59 LAKHS WHICH IS CONSIDERABLY LOW COMPARING TO THE TOTAL PRODUCTION MADE BY THE ASSESSEE. ACCORDING TO THE LD. REPRESENTATIVE, THE ASSESSEE CANNOT MANUFACTURE THE ENTIRE GOODS IN-HOUSE ON THE COST OF ` 18.59 LAKHS. THE ASSESSEE HAS TO INCUR ADDITIONAL COST F OR PURCHASING RAW MATERIAL LIKE YARN, FABRICS, ETC. OVER AND ABOVE WH AT WAS DISCLOSED IN THE BOOKS OF ACCOUNT. IN ORDER TO REGULARIZE TH E PURCHASES MADE FROM GREY MARKET AND THE PRODUCTION COST, VOUCHERS UNDER DIFFERENT HEADS WERE OBTAINED, WHICH WERE USED FOR ACCOUNTING PURPOSES. EVEN THOUGH THE DEPARTMENT MAY NOT APPRECIATE THE W AY IN WHICH THE VOUCHERS WERE OBTAINED, ACCORDING TO THE LD. RE PRESENTATIVE, IT WOULD STAND TO TEST OF SCRUTINY BY THE INCOME-TAX A UTHORITIES. ACCORDING TO THE LD. REPRESENTATIVE, THE ASSESSEES TURNOVER WAS VERY HIGH. THE MANUFACTURING OPERATION OF THE ASSE SSEE WAS ALSO VERY COMPLEX, SINCE THE ASSESSEE HAS TO MEET THE EX PECTED STANDARDS FIXED BY THE COMPANIES WHICH ARE IMPORTIN G FABRICS. ACCORDING TO THE LD. REPRESENTATIVE, THE ASSESSEE C ONSUMED RAW MATERIAL AT 33.79% FOR THE ASSESSMENT YEAR 2012-13 AS AGAINST 56.87% FOR THE EARLIER YEAR. SIMILARLY, THE IN-HOU SE EXPENSES WERE ONLY 63.79% AS AGAINST 70.70% FOR THE EARLIER YEAR. THE LD. 5 I.T.A. NO.583/MDS/16 REPRESENTATIVE FURTHER SUBMITTED THAT WITHOUT SUCH PURCHASES FROM GREY MARKET, THE IN-HOUSE PRODUCTION COULD NOT HAVE BEEN ACHIEVED BY THE ASSESSEE. THE EXPENDITURE CLAIMED BY THE AS SESSEE IS, IN FACT, VERY LESS FOR THE YEAR UNDER CONSIDERATION IN TERMS OF PERCENTAGE FOR THE OTHER YEARS. THEREFORE, IT CANN OT BE SAID THAT THE PURCHASES CLAIMED BY THE ASSESSEE ARE BOGUS. EVEN IF THE EXPENSES CLAIMED FOR PURCHASE OF RAW MATERIAL ARE U NSATISFACTORY TO THE ASSESSING OFFICER, ACCORDING TO THE LD. REPRESE NTATIVE, THE ASSESSING OFFICER HAS TO EXAMINE THE ACTUAL CONSUMP TION OF RAW MATERIAL AND PROFIT. ACCORDING TO THE LD. REPRESEN TATIVE, WITHOUT PURCHASE OF RAW MATERIAL, THE ASSESSEE COULD NOT HA VE MANUFACTURED THE FINISHED GOODS AS DECLARED, THEREF ORE, THE CIT(APPEALS) IS NOT JUSTIFIED IN CONFIRMING THE ORD ER OF THE ASSESSING OFFICER. 4. ON THE CONTRARY, DR. U. ANJANEYALU, THE LD. DEPA RTMENTAL REPRESENTATIVE, SUBMITTED THAT THE ASSESSEE BOOKED ENORMOUS AMOUNT OF BOGUS EXPENDITURES. ACCORDING TO THE LD. D.R., THERE MAY BE SOME DIFFICULTY FOR THE ASSESSEE IN CARRYING OUT ITS BUSINESS ACTIVITY. IT DOES NOT MEAN THAT THE ASSESSEE CAN V IOLATE THE PROVISIONS OF LAW. SINCE THE ASSESSEE CLAIMS THAT RAW MATERIALS 6 I.T.A. NO.583/MDS/16 WERE PURCHASED IN GREY MARKET, IN ALL PROBABILITY, THE ASSESSEE MIGHT HAVE PAID THE PURCHASE PRICE IN CASH CONTRARY TO THE PROVISIONS OF SECTION 40A(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT'). ACCORDING TO THE LD. D.R., THE OBJECT OF SECTION 40A(3) OF THE ACT IS TO CURB THE GREY MARKET. 5. REFERRING TO THE ASSESSMENT ORDER, THE LD. D.R. POINTED OUT THAT THE ASSESSING OFFICER, DURING THE COURSE OF AS SESSMENT PROCEEDING, FOUND THAT THE TOTAL CREDIT BALANCE WAS ` 4.18 CRORES OUT OF WHICH, A SUM OF ` 3.14 CRORES WAS OUTSTANDING IN RESPECT OF FIVE PARTIES. THE ASSESSING OFFICER FOUND THAT THE FIVE CREDITORS ESTIMATED THEIR INCOME WITHOUT MAINTAINING ANY PROP ER BOOKS OF ACCOUNT. ACCORDING TO THE LD. D.R., IN THE ABSENCE OF ANY MATERIAL AVAILABLE ON RECORD TO SUBSTANTIATE THE CREDITWORTH INESS OF FIVE PARTIES FROM WHOM THE ASSESSEE SAID TO HAVE PURCHAS ED THE RAW MATERIAL ON CREDIT, THE ASSESSING OFFICER HAS RIGHT LY TREATED THE SO- CALLED PURCHASE AS BOGUS PURCHASE. IN FACT, A SWOR N STATEMENT WAS RECORDED BY THE ASSESSING OFFICER AFTER EXAMINING T HE SO-CALLED CREDITORS UNDER SECTION 131 OF THE ACT. ACCORDING TO THE LD. D.R., EACH ONE OF THE CREDITORS CLAIMED BEFORE THE ASSESS ING OFFICER THAT THEY HAVE DONE JOB WORK LIKE EMBROIDERY, STITCHING, CHECKING AND 7 I.T.A. NO.583/MDS/16 SEQUENCING TO THE EXTENT OF ` 8 LAKHS TO 12 LAKHS APPROXIMATELY ON AD HOC AND PIECE RATE BASIS. THE ASSESSING OFFICER , ON EXAMINATION OF RESPECTIVE PARTIES, FOUND THAT CHEQUES ISSUED BY THE ASSESSEE WERE IMMEDIATELY ENCASHED. ALL THE FIVE CREDITORS ARE HAVING BANK ACCOUNT IN THE SAME BRANCH. ACCORDING TO THE LD. D .R., THE ASSESSEE ITSELF ADMITTED THAT THEY INTRODUCED BOGUS EXPENDITURE IN THE BOOKS, THEREFORE, THE CIT(APPEALS) HAS RIGHTLY CONFIRMED THE ORDER OF THE ASSESSING OFFICER. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. ADMITTEDLY, THE ASSESSEE-PARTNERSHIP FIRM ENGAGED IN THE BUSINESS M ANUFACTURING AND EXPORT OF GARMENTS. DURING THE COURSE OF ASSES SMENT PROCEEDING, THE ASSESSING OFFICER FOUND THAT THE SO -CALLED EXPENDITURE CLAIMED BY THE ASSESSEE TO THE EXTENT O F ` 3,01,04,150/- IS BOGUS AND NO SUCH PURCHASES WERE MADE AS CLAIMED BY THE ASSESSEE. THE ASSESSEE APPEARS TO HAVE CLAIMED BEF ORE THE LOWER AUTHORITIES THAT CREDIT PURCHASES WERE MADE FROM FI VE PARTIES, NAMELY, (I) BAMBOO CHECKING CENTRE; (II) R.V.S. STI TCHING CENTRE; (III) SHANKAR HAND EMBROIDERS; (IV) SILKY SHINE FAS HION; AND (V) S.K. SQUANCES. THE ASSESSEE ALSO CLAIMED THAT RAW MATERIAL, SUCH 8 I.T.A. NO.583/MDS/16 AS YARN AND FABRICS, ARE PURCHASED FROM GREY MARKET SINCE SUCH PURCHASE IS COST ADVANTAGE TO THE ASSESSEE. THE FA CT IS THAT EXISTENCE OF GREY MARKET IN THIS LINE OF BUSINESS I S NOT IN DISPUTE. WHEN THE EXISTENCE OF GREY MARKET IN THIS LINE OF B USINESS IS NOT IN DISPUTE, THE CLAIM OF THE ASSESSEE THAT THEY HAVE P URCHASED RAW MATERIAL SUCH AS YARN AND FABRICS FROM SUCH GREY MA RKET CANNOT BE DOUBTED AT ALL. THE ASSESSEE ADMITTEDLY HAS NOT MA INTAINED ANY PROPER BOOKS OF ACCOUNT AND THE ASSESSEE ITSELF ADM ITTED THAT THE GOODS PURCHASED FROM GREY MARKET ARE NOT ROUTED THR OUGH BOOKS MAINTAINED IN THE REGULAR COURSE. THE EXPENDITURE BOOKED IN THE BOOKS OF ACCOUNT IS ONLY ` 18.59 LAKHS. THE ASSESSEE ITSELF RETURNED AN INCOME OF ` 57,07,989/-. WHEN THE ASSESSEES EXPENDITURE IS ONLY ` 18.59 LAKHS, AS RIGHTLY SUBMITTED BY THE LD. REPRES ENTATIVE FOR THE ASSESSEE, THE ASSESSEE COULD NOT HAVE EARNED ` 57,07,989/-. THEREFORE, THE BOOKS OF ACCOUNT MAINTAINED BY THE A SSESSEE ARE NOT REFLECTING THE CORRECT INCOME OF THE ASSESSEE. FRO M THE MATERIAL AVAILABLE ON RECORD, IT IS OBVIOUS THAT THE ASSESSE E PURCHASED RAW MATERIAL IN GREY MARKET OUTSIDE THE BOOKS OF ACCOUN T. 7. THE ASSESSING OFFICER MADE CASUAL REFERENCE ABOU T SECTION 40A(3) OF THE ACT REGARDING USE OF CASH FOR PURCHAS E OF RAW MATERIAL 9 I.T.A. NO.583/MDS/16 IN THE GREY MARKET. IT IS NOT THE CASE OF REVENUE THAT THE ASSESSEE HAS PAID ` 20,000/- TO ANY PARTICULAR PERSON ON A PARTICULAR D AY. THE ASSESSING OFFICER CANNOT PRESUME THAT THE ASSESSEE PAID ` 20,000/- AND ABOVE FOR PURCHASE OF RAW MATERIAL IN GREY MARK ET. AS RIGHTLY CONTENDED BY THE LD. D.R., THE OBJECT OF SECTION 40 A(3) OF THE ACT IS TO CURB THE GREY MARKET AND CURTAIL THE CIRCULATION OF BLACK MONEY. IF THE ASSESSING OFFICER HAS ANY DOUBT, HE HAS TO BRIN G ON RECORD THE DETAILS OF PAYMENT MADE BY THE ASSESSEE IN CASH EXC EEDING ` 20,000/- TO ANY PARTICULAR INDIVIDUAL. UNFORTUNATE LY, THE ASSESSING OFFICER COULD NOT BRING ON RECORD ANY DETAILS REGAR DING THE PAYMENT MADE BY THE ASSESSEE EXCEEDING ` 20,000/-. IN FACT, THE ASSESSING OFFICER MADE DISALLOWANCE ON THE GROUND THAT THE CL AIM OF PURCHASE OF RAW MATERIAL IS BOGUS. IN OTHER WORDS, THE ASSE SSING OFFICER FOUND THAT THE ASSESSEE HAS NOT PURCHASED ANY RAW M ATERIAL AT ALL. THE FACT REMAINS THAT THE PRODUCTION OF FINISHED GO ODS IN-HOUSE IS NOT DISPUTED. THE TURNOVER OF THE ASSESSEE IS NOT DISPUTED. THEREFORE, THE ASSESSING OFFICER CANNOT DISPUTE THE PURCHASE OF RAW MATERIAL. AS RIGHTLY SUBMITTED BY THE LD. REPRESEN TATIVE FOR THE ASSESSEE, THE GROSS PROFIT WOULD GO UPTO 28.60% IN CASE THE PURCHASE OF RAW MATERIAL TO THE EXTENT ` 3,01,04,105/- IS DISALLOWED, WHICH IS EXORBITANT WHEN COMPARED TO OTHER YEARS. 10 I.T.A. NO.583/MDS/16 8. WHEN THE ASSESSEE HAS NOT MAINTAINED ANY BOOKS O F ACCOUNT FOR PURCHASE OF RAW MATERIAL IN GREY MARKET , AND THE TURNOVER AND IN-HOUSE PRODUCTION OF FINISHED GOODS ARE NOT DISPUTED, THIS TRIBUNAL IS OF THE CONSIDERED OPINIO N THAT THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS NOT J USTIFIED. 9. ACCORDINGLY, THE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE AND THE DISALLOWANCE OF ` 3,01,04,150/- IS DELETED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED ON 31 ST AUGUST, 2016 AT CHENNAI. SD/- SD/- (. !'# ! ) ( . . . ) (A. MOHAN ALANKAMONY) (N.R.S. GANESAN) % / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 5 /DATED, THE 31 ST AUGUST, 2016. KRI. / -267 87)2 /COPY TO: 1. +, /APPELLANT 2. -.+, /RESPONDENT 3. 1 92 () /CIT(A)-3, COIMBATORE 4. PRINCIPAL CIT-3, COIMBATORE 5. 7: -2 /DR 6. ;( < /GF.