Mr. B.Selvaraj, Coimbatore V. ACIT, Coimbatore

ITA 587/CHNY/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51761 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 3 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 04-08-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 29-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR I VIJAYAKUMAR
• Assessee Lawyers: S SRIDHAR
• Section: 40A(3); 131; 68

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI [BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI N.S. SAINI, ACCOUNTANT MEMBER] I.T.A.NO.587/MDS/2010 ASSESSMENT YEAR : 2007-08 SHRI B.SELVARAJ NO.103-106, DEVANAGAPET STREET NO.1 COIMBATORE 641 001 VS THE ACIT CIRCLE III COIMBATORE [PAN AGVPS9258F ] (APPELLANT) (RESPONDENT) I.T.A.NO.947/MDS/2010 ASSESSMENT YEAR : 2007-08 THE ACIT CIRCLE III COIMBATORE VS SHRI B.SELVARAJ NO.103-106, DEVANAGAPET STREET NO.1 COIMBATORE 641 001 (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI S.SRIDHAR DEPARTMENT BY : DR.I.VIJAYAKUMAR, CIT/DR DATE OF HEARING : 04-08-2011 DATE OF PRONOUNCEMENT : 23-08-2011 O R D E R PER HARI OM MARATHA, JUDICIAL MEMBER: THESE ARE CROSS APPEALS EMANATING FROM THE APPELLATE ORDER DATED 26.3.2010 PASSED BY THE LD. CIT(A), COIMBATOR E, FOR ASSESSMENT YEAR 2007-08. ITA 587 & 947/10 :- 2 -: 2. BEFORE WE ADDRESS THE REAL CONTROVERSY BETWEEN T HE PARTIES, IT BECOMES IMPERATIVE TO NARRATE THE FACTS OF THE CASE . THE ASSESSEE, NAMELY, SHRI B.SELVARAJ, AN INDIVIDUAL, FILED HIS R ETURN OF INCOME FOR ASSESSMENT YEAR 2007-08 ON 28.9.2007. THIS RETURN OF INCOME WAS PROCESSED U/S 143(1) ON 30.8.2008 RESULTING IN NIL DEMAND. WHEN THE CASE WAS TAKEN UP FOR SCRUTINY, VARIOUS ADDITIO NS WERE MADE. ON PERUSAL OF THE BOOKS OF ACCOUNT AND THE ACCOMPANYIN G MATERIALS IN SUPPORT OF IT, IT WAS NOTICED BY THE ASSESSING OFFI CER THAT THE ASSESSEE HAD SHOWN PURCHASES FROM M/S SRI GANAPATHI TEXTILE S, D.B. ROAD, COIMBATORE, AS DETAILED BELOW: 03/04/2006 ` 528,000 02/05/2006 ` 530,000 29/09/2006 ` 708,000 06/10/2006 ` 519,000 11/10/2006 ` 177,000 20/10/2006 ` 330,000 21/10/2006 ` 330,000 21/12/2006 ` 324,000 27/12/2006 ` 243,000 TOTAL ` 36,77,800 3. BEFORE WE PROCEED FURTHER, WE MAY MENTION THAT THE ASSESSEE IS IN THE BUSINESS OF WEAVING FABRICS UNDER THE NAME A ND STYLE ANNAPOORNA FASHIONS FOR THE LAST MORE THAN TEN YE ARS. THE ASSESSEE BUYS YARN, GETS IT DYED AND GETS THE WOVEN FABRICS MANUFACTURED ITA 587 & 947/10 :- 3 -: THROUGH WEAVERS AS PER THE SPECIFICATION AND REQUIR EMENTS OF HIS CUSTOMERS. IN OTHER WORDS, THE ASSESSEE GETS THE F ABRIC WOVEN THROUGH OUTSOURCING. THE ASSESSING OFFICER STARTE D VERIFYING THE GENUINENESS OR OTHERWISE OF THESE TRANSACTIONS, MEN TIONED ABOVE, BY WRITING A LETTER DATED 16.11.2009 TO M/S SRI GANAPA THI TEXTILES, WHICH WAS RETURNED UNSERVED BY THE POSTAL AUTHORITIES WI TH THE REMARK NOT AVAILABLE. WHEN THIS FACT WAS CONFRONTED WITH TH E ASSESSEE, HE REPLIED THROUGH LETTER DATED 1.12.2009 THAT ALL THE TRANSACTIONS INCLUDING PAYMENTS IN CONNECTION WITH THE PURCHASES WERE BEING MADE THROUGH AGENTS. TO ILLUSTRATE, IT WAS STATED THA T AS ON 31.3.2006 A SUM OF ` 30,65,800/- WAS OUTSTANDING AND DUE WHICH WAS PAI D ON DIFFERENT DATES STARTING FROM 25.4.2006 TO 5.10.20 06 THROUGH CROSSED CHEQUES DRAWN ON TAMILNADU MERCANTILE BANK BY HANDI NG OVER THEM TO AGENTS. THE DETAILS OF THE CHEQUES WITH AMOUNT SO ISSUED AND HANDED OVER TO THE AGENT(S) ARE AS UNDER: DATE OF PAYMENT CHEQUE NO AMOUNT 25/4/2006 356263 2,50,000/ - 2/5/2006 356274 2,50,000/- 16/5/2006 356283 2,50,000/- 27/5/2006 356288 2,50,000/- 11/7/2006 358901 2,50,000/- 20/7/2006 358910 2,50,000/- 3/8/2006 358919 3,00,000/- 17/8/2006 358943 3,00,000/- ITA 587 & 947/10 :- 4 -: 22/8/2006 358968 2,50,000/- 7/9/2006 358998 3,00,000/- 21/9/2006 359028 1,50,000/- 28/9/2006 359037 1,00,000/- 5/10/2006 359601 1,65,000/- TOTAL 30,65,000/- 4. THEREAFTER, THE ASSESSING OFFICER ISSUED A LETT ER TO TAMILNADU MERCANTILE BANK, SELVAPURAM BRANCH, COIMBATORE, SEE KING DETAILS FROM THE BANK AS TO IN WHICH ITS BRANCH THE CHEQUES H AVE BEEN CREDITED. THE BANK REPLIED, THROUGH LETTER DATED 17.11.2009, THAT THE CHEQUES ISSUED BY SHRI SELVARAJ WERE ENCASHED IN COIMBATORE AT R.S.PURAM BRANCH OF TAMILNADU MERCANTILE BANK AFTER A PERIOD OF ABOUT 6-7 MONTHS FROM THE DATE OF ISSUE OF THE CHEQUES. THE DETAILS OF ENCASHMENTS WERE ALSO SUPPLIED WHICH ARE TABULATED AS UNDER: CHEQUE NO. DATE OF ENCASHMENT AMOUNT 356263 18/10/2006 2,50,000/- 356274 31/10/2006 2,50,000/- 356274 14/11/2006 2,50,000/- 356283 14/11/2006 2,50,000/- 356288 27/11/2006 2,50,000/- 358901 9/1/2007 2,50,000/- 358910 20/1/2007 2,50,000/- 358919 1/2/2007 3,00,000/- 358943 10/2/2007 3,00,000/- 358968 21/2/2007 2,50,000/- 358998 1/3/2007 2,50,000/- ITA 587 & 947/10 :- 5 -: 359028 10/3/2007 1,50,000/- 359037 17/3/2007 1,00,000/- 359031 23/3/2007 1,65,000/- 5. THEREAFTER, THE ASSESSING OFFICER ISSUED A LETTER D ATED 23.11.2009 TO THE MANAGER OF R.S.PURAM BRANCH OF TA MILNADU MERCANTILE BANK TO FURNISH THE DETAILS OF THE BANK ACCOUNT IN WHICH THESE CHEQUES ISSUED BY SHRI SELVARAJ WERE ENCASHED . IT WAS REPLIED THROUGH LETTER DATED 24.11.2009 THAT THE CHEQUES WE RE CREDITED TO THE ACCOUNT OF SMT. KALAIVANY IN ACCOUNT NO.13615005080 0363. THE ASSESSING OFFICER MADE ENQUIRIES WITH SMT. KALAIVAN Y BY SUMMONING HER U/S 131 ON 9.12.2009; AND HER STATEMENT ON OAT H WAS RECORDED. SHE STATED THAT SHE WAS A HOUSEWIFE AND WAS NOT DOI NG ANY BUSINESS. BUT WHEN SHE WAS ASKED IF SHE WAS DOING ANY OTHER W ORK, LIKE CHEQUE DISCOUNTING JOB, SHE UNEQUIVOCALLY STATED THAT SH E HAD DONE CHEQUE - DISCOUNTING BUSINESS WITH SOME BUSINESSMEN BETWEEN THE YEAR 2005 TO 2008. AFTER STATING THAT SHE HAD NO BUSINESS C ONNECTION WITH M/S ANNAPOORNA FASHIONS, THE PROPRIETARY CONCERN OF THE ASSESSEE, SHE HAS ACCEPTED THAT SHE HAD DONE CHEQUE DISCOUNTING F OR HIM AND HAD OBTAINED COMMISSION FROM HIM WHICH HAS BEEN REFLECT ED IN HER RETURN OF INCOME FOR ASSESSMENT YEAR 2007-08. HOWEVER, SH E DENIED BEING AN AGENT OF M/S SRI GANAPATHI TEXTILES. UNDER THES E CIRCUMSTANCES, THE ASSESSING OFFICER PROPOSED TO DISALLOW THE PURC HASES OF ITA 587 & 947/10 :- 6 -: ` 36,77,800/- AND PAYMENTS MADE TO BANK AS WELL AS OU TSTANDING CREDIT OF ` 36,78,600/- BECAUSE THE ASSESSEE WAS UNABLE TO PROV E THE GENUINENESS OF THESE PURCHASES AS WELL AS OF PAYMEN TS. AGAINST WHICH THE ASSESSEE THROUGH LETTER DATED 17.12.009 REPLIED THAT YARN WAS PURCHASED FROM M/S SRI GANAPATHI TEXTILES FOR AN AM OUNT TOTALING TO ` 36,77,800/- IN THE YEAR 2006-07. IT WAS STATED THA T THE PURCHASES ARE DULY RECORDED IN THE STOCK REGISTER ALONGWITH I TS CONSUMPTION IN THE MANUFACTURE OF WOVEN FABRICS. IN SUPPORT THEREOF P RINTOUTS OF THE STOCK REGISTER WERE ENCLOSED. IT WAS FURTHER EXPLA INED THAT IN THE HANDLOOM FABRICS BUSINESS THE USUAL PRACTICE IS TO MAKE THE PURCHASES THROUGH AGENTS, WHO HAVE WIDE CONTACTS WITH THE YA RN SUPPLIERS AND MILLS AND THE PAYMENTS THROUGH CHEQUES ARE ALSO MA DE TO THEM. THE PURCHASES FROM M/S SRI GANAPATHI TEXTILES WERE MADE THROUGH AGENT(S) AND THEIR PAYMENTS WERE GIVEN TO THE AGENT (S). IT WAS FURTHER EXPLAINED THAT ONLY FROM THE NOTICE THE ASS ESSEE CAME TO KNOW THAT M/S SRI GANAPATHI TEXTILES HAS SHIFTED ELSEWHE RE AND NOT FUNCTIONING AT THE GIVEN ADDRESS, GIVEN IN THE INVO ICE. ACCORDING TO THE ASSESSEE, ALL THE TRANSACTIONS ARE GENUINE AND AS PER RECORD, THE PURCHASES WERE MADE FROM M/S SRI GANAPATHI TEXTILES AND THESE CANNOT BE DISALLOWED BECAUSE DUE TO CHANGE OF ADD RESS THE LETTER SENT TO IT RETURNED UNSERVED. WITH REFERENCE TO TH E RECORD RELATING TO PURCHASES FURNISHED BEFORE THE ASSESSING OFFICER, IT WAS STATED THAT ITA 587 & 947/10 :- 7 -: WITH THE HELP OF THOSE DOCUMENTS, THE ASSESSEE HAS DISCHARGED ITS PRIMARY ONUS CAST UPON IT TO PROVE THE PURCHASES. IT WAS EXPLAINED THAT THE FACTORS WHICH ARE BEYOND THE CONTROL OF TH E ASSESSEE CANNOT BE HIGHLIGHTED TO REJECT THE EXPLANATION INASMUCH A S THE SALE CONSIDERATION SHOULD BE ON THE ACCEPTABILITY OF THE EXPLANATION OFFERED NOT ON THE ADEQUACY OF THE EVIDENCE MARSHALED TO SU BSTANTIATE THE PURCHASE CLAIM. IT WAS STRONGLY SUBMITTED THAT ALL THE PURCHASES WERE MADE THROUGH PROPER BANKING CHANNELS ADHERING TO TH E ACCEPTED BUSINESS PRACTICES AND PRUDENCE. THE ASSESSEE OBJE CTED TO THE INFERENCE OF THE ASSESSING OFFICER AGAINST THE PURC HASES BY SUBMITTING THAT HOW THE SALE COULD BE EFFECTED WITHOUT MAKING PURCHASES OF THE RAW MATERIALS. IT WAS ARGUED THAT EVEN IF M/S SRI GANAPATHI TEXTILES WOULD HAVE CLOSED ITS BUSINESS, IT WOULD NOT MAKE T HE PURCHASES INGENUINE. WITH REGARD TO THE CLOSING BALANCE AS O N 31.3.2006, IT WAS SUBMITTED THAT THE ASSESSEE ISSUED POST DATED CHEQU ES IN THE NAME OF M/S SRI GANAPATHI TEXTILES AND THE CHEQUES WERE DUL Y CROSSED AS STIPULATED U/S 40A(3) OF THE ACT AND WERE SENT THRO UGH THE AGENT(S) TO PROCURE YARN FOR THE ASSESSEE. IT WAS EDUCATIVELY STATED THAT THE USUAL PRACTICE IN THE HANDLOOM INDUSTRY IS TO ISSUE POST DATED CHEQUES FOR WANT OF IMMEDIATE LIQUID FUNDS AND THESE CHEQ UES ARE USUALLY DISCOUNTED WITH CHEQUE-DISCOUNTERS AGAINST SOME C OMMISSION CHARGES TO FACILITATE YARN SUPPLIERS IMMEDIATE NEE DS. IT WAS STATED ITA 587 & 947/10 :- 8 -: THAT THE ASSESSEE DID NOT HAVE ANY DIRECT DEALING W ITH WITH BILL DISCOUNTING PEOPLE AND ALL THE CHEQUES ARE DULY CRO SSED WHICH FACT HAS EVEN BEEN CONFIRMED BY THE TAMILNADU MERCANTILE BANK, SELVAPURAM BRANCH. THE ASSESSEE HAS DISCARDED THE DEROGATORY PORTION OF THE STATEMENT OF SMT. KALAIVANY BEING TA TTERED AND FETCHERED. THE ASSESSEE DEMANDED CROSS EXAMINATION OF SMT. KALAIVANY ALONGWITH A COPY OF HER STATEMENT. BUT I NSTEAD THE ASSESSING OFFICER SUMMONED THE ASSESSEE U/S 131 AND HIS STATEMENT WAS RECORDED IN WHICH HE HAS REPLIED TO SPECIFIC QU ESTION WHICH (ANSWERS) CAN BE SUMMARIZED AS UNDER: - AII PAYMENTS TO THE PURCHASERS ARE MADE BY CROSSED CHEQUES . - DURING THE YEAR HE PURCHASED YARN FROM SRI GANAPATHI TEXTILES OF VARIOUS COUNTS LIKE 40S AND 60S. - THE ASSESSEE DID NOT KNOW WHO IS THE PARTNER OR PROPRIETOR OF SRI GANAPATHI TEXTILES, AND THAT THE ASSESSEE WAS DEALING WITH THEIR AGENTS LIKE KAVI, SENTHI I AND SARAVANAN , WHOSE PRESENT WHEREABOUTS ARE NOT KNOWN TO THE ASSESSEE. - THE PAYMENTS TO SRI GANAPATHI TEXTILES WERE MADE BY CROSSED CHEQUES AND HANDED OVER TO THEIR AGENTS AND THERE AFTER HE DID NOT BOTHER ABOUT THEM, THAT IS WHEN IT WAS ENCASHED OR WHO EN CASHED THE CHEQUES. - THE ASSESSEE SAID THAT HE WAS MAINTAININ91 DAY TO DAY STOCK BOOK, BUT IT WAS NOT HANDED TO THE AUDITOR AT THE TIME OF AUDIT. - THE ASSESSEE EXPRESSED HIS INABILITY TO PROD UCE THE PROPRIETOR/PARTNER OF SRI GANAPATHI TEXTILES OR ITA 587 & 947/10 :- 9 -: THEIR AGENTS WHO ARE NOW NOT VISIBLE IN THE MARKET. - AFTER READING THE SWORN STATEMENT OF SMT. KALAIVANY HE STATED THAT HE HAD NO COMMENTS. 6. AFTER DISCUSSING EACH AND EVERY POINT RAISED ON B EHALF OF THE ASSESSEE WITH REFERENCE TO SECTION 40A(3), THE ASSE SSING OFFICER HAS FINALLY DUBBED THE EXPLANATION OF THE ASSESSEE, REG ARDING THE PURCHASES AND PAYMENTS TO M/S SRI GANAPATHI TEXTILE S, AS EVASIVE, INCONSISTENT AND CONTRADICTORY. CONSEQUENTLY, HE H AS DISALLOWED THE PURCHASES OF ` 36,77,800/- AND PAYMENTS OF ` 30,65,800/-, MADE DURING FINANCIAL YEAR 2006-07, AND HAS THUS MADE CO NSEQUENT ADDITIONS. AGGRIEVED, THE ASSESSEE FILED APPEAL AN D THE LD. CIT(A) HAS ACCEPTED PAYMENT OF ` 30,65,800/-AS GENUINE, BUT HAS SUSTAINED THE ADDITION OF ` 36,77,800/- MADE ON ACCOUNT OF INGENUINITY OF PURC HASE TRANSACTIONS FROM M/S SRI GANAPATHI TEXTILES. NOW, BOTH THE PARTIES ARE AGGRIEVED. THE ASSESSEE HAS RAISED THE FOLLOWI NG GROUNDS: 1. THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) I, COIMBATORE DATED 26-3-2010 IN ITA NO. 161/09-10 FOR THE ABOVE MENTIONED ASSESSMENT YEAR IS CONTRARY TO LAW, FACTS, AND IN THE CIRCUMSTANCES OF THE CASE. 2. THE CIT (A) ERRED IN SUSTAINING THE DISALLOWA NCE OF THE CLAIM OF PURCHASES TO THE EXTENT OF ` 36,77,800/- FROM M/S.SRI GANAPATHY TEXTILES ON THE FACTS AND IN THE 'CIRCUMSTANCES OF THE CASE WITHOUT ASSIGNING PROPER REASONS AND JUSTIFICATION. ITA 587 & 947/10 :- 10 - : 3. THE CIT(A) FAILED TO APPRECIATE THAT THE SUST ENANCE OF THE CLAIM OF PURCHASES FROM M/S.SRI GANAPATHY TEXTILES WAS WRONG, INCORRECT, UNJUSTIFIED, ERRONEO US AND NOT SUSTAINABLE BOTH ON FACTS AND IN LAW. 4. THE CIT(A) FAILED TO APPRECIATE THAT THE CLAIM OF PURCHASES WAS GENUINE AND PROVED BEFORE HIM AS WELL AS IN THE ASSESSMENT PROCEEDINGS TO THE HILT INASMUCH AS NON CONSIDERATION OF THE TRADE PRACTICE IN THE CONSIDERATION OF EXPLANATION OFFERED WOULD VITI ATE THE ACTION TO MAKE THE SAID ADDITION IN THE COMPUTATION OF TAXABLE INCOME. 5. THE CIT(A) FAILED TO APPRECIATE 'THAT THE FIND INGS RECORDED IN THIS REGARD IN PARA 6 OF THE IMPUGNED. ORDER WERE WRONG, INCORRECT, UNJUSTIFIED, ERRONEOUS AND NOT SUSTAINABLE BOTH ON FACTS AND IN LAW. 6. THE CIT(A) FAILED TO APPRECIATE THAT HAVING NOT REJECTED THE FINANCIAL RESULTS/BOOKS OF ACCOUNTS, T HE SUSTENANCE OF THE DISALLOWANCE OF PURCHASES IN THE COMPUTATION OF TAXABLE TOTAL INCOME WAS INCORRECT A ND UNJUSTIFIED. 7. THE CIT(A) FAILED TO APPRECIATE THAT THE MATERI AL EVIDENCES PLACED ON RECORD COUPLED WITH TRADE PRACTICE WERE TOTALLY BRUSHED ASIDE AND IGNORED IN THE SUSTENANCE OF THE SAID DISALLOWANCE. 8. THE CIT(A) FAILED TO APPRECIATE THAT HAVING NOT VERIFIED THE FACTS AND FURTHER HAVING NOT INVESTIGA TED THE MATTER THOROUGHLY THE SUSTENANCE OF THE SAID DISALLOWANCE ON SURMISE AND SUSPICION WAS INCORRECT AND UNJUSTIFIED. 9. THE CIT(A) FAILED TO APPRECIATE THAT NON CONSID ERATION OF THE RELEVANT FACTS WOULD VITIATE THE IMPUGNED OR DER INASMUCH AS THE WRITTEN SUBMISSIONS WERE NOT APPRECIATED IN PROPER PERSPECTIVE IN PASSING OF THE IMPUGNED ORDER. ITA 587 & 947/10 :- 11 - : 10. THE CIT (A) FAILED TO APPRECIATE THAT THE NON- CONSIDERATION OF VARIOUS SUBMISSIONS ON THE MAINTENANCE OF THE BOOKS OF ACCOUNTS AS WELL AS ON THE REPORTED PROFIT FOR ASSESSMENT WOULD VITIATE TH E ACTION TO MAKE THE ADDITION MADE IN THE COMPUTATION OF TAXABLE TOTAL INCOME. 11. THE CIT (A) ERRED IN HIS DIRECTION FOR CHARGIN G ` 30,65,800/- AS THE INCOME OF THE 'PRECEDING YEAR' WHILE DELETING THE SAID ADDITION IN THE ASSESSMENT YEAR UNDER CONSIDERATION WITHOUT ASSIGNING PROPER REASONS AND JUSTIFICATION. 12. THE CIT (A) FAILED TO APPRECIATE THAT THE APP ELLATE POWERS IN GIVING THE SAID DIRECTIONS WERE 'OVER STRETCHED' AND HENCE THE FINDINGS TO THE SAID EFFEC T IN PARA 7 OF THE IMPUGNED ORDER WERE WRONG AND INVALID . 13. THE CIT (A) OUGHT TO HAVE DELETED THE SAID AD DITION BASED ON THE FACTS AND FURTHER BASED ON THE. EXPLANATIONS OFFERED AND HENCE NON CONSIDERATION OF THE RELEVANT FACTS WOULD NULLIFY THE SAID ADDITION EVEN THOUGH DELETED ON THE SAID TECHNICAL GROUND. 14. THE CIT(A) FAILED TO APPRECIATE THAT THERE WA S NO PROPER OPPORTUNITY GIVEN IN PASSING OF THE IMPUGNED ORDER AND ANY ORDER PASSED IN VIOLATION OF THE. PRINCIPLES. OF 'NATURAL JUSTICE' WOULD BE NULLITY I N LAW. 7. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) IS AGAINST FACTS AND CIRCUMSTANCES OF TH E CASE. 2. THE LEARNED CIT(A) ERRED IN DELETIN G THE DISALLOWANCE OF ` 30,65,800/- U/S 40A(3) ON THE GROUND THAT THE PAYMENTS RELATE TO THE PREVIOUS YEAR. 3. THE LEARNED CIT(A) OUGHT TO HAVE CONSIDERED THAT THOUGH THE PAYMENTS RELATED TO AN EARLIER YEAR, BUT ITA 587 & 947/10 :- 12 - : WERE MADE IN THIS ASSESSMENT YEAR, IN CONTRAVENTION OF SECTION 40A(3). FOR THESE AND OTHER GROUNDS THAT MAY-BE ADDUCED AT THE TIME OF HEARING, THE ORDER OF THE LEARNED CIT(A) MA Y BE CANCELLED AND THAT OF THE ASSESSING OFFICER RESTORE D. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE C AREFULLY COGITATED THE REASONING OF THE ASSESSING OFFICER GI VEN IN HIS ORDER FOR MAKING ADDITION AFTER DOUBTING THE GENUINITY OF PUR CHASES FROM M/S SRI GANAPATHI TEXTILES AND THE REASONS FOR REJECTING TH E CLAIM OF PAYMENTS MADE THROUGH CROSSED CHEQUES VIA AGENT(S), AS HAS B EEN CLAIMED BY THE ASSESSEE. WE HAVE ALSO PERUSED AND HIBERNATED UPON THE REASONINGS GIVEN BY THE LD. CIT(A) TO SUSTAIN ONE PART AND DELETING THE OTHER PART OUT OF ADDITIONS MADE BY THE ASSESSI NG OFFICER. IN OUR CONSIDERED OPINION, BOTH THE ADDITIONS MADE BY THE ASSESSING OFFICER ARE NOT WELL FOUNDED. THE REASONS FOR OUR ABOVE EP ILOGUE WILL FOLLOW. AT THE OUTSET, WE MAY STATE THAT THE FINDING GIVEN BY THE LD. CIT(A) IS DIAGONALLY CONTRADICTORY. IF THE PAYMENTS MADE TOW ARDS PURCHASES ARE ACCEPTED WHY AND HOW PURCHASES CAN BE DOUBTED. AT THE SAME TIME, IN OUR CONSIDERED OPINION, THE ASSESSING OFFI CER HAS ALSO STRETCHED THE ISSUE OF GENUINITY OF THE PURCHASES BY PULLING IT IN VARIOUS DIRECTIONS. IN A SENSE HE HAS ONLY BEATEN AROUND THE BUSH. PARTICULARLY FROM THAT SIDE OF THE BUSH WHICH SUIT ED HIS NOTION THAT THE PURCHASE TRANSACTIONS ARE NOT GENUINE. LET US EXAMINE THE MODUS ITA 587 & 947/10 :- 13 - : EMPLOYED FOR THE PURCHASE OF YARN IN THIS LINE OF B USINESS. TO START WHEN THE ASSESSING OFFICER HAS PROCEEDED TO SCRUTIN IZE THE RETURN OF INCOME FILED FOR THIS YEAR, HE HAS PERUSED THE RETU RN OF INCOME AND ITS ACCOMPANYING DOCUMENTS, INCLUDING THE BOOKS OF ACCO UNT AND HAS QUESTIONED THE PURCHASES FROM M/S SRI GANAPATHI TEX TILES, WHOSE DATEWISE DETAILS WE HAVE EXTRACTED IN THE FORMER PA RT OF THIS ORDER. AFTER AROUSING A DOUBT, HE HAS STARTED SUSPECTING THE GENUINENESS OF ENTIRE TRANSACTIONS. HE WROTE A LETTER TO M/S SRI GANAPATHI TEXTILES DIRECTLY, WITHOUT CALLING FOR ANY EXPLANATION FROM THE ASSESSEE. NO DOUBT, HE HAS GOT A POWER TO DO SO, BUT HE, BEING A QUASI-JUDICIAL BODY, HAS TO ACT JUDICIOUSLY. WHEN THE LETTER RET URNED UNSERVED BY THE POSTAL AUTHORITIES WITH THE REMARK NOT AVAILAB LE THERE, HE WAS DUTY BOUND TO CONFRONT THIS FACT TO THE ASSESSEE. BUT INSTEAD, HE HAS TAKEN A DIFFERENT ROUTE WITH PRE-OCCUPIED MIND AND THEREAFTER WHATEVER INVESTIGATIONS HE DID WERE IN WRONG AND DI FFERENT DIRECTIONS, AND THEIR RESULT COULD NOT MAKE A COMPLETE CHAIN OF EVENTS. THE BANK HAS CONFIRMED ALL TRANSACTIONS. THE VERSION OF THE BANK IS THAT THE CHEQUES IN QUESTION WERE ENCASHED IN THE R.S.PURAM BRANCH OF TAMILNADU MERCANTILE BANK. THE DETAILS OF CHEQUE N UMBER, DATE OF ENCASHMENT ALONGWITH AMOUNT HAVE BEEN EXTRACTED IN THE EARLIER PART OF THIS ORDER. AFTER NOTING THAT THE CHEAQUES WERE ENCASHED IN R.S.PURAM BRANCH OF TAMILNADU MERCANTILE BANK, THE ASSESSING OFFICER ITA 587 & 947/10 :- 14 - : WROTE A LETTER DATED 23.11.2009 TO THE MANAGER OF T AMILNADU MERCANTILE BANK, R.S.PURAM BRANCH. THE SENIOR MANA GER REPLIED VIDE LETTER DATED 24.11.2009 THAT THE CHEQUES WERE CREDI TED TO THE ACCOUNT OF ONE SMT. KALAIVANY IN HER ACCOUNT NUMBER WHICH I S MENTIONED IN THE EARLIER PART OF THE ORDER. IN ANY CASE, UPTO T HIS STAGE STILL WE DO NOT FIND ANY DEFECT IN THE CLAIM OF THE ASSESSEE B ECAUSE HE HAS CATEGORICALLY STATED THAT PAYMENTS WERE MADE THROU GH POST DATED CHEQUES WHICH ARE DISCOUNTED BY CERTAIN AGENT(S) TO MAKE FUNDS IMMEDIATELY AVAILABLE TO THE WEAVERS AND IT IS A L OCAL PREVALENT PRACTICE IN THIS LINE OF BUSINESS. SMT. KALAIVANY IS ONE OF SUCH AGENTS AND IN HER STATEMENT RECORDED U/S 131 ON 9.12.200 9, SHE HAS CLEARLY STATED THAT SHE HAS DONE CHEQUE-DISCOUNTING FOR M/S ANNAPOORNA FASHIONS, WHOSE PROPRIETOR IS SHRI SELVARAJ, BUT SH E HAS FAIRLY STATED THAT SHE DID NOT HAVE ANY BUSINESS DEALING WITH HIM . WHERE IS THE PROBLEM. THE ASSESSEE HAS NOT CLAIMED THAT HE HAD ANY BUSINESS CONNECTION WITH HER. THE ASSESSEE IS INTERESTED IN GETTING CONTINUAL SUPPLY OF YARN AS PER HIS BUSINESS NEEDS WHICH HE UNDERSTANDS BETTER THAN OTHERS AND THE PAYMENTS ARE MADE THROUGH POST DATED CHEQUES WHICH ARE DISCOUNTED BY SOME OTHER PERSON, MAY BE C ALLED AN AGENT OR WITH ANY OTHER NAME. SHE HAS CATEGORICALLY ACCE PTED THAT SHE HAD DONE CHEQUE DISCOUNTING AND RECEIVED COMMISSION. T HE COMMISSION SO OBTAINED BY DISCOUNTING CHEQUES HAS BEEN REFLECT ED IN HER ITA 587 & 947/10 :- 15 - : STATEMENT OF RETURN OF INCOME FOR THE ASSESSMENT YE AR 2007-08. IN A WAY, THE CONTENTION OF THE ASSESSEE IS FOUND TO BE CORRECT TO THAT EXTENT. AS THE ASSESSEE IS MORE CONCERNED IN GETTI NG YARN WOVEN THROUGH REGULAR WEAVERS, WHO ARE UNDENIABLY, NOT HA VING ANY BANK ACCOUNT(S) AND THE PRACTICE FOR PAYMENT PREVALENT IS BY ISSUANCE OF POST DATED CHEQUES WHICH ARE DISCOUNTED THROUGH AGE NT(S) AND THE CHEQUES BEING ACCOUNT PAYEE, THE ASSESSEE IS NOT EV EN REQUIRED TO KNOW THE OTHER MINOR DETAILS, ON WHICH THE ASSESSIN G OFFICER HAS BEEN INSISTING. THE ASSESSING OFFICER HAS GOT EVERY RIG HT TO SATISFY HIMSELF OBJECTIVELY, BUT WHEN THE CLAIM OF THE ASSESSEE IS FOUND TO BE SUITABLE AND PRIMA-FACIE CORRECT, THE PRIMARY ONUS CAST ON THE ASSESSEE IS TO BE TREATED AS DISCHARGED. THEREAFTER, IT IS THE DUTY OF THE ASSESSING OFFICER TO BRING SOMETHING ON RECORD COUNTERING TH E PRIMA-FACIE CLAIM. THE DEPARTMENT HAS NEITHER DIRECTLY ALLEGED NOR HAS PROVED THAT AFTER ENCASHING THE CHEQUES MONEY HAS TRAVELLED BACK TO THE ASSESSEE. THERE IS NOT EVEN AN IOTA OF ANY SUCH EVIDENCE ON R ECORD. THE ASSESSING OFFICER HAS EXAMINED THE ASSESSEE AND HE HAS CLEARLY ARTICULATED THE SEQUENCE OF EVENTS WHICH TOOK PLACE IN THE PURCHASE OF YARN FROM M/S SRI GANAPATHI TEXTILES FOR AN AMOUNT OF ` 36,77,800/-. HE HAS FOUND THE PURCHASES TO BE DULY FOUND RECORD ED IN THE STOCK REGISTER AND ALSO THE CONSUMPTION THEREOF FOR THE M ANUFACTURE OF WOVEN FABRICS WHICH IS SUPPORTED BY EVIDENCE. THE PAYMENT THROUGH ITA 587 & 947/10 :- 16 - : POST DATED CHEQUES AND SUBSEQUENT DISCOUNTING THROU GH AN AGENT(S) TO MAKE AVAILABLE IMMEDIATE PAYMENTS TO WEAVERS IN THIS LINE OF BUSINESS AND PARTICULARLY IN THE SAME AREA HAS BEEN FOUND TO BE A PREVALENT PRACTICE BY THIS VERY BENCH IN THE CASE O F M/S HANDLOOM HERITAGE LTD IN I.T.A.NOS. 1792 TO 1803/MDS/2010 & OTHERS, ORDER DATED 20.5.2011, IN WHICH ONE OF US [JM] WAS THE AU THOR. IN CASE THE SAID CONCERN M/S SRI GANAPATHI TEXTILES HAS SHIFTED ITS PLACE OF BUSINESS ELSEWHERE AND IS NOT FUNCTIONING AT THE GI VEN ADDRESS, GIVEN IN THE INVOICE, THE ASSESSEE CANNOT BE PUT TO BLAME AND THIS FACT ALONE CANNOT RENDER THE TRANSACTIONS, IN QUESTION, INGEN UINE. WE ARE IN AGREEMENT WITH THE ASSESSEE THAT THE FACTS WHICH AR E BEYOND HIS CONTROL CANNOT BE MADE A BASIS FOR REJECTING THE EN TIRE EXPLANATION. WHEN THE FACTS RELATING TO THE PURCHASES ARE AVAILA BLE IN RECORDS, WHICH ARE AVAILABLE BEFORE THE ASSESSING OFFICER, H E COULD HAVE FOUND SOME DEFECT(S) IN THEM TO REJECT THEM BUT SINCE HE HAS NOT DONE SO, HE CANNOT DRAW ALTOGETHER DIFFERENT INFERENCES BASE D ON INCOHERENT ENQUIRY RESULTS, WHICH HAVE BEEN CUT AND PASTED TO COMPLETE A STORY. WHEN THE PURCHASES ARE MADE THROUGH PROPER BANKING CHANNELS AS PER THE PREVALENT BUSINESS PRACTICES IN THE AREA, IT S HOULD BE EASILY BRUSHED ASIDE. THE PAYMENTS HAVING BEEN MADE THRO UGH POST DATED CROSSED CHEQUES AS REQUIRED U/S 40A(3), AND WITHOUT THERE BEING CONTRARY EVIDENCE, WHY THE PAYMENTS ARE DOUBTED. T HE ASSESSEE ITA 587 & 947/10 :- 17 - : HANDED OVER CHEQUES TO AGENT(S) WHO PROCURED THE YA RN FOR THE ASSESSEE FOLLOWING A USUAL PRACTICE IN THE HANDLOOM INDUSTRY, AND WHEN THE ASSESSEE WAS NOT EVEN GIVEN AN OPPORTUNITY TO CROSS EXAMINE SMT. KALAIVANY, DESPITE HE MADE A REQUEST I N WRITING FOR THAT AND HER STATEMENT WAS ALSO ONLY SHOWN, DURING ASSES SEES EXAMINATION, WHICH WE DO NOT TREAT AS LEGALLY VALID PROCEDURE, KNOWN TO THE LEGAL CIRCLES. REGARDING STOCK AVAILABILIT Y TO WHICH THE ASSESSING OFFICER HAS REFERRED TO, IS NOT OF MUCH R ELEVANCE IN VIEW OF THE FACT THAT THE ASSESSEE HAS FOUND TO HAVE MADE THE PURCHASES TO THAT EXTENT. THE QUESTION IS AS TO WHETHER THE PUR CHASES ARE GENUINE OR NOT AND NOT THAT WHAT IS THE STOCK POSITION AS O N A PARTICULAR DATE. IN THIS CASE, THE REGISTRATION NUMBER OF M/S SRI GA NAPATHI TEXTILES WAS PROVIDED TO THE ASSESSING OFFICER AND THE FACT THAT THE ASSESSEE ISSUED CROSSED CHEQUES IN THE NAME OF M/S SRI GANAPATHI TE XTILES WHICH FACT HAS NOT BEEN DENIED AND CANNOT BE DENIED BY THE DEP ARTMENT AND THE ASSESSEE HAS MADE THE PURCHASES WHICH ARE REPORTED IN HIS BOOKS OF ACCOUNT COUPLED WITH THE FACT THAT THE CHEQUES HAVE BEEN ENCASHED ALSO BY A CHEQUE DISCOUNTING AGENT NAMELY, SMT. KAL AIVANY. IT IS NOT A CASE OF THE REVENUE THAT SMT. KALAIVANY IS IN ANY W AY RELATED WITH THE ASSESSEE RATHER SMT. KALAIVANY HAS DISCLOSED THE CO MMISSION RECEIVED FROM DISCOUNTING OF THE CHEQUES IN THE NAME OF M/S SRI GANAPATHI TEXTILES; AND HAS ALSO DISCLOSED TO THE DEPARTMENT IN HER RETURN OF ITA 587 & 947/10 :- 18 - : INCOME FOR THE YEAR. IF THE ASSESSEE HAS BEEN MAIN TAINING A BUFFER STOCK TO MEET THE EMERGENT NEEDS OF ITS BUSINESS, T HERE IS NO HARM IN THAT AND NO NEGATIVE INFERENCE CAN BE DRAWN THEREFR OM. MOREOVER, THE ASSESSEE HAS BEEN DECLARING ALMOST SIMILAR GROS S PROFIT RATE DURING ASSESSMENT YEARS 2006-07, 2007-08 AND 2008-09 AS IS EVIDENCED FROM THE PAPER FILED BEFORE US DURING HEARING. THE REAS ON GIVEN BY THE LD. CIT(A) THAT THE ASSESSEE SHOULD HAVE PRODUCED THE P ARTY FROM WHOM HE HAD PURCHASED YARN WOULD NOT MAKE THAT PARTY AS ASSESSEES CREDITOR. THE TRANSACTIONS ARE BUSINESS TRANSACTIO NS AND ARE NOT REQUIRED TO BE PROVED IN THE MANNER AS THESE ARE U/ S 68 OF THE ACT. THEREFORE, KEEPING IN MIND THE ENTIRETY OF THE FACT S OF THE CASE AND THE MODUS OF PAYMENT IN THIS LINE OF BUSINESS IN TH E CONCERNED AREA, WE CANNOT HOLD THAT THESE PURCHASES ARE NOT GENUINE . IT IS TRUE THAT THE BANK STATEMENT OF THE ASSESSEE WITH REGARD TO T HESE PAYMENTS COULD NOT BE PRODUCED BUT IT WOULD NOT MAKE ANY ADV ERSE EFFECT ON THE FACTUAL POSITION INASMUCH AS IT IS A CLEAR CASE OF THE ASSESSING OFFICER THAT THE CROSSED CHEQUES WERE ENCASHED BY SMT. KALA IVANY AS STATED ABOVE. THEREFORE, WE HOLD THAT THE PURCHASES ARE G ENUINE AND ANY ADDITION SO MADE HAS TO BE DELETED FROM THE HANDS O F THE ASSESSEE. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE STANDS AL LOWED. ITA 587 & 947/10 :- 19 - : 10. REGARDING DELETION OF ADDITION OF ` 30,65,800/- WHICH IS THE SUBJECT MATTER OF REVENUES APPEAL, THIS ISSUE IN A WAY GETS COVERED ON THE REASONING WHICH WE HAVE GIVEN REGARDING DELE TION OF THE ADDITION OF ` 36,77,800/- ON ACCOUNT OF PURCHASES MADE DURING THE FINANCIAL YEAR 2005-06. THE ASSESSEE OWED ` 30,65,800/- AS ON 31.3.2006 FOR WHICH THE ASSESSEE ISSUED POST DATED CHEQUES IN THE NAME OF M/S SRI GANAPATHI TEXTILES. THE CHEQUES WE RE DULY CROSSED AS STIPULATED U/S 40A(3) OF THE ACT FOR ASSESSMENT YEAR 2006-07 AND IN THAT YEAR ONLY THE ASSESSEE HAS CLAIMED THE PURCHAS ES AND EXPENDITURE IN THE PROFIT & LOSS ACCOUNT. WHEN ALL THE CHEQUES WERE ISSUED DULY CROSSED TOWARDS EXPENDITURE INCURRED IN PURCHASES MADE DURING FINANCIAL YEAR 2005-06, HAVING CLOSING BALAN CE OF ` 30,65,800/- AS ON 31.3.2006, WHICH WAS PAID DURING THE FINANCIA L YEAR 2006-07 WHICH FACT HAS BEEN CONFIRMED FROM TAMILNADU MERCAN TILE BANK, SELVAPURAM, COIMBATORE, THIS ADDITION CANNOT BE SUS TAINED IN THE EYES OF THE LAW. SECTION 40A(3) WAS MANDATED WITH EFFEC T FROM 13.7.2006 PROVIDING PAYMENT TO BE MADE BY MEANS OF AN ACCOUNT PAYEE CHEQUE ON OR AFTER 13.7.2006 TOWARDS ANY EXPENDITURE INCUR RED. WHEN THE ASSESSEE HAD INCURRED EXPENDITURE DURING FINANCIAL YEAR 2005-06 AND MADE THE PAYMENTS DURING FINANCIAL YEAR 2006-07, TH ERE IS NO VIOLATION OF ANY PROVISION OF THE ACT INCLUDING SECTION 40A(3 ). THE ASSESSEE HAS ALSO GIVEN A COMPARABLE CHART IN THIS REGARD WHICH IS AS UNDER: ITA 587 & 947/10 :- 20 - : TURNOVER NAME PAN SALES STITCHING CHARGES GROSS PROFIT GROSS PROFIT RATIO % M/S SREE KRISHNA EXPORTS AANFS3505K 22753234.50 0.00 230516.20 10.13 M/S ABIRAMI EXPORTS AAHFA1074B 17436264.15 1046654.00 1363809.21 7.38 M/S HARITHA TEX (PROP.S.A.KRISHNARAJ) AFSPK0202P 5787078.80 0.00 683792.80 11.82 11. FROM THE ABOVE CHART IT IS CLEAR THAT IN OTHER CA SES THE TURNOVER IS LESS THAN THE ASSESSEES TURNOVER. OBVIOUSLY, WHEN THE TURNOVER INCREASES, GROSS PROFIT WILL REDUCE MARGINALLY. T HE GROSS PROFIT RATE FOR THE ASSESSMENT YEAR SHOWN AT 7.24% IS REASONABLE AN D THERE IS NO REQUIREMENT OF ANY TINKERING THEREWITH. THEREFORE, THERE IS NO NEED TO INTERFERE IN THIS FINDING OF THE LD. CIT(A). THE D ELETION IS CONFIRMED. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE STANDS AL LOWED AND THAT OF THE REVENUE STANDS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 23-08-2011. SD/- SD/- (N.S. SAINI) ACCOUNTANT MEMBER ( HARI OM MARATHA ) JUDICIAL MEMBER DATED: 23 RD AUGUST, 2011 RD COPY TO: APPELLANT /RESPONDENT/CIT(A)/CIT/DR