Self Knitting Works V. Commissioner of Income Tax, Central Circle, Ludhiana

ITA/138/2014

AI Insights

M/s Self Knitting Works, a partnership firm engaged in manufacturing and sale of knitted cloth, appealed against the order of the Income Tax Appellate Tribunal which had allowed the revenue's appeal and dismissed the assessee's application challenging the CIT(A)'s decision. The primary contention was regarding the addition of ` 37,30,300 as unexplained cash sales, which the Tribunal found justified based on the lack of details such as quantity sold and the identity of the buyers in the sales bills. The Tribunal also rejected the assessee's invocation of Rule 27 to challenge the disallowance of certain expenses, stating that the rule does not allow for claiming fresh relief not part of the grounds raised by the appellant.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 795413 (HC-MISC)
• Appeal Type: Others
• Pronouncement Date: 11-07-2014
• Assessment Year: misc
• Other Referred Cases: CIT vs. Sanjay Chhabra, R.B. Jessaram Fatechand vs. CIT, CIT vs. Dehati Coop. Marketing Society, Deep Chand Kothari vs. CIT, CIT vs. Abdul Rahman Sait, Dahod Sahakari Kharid Vechan Sangh Limited vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Assessee Lawyers: J S BHASIN; RAJIV SHARMA
• Keywords: Genuineness of sales; Unexplained cash credit; Rule 27 of ITAT Rules
• Section: 40(a)(ia); 145(3); 260A

Judgement Text

"ITA No.138 of 2014 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.138 of 2014 Date of decision: 11.7.2014 M/s Self Knitting Works ……Appellant Vs. Commissioner of Income Tax, Central Circle, Ludhiana …..Respondents CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON’BLE MR. JUSTICE JASPAL SINGH Present: Mr. J.S.Bhasin, Advocate and Mr. Rajiv Sharma, Advocate for the appellant. Ajay Kumar Mittal,J. 1. This appeal has been preferred by the appellant-assessee under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 30.8.2013, Annexure A.3 passed by the Income Tax Appellate Tribunal Chandigarh 'A' Bench in ITA No.318/CHD/2011, for the assessment year 2005-06, claiming following substantial questions of law:- “a) That whether in the facts and circumstances of the case, the Tribunal was correct in holding that credit of ` 37,30,300/- in profit and loss account was not relating to sale of goods but in the nature of cash credit? b) That whether in the facts and circumstances of the case, the Tribunal was correct in applying the ratio of this Hon'ble Court GURBAX SINGH 2014.08.26 11:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.138 of 2014 2 in the case of CIT vs. Sanjay Chhabra 336 ITR 71 (P&H), when in that case the issue was of undisclosed investment made in unaccounted sales, whereas in present case, the dispute was only of genuineness of 'cash sales' made in books, to unidentified parties? c) That whether the Tribunal was justified in reversing the most cogent findings of learned CIT(A) to the effect that when the sales were not proved to be outside the books or unaccounted, and even the purchases and closing stock were not disputed, the impugned sales could not be disbelieved? d) that whether in the facts and circumstances of the case, the learned Tribunal was correct in law to hold that under rule 27 of the ITAT Rules, 1963, it was not open to the respondent to claim any fresh relief denied by CIT(A) and which is not part of the grounds of appeal raised by the revenue? e) That in the facts and circumstances of the case, whether the learned Tribunal was correct in law to hold that the factual issues could not be raised under Rule 27 of the ITAT Rules, 1963? f) Whether the order of the Tribunal is legally unsustainable and bad in law and perverse?” 2. Briefly,the facts necessary for adjudication of the controversy involved, as narrated in the appeal may be noticed. The appellant-assessee is a partnership firm having its office at Basti Jodhewal, Ludhiana. It is engaged in the business of manufacturing and sale of knitted cloth. It filed its return of Income for the assessment year 2005-06 on 16.11.2007 returning a loss of ` 22,06,350/-. Its premises were subjected to search and seizure by the Income Tax department on 7.10.2003. However, the search action on being challenged before this court, finalization of assessment pertaining to block period ending upto 31.3.2004 was stayed by this Court. GURBAX SINGH 2014.08.26 11:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.138 of 2014 3 In the meantime, the Director, Revenue Intelligence also conducted a search on 14.2.2007 and seized the entire record which was not released till the assessment was finalised. As a result, there was delay in filing of the income tax return. The Assessing officer made certain additions after rejecting the books of account under Section 145(3) of the Act vide order dated 26.12.2007, Annexure A.1. The additions were on account of disallowance of cash sales made in lots as per three sale bills to unidentifiable parties, application of GP rate of 5% on enhanced sales of ` 2.5 crores, disallowance of expenses under section 40(a) (ia) for non deduction of TDS, disallowance out of car expenses and telephone expenses. The major addition of ` 37,30,300/- was made by rejecting the assessee's contention that stocks which had deteriorated because of prolonged storage for want of export orders, were sold in lots vide three cash memos against cash receipts to realize the blocked funds. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 1.10.2010, Annexure A.2, the CIT(A) partly allowed the appeal. Addition of ` 37,30,300/- was deleted by accepting the assessee's contention supported by judgment of the Bombay High Court in R.B.Jessaram Fatechand vs. CIT, (1970) 75 ITR 33 (Bom) to the effect that for cash sales, identity of the customer was not essential more so when the status of opening stock, purchases and closing stock was not disputed. The CIT(A) also upheld that when the sales were not proved to have been made outside the books of account, disallowance of sale would result in increase in closing stock. Aggrieved by the order, the revenue filed appeal before the Tribunal. The assessee however chose to file application under GURBAX SINGH 2014.08.26 11:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.138 of 2014 4 Rule 27 of the Income Tax Appellate Tribunal Rules, 1963 (in short, “the Rules”) before the Tribunal to assail the order passed by the CIT(A) on the grounds decided against it. Vide order dated 30.8.2013, Annexure A.3, the Tribunal allowed the appeal of the revenue and dismissed the application filed by the assessee as not maintainable. Hence the present appeal by the assessee. 3. Learned counsel for the appellant-assessee submitted that no addition could have been made on account of unexplained credit of ` 37,30,300/-in the profit and loss account of the assessee. It was urged that there was no dispute regarding purchase etc. and in such circumstances, addition made by the Assessing Officer and sustained by the Tribunal was uncalled for. It was further contended that the GP rate of 5% on enhanced sales of ` 2.5 crores had been applied by the Assessing officer by rejecting the books of account and in such circumstances, separate addition on account of unexplained cash credit of ` 37,30,300/- in the books of account could not have been made. Support was drawn from judgments in CIT v. Abdul Rahman Sait, (2008) 306 ITR 142 (Mad.), Dahod Sahakari Kharid Vechan Sangh Limited v. CIT, (2006) 282 ITR 321 (Guj.), CIT vs. Dehati Coop.Marketing Society, (1981) 130 ITR 505 (P&H), Deep Chand Kothari v. CIT, (1988) 171 ITR 381 (Raj.) and CIT v. Sanjay Chhabra, (2011) 336 ITR 71 (P&H). It was also argued that the Tribunal had wrongly not allowed the appellant to invoke Rule 27 of the Rules with regard to disallowance of expenditure amounting to ` 6,90,462/- under Section 40(a) (ia) and part disallowance out of car expenses, car depreciation and telephone expenses. GURBAX SINGH 2014.08.26 11:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.138 of 2014 5 4. After hearing learned counsel for the appellant, we do not find any merit in the appeal. 5. The answer to the following two questions arise for adjudication in the present appeal:- (a) Whether in the facts and circumstances, the addition of ` 37,30,300/- as unexplained sales was justified? (b) Whether the assessee was entitled to invoke Rule 27 of the Rules in the present case? 6. The Tribunal while adjudicating the issue against the assessee had noticed in its order dated 30.8.2013, Annexure A.3 that the dispute was relating to three sales bills amounting to ` 37,30,300/- under which alleged cash sales were made. There was no mention of any quantity sold. The name of the parties to whom the goods were sold was also missing. There was totalling errors in each bill and the mode of transportation of those goods also could not be explained by the assessee. On consideration of entire material on record, it was concluded that the genuineness of the transaction could not be established. The Tribunal was, thus, justified in sustaining the addition of ` 37,30,300/- as unexplained sales with the following observations:- “The Assessing Officer had also sought information from the State Excise and Taxation department and as per the said information, the assessee had declared sales of ` 1,96,07,007/-. The said information received by the AO was prior to the filing of the return of income by the assessee. AO noted that in the trading account accompanying thereto, the assessee had declared sales of ` 2.78 crores though in the sales tax return, total sales declared were ` 1.96 crores. The explanation of the assessee to the show cause notice was that the difference in sales was attributable to the sales made in lots vide 14 lot Sale Bill Nos.1 – Lot Sale to 14 – Lot Sale in April 2004, GURBAX SINGH 2014.08.26 11:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.138 of 2014 6 amounting to ` 1,01,26,294/-, majority of which were not declared in the original sales tax return through oversight. The Assessing Officer scrutinized each of the sale bills and came to the conclusion that there were four categories of sales made by the assessee as tabulated in the chart. The AO has accepted the category of sales under Sr.No.(ii) to (iv). However, in respect of Sr. No.(i), it was observed that the cash sales of ` 37,30,300/-were in respect of lot sales made in cash without mention of any quantity of goods sold nor the name/s of the party/s to whom sold as per cash memo Nos. 1- lot, to No.3 – lot sale, in the month of April 2004. The AO noted that there was no mention of quantity of goods sold which reflect that no actual sale of goods as per the said cash memos had been made by the assessee, another show cause notice was issued to the assessee that why said receipt in cash be not treated as Income from undisclosed sources introduced in the garb of cash sales ingenuinely made. The reply of the assessee was that the said sales were made with the intention to liquidate the stocks which were piled up due to non procurement of export order and as the quality of the goods had started deteriorating, the sales were made to realize the funds from such stocks. The assessee claimed that it had stock of ` 3,07,48,100/- brought forward from last year in addition to purchases of `1,58,66,097/- made during the year. The sales were claimed to be made in distress. The AO found no merit in the explanation filed by the assessee in respect of cash sale of ` 37,30,300/- allegedly made in lots but without mention of any quantity of goods sold. As per various reasons tabulated at page 7 of the assessment order, the Assessing Officer treated the said sum of ` 37,30,300/- as income from undisclosed source. The AO further excluded the said amount of ` 37,30,300/- from the sales account and adopted the sale of the assessee at ` 241,36,929/- (` 2,78,67,229/- - ` 37,30,300/-) on which GP rate was applied by the Assessing Officer to compute the estimated profits in the GURBAX SINGH 2014.08.26 11:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.138 of 2014 7 hands of the assessee. xx xxx xx xx xx xx xx xx 13. We have heard the rival contentions and perused the record. The assessee is engaged in the manufacturing and sale of knitted cloth. The assessee failed to furnish the return of income in time and thereafter, notice under Section 142(1) of the Act was issued to the assessee time and again and there was total non compliance by the assessee. The assessee furnished return of income declaring loss of ` 22,06,350/-. The sequence of events during assessment proceedings are referred to by the AO at pages 1 and 2 of the assessment order. The assessee did furnish some information during the course of assessment proceedings. The AO noted that during the year under consideration, the assessee had declared sales of ` 2.78 crores out of which, cash sales in lots without mentioning the quantity sold and/or names and addresses of the parties to whom sold, totalling ` 37,30,300/- was made by the assessee. After picking up the case for scrutiny and before the assessee furnished the return of income, the Assessing Officer sought information of the sales made during the year from State Excise and Taxation department. Vide the said information, the assessee was found to have declared sales of `1.96 crore including fabrication receipt of ` 7 lacs, while as per trading account, later filed along with the return of Income, the sales were declared at Rs.2.78 crore. The assessee claims to have filed revised sales tax return on 12.11.2007 in which the sales of `2.78 crore were declared to State Excise and Taxation Department. The difference in sales as originally declared to the sales tax department and as in the revised return of Income was claimed to be on account of sales made in lots vide 14 lot sale bills No.1 – lot sale to 14 – lot sales in April 2004 amounting to `1,01,26,294/- which the assessee claims that by omission was not declared in the original sales tax return. Sales totalling GURBAX SINGH 2014.08.26 11:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.138 of 2014 8 `63,95,994/- were supported by bills without mentioning of any quantity of goods sold but with names of parties to whom sales were effected in April 2004 itself and the same were accepted by the Assessing Officer. The dispute is in relation to the three sales bills totalling ` 37,30,300/- under which cash sales were made in lots without mention of any quantity sold and/or name of the parties to whom sold. Details of the sales made by the assessee vide three bills are as under:- Sr.No. Category Amount 1. Cash sales in lots without mention of any quantity sold and names of the parties to whom sold as per the following cash memos (a) Cash memo No. l lot sale dated 1.4.2004 after consideration goods returns with net of such sales(1035000- 802000). (b) Cash memo no.2-1 lot sale dated 5.4.2004 (c) Cash memo no.3-1 sale deed dated 20.4.2004 Rs.233000/- Rs.1072500/- Rs.24,24,800/- Total Rs.37,30,300/- 14. The lot sales made by the assessee totaling ` 37,30,300/- were made in cash and in the month of April 2004,without mentioning any quantity of goods sold in the relevant cash memos. The assessee has declared closing stock of ` 2.17 crore as on 3.3.2005. The opening stock declared by the assessee was `3.07 crores and the total purchases made during the year were `1.58 crores. The plea of the assessee before the Assessing officer was that it had ample stocks available with it and out of the said available stock, the aforesaid cash sales were made. The Assessing officer observed that if old stocks were available with the assessee where was the need to make fresh purchases to the tune of ` 1.58 crores and further stock of ` 2.17 crores has been shown at the close of the year. The AO thus GURBAX SINGH 2014.08.26 11:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.138 of 2014 9 questioned the genuineness of the cash sales made in the lots amounting to ` 37,30,300/-. The CIT(Appeals) accepting said plea of the assessee had deleted the addition. We find no merit in the order of the CIT(Appeals) in this regard. Perusal of the sales bills placed at pages 19 to 2 of the paper book reflect in the order of CIT(A) in this regard. The onus is upon the assessee to prove and establish the sales made by it during the year under consideration. Perusal of the sales bills placed at pages 19 to 21 of the paper book reflect the assessee to have sold knitted cloth in cash to unknown parties and each bill prepared by the assessee reflects totalling errors which could not be explained by the learned AR for the assessee, though the same was put to him during the course of hearing. The Bill no.1 – lot sale for ` 11,38,500/- in fact totals to `11,17,000/-, the bill No.2 – lot sale of ` 11,79,750/- totals to `11,58,300/- and the bill No.3 – lot sale totals to `26,67,280/- where as the correct total was ` 26,18,784/-. The assessee had shown gross value of the goods sold and had added the excise duty to the said value but the calculation error has been made while totaling the two figures in each of the three figures. In absence of any explanation being given by the learned AR for the assessee, adverse inference is to be drawn against the assessee. Further the assessee has failed to produce any evidence as to how the said goods were transported and even the bills do not talk of the requisite details of GR numbers. 15. The paper book reflects another bill No.07 – lot dated 6.4.2004 which is placed at page 37 of the paper book in such details in which the quantity is mentioned at 12810@ ` 10/- sold for `1,28,300/-. Other lot sales made by the assessee have been accepted in view of the names of the parties being available and the same are not in dispute. However, in respect of first three bills i.e. 1 to 3 lot sales, no such details have been filed by the assessee. Further, the assessee had failed to GURBAX SINGH 2014.08.26 11:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.138 of 2014 10 declare the said sales in the return of income filed by it before the sales tax authority and only after the information was received by the Assessing officer, revised returns were filed before the sale tax authority including the said cash lot sale as its turnover. The assessee against Bill No. 1- lot sale claims to have received return of goods and also cash transaction in this regard. Where basic details i.e. name of the party is not available with the assessee, the said return of goods cannot be accepted. In view thereof, no reliance can be placed on the sale tax return filed by the assessee. The onus was upon the assessee to explain the credit of ` 37,30,300/- which the assessee has failed to discharge and in the absence of having established that the said amount relates to sale of goods, mere reliance on the three sale bills does not absolve the assessee from its onus and we find no merit in the stand of the assessee in this regard.” 7. In view of the aforesaid findings, the assessee cannot derive any benefit from the judgments relied upon. The said judgments being based on individual fact situation, do not advance the case of the assessee. 8. Adverting to applicability of Rule 27 of the Rules, it would be expedient to reproduce Rule 27 of the Rules which reads thus:- “27. The respondent may support order on grounds decided against him - The respondent though he may not have, may have appealed may support the order appealed against on any of the grounds decided against him.” 9. The Tribunal noticed that by virtue of Rule 27 of the Rules, the respondent is entitled to support the order appealed against and raise defence against the appeal filed by the appellant on any of the grounds which have been decided against him but cannot invoke the said rule to claim any fresh relief which was denied by CIT(A) and which is not part of GURBAX SINGH 2014.08.26 11:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.138 of 2014 11 the ground so raised by the appellant. The Tribunal had rejected the contention of the assessee by recording as under:- “18. The assessee has filed an application under rule 27 of Income Tax Appellate Tribunal Rules under which it has raised two grounds of appeal i.e. one against disallowance of expenses amounting to ` 6,90,462/- under section 40(a) (ai) of the Act and second against part disallowance out of car expenses, car depreciation and telephone expenses. The learned AR for the assessee pointed out that this stands covered by the decision of the Chennai Bench of the Tribunal in ACIT vs. India Cement Limited [124 ITD 343 (Chennai)] and by the decision of Hon’be Punjab and Haryana High Court in CIT vs. Dehati Cooperative Marketing cum Processing Society [130 ITR 505 (P&H)]. The learned DR for the revenue pointed out that the grounds of appeal raised by the assessee vide said application under Rule 27 of the Income Appellate Tribunal Rules were absolutely different from the issue raised by the revenue in its appeal and the present application was not maintainable. 19. We have heard the rival contentions and perused the record. Under the provisions of section 253 of the Income Tax Act, the procedure of appeals to the Appellate Tribunal is provided. Both the assessee and the Commissioner are empowered to appeal against the orders passed by the lower authorities under various provisions of the Act as enumerated in sub section (1) and sub section (2) of section 253 of the Act. Under sub section (3), time limit for filing the appeal before the Tribunal is provided under sub section 4 to section 253 of the Act, the provisions lay down the procedure of filing memorandum of cross objections by the Assessing officer or the assessee, as the case may be, on the receipt of the notice that an appeal against the order of the Dy. Commissioner of Income Tax or CIT (Appeals) had been preferred under sub section (1) or sub section (2) of section 253 of the Act. It is further provided under sub section (4) that the said memorandum of cross GURBAX SINGH 2014.08.26 11:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.138 of 2014 12 objection can be treated as an appeal presented within the time specified in sub section and would be disposed of by the Tribunal accordingly. Under sub section (6) of section 253 of the Act, the appeal is to be filed in prescribed form and verified in the prescribed manner and is to be accompanied with Tribunal fee, where the appeal is filed by the assessee. However, where the appeal is filed by the revenue, then no appeal fee is payable. Further alongwith an application for stay of demand, fee of ` 500/- is prescribed under sub section (7) to section 253 of the Act. 20. The Appellate Tribunal, in order to regulate its powers and functions have formulated the Income Tax Appellate Rules, 1963. Rule 27 of Income Tax Appellate Tribunal Rules reads as under:- ‘The respondent though he may not have, may have appealed may support the order appealed against on any of the grounds decided against him. The said rule 27 provides remedy to the respondent to support an order passed on any of the grounds decided against him.’ 21. The respondent by way of the said Rule 27 is empowered to support the order appealed against any of the ground decided against him. Rule 27 of the Income Tax Appellate Tribunal Rules lays down that where no appeal has been filed by any respondent he may support the order appealed against i.e. the order of the CIT(Appeals) on any of the grounds decided against him. The proposition proposed under Rule 27 of the Income Tax Appellate Tribunal Rules is that the respondent can raise defence against the appeal filed by the appellant on any of the grounds which have been decided against him but under the said provisions of the Act, it is not open to the respondent to claim any fresh relief which was denied to him by the CIT (Appeals) and which is not part of the ground so raised by the Revenue.” 10. It may be noticed that where the respondent is aggrieved GURBAX SINGH 2014.08.26 11:26 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.138 of 2014 13 against any disallowance or addition sustained by the CIT(A) which is not under challenge at the behest of the appellant, the only remedy available with the respondent is to either file separate appeal or agitate the issue by way of cross objections in the appeal filed by the appellant impugning the disallowance or the addition sustained. Thus, no error could be pointed out by learned counsel for the respondent-assessee in the approach of the Tribunal which may warrant interference by this Court under Section 260A of the Act. The Tribunal had rightly not allowed the assessee to urge relating to disallowance of expenditure under Section 40(a)(ia) of the Act and part disallowance out of car expenses, car depreciation and telephone expenses. 11. In view of the aforesaid findings, no substantial question of law arises. The appeal stands dismissed. (Ajay Kumar Mittal) Judge July 11, 2013 (Jaspal Singh) ‘gs’ Judge GURBAX SINGH 2014.08.26 11:26 I attest to the accuracy and integrity of this document High Court Chandigarh "