R Natvarlal Parekh, Mumbai vs Assessee

ी संजय अरोड़ा, लेखा सद य, एवं ी िवजय पाल राव, याियक सद य के सम । BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER आयकर अपील सं./ I.T.A. No.7146/Mum/2010 ( िनधा रण वष / Assessment Year : 2003-04)

R. Natvarlal Parekh बनाम/ बनाम Income tax Officer-15(1)(4) 55/6, Rajbaug Estate, Vs. Matru Mandir 1 s t Floor, Tambakanta Tardeo Mumbai-400 003. Mumbai-400 007. थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AAFFR 8461 H (अपीलाथ /Appellant) .. ( यथ / Respondent)

ओर से / Assessee by : Shri B.P. Purohit -AR यथ क ओर से/Respondent by : Shri Jeetendra Kumar - DR

सुनवाई क तारीख / Date of 28/01/2015 Hearing : घोषणा क तारीख /Date of 12/02/2015 Pronouncement : आदेश / O R D E R PER VIJAY PAL RAO, JM :

This appeal by the assessee is directed against the order dated 2/8/2010 of CIT(A) for the assessment year 2003-04. The assessee has raised the following grounds:-

"1. On the facts and in circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the impugned assessment without appreciating that the order is bad in law and on facts, is legally untenable and deserves to be annulled.

2. On the facts and in circumstances of the case and in law, the Ld. CIT(A) has erred in sustaining the assessment assessing the appellant's total income at Rs. 4637810/- as a result of addition of Rs.3677093/- invoking provisions of sec. 68 of the I. T. Act, whereas no such addition can be made u/s 68 in the case of the appellant.

3. On the facts and in circumstances of the case and in law, the CIT(A) has erred in sustaining disallowance of 1/5th of motor car expenses and depreciation and 1/5th of telephone expenses.

4. Your appellant therefore humbly prays that the addition made u/s 68 and disallowance made 1/5th motor car and telephone expenses may please be deleted / the 2 ITA No.7146/Mum/10

impugned order may please be annulled."

2. Ground No.1 is general in nature and no specific finding is required.

3. Ground No.2 is regarding the addition made under section 68 of the Income tax Act. The assessee is a firm and working as commission agent of sale of yarn. During the course of assessment proceedings the AO noted from the bank statement of the assessee that the closing balance in the account as on 31/03/2003 was Rs.13,52,673/- whereas the balance-sheet as on 31/3/2003 showed a debit balance of Rs.1,12,82,800/-. As there was a huge variation between the balance as per books and that of bank statement, the assessee was asked to furnish bank reconciliation statement. The assessee filed summary of bank reconciliation statement to show the reason for difference as cheques issued but not debited in the bank account of Rs.1,78,12,041/-. The AO observed that most of the cheques were issued on 25/3/2003 and 26/3/2003 and same were cleared on 25/9/2003 and 26/9/2003 respectively. Accordingly the AO asked the assessee to explain the nature of transaction entered with each of these parties where the cheques issued exceed Rs.50,000/-. The assessee was also asked to furnish copy of ledger account of all the parties to whom cheques exceeding Rs.50,000/- was issues by it but not encashed before 31/3/2003. The AO further observed that it was not clear if the payments were made on account of transaction of purchases of goods or any services rendered by those parties or in the nature of financial transaction. In response the assessee submitted that many of the parties are Bhiwandi based and they keep changing their addresses. The numbers of parties are many and scattered and tracing them is difficult and time consuming. Thus the assessee submitted it required the time of up till last week of March to collect their latest address and required details. Finally the assessee filed a letter dated 10/3/2006, and filed the details giving name and address, cheque no., date, amount, date of realization and nature of payment. The assessee submitted before AO that advances were received from certain parties. The AO noted that the assessee has not furnished the address and PAN of those parties from whom the advance amount purportedly was received by the assessee. The assessee filed its letter dated 10/3/2006 and submitted 3 ITA No.7146/Mum/10

that the assessee is commission agent doing business of selling yarn of Reliance Industries etc. As a matter of precaution the assessee insisted on advance from the buyers from Bhiwandi who keep on changing their addresses frequently. Thus assessee submitted that only against the advance the assessee is supplying goods to the buyers. In order to expand the business the assessee also planned to sell goods of other producers and received the advance from regular buyers. Since the reliance raised the objection against dealing in the goods of other producers and thereafter the assessee to stop business for reliance the assessee claimed to have abandoned the plan of doing business with the other parties and has to return advance against the booking of other producers. Thus, assessee submitted that the cheque issue to the tune of Rs.1,78,12,041/- are in respect of refund of such advances received from buyers. However, the buyers refuse to accept the refund as the rates of yarn had increased in the meantime. The assessee contended that the cheques were then given to the sister concern of the assessee and only on the intervention of the 'Yarn Merchant Association' the refund was made to the buyers through sister concern.

3.1 The AO did not accept the explanation of the assessee and observed that in the absence of relevant details, address of the parties, the genuineness of the transaction is not proved. Since the assessee claimed that the amounts were repaid through its sister concern, the AO called the details from the bank of the assessee, Bank of Baroda, Jhaveri Bazar, Mumbai and found that the alleged cheques issued by the assessee were credited in the personal account of the family members of the partners of the assessee. Further, the AO noted that the cheques purported to be issued in the month of March 2003 were cleared/encashed in the month of September 2003. The AO has annexed the details of all the cash credits, the cheques issued by the assessee to the sister concern in annexure A, B and C of the assessment order. The AO has held that the claim of the assessee was that the amount was finally returned to the parties is contrary to the fact as it was credited to the personal account of the family members of the partners of the firm. Accordingly the AO was of the view that the assessee failed to prove the genuineness of the advance received from the parties and made the addition 4 ITA No.7146/Mum/10

of Rs.36,77,093/- as unexplained cash credit under section 68 of the Act. The assessee challenged the action of the AO before the CIT(A) and contended that in order to ascertain the genuineness of the advance or loan, credit worthiness of these parties, the department should summon all these twenty two parties from whom such advance have been received. Considering the request of the assessee the CIT(A) issued a remand order under section 250(4) of the Income tax Act dated 13/09/2007. The AO submitted its remand report dated 17/04/2008. Thereafter, the assessee made a representation of 26 pages vide letter dated 19/07/2008 as well as vide letter dated 30/07/2008 and pointed out the requirement of issuing of summon and the process to be followed. Accepting the request of the assessee the CIT(A) issued another remand order dated 22/01/2009 and directed the AO to obtain all evidence from the assessee for completion of remand proceeding. Since there was a change of jurisdiction of the case of the assessee, therefore, CIT(A) issued a fresh order dated 17/02/2010 directing the AO to submit the remand report.

In compliance of the remand order the AO submitted the remand report dated 22/3/2010. The CIT(A) noted that during the assessment proceeding the AO issued summons to all 22 parties together with letter for furnishing all information and appearing before him for necessary verification/examination. Simultaneously, summons were also sent through RPAD alongwith letters. A second set of summons and letters were also given to the assessee with a request to get it served to the parties if there is any change in address and or instructions before CIT(A) on the date and time specified in the individual summons with relevant details and evidence. Out of 20 summons sent to Bhiwandi parties 17 were returned unserved by postal authorities. However, in respect of rest 3 parties neither letter were returned back not any service acknowledgement received from the postal authorities. The summons issued to two parties belonging to Mumbai were served and out of these two parties M/s. Textile Product Marketing Agency appeared before the AO and statement was recorded. The AO found that this party is having a different version as this party had not advanced any loan to the assessee.

The payments were made against purchase bills. However, the AO mentioned in the remand report that reply from 10 parties were received in which these parties stated that 5 ITA No.7146/Mum/10

payments were made as advance for purchase of yarn and payments for such purchases were received by cheque. Since the summons issued to these parties through RPAD were received back unserved, the AO doubted the genuineness of the reply in the absence of personal attendance of these parties. The CIT(A) after considering the remand report as well as the comments and submissions of the assessee confirmed the addition made by the AO.

4 Before us, the ld. AR of the assessee submitted that the AO has proceeded on wrong premises and doubted the re-payment by the assessee. He has pointed out that initially the AO initiated the enquiry due to the discrepancy in the balance in the books of account and in the bank account of the assessee. The assessee filed the reconciliation and explained the difference being cheques issued by the assessee but not encashed. Therefore, balance in the bank was shown at Rs.13,52,673/- as against the balance shown in the balance sheet of Rs.1,12,82,800/-. The AO has conducted the enquiry regarding the genuineness of the repayment whereas the addition has been made under section 68 of the Income tax Act which is not sustainable in the facts of the case. He has referred to Annexure-C to the assessment order and submitted that the receipts shown in Annexure-C are in respect of the advance received by the assessee for supply of goods. The ld. AR has reiterated the explanation as advanced before the authorities below and submitted that due to the objection of the Reliance Industries, the assessee had to abandon its plan to expand the business by dealing in products of other manufacturers of textile yarn and, consequently, the assessee decided to refund the advance received from the potential buyers of yarn. Since the parties refused to receive the refund due to the increase in the price of yarn, the assessee transferred money to the sister concern and through intervention of the Yarn Merchants Association the money was ultimately returned to these parties.

4.1 He has referred to the reply received from the parties during the remand proceedings and submitted that out of 22 parties 18 parties have submitted their confirmation of giving advance for purchase of goods and received back their amount 6 ITA No.7146/Mum/10

through cheques. The ld. AR has submitted that the assessee obtained copy of the reply submitted by these parties to the AO during the remand proceedings by filing an application under RTI Act. Thus, the assessee explained the source of credit which has been confirmed by these parties. The ld. AR has submitted that the details and amounts given in the annexure B & C tallies and, therefore, the AO has accepted the amounts shown as credit in the books and also the payment made by the assessee through sister concern are matching. In some of the cases the amount was received against the actual supply of goods and, therefore, the same cannot be treated as unexplained cash credit. He has referred to the remand report and submitted that the AO has assumed wrong facts and proceeded on incorrect understanding of the fact. The ld. AR has submitted that in para-3 of the remand report the AO has stated that in order to verify the genuineness, creditworthiness and correctness of loan as alleged to have been borrowed by the assessee, whereas the assessee has never claimed having borrowed any loan from these parties, but amounts were received as advance against supply of yarn.

He has further contended that it is a standard practice in this trade that the goods are not supplied to Bhiwandi parties without receiving money in advance. All the transactions were through cheques and repayment was made by the intervention of the Yarn Merchant's Association. Therefore, the repayment was accepted and confirmed by these parties to prove that the transaction of receiving advance from these parties is genuine. He has further submitted that when the partner of M/s. Textile Product Marketing Agency appeared before the AO and stated that they have not advanced any loan to the assessee it corroborates the claim of the assessee that these amounts were not received as an advance or loan but it was an advance against supply of yarn. The AO in para-6 of the remand report has stated that this party has taken a different stand which is not correct observation of the AO. The Ld. AR has referred to the invoice/bills in respect of sale of M/s. Textile Product Marketing Agency (Pg No.44 and 45 of PB) and submitted that the amount of these bills matches with the amount shown in the accounts and even given in the remand report by the AO.

Thus, the ld. AR has submitted that the assessee has discharged its onus of proving the genuineness of transaction as these parties have confirmed the transaction of giving the advance 7 ITA No.7146/Mum/10

payment against supply of yarn and also receiving back the money through cheques. The AO has proceeded under wrong impression and contrary to the facts while making the addition u/s. 68 of the Act in respect of these amounts received by the assessee as advance payment for supply of yarn, instead of wrong presumption of AO, that the amount claimed by the assessee, is a loan taken from these parties. Thus, the ld. AR has submitted that the very basis of addition by the AO is contrary to the facts, accordingly not sustainable.

4.2 On the other hand the ld. DR has submitted that the assessee has failed to prove the genuineness and credit worthiness of the creditors, even the repayment to the creditors was not proved by the assessee by producing evidence. The assessee has not brought on record the details of the final payment to the creditors. The AO clearly gave a finding that the amount claimed to have been transferred to the sister concern was transferred to the saving bank account of the family members of the partners of the assessee. Therefore, the genuineness of the transaction was doubted by the AO . He has further submitted that the assessee has not furnished the bank account from where ultimately the advances were returned to the parties and therefore even the repayment to the creditors is doubtful. The filing of confirmation without giving the details cannot be accepted when the summons issued by AO were received back unserved. Therefore, the assessee manipulated the confirmation from the so called creditors. He has relied upon the orders of authorities below.

5. We have considered the rival submissions as well as relevant material on record. We note that the AO started the verification by noticing discrepancy in the closing credit balance as per the books of the assessee and as per the bank statement. After the assessee filed the reconciliation statement regarding the balance as per books and that per the bank statement, the AO further noted that the assessee has shown the credits from 22 parties. On query, the assessee submitted that this credit represents advance received by the assessee from the Bhiwandi parties for supply of goods but due to the objection of the Reliance Industries, whose products the assessee was dealing in, the assessee decided to refund the said amount of Rs.36,77,093/-. It is 8 ITA No.7146/Mum/10

pertinent to note that the entire explanation of the assessee is only the submission and the contentions without any supporting evidence to show that the credit shown by the assessee in the books is an advance received from the buyers of the goods. The assessee claimed that the parties refused to accept the refund due to increase in the price of the yarn and, therefore, the assessee transferred the said amount through cheques to its sister concerns. The cheques were issued in the month of March 2003, which were finally encashed and cleared in the month of September 2003 after a gap of six months. There is no explanation from the assessee as to why the cheques were issued to the sister concern and it were encashed only after a lapse of six month period. How the AO doubted the genuineness of the transaction as the explanation of the assessee was not found to be acceptable and asked the assessee to produce the creditors in person? The assessee expressed its inability to produce its creditors. The AO has recorded the fact that the cheques to the extent of the amount in question transferred to the sister concern was finally credited to the personal saving bank account of family members of the partners. The details of which has been given by the AO at page-6 in para-4 as under :-

"4. On perusal of bank accounts of the above named account holders viz., Tejbrabha Silk Mills, Shree Silk Mills, Jayco Silk Mills, the amount credited in their accounts as above, were transferred to personal savings bank accounts of the family members of your partners as per details given below:

Name of the sister concern Amount Transferred to S.B. Account Tejprabha Silk Mills Rs.7,23,507.19 No.27175, No.27174, No.27173, Rs.6,75,162.66 No.27168 and 27167 Rs.5,96,261.00 Shree Shakti Mills Rs.7,42,046.00 No.27176, No.27175, No.27173, Rs.6,20,012.00 No.27168 and No.27167 Rs.6,97,576.00 M/s. Jayco Silk Mills Rs.7,82,849.00 No.27176, No.27175, No.27168 Rs.6,64,692.00 and No.27169 Rs.7,39,956.00

The S.B. Accounts bearings No. 27167, 27168, 27169, 27173, 27174, 27175 and 27176 with Bank of Baroda, Zaveri Bazar, Mumbai held by the family are introduced by your firm only.

I t i s c l e a r f r o n t t h e a b o v e t h a t t h e a m o u n t s c l a i m e d t o h a v e b e e n r e c e i v e d a s a dv ances 9 ITA No.7146/Mum/10

from the so called "Bhiwandi" partie s whose addresses are yet to be furnished by you have been credited back to the bank accounts held by the family members belonging to your partners. Therefore, the claim made on your behalf that th e c he q ue s w e re tra n s fe r re d t o yo ur si ste r co n ce rn s fr om w he r e u ltim a te l y t he a dva n ce s were returned to the parties is contrary to the facts of your case as detailed above. You are, therefore, requested to explain as to why the credits in your books claimed as advanced from parties from Bhiwandi should not be treated as unexplained cash credit u/s. 68 of the I. Tribunal Act, 1961 and added to your income for the assessment year 2003-04."

5.1 Once the AO has brought out a fact that the amount in question was claimed to have been transferred in the account of sister concern, has finally found destination in the personal saving account of the family members of the partners then a heavy burden is cast upon the assessee to disprove the fact brought on record by the AO. We find that the assessee has failed to furnish the name and address of the parties/creditors as well as to prove the genuineness of the advance from these parties. The AO made the addition under section 68 as unexplained credit. On appeal, the assessee has contended before the ld. CIT(A) that the AO should have summoned the creditors under section 131 to verify the genuineness of the transaction, on which the CIT(A) issued the remand order. During the remand proceeding the AO issued summons to all 22 parties. The summons issued through speed post to the Bhiwandi parties were returned unserved by the postal authorities in case of 17 out of 20 parties and the remaining 3 summons neither returned back nor any acknowledgment were received. The assessee claimed that it has served summons to 18 parties out of 20 parties. In these circumstances, the AO asked the assessee to produce the parties in question. The assessee again expressed its inability to produce the parties in person. It is pertinent to note that out of two Mumbai based parties one party appeared in response to summons issued to M/s. Textile Product Marketing Agency. One Shri Sitaram Rawat, partner of the said concern appeared before the AO on 11/3/2010 whose statement was recorded. We note that he has stated that the amount was against the purchase of yarn from the assessee. He has also given the bills, cheque number, date as well as the amount and bank. Even from the record we find that the amount matches with the bills under which the goods were sold to the said party and only some balance amount which was 10 ITA No.7146/Mum/10

received over and above the sale consideration is appearing against the said party. We find that after deducting the commission from the said amount, the balance amount tallies/matches with the amount appearing against that creditor. Therefore, to the extent of the advance received from the said Bombay party, namely Textile Product Marketing Agency, the assessee proved and explained the nature and genuineness of the credit transaction. Accordingly the addition to the extent of the credit appearing in the name of Textile Product Marketing Agency at Sl.No.56 of Annex.-B and Sl.No.19 of Annex.-C is deleted.

5.2 Though, the AO has mentioned the amount in question as loan/advance received by the assessee however, it makes no difference whether the amount is received in the name of advance for supply of goods or loan/advance, it will remain as cash credit in the books of the assessee and, therefore, has to be tested under section 68 of the Income tax Act. Accordingly we do not find any substance in the contention that the AO has presumed wrong fact by treating the amount as loan and advance as it is irrelevant whether the assessee has shown it in the books of account as loan and advance or advance for supply of goods, so long the assessee failed to explain the same to the satisfaction of the AO. Description of the same, either as 'loan or advance' or as 'advance against supply of goods', it may be appreciated, is only in explanation of or toward the nature of the credit, obligatory on the part of the assessee to establish u/s. 68 of the Act. We find that the assessee has not given the details of cheques under which the amount was received from these parties which indicate that the amount was received in cash and not through cheques. There is no documentary evidence to support the claim of the assessee that this amount was received as an advance for supply of goods. There is no correspondence between the assessee and these parties regarding the amount received, the repayment offered by the assessee and the alleged refusal from these parties to accept the refunds. It is beyond imagination that an amount is received by the assessee as an advance against supply of goods and the assessee offered the refund to the parties which was refused by them, but there is no correspondence regarding the entire episode of refund and refusal and payment was 11 ITA No.7146/Mum/10

claimed to have been made to the creditors. The entire explanation of the assessee is only submission which is full of loopholes. Why were the cheques, issued in March 2005, not in favour of the creditors (buyers)? There is nothing to show that these were issued in the favour of the proposed buyers, and only subsequently endorsed in the favour of the sister concern, as stated by the ld. AR, on a query by the Bench during the hearing. Rather, why were the funds at all transferred to the account of the sister concern? The settlement, stated to be arrived at through the agency of the trade association, is completely unevidenced. Why, again, were the funds transferred from the account of the assessee's sister concern to that of the assessee's family members? The assessee has not produced any records to substantiate its story that the amount was finally repaid by the intervention of the 'Yarn Merchant Association'. The assessee has put forth an interesting story, however, it lacks substance and veracity. The AO has clearly brought out that the amount claimed to have been transferred to the sister concern was finally transferred to the family members of the partners in their personal account.

Further, the time gap between the alleged transfer of money by issue of cheques in the month of March and finally their encashment in the month of September 2003 also remains unexplained. Though, the assessee produced the confirmation from 18 parties out of the 21. However, we find that none of these confirmations explained how the amount was received by these creditors on so called refund. We have already stated the transfer of funds from the accounts of the assessee's family members to that of the creditors as totally unsubstantiated. There is no detail of cheque number through which this alleged amount was refunded to these creditors. Once the summons issued by the AO were received back then the service claimed by the assessee in person cannot be accepted unless and until someone from the party is produced before the AO to prove the genuineness of the transaction. We further note that in some of the cases the acknowledgement of the return was filed along with confirmation. However, all these returns are for income which is less than the minimum taxable income. Further, apart from the acknowledgement of return the assessee has not furnished the relevant record to show such payment as appearing in the accounts of these parties.

Therefore, in the absence of any documentary evidence to prove the genuineness of transaction 12 ITA No.7146/Mum/10

and creditworthiness of the creditors, the explanation of the assessee does not inspire confidence. The assessee's contention before us that what is being doubted is the 'repayment' and not the 'credit' itself, again, only needs to be stated to be rejected. Section 68 applies only to a credit appearing in the books of account of the assessee, so that the fact or the existence of the credit is a condition precedent for the application of section. The several doubts, which we have held as valid, qua repayment, only exhibit that the genuineness of the credit/s, i.e., of it representing a genuine liability of the assessee, is in serious doubt, much less proved, as required, i.e., if it is not to be considered as the assessee's income in view of section 68 of the Act, the case law on which is legion. Accordingly, in the facts and circumstances of the case except in the case of Textile Product Marketing Agency where there is actual transaction of supply of goods, in all other cases we do not find any error or illegality in the orders of authority below. Hence the addition under section 68 in respect of 21 parties is confirmed.

5.2 Ground No.3 and 4 regarding adhoc disallowance of motor car expenses, depreciation and telephone expenses.

5.3 We have heard the ld. AR as well as the ld. DR and considered the relevant material on record. The AO has disallowed 20% of the expenditure debited on account of motor car, depreciation and telephone on the ground of personal use of car and telephone. This disallowance was made by AO because the assessee has not produced the log book for running the car to verify the exclusive use of car for business purposes. Similarly the personal use of telephone was not ruled out because the assessee has not furnished the details. After considering the facts and circumstances of the case and the assessee being a partnership firm the personal use of car and telephone cannot be ruled out. However, the disallowance of 20% in our view is excessive and we find that 10% of the disallowance on account of personal use will be just and proper. Accordingly we restrict the disallowance of expenses on account of car depreciation and telephone to 10%.

4. In the result appeal is partly allowed.

13 ITA No.7146/Mum/10 Order pronounced in the open court on 12/02/2015 .

आदेश क घोषणा खुले यायालय म) *दनांकः 12/02/2015 को क गई ।

Sd/- Sd/- ( Sanjay Arora ) ( Vijay Pal Rao ) लेखा सद य / ACCOUNTANT MEMBER याियक सद य / JUDICIAL MEMBER मुंबई Mumbai; *दनांक Dated 12/02/2015 व.िन.स./ Jv, Sr. PS

आदे श क ूितिल प अमे षत/Copy षत of the Order forwarded to : 1. अपीलाथ / The Appellant 2. ू यथ / The Respondent. 3. आयकर आयु (अपील) / The CIT(A)- 4. आयकर आयु / CIT 5. वभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai 6. गाड% फाईल / Guard file. आदे शानुसार/ ार BY ORDER, स या पत ूित //True Copy// उप/सहायक उप सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, अिधकरण मुंबई / ITAT, Mumbai.