Ita/111/2009 Of The Commissioner Of Income Tax v. M/S.t.m.v.shenoy

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN WEDNESDAY, THE 29TH SEPTEMBER 2010 / 7TH ASWINA 1932 ITA.No. 111 of 2009(Y) ------------------------------- ITA. NO.780/COCH/2007 OF I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT: -------------------------------------- THE COMMISSIONER OF INCOME TAX,COCHIN. BY SRI. P.K.R. MENON, SENIOR ADVOCATE, S.C, G.O.I (TAXES, ADV.SRI.JOSE JOSEPH, SC, INCOME TAX. RESPONDENT/RESPONDENT: ------------------------------------------- M/S. T.M.V. SHENOY,PERFUMERS, MAHAKAVI BHARTHIYAR ROAD,COCHIN – 682 035. BY SRI.V. RAMACHANDRAN, SENIOR ADVOCATE, ADVS. SRI.K.ANAND, SMT.LATHA KRISHNAN. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 29/09/2010,ALONG WITH ITA. NO.475 OF 2009 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR &K. SURENDRA MOHAN, JJ. ------------------------------------------------------------ I.T.A.NOS: 111, 475, 481, 511, 1211,1235, 722, 1062, 1181, 1182,1184 & 1227 OF 2009 ----------------------------------------------------------- Dated this the 29[th] September, 2010. JUDGMENT Ramachandran Nair, J. The question raised in the connected appeals filed againsttwo related assessees is one and the same and therefore wecombined the appeals and proceed to dispose of the same in thiscommon judgment. 2. Heard senior standing counsel appearing for thedepartment and senior counsel Mr. V.Ramachandran appearing forthe respondent-assessee. 3. The assessments in the case of Messrs. T.M.V.Shenoypertains to the years 1996-97 to 2001-02 whereas assessmentsinvolved in the case of Messrs. K.H.Dhamdhere pertains to theassessment years 1997-98 to 2002-03. We have gone through themain orders produced in I.T.A.Nos: 722/2009 and 1184/2009.Some of the assessments are income escaping assessments madebased on material collected on survey conducted under Section133A of the Act and for later years assessments are regular ITA Nos: 111/2009 etc. assessments which are also based on the details collected duringsurvey. The assessee is engaged in purchase, processing andtrading in synthetic perfumes and herbal oil extracts such asvertvert oil, lemon grass oil, and herbals like Koduveli, wild gingeretc. The suppliers bring the goods from far away places in thewestern ghats like Rajakad, Kuttiyoor, Kelakam, Vanianpady, SultanBethery etc. The Assessing Officer noticed that all purchasesaccounted are below the limit that attracts Section 40(A)(iii) of theIncome Tax Act entitling the assessee for cash purchases.However, on verifying the purchase documents it was noticed thatthe suppliers have not issued any documents and all the purchasesare made by the assessee with their own printed bought notes.The bought notes contain only name of the supplier and the placefrom where he hails but without any address of the supplier. Inother words in none of the cases the supplier is identifiable ortraceable because the bought notes do not contain the address ofany of the suppliers. Further the suppliers are not regular suppliersof the respondent-assessee but the Assessing Officer found thatevery supplier has supplied goods only once in a year. The boughtnote shows only one date that is the date of purchase and beneaththe bought note there is signature of the supplier acknowledging ITA Nos: 111/2009 etc. receipt of the amount. However there is nothing to indicate on ITA Nos: 111/2009 etc. receipt of the amount. However there is nothing to indicate on which date the supplier received the payment for the sale made.Every bought note therefore shows that purchase was made againstcash payments made on same date. However, on verifying thepurchase account of the assessee the Assessing Officer found thatthe entire purchases are accounted as credit purchases though cashpayments were made on the date of purchase itself as seen fromthe bought notes. Therefore, Assessing Officer treated thepayments made under the bought notes as unexplainedexpenditure and brought the same to tax under Section 69C of theIncome Tax Act. 4. The assessee filed appeals against the assessmentschallenging the additions made under Section 69C of the Act. Thefirst appellate authority partly allowed the appeal by deletingadditions made as such but by sustaining addition of only peak ofthe purchases. The Tribunal on second appeal filed by thedepartment as well as the assessee cancelled the entire additionson the ground that Section 69C is not applicable. 5. During the initial hearing we directed the department toproduce the seized records which are produced before us duringthe final hearing held today. On going through the bought notes ITA Nos: 111/2009 etc. we find that the allegation made by the Officer is perfectly correctbecause none of the bought notes contain full address of thesupplier and going by the receipt of cash acknowledged by thesupplier, the bought notes clearly establishe that those purchasesare actually cash purchases made by the assessee. In other wordscash is paid against supply of goods on the date of purchase itself.Obviously assessee did not have cash balance in the books toaccount cash payments on the date of making the purchase andpaying for the same. Therefore, purchases are accounted as creditpurchases in the books of account though the bought notes proveto the contrary. The question to be considered is whether Section69C addition is called for. While the senior counsel appearing forthe department contended that Section 69C is attracted becauseassessee has not offered any explanation for the expenditureincurred that is actual payment made against purchases afteraccounting the transactions as credit purchases, the contention ofthe senior counsel appearing for the respondent is that at themaximum assessee did not have cash balance in the book toaccount the payments and the assessee has in fact accounted thecash payments later. As already noticed by us, this is a case ofassessee's purchasing raw materials with unaccounted cash and ITA Nos: 111/2009 etc. ITA Nos: 111/2009 etc. later accounting payments as and when cash balance is available inthe books of account. However, what we find is that the assessingofficer has not examined as to how the assessee generated thecash to account payments for the credit purchases accounted whichwere in fact purchases against cash payments. The assesseecannot run the business, whether in manufacturing or processing oreven trading, without purchasing the goods and without payingfor the same. This is a case where the genuineness of assessee'saccount itself has to be gone into because neither address of thesupplier is there nor the credit purchase accounted is correct in asmuch as bought note show that the goods are paid for on the dateof purchase itself. However, since Assessing Officer has notdoubted the genuineness of purchases accounted by the assesseeand what he has found is that assessee has only accounted cashpurchase as credit purchase, the question to be considered is fromwhat source assessee later accounted payments. If the assesseehas already made payments at the time of purchases, the laterpayments accounted in the books obviously would not have takenplace leaving unaccounted cash with the assessee. However, thereis nothing to indicate even in the assessment order as to whathappened to the cash later shown as paid but actually not paid by ITA Nos: 111/2009 etc. the assessee by reversing the credit entries shown in the purchaseaccount. Assessing Officer himself recorded in the orders thatassesee has accounted payments around ten months afteraccounting cash purchases as credit purchases. Since payments arealready made at the time of purchase, assessee has obviouslyunaccounted cash with them, whether from their own source orfrom elsewhere, which certainly could be brought to tax underSection 69C because when purchase is accounted as a creditpurchase, the cash actually paid for the goods purchased remainsunaccounted and so much so it assumes the character ofunexplained expenditure. However, if additions are made on thisbasis, then certainly the assessee is entitled to debit the purchasecost in the computation of income. In other words the additionsunder Section 69C should not be disallowance of expenditure forthe purchase of raw materials for processing or for trading if thepurchases are genuine. We feel the Assessing Officer shouldconsider the entire accounts pertaining to purchase of rawmaterials and all other transactions and additions should be madeonly to the extent of the unaccounted income if any generated bythe assessee in the course of business. Assessee's contentionaccepted by the Tribunal is that assessee has been following the ITA Nos: 111/2009 etc. same system of accounting for the last several years. In our viewthis only indicates that assessee is generating and rolling blackmoney and their accounts are unreliable. ITA Nos: 111/2009 etc. same system of accounting for the last several years. In our viewthis only indicates that assessee is generating and rolling blackmoney and their accounts are unreliable. 6. It is seen from the assessment orders that AssessingOfficer has accepted the profit arrived under the profit and lossaccount and only one addition under Section 69C is made. If theaddition under Section 69C has lead to disallowance of cost ofmaterials purchased, then the same cannot be sustained.Therefore, we feel the entire account and transactions call forexamination before making addition under Section 69C. Further, inview of the fact that the purchase account does not record correctposition, it is for the officer to examine the correctness of the otheraccounts maintained by the assessee. We therefore feel that theTribunal was not justified in allowing the appeals by holding thatSection 69C is not applicable. In fact, in our view Section 69Capplies to the facts of this case but what we feel is addition underSection 69C when it relates to purchases, the genuineness of whichare not doubted should not lead to disallowance of expenditure onpurchases. We therefore, allow the appeals by setting aside theorders of the Tribunal and that of the CIT (Appeals) in both set ofcases and remand the matter to the Assessing Officer for ITA Nos: 111/2009 etc. reconsidering the entire question after giving opportunity to theassessee. We make it clear that the Assessing Officer should afterexamining the accounts and after considering the matter issue pre-assessment notice and make assessment after giving anopportunity to the assessee for hearing. C.N.RAMACHANDRAN NAIR Judge jj K. SURENDRA MOHANJudge