Jaydeep Cotton Fibers Pvt Ltd v. Assistant Commissioner Of Income Tax

C/SCA/20187/2017 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 20187 of 2017 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE B.N. KARIA ========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ?see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ?judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ?as to the interpretation of the Constitution of India or any order made thereunder ? ========================================================== JAYDEEP COTTON FIBERS PVT LTDVersus ASSISTANT COMMISSIONER OF INCOME TAX ========================================================== Appearance:MR B S SOPARKAR(6851) for the PETITIONER(s) No. 1MRS MAUNA M BHATT(174) for the RESPONDENT(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE B.N. KARIA Date : 03, 09/04/2018 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1.Petitioner has challenged a notice dated 30.03.2017 issued by the respondent-Assessing Officer to reopen the petitioner's assessment for the assessment year 2010-11. 2.Facts are as under. 3.Petitioner is a company registered under the Companies Act. One of the major activities of the petitioner company is to purchase raw cotton from the market including directly from the cultivators-farmers. Such cotton is either sold by the company directly as part of its trading activity or consumed in its ginning and processing activity. The assessee makes domestic as well as export sales. For the assessment year 2010-11, the petitioner had filed return of income on 23.09.2010, declaring total income of Rs.4.85 crores (rounded off). After first processing the return under section 143(1) of the Income Tax Act, 1961 ('the Act' for short) the same was taken in scrutiny. During such scrutiny assessment proceedings, the Assessing Officer examined the petitioner's purchases of cotton directly from farmers, for which, payments in cash were made even though the purchases exceeded Rs.20,000/-. The petitioner replied to the queries raised by the Assessing Officer with supporting materials. The Assessing Officer passed the order of assessment on 05.03.2013 and accepted the petitioner's income as returned making following observations: “2.In response to the said notices issued Shri Haresh Dadhania, CA from M/s. H. Jamnadas & Co., CAs. duly authorized representative of the assessee attended from time to time and furnished the details as called for. The books of account along with bills and vouchers were called for and examined on test check basis. The case was also discussed with him. 3.The assessee company is engaged in the business of Manufacturing of Cotton & Cotton Seeds under the name & style of M/s.Jaydeep Cotton Fibers Pvt. Ltd. During the year under consideration, the assessee company has shown total sales of Rs.3670091744/- on which the Gross profit declared of Rs.226097106/- which in terms of percentage comes to 6.16% as against the total sales of Rs.1690247230/- on which the Gross profit of Rs.72855576/- disclosed in the immediately preceding year i.e. 4.31%. Since the Gross Profit ratio are increased by 1.85% so trading results declared by the assessee are accepted. 4.After discussion and data made available on records, the total income of the assessee is accepted as such i.e. Rs. 4,85,20,270/-. 3.The assessee company is engaged in the business of Manufacturing of Cotton & Cotton Seeds under the name & style of M/s.Jaydeep Cotton Fibers Pvt. Ltd. During the year under consideration, the assessee company has shown total sales of Rs.3670091744/- on which the Gross profit declared of Rs.226097106/- which in terms of percentage comes to 6.16% as against the total sales of Rs.1690247230/- on which the Gross profit of Rs.72855576/- disclosed in the immediately preceding year i.e. 4.31%. Since the Gross Profit ratio are increased by 1.85% so trading results declared by the assessee are accepted. 4.After discussion and data made available on records, the total income of the assessee is accepted as such i.e. Rs. 4,85,20,270/-. Total Income Rs.4,85,20,270/-“ C/SCA/20187/2017 JUDGMENT 4.Subsequently, the petitioner was subjected to survey operation. During such survey and post-survey, the departmental authorities raised various queries. All these queries were revolving around the assessee's purchase of cotton directly from farmers, for which, cash payments were made. Multiple details called from the petitioner included the verification of the farmer producers, their land holdings and their confirmation of sale of the produce to the petitioner. Since the petitioner had purchased cotton from large number of farmers, such details were called for some of them on sample basis. The petitioner supplied such information to the extent possible and tried to justify the reasons for not being able to supply for the rest. 5.It appears that the department carried detailed inquiries with the details so supplied by the petitioner. Investigation Wing of the department contacted the State Government Revenue authorities and tried to match the election card details or Aadhar Card details of the farmers as the case may be, as well as their land holdings and crop patterns. An extensive report was prepared which was presented before the Assessing Officer. On the basis of such materials so available, the Assessing Officer recorded his reasons for forming a belief that income chargeable to tax had escaped assessment. He thereafter issued the impugned notice for reopening the assessment. His recorded reasons were as follows: “During the course of search and survey on Vadalia group, it was observed that one of the group concern M/s Jaydeep Cotton Fibres Pvt Ltd had booked large number of unregistered (URD) cash purchases of agro commodities (mainly raw cotton) which was running into crores of rupees every year for last 7 financial year. These were the purchases of mainly cotton which the assessee stated to have made directly from the farmers for which the company had issued self-made cash vouchers. Large number of vouchers recorded cash purchases of more than 3-4 lacs per voucher. Further the total quantum of cash URD purchases was huge for the 7 FY covered under the search whose FY-wise quantum was determined from the books of accounts seized/impounded during the search/survey and is as under- C/SCA/20187/2017 JUDGMENT Further it was found that assesse has claimed all these cash purchases exceeding Rs 20,000 as business expenses in light of the provisions of section 40A(3) rw Rule 60D(e). It is important to mention here that rule 6DD(e) grants immunity from the provisions of section 40A(3) only if cash payments in excess of Rs. 20,000 are made to the cultivator, grower or producer for the purchase of agricultural produce. C/SCA/20187/2017 JUDGMENT Further it was found that assesse has claimed all these cash purchases exceeding Rs 20,000 as business expenses in light of the provisions of section 40A(3) rw Rule 60D(e). It is important to mention here that rule 6DD(e) grants immunity from the provisions of section 40A(3) only if cash payments in excess of Rs. 20,000 are made to the cultivator, grower or producer for the purchase of agricultural produce. Hence during the course of survey on Jaydeep Cotton Fibres Pvt Ltd the CEO of the company Sh Chirag Mansukh Patel was asked to produce the documents so as to prove that the URD cash purchases had been made from cultivators. However he could not produce any such documents and accepted that we have no such documentary evidence to prove that the sellers were cultivators. Several details pertaining to URD purchases were called during post search enquiries. From the submission it becomes clear that the assessee fails to prove even 1% of their URD cash purchases that the purchasesweremadefrom cultivators/growers/producers. Not even a single person was produced in the office. Though certain submissions were made by the assessee but in no case PAN or return of income was submitted by the assessee. No confirmation was submitted by the assessee from the purchase parties regarding the cash sales. No information was submitted by the assessee regarding the cultivation area, production and yield. from Further it is noticed that the 7/12 and 8-A forms submitted in respect of various parties were incomplete and/or incorrect. Eg in many cases, the land was not in the name of the person from whom purchases were recorded in the books. In many cases the crop was not mentioned at all on the form No-12 and in many cases the crop mentioned on the form No-12 was other than cotton. Independent enquiries were conducted by the Investigation Wing Rajkot through the office of District Collector cum District Electoral Officer, Rajkot and Revenue InspectionCommissioner,Gandhinagar, Gujarat to verify the claim of assessee u/s 40A(3) with respect to the URD purchases. The purchase data submitted by the assessee is tallied with the District Electoral Data Gandhinagar, The and the land record data received from Revenue Inspection Commissioner. The enquiries done by the Investigation Wing through the District Electoral Office and revenue inspection Commissioner point to mass discrepancy with regards to the purchases made by the assesses during block AY (2011-12 to 2017-18). The District Collector cum District Electoral Officer of Rajkot submitted the verification report after tallying the names in the URD purchases against the electoral records. On analysis of the data it emerges that out of the 794 URD purchase entries whose electoral records were retrieved, 484 names were non-existent in the respective villages which assessee had recorded against their names in its books of account. In percentage terms it can be stated that 61% of the purchase parties were non-verifiable from the electoral records of the respective villages. Hence the purchases made from these persons becomes doubtful and the claim of the assessee u/s 40A(3) rw Rule 6DD becomes further weak based on the outcome of this exercise for the concerned persons. It reveals a fabricated modus operandi wherein real net profit is concealed to give way to net profit which is abysmal. The NP ratio of assessee ranges from 0% to 2% from FY 2009-10 to FY 2015-16. t cannot be a prudent business practice in terms of return of income to show such less marginal NP. their names in its books of account. In percentage terms it can be stated that 61% of the purchase parties were non-verifiable from the electoral records of the respective villages. Hence the purchases made from these persons becomes doubtful and the claim of the assessee u/s 40A(3) rw Rule 6DD becomes further weak based on the outcome of this exercise for the concerned persons. It reveals a fabricated modus operandi wherein real net profit is concealed to give way to net profit which is abysmal. The NP ratio of assessee ranges from 0% to 2% from FY 2009-10 to FY 2015-16. t cannot be a prudent business practice in terms of return of income to show such less marginal NP. Investigation Wing Rajkot conducted further enquiry through Revenue Department granted access to the land records (Form No- 7/12) of Saurashtra region. In this exercise the existence of land in the names of the URD purchase parties of the assessee was verified for respective villages with the purpose whether these parties as submitted by the assessee were actually farmers and did they have land to produce agriculture earnings. The data retrieved from the land revenue records shows that out of a total of 1602 “URD purchase parties verified in the land records, 963 persons don't possess land in the respective villages. ie 60% of the persons are non-verifiable from the land revenue records also. This is a significant finding that these people from whom purchases have been made in huge quantities and for which huge payments have been made do not possess land to cultivate agriculture produce. The assessee has been confronted and he could not satisfactorily explain these discrepancies. The enquiries done by the Investigation Wing through the District Electoral Office and revenue Inspection Commissioner point to mass discrepancy with regards to the purchases made by the assessee during block AY. Hence the benefit of rule 6DD cannot be given to him for those cash purchases. Further the analysis of the electoral data on a sample of around 800transactions and of land revenue data on a sample of around 1600 showsthatroughly60%ofthe transactions/persons are non-verifiable thereby shifting the onus back on the the assessee. In view of above I have reasons to believe that the 60% of the purchases i.e. Rs.32,02,09,920/- chargeable to tax has escaped within the meaning of Sec. 147 of the I.T. Act 1961. As the present case falls in the time limit of 4 to 6 years from the end of relevant AY, the approval of Pr CIT is sought for the reopening, which is accorded vide letter dated 27/03/2017.” 6.Petitioner raised objections to the notice of reopening under communication dated 12.07.2017. Such objections were however rejected by an order dated 17.08.2017, upon which, this petition came to be filed. 7.Taking us extensively to the materials on record, counsel for the petitioner raised following contentions: I.Original assessment of the return filed by the petitioner was scrutinized, during which, the Assessing Officer had raised specific queries about the assessee's cash purchases of cotton from farmers directly. The petitioner had provided full material with respect to the details so asked for. After being satisfied about the genuineness of the purchases, the C/SCA/20187/2017 JUDGMENT Assessing Officer passed the order of assessment. Any attempt on part of the Any attempt on part of the Assessing Officer now to reassess such income would amount to change of opinion. II.Impugned notice has been issued beyond a period of four years from the end of relevant assessment year. There was no failure on the part of the assessee to disclose truly and fully all material facts. The notice is therefore bad in law. C/SCA/20187/2017 JUDGMENT Assessing Officer passed the order of assessment. Any attempt on part of the Any attempt on part of the Assessing Officer now to reassess such income would amount to change of opinion. II.Impugned notice has been issued beyond a period of four years from the end of relevant assessment year. There was no failure on the part of the assessee to disclose truly and fully all material facts. The notice is therefore bad in law. III. Counsel submitted that the Assessing Officer has proceeded on completely erroneous premises as can be seen from the reasons recorded. Further, the reopening of the assessment is based on conjectures and surmises. Notice has been issued for mere verification. Counsel submitted that failure on the part of the petitioner to produce large number of farmers before the Revenue authorities during the post survey inquires, would not enable the Assessing Officer to reopen the assessment. After a long period of time, the farmers would in any case be reluctant to appear before the authorities, particularly when their income being tax exempt, they had no stakes in the matter. 8.On the other hand, learned counsel Shri Bhatt for the department opposed the petition contending that Assessing Officer had voluminous material at his command to enable him to form a belief that income chargeable to tax has escaped assessment. There were large scale discrepancies in the information supplied by the petitioner with respect to the farmers. When such information was tallied or checked with the State Revenue authorities, in number of cases it was found that the farmer who was supposed to have sold the crop did not own the agricultural land. In some other cases, the electoral roll did not contain the names of the farmers of the same village. These discrepancies were processed and collected by the investigation wing which culminated into a report which was prepared and produced before the Assessing Officer. The Assessing Officer thus at his command, had the material collected during the survey, post-survey inquiries and the information supplied by the State Government agencies which was referred to in the investigation report. He submitted that when it is prima-facie shown that the purchases were bogus, merely because the Assessing Officer had during the original assessment proceedings made some limited inquiries, would not prevent the Assessing Officer from reopening the assessment. This would not be a case of change of opinion since additional material was available with the Assessing Officer which prima-facie showed that the disclosures made by the assessee were not true. 9.Few preliminary issues may be cleared at the outset. Present, undoubtedly, is a case where the original assessment was completed after scrutiny. In such scrutiny assessment, the petitioner's purchases of cotton directly from farmers, for which, cash payments were made, did attract the attention of the Assessing Officer. He therefore raised queries and elicited response from the assessee. On the face of it therefore, this issue is one which was examined by the Assessing Officer during the original assessment proceedings. If on the basis of the same material, the Assessing Officer desired to take a re-look or 9.Few preliminary issues may be cleared at the outset. Present, undoubtedly, is a case where the original assessment was completed after scrutiny. In such scrutiny assessment, the petitioner's purchases of cotton directly from farmers, for which, cash payments were made, did attract the attention of the Assessing Officer. He therefore raised queries and elicited response from the assessee. On the face of it therefore, this issue is one which was examined by the Assessing Officer during the original assessment proceedings. If on the basis of the same material, the Assessing Officer desired to take a re-look or reassess the same income, it would undoubtedly be a case of change of opinion. Even within four years, reopening of the assessment would not be permissible. Present being a case of notice being issued beyond a period of four years, the additional requirement of lack of true and full disclosure on the part of the assessee leading to income chargeable to tax escaping assessment would also arise. However, the question of true and full disclosures in a case like the present one would have a close link with the fresh or the additional material the Assessing Officer may have gathered after the assessment was completed. If the Assessing Officer is in a position to demonstrate that there is enough material available, prima-facie suggesting that the purchases were bogus and in the large number of cases, the farmers producers either did not exist or did not carry out agricultural activities of producing sufficient cotton to sell to the petitioner, the very foundation of the petitioner's disclosures would become shaky. However, when the Assessing Officer is seeking to reopen the assessment several years after the completion of the financial year and long number of years even after the completion of assessment proceedings, the nature of the material at his command with a limited purpose of ascertaining its existence, would certainly be called for. 10.In this context, we would have to refer to the material on record at some length. Before doing that, we may summarize the reasons why the Assessing Officer desires to reopen the assessment. In the reasons recorded, he noted that the assessee had made cash purchases of cotton by issuing vouchers. Typically, these purchases were in the range of Rs.3 to 4 lakhs. For different assessment years, the total of such purchases varied. In the assessment year 2010-11, the assessee had made such cash purchases, total value of which came to Rs.53.36 crores (rounded off). He recorded that though each such cash purchase exceeded Rs.20,000/-, in terms of rule 6DD, the assessee had not made payment through banking channel since such purchasers were stated to be cultivators, growers or producers of the agricultural produce. During the survey, the CEO of the company was asked to produce the documents. He could not produce the documents to prove that the sellers were cultivators. During the post survey inquiries, the assessee could not produce any cultivator, grower or producer before the authority. The PAN number and the return of income was not produced. Their confirmations were also not produced, nor could the assessee produce the details of the area under cultivation, the production and the yield. 7/12 and 8A forms submitted by the assessee did not match with the sellers and in some cases, the crop mentioned in the Revenue records was other than cotton. It was also recorded that independent inquiries were made with the State Election authorities and it was found that the electoral rolls do not match with many sellers. Inquiries were also made with State Revenue authorities where it was found that in large number of cases, the agriculturists do not possess the lands in their respective villages. The Assessing Officer noted that the net profit ratio in case of the assessee was low. The Assessing Officer referred to the sample data of some 1600 such sellers and found that there were many discrepancies of the above noted nature in case of majority of them. 11.To summarize, the Assessing Officer's reasons for forming a belief that income chargeable to tax has escaped assessment flows from following premises.(i)During survey, the assessee could not produce documentary evidence to prove that the sellers were the cultivators. (ii) The assessee could not produce a single farmer before the authority. (iii)Thelandrecordsshowedmany discrepancies. Land was not in the name of the person from whom purchases were made and the land record did not show cotton as the crop in some cases. (iv) The assessee could not produce PAN or returns of the sellers. (v)The election card details of the farmers did not match with the Government's official record in some cases. (vi) The net profit ratio of the assessee was very low. (vii)In large number of cases, the records were not verifiable. The farmers do not own lands in their names. The assessee could not satisfy these discrepancies. 09.04.18 12.In the objections raised as well as before us, the assessee has been contending that the reasons cited by the Assessing Officer were not valid. The assessee could not be expected to present the producers or growers of the cotton before the authorities several years after the purchases were made. Evidence shows that majority of the purchasers were owning lands. In some cases, the lands were in the names of the family members, that by itself, would not mean that the person from whom such produce was purchased was not a genuine producer. In India, the agricultural operations are often carried out by persons who may not be owning the lands. The assessee's profit ratio for the current year was as good or better than the current year and in any case, the assessee in making profit higher than other entities engaged in the same business. The sellers being agriculturists, their income was exempt. Question of providing their PAN or returns did not arise. arise. 13.We must remember that in the present case, the return filed by the assessee was originally taken in scrutiny and during which scrutiny assessment, the Assessing Officer had examined this issue pointedly. This therefore was a scrutinized issue. We may also remember that the impugned notice has been issued beyond the period of four years from the relevant assessment year. We may approach the different grounds which weighed with the Assessing Officer which are summarized above, with this background in mind. The combined effect of these ground pressed in service by the Assessing Officer seems to be that during the post survey inquiries, he put the entire burden of reestablishing the genuineness of the purchasers on the assessee. These purchases were made several years before from thousands of individual agriculturists who were the growers of the crop. The fact that the assessee could not produce documentary evidence to prove that the sellers were the cultivators during the survey can therefore hardly be a factor which could weigh while judging that income chargeable to tax has escaped assessment. The agriculturists who had sold the crop to the assessee at the relevant time, would be reluctant to come before the Revenue authorities and this therefore, by itself, may also not be a relevant factor. In any case, we are informed that in the present year, the assessee had produced every person who the Assessing Officer required for the purpose of ascertaining the factum of sale. Such persons had also backed the assessee. The fact that some of the land records did not show the names of the agriculturists concerned was also explained by the assessee by pointing out that in most of the cases, the land was in the name of the near relative of the producer. In some cases, it may happen that the producer may not own the land. However, merely not owing the land does not mean that he is not cultivating the land. Being enrolled in some other village as a voter also would not be conclusive since it is not uncommon that in case of migrating population, the name may be shown as a voter in the native place whereas the person may have settled for work or occupation at a different place. The income from agriculture being exempt, the petitioner cannot C/SCA/20187/2017 JUDGMENT be blamed if PAN or returns of sellers were not produced. In totality, the Assessing Officer has referred to some bids and pieces of material to form a belief that the purchases were not genuine. During the course of original assessment, the Assessing Officer may be well within its rights to carry out minute possible detailed inquiry with respect to all such sales and purchases. However, one such inquiry was over. Scrutiny assessment framed, during which, these transactions came up for pointed consideration, reopening of assessment cannot be permitted on mere surmises, conjectures, suspicion or for further inquiry. The added element of the notice being issued beyond the period of four years from the end of relevant assessment year is also relevant. 14.In the result, impugned notice is quashed. Petition is allowed and disposed of. (AKIL KURESHI, J) ANKIT SHAH (B.N. KARIA, J)