Commissioner of Income Tax vs T.M.V. Shenoy

C.N. Ramachandran Nair, J.—The question raised in the connected appeals filed against two related Assessees is one and the same and therefore, we combined the appeals and proceed to dispose of the same by this common judgment.

Heard senior standing counsel appearing for the department and senior counsel Mr. V. Ramachandran appearing for the Respondent-Assessee.

The assessments in the case of Messrs. T.M.V. Shenoy pertains to the years 1996-97 to 2001-02 whereas assessments involved in the case of Messrs. K.H. Dhamdhere pertains to the assessment years 1997-98 to 2002-03. We have gone through the main orders produced in ITA Nos. 722/2009 and 1184/2009. Some of the assessments are income escaping assessments made based on material collected on survey conducted u/s 133A of the Act and for later years assessments are regular assessments which are also based on the details collected during survey. The Assessee is engaged in purchase, processing and trading in synthetic perfumes and herbal oil extracts such as vert vert oil, lemon grass oil, and herbals like Koduveli, wild ginger etc. The suppliers bring the goods from far away places in the western ghats like Rajakad, Kuttiyoor, Kelakam, Vanianpady, Sultan Bethery etc. The Assessing Officer noticed that all purchases accounted are below the limit that attracts Section 40(a)(iii) of the Income Tax Act entitling the Assessee for cash purchases. However, on verifying the purchase documents it was noticed, that the suppliers have not issued any documents and all the purchases are made by the Assessee with their own printed bought notes. The bought notes contain only name of the supplier and the place from where he hails but without any address of the supplier. In other words in none of the cases the supplier is identifiable or traceable because the bought notes do not contain the address of any of the suppliers. Further, the suppliers are not regular suppliers of the Respondent-Assessee but the Assessing Officer found that every supplier has supplied goods only once in a year. The bought note shows only one date that is the date of purchase and beneath the bought note there is signature of the supplier acknowledging 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 against cash payments made on same date. However, on verifying the purchase account of the Assessee, the Assessing Officer found that the entire purchases are accounted as credit purchases though cash payments were made on the date of purchase itself as seen from the bought notes. Therefore, Assessing Officer treated the payments made under the bought notes as unexplained expenditure and brought the same to tax u/s 69C of the Income Tax Act.

The Assessee filed appeals against the assessments challenging the additions made u/s 69C of the Act. The first appellate authority partly allowed the appeal by deleting additions made as such but by sustaining addition of only peak of the purchases. The Tribunal on second appeal filed by the department as well as the Assessee cancelled the entire additions on the ground that Section 69C is not applicable.

During the initial hearing we directed the department to produce the seized records which are produced before us during the final hearing held today. On going through the bought notes we find that the allegation made by the Officer is perfectly correct because none of the bought notes contain full address of the supplier and going by the receipt of cash acknowledged by the supplier, the bought notes clearly establish that those purchases are actually cash purchases made by the Assessee. In other words cash is paid against supply of goods on the date of purchase itself. Obviously Assessee did not have cash balance in the books to account to make cash payments on the dates of making the purchase and paying for the same. Therefore, purchases are accounted as credit purchases in the books of account though the bought notes prove to the contrary. The question to be considered is whether Section 69C addition is called for. While the senior counsel appearing for the department contended that Section 69C is attracted because Assessee has not offered any explanation for the expenditure incurred that is actual payment made against purchases after accounting the transactions as credit purchases, the contention of the senior counsel appearing for the Respondent is that at the maximum Assessee did not have cash balance in the book to account the payments on the dates of purchases but the Assessee has in fact accounted the cash payments later. As already noticed by us, this is a case of Assessee''s purchasing raw materials with unaccounted cash and later accounting payments as and when cash balance is available in the books of account. However, what we find is that the Assessing Officer has not examined as to how the Assessee generated the cash to account payments for the credit purchases accounted which were in fact purchases against cash payments. The Assessee cannot run the business, whether in manufacturing or processing or even trading, without purchasing the goods and without paying for the same. This is a case where the genuineness of Assessee''s account itself has to be gone into because neither address of the supplier is there nor the credit purchase accounted is correct inasmuch as bought note show that the goods are paid for on the date of purchase itself. However, since Assessing Officer has not doubted the genuineness of purchases accounted by the Assessee and what he has found is that Assessee has only accounted cash purchases as credit purchases, the question to be considered is from what source Assessee later accounted payments. If the Assessee has already made payments at the time of purchases, the later payments accounted in the books obviously would not have taken place leaving unaccounted cash with the Assessee. However, there is nothing to indicate even in the assessment order as to what happened to the cash later shown as paid but actually not paid by the Assessee by reversing the credit entries shown in the purchase account. Assessing Officer himself recorded in the orders that Assessee has accounted payments around ten months after accounting cash purchases as credit purchases. Since payments are already made at the time of purchase, Assessee has obviously unaccounted cash with them, whether from their own source or from elsewhere, which certainly could be brought to tax u/s 69C because when purchase is accounted as a credit purchase, the cash actually paid for the goods purchased remains unaccounted and so much so it assumes the character of unexplained expenditure. However, if additions are made on this basis, then certainly the Assessee is entitled to debit the purchase cost in the computation of income. In other words the additions u/s 69C should not be disallowance of expenditure for the purchase of raw materials for processing or for trading if the purchases are genuine. We feel the Assessing Officer should consider the entire accounts pertaining to purchase of raw materials and all other transactions and additions should be made only to the extent of the unaccounted income if any generated by the Assessee in the course of business. Assessee''s contention accepted by the Tribunal is that Assessee has been following the same system of accounting for the last several years. In our view this only indicates that Assessee is generating and rolling black money and their accounts are unreliable.

It is seen from the assessment orders that Assessing Officer has accepted the profit arrived under the profit and loss account and only one addition u/s 69C is made. If the addition u/s 69C has lead to disallowance of cost of materials purchased, then the same cannot be sustained. Therefore, we feel the entire account and transactions call for examination before making addition u/s 69C. Further, in view of the fact that the purchase account does not record correct position, it is for the officer to examine the correctness of the other accounts maintained by the Assessee. We therefore, feel that the Tribunal was not justified in allowing the appeals by holding that Section 69C is not applicable. In fact, in our view Section 69C applies to the facts of this case but what we feel is addition u/s 69C when it relates to purchases, the genuineness of which are not doubted should not lead to disallowance of expenditure on purchases. We therefore, allow the appeals by setting aside the orders of the Tribunal and that of the CIT (Appeals) in both set of cases and remand the matter to the Assessing Officer for reconsidering the entire assessments after giving opportunity to the Assessee. We make it clear that the Assessing Officer should after examining the accounts and after considering the matter issue pre-assessment notice and make assessment after giving an opportunity to the Assessee for hearing.