ORDER
S.C. Tiwari, A.M.
1. This appeal has been filed by the assessee on 5th Jan., 2004, against the order of the learned CIT(A)-XXIV, New Delhi, dt. 24th Nov. 2003, in the case of the assessee in relation to assessment order under Section 143(3) for asst. yr. 2000-01.
2. Main dispute in this appeal is directed against the addition of a sum of Rs. 3,02,50,000 made by the AO under Section 68 in respect of cash credits in the name of Kamlesh Steel (P) Ltd. Facts of the case leading to this ground of appeal, briefly, are that during the course of assessment proceedings, the learned AO noted that there was a credit balance of Rs. 11,27,40,000 appearing in the books of account of the assessee in the name of Kamlesh Steel (P) Ltd. The learned AO noticed that the opening balance in this account was Rs. 8,24,90,000 and during the period 30th July, 1999 to 16th Aug., 1999, the assessee received further amounts by way of cheque Nos. 352210 to 352221 of the value of Rs. 3 crores and another cheque No. 470216 for Rs. 2,50,000. Thereafter, the assessee returned money to the extent of Rs. 2 crores during the period 8th Oct., 1999 to 11th Oct., 1999. However, the sum of Rs. 2 crores was again received by the assessee during the period 3rd Feb., 2000 to 7th Feb., 2000, by cheque Nos. 352950 to 352954 of Rs. 40 lakhs each. The AO found that the series of the cheque numbers first was from 352210 to 352221 and thereafter it was from 352950 to 352954. The AO issued a letter dt. 3rd July, 2003, to the assessee wherein the AO pointed out that neither the letter of confirmation nor the copy of account had been filed in the case of Kamlesh Steel (P) Ltd. The AO asked the assessee to furnish certain specified information in respect of this account and, in particular, he asked the assessee to establish identity, creditworthiness and genuineness of the transaction, including PAN Number of the creditor and the particulars of assessment in case of the creditor. The AO also asked the assessee to explain the current position of the account as to whether the funds had been returned back and, if so, when and how ? According to the AO, the case was fixed thereafter on 14th Feb., 2003, 3rd March, 2003, 6th March, 2003, 10th March, 2003 and 11th March, 2003. The assessee did not do anything better than seeking adjournment of hearing on various dates. However, on 21st March, 2003, the assessee furnished new address of Kamlesh Steel (P) Ltd. Thereupon, the AO issued summons to the party for appearance and deposition on 28th March, 2003. The assessee was also asked to appear on that date. However, the summons issued by the learned AO at the address of Kamlesh Steel (P) Ltd., as furnished by the assessee, could not be served because that turned out to be the residence of one of the directors of the company named Mr. N.K. Taneja, who had expired one and a half month ago. Thereupon, the assessee informed the AO that Mr. Munjal Taneja, son of late Shri N.K. Taneja, had been appointed its director after the death of Mr. N.K. Taneja and that Shri Munjal Taneja was also residing at the same address. Thereafter, fresh summons were served on Mr. Munjal Taneja for appearance on 28th March, 2003. On 28th March, 2003 one Shri G.P. Garg, representative of Shri Munjal Taneja, attended and informed that there had already been a search under Section 132 in the case of M/s Kamlesh Steel (P) Ltd. Shri Garg submitted that no useful purpose would be served by calling Mr. Munjal Taneja, who had been recently appointed as director. Shri Garg stated that instead he would file a copy of order under Section 158BC in the case of Kamlesh Steel (P) Ltd. The same was filed on 29th March, 2003. In the assessment order, the learned AO has extracted certain portions of the said order under Section 158BC in case of Kamlesh Steel (P) Ltd. That order revealed that Shri N.K. Taneja could not substantiate the genuineness of alleged projects executed by Kamlesh Steel (P) Ltd. He could not furnish even the rudimentary details of the alleged business. He could not inform where the projects were located; how the alleged contracts were received; with whom the assessee dealt with on behalf of the contractees. Shri Taneja could not refute the conclusion that no professional services were rendered by Kamlesh Steel (P) Ltd. and the projects were on paper only, especially when the company did not have any technical manpower or know-how. It was further found that there were certain deposits credited in the books of account of Kamlesh Steel (P) Ltd., which on examination were found to be not genuine.
3. The learned AO held that in spite of opportunities, the assessee could not establish genuineness of the transactions recorded in the name of Kamlesh Steel (P) Ltd. The alleged creditor did not have the means to advance this kind of money to the assessee and appeared only to be a name lender without having any real funds. Balance sheet of Kamlesh Steel (P) Ltd. for asst. yr. 2000-01 revealed sundry creditors to the tune of Rs. 7.36 crores and unsecured loans of Rs. 6.98 crores, whose creditworthiness was not proved during the block assessment proceedings. It was, therefore, clear that Kamlesh Steel (P) Ltd. had no genuine business. Therefore, deposits in the name of that party in the books of the assessee remained unexplained within the parameters of Section 68. Even identity was not proved because it was a bogus concern just for the purpose of laundering money and to operate as a name lender. No director of that company was produced. The assessee did not even furnish complete and correct address of the party. It was only at the last leg of the case that the assessee supplied residential address of a director, who had already expired. The learned AO, therefore, held that all the three ingredients of a satisfactory Explanation under Section 68, viz., identity, creditworthiness of the creditor and genuineness of the transaction were not proved. The learned AO, therefore, assessed the sum of Rs. 3,02,50,000 in the hands of the assessee under the provisions of Section 68 of the Act.
4. During the course of hearing before the learned CIT(A), the assessee argued that it had borrowed money from M/s Kamlesh Steel (P) Ltd. by account payee cheques drawn on Vaish Co-operative Adarsh Bank Ltd. Kamlesh Steel (P) Ltd. was a company incorporated under the Companies Act, 1956. It had maintained its books of account; had an account with a bank; its accounts were audited by a firm of chartered accountants. Therefore, it could not be said that the identity of the company was not proved. The creditworthiness of Kamlesh Steel (P) Ltd. was evident from the account maintained with Vaish Co-operative Adarsh Bank Ltd. As the loans were received through account payee cheques, the genuineness of the transaction was also proved. The assessee also stated that the AO relied upon the block assessment order made by another officer. He was required to arrive at findings of fact on his own. As the AO followed the conclusions drawn by an extraneous authority, the same were invalid and deserved to be annulled. The assessee relied upon the judgments in Sheo Narain Jaiswal and Ors. v. ITO and Ors. ; Sirpur Paper Mill Ltd. v. CWT and J.K. Synthetics Ltd. and Ors. v. CBDT and Ors. (1972) 83 ITR 335 (SC) in support of these contentions.
5. The learned CIT(A) considered the contentions of the assessee as well as the AO. He found that merely because Kamlesh Steel (P) Ltd. was a company incorporated under the Companies Act, 1956 and had its accounts audited by a firm of chartered accountants, its identity was not established beyond doubt because the company itself was a sham intended to provide accommodation entries to various businessmen to help evade their taxes. Kamlesh Steel (P) Ltd. had been changing its address very frequently. It showed availability of funds from four bogus concerns, viz., Vikas Enterprises; Himgiri Agency; Kalinga Trading Company and Welcome Enterprises. The bank accounts of these bogus concerns were maintained by one Shri Arun Kumar Jain in one of his diaries which was recovered at the time of search. The summons issued by the AO to the four fictitious parties remained unserved. Kamlesh Steel (P) Ltd. showed commission payments of lakhs of rupees to a number of parties but all such parties were found to be non-existent. It showed professional receipts of crores of rupees which could not be substantiated. On these facts, the conclusion was clear that Kamlesh Steel was a mere name lender and was being operated for the purpose of giving accommodation entries. In case of the assessee, M/s Shiv Cable & Wire Industries, the AO asked for the examination of a director of Kamlesh Steel but that was not done. The assessee furnished address of the deceased director and the information regarding the deceased director’s son replacing the deceased was given later. Even the new director was not produced. There was no weight in the argument that creditworthiness of Kamlesh Steel was established by the bank account it maintained. It was a well known fact that most of the fictitious concerns engaged in the business of accommodation entries did so by opening accounts in one or the other bank. The entries of funds received in the bank account were in the names of non-existing parties. Therefore, no creditworthiness of Kamlesh Steel (P) Ltd. was established or proved. The learned CIT(A) also did not agree that the AO erred in relying on the conclusions drawn by another officer. The learned AO relied upon the proceedings and findings in the case of none other than Kamlesh Steel (P) Ltd. The conclusion in that case had been drawn on the basis of detailed enquiry. As to the confirmations, etc., no reliance could be placed upon because they were sham documents. The learned CIT(A) relied upon the judgment in M.S. Ramaraj v. Commr. of Agrl. IT in that respect. The learned CIT(A), therefore, confirmed the assessment of the sum of Rs. 3,02,50,000 in the case of the assessee under Section 68 of the Act.
6. During the course of hearing before us, the learned Counsel pointed out that though there were 9 grounds of appeal, the relevant grounds were only ground of appeal Nos. 3 and 6. He stated that grounds of appeal Nos. 1 and 2 were not pressed. As to ground of appeal Nos. 8 and 9, the learned Counsel pointed out that the same were consequential and depended upon the view taken by us in relation to ground Nos. 3 and 6. In respect of ground of appeal Nos. 4 and 5, the same were merely elaboration of the arguments of the assessee in support of ground of appeal No. 3. Similarly, ground of appeal No. 7 was only elaboration of arguments in support of ground of appeal No. 6.
7. In support of ground of appeal No. 3, disputing the addition of Rs. 3,02,50,000, the learned Counsel relied upon copy of account of Kamlesh Steel (P) Ltd. in the books of the assessee; copy of assessee’s account in the books of Kamlesh Steel (P) Ltd. as also the list of loans and advances in their books as on 31st March, 2000; acknowledgement of return of income filed by Kamlesh Steel (P) Ltd. for asst. yr. 2000-01; audited balance sheet and P&L a/c of Kamlesh Steel (P) Ltd. for the year ended 31st March, 2000 and copy of relevant extracts from the bank account of Kamlesh Steel.
8. The learned Counsel argued that in this case, the assessee had already received loans to the extent of Rs. 8,24,90,000 from Kamlesh Steel as at the beginning of the assessment year but no additions were made in case of the assessee for earlier assessment years. Kamlesh Steel (P) Ltd. was an existing company assessed to tax. It was also not in dispute that the money had been received by assessee through account payee cheques. The amounts borrowed from Kamlesh Steel were eventually repaid by the assessee and the repayments were also through account payee cheques. The learned Counsel argued that the assessee had done all that it could to establish the genuineness of its transactions with Kamlesh Steel. The burden was, therefore, entirely on the Revenue to establish that the apparent was not true.
9. The learned Departmental Representative argued that while on the question of burden of proof the fact should not be lost sight of that the addition had been made by the AO under the provisions of Section 68 of the Act. It was well known that the ploy of introducing one’s own unaccounted income in the name of deposit from third party was rampant practice and, therefore, the provisions of Section 68 cast burden of proof upon the assessee. He in particular relied upon the findings of the learned CIT(A) at pp. 9 and 10 of the impugned order. The learned Departmental Representative argued that apart from the documentation which was carefully crafted by the assessee in collusion with Kamlesh Steel (P) Ltd., the assessee had done precious little to establish the intrinsic veracity of the transaction. The learned AO granted the assessee several opportunities to do the same but the assessee adopted dilatory tactics. Finally, the learned AO issued a detailed show-cause notice to the assessee. The manner in which the assessee delayed the proceedings the AO could not have done better than referring to the assessment records of Kamlesh Steel (P) Ltd. There was no force in the contention that Kamlesh Steel was an existing assessee when that company itself was incorporated and subjected to assessment under the IT Act for the purpose of lending accommodation entries to those who needed the same. The learned Departmental Representative relied in this respect on the judgment of the Calcutta High Court in CIT v. Korlay Trading Co. Ltd. . He also argued that much could not be made out of the fact that the transactions had been entered through bank accounts. Transactions entered through banking channels were not sacrosanct. In that respect, the learned Departmental Representative relied upon the judgments in CIT v. United Commercial & Industrial Co. (P) Ltd. (sic).
10. We have carefully considered the rival submissions. By now, it is well-settled legal position that there are three ingredients of a satisfactory Explanation within the meaning of Section 68 of the Act, viz., identity of the creditor; financial capacity of the creditor and genuineness of transaction. Therefore, filing of mere confirmation is not sufficient–Shankar Industries v. CIT ; Nanak Chandra Laxman Das v. CIT ; Hari Chand Virender Paul v. CIT , etc. The learned Departmental Representative has also rightly placed reliance on the judgments (supra) and CIT v. Precision Finance (P) Ltd. that mere fact that transactions were by cheque payments is not sacrosanct. In the instant case, the assessee disclosed an opening balance of Rs. 8,24,90,000 and fresh money received at Rs. 3,02,50,000. The learned AO was, therefore, justified to look beyond confirmation letter, copies of ledger account and particulars of cheques furnished by the assessee. We see force in the contention also of the learned AO that response of the assessee to his show cause letter was rather lukewarm. The assessee sought adjournments several times and while furnishing the address of Kamlesh Steel (P) Ltd., did not inform the AO that it was residential house of Mr. N.K. Taneja, who had already died and was replaced by his son, Shri Munjal Taneja. We do not see force in the contentions of the assessee raised before the learned. CIT(A) that the AO was not justified in relying upon the assessment proceedings in the case of Kamlesh Steel (P) Ltd. With a view to verify the financial capacity as well as genuineness of transaction of the assessee, the assessment records of Kamlesh Steel (P) Ltd. constituted the most relevant material. There is clear finding of Hon’ble Supreme Court in the case of CIT v. Orissa Corporation (P) Ltd. that where it is in the knowledge of the AO that the creditor is income-tax assessee and the AO is in possession of the particulars of assessment records of the creditor, it is mandatory to examine the source of income of the alleged creditor to find out whether they were creditworthy or were such who could advance the alleged loan. However, after having noticed these aspects, we find that the learned AO did not follow the proper procedure insofar as he did not confront the assessee with the material gathered and inferences drawn on the basis of the assessment records of Kamlesh Steel (P) Ltd. As to the contention of the learned Counsel of the assessee that the assessee had already received huge loans to the extent of Rs. 8,24,90,000 and such loans had not been questioned in the earlier assessment orders of the assessee, it is not known to us as to whether that was done prior to the search in the case of Kamlesh Steel (P) Ltd. or after taking into consideration the material gathered and findings reached in the case of the creditor after the search. We, however, agree that it is also a relevant issue. We are, therefore, of the view that it would be in the interest of justice both to the assessee as well as to the Revenue to restore this issue to the file of the learned AO for decision afresh. The AO is directed to allow the assessee reasonable opportunity of being heard, particularly in relation to any material that the AO may rely upon whether on the basis of material gathered in the case of Kamlesh Steel (P) Ltd., or on the basis of the AO’s own enquiry that he may henceforth make. Thereafter, the AO would decide this issue afresh in accordance with law and facts of the case.
11. Ground of appeal No. 6 in this case is directed against the order of the learned CIT(A) rejecting the assessee’s claim for set off of loss of Rs. 1,62,21,876. Facts of the case in this respect, briefly, are that the assessee filed a consolidated trading account of securities and plastic raw material. The learned AO found that in trading of plastic raw material, the assessee had disclosed a loss of Rs. 1,62,21,876 on sales of Rs. 9.51 crores. The learned AO found that the entire sales were made in cash. He found that a major part of the sale had been made at rates ranging from Rs. 22 per kg. to Rs. 24 per kg. However, there were some sales recorded @ Rs. 33 per kg. to Rs. 40 per kg. The average purchase price of the assessee was Rs. 31 per kg. for the whole period. The learned AO noted that the assessee was buying goods @ Rs. 31 per kg. At about the same time, he was selling goods at much lower rate. In the months of March, 1999, the prevailing price was Rs. 32 per kg., but immediately thereafter in April, the assessee was selling goods at the rates ranging from Rs. 22 to Rs. 24 per kg. The learned AO noted that there was an agreement also with M/s Mega Overseas for import of goods by them @ Rs. 32 per kg. in the month of June, 1999. As against that agreement, the assessee had sold goods to others at a much lower rate. During the course of assessment proceedings, the assessee contended that there was a slump in the market. The learned AO did not agree to this contention because Mega Overseas had agreed to purchase @ Rs. 32 per kg. in the month of June, 1999. The learned AO held that the assessee could have easily sold its entire purchases to Mega Overseas at higher rate. There was no reason as to why the assessee should be selling goods at around Rs. 24 per kg., while the same could be sold to Mega Overseas for Rs. 32 per kg. The assessee argued that the goods sold at lower rate were defective. The quality to be sold to Mega Overseas was much superior. According to the assessee, Mega Overseas had informed that on inspection, the material was found to be not acceptable. The learned AO did not accept this Explanation for want of further details as to who had inspected the goods. There was no evidence that the goods were defective. On this reasoning, the learned AO disallowed the assessee’s claim of loss of Rs. 1.62 crores.
12. During the course of hearing before the learned CIT(A), the assessee submitted that it had purchased imported plastic recycled granules at the rates varying from Rs. 16 per MT to Rs. 710 per MT. Cheaper variety was sold to small manufacturers of tarpoline, plastic bags, cheap quality of footwear, etc. In December, 1998, there was a move against small industries by the Pollution Control Department of the Government. Because of the turmoil, there was an adverse impact on the sale price. As to the agreement with Mega Overseas, the goods supplied to them were of different quality. M/s Mega Overseas declined to purchase the goods of lower quality. As a result, there was no buyer to lift the large quantity of lower quality of goods already imported by the assessee. In these circumstances, the assessee had to resort to sell directly to the consumers customers at whatever price the assessee could get. The assessee also relied upon copies of agreement with three foreign suppliers. The learned CIT(A) found it surprising that the language of all the three agreements was identical. It was difficult to believe that all the foreign manufacturers/suppliers residing in different countries could sign identical piece of documents. The learned CIT(A) also noticed that even in the agreements with German, Swiss and other European suppliers, the price was quoted in U.S. dollars only. The learned CIT(A) also found that the Explanation of the assessee due to shifting of pollutant industries around December, 1998, the sale price of the assessee got affected was not based on any evidence. The learned CIT(A) also found that the copy of agreement with M/s Mega Overseas filed by the assessee to show that it was required to sell goods of higher quality did not appear to be authentic. The learned CIT(A) also emphasized that the assessee had himself valued closing stock as on 31st March, 1999, @ Rs. 32 per kg. The market price could not fall to as low as Rs. 24 and Rs. 26 per kg. in the immediately succeeding months. On these reasonings, the learned CIT(A) found the disallowance of loss made by the AO to be justified. He confirmed the same. Still aggrieved the assessee is in appeal before us.
13. During the course of hearing before us, the learned Counsel for the assessee argued that there was considerable amount of turmoil in the market because small-scale industries were being relocated. The authorities below had disbelieved this specific Explanation given by the assessee without any enquiry. The learned Counsel referred to details of sale invoices at pp. 151 to 155 of the paper book. He submitted that in certain months, the assessee had sold at higher price. Price variation depended upon fluctuation in the market as well as variation in the quality of goods being sold. Thereafter, the learned Counsel referred to working given at p. 148 of the paper book and he argued that the opening stock had been valued by the assessee @ Rs. 30.02 per kg. and not @ Rs. 32 per kg. as assumed by the AO as well as the learned CIT(A). According to the learned Counsel, the disallowance of the loss claimed was made based on suspicion. There was not even one instance of suppression of sale or any manipulation in the books of account brought on record by the authorities below.
14. The learned Departmental Representative emphasized that most of the sales of the assessee were in cash. The small amount of sale was made to sister-concern only, such as, Mega Overseas. The learned Departmental Representative referred to the judgment of Hon’ble Bombay High Court in Dhondiram Dalichand v. CIT (1971) 81 ITR 609 (Bom) in support of the contention that on these facts the AO was justified in not accepting the book results. In his rejoinder, the learned Counsel for the assessee pointed out that M/s Mega Overseas had financed the assessee to the extent of Rs. 9 crores. As the assessee did not pay interest, the goods were required to be sold to Mega Overseas at concessional price. The goods imported by the assessee were also subject to customs control. There were no adverse observation or action from customs authorities.
15. We have carefully considered the rival submissions. It is seen that bulk of the assessee’s sales were made in cash and the buyers were not identifiable. On these facts, the authorities below could estimate the selling price provided there was material to show that the prevalent market rate was higher. In the alternative, the authorities below could estimate the declared GP as the assessee’s sales were more or less unverifiable. For that purpose also, it was necessary to point out that the declared rate of GP by the assessee was lower than the expected rate of GP in the assessee’s line of trade. The AO has attempted to compare purchase rate with selling rate. The assessee has easy and cogent Explanation that there was wide variation in the quality of goods the assessee dealt in. Hence, unless the learned AO compared purchase price and sale price of the same quality, the inferences of the learned AO cannot be accepted. Besides, it appears to us that this was an exceptional year because several small industrial units found to be spreading pollution had been directed to be closed down and relocated in far off areas. The assessee’s Explanation in this behalf has been lightly taken by the authorities below. The AO was not entitled to make disallowance of the assessee’s claim of loss without arriving at a finding that the goods were sold below the prevalent market rate. The learned AO has compared the average purchase price with average sale price, whereas comparison was required to be made between the purchase price of a specific material with the sale price of that very kind of material. In these circumstances, having regard to the fact that this was an exceptional year on account of turmoil in the market, we are inclined to delete the disallowance of loss as made by the learned AO. This ground of appeal is, therefore, allowed.
16. In the result, this appeal is partly allowed.