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Case Number

I.T.A No. 513.Luc/10, Assessment Year: 03-04

Attorney(S)

Assessee by: Shri M.P Mishra, Advocate
Revenue by: Shri H.S Usmani, D.R

Judges

H.L Karwa, V.P

Acts

u/s 142(1) and 143(2) of the I.T. Act, 1961 (in short, the Act).
INCOME TAX ACT 1961

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Smart Summary

Concise Structured Summary of the Tribunal Opinion (AY 2003-2004)

Factual and Procedural Background

This appeal was filed by the assessee against the order of CIT(A)-II, Lucknow dated 22/01/2010 in respect of assessment year 2003-2004. The assessee firm was constituted on 01/08/2002 and obtained wholesale/distribution agency for products of Hindustan Lever Ltd. The assessment return (showing income of Rs. 740) together with an audit report was filed on 25/11/2003. The case was selected for scrutiny and the Assessing Officer (AO) issued notices under sections 142(1) and 143(2) of the Income-tax Act, 1961.

The AO observed deposits of Rs. 1,60,000 in the firm's bank account (Account No. C.D.105, Punjab National Bank, Sant Kabirnagar) made between 02/08/2002 and 06/08/2002, specifically:

02/08/2002 — Rs. 15,000 (cash)
03/08/2002 — Rs. 45,000 (cash)
05/08/2002 — Rs. 50,000 (cash)
06/08/2002 — Rs. 50,000 (cash)

The AO rejected the assessee's explanation that these deposits represented advances from dealers and added Rs. 1,60,000 to the assessee's income under section 69 of the Income-tax Act. The assessee appealed to the CIT(A), who sustained an addition of Rs. 1,20,000 (i.e., allowed Rs. 40,000 as explained). The assessee further appealed to the Tribunal.

Legal Issues Presented

Whether the addition under section 69 of the Income-tax Act of Rs. 1,20,000 (out of deposits totalling Rs. 1,60,000) was justified, i.e., whether the deposits were unexplained cash/advances or explained advances from dealers.
Whether the CIT(A) erred in relying on the remand report and presuming that the assessee had inflated the figures of advances received from dealers (i.e., whether the CIT(A)'s reliance on such material and inferences was proper).
Whether the CIT(A) correctly sustained 10% ad hoc additions out of Selling & Distribution Expenses and Staff Welfare Expenses (this ground was raised but later not pressed before the Tribunal).

Arguments of the Parties

Appellant's Arguments (as presented before the Tribunal)

The assessee firm was formed on 01/08/2002 and the shop was inaugurated that date; attendees included kirana and general merchants who intended to make purchases and some of whom gave advances for preferential supply.
Detailed particulars of advances were furnished for five dealers who advanced sums on 01/08/2002 totalling Rs. 62,000 (Ajay Kumar Rs. 20,000; Ram Niwas Rs. 20,000; Ridhi Sidhi Rs. 9,000; Ashok Provision Rs. 8,000; Amar Chand Stores Rs. 5,000).
Further advances were alleged to have been received on 3rd, 5th and 6th August 2002: Rs. 30,000 on 03/08 (two persons), Rs. 68,000 on 05/08 (five persons), and Rs. 42,000 on 06/08 (four persons), totaling the Rs. 1,60,000 deposited.
The advances were recorded in the books of account, and the deposits in the bank were made from the cash balance as per books. Ledger accounts (pages 15–27 of the Paper Book) purportedly show these advances being adjusted against subsequent sales within a few months, with some dealers making further payments.
First purchase voucher appeared dated 08/08/2002; Redistribution Stockist Agreement with Hindustan Lever Ltd. was executed on 02/05/2003 (copies placed in paper book), supporting the commercial context of the transactions.
Therefore, the deposits were advances from retail/wholesale merchants and were verifiable from books; no addition under section 69 was warranted.

Revenue's / Assessing Officer's Position (as recorded)

The AO rejected the assessee's explanation that the deposits were advances from dealers and treated the sum of Rs. 1,60,000 as unexplained, adding it to income under section 69.
The remand report and enquiries under section 133(6) resulted in notices being served on 11 out of 13 dealers; only two persons replied and they could not confirm the exact amounts claimed by the assessee, leading the AO and later CIT(A) to suspect inflation of figures.
The CIT(A) observed that two dealers could not be traced at the given addresses and, on overall consideration, held that only 25% (Rs. 40,000) of the deposits could be considered explained and sustained an addition of Rs. 1,20,000.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Tribunal considered the material on record, the AO's action, the CIT(A)'s order, and the submissions made by the assessee's counsel (Shri M. P. Mishra). Key aspects of the Tribunal's analysis as explicitly recorded are:

The Tribunal reviewed the sequence of events: firm constitution and shop inauguration on 01/08/2002, bank deposits between 02–06 August 2002, first purchase voucher dated 08/08/2002, and the later Redistribution Stockist Agreement executed on 02/05/2003 (documentary material placed in the paper book).
The Tribunal noted that the assessee produced ledger accounts (pages 15–27) which, on their face, showed that advances had been accounted for in subsequent sales to those depositors within a period of a few months; some depositors had made further payments and some had payments adjusted against sales.
The Tribunal weighed this documentary evidence against the AO/CIT(A) reliance on limited responses to notices under section 133(6) (only two replies) and the fact that two dealers were not traced by the inspector. The Tribunal considered whether these investigative gaps sufficed to treat the deposits as unexplained.
On an overall consideration of facts and the documentary verifiability of the transactions in the books, the Tribunal concluded that the transactions were verifiable from the books of accounts and that the AO had not appreciated the evidential material showing adjustment of advances against sales.
Consequently, the Tribunal found no basis for sustaining the addition of Rs. 1,20,000 and deleted that addition which had been upheld by the CIT(A). The Tribunal explicitly stated: "Thus, considering the entire facts and circumstances of the present case, I am of the confirmed view that no addition is called for and accordingly I delete the addition of `1,20,000/- sustained by the CIT (A)."

Note: The Tribunal also recorded that Ground No. 3 (10% ad hoc additions on selling & distribution and staff welfare expenses) was not pressed by the assessee at the hearing and was dismissed as not pressed; Ground No. 4 was general and not specifically commented upon.

Holding and Implications

APPEAL PARTLY ALLOWED

Holding:

The Tribunal deleted the addition of Rs. 1,20,000 that had been sustained by the CIT(A) under section 69 in relation to bank deposits totalling Rs. 1,60,000 for August 2002.
Ground No. 3 (relating to 10% ad hoc additions) was not pressed before the Tribunal and was dismissed as not pressed. Ground No. 4 was general and required no specific comment.

Direct implications for the parties:

The assessee obtains relief by the deletion of the Rs. 1,20,000 addition; the Tribunal found the documentary ledger entries and subsequent sales records sufficient to explain the deposits as advances from dealers.
The AO's addition treating the entire Rs. 1,60,000 as unexplained was not sustained in full by the Tribunal (the Rs. 1,20,000 portion sustained by CIT(A) was deleted).

Broader implications:

The opinion records only the direct decision in the facts of this case and does not articulate or establish a broader ratio or new precedent beyond the conclusion that ledger entries and documentary adjustments, where verifiable, can rebut an AO's treatment of deposits as unexplained. The opinion does not cite other cases or legal authorities to frame a broader principle.

Order pronounced in open court on 04/11/2010. Signed: H. L. Karwa, Vice President. Copies forwarded to Appellant, Respondent, CIT(A), CIT and Assistant Registrar (as per the opinion text).

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M/S. Saumya Sales Corporation, Khalilabad, Distt: Sant Kabir Nagar v. Income Tax Officer, Basti .

This appeal, filed by the assessee, is directed against the order of CIT(A)-II, Lucknow dated 22/01/2010 relating to assessment year 2003-2004.

2. Ground No.1 and 2 of the appeal read as under:

1. That the learned Commissioner of Income-tax (Appeals) erred in law and on facts in arbitrarily confirming the addition uls 69 of the Income-tax Act, 1961, to the extent of `1,20,000/- out of the advance amounting to `1,60,000/-, which was deposited by thirteen dealers for purchase of the products of Hindustan Lever Ltd., for which the assessee has obtained distributorship of the said company.

2. That the learned Commissioner of Income-tax (Appeals) erred in law and on facts in relying upon the flimsy remand report sent by the Id. A.O. and presuming that 'the appellant had definitely inflated the figures of advance received from the dealers at the time of opening of business', on the basis of mere suspicion.

3. Briefly stated, the facts of the case are that the assessee firm was constituted on 01/08/2002 and it obtained wholesale agency for the products of Hindustan Lever Ltd. The return, showing income of `740/- for assessment year 2003-2004 along with the audit report in prescribed proforma, has been filed on 25/11/2003. The case was eventually selected for scrutiny and the Assessing Officer issued various notices u/s 142(1) and 143(2) of the I.T. Act, 1961 (in short, the Act). In compliance with the aforesaid notices the assessee attended and produced books of accounts and all vouchers etc. which were maintained in the regular course of business. The Assessing Officer observed that in the firms bank account No. C.D.105, Punjab National Bank, Sant Kabirnagar, `1,60,000/- was deposited between the period 2nd August 2002 to 6th August 2002, the details of which re as follows: Date of deposit Amount (`) Mode of deposit

--------------------- ---------------- ----------------------- 02/08/2002 15,000 Cash 03/08/2002 45,000 Cash 05/08/2002 50,000 Cash 06/08/2002 50,000 Cash 3.1 The Assessing Officer has rejected the explanation of the assessee regarding the aforesaid deposits that were made out of the advances made by the dealers in retail of the consumer goods for purchases and added the sum of Rs.1,60,000/- to the income of the assessee u/s 69 of the Act.

4. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the CIT (A). The learned CIT (A) sustained the addition of Rs.1,20,000/- out of Rs.1,60,000/- observing as under: 3.3 I have carefully considered the report of AO and the submissions of appellant on the above issue. It is seen that the AO has been able to serve notices U/S 133(6) of the IT Act on 11 out of 13 dealers, whose addresses were provided by Ld. AR of appellant, but only two persons have filed reply in response to notices issued by the AO and they have also not been able to tell exactly the amount advanced by them to the appellant in August 2002, even though they have stated to have advanced some money to the appellant. It is seen that the appellant has claimed to have received advance of `17,000/- from Shri Ved Prakash and advance of `20,000/- from Shri Ajay Kumar and these persons, being small traders, would have recollected the amounts advanced by them if they were at the figures stated by appellant. In view of this, I conclude that the appellant had definitely inflated the figures of advance received from the dealers at the time of opening of business. Moreover, two of the dealers could not be found by the Inspector deputed by the AO at the given addresses. From this, it is indicated that the amounts totaling `1,60,000/- deposited by appellant in its bank account in the first week of August 2002 cannot be considered fully explained. Even if due consideration is given to statement of two persons who have filed submissions before the AO, the exact amount advanced by them cannot be said to be established. In such circumstances, I do not think that the entire amount of `1,60,000/- can be considered explained in the hands of the appellant. On overall consideration of facts and circumstances relating to the issue, I feel that at most 25% of total deposit of `1,60,000/- , i.e. `40,000/- can be considered explained in the hands of the appellant. In view of this, I sustain the addition to the extent of Rs.1,20,000/- and direct the Assessing Officer to delete the balance addition of Rs.40,000/-.

5. I have heard the learned representatives of both the parties at length and have also carefully gone through the material available on record. Shri M. P. Mishra, learned counsel for the assessee narrated certain facts of the case which are as under: 5.1 The assessee firm was constituted on 01/08/02 and it entered distribution business of the products of Hindustan Lever Ltd. and the shop was inaugurated on the said date. The people attending the inaugural function had a number of Kirana & General merchants dealing in wholesale and retail, who had arrived with intention of making some purchases. Five of those dealers were in urgent need of various products and deposited the money in advance with a view to get preferential supply of the goods as soon as possible. The details of such dealers, who had advanced money on 01/08/02 is as under:

i) Shri Ajay Kumar `20,000 ii) Shri Ram Niwas `20,000 iii) M/s Ridhi Sidhi ` 9,000 iv) M/s Ashok Provision ` 8,000

v) Shri Amar Chand Stores ` 5,000

------------ `62,000 It is also claimed by Shri M. P, Mishra, learned counsel for the assessee that later on more advances were made by Kirana and general merchants on 3rd, 5th and 6th of August 2002. The details of the same are available at page No. 2 of assessees paper book. From these details it is evident that an advance of `30,000/- was received on 3rd August 2002 from two persons, `68,000/- was received on 5th August 2002 from five persons and `42,000/- was received on 6th August 2002 from four persons. Shri M. P, Mishra, learned counsel for the assessee vehemently submitted that the afore mentioned advances have duly been recorded in the books of accounts and out of cash balance the total sum of `1,60,000/- was deposited in the bank account of the firm on 2nd, 3rd, 5th and 6th August 2002. The Assessing Officer has however, observed that in the firms bank account No. C.D.105 in Punjab National Bank, Sant Kabirnagar, the sum of `1,60,000/- was deposited as mentioned herein above. As regards the amount of `1,60,000/-, Shri M. P, Mishra, learned counsel for the assessee submitted that the deposits have been made out of cash balance as per books of accounts. According to the learned counsel for the assessee the A.O. failed to appreciate that the depositors were retail / wholesale merchants and not consumers and made addition of `1,60,000/- as unexplained investment on the basis of the hypothesis that no customer would advance money for consumer goods of daily use manufactured and traded by the distributor of Hindustan Lever Ltd. without allowing the assessee to explain that the persons depositing the advances are retail / wholesale merchants and the afore- mentioned advances have been adjusted against the purchases made by them during the year. 5.2 It is observed that the assessee has obtained the redistribution stockistship of M/s Hindustan Lever Limited and the shop was inaugurated on 1st August 2002. The first purchase was, however, made vide voucher dated 08/08/2002 and after considering the performance of the assessee, the aforesaid manufacturers signed Redistribution Stockist Agreement through Indexport Limited, Hindustan Lever Limited House, 165/166, Bacbay Reclamation, Mumbai - 400020, on 02/05/03. A copy of the aforesaid agreement is placed at pages 1, 1A & 2 of the Paper Book. It seems that the A.O. has arbitrarily rejected the explanation regarding the aforesaid deposits which were made out of cash balance as per books of accounts, on the basis of the presumption that no customer would advance money for consumer goods of daily use manufactured and traded by the distributor of Hindustan Lever Ltd., without allowing the assessee to explain that the persons who deposited the advances are retail & wholesale merchants and the afore-mentioned advances have been adjusted against the purchases made by them during the year itself. The copies of the ledger accounts of the afore-mentioned merchants, (which are self-explanatory) are available at pages 15 to

27 of the Paper Book. A perusal of these ledger accounts would reveal that all those advances had not only been accounted for in the sales made to those depositors within a period of few months but some of them have paid further sums in respect of the difference and the others have made more payments regarding further sales also. 5.3 From the above discussion, it would be clear that the Assessing Officer has added the sum of `1,60,000/- since he has failed to appreciate that the sums have been advanced by the retail/ wholeseller merchants and the same have been adjusted against the purchases made by them which have been duly recorded in the books of accounts. I observe here that the transactions are fully verifiable from the books of accounts. Thus, considering the entire facts and circumstances of the present case, I am of the confirmed view that no addition is called for and accordingly I delete the addition of `1,20,000/- sustained by the CIT (A). In that view of the matter, ground No. 1 and 2 of the appeal are allowed.

6. Ground No. 3 of the appeal reads as under:

3. That the learned Commissioner of Income-tax (Appeals) erred in law and on facts in sustaining 10% of ad hoc additions out of Selling & Distribution Expenses and Staff Welfare Expenses, on the basis of presumptions, surmises and conjectures.

7. At the time of hearing of the appeal, Shri M. P. Mishra, learned counsel for the assessee did not press for this ground of appeal, and accordingly I dismiss the same as not pressed.

8. Ground No. 4 of the appeal is general in nature and hence no specific comment is called for.

9. In the result, the appeal is allowed partly as indicated above. (Order pronounced in the open court on 04/11/2010 ) Sd/. (H. L. KARWA) VICE PRESIDENT Dated: 04/11/2010 *Singh Copy forwarded to the: -

1. Appellant.

2. Respondent.

3. CIT (A)

4. CIT

5. DR. Assistant Registrar

M/S. Saumya Sales Corporation, Khalilabad, Distt: Sant Kabir Nagar v. Income Tax Officer, Basti .

Concise Structured Summary of the Tribunal Opinion (AY 2003-2004)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments (as presented before the Tribunal)

Revenue's / Assessing Officer's Position (as recorded)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

M/S. Saumya Sales Corporation, Khalilabad, Distt: Sant Kabir Nagar v. Income Tax Officer, Basti .

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