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Balaji Textile Industries (P.) Ltd. v. Third Income-tax Officer
Factual and Procedural Background
This is an appeal by the assessee (appellant-company carrying on textile business) against the order of the CIT(A)-V, Bombay dated 26-9-1988. The grounds of appeal all relate to a single factual claim: deduction of purchases of textile goods made in March 1985 from twelve parties residing in Bhiwandi (total purchases claimed Rs. 1,84,695).
The appellant filed its return for assessment year 1985-86 which was initially accepted under section 143(1) of the Income-tax Act, 1961. The Assessing Officer, with approval of the IAC, issued a notice under section 143(2)(b) (text contains a typographical variant "1430(b)") and reopened the assessment. On reopening, the Assessing Officer disbelieved the genuineness of the March 1985 purchases, disallowed them and determined total income at Rs. 1,87,380.
The Assessing Officer issued summonses to the twelve Bhiwandi traders at the names and addresses provided by the appellant, but these summonses were returned unserved. The Assessing Officer and the CIT(A) drew adverse inferences, considering (inter alia) that: the appellant occupied premises free of rent from M/s. Shree Sitaram Dyeing and Printing Mills (P.) Ltd., sold the textile goods to that company and adjusted sale proceeds against a prior loan taken from it; no evidence of transport or physical receipt of goods was shown; the cheques issued to the Bhiwandi traders were crossed but not account-payee and were encashed in Bombay (not at Bhiwandi).
The Assessing Officer and CIT(A) concluded the transactions were sham and that the appellant was a front for M/s. Shree Sitaram Dyeing and Printing Mills (P.) Ltd. The CIT(A) confirmed the Assessing Officer's disallowance. The appellant appealed to the Tribunal.
Legal Issues Presented
- Whether the assessee has proved the purchases of textile goods claimed (March 1985) and is entitled to deduct them in computing taxable income.
- Whether the reopening of assessment and the consequent inquiry (including reliance on non-service of summonses and related adverse inference) were proper for disallowing the purchases — this issue was raised by the appellant though the Tribunal's principal focus was on proof of purchases.
Arguments of the Parties
Appellant's Arguments
- The appellant produced printed bills from the twelve Bhiwandi traders and copies of the crossed cheques issued in their names; these constituted prima facie evidence of purchases.
- It is immaterial that the cheques were encashed by the payees at Bombay rather than at Bhiwandi; the appellant cannot be held responsible for where the sellers encashed cheques and there was no allegation that the appellant received any amounts back.
- Names and addresses of the twelve traders were furnished; non-service of summonses on those traders should not attract an adverse inference against the appellant. The appellant argued that the Assessing Officer should have taken further steps (e.g., issued warrants) to secure attendance of those traders if their evidence was material.
- The appellant had earlier taken a loan from M/s. Shree Sitaram Dyeing and Printing Mills (P.) Ltd. Interest paid on that loan was claimed and allowed as a deduction, which, the appellant argued, supports the reality of dealings between the parties and undermines an inference of sham transactions.
- There was a nexus in that the appellant purchased from the Bhiwandi traders and sold to M/s. Shree Sitaram, which adjusted the sale proceeds against the loan in both parties' books — such accounting entries corroborate the transactions.
- The appellant relied on the Allahabad High Court decision in Nathu Ram Premchand v. CIT [1963] 49 ITR 561 to argue that non-production of witnesses (or failure of service) is not a ground for drawing an adverse inference against an assessee where the assessing officer could have enforced attendance under statutory powers.
Departmental Representatives' Arguments
- The purchases were all made at the end of March 1985 and none of the sellers appeared before the Assessing Officer to confirm the sales.
- No cheques were deposited in banks at Bhiwandi; instead all cheques were encashed in Bombay — suggesting the Bhiwandi traders may not have been genuine participants in the transactions.
- There was no proof of taking delivery of goods or of transportation of goods from Bhiwandi to Bombay.
- The pattern of selling on credit with crossed (but not account-payee) cheques and the other facts together indicate the transactions were sham and the purchases cannot be allowed as deductions.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Nathu Ram Premchand v. CIT [1963] 49 ITR 561 (Allahabad High Court) | It was relied upon for the principle that an adverse inference should not be automatically drawn against an assessee for non-production of a witness when the assessing officer could have enforced attendance under statutory powers (reference to section 37(i) of the Income-tax Act and Order XVI, Rule 10 CPC in the appellant's reliance). | The case was relied upon by the appellant's counsel to argue that non-service of summonses on the Bhiwandi traders should not be attributed to the appellant. The Tribunal's opinion records this reliance. The text of the opinion does not state that the Tribunal expressly based its decision on this precedent; rather the Tribunal considered the totality of factual evidence and concluded that the purchases were proved and genuine. |
Court's Reasoning and Analysis
The Tribunal undertook a fact-based analysis and explained its step-by-step reasoning as follows:
- Printed bills produced by the Bhiwandi traders are not conclusive proof, but they do constitute prima facie evidence that the appellant purchased certain goods from those parties.
- The appellant sold the purchased goods to M/s. Shree Sitaram Dyeing and Printing Mills (P.) Ltd., and adjusted sale proceeds against a prior loan taken from that party. Entries reflecting sale and adjustment appear in the books of account of both the appellant and M/s. Shree Sitaram.
- The Tribunal held that the books of account of both the appellant and M/s. Shree Sitaram cannot be discarded merely by asserting they are not genuine, particularly where neither the Assessing Officer nor the CIT(A) expressed any specific opinion discrediting those accounting entries.
- The fact that purchases occurred in March 1985 (with no earlier business activity in that year) does not by itself render the transactions suspect; a taxpayer is not required to carry on business uniformly throughout the year and may legitimately commence operations or execute transactions in a particular month.
- The Tribunal found no persuasive reason to disbelieve that sales to M/s. Shree Sitaram were effected; and since sales would be unlikely in absence of genuine purchases, a reasonable inference is that the appellant did possess the goods and transacted in the manner recorded.
- On balance, taking all facts into account — the printed bills, cheques, accounting entries, adjustment against the loan and the absence of any direct findings that the accounting entries were fabricated — the Tribunal concluded that a reasonable and convincing inference supports the genuineness of the purchases.
- The Tribunal therefore reversed the view of the Assessing Officer and CIT(A) that the transactions were sham, and allowed the deduction claimed for purchases.
Holding and Implications
APPEAL ALLOWED
Direct effect: The Tribunal allowed the appellant's appeal and held that the appellant had proved the purchases of textile goods made in March 1985; the appellant was therefore entitled to the full deduction for those purchases (Rs. 1,84,695 as claimed). The reopening-based disallowance by the Assessing Officer and confirmation by the CIT(A) were set aside to the extent they disallowed those purchases.
Broader implications: The opinion rests on evaluation of the specific facts (bills, cheques, accounting entries and adjustment against a loan) and draws a factual inference of genuineness; the Tribunal did not purport to lay down a new general legal principle. The decision emphasizes that prima facie documentary evidence and consistent accounting entries may be sufficient to sustain claimed transactions where there is no direct proof of fabrication and where the assessing authorities have not specifically impeached the accounting entries.
Per T.A. Bukte, Judicial Member - This is an appellant's appeal against the order of the CIT(A)-V, Bombay dated 26-9-1988 on several grounds and sub-grounds running into five pages. All the grounds and the sub-grounds of appeal relate to the only one point of claim of deduction of purchase of textile goods in the month of March 1985 alone from twelve parties residing in Bhiwandi. The Assessing Officer disallowed the said claim by giving several reasons and the CIT(A) V, Bombay has confirmed the disallowance made by the Assessing Officer. Therefore, the appellant has preferred this appeal against that order of the, CIT(A) V, Bombay.
2. We have heard the learned counsels for the assessee S/Shri S.E. Dastur and PA. Pardiwala and the learned Departmental Representatives, Shri Y.S. Rawat and Shri N.C. Nair. Their arguments are taken into consideration.
3. The appellant is carrying on business in textile. The appellant-company filed the return of income for the assessment year 1985-86 showing an income of Rs. 2 `824. The return of income was accepted under section 143(1) of the Income-tax Act. 1961. Subsequently. the Assessing Officer issued a notice under section 1430(b) of the Act with the approval of the IAC and reopened the assessment. He completed the reopened assessment and determined the total income at Rs. 1,87,380 by disallowing the purchases of Rs. 1,84,695 made during the previous year by disbelieving the genuineness of the said purchases. The Assessing Officer wanted to verify the purchases of the textile goods made by the appellant from twelve parties of Bhiwandi and, therefore, he issued the summonses to them on the names and the addresses furnished by the appellant. Those summonses, however, could not be served upon those twelve parties because they were not available on the addresses furnished by the appellant. The postal authorities also returned the summonses unserved.
4. The appellant explained that those twelve parties of Bhiwandi probably might have left out of Bhiwandi. Non service of the summonses on them should not' be considered to draw an adverse inference against the appellant. It was also, explained that there were considerable number of parties in manufacturing textiles and some of them were very small parties. Not finding them on their addresses does not mean that the purchases were not genuine. The Assessing Officer as well as the CIT(A) also noticed that the appellant-company occupied the office premises at 33, Old Hanuman First Lane, Kalbadevi Road, Bombay, free of rent from M/s. Shree Sitaram Dyeing and Printing Mills (P.) Ltd. and the entire sales of textile goods were also made to the said party at the same address. The appellant-company had also taken the loan from M/s. Shree Sitaram. Dyeing and Printing Mills (P.) Ltd. and the sale of the textile goods was adjusted against the loan taken by the appellant-company earlier. The Assessing Officer as well as the CIT(A) considered that there was no evidence to show for transport and taking possession of textile goods from those twelve parties of Bhiwandi. There was also no proof to show that the textile goods purchased by M/s. Shree Sitaram Dyeing and Printing Mills (P.) Ltd. were given possession of.
5. The another fact, according to the Assessing Officer as well as the CIT(A) assumed Importance, was that the crossed cheques were issued to the traders at Bhiwandi but not on "account payee" cheques. All those cheques were encashed in the Bank accounts in Bombay but not at Bhiwandi. For these reasons, the Assessing Officer held that the transactions were sham and the appellant-company acted only as a front company for M/s. Shree Sitaram Dyeing and Printing Mills (P.) Ltd. Thus, he determined the total income at Rs. 1,87,380 by disallowing the purchases of textile goods of Rs. 1,84,695 and by reopening the assessment under section 143(2)(b), read with section 143(3) of the Act.
6. The appellant submitted before the CIT(A) that the reopening of the assessment was bad in law by issuing a mere memo. However, the CIT(A) did not accept this contention because he held that a clear notice was issued for making a sample scrutiny assessment. To prove the genuineness of purchases for textile goods, the appellant filed the copies of the bills issued by all the twelve traders at Bhiwandi before the CIT(A). The copies of the cheques issued to those parties were also filed. It was submitted that the purchases were not bogus.
7. The CIT(A) took into consideration that all the purchases were made in the month of March 1985 only. No business activities were carried on by the appellant-company prior to March 1985. The payments were made by the cheques but not a/c payee. The cheques were not encashed in the accounts of the sellers at Bhiwandi but all of them were put in bank at Bombay only. The summons were not served on those twelve parties at Bhiwandi. From these facts, the CIT(A) inferred that the traders at Bhiwandi issued printed bills for selling the goods and received amounts by cheques. Therefore, those traders might be established traders at Bhiwandi. They might not be casual traders as submitted on behalf of the appellant. He also inferred that it was not possible to believe that all the twelve traders may have left the Bhiwandi within a period of three years and might have shifted to some other places. He held that there was no evidence to show of taking possession of the textile goods by the appellant and the transportation of the same to the Bombay. Not even one trader put a cheque in his account at Bhiwandi where adequate facilities of banking are available. Therefore, he held that the Assessing Officer was justified in drawing an adverse inference and holding that the purchases of textile goods made by the appellant were bogus transactions.
8. From the above narrated facts relating to the purchase of textile goods by the appellant in the month of March 1985 alone, the only point which has arisen for our consideration is whether the assessee has proved the purchases of textile goods as claimed and entitled for the deduction of the said purchases.
9. The learned counsel for the appellant, Shri S.E. Dastur, contended that the printed bills issued by the traders at Bhiwandi is an evidence for purchasing the textile goods by the appellant. The crossed cheques were issued in the names of the parties and the same have been encashed. It is Immaterial that whether the cheques issued by the appellant to the said parties were encashed. If the sellers had encashed the cheques issued to them at Bombay, the appellant is not responsible for that act of the traders from Bhiwandi. There is no allegation that the appellant received back the amounts of the said cheques. The appellant furnished the names and the addresses of all those twelve parties at Bhiwandi. The appellant cannot be held responsible for non-service of the summons upon them and return of the same. However, the appellant explained that the traders from whom the textile goods were purchased were small traders and they might have left Bhiwandi. It is a fact that none of those traders were found at Bhiwandi but they were not found at Bhiwandi within a period of three years but, according to Shri Dastur, non-finding them at Bhiwandi and their where about, cannot be attributed to the appellant. He submitted that the Assessing Officer should have taken further step to issue warrants against them to secure their presence and to confirm whether the purchases of textile goods were made from them by the appellant or not. As the Assessing Officer did not issue the warrants against those small traders, according to Mr. Dastur, he failed to make further investigation. For that purpose also. the appellant should not be held responsible.
10. His another argument is that the appellant had taken the loan from M/s. Shree Sitaram Dyeing and Printing Mills (P.) Ltd., earlier than the purchase and sale of textile goods. The appellant paid the interest on the said loan to the said concern. The appellant claimed the allowance of interest paid on the loan as deduction and the department has allowed the deduction of interest paid by the appellant on that loan. For these reasons also, according to him, the purchases cannot be considered as not genuine. However, raising of loan and payment of interest was proved and the same was rightly allowed as deduction.
11. Mr. Dastur's third contention is that when the appellant purchased the textile goods of twelve parties from Bhiwandi and sold them to M/s. Shree Sitaram Dyeing and Printing Mills (P.) Ltd., the sale price was adjusted towards payment of loan. He urged that there is a nexus in adjusting the sale price of the textile goods against the loan raised by the appellant earlier. The purchaser M/s. Shree Sitaram Dyeing and Printing Mills (P.) Ltd. adjusted the sale price of textile goods in its books of account and the assessee also did so. Therefore, he contended that the purchases cannot be held to be bogus not to allow the claim.
12. Mr. Dastur relied on the decision of the Allahabad High Court in the case of Nathu Ram Premchand v. CIT [1963] 49 ITR 561 , in favour of his contention that no adverse inference can be drawn against an assessee merely because the assessee had taken a dasti summons for production of a witness and had not produced him. In the instant appeal, the appellant had not taken any summon served upon the traders at Bhiwandi. The Allahabad High Court, in that case, held that it is the duty of the income- tax Officer to enforce the attendance of the witness if his evidence is material, in exercise of his powers under section 37(i) of the Income-tax Act, read with Order XVI, Rule 10, of the Civil Procedure Code. Shri Dastur argued that non-service of the summons on the traders at Bhiwandi in spite of furnishing the names and addresses to the Assessing Officer cannot be attributed to the appellant to draw an adverse inference. Hence, he contended that the adverse inference drawn by the Assessing Officer and accepted by the CIT(A) against the assessee is not correct.
13. The Departmental Representatives submitted that the purchases were made in the end of the month of March 1985 and none of the sellers came before the Assessing Officer to confirm the sales. No cheques were put in banks at Bhiwandi. According to them, the transactions were sham and there is no proof of taking delivery of textile goods at Bombay. There is also no proof of transportation of goods to Bombay from Bhiwandi. They have made a new point that it was strange that all the parties at Bhiwandi sold the goods on credit to the appellant for issuing crossed cheques. For this also, they contended that the genuineness of the purchases and sale is not established. According to them, the appellant's claim is not allowable.
14. We have examined the facts as brought on record by the appellant. We have taken into consideration the arguments advanced on behalf of both the parties. In our opinion, issuing printed bills for selling the textile goods to the appellant at Bhiwandi is not a conclusive proof but it is a prima facie proof to arrive to a correct conclusion that the appellant purchased certain goods from certain parties at Bhiwandi. The appellant sold those goods to M/s. Shree Sitaram Dyeing and Printing Mills (P.) Ltd. and adjusted the sale proceeds against the loan taken by it from that party. The appellant's books of account and the books of account of M/s. Shree Sitaram Dyeing and Printing Mills (P.) Ltd. In which the entries of sale and adjustment are made cannot be discarded merely by saying that they are not genuine entries though neither the Assessing Officer nor the CIT(A) opined anything in respect of those entries. Further, in our opinion, the purchase of the goods in the month of March 1985 does not make any difference. The appellant might not have carried on any business activities prior to March 1985, but that does not mean that the appellant was not entitled to carry on the business activity in the month of March 1985. The appellant cannot be compelled to carry on the business activity through- out the year. There are no good reasons to disbelieve the sales made by the appellant to M/s. Shree Sitaram Dyeing and Printing Mills (P.) Ltd. No sales were likely to be effected if there were no purchases. A sale can be made if the goods are available with the seller. From all these facts on record, a reasonable and convincing inference which can be drawn is that the appellant purchased the textile goods, sold them and adjusted the same towards the loan taken by it. Therefore, the assessee is entitled to get the entire deduction.
15. In the result, the appellant succeeds and the appeal is allowed.
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