Commissioner of Income Tax vs Atma Prakash Batra

Ms. Harsha Devani, J.—In this appeal u/s 260A of the income tax Act, 1961 ("the Act"), the appellant-Revenue has challenged the common order dated December 12, 2008, made by the income tax Appellate Tribunal, Ahmedabad Bench "C" (the Tribunal), by proposing the following five questions :

(1) Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal is right in law in deleting the addition made by the Assessing Officer in the sum of Rs. 1,67,59,134 on account of unaccounted purchases ?

(2) Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal is right in law in deleting the disallowance of claim of export commission in the sum of Rs. 3,83,37,678 ?

(3) Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal is right in law in restoring the issue of eligibility for deduction u/s 80HHC of the income tax Act to the Assessing Officer ?

(4) Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal has committed an error in reversing the order of the Commissioner of income tax (Appeals)-III, Surat, without assigning any cogent and relevant reasons ?

(5) Whether, on the facts and in the circumstances of the case, the order of the income tax Appellate Tribunal is contrary to the evidence and material on the record of the case and, hence, perverse or not ?

The assessee is an individual and is engaged in the business of exporting of processed cloth. The assessment year is 2004-05 and the corresponding accounting period is the financial year 2003-04.

The proposed questions No. 1, 2 and 3 relate to three difference issues whereas proposed questions No. 4 and 5 are general in nature relating to all the first three questions.

In relation to proposed question No. 1, the Assessing Officer observed that the assessee had made total purchases of Rs. 24,88,63,282 and to verify the same, issued notices u/s 133(6) of the Act. In case of 17 parties, the notices were returned by the postal authorities with remarks "party not available". The total purchases made from these 17 parties were to the tune of Rs. 16,75,91,346. The Assessing Officer also deputed the inspector of the office to verify the availability of such firms and persons at the given addresses, but the parties were found to have never existed even in the past. The Assessing Officer made inquiries with the Central Excise and Customs Department in response to which, the Central excise authorities stated that these parties were fake/bogus/non-existent. The Central excise authorities also forwarded an alert circular dated May 3, 2005, wherein the names and addresses of the firms found bogus were mentioned. Based on these facts, the Assessing Officer was of the view that without purchase of grey cloth, sale of cloth shown by the assessee would not be possible, but these purchases were made from parries other than those whose bills were recorded in the books. According to the Assessing Officer, the cloth would have been purchased without bills, to save the cenvat duty which was 10 per cent, of the purchase price. The Assessing Officer held that the main support that was taken for proving the fake and bogus parties was the copy of the registration certificate in Form No. 2C issued by the Central Excise Department. However, none of the parties were found at the addresses mentioned in the registration certificates. The concept of cenvat was brought into operation with effect from April 1, 2003, and all the traders having stock of grey cloth as on that date were required to apply for registration along with a self-certified declaration which meant that no physical verification was to be carried out by the Central excise in respect of such a declaration. Certain parties which were not having actual stock of grey also applied for the registration since no physical verification was being carried out. The certificate was only provisional and, therefore, the explanation of the assessee that the registration certificate would prove the genuineness of the firm was not acceptable. The Assessing Officer, therefore, concluded that the assessee purchased the grey cloth from persons without purchase invoice and produced fake bills of purchase from the parties which never existed at the given address. Had the assessee purchased such material from the genuine dealers, it would have to pay cenvat at 10 per cent, and the cost of purchase such material from the genuine dealers would be higher. The Assessing Officer, therefore, concluded that the purchases were inflated by 10 per cent, of the purchase price shown because cenvat was not paid on such purchases and, therefore, the additional income earned by purchasing grey without bills was computed at 10 per cent, of the purchases and addition of Rs. 1,67,59,134 was made to the income.

Being aggrieved, the assessee preferred an appeal before the Commissioner (Appeals), but did not succeed. Before the Commissioner (Appeals), it was submitted on behalf of the assessee that during the assessment proceedings, all books of account and purchase bills with detailed addresses of the parties were furnished. These bills contained excise registration number and the relevant division of the Department where those suppliers were assessed. No adverse inference could be drawn in case the parties were not found, since the assessee gave the addresses on the basis of purchase bills and it was quite likely that those parties subsequently closed the business or shifted to some other place. The assessee made payments for such purchases through regular banking channel within a reasonable time and no amount was outstanding at the time when assessment proceedings were taken up. The excise duty of 10 per cent, of the purchase price was included in the purchase bills and so far as the assessee was concerned, he had paid excise duty to the suppliers and there was no evidence on record that part of the purchase price returned back to the assessee. Duty payment certificate of the Excise Department was also filed. The suppliers were registered with the Excise Department and for getting the excise registration; the applicant had to give detailed addresses with exact place of location. The Central Excise authorities had also issued certificates relating to duty payment for purchases made by the assessee and even refunded such duty on export of processed cloth which would not be the case, if duty was not paid. The refund of excise duty after export was issued only when due verification of payment of duty was done. If the suppliers had taken wrong credit, the only remedy was recovery of equal amount in cash from them as provided in the Cenvat Credit Rules and such duty could not be recovered from the assessee. The Commissioner (Appeals) after considering the explanation given by the assessee was of the view that the assessee had exported the cloth and, therefore, the total quantum of purchases shown by him was genuine since export could not be made without purchases. He, however, held that it had been proved beyond doubt that the purchases were not made from the persons claimed by the assessee but from third parties without payment of excise duty and confirmed the addition. The assessee took the matter in second appeal before the Tribunal and succeeded.

Assailing the impugned order of the Tribunal, Mr. B. B. Naik, learned senior advocate appearing on behalf of the appellant, submitted that the case of the Revenue was that the purchases were bogus as during the assessment proceedings, the assessee could not produce the sellers and the invoices were found to be fake and bogus. It was submitted that the onus or burden of proof was on the assessee when the assessee had claimed deduction towards purchases. It was submitted that the findings recorded by the Tribunal are based on assumption and presumption and are not supported by the evidence and material on the record of the case. Referring to paragraph 12 of the impugned order, it was submitted that the finding that it may be possible that the sellers might have surrendered licence/ registration, out of which they were earning and might have closed the business and were not traceable for that reason, is not based on any evidence or material on the record and as such, the impugned order is perverse.

On the other hand Mr. S. N. Soparkar, learned senior advocate appearing for the respondent invited attention to the paper book which formed part of the record before the Assessing Officer. Attention was invited to the written submissions submitted before the Commissioner (Appeals) whereby his attention was drawn to the copies of various cheques issued by the assessee to his suppliers. Sample copies whereof are attached to the paper book at pages 468 to 498. Inviting attention to the copies of cheques at pages 469 onwards, it was pointed out that all the said cheques were account payee cheques. Attention was also invited to the invoices issued by the sellers all of which form part of the paper book. Attention was invited to the certificates issued by the central excise authorities evidencing payment of duty in respect of the goods purchased by the assessee. It was submitted that on the basis of the certificates so issued, refund had also been granted to the assessee on the exports made by it and that the assessee had paid the tax on the said amount. As regards the contention raised on behalf of the Revenue that the impugned order of the Tribunal was based upon assumptions and presumptions, attention was invited to the surrender of registration certificates at page 297 onwards in respect of some of the noticees, evidencing the fact that the said parties had surrendered their registration certificates under the Central Excise Act. It was submitted that there was ample material on record in support of the assessee''s case and that the order of the Tribunal is not based upon assumptions and presumptions, but is based on material available on record.

The learned counsel further referred to the balance-sheet, to point out that excise refund is shown as income worth Rs. 1,06,78,168 which was offered for taxation. This account had been prepared by the assessee on the basis of the claim made as per the invoice/ARE-1/duty paid certificate. It was also submitted that the Assessing Officer while jumping to the conclusion that the price of the purchases had been inflated to the extent of 10 per cent, has not thought it fit to verify the market price of the goods in question to ascertain whether in fact the price had been inflated. In conclusion the learned counsel submitted that the impugned order passed by the Tribunal is just, legal and proper and does not call for any intervention by this court.

As can be seen from the order made by the Commissioner (Appeals), the Commissioner (Appeals) has recorded that the Assessing Officer never doubted the purchases but has only held that the said purchases were made from parties other than ones from whom the bills were taken. The Commissioner (Appeals) found that none of the cheques were account payee cheques and that all were crossed bearer cheques which can be easily encashed and endorsed several times. The Commissioner (Appeals) surprisingly found that none of the parties from whom huge amount of purchases were made were not found existing presently or even in the past at the addresses mentioned on their invoices as was evident from the return of notices u/s 133(6) of the Act issued by the Assessing Officer and spot inquiry by the inspector of the office. It was further recorded that during the appellate proceedings also, the assessee was asked to produce at least some of the parties for verification, but the same was not done on the ground that the said parties might have closed down their business or would have left the city for good or could have changed their addresses. It was also recorded that the assessee had not furnished certificate from his bank as to whether the payment was made by account payee cheques to these parties, which was required to verify the claim of the assessee that most of the payment to the suppliers was made by account payee cheques. The Commissioner (Appeals) was, accordingly, of the view that this proved that the payments were made either in cash or by crossed or bearer cheques which could be easily endorsed to third parties or could be easily encashed. It was also noted that the assessee had purchased huge quantities from each of the so-called registered dealers and could not produce even a single party for verification nor any evidence was produced before the Assessing Officer or before him that the payments to these parties were made through account payee cheques. According to the Commissioner (Appeals), the copy of the registration certificate issued by the Central excise authorities were only provisional certificates issued in camps held for expediting the registration procedure without physical verification of either the address of the party or the actual stock of grey cloth available with it. Therefore, the certificate could not be accepted as genuine. According to the Commissioner (Appeals), even the Excise Department has apparently been duped into refunding excise duty after export which was not paid to the Department in the first incident itself. The benefit derived by the assessee from purchases made from parties other than claimed would be non-payment of cenvat duty at 10 per cent, and the purchases have been inflated to that extent.

Before the Tribunal, on behalf of the assessee, it was submitted that all the parties from whom grey cloth had been purchased were registered under the Central Excise Act and were having valid registration number and that the purchases made from them were duly authenticated by the Excise Department by affixing the stamp on the duty paid certificate. It was submitted that the Central Excise Department had refunded the duty paid by the purchasers to the assessee, which meant that the authorities were satisfied regarding the genuineness of the purchases. It was submitted that whatsoever purchases were made by the assessee, they used to pay cenvat as per rule 12B of the Central Excise Rules, that is, at 10 per cent, or whatever rate was applicable at the relevant point of time. That since the assessee had purchased the aforesaid material from them, he had to pay the duty on the goods and the duty paid by the assessee had been claimed as excise refund. According to the assessee, in terms of the relevant rules, the seller was required to collect cenvat from the assessee by including the same in the invoice value and thereafter, it was the duty of the seller to pay it to the Excise Department. That, as per the allegations of the Assessing Officer, the sellers have not deposited the aforesaid duty with the Excise Department and, as such, the Assessing Officer has sought to disallow the 10 per cent, cenvat which was de facto paid by the assessee as included in the invoice value. This 10 per cent, cenvat paid by the assessee had also been supported by way of duty paid certificate, ARE-1. According to the assessee, thereafter, the seller had surrendered the licence/registration which he was earlier having and as such, since he had surrendered and closed the business, he was not traceable. It was pointed out from the invoices of the various parties, that the sellers had included 10 per cent, stated to be cenvat tax which the assessee had paid and included in the purchase value. According to the assessee, the purchases could not be doubted because the whole procedure including the addresses, had been verified by the Excise Department who are not in the assessee''s control. From the copies of the aforesaid duty paid certificates, it is clear that there are columns like invoice number, date, quantity of material, assessable value, total of 10 per cent, cenvat paid, entry number, date, etc., all of which have been verified and mentioned as verified by the concerned authorities of the Excise Department.

The Tribunal, in the impugned order, has upon appreciation of the evidence on record, found that the assessee had purchased the duty paid goods and availed of cenvat credit in terms of the Cenvat Credit Rules. According to the Tribunal, it was the duty of the seller to pay excise duty to the Excise Department which had been done by the seller and, consequently, since the goods had been sold under the proper invoices, the assessee had availed of the cenvat credit of the same. That 10 per cent, of the cenvat credit availed of by the assessee on the basis of the invoices of the sellers was also supported by way of duty paid certificate and subsequently, the goods were cleared by the assessee under ARE-1. The Tribunal after examining the scheme of the Central Excise Act and the Rules framed thereunder, was of the view that the Central Excise Act and the Rules provide for registration and that the registration is never provisional. Further, when any person purchases duty paid goods from a seller/manufacturer, under the Cenvat Credit Rules, such person is entitled to the cenvat credit of the duty paid by the seller/manufacturer of such goods. Referring to various provisions of the Rules, the Tribunal was of the view that in view of the provisions of the Act and the Rules, the Department would be aware of the activities of the purchaser and the seller, and that the purchaser cannot be deprived of the benefit of the cenvat credit in terms of the legal provisions. The Tribunal took note of the fact that the sellers were registered with the Central Excise Department which was evident from the bills issued by them to the assessee. That even if the "alert circular" issued by the Central Excise Department, dated May 3, 2005, is perused, it is evident that the relevant financial year in which the bills were issued and the goods were purchased by the assessee was financial year 2003-04. The Tribunal has noted that though the parties at the moment are not traceable at the addresses and the Central Excise Department had issued "alert circular", but it is also a fact that the very same Central Excise Department had issued cenvat credit on the basis of the bills issued by the sellers. Not only that, the Central Excise Department after due verification of the said parties, has issued refund at 10 per cent, to the assessee. The Tribunal has found as a matter of fact that even the payments had been made by the assessee through account payee cheques in most of the transactions and this fact was evidenced by the documents filed before the Tribunal as well as the before the lower authorities in the paper book. On behalf of the Revenue, this finding of the Tribunal has been vehemently assailed. However, as pointed out by the learned counsel appearing for the assessee, copies of various cheques formed part of the paper book before the Assessing Officer which clearly shows that payments to several parties have in fact been made by account payee cheques. It is in the background of the aforesaid findings of fact recorded by it that the Tribunal was of the view that the authorities below were not justified in making addition by disallowing 10 per cent, of the cenvat credit.

Thus, it is apparent that the Tribunal has based its conclusions on findings of fact recorded by it upon appreciation of the evidence on record. Having regard to the submissions advanced by the learned counsel for the respective parties, and having perused the record of the case, it is not possible to state that the findings recorded by the Tribunal are based on irrelevant material or that any relevant material has been ignored. The learned counsel for the appellant is not in a position to indicate any evidence to the contrary from the record of the case. The Tribunal has given sufficient, cogent and convincing reasons for the conclusion arrived at by it. Based on the findings of fact recorded by the Tribunal, this court does not find any reason to take a different view. In the circumstances, this ground of appeal is dismissed.

In relation to proposed question No. 2, which relates to deletion of disallowance of claim of export commission in the sum of Rs. 3,83,37,678, during the assessment proceedings, from the copies of the invoices filed by the assessee, the Assessing Officer found that in export sales invoices, there was a deduction under the head "Commission" of 11.5 per cent, or 12 per cent, and after deducting the said amount, net figure of sale was worked out. The total amount of net sales was Rs. 28,74,85,387, but as per the accounting standards, the amount of export commission should have been reflected on the credit side by showing gross sale minus commission and the net sales would be in as outer column on the credit side of the manufacturing account. The assessee also did not furnish any agreement for paying such commission nor did it file any proof of such remittance routed through the Reserve Bank of India (RBI). The foreign agents'' commission was allowable up to 12 per cent, under the Central Excise and Customs Rules, while giving the DEPB benefit, but the same was required to be proved beyond doubt as required by the RBI guidelines. Further, the assessee received payment from foreign buyers after six months and the assessee could not take the plea that the foreign agents received payment of commission directly from the buyer, since unless there was a due for making payment for purchase, no amount of commission would become payable and no one would pay such commission in advance. The Assessing Officer further observed that names and addresses of foreign agents did not confirm the actual payment and, therefore, disallowed the claim of the commission.

The assessee took the matter in appeal before the Commissioner (Appeals), who confirmed the addition. The assessee preferred a second appeal before the Tribunal and succeeded.

Mr. B. B. Naik, learned senior advocate appearing for the Revenue has submitted that as per the findings recorded by the Assessing Officer, as confirmed by the Commissioner (Appeals), the assessee had failed to produce any evidence in the form of agreements or contract with any party for payment of commission. It was submitted that the Tribunal has recorded a finding that the commission agents might have been appointed by the buyers, the assessee is entitled to deduction of payment of commission to agents appointed by the buyers, which is contrary to the normal principles for payment of commission to the agents. According to the learned counsel, the assessee could not produce any evidence on record as to what services were rendered by which agent, for which commission payment has been made by the assessee and claimed as deduction. It was contended that the findings recorded by the Tribunal that considering the nature of the service rendered by the agent, even if they are appointed by the buyers, the services were indirectly rendered to the assessee is without any basis whatsoever. It was submitted that there is no evidence or material on record to record such a finding and that not a single agreement had been produced by the assessee on record to substantiate the findings recorded by the Tribunal.

On the other hand, Mr. S. N. Soparkar, learned senior advocate appearing on behalf of the respondent-assessee, submitted that the assessee has shown the net deduction after payment of commission, whereas it is the case of the Assessing Officer that he should have shown gross income and claimed deduction as expenditure. It was submitted that the ultimate result would be the same, hence, in either case, no prejudice is caused to the Revenue.

As can be seen from the order of the Commissioner (Appeals), before the Commissioner (Appeals), the assessee had filed confirmations from the agents acknowledging receipt of commission which was paid for securing the export order. It was the case of the assessee that considering the nature of service, no documentary evidence could be maintained. The payment of commission was deducted from the export invoice itself and made directly to the agents by the buyer and there was no need to have any written agreement for the same. That the assessee had duly complied with the rules framed by the RBI and the payment of commission was recognized by the RBI. That there was no significant defect in the system of accounting and as such, the provisions of section 145 of the Act could not be invoked.

The Commissioner (Appeals) was of the view that considering the fact that there was no agreement with the so-called agents for payment of any commission, since the payment was received from the foreign buyers more than six months after the export was made, therefore, the commission agent could not have received such an amount directly from the buyer since unless there was a fixed date for making payment no commission would be payable and no buyer shall pay such commission in advance and, therefore, the claim of payment of commission to the foreign agents had not been established. According to the Commissioner (Appeals), if the assessee''s explanation that only the net amount had been realised from the customers were to be accepted, then it would have been a trade discount and not commission.

Before the Tribunal, on behalf of the assessee, reference was made to the copies of confirmations of some of the parties, which formed part of the paper book. It was submitted that the assessee is an export oriented unit and as such, there cannot be any disallowance with reference to the commission payment since that would amount to disallowance of the claim u/s 80HHC of the Act. After pointing out various details from the paper book as well as a Central Board of Direct Taxes circular, it was submitted on behalf of the assessee that such types of transactions had already been accepted by the Board and that, this was not a new concept of deducting commission from invoice value. It was submitted that whatever amount was received by the assessee as net consideration of export had been offered as export turnover and the Department had failed to bring on record any evidence to the effect that the assessee had received gross export turnover.

The Tribunal, after considering the rival submissions and after appreciating the evidence on record, found that the receipt of commission amount had been duly confirmed by the agents which in turn meant that the amount which had been deducted from the invoice value actually represented commission payments which were finally received by the agent. This had been done in accordance with the terms and conditions agreed upon between the buyers and the seller, even though there was no formal agreement. The agents had unequivocally confirmed and reconfirmed the nature of the transactions and that the absence of any formal agreement could not be held to be a ground to dismiss the claim of the assessee. There were clear contra confirmations from the agents. Thus, once the genuineness of the commission as well as its justification of having been wholly and exclusively incurred for the purpose of the assessee''s business was established, the same becomes admissible as deduction u/s 37(1) of the Act. The Tribunal was of the view that it could not be held that the gross invoice amounts were what had accrued to the assessee, and that these were the amounts on which the assessee should have been assessed. According to the Tribunal, the outgoing commission from the invoice values would have to be reduced from the gross amounts, and the net amount which was the actual sum received by the assessee in India, and which was duly certified and permitted by the RBI and its authorised dealer, was what had been earned by the assessee from such transactions. The Tribunal further found that the commission was not deducted from the export invoices in an ad hoc manner and it was clearly under an agreement between the buyer and the seller, as also between the buyer and the agent. Consequently, the assessee was under an obligation to deduct commission from the gross invoice value. In the present case, there was a compulsion to deduct the commission from the export invoices which was clearly indicated in the confirmation letters of the agents, and that the ingredients which were necessary for such deduction of commission to be treated as diversion of income by over riding title was clearly present. It was further found that in the present case, the gross export proceeds never reached the assessee, no such income had, therefore, accrued to the assessee and this was because of an obligation or compulsion to deduct the commission from the export invoices which clearly showed this to be a case of diversion of income by overriding title. The amounts deducted from the export invoices were thus clearly allowable as deduction.

As regards the findings of the lower authorities that the confirmations issued by the parties were on plain paper, the Tribunal after appreciating the evidence on record has found that except one party, namely, Mohmed Abdulla of Dubai, all other communications were on letter heads of the respective parties. It was further found that none of the payments had come beyond six months, but the same were within six months as could be verifiable from the bank realization certificates enclosed annexed in the paper book. The Tribunal recorded that each of the transactions between the assessee as the seller and the two buyers were mediated by agents, whose existence was established beyond doubt, by the confirmation letters. Secondly, there was rendering of services. The agents had clearly written that they had rendered services; in procuring samples, deciding the orders and settling all matters between the buyers and seller including payments by the buyers to the seller. The existence of the agents and their functioning was for the benefit of the assessee as well. The Tribunal, accordingly, was of the view that the claim of the assessee towards commission payment deserves to be allowed.

From the facts noted hereinabove, it is apparent that the conclusion arrived at by the Tribunal is based upon findings of fact recorded by it after appreciating the evidence on record, which have not been dislodged by the Revenue by pointing out any evidence to the contrary. The reasons assigned by the Tribunal for arriving at its conclusion are reasonable and convincing. On behalf of the Revenue nothing has been pointed out to persuade the court to take a different view. In the circumstances, the conclusion arrived at by the Tribunal being based upon findings of, fact does not give rise to any question of law. This ground of appeal is also dismissed.

In relation to proposed question No. 3, which pertains to restoring the issue of eligibility for deduction u/s 80HHC of the Act, as can be seen from the impugned order of the Tribunal, the Tribunal has recorded that it was admitted by both the sides that the issue needs to be set aside to the file of the Assessing Officer to decide afresh in the light of insertion of clause (iiid) to section 28 of the Taxation Laws (Amendment) Act, 2005, with retrospective effect from April 1, 1998. In the circumstances, it is apparent that the Tribunal has decided the issue of eligibility for deduction u/s 80HHC of the Act on a consensus and as such, it is not open for the Revenue to challenge the same nor does it give rise to a question of law. In the circumstances, this ground of appeal is also dismissed.

In so far as the proposed questions No. 4 and 5 are concerned, as noted hereinabove, the same are only ancillary grounds, which pertain to the first three proposed questions.

In the light of the aforesaid discussion, it is not possible to state that the Tribunal has committed any legal error so as to warrant interference. No question of law, much less a substantial question of law, can be stated to arise out of the impugned order of the Tribunal. The appeal is, accordingly, dismissed.