Friday 14 September 2012

Whether mere fact that payments in respect of expenses incurred by assessee were made by account payee cheques, it suffices to accept the transactions as genuine - NO: HC

THE issues before the Bench are - Whether, if a party fails to avail of the opportunity to cross-examine a person at the appropriate stage in the proceeding, the said party would be precluded from raising such issue at a later stage of the proceeding; Whether mere fact that payments in respect of expenses incurred by the assessee were made through account payee cheques can be the sole criteria to accept the genuineness of the transaction; Whether the transactions through account payee cheques can be accepted even when the identity of the creditors to whom such payments were
made were doubtful and Whether the issue as to the expenses were necessary or not in terms of the commercial expediency u/s 37 (1) of the Act would arise only after the assessee had discharged its initial onus to prima facie establish such claim. And the verdict goes against the assessee.
Facts of the case
For AY 1994-95, the appellant had debited a sum of Rs. 69,59,507/- towards advertisement and sale in its P&L account. In the AY 1993-94 the amount so debited was Rs. 14,19,197/- and in the AY 1992-93 was Rs. 2,03,507/-. In the course of scrutiny of such return, the assessee was called upon to furnish necessary details of expenditure as to how such steep rise had occurred on advertisement and sale promotion in that year.

The assessee stated that the sale had gone up by nearly 17% in that year and hence the sales promotion and advertisement expenses had to be increased correspondingly. It was found that although the sales in the said year had in fact gone up net profit had suffered a drastic fall. Enquiry was made in the course of the assessment as to whether the assessee who is a wholesale dealer of cigarettes of I.T.C. Ltd. was required to incur expenditure on advertisement and sales promotion and assessee was called upon to furnish a confirmation in this regard from its principal, namely, ITC. The appellant assessee did not submit such confirmation whereupon the AO wrote to ITC seeking clarification.

A reply was received on 25.02.1997 wherein it was stated that wholesale dealers were free to undertake such expenditure at their own risk but was under no obligation to do so. In view of the substantial increase in the matter of expenses on account of sales promotion and advertisement which was claimed to have been voluntarily undertaken by the appellant assessee, the AO decided to verify the items of expenditure claimed by the assessee. In course of such verification, the AO called upon the assessee to submit details of advertisement, sales promotion and sampling and display expenditure. Subsequent to the submission of details the Inspector of Income Tax conducted enquires about the parties with whom the assessee claimed to have had transactions in that regard.

Pursuant to the enquiries so conducted the AO in the course of assessment pointed out to the material collected against the assessee and called upon him to respond thereto. Thereafter, by letter dated 12.03.1997 the AO communicated to the appellant assessee the materials collected against him in the course of such enquiry by the Inspectors and called upon the assessee to respond to the same. In reply to such letter, the assessee claimed that it had provided all information which was in its possession and control and claimed since the payments were made by account payee cheque such the deductions as claimed ought to be allowed.

With regard to the expenses relating to sampling and display of products, the appellant assessee claimed that the cigarettes were distributed through hawkers, sales representatives and that they have no record in respect of each individual shop.

In the aforesaid reply the appellant assessee did not call upon the AO to give a copy of the Inspector’s Report or any other or further material. Nor did the assessee call upon the AO to summon the individuals interrogated by the Inspector for cross-examination in the course of the assessment proceeding.

The AO in conclusion of its assessment by the assessment order dated 31.03.1997 disallowed the various deductions claimed by the assessee particularly deduction on account of expenses incurred through M/s. Grafic Circle, being expenses incurred for hiring of vehicles to the tune of Rs. 5,69,000/-, through M/s. Universal Printers to the tune of Rs. 15,56,658/- on account of expenses incurred for printing through M/s. Ma Tara Enterprises to the tune of Rs. 5,93,900/- on account of hiring manpower and on account of expenses incurred for sampling and displays to the tune of Rs. 27,68,607/-.

Before the CIT (Appeals), the assessee, inter alia, claimed that the AO had proceeded with the assessment proceeding in violation of the principles of natural justice inasmuch as copy of the Inspector’s report was not supplied to it and the persons who had been interrogated were not called for cross-examination. The appellant assessee also claimed that the enquires in the bank accounts of various entities through whom such expenditure were made were undertaken behind back of the appellant assessee. CIT (Appeals) in its order dated 13.04.1998 set aside the assessment order, inter alia, on the ground that the payments to M/s. M/s. Grafic Circle, M/s. Universal Printers, M/s. Ma Tara Enterprises were by account payee cheques and hence the deduction of such expenditure ought not to have been disallowed. The disallowance of expenditure on the ground of display and sampling was also set aside by CIT (Appeals) on the ground that the AO erred in law in rejecting such expenditure as unnecessary. The third member of the Tribunal upheld the disallowance of expenses by the AO, inter alia, on the ground that the appellant assessee was given adequate opportunity to rebut the materials collected against him and that it was the appellant assessee who failed to discharge his initial onus to establish such claims for deduction.

On further appeal by the assessee, the High Court held that,


++ it is settled law that principles of natural justice cannot be construed in isolation from the factual matrix of the case or it has many a facets. It is to be seen as to whether in the factual backdrop of the instant case the claim of the appellant assessee for the first time before the CIT (Appeals) that he was not given an adequate opportunity of hearing in respect of the materials collected against him is justified or not;

++ from the correspondence between the assessee and the AO, there is no doubt that the principles of natural justice have been substantially complied with in the instant case. The appellant assessee was duly communicated with the substance of the inspector’s report, the identity of the persons who had been interrogated by the inspector and also repeatedly called upon to furnish necessary particulars of the shops through which the expenses on account of sampling and display were made;

++ an adjournment was sought for to respond to the contents of the inspector’s report which was duly granted. A perusal of the reply to the said letter dated 12.03.1997 makes it evident that the assessee did not feel prejudiced in any way in the manner of conduction of such proceeding and categorically indicated that it has submitted whatever materials were within their possession and control in support of their claim and did not have anything more to submit. In the present situation adequate compliance of natural justice was made. In order to have benefit of complete compliance of natural justice active cooperation by way of effective response to the queries ought to have been furnished;

++ it is apposite to mention that neither the appellant assessee at that stage called upon the AO to furnish a copy of the inspector’s report nor did it call upon the AO to produce the persons who were examined by the inspector in course of enquiry for cross examination. Such conduct of the appellant assessee clearly establishes that there was compliance of the principles of natural justice as far as the AO is concerned and the assessee did not suffer any prejudice in the manner in which the assessment proceeding was conducted. Furthermore non-supply of the copy of the inspector’s report did not cause any prejudice to the assessee inasmuch as the contents thereof were in fact substantially communicated to the assessee by the aforesaid letter of the AO dated 12.07.1997 to which the assessee was given adequate opportunity to respond;

++ if the assessee felt that cross-examining of any person was necessary for establishing its case it was incumbent upon the assessee to make such prayer before the AO during the assessment proceeding. If a party fails to avail of the opportunity to cross-examine a person at the appropriate stage in the proceeding, the said party would be precluded from raising such issue at a latter stage of the proceeding. Therefore the belated claim of the assessee at the appellate stage that it was denied the opportunity of cross-examining witnesses in the assessment proceeding is wholly untenable in law;

++ Plea of violation of natural justice taken at the appellate stage appears to be belated and clearly an afterthought. It appears that no prejudice had been suffered by the appellant assessee in the manner the proceeding was conducted by the AO and the assessee was not aggrieved at that stage. Only when the assessment order went against it, the assessee conveniently raised such belated plea of denial of opportunity of fair hearing and breach of principles of natural justice;

++ with regard to the enquiries made in respect of the bank accounts of the entities through which expenditure has been made, no prejudice is caused to the appellant assessee. Such enquiries were made to ascertain the address of the said entities for serving notices upon them u/s 131 of the Act. Repeated opportunities to the appellant assessee to disclose the identity of the said entities and/or to bring them before the AO had yielded no result. Undoubtedly it was the initial burden of the assessee to establish the identity of such persons and/or to produce them to support its claim. The assessee having failed to do so, the AO had no alternative but to make enquiries in the bank accounts of those entities to establish their identities. However, such effort also proved futile inasmuch as neither any address was given in the said account opening forms nor there was no introducer to such account. In this backdrop it cannot be said that enquiries made by the inspector in respect of the bank accounts of those entities were in violation of principle of natural justice or caused any prejudiced to the assessee;

++ the purpose of such enquiry was to issue notices u/s 131 of the Act upon such entities, whose identities the assessee ought to have divulged in the first place. The third member rightly held that such enquiries have not caused any prejudiced to the appellant assessee and remanding the case would serve no worthwhile purpose inasmuch as the appellant assessee inspite of repeated opportunities have failed to produce the said entities before the AO;

++ when the identity of the entities though whom such expenses were made were doubtful and the assessee had failed to dispel such doubt by discharging its initial onus, mere fact that payments were made through account payee cheques would not be the sole criteria to accept the geniusness of such transaction. Reliance in this regard has been rightly made to the ratio of a decision of this Court reported in 208 ITR 465 wherein this Court did not accept transactions through account payee cheques when the identity of the creditors to whom such payments were made were doubtful;

++ it is settled law that the principles of natural justice is to achieve purpose of logical conclusion and in the facts of this case it is clear the remand of the case would not serve any purpose at all as the assessee inspite of opportunity had failed to produce such evidence and discharge its onus during the assessment proceeding itself. In view of its failure to produce adequate and cogent material to establish the claim of expenses on sampling and display, the accounting member had rightly held disallowance can be made on that ground itself without even considering the inspector’s report;

++ furthermore, the issue as to whether such expenses were necessary or not in terms of the commercial expediency u/s 37 (1) of the Act would arise only after the assessee had discharged its initial onus to prima facie establish such claim. If the assessee had failed to discharge its primary onus to establish such claim as in the present case, the question as to its commercial expediency does not arise at all;

++ in view of such finding, remand of the case in the facts of the case is wholly unjustified and is not necessary in view of the fact that there is no violation of principle of natural or denial of an opportunity of fair hearing to assessee. For the aforesaid reasons, the opinion of the third member of the tribunal was confirmed.

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