DELHI F BENCH DEPUTY CHAMPION COMMISSIONER OF v. COMPUTERS (P.) LTD. INCOME TAX, CIRCLE 25(6) October 21, 2005 JUDGMENT PerG.S. Pannu, AM. - This appeal has been preferred by assessee againstthe order of CIT(A) dated 7-1-2002 pertaining toassessment year 1998-99. Thesolitary ground in this appeal raised by assessee is with regard to thedirection of CIT(A) in upholding addition madeby Assessing Officer of Rs. 15,20,234 out of purchases on groundthat purchases were made by assessee from bogus parties. 2.If brief, facts relevant for purposes of disposal of appeal can besummarized as follows: That appellant assessee is company incorporatedunder provisions of Companies Act, 1956 and is engaged in businessof import of computer components and manufacture and sale of computers. TheAssessing Officer received information from Jt. Commissioner of Income Tax,Special Range, 36, New Delhi to effect that assessee had made boguspurchases from four persons, details of which are as follows:' Name of Bogus Party Amount (Rs.) 1. Durga Trading Company 40,000 2. Sero Systems 5,52,534 3. Unique Kendra 6,27,700 4. Ritco Sales India 3,00,000 Rs. 15,20,234 3.The Assessing Officer further notes in order of assessment that saidinformation was unearthed during search and seizure operation on 22- 6-1998carried out in case of one M/s. T.R. Chadha Group. For this reason, theAssessing Officer has treated purchase of Rs. 15,20,234from aforesaid four parties belonging to T.R. Chadha Group as bogus.Another reason stated by Assessing Officer to make disallowance wasthat while examining stock records produced by assessee, AssessingOfficer found that stock of various items showed negative quantitativebalances. details in this regard as pointed out by theAssessing Officer in his order was as under:' "...itwas found that stock of various items stands at negative quantity thereforethe stock records cannot be relied upon. For example, stock of CPU P-120 isnegative on 22-4-1997, 30-4-1997, 1-5-1997, 6-5-1997, 10-6- 1997, 11-6-1997,12-6-1997, 22-7-1997 and so on. Similarly, stock of Cabinet is negativefrom 13-8-1997 to 4-12-1997 and further negative from 16- 12-1997 to16-1-1998." 4.On account of aforesaid, Assessing Officer concluded that stockrecords could not be relied upon. On account of aforesaid two reasons, theaddition of Rs. 15,20,000 was made treating theaforesaid purchases as bogus purchases. In appeal before CIT(A),the assessee made various submissions. However, CIT(A)has since sustained addition on account of reasons taken by theAssessing Officer. CIT(A), in sustaining theaddition, took additional reasoning to effect that when figure ofbogus purchases is adjusted, it marginally increases GP rate of theassessee, which still remained within reasonable limits. Aggrieved with theaforesaid stand of lower authorities assessee is presently in appealbefore us. 5.Before us, ld. counsel appearing on behalf of assessee company hasprimarily reiterated submissions made before lower authorities, whichcan be appreciated in following manner: first submissions of ld.Counsel is that during course of assessment proceedings, assessee hadrequested Assessing Officer that it may be provided opportunity to gothrough contents of information/report which was being used against it.That Assessing Officer did not provide any copy of information in thisregard. Our attention was invited to copies of communication addressedby assessee to Assessing Officer dated 9-3-2001, copy of which hasbeen placed at paper book pages 4-7. Secondly, it was submitted that theassessee company had accounted for purchases in its books of accountincluding its day-to-day records maintained. It was submitted that itemspurchased have been used by assessee either in manufacturing of thecomputers or for resale of components and for that matter referred to thedetails in this regard which are placed at pages 72 to 74 of paper bookfiled before us. ld. Counsel submitted that purchases could not havebeen taken as bogus on ground that sales made by assessee have beentaken as genuine. It was further submitted that assessee company hadjustified its purchases before lower authorities on basis of copyof invoices, sales tax register nos., details of items purchased etc. ofeach of four parties under consideration. That paymentfor goods purchased were made through cheque and none of thepayments was made in cash. That goods purchased were duly recorded in thestock records of assessee company. That itemspurchased were computer components which were consumed by assessee in itsbusiness of manufacturing of computers or for resale as trading items.That closing stock of components is duly reflected in tradingaccount and balance sheet of company and no infirmity in same wasnoted. Our attention was invited to paper book filed to demonstrate thatall aforesaid submissions were supported by necessary material whichwas placed before lower authorities in this regard. 6.Coming to issue of negative stock noted by Assessing Officer in thestock records, ld. Counsel submitted that assessee did not have anyopportunity to explain same before Assessing Officer for reasonthat no such query was confronted to assessee during assessmentproceedings. However, it was submitted that assessee company made detailedsubmissions along with relevant material before CIT(A)and for that matter, referred to paper book wherein such material is placedat pages 93 to 99. In brief, it was stated that negative balances noted bythe Assessing Officer did not represent any discrepancy so as to justify theimpugned addition. reasons can be manifold, viz., that in certainsituations, items are delivered by manufacturing company against theassessee's warranty claims, which are sometimes sold to customer and thewarranty claimant is given items later after making fresh purchases. That stock items are delivered to customer from theFaridabad and Gurgaon Branch which has to be replaced later to avoid mixing ofmanufacturing stock with trading stock to avoid excise problems.That entries in books are made while entering purchase invoices whereasparties sometimes deliver material against challan and invoices areissued later. assessee in meantime sells material as it hasphysically received same but purchase entry could not be recorded intime as invoice was delivered later. Therefore, there would be negativestock at given point of time. That sometimes material is procured by theassessee and sold to customer subject to approval and in such situation,the sale invoice is made earlier and purchase invoices made would beentered later after assessee advises supplier that it intends topurchase it. Ld. counsel contended that aforesaidreasons led to negative balances in stock records during year and wereexplained before lower authorities. In any case, it was submitted that theaforesaid discrepancies were set right at time of taking closing stockinventory and completion of accounts. Therefore, there could not be anyground to make any addition on this count. It was further submitted that thecomplete reconciliation in this regard covering item-wise stocks was submittedbefore CIT(A) and same has not been adverselycommented. In any case, it was submitted that value of negative balancesnoticed by Assessing Officer was merely Rs. 1,34,478 as is evident from thedetails and therefore, same could not be reason so as to justify thebogus purchase of Rs. 15,20,234. With regard to argument of ld. CIT(A) regarding minor variation in gross profitrate as result of disallowance of bogus purchases, ld. Counsel vehementlyargued that same cannot be reason for sustaining disallowance madeby Assessing Officer. According to him, trading results during yearare favourable in comparison to earlier year and therefore, reasonadvanced by CIT(A) is misconceived. 7.On other hand, ld. DR has defended orders of lower authorities. Theld. DR pointed out that addition made by Assessing Officer was on aspecific ground, namely information received from Investigation Wingwhereby impugned purchases were found to be made from four bogus concerns.Therefore, according to him, explanation offered by assessee on thebasis of its own records could not be considered as sufficient. According tothe ld. DR, it was not case where addition towards thetrading results have been made in generalized manner. Therefore,according to ld. DR, onus was on assessee to prove that fourparties in question were genuine. It was submitted by ld. DR thatconsidered in aforesaid light, it is evident that assessee has not madeany effort in this regard, either before lower authorities or even beforethe Tribunal. 8.We have considered rival submissions. crux of issue relates to theclaim of assessee of purchase of Rs. 15,20,234from four parties which have been detailed by us in earlier part of theorder. Assessing Officer has disallowed same for two reasons and CIT(A) has sustained same for third reason also. Wewould discuss three reasons hereinafter. first reason taken by theAssessing Officer is that stock record maintained by assessee was notreliable inasmuch as on certain dates falling within previous year underconsideration, stock balance of certain items was negative. We haveexamined reasons and details submitted by assessee in this regardbefore CIT(A). In our view, there is no reason tosustain stand of revenue on this count inasmuch as overallquantities of opening stock, purchase, sale and closing stock have not beenfound to be suffering from any discrepancies. After having perused factsituation, in our view, it is case where there can be, at best, mismatch ofdate of purchase invoice and sale invoice. aforesaid reason, in any case,in our view, is not germane to addition which has been sought to be made bythe revenue. Similarly, reference to gross profit rate of assesseeby CIT(A) is also irrelevant to decide theaddition in question. No case has been made out by CIT(A)that gross profit rate suffered from any infirmity or that samewarranted any interference, either on account of past history or for any otherreason found in records of current assessment year. Therefore, on thisreason also, we do not deem it fit to sustain addition. 9.This leaves us with primary reason which prompted Assessing Officer tomake impugned addition. Assessing Officer received information thaton account of search and seizure operation on M/s. T.R. Chadha Group, fourparties from whom purchases were made by assessee were found to be bogus.In this regard, we find that nowhere at stage of either assessmentproceedings or even before first appellate authority, so-calledinformation has been brought out by authorities and neither same hasbeen provided to assessee. said information, which is foundationfor making entire addition has not been adequatelydiscussed by either of lower authorities in their respective orders. In theabsence of same, therefore, it is not feasible to evaluate efficacy ofthe same. Further, it is settled proposition of law that whenever revenueintends to rely on material or information which is adverse to assessee,to make addition, said information or material must be confronted to theassessee so that assessee is allowed adequate opportunity to rebut or meetthe same. We find that apart from informing assessee that certaininformation emanating from search on M/s. T.R. Chadha Group has beenreceived, no effort has been made to provide said material to assessee.Indeed, assessee had requested Assessing Officer seeking copies of thereport of Investigation Wing in this regard, as is evident from thecommunication that have been placed before us. But Assessing Officer hasfailed to do so and even at stage of CIT(A),no effort has been made to rectify said position. Having regard to theaforesaid, in our view, matter requires to be revisited by AssessingOfficer in said light. We hereby set aside order of CIT(A) and remand issue to file of AssessingOfficer for carrying out following limited exercise. Assessing Officershall provide copies of material and information in his possession, withregard to four parties in question so as to enable assessee to rebutthe same in manner as permitted by law. Assessing Officer shallconsider pleas of assessee and material furnishedby assessee in support of its stand and thereafter pass appropriateorders in accordance with law. We may mention here that if AssessingOfficer fails to provide material or information which he has reliedupon to make addition, then no addition can be made in this regard. We mayalso mention here that since we have found other two reasons for making theaddition as unjustified, therefore, addition, if at all, is required to bemade by Assessing Officer, it shall be made by him only in light of hisfindings with regard to aforesaid verification exercise directed by us andnot for other reasons, which have been found to be as inadequate andnon-germane to context. 10.In result, for statistical purposes appeal of assessee is treatedas allowed as above. 11. Order pronounced in opencourt on 21-10-2005. *** Champion Computers (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle 25(6)