Rajasthan H.C : Where purchase and sale of paddy was made at fair market price and loss incurred in transaction was due to market fluctuation, such loss was allowable

High Court Of Rajasthan

CIT vs. Kamal Trading Company

Section : 28(iii)

Arun Mishra And Narendra Kumar Jain, J.

D.B. It Appeal No. 184 Of 2011

February 6, 2012


1. Heard on the question of admission.

2. The appeal has been preferred as against the order passed by the Income-tax Appellate Tribunal affirming the order passed by the Commissioner of Income-tax (Appeals).

3. Deletion of addition of Rs. 22,41,482 has been ordered by the Commissioner of Income-tax (Appeals), which addition was made by the Assessing Officer on account of unexplained sundry creditors. Disallowance was also made on account of claim of loss of Rs. 2,00,200 in the paddy account. The Commissioner of Income-tax (Appeals) has found that certain statements of certain farmers were recorded by the Inspector of Income-tax, but it were recorded behind the back of the assessee. The assessee was not given opportunity to cross-examine the witnesses. Statements were written in Hindi, whereas the farmers were illiterate or semi-literate. Affidavits were filed by the assessee of each and every farmer, which have been relied upon by the Commissioner of Income-tax (Appeals) and the said finding has been affirmed by the Income-tax Appellate Tribunal.

4. The Commissioner of Income-tax (Appeals) with respect to sundry creditors has given the findings that on consideration of statements of 20 farmers and the affidavits, merit has been found in the contention of the assessee that the Inspector of Income-tax was not authorized to record or collect statements and the said statements were recorded behind the back of the assessee. It was further held that to expect illiterate and semi-literate farmers to recount from memory details of accounts with the assessee was asking too much. They are not expected to be familiar with concepts such as financial year and 31st March. They do not understand the timing difference. Merely by the fact that the stamp papers were purchased from one stamp vendor, it does not lead to the inference that the contents of the affidavits were dictated by the assessee. The Assessing Officer did not bring on record any other evidence to support such inference. Each of these farmers appeared before the Assessing Officer to confirm that he sold his crops. Thus, there is no reason with the Assessing Officer to ignore their statements. Affidavits were enough and sufficient piece of evidence so as to accept the case of the assessee. Reasons in detail have been given by the Commissioner of Income-tax (Appeals) in 4-5 pages. The order of the Commissioner of Income-tax (Appeals) has been affirmed by the Income-tax Appellate Tribunal. In paragraph No. 13, the Income-tax Appellate Tribunal has observed thus :

“After hearing the rival contentions and on a perusal of the materials available on record, we noted that the Assessing Officer has examined the books of account during the course of the assessment proceedings but he did not find any mistake in the books of account. Even the Assessing Officer failed to prove any transaction as non-genuine. The Inspector made enquires behind the back of the assessee-firm and without affording any opportunity, the Inspector furnished his report to the Assessing Officer. When the Assessing Officer confronted the assessee-firm with the report of the Inspector, the assessee-firm contacted all the farmers and requested the Assessing Officer to issue summons under section 131 of the Act. All the farmers appeared before the Assessing Officer who examined them individually and all of them confirmed that they sold their crops to the assessee-firm. They have faith in the assessee-firm as it is their permanent ‘aratia’ and the full amounts are paid after certain period. The amount as stated in the accounts as on March 31, 2006, was outstanding which was paid subsequently within 2/3 months. From the above facts and also keeping in view the materials available on record, the Assessing Officer has not brought any evidence on record to disprove any transactions. Therefore, in such circumstances, the disallowance has been made on surmises and conjectures. Hence, the learned Commissioner of Income-tax (Appeals) has rightly deleted the said addition. Thus, ground No. 2 of the Revenue is dismissed.”

5. For the reasons stated by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal, we are satisfied that a finding of fact has been recorded by the Commissioner of Income-tax (Appeals), which has been affirmed by the Income-tax Appellate Tribunal, thus, no case for interference in the appeal is made out. No substantial question of law is involved with respect to the deletion of Rs. 22,41,482.

6. Coming to the submission with respect to the disallowance of Rs. 2,00,200 in the paddy account, the Commissioner of Income-tax (Appeals) has deleted the disallowance of Rs. 2,00,200 made by the Assessing Officer. Certain paddy was purchased by the assessee from Kamal and Co. on March 22, 2006, at Rs. 13,01,200 and on the very same day, it sold the same to Shri Vimal Kumar Jain for sale consideration of Rs. 11,01,100 which resulted in loss of Rs. 2,00,200. The Assessing Officer required the explanation of the assessee in this regard and it was submitted by the assessee that because there was no storage facility/godown, he sold the same as per the prevailing rate of the market on that day as per vikray parchi issued by the Krishi Upam Mandi Samiti. With respect to deleting the disallowance of Rs. 2,00,200, the Commissioner of Income-tax (Appeals) has given the following reasons :

“I have perused the assessment order and reports of the Assessing Officer received during the appeal proceedings and considered the submissions of the appellant as well as rejoinders to various reports of the Assessing Officer.

On March 22, 2006, the appellant purchased 1001 quintals of paddy from Kamal and Co. and on the same day sold the same to Shri Vimal Kumar Jain at a lower rate, thereby incurring a loss of Rs.2,00,200.

The Assessing Officer disallowed this loss holding that the appellant had failed ‘to furnish documentary evidence in support of his claim that loss in the paddy account was due to market fluctuation’.

For both the purchase and the sale, the appellant had submitted bills and necessary documents to the Assessing Officer. It is pertinent to recall that the transactions were made through the mandi system, an independent market mechanism to ensure that all transactions are conducted at fair market prices. As a matter of fact, the document recording the sale, known as vikray parachi, is issued by the mandi authorities. In such circumstances, there should be no doubt that the two transactions were entered into at fair market prices. Furthermore, there is no evidence that either party was related to the appellant. In wake of an independent and fair system and the fact that the transactions were between unrelated parties, in my view, the demand of the Assessing Officer for evidence to show that loss was due to fluctuation in market rates is redundant.

Further, in a situation where the appellant had discharged its responsibility by furnishing necessary details and document, in my opinion, the onus was on the Assessing Officer to bring on record the evidence to show that motive behind the two transactions was evasion of income-tax.

In these facts and circumstances, it is my considered view that the decision of the Assessing Officer was based on conjectures and surmises. The disallowance of Rs. 2,00,200 is not confirmed. Ground No. 1 of the appeal is accepted.”

7. The Income-tax Appellate Tribunal has affirmed the aforesaid findings.

8. In view of the above, it would not be appropriate to take a different view in the matter. We find no substantial questions of law involved in this appeal.

9. Apart from that, even the appeal cannot be entertained on the aforesaid ground as tax would be below Rs. 1 lakh and it was prevailing instruction at that relevant time that the appeal could not have been preferred on the aforesaid issue in case the tax liability is below Rs. 4 lakhs. Due to this also, the appeal cannot be entertained, hence, the appeal is dismissed.

[Citation : 346 ITR 60]

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