No addition for bogus purchase on borrowed satisfaction from VAT Dept. without proper examination

Ravi Developments Vs ACIT (ITAT Mumbai)

Conclusion: Addition of bogus purchase by AO was not justified on borrowed satisfaction from the Value added tax (VAT) department without proper cross-verification.

Held: During the assessment proceedings, the purchase was disallowed by AO @ 91% of the total purchase. The addition was made fully depending on the available documents from the VAT authorities. No cross verification was allowed by AO. Assessee filed an appeal before the CIT(A). The CIT(A) confirmed the addition; hence, assessee filed an appeal before the ITAT. It was held that the VAT authorities were generally examining the payment of VAT. The Sale Tax Department mostly concerned about the input tax credit availed by the party & payment of output tax. Assessee had utilized this purchase for its working progress.  The details of purchase was also submitted. The whole addition was made on borrowed satisfaction from VAT department. No proper cross verification was made by the revenue authorities. AO also did not make any strong objection against the assessee. The stock was exhausted by assessee during the year through sales. Hence, the addition sustained by the CIT(A) was deleted.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The instant appeals are filed by the Assessee against the order of the Learned Commissioner Income Tax (Appeals), Pune-11 [in short CIT(A)] order passed u/s 250 of the Income Tax Act, 1961 (in short ‘Act’), for assessment years 2009-10 & 2010-11. Boththe orders were passed on dated 25.02.2022. The impugned orderswere generated for the period 2009-10 & 2010-11 from the orders of the learned Assistant Commissioner of Income Tax, Circle-2, Thane, both the orders are passed on 28.03.2013, passed u/s 143(3) r.w.s. 153A of Act.

The assessee filed both the appeals of two years but the issues are consequential in nature. So, we are adjudicating the issues by a common order related to both the appeals.

2. The assessee has raised the following grounds: –

In ITA No. 764/MUM/2022 for the A.Y. 2009-10

“1.On the facts and circumstances of the case and in law, Ld. CIT(A) erred in upholding the addition to the extent of Rs. 10,649/- corresponding to employees ’ contribution even when the same is deposited into the treasury by the appellant before the filing of return of income.

2. On the facts and circumstances of the case and in law, Ld. CIT(A) erred in confirming the action of the Ld. A.O. in treating the existing liability of Rs. 1,57,854/- on the reasoning of cessation of liability.

2.1. On the facts and circumstances of the case and in law, Ld. CIT(A) erred in confirming the existing liability of Rs. 1,57,854/- without considering the appellant’s submission by stating that no submissions have been made.

3. On the facts and circumstances of the case and in law, Ld. CIT(A) erred in upholding the action of the Ld. A.O. in disallowing the purchases of Rs. 9,52,592/-claimed in respect of project Green A on the reasoning that such purchases were bogus.

4. Without prejudice to the above, On the facts and circumstances of the case and in law, Ld. CIT(A) erred in ignoring the facts that even if the purchases are deemed to be bogus, only a percentage of the total purchases can be disallowed and not the entire purchases. Reliance is placed on the decision of the Hon’ble High Court of Bombay in the case of “the Principal Commissioner of Income Tax-17 versus M/s Mohommad Haji Adam & Co. 2019(2) TMI 1632”.

5. On the facts and circumstances of the case and in la Ld. CIT(A) erred in confirming the addition of Rs. 3,93,720/- being interest on late deposit of TDS.

6. Appellant craves leave to add, alter, modify or delete any of the grounds of appeal.”

“1.On the facts and circumstances of the case and in law, Ld. CIT(A) erred in upholding the addition to the extent of Rs. 92,400/-without considering the submission made by the appellant on the ground of violation of provisions of section 40A(3).

2. On the facts and circumstances of the case and in law, Ld. CIT(A) erred in upholding the additions of Rs. 2,05,630/- being interest paid on delayed of payment of TDS made by the ld. A.O. on the ground that the same is not allowed as business expenditure.

3. On the facts and circumstances of the case and in law, Ld. CIT(A) erred in upholding the addition to the 4extent of Rs. 2,14,848/- corresponding to the late deposit of provident fund contribution to the government treasury, even when the same is deposited into the treasury by the appellant before the filing of return of income.

4. On the facts and circumstances of the case and in law, Ld. CIT(A) err as donations expenses by stating that the same is not incurred for the purpose of business and profession.

5. On the facts and circumstances of the case and in law, Ld. CIT(A) erred in upholding the action of the Ld. AO in disallowing 91% of the purchase claimed in respect of project VAL DAF D & ORC B,C i.e. 91% of Rs. 68,49,206/- amounting to Rs. 62,32,777/- effected in FY 2008-09 on the reasoning of that such purchases were bogus.

6. Without prejudice to the above, On the facts and circumstances of the case and in law, Ld. CIT(A) erred in ignoring the facts that even if the purchases are deemed to be bogus, only a percentage of the total purchases can be disallowed and not the entire purchases. Reliance is placed on the decision of the Hon’ble High Court of Bombay in the case of “the Principal Commissioner of Income Tax-17 versus M/s Mohommad Haji Adam & Co. 2019(2) TMI 1632”.

7. On the facts and circumstances of the case and in la Ld. CIT(A) erred in confirming the action of Ld. AO wherein he has disallowed the bonus expenses of Rs. 65,417/-, in spite of the fact that the rectification application was already filed and pending requesting to rectify the said error.

8. On the facts and circumstances of the case and in la Ld. CIT(A) erred in confirming disallowance on account of depreciation amount to Rs. 3,65,527/-.

9. Appellant craves leave to add, alter, modify or delete any of the grounds of appeal.”

3. Brief facts of the case are that the assessee is a developer & carrying on business as promoter. The search was taken place in the premises of assessee. The revenue assessed U/s 143(3)/ 153A of the Act &added back in different heads for both the assessment years accordingly. The addition was made disallowance of delayed payment of PF & ESI, addition of existing liability and claim of purchase related, project Green A, the addition was made for the assessment year 2010-11 related to Section 40A(3), interest paid on delayed of payment of TDS&Miscellaneous expenses and purchase. Being aggrieved the assessee filed an appeal beforethe Ld. CIT(A). The Ld. CIT(A) upheld the order of the ld. A.O.

4. During the hearing, the learned counsel of the assessee filed paper books for both the years and compilation of judgment which are kept in record.

4.1 Related to the late payment of PF & ESI the assessee filed a detailed list in page no. 48 of the paper book and payments have made within the filing of return u/s 139(1) of the Act but the delayed payment was made after the due date of the specific Act. The issue is covered as per the order of the Coordinate Bench in the case of Shashi Rajawat vs. ITO in ITA No. 81/JP/2021 date of order 12.10.2021. The issue is decided in favour of the assessee. So, the addition made of Rs. 10,649/- be deleted.

4.2. The learned counsel further argued on addition of Rs. 1,57,854/- was added back the closing balance of creditor’s account namely “Saurabh Enviro Associates” which was outstanding for long period. In this respect, the learned counsel filed ledger copy in page no. 54 of the APB. As per the assessee, the said liability is in dispute so it is persisting in the books of the assessee.

4.3. The Ld. DR argued and relied on the order of the Ld. CIT(A). The ld. DR further argued that the cessation of the liability u/s 41 of the Act related to the party. The extract the order of the Ld. CIT(A) in point No. 14 is as follows.: –

“14. The third ground raised by the appellant is regarding the action of the Assessing Officer in treating the liability of Rs. 1,57,8547- as ‘cessation of liability’.

Facts leading to this addition are that during the assessment proceedings, the Assessing Officer noticed that an amount of Rs. 1,57,8547- is shown as outstanding in the name of M/s Saurabh Enviro Associates, for a long period. The Assessing Officer accordingly, held this amount as income of the assessee by treating the same as cessation of liability within the meaning of sec.41 of the Act. During the appellate proceedings, no submission with regard to said grounds of appeal have been made by the appellant which shows that the appellant does not want to press this ground of appeal. The same is accordingly DISMISSED and the addition made by the Assessing Officer is confirmed.”

4.4. The learned counsel of the assessee further argued that the purchase amount of Rs. 7,04,60,907/- was made from 10 dealers. Only the purchase from Sivanmani Traders and Vinayak Trading Co. were made for project green A amount of Rs. 2,72,146/- and Rs. 6,80,446/- total amount of Rs. 9,52,592/- was made on financial year 2008-09 and the sale was completed in financial year 2008-09. But as per the revenue that purchase was made from Hawala dealers in page no. 34 of the APB also. The learned counsel referred the judgment on which are as follows:-

1. Nimitee Constructions & Designs Pvt. Ltd. Vs. ACIT 2017(9) TMI 717-ITAT Mumbai.

2. M/s Lotus Construction vs. JCIT-32(2), Mumbai 2018 TMI 1749-ITAT Mumbai.

3. Commissioner of Income-tax-I vs. Simit P Sheth-2013 (10) TMI 1028-Gujarat High Court.

4. M/s Excel Reality N Infra Ltd. Vs DCIT-9(2)(2), Mumbai (Vice-Versa) 2021 (10) TMI 948-ITAT Mumbai.

5. Shri Pravin Cbokadia vs. ITO-Circle 19(2)(5)-ITA No. 3552/Mum/2019

6. Shri Praveen Singh Chandan Singh Dewal vs. ITO 19(2)(5), Mumbai, 2021 (12) TMI 50 –ITAT Mumbai.

7. M/s Resolve Salvage & Fire India Private Limited vs. DCIT 14(3)(1), Mumbai 2022 (4) TMI 906-ITAT Mumbai.

8. DCIT, Circle-3(1), P-7, Kolkata M/s narayaniIspat Pvt. Ltd. 2017 (10) TMI 67-ITAT Kolkata.

4.5. The ld. DR relied on the order of the Revenue authorities and not able to bring any contrary fact in relation to submission of the assessee.

5. The learned counsel further argued that the payment of late deposit of TDS amount of Rs. 3,93,720/-which was debited in the P &L account. In this respect the counsel filed a detailed submission in page No. 33 of the APB.

5.1. The ld. DR relied on the orders of the Revenue authorities.

6. We heard the rival submissions and relied on the documents available in the record. Here, we are disposing the grounds appeal wise which are as follows:-

For ITA no-764/MUM/2022

6.1. The related to ground No.1 for late deposit of the PF & ESI the issue was adjudicated in favour of the assessee. So, we are deleting this addition of Rs. 10,649/­. Relatedground nos. 2& 2.1 the appellate authority had mentioned in the order this this issue was not pressed by the learned counsel of the assessee before the Ld. CIT(A). But the same issue is agitated before us. This issueis setting aside to the Ld. CIT(A) for further adjudication. The learned counsel of the assessee filed a detailed document and ledger account to substantiate its claim related Ground no-2& 2.1. The assessee is directed to submit those details before the Ld. CIT(A) in support of the claim. The assessee should get a reasonable opportunity for redressal of his grievance. Related to disallowance of purchase in ground nos. 3& 4, the purchase was made for the financial year 2008-09 and sale was also made in same year. The learned counsel of the assessee submitted catena of judgment. Moreover, no such any specific finding in the order of the AO for verification of the party in dispute. Both the revenue authorities did not complete verification of the purchaser in proper way. The ld. DR was not able to press the issue strongly.We are not accepting the order of the Ld. CIT(A) for the addition made an amount of Rs. 9,52,592/-. Accordingly, the addition amount of Rs. 952,592/- is deleted. In ground no-5,related to claim of expanses for late payment charge of TDS amount of Rs. 3,93,720/- the issue was adjudicated by the Ld. CIT(A). The ld. DR also relied on the order of the Ld. CIT(A). We respectfully considered the ordersof the Coordinate Bench in case of DNV GL AS vs. ADIT in ITA No. 4687/MUM/2016, dated-31-05-2017, M/s Jindal Aluminum Ltd. Vs. DCIT in ITAT No. 32/Bang/2019 dated 25.08.2021. We are inclining on the order of the CIT(A). The ground no-5 of assessee is dismissed.

For ITA no-765/MUM/2022

6.2. The learned counsel mentioned thatground no. 1 related to disallowance u/s 40A(3) of the Act amount of Rs. 92,400 is not pressed. For ground no. 2 related to late payment charge of TDS amount of Rs. 2,05,630/- is decided in assessment year 2009-10, vide above. For brevity the issue is disposed of against the assessee. Accordingly, ground-2 of the assessee is dismissed.

In ground no. 3 related to late deposit of PF amount of Rs. 2,14,848/-, the details submission was made with list by the learned counsel which is annexed in page No. 24 & 25 of the Paper book. The amount was deposited before the filing of the return filed u/s 139(1) of the Act. The said issueis already adjudicated for assessment year 2009-10 for brevity the matter is disposed of in favour of the assessee.

The learned counsel of the assessee has not pressed the ground no. 4 related to miscellaneous expenses amount of Rs. 1,62,407/-.

The learned counsel argued on the ground no. 5 for disallowance of 91% of the purchase claimed in respect of project VAL DAF D & ORC, B, C i.e. 91% amounting to Rs. 62,32,777/- which is affected in FY 2008-09 on reason that this particular purchase was bogus.

6.3. The extracted of the order of the Assessing Officer in para 10.1 is reproduced as below: –

“ 10.1 On perusal of the returns of income and its annexure submitted for AY 2005-06 to AY 2011-12, it was noticed that assessee had furnished list of various Sundry Creditors & Purchasers along with VAT numbers. Accordingly letters were issued to these Purchase parties for furnishing of information u/s 133(6) of the IT Act and so as to ascertain the genuineness of the above transaction. However, the letters were returned un served. Accordingly, the assessee was requested to produce the Purchase parties before the undersigned along with various details, Name & Address of Purchaser, VAT number, copy of return of income, Copy of Sales Tax Return, Copy of the Purchase Order, Details of Octroi, Details of mode of transport etc, to prove the genuineness of the creditors/ Purchasers appearing in the books of accounts vide Show cause dated 04.03.13, the relevant portion of which is reproduced as under:

On perusal of the return of income submitted for AY 2005-06 to AY 2011-12, it was noted that you have furnished the list of Sundry Creditors. Accordingly letters were issued to these Sundry Creditors for furnishing of information u/s 133(6). However the letters were returned unserved as per the list enclosed herewith. Annexure-4. You are requester to give the complete details of these above-mentioned Sundry Creditors as follows as it, is your responsibility to prove the genuineness of the creditors appearing in your books of accounts.

a. Name & Address of the Party from whom the purchases have been made.

b. VAT number.

c. Copy of return of income.

d. Copy of Sales Tax Return.

e. Copy of the Purchase Order.

f. Details of Octroi/ Freight Charges if paid.

g. Details of mode of transportation, and installation. You are. requested to submit the above details immediately, failure to which the name will be treated as unexplained investments on account of Purchases made in. your case.

On perusal of the Annexure-4, it was also noted that following parties were blacklisted by the Sales Tax Department on account of Hawala Transactions. The letters issued for furnishing information u/s 133(6) was also returned unserved. Hence you are hereby given a show cause as to explain why the above Purchase transactions in the case of the above parties for various years an mentioned below should not be treated as unexplained investments on. account of Purchases in your cases and added to your total income.

6.4. The Ld. DR relied on the order of the revenue authorities and prayed for sustaining the addition.

7. We heard the rival submission and relied on the documents available in the record. The purchase was disallowed by the Ld. A.O. @ 91% of the total purchase. The addition was made fully depending on the available documents from the VAT authorities. No cross verification was allowed by the ld AO. The VAT authorities are generally examining the payment of VAT. The Sale Tax Department mostly concerned about the input tax credit availed by the party & payment of output tax. The assessee had utilized this purchase for its working progress. For explanation of fact, learned counsel in his PB page no. 38 annexed the comparative net profit ratio for assessment year 2008-09 to 2010-11. The details were submitted before the ld. A.O. on 11.01.2013 vide page no. 37 of the APB. The issue was also discussed by filing a letter dated 09.07.2014 to the Ld. CIT(A). The copy of the letter is annexed in page no. 18 to 26 of the APB. The details of purchase was also submitted in page no. 35 of the APB. The whole addition was made on borrowed satisfaction from VAT department. No proper cross verification was made by the revenue authorities. The ld DR also did not make any strong objection against the assessee. The stock was exhausted by the assessee during the year through sales. The ld. Counsel relied on the following judgments which are as follows: –

1. Nirmitee Constructions & Designs Pvt. Ltd. Vs. ACIT 2017(9) TMI 717-ITAT Mumbai.

2. M/s Lotus Construction vs. JCIT-32(2), Mumbai 2018 TMI 1749-ITAT Mumbai.

3. Commissioner of Income-tax-I vs. Simit P Sheth-2013 (10) TMI 1028-Gujarat High Court.

4. M/s Excel Reality N Infra Ltd. Vs DCIT-9(2)(2), Mumbai (Vice-Versa) 2021 (10) TMI 948-ITAT Mumbai.

5. Shri Pravin C. Bokadia vs. ITO-Circle 19(2)(5)-ITA No. 3552/Mum/2019

6. Shri Praveen Singh Chandan Singh Dewal vs. ITO 19(2)(5), Mumbai, 2021 (12) TMI 50 –ITAT Mumbai.

7. M/s Resolve Salvage & Fire India Private Limited vs. DCIT 14(3)(1), Mumbai 2022 (4) TMI 906-ITAT Mumbai.

8. DCIT, Circle-3(1), P-7, Kolkata M/s narayani Ispat Pvt. Ltd. 2017 (10) TMI 67-ITAT Kolkata.

Accordingly, we are declining the order of the Ld. CIT(A) and directing to delete the addition amount of Rs. 62,32,777/-.

8. In the result, In ITA No. 764/Mum/2022 in ground nos. 1,3 & 4 are allowed, ground no. 2 & 2.1 are allowed for statistical purposes and ground No. 5 is rejected. Ground no. 6 is general in nature.

In ITA No. 765/MUM/2022 in ground no. 1,4,7,8 is not pressed. Ground no. 2 is dismissed. Ground nos. 3, 5 and 6 are allowed. Ground no. 9 is general in nature. Therefore, the appeals of the assessee are partly allowed.

Order pronounced in the open Court on 04.08.2022.