J.M. Mhatre Infra Private Limited Vs ACIT (ITAT Mumbai)
Introduction: In a significant legal development, the Income Tax Appellate Tribunal (ITAT) Mumbai delivered a landmark verdict in the case of J.M. Mhatre Infra Private Limited vs. Assistant Commissioner of Income Tax (ACIT). The case pertained to the disallowance of interest amounting to Rs. 1,16,82,953/- paid on an unsecured loan. This ruling sheds light on the meticulous examination of evidence and the importance of substantiating claims in tax matters.
Background: During the assessment proceedings, the assessing officer (AO) observed that the assessee had debited an amount of Rs. 182,31,15,911/- under the head ‘interest to others’. Upon scrutiny, the AO found that a significant portion of this interest pertained to transactions with various entities, including Alka Securities Ltd., Aidos Trades Ltd., and Mahesh Kothari Share & Stock Brokers Pvt. Ltd. The AO alleged that these transactions were merely accommodation entries and disallowed the interest amounting to Rs. 1,62,94,076/-, adding it to the assessee’s total income.
Key Arguments and Rulings: The assessee appealed the AO’s decision before the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the disallowance. However, during the appellate proceedings before the ITAT, the assessee submitted substantial evidence, including ledger accounts, bank statements, and legal documents, to substantiate the genuineness of the transactions.
Critical Analysis: Upon careful examination of the evidence presented by the assessee, the ITAT noted that the transactions in question were not merely accommodation entries but genuine arrangements made due to a shortage of working capital. The assessee had entered into agreements with the concerned parties to settle outstanding dues owed to subcontractors, which were subsequently converted into unsecured loans.
Judicial Verdict: Based on the comprehensive evidence provided by the assessee, the ITAT overturned the lower authorities’ decision to disallow the interest payment. The Tribunal emphasized that the assessing officer had failed to refute or disprove the evidence brought forth by the assessee. Consequently, the disallowance of interest expenditure was deemed unjustified, and the appeal of the assessee was partly allowed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal filed by the assessee is directed against the order passed by the ld. CIT(A)-11, Pune, dated 31.03.2023 for A.Y. 2018-19. The assessee has raised the following grounds before us:
“1. The Commissioner of Income-tax (Appeals)-11, Pune (hereinafter referred to as the CIT(A)) erred in upholding the action of the Assistant Commissioner of Income- tax, Central Circle1, Thane (hereinafter referred to as the Assessing Officer) in making an addition of Rs.56,04,344 being alleged bogus sub-contract charges debited to the profit and loss account.
The appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in making the impugned addition of Rs.56,04,344, being alleged bogus sub-contract charges inasmuch as he has not correctly appreciated the facts of the case in its entirety and hence, the impugned addition of Rs.56,04,344 is bad in law and needs to be deleted.
The appellants further, contend that on the facts and in the circumstances of the case and in law, the Assessing Officer and the CIT(A) have not brought anything on record to dispute the work carried out by the appellants and hence, the disallowance made by the Assessing Officer and upheld by the CIT(A) is bad in law and needs to be deleted.
Without prejudice, the appellants contend that on the facts and in the circumstances of the case and in law, since the Assessing Officer and the CIT(A) have not disputed the quantum of work carried out by the appellants, the disallowance made by the Assessing Officer and upheld by the CIT(A) is on a higher side, not commensurate with the facts of the case and the business of the appellants.
2. The CIT(A) erred in upholding the action of the Assessing Officer in making a disallowance of a sum of Rs. 1,16,82,953, being interest paid on unsecured loans obtained from Alka Securities Limited and others on the ground that the said unsecured loans are arising out of an arrangement which is not genuine and therefore, the interest paid on such unsecured loans cannot be considered as genuine.
The appellants contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in making the impugned disallowance of Rs.1,16,82,953 inasmuch as he has not correctly appreciated the facts of the case in its entirety and hence, the impugned disallowance of Rs.1,16,82,953 is bad in law and needs to be deleted.
The appellants further, contend that on the facts and in the circumstances of the case and in law, the CIT(A) ought not to have upheld the action of the Assessing Officer in making the impugned disallowance of Rs.1,16,82,953 inasmuch as the arrangement resulting in the unsecured loans is arising out of order of the NCLT dated 09.07.2021 and is genuine; the CIT(A) has brought nothing on record to prove that the same is non- genuine and hence, the impugned disallowance of Rs.1,16,82,953 is bad in law and needs to be deleted.”
2. The fact in brief is that return of income declaring total income of Rs.85,32,38,690/- was filed on 30.09.2018. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on 08.05.2019. A search and seizure action u/s 132 of the Act was carried out on the business and residential premises of the Mhatre Group of cases including the assessee on 20.09.2017 M/s J.M Mhatre Infra Pvt. Ltd. The assessee is a leading civil contractor in Panvel region and it has completed many civil contracts for construction of roads, bridges etc. In the case of the assessee it was found from the search action that assessee has been claiming sub-contract charges in the profit and loss account, these sub-contract charges were paid for labour engaged at its various sites and also at quarry and stone crushing units. It was also noticed that assessee has been recording bogus sub-contract charges in its books of account. The sub-contractors were the relatives or employees of the assessee. The bank account of sub-contractors were credited with the amount paid as sub-contract charges and immediately thereafter the amount was withdrawn in cash. The assessing officer stated that similar issue has been discussed in the order passed for assessment year 2012-13 to 2017-2018 in the cases of the assessee after considering the incriminating documents seized during the course of search, detail filed by the assessee, statement of the assessee and other persons the following conclusion were drawn.
“i. That the Measurement Book is maneuvered so as to ostensibly provide virtual reality to the bogus sub-contract charges.
ii. That the Measurement Book is prepared only for record in the case of bogus sub-contractors with the main purpose to ensure that the staff in general in the company [JMMIPL] does not know of the bogus accommodation entries carried out by company [IMMIPL] it its books
iii. That the normal procedure in the case of genuine sub-contractor is followed in maintaining the Measurement Book in the case of bogus subcontractor.
iv. That in the case of genuine sub-contracters Measurement Book is prepared on the basis of actual work completed, whereas in the case of non-genuine sub- contractor, Measurement Book is prepared as per convenience as required
v. That in the case of bogus contracts there is no work order issued, since, no actual work is carried out by them.
vi. That the bank accounts are opened in the case of bogus sub-contractors from whom pre-signed cheques are obtained, which are then used by the company [JMMIPL] to withdraw the cash from these accounts whenever required.
vii. That Shri Janardhan Moru Mhatre after perusing the books of accounts and consulting his in-house Chartered Accountant has confirmed that all the sub- contractors as mentioned in Q.30 of his statement [refer the statement affixed above), have not done any contractual work and have been used by the company [JMMIPL] to inflate the expenses. He unequivocally has confirmed that each and every such contractor is bogus.
viii. That Shri Janardhan Moru Mhatre has gone on to explains and agreed that either the bogus sub-contractors were the employees of the company [JMMIPL] or their relatives
ix. That with respect to the remarks “Adjustment party as per Gagan’, it is explained by Shri Jandhan Moru Mhatre that these are non-genuine subcontractors [bogus sub-contractors], which are managed by Shri Gagan Koli, accountant of the assessee company.
x. that bogus sub-contract charges have been booked in the last 6 years and he declare the same during the search action as the income of the assessee for respective years
xi. That all the bogus sub-contractors have admitted to have not performed any contractual work for JMMIPL, but have in connivance with JMMIPL, indulged into providing bogus entries in the form of sub-contract charges.
xii. Bank accounts of the alleged sub-contractors are in the same bank i.e Bank of Baroda, Panvel Branch, where the bank account of assessee company is operated. These bank accounts are operated and managed by the assessee company. Significantly, the assessee company came forward as introducer to open these bank accounts in the same bank i.e Bank of Baroda, where the assessee company has its bank account.
xiii. Returns of income of the alleged sub-contractors have been uploaded by the assessee company as is evident from presence of same IP addresses in their returns of income as is appearing in the assessee company’s and its directors returns of income. This too indicates that the returns of income of the alleged sub-contractors are prepared and filed by the assessee company
xiv. Almost all the sub-contractors have denied to have carried out any contractual work for the assessee company They have also admitted that only the amount was credited in their bank account, which was subsequently withdrawn in cash by the employees of the assesse company after obtaining blank signed cheques from them.”
3. From the aforesaid conclusions the AO stated that assessee has recorded the bogus expenditure in the form of sub-contract charges so as to inflate the expenditure with ultimate motive to reduce the profits and evade taxes there on. Therefore, the assessing officer concluded that the entire expenditure booked by the assessee in respect of subcontractor was purely bogus. The assessing officer found that in assessment year 2018-19 assessee has claimed following expenses in case of the sub-contractor:
