BGR Energy Systems Ltd. Vs ACIT (ITAT Chennai)
Conclusion: Additions made by AO was not only on the basis of sworn statement but also on the basis other evidences collected during the course of search including discrepancies in books of accounts regarding accounting of bogus purchases therefore, there was no merit in arguments of assessee that AO had made additions towards alleged purchases only on the basis of statement recorded from those parties without further evidences.
Held: Assessee-company was engaged in the business of manufacture of capital goods and in construction of EPC contracts. A search and seizure operations u/s.132 was carried out in the case of assessee. AO had made additions towards purchases from certain alleged bogus suppliers on the ground that assessee could not substantiate purchase from those parties with necessary evidences. During the course of search, certain bill books/purchase invoices belonging to five concerns were found and seized. AO was of the opinion that assessee was indulged in obtaining accommodation entries of bogus purchase bills from nonexistence suppliers to inflate expenses. According to AO, assessee had followed meticulous standard operating procedures for purchases in their books of accounts in SAP software. AO found that in respect of purchase from the five parties, assessee did not follow standard operating procedures. Therefore, he opined that purchases from alleged five parties were bogus in nature which were not supported by necessary evidences and hence, made additions to total income. It was held that sworn statement was not conclusive evidence in order to make any additions. AO had to bring on record corroborative evidences to support the confession statement taken during the course of search. In this case, additions made by AO was not only on the basis of sworn statement but also on the basis other evidences collected during the course of search including discrepancies in books of accounts regarding accounting of those purchases. As per fact brought out by AO, assessee had followed meticulous SOP for purchases whereas, for the purchases from these five parties said SOP was missing. Assessee group did not have supporting documents and evidences to show that they had made purchases from those parties. If the purchases were genuine, assessee could have produced necessary evidences and also produced those parties when AO called upon assessee to produce those parties for verification. Although, AO had traced out those parties by using his statutory powers and obtained statements from them, but assessee had failed in its duties to produce the parties when AO had called upon to do so. It was very clear that the so called parties were not directly in connection with assessee and assessee had arranged bogus bills through intermediaries. Therefore, there was no merit in arguments of assessee that AO had made additions towards alleged purchases only on the basis of statement recorded from those parties without further evidences.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This bunch of four appeals in ITA Nos.23, 24, 25 & 116/Chny/2018 filed by the assessee are directed against separate orders of learned Commissioner of Income Tax (Appeals)-19, Chennai, dated 26.10.2017 & 27.10.2017 and pertains to assessment years 2011-12 to 2014-15. The three appeals in ITA Nos.1510 to 1512/Chny/2018 filed by the Revenue and cross objections filed by the assessee are directed against common order of learned Commissioner of Income Tax (Appeals)-19, Chennai dated 20.02.2018 and pertains to assessment years 2011-12 to 2013-14. Since, facts are identical and issues are common, for the sake of convenience these appeals are heard together and are being disposed off, by this consolidated order.
ITA Nos.23, 24, 25 & 116/Chny/2018
2. The assessee has raised common grounds of appeal for all assessment years. Therefore for the sake of brevity grounds of appeal filed for assessment year 2011-12 are reproduced as under:-
1. The contention of the Learned Commissioner of Income-tax (Appeals) is contrary to law and facts of the case.
2. Purchases from 5 Vendors not proved:
2.1 The Learned CIT(A) erred in not appreciating the facts of the case by upholding the addition made by the Learned Assessing Officer amounting to Rs. 71,97,83,480/- in the hands of the appellant being the alleged bogus purchases without any corroborative basis and only on the assumptions made by the Learned Assessing Officer.
2.2 The Learned CIT(A) had erred in considering only the contention of the Learned Assessing Officer which is based on sworn statements to arrive at a conclusion and had failed to consider the Purchase Order, Goods Received Note, Invoices, Project specifications, entries in the books of account and payment made through RTGS to the Vendors to prove these purchases were not bogus in nature.
2.3 The Learned CIT(A) has erred in not adjudicating the ground of appeal filed by the Appellant i.e not considering the income offered by the Appellant during the search proceedings amounting to Rs. 30,00,00,000/- which relates to alleged bogus Purchases. Such, non-consideration has resulted in double taxation of Rs. 30,00,00,000/-which already forms part of the addition made during the AY 2011-12 amounting to Rs. 71,97,83,480/-
3. Disallowance of Warranty obligation:
3.1 The Learned CIT(A) erred in upholding the disallowance of Rs. 5,65,92,452/-, that represents provision made by the appellant towards warranty for the relevant previous years without considering the facts and appellant’s contention.
3.2 The Learned CIT(A) erred in contending that the appellant is only a contractor who executes the projects and therefore, a minimal warranty provision will be sufficient without considering the fact that the warranty obligations are applicable irrespective of whether the appellant is manufacturer or not.
3.3 The learned CIT(A) has erred in contesting that the minimal requirement of provisions for warranty obligations is well taken care of by the retention monies and has not appreciated the fact that the Retention monies are different from Provisions for Warranty Obligations.
3.4 The Learned CIT(A) has failed to appreciate the fact that under the mercantile system of accounting, the tax payer can make a provision for all liabilities which are foreseen in relation to transactions of the year, whether it is payable during the year or not.
3.5 The learned CIT(A) has erred in confirming the contention of Learned Assessing officer related to denial of credit for Minimum Alternate Tax U/S 115JAA by disallowing warranty obligation.
4. Interest on advances to subsidiaries:
4.1 The Learned CIT(A) erred in upholding the addition of Rs.1,33,70,507/-, which represents interest expenditure incurred, which according to the learned Assessing Officer, pertains to amount diverted to sister concerns without charging interest.
4.2 The Learned CIT(A) has erred in stating that the Hon’ble ITAT and CIT(A) for the AY 2007-08, 2008-09 & 2009-10 had disallowed the said expenditure. Whereas, the Learned CIT(A) passed a favourable order and the Hon’ble ITAT restored the matter to the file of the Learned Assessing Officer for verification.
4.3 The Learned CIT(A) has erred in upholding the addition without considering the fact that the loans given were in the nature of commercial expediency.
4.4 The Learned CIT(A) had also failed to consider that disallowance cannot be made in cases where loan was given in mutual interest and commercial expediency- S.A Builders Ltd vs. CIT(A) 288 ITR 1 (SC).
5. The appellant seeks your leave to add, alter, amend, or delete any of the grounds urged, at the time hearing.
3. The brief facts of the case extracted from ITA No. 23/Chny/2018, for the assessment year 2011-12 are that the assessee M/s. BGR Energy Systems Ltd., (BGRESL) is engaged in the business of manufacture of capital goods and in construction of EPC contracts. The assessee company further executes engineering, procurement & construction contracts for power plants, oil & gas industries and process industries. filed its return of income for the assessment year 2011-12 to 2013-14 u/s.139(1) of the Income Tax Act, 1961 (hereinafter the ‘Act’). A search and seizure operations u/s.132 of the Income Tax Act, 1961 was carried out in the case of assessee on 18.02.2014. During the course of search, bills books / purchase invoices belonging to the following five concerns were found and seized as exhibit
i. ANN/VV/BGR-Office/B&D/S-1
ii.ANN/VV/BGR-Office/B&D/S-2
a. M/s. Sonal Steel Trading Pvt. Ltd.
b. M/s. Megha Enterprises
c. M/s. Satyam Enterprises
d. M/s. United Brothers
e. M/s. Meenakshi Enterprises
During the course of search Shri P.R. Easwer Kumar, CFO of the assessee company was available. He was requested to furnish details regarding the manner in which financial operations of the company was being managed. As informed by him, the company has deployed SAP software solutions for managing operations. The modus deployed include HR, Materials Management and Finance & Control. This application software imposed certain level of discipline on the user. During the course of search, assessee was asked to explain the purchases made from five concerns including evidences like purchase bills, delivery notes, transport bills, goods receipt notes, etc. In response, the assessee could not furnish necessary supporting evidences in respect of purchases from above five parties. Therefore, actual purchases from said parties were verified with reference to internal control system followed for regular purchases and found that purchase from above five parties were always made by making advance payment by RTGS to one of the person identified as bill traders. The payment was always processed and initiated by late B.G. Raghupathy. The purchase order approval was also made by late B.G. Raghupathy. The invoices were received by company in chairman’s office. The materials were always shown to be consumed as non-billable materials used in the work. The assessee could not produce any employee of the company who received material nor did they produce any other person who received the material on behalf of the company. The company could not produce delivery challan or any proof at all. Further, all these cases, material received entry is made in SAP as per instructions of CMD’s office as against general practice of entries being made after materials are physically received by the receiver.
4. During post search investigation, Shri Tilok Chand Parmer, Managing Director of M/s. Sonal Steels Pvt. Ltd., was searched along with the company. M/s Sonal Steels Pvt. Ltd., was found to be engaged in purchase and sale of stainless steel Tiffin-box items. Apart from the transactions from M/s. BGRESL, there are no other huge purchases or sale. A statement was recorded from Shri Tilok Chand Parmer, where he has admitted that he had neither purchased these items nor sold these items to any person including BGRESL. He had further stated that he had supplied only bills to the company for a commission. He, further, explained the modus operandi of bogus bill trader as per which he had received RTGS payments from BGRESL and the same were further rooted through other concerns in the market including concerns belonging to Shri Dileep Kumar Jain and Shri B. Kamalesh Kumar Jain. He had also stated that one Shri Dhanaram was employed by Shri Dileep Kumar to operate several bank accounts in Purasawalkam branch of Axis Bank and further he was also withdrawing cash that was finally returned to M/s. BGRESL.
5. During the course of assessment proceedings, the AO called upon the assessee to produce necessary evidences including bills and vouchers in support of purchase from five parties. The AO had also called upon the assessee to produce parties in person for examination. The assessee has furnished purchase bills from said parties, however, could not furnish any other evidences including delivery notes, lorry receipts and goods receipt note to support purchases. The assessee had also not able to produce the parties in person. The AO on the basis of information furnished by the assessee has issued summons to the so called five suppliers. In response, they appeared before the AO and filed necessary details. The AO had also recorded statement from them. During the course of assessment proceedings, they have reiterated their statement given during the course of search and confirmed that except issuing bills they does not supplied any goods to the assessee. They further clarified that after receipt of payment through RTGS, cash was withdrawn from bank and returned to the assessee. The AO had also given opportunity of cross examination of the parties to the assessee. During the course of assessment proceedings, Shri P.R. Easwer Kumar, CFO of the assessee company was allowed to cross examine Shri Tilok Chand Parmar in presence of the AO. Thereafter, the AO has questioned Shri H. Venugopal of CPSG about this specific purchase from bogus bill traders for which, he could not establish the purchase with necessary proof. Therefore, the AO on the basis of information collected during the course of search and post search investigation came to the conclusion that purchases from above five parties are not genuine which are not supported by necessary evidences. The AO further was of the opinion that they merely provided invoice copies and returned cash to the company and this was done for a small commission of 0.25% of total value of bills issued to the assessee. The AO further noted that these bill traders did not even purchase materials allegedly sold by them. They have rooted the payment received from the assessee to other concerns and finally returned cash to the company through one Shri Ravi Kumar. Therefore, he opined that purchases from so called suppliers of steel are bogus in nature which was taken to inflate expenditure.
6. The AO has discussed the issue at length in light of statements recorded from the assessee and its employees and also statement recorded from Shri Tilok Chand Parmar, one of the suppliers of alleged five bogus bill suppliers. The AO has also taken support from letter of Shri Tilok Chand Parmar dated 04.02.2016, submitted before AO during the course of assessment proceedings, where he has stated that he stands by his depositions made before the DDIT(Inv) on 23.02.2014. The AO has taken support from the statement of Shri J. Ganapathy, Proprietor of M/s. Megha Enterprises recorded on oath u/s.131 of the Act, on 16.02.2016, where he had admitted that he had opened an account with Union Bank of India, Sowcarpet branch at the behest of one Shri Behru Singh in the name of M/s. Megha Enterprises. He further submitted that he had done this work to facilitate somebody else’s transactions out of sheer necessity of money. The AO had also taken support from statement of Shri M. Govind, Proprietor of M/s. United Brothers, where he had deposed that he was doing business of sale of utensils and vessels till 2013. He further stated that he was not aware of the existence of M/s. BGR Energy Systems Pvt. Ltd., nor did he do any business with them. However, when he was shown the bank extract of Account No.37941 held in the name of United Brothers, he submitted that he had opened this bank account at the instance of Shri Behru Singh for a commission. Therefore, the ld.AO opined that when the assessee is making its purchases from big suppliers like SAIL, Tata Steel, JSW & NRIL, failed to explain why it has gone for purchases from small time vendors like these five parties based at Chennai. He further noted that materials purchased from big traders like SAIL, Tata Steel, etc., do have delivery challans to their purchase invoices whereas, purchase invoices of these five parties are without delivery challans. From the above, it is very clear that purchases from above five parties are bogus in nature and nothing but accommodation entries. Accordingly, purchases from five parties to the extent of Rs.113,48,73,346/- for assessment years 2011-12 to 2013-14 has been treated as bogus purchases and added to total income of the assessee. The relevant findings of the AO are as under:-
Issues springing subsequent to initiation of Sec.153A proceedings
2.4 During the course of search action u/s 132 on 18.02.2014 at the business premises of M/s. BGRESL, Bill book/purchases invoices belonging to the following five concerns were found seized as exhibit
i. ANN/VV/BGR-Office/B&D/S-1
ii. ANN/VV/BGR-Office/B&D/S-2
a. M/s. Sonal Steel Trading Pvt. Ltd.
b. M/s. Megha Enterprises
c. M/s. Satyam Enterprises
d. M/s. United Brothers
e. M/s. Meenakshi Enterprises
2.5 Notices u/s 142(1) along with specific questionnaire were issued. The assessee company’s reply to the notices have been considered. The issues springing up from the notices u/s 142(1) and the corresponding replies from the assessee-company are summarized as under
Non-production of the five vendors: The assessee-company was asked to producethe thilowing five vendors before this office for examination;
a. M/s. Sonal Steel Trading Pvt. Ltd.
b. M/s. Megha Enterprises
c. M/s. Satyam Enterprises
d. M/s. United Brothers
e. M/s. Meenakshi Enterprises
The assessee.-company, vide its reply dt. 27.01.2016 has submitted that it had closed its accounts with the above vendors and that it is no longer dealing with them, Further, it submitted that it had sent letters by regd. post to the above five vendors to appear before this office. Strangely, the assessee-company had chosen to close down its transactions with the above five Vendors with whom it had done substantial transactions during the previous years relevant to the assessment years 2011-12, 2012-13 and 2013-14. Further, the assessee company has proved that it had indeed made genuine efforts to trace the five vendors apart from merely stating that it had sent letters by regd. post to those vendors.
However, this office made efforts to trace the five vendors and succeeded in locating three of them namely, 1. Shri Tilok Chand Parmar, Managing Director, M/s. Sonal Steel Trading Co. Pvt. Ltd., 2. Shri Janakiraman Ganapathy, Prop: M/s. Megha Enterprises and 3. Shri Govind, Prop: M/s. United Brothers.
i) Shri Tilok Chand Parmar, vide letter dated Nil filed on 04.02.2016 submitted by him during the course of sec, 153A proceedings has submitted that he stands by his depositions made before the DDIT(Inv) on23.02.2014. Vide his submissions, he has admitted that he has done only Bill Trading with M/s. BGR Energy Systems Pvt. Ltd. and has actually returned back the money to Shri B G Raghupathy group through an intermediary.
ii) Shri J. Ganapathy, Prop. M/s Megha Enterprlsbs was examined under oath u/s 131 of the Income Tax Act 1961 on 16.02.2016. In his deposition, he has submitted that he had opened an account Union Bank of India, Sowcarpet Branch at the behest of one Mr Behru Singh in the name of M/s. Megha Enterprises. Further he submitted that he had done this work of opening a bank account to facilitate somebody else’s transaction out of sheer necessity of money. Further he has stated that he is not aware of the transactions carried in this account sinice he had signed on the blank cheque leaves at the behest of Mr. Bebru Singh. Shri Ganapathy submitted that he got a commission of Rs 15,000/- for the trouble he took in opening this bank account for Behru Sing and signing blank cheque leaves. Shri Ganapathy submitted that the signatures on the purchase invoices of M/s. Megha Enterprises were not his. Further when he was shown the purchases invoices in the name of M/s. United Brothers found and seized from the premises of M/s.BGR Energy Systems Pvt. Ltd. on 21.02.2014 vide ANN/VV/BGR-office/B&D/S-2, Shri Ganapathy submitted that the signatures on these invoices were not his. The copy of statement recorded from Shri Ganapathy was forwarded to M/sBGR Energy Systems Pvt. Ltd.
iii) Shri M. Govind Prop: M/s.United Brothers was examined on oath on 25.02.2016. He deposed that he was doing the business of sale of utensils and vessels till 2013. He has stated that he was not aware of the existence of the concern M/sBGR Energy Systems Pvt. Ltd. nor did he do any business with M/s.BGR Energy Systems Pvt. Ltd. Further, when he was shown the bank extract of Account No37941 held in the name M/s, United Brothers, he submitted that he had opened this bank account at the instance of one Mr.Behru Singh for a commission. He submitted that his signatures were taken on all the cheque leaves. Further, Shri Govind expressed surprise at the extract of transactions done in this account. Further when he was shown the purchases invoices in the name of M/s. United Brothers found and seized from the premises of M/s. BGR Energy Systems Pvt. Ltd. on 21.02.2014 vide ANN/VV/BGR-office/B&D/s-2, Shri Govind submitted that the signatures on these invoices were not his. A copy of this deposition was forwarded to M/s. BGR Energy Systems Pvt. Ltd.
The statements of Shri Govind and Shri Ganapathy are made part of this order as Annexure C.
2.6 On 28/03/2016, Shri P R Easwar Kumar, president and CEO of M/s BGRESL was afforded the facility of cross-examining Shri Tilok Chand Parmar M. D of M/s Sonal Trading Co. Pvt. Ltd, and Shri, J, Ganapathy Prop: M/s Megha Enterprises. At the start of the proceedings Both Shri Tilok Chand Parmar and Shri J. Ganapathy requested that they be asked questions interacted in the Tamil language which was acceded to by Shri. P. R. Easwar kumar. The English version of the cross examination proceedings is made an Annexure to this order vide Annexure D.
The following points evolve/establish themselves from the cross examination proceedings:
1) Shri. Tilok Chand Parmar stands by his sworn statement made before the DDIT(lnv) on 18.02.2014 that he had supplied bills for a commission to M/s BGRESL and that there was no physical transfer of materials/goods.
2) Further, Shri Tilok Chand Parmar had supplied Bills to the tune of Rs 8 crores(app) between the period Jan 2012 to Dec 2012
3) There is a pending dispute between Shri. Tilok Chand Parmar and M/s BGRESL regarding this balance bills supplied by M/s Sonal Steel Trading Pvt. Ltd to M/s BGRESL which is yet to be honored by M/s BGRESL for some unknown reason. Further, it is clearly established now that M/s BGRESL had purchased only Bills from M/s Sonal Steel Trading Co. Pvt Ltd. or else, during the course of cross examination proceedings why did not the issue of transfer of materials came in? And, why Shri, Tilok Chand Parmar mentioned about only pending Bills/Payment from M/s BGRESL without referring to the corresponding transfer of material? And why did Shri. P. R. Easwar Kumar ask Tilok Chand parmar to furnish copies of Bills and purchase orders instead of asking him (Tilok Chand Parmar as to when he has delivered the goods, if at all there was a genuine transfer of the material from M/s. Sonal Trading Co. Pvt. Ltd. to M/s. BGRESL?
4) Shri J. Ganapathy Prop: M/s. Megha Enterprises Shri P.R. Easwar Kumar that he has not done any business with the concern which Shri P.R. Easwar Kumar represents and that one Mr. Behru Singh did that Bank Operations. Further, Shri J. Ganapathy submitted to Shri P.R. Easwar Kumar that he has signed on blank cheque leaves of the instance of one Mr. Behru Singh for the lure of some quick money and that he has nothing to do with M/s. Megha Enterprises.
5) Shri Easwar Kumar was not in position to further probe Shri J. Ganapathy.
2.7 It is crystal clear from the preceding paragraphs that the assessee company M/s.BGR Energy Systems Pvt. Ltd has indulged in bill trading transactions with the concerns M/s. Sonal Steel Trading Co. Pvt. Ltd.., M/s Megha Enterprises and M/s. United Brothers. In the ease of M/s. Sonal Steel Trading Co., Pvt., the MD Shri Tilok Chand Parmar has deposed that he had only supplied Sills to M/s.BGR Energy Systems Pvt. Ltd for a commission, Whereas, in the cases of M/s. Megha Enterprises and M/s. United Brothers M/s.BGR Energy Systems Pvt. Ltd has done transactions/effected business without the knowledge of the very owners of the bank account/concerns.
2.8 Further the startling revealation is the possession of forged purchases invoices in the custody of M/s BGR Energy Systems Pvt. Ltd with regard to these two entities found and seized u/s.132 on 21.02.2014. Surely the purchase invoices cannot be forged if the transactions were to be genuine. Otherwise, what was the necessity for M/s.BGR Energy Systems Pvt. Ltd to have in its custody forged purchase Invoices? Hence, it is established beyond doubt that the purchases made by M/s.BGR Energy Systems Pvt. Ltd from these live vendors based on Chennai are bogus. But, strangely, M/s.BGR Energy Systems Pvt. Ltd claims genuinity of transactions on the strength of transactions on the strength of possession of these manufactured invoices.
2.9 Conversely, this explains why M/s.BGR Energy Systems Pvt. Ltd should go for purchases from small-firm ‘vendors’ like these five parties based at Chennai when its regular purchases are from big players like SAIL, TATA STEEL, JSW, & NRIL. The stark intention behind the purchases from the five local vendors based at Chennai stands doubly exposed. Stocks purchased from SAIL, TATA STEEL, JSW & NRIL do have delivery challans attached to their purchase Invoices whereas the purchase invoices of these five parties are without delivery challans-simply because they are bogus, as they are merely raised without actual transfer of goods and materials mentioned therein.
3.1 Hence, vide discussions made above, and vide series of elinching evidences as proved and point above, it is hereby held that M/s. BGR Energy Systems Pvt has indulged in bogus purchases to the extent of Rs.113.48 crores from the following five parties for the respective previous years relevant to the assessment years as below:
Amount in Rs.
