ITAT Confirms Addition of 1% Commission on Hawala / Bogus Turnover

INCOME TAX APPELLATE TRIBUNAL, “E” BENCH, MUMBAI

BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND
SHRI AMIT SHUKLA, JUDICIAL MEMBER

ITA no. 8932/Mum./2010 – Assessment Year : 1996-97)

ITA no. 8933/Mum./2010-Assessment Year : 1997-98)

ITA no. 5853/Mum./2012 – Assessment Year: 1998-99)

M/s. Saroj Anil Steel P. Ltd.

V/s.

Income Tax Officer Ward-3(4)

Date of Order – 04.04.2014

ORDER

The aforesaid appeals have been preferred by the assessee challenging the impugned order dated 15^th September 2010, for the assessment year 1996-97 and 1997-98 and order dated 16^th July 2012, for the assessment year 1998-99 respectively, passed by the learned Commissioner (Appeals)-I, Thane, for the quantum of assessment passed under section 143(3) r/w section 254 of the Income Tax Act, 1961 (for short “the Act”). The appeals for the assessment year 1996­97 and 1997-98 were heard on 10^th March 2014 and the appeal for the assessment year 1998-99 was heard on 11^th March 2014.

2. Since all these appeals pertain to the same assessee involving common issues, except variation in figures, arising out of identical set of facts and circumstances, therefore, as a matter of convenience, these appeals are being disposed of by way of this consolidated order. However, in order to understand the implication, it would be necessary to take note of the facts of one appeal. We are, accordingly, narrating the facts, as they appear in the appeal in ITA no. 8932/Mum./2010, for assessment year 1996-97.

3. The sole issue involved, which is common in all the years under appeal, is determination of correct hawala income in the hands of the assessee. For the sake of ready reference, the grounds raised by the assessee in the assessment year 1996-97, are reproduced herein below:-

“(a) The Assessing Officer as well as Commissioner of Income tax (Appeal) has failed to determine the correctly the hawala Income. The appellant has issued Bills i.e. Sales Bills to the commercial world i.e. the needy persons. Who has paid the appellant the Hawala Commission.

(b) The Appellant Tribunal has given clear direction to compute Hawala Income and one can not earn Income from own concerns or Sister concerns or groups concerns and transaction of such concerns and or groups be excluded from the turnover.

(c) The AO as well as CIT(A) ought to determine turnover as the transactions with commercial world on which appellant has earned Income.

(d) The AO ought to have reduced the transaction with the sister concerns group concerns transactions which are done to inflate sale for obtaining bank facilities on which no commission is earned.

(e) The AO as well as CIT (A) ought to have considered the submission, an affidavits and various documentary proof filed with the AO as well as to the CIT (A) that the appellant has not earned any commission Income from Sister or Group concerns.

2)(a) The AO eared in Law as well as facts and circumstances of case by assessing the Income of Rs. 15,40,950/- on basis of total Turnover at the rate of 1% of Total Turnover of Rs. 15,40,95,400/-.

(b) Appellant had earned Commission Income on bills issued to outside party. Income from this activity can be computed on the basis of sales made to outsider to whom, bills are issued for earning nominal commission. Therefore those bills on which Income is earned will be taken as turnover or Bills amounts be taken for a turnover and all the office running expenses should be allowed from Income computed on above turnover i.e. 1 % of commercial Hawala turnover.

(c) In this type of business, Income can be earned on commercial turnover i.e. sales made to third party (other than Sister Concerns). Therefore Income should be computed accordingly. The sister Concern transaction on which no commission was earned so such transaction should be reduced from total turnover as follows: –

 The business income will be 1 % of Hawala Commercial turnover of i.e. 1 % of Rs.4,66,00,000/- which comes to Rs.4,66,000/-.

During the year under consideration, Appellant made total Turnover of Rs.15,57,00,478/- out of which turnover with sister concern is of Rs. 10,91,00,478/- which is to be reduced from total turnover while determining the Commercial Hawala Turnover.”

4. Brief facts, which are permeating through all the years under appeals, are that a survey action under section 133A was conducted by the Revenue at the business premises of the assessee on 17^th December 1998. During the course of survey, it was found that the assessee is not actually doing business in iron/steel, but is mainly engaged in issuing bogus sale bills without actually delivering the goods, except in a very few transactions. In other words, the assessee was mainly involved in hawala transactions i.e., accommodation entries. The Assessing Officer, vide original assessment order dated 26^th March 2002, has taken the sales at F15,57,00,478. However, for the purpose of calculating net commission, he has estimated the income @ 1% of the sales in the following manner:-

5. The learned Commissioner (Appeals), during the course of first appellate proceedings, directed the Assessing Officer to estimate the income of commission from hawala transaction @ 0.4% of gross turnover.

6. In the second appeal, the Tribunal, vide order dated 31^st March 2005, directed the Assessing Officer to estimate the income @ 1% of the total turnover and also directed to allow certain administrative expenses therefrom. The relevant observations and the findings of the Tribunal in the first round as given in Page-150 and 151, are as under:-

“6. Learned representatives have very fairly agreed that there are no precedents on the issue as to what should constitute reasonable profit from the activity of issuing hawala bills for sale of iron and steel. Shri Bhujle tried to rely upon the Tribunal decision in respect of bill discounting cases, but when it was pointed out tohim that bill discounting business and hawala business are not comparable, he fairly did not press the point further. He, however, submitted that not more than 2% net profit can be justified in such a line of activity. On the other hand, Shri Reddy submitted that even hawala commission is taken at 1% not more than 1% to 15% expenses can be justified. It was thus contended that 85% net profit is the least possible net profit from this line of activity. Respective stands were also reiterated before us. We are of the view that all that is required for us is to estimate a reasonable basis on which income from this activity can be computed. The guidance is available from the order of the Assessing Officer himself. The e Assessing Officer has observed that the normal rate of hawala commission ranges from 1% to 2%. That means, 1% hawala commission rate cannot be said to be an unrealistic rate. The next question then is as to what should be the expenses deductible from this to arrive at net profit rate. The assessee before us is an artificial juridical person and the assessee has to incur some expenses to have its continued legal existence, and to meet the costs of running the office etc. These expenses should be allowed as a deduction. The assessee has also contended that a deduction should also be allowed in respect of commission that the assessee has to pay to those who get him the business of hawala entries. Since we have already adopted a minimum commission rate of 1 %., we do not consider it necessary to allow further deduction in respect of such a commission. This claim must be declined. In effect, the net income from this business is to be arrived at by reducing from 1% of total turnover, the office expenses and the expenses incurred from continued legal existence of the company (such as filing fees, ROC fees, audit fees and expenses on statutory compliances) and also the directors remuneration in case the assessee has claimed the same. The net profit is to be computed accordingly. Accordingly, we restore the matter to the file of the Assessing Officer for re-compute the profit on the above line.

8. We may mention that parties have addressed us at length on other peripheral aspects of the matter, but, in view of the estimation basis explained above, which we consider to be fair and reasonable, we see no need to deal with those issues in detail. The matter stands restored to the file of the Assessing Officer with the above directions.

7. In pursuance of the above, the Assessing Officer passed assessment order dated 30^th November 2006, determining the total income of the assessee at 13,73,980, after allowing certain expenditure. Aggrieved by the said order with regard to allowability of certain expenditures, the assessee preferred an appeal before the learned Commissioner (Appeals), who vide order dated 14^th August 2007, dismissed the appeal of the assessee. On further appeal before the Tribunal, the co-ordinate bench, vide order dated 11^th September 2008, in the second round, again set aside the matter to the file of the Assessing Officer after observing and holding as under:-

“3.1 We have perused the records and considered the matter carefully. The dispute is regarding estimation of income from hawala transactions. Gross income from hawala transactions has already been upheld by the Tribunal at the rate of 1 %. The real dispute is regarding allowance of expenses against the aforesaid gross income. The Tribunal in appeal against the original assessment had held that office expenses as well as the expenses for legal existence of the company such as filing fees, ROC fees / audit fees and expense on statutory compliances have to be allowed and that the commission for promotion of sales is not to be allowed. The Assessing Officer in the fresh assessment as per the directions of the Tribunal has allowed directors; remunerations, auditor’s fees, filing fees and other statutory expenses but out of the balance expenditure he has allowed only 60,000 as office expenses. The case of the assessee is that the entire administrative expenditure which had been actually incurred have to be allowed. On careful perusal of the expenses claimed we find that the assessee has also claimed expenses on account of warehousing charges, commission, sales promotion, brokerage, expenditure on sale promotion, commission and brokerage is actually not to be allowed as per the earlier directions of the Tribunal. Further, as the assessee is only providing hawala entries without any actual purchase and sale of goods, warehousingcharges cannot be allowed has rightly held by the learned CIT(A). All the remaining expenses incurred by the assessee for the running of the office including office renovation, conveyance, etc. have to be allowed provided the same are found to be genuine. The Assessing Officer has estimated the expenses without making any examination of genuineness of expenditure claimed, which is not correct. Expenses can be estimated only when these are not properly vouched or are found to be bogus. But this aspect has not been examined. We therefore, set aside the order of the CIT(A) and restore the matter to the file of the Assessing Officer for passing a fresh order in the light of observations made above and after allowing opportunity of hearing to the assessee.”

8. Thus, in this order the Tribunal restricted the scope of the Assessing Officer to examine certain expenses only. Insofar as the net commission rate of 1% for estimating the commission income is concerned, the same stood final as per the earlier order of the Tribunal as reproduced in the foregoing paragraphs.

9. The Assessing Officer, in pursuance of the aforesaid observations, finally computed the income at r 12,28,020, after analyzing and verifying the various administrative expenses debited to the Profit & Loss account. Against the said order, the assessee preferred first appeal before the learned Commissioner (Appeals), wherein a plea was raised for the first time, that major part of the turnover constitutes sales to sister concern on which the assessee has not earned any income and, therefore, the turnover of the sister concern should be excluded for computing the commission income by applying the rate of 1%. In support of this contention, reliance was placed on the decisions of the Tribunal, Mumbai Benches, in Maganlal B. Jain and Palrecha and Co., ITA no.905/Mum./1981.

10. The learned Commissioner (Appeals) held that the Assessing Officer has only followed the directions of the Tribunal and has considered the expenditure after verifying the details as mandated by the Tribunal. These dis allowances, as made by the Assessing Officer, have not been seriously agitated before him and the only plea taken before him is that the turnover relating to sister concern amounting to 710,91,00,478 should be excluded from the total turnover. The learned Commissioner (Appeals) out rightly rejected the assessee’s contention and held that this is a new plea raised for the first time, which has neither been raised at the stage of three assessment proceedings or before any of the first appellate authorities or before the Tribunal and, therefore, he rejected the assessee’s plea on this score after observing and holding as under:-

“5.3 As regards the plea of the appellant that the turnover with the sister concerns amounting to Rs.10,91,00,478/- should be excluded from the total turnover for computing the Income at @ %, I find that, this is a new Issue raised for the first time before me in appeal. This issue has neither been raised before the AO during the three assessment proceedings nor before the CIT(A) two times earlier and not even before the ITAT twice. Accordingly I hold that this is an afterthought and also I find the plea to be devoid of any merit. While raising bills in the name of the sister concern also, there is a profit element incorporated. It could, therefore, not be said that the appellant has not earned income by way of commission in turnover with sister concern. Accordingly, I reject the ground Nos 1 to 3 on technical ground as well as on merit. The grounds No no. 1 to 3 are thus dismissed.”

11. However, the learned Commissioner (Appeals) gave some part relief of r 27,790 on account of certain expenses. Aggrieved, by the said order, the assessee is in appeal before us.

12. The learned Counsel for the assessee, before us, submitted that the turnover relating to sister concern, should have been excluded from the total turnover for computing the commission income @ 1%. This is because the assessee cannot earn income from own sister concern and has, in fact, not earned any commission income from sister / group concern. He submitted that the Tribunal in Anil Goel Exim Pvt. Ltd., ITA no.1330/ Mum./2002, ITA no.2314 & 2315/Mum./2003, vide order dated 25^th April 2005, has noted this point and directed the Assessing Officer to look into this issue. He pointed out the relevant observations of the Tribunal given in Page-5 and 6 of the said which is reproduced herein below:-

“The above point is raised by the learned Counsel. It is submitted that certain intra group accommodation entries were raised purely for the purpose of raising bank finances and these entries, therefore, cannot be viewed as source of revenue being generated.

6. As far as this plea is concerned, we are of the view that since matter is required to be restored to the file of the Assessing Officer for adjudication de novo in the light of directions, contained in Tribunal’s order dated 31^st march 2005, the Assessing Officer is to be directed to consider this plea as well. We accordingly direct the Assessing Officer to deal with this contention in accordance with the law and by way of a speaking order.”

13.  Thus, this matter needs to be looked into by the Assessing Officer as the Tribunal has admitted that intra group accommodation entries may not be the source of revenue. He also referred to various affidavits filed by the sister concern stating that on the sale bills issued to them, the assessee has not earned any commission income nor they have paid any such commission to the assessee. He submitted that these affidavits were also filed before the Assessing Officer. Thus, the sum and substance of the learned Counsel is that while estimating the income @ 1% as commission on the total turnover, the turnover pertaining to sister concern should be excluded and this matter can be examined or verified by the Assessing Officer.

15. The learned Departmental Representative, on the other hand, submitted that the plea which has been being raised for the first time before the learned Commissioner (Appeals) in third round of proceedings cannot be entertained now for the reason that the assessments have been passed purely in pursuance of the direction given by the Tribunal wherein the scope of the assessment was very limited. Thus, he strongly relied upon the observations and the findings of the learned Commissioner (Appeals) on this score.

15. We have heard the rival contentions, perused the findings of the authorities below as well as the material available on record. We have already recorded the chequred history of various rounds of proceedings in the assessee’s case and this is the third round of proceedings which is in pursuance of the directions given by the Tribunal. In the first round, the Tribunal has set aside the matter to the file of the Assessing Officer only for the purpose of examining the expenses and insofar as the assessment of net commission is concerned, the same was upheld at 1% of the turnover as determined by the Assessing Officer i.e., the turnover of 15,40,95,410 for the assessment year 1996-97, which stood already crystallized. There is in fact also no dispute that the sales to the sister concern are also hawala transaction and not actual sales. Thereafter, no legal remedy was pursued and this inter-alia means that the issue of commission income or total turnover has attained finality. Even in the second round before the Tribunal, this issue was not the subject matter of agitation. Now, in the third round of proceedings, the assessee has taken a plea that the turnover pertaining to its sister concerns should be excluded from the total turnover for the purpose of estimating the commission income. There is no observation or finding of the Tribunal on this score. Even in the second round of proceedings, the Tribunal has set aside the issue purely for examination of expenditures only. In this order also, there is no whisper with regard to the plea which has been raised by the assessee in this round of proceedings. Once the mater has reached up to the stage of the Tribunal and categorical directions have been given for framing the assessment, the Assessing Officer cannot travel beyond the scope and ambit of the directions of the Tribunal. The plea which has been taken by the assessee before the learned Commissioner (Appeals) or may be before the Assessing Officer, cannot be entertained in the third round of the proceedings. If the assessee had taken such a plea before the Tribunal in the first round of the proceedings and the Tribunal has not dealt with such an issue, then the only course left was to file misc. application or seek legal remedy before the High Court. Once there was no such direction either in the first round or in the second round of the proceedings, then such a plea cannot be entertained now as the scope of set aside proceedings by the Tribunal is strictly circumscribed by the directions of the Tribunal. Hence, the place and the ground raised by the assessee before us is not maintainable and are rejected.

16. Now, coming to the decision of the Tribunal in Anil Goel Exim Pvt. Ltd. (supra), as relied upon by the learned counsel, it is seen that this decision has been rendered in the case of a different assessee, may be in the case of a sister concern, however, the same has no relevance or bearing in the present case, as in the case of assessee itself, the Tribunal has set aside the matter twice before the A.O. with specific directions and the ground raised before us was certainly not one of them. Hence, the said decision relied upon by the learned counsel is of no assistance. In view of these facts, the plea raised by the learned counsel before us and also the grounds taken in the all assessment year 1996-97, 1997-98 and 1998-99 which are same cannot be sustained. Accordingly, the grounds raised by the assessee for all the assessment years i.e., 1996-97, 1997-98 and 1998-99 are dismissed.

17. In the result, assessee’s appeal for the assessment year 1996-97, 1997-98 and 1998-99 are dismissed.

Order pronounced in the open Court on 4^th April 2014

Click Here to Read More Case Laws/ Articles on Bogus purchases