ITAT upheld disallowance of expenditure not proved/supported by relevant bills

Print Plus Private Limited Vs ITO (ITAT Mumbai)

Brief facts is that the AO noticed from perusal of Tax Audit Report that the appellant/assessee had paid remuneration to directors amounting to Rs. 23,26,200/-. However, it was noticed that an amount of Rs.36,00,600/- was debited to Profit & Loss account instead of Rs. 23,26,200/-. On a query, the assessee explained that the difference of Rs.12,74,400/- pertained to reimbursement of expenses incurred by the directors. And in support, sample cash vouchers for Rs.2,33,900/- were filed. The AO noted that all the vouchers were signed by Mr. Desai mentioning expenses of revenue & travelling. However, the AO noted that appellant could not produce any corroborative evidence in the form of bills/receipts, show the availability of cash balance with directors, nature of expenses (whether related to the business), ledger accounts, cash flow statement etc. Accordingly, the excess unverifiable deduction claimed by the appellant in the Profit & Loss account of Rs. 12,74,400/- was disallowed u/s 37(1) of the Act.

ITAT notes that the Ld.CIT(A) confirmed the disallowances as made AO because the assessee was not able to produce any bills pertaining to the expenses claimed to the tune of Rs.12,74,400/- (i.e. expenditure incurred by the directors). Before us also the 8 assessee/Ld.AR could not produce any bills other than the self made vouchers which is riddled with infirmities as pointed out by the Ld.CIT(A). Further we note that the assessee had already claimed expenses on various counts VIZ travelling, fuel expenditure and other expenses separately. And further we note that the directors in their return of income has shown only remuneration at a total of Rs.23,26,200/- and since the excess claim of expenditure on behalf of directors could not be proved/supported by relevant bills, we agree with the impugned action of Ld.CIT(A) on this issue and are inclined to confirm the same.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. This appeal is preferred by the assessee the against order of the Ld.CIT(A)-13 Mumbai dated 28-02-2020 for AY 2011-12.

2. The Grounds of appeal raised by the assessee are as under:

“1. The Learned CIT Appeals erred in not considering the principles of natural justice while passing the Appellate Order. The Learned CIT has ITA.NO.1719/MUM/2020 AY-2011-12 Print Plus Private Limited overlooked the fact that the name of the Appellant was not appearing as beneficiary of the alleged hawala dealer.

2. On the facts and circumstances of the case, the Learned CIT erred in retaining the addition of Rs. 17,99,061/- (being 25% of the original disallowance of Rs.71,96,242/-).

3. Without prejudice to the Ground No. 2, the Appellant prays that the rate of Gross Profit adopted by the Learned CIT is excessive,

4. On the facts and circumstances of the case, the Learned CIT erred in confirming the addition of Rs. 12,74,400/- being Directors Remuneration.

5. The Appellant craves the leave to add, amend or modify any of the grounds stated above.”

3. The first Ground of appeal of the assessee is against the violation of principle of natural justice by the Ld. CIT(A).

4. In respect of this grounds of appeal of the assessee, the Ld.AR could not demonstrate with the aid of any material or action of Ld.CIT(A) from record to show that there was violation of natural justice. We note that before the Ld.CIT(A), the Ld.AR of the assessee had appeared and his presence has been marked in the caption page of the impugned order. We note that Ld. CIT (A) has reproduced the submissions of the assessee and thereafter has passed a reasoned order. Therefore, we do not find any force in this ground of appeal of the assessee and so it is dismissed.

5. Coming to the ground No.2 of the appeal which is against the action of Ld.CIT(A) restricting the addition to 25% from the original disallowances made by the AO at 100%.

6. Brief facts is that AO noted that the assessee had filed return of income on 30-02-2011, declaring total income of Rs.11,24,720/-. Later the case of the assessee was selected for scrutiny and that he came across the report from the DGIT (investigation) which in-turn was on the basis of an information from Sales Tax Department that assessee was indulging in accepting bogus purchases bills from bogus/hawala bill providers. In this report the AO noted that the assessee has taken such service/ accommodation from the following two companies :-

7. The AO furnished a copy of the information received from Sales Tax Department to the assessee and after going through the reply of the assessee, the AO did not accept the claim of the assessee that the transaction with these two companies was genuine. For coming to such a conclusion, the AO noted that assessee failed to bring any evidence before him to show that the assessee was maintaining any stock Register or any contemporaneous records to establish the receipt of goods purported to have been purchased from the aforementioned two parties. The AO also noted that notice issued to these two parties (supra) u/s 133(6) of the Act have been returned unserved by the postal department and thereafter he directed the assessee to produce the above parties before him which assessee failed to do so. The AO also took note of certain other factors which raised questions regarding the genuiness of the purchase made by the assessee from these two parties which he has noted at page 4 of his order and then the AO described the modus-operandi of the accommodation entry operators and thereafter he found that the purchases made by assessee from the aforesaid two parties were bogus and therefore he added the entire amount of Rs. 71,96,242/- i.e. 100% of the purchases from these two parties were disallowed.

8. Aggrieved the assessee preferred an appeal before the Ld. CIT(A) who noted the fact that the AO while making the disallowance of purchases from these two parties has not disputed the sales shown by the assessee.

Therefore, the Ld. CIT(A) was of the opinion that without purchases, no sales could have taken place; and therefore he was of the opinion that the profit embedded in the accommodation transaction in respect of the bogus purchases need only to be taxed. So he estimated the same at the rate of 25% of the purchases price by observing as under:-

“7.3.25 The appellant is engaged in the business of commercial printing. It has itself shown a GP rate of 16.77% for the year under consideration. VAT on genuine purchases of raw material i.e. paper is @ 5%. Therefore, ITA.NO.1719/MUM/2020 AY-2011-12 Print Plus Private Limited in light of the above decisions, taking in to account the totality of the facts, it will be reasonable to estimate the profit embedded in the accommodation entries of bogus purchases @ 25 % of the purchase amount. As it is an estimate of the profit embedded in purchase, it cannot be subject to any adjustment on account of any subsequent profit arising from the sale of the materials as held by the Hon’ble ITAT. Mumbai Bench in the decision in ITA No. 6555/Mum/2017 for AY 2009–10 in the case of M/s Muhta Markfin (P) Limited Vs. ITO–5(2)(3). has held as under:

“We are of the considered view that as the profit element accounted for by the assessee in its regular books of accounts pertains to the profit which it would have made from selling the goods under consideration, therefore, the same would have no bearing on the qualification of the monetary benefit involved in making of purchases by the assessee at a lower price from the open/grey market, as in comparison to purchases made from registered dealer“

7.3.26. Accordingly, addition made by the AO to the extent of Rs.17,99,061/– being 25% of the total bogus purchases of Rs. 71,96,242/– is upheld. Hence, Grounds no.1 of the appellant is partly allowed.”

9. Still not satisfied with the partial relief given by the Ld.CIT(A), the assessee is before us .

10. We have heard both the parties and perused the records. Before us the Ld. AR could not controvert the fact finding made by the Ld.CIT(A) that the purchases made from the aforesaid two parties (as informed by the Sale Tax Print Plus Private Limited authorities Supra), were bogus purchases i.e. not genuine purchase of goods. We note that even though AO had disallowed the 100% purchase expenses booked by assessee in respect of purchases from them (Rs.71,96,242/-), the AO accepted the entire sales shown by the assessee, meaning he accepted the sales but not the purchases. Therefore, the Ld.CIT(A) rightly noted that without purchases, no sales could have happened. In such a scenario the Ld.CIT(A) was right only to estimate the profit embedded in the bogus purchases which could have been inflated in the books of assessee. Accordingly, the Ld.CIT(A) has restricted the disallowance to 25% of the total bogus purchases of Rs.71,96,204/- i.e. Rs.27,99,261/-. For taking such an action the Ld.CIT(A) has noted that the assessee is engaged in the business of commercial printing and has shown GP of @ 6.77% and VAT on genuine purchases of paper was @ 5%. After hearing the Ld. AR of the assessee and taking in to consideration the overall facts of the case, according to us it would reasonable to estimate the profit at 12.5% of the purchase amount rather than 25% as restricted by the Ld.CIT(A). So this ground of appeal of the assessee is partly allowed and the AO is directed to give relief to the assessee accordingly.

11. Next ground of appeal assessee is against of the action of the Ld.CIT(A) confirming the addition of Rs. 12,74,400/- added by the AO by disallowing the sale.

12. Brief facts is that the AO noticed from perusal of Tax Audit Report that the appellant/assessee had paid remuneration to directors amounting to Rs. 23,26,200/-. However, it was noticed that an amount of Rs.36,00,600/- was debited to Profit & Loss account instead of Rs. 23,26,200/-. On a query, the assessee explained that the difference of Rs.12,74,400/- pertained to reimbursement of expenses incurred by the directors. And in support, sample cash vouchers for Rs.2,33,900/- were filed. The AO noted that all the vouchers were signed by Mr. Desai mentioning expenses of revenue & travelling. However, the AO noted that appellant could not produce any corroborative evidence in the form of bills/receipts, show the availability of cash balance with directors, nature of expenses (whether related to the business), ledger accounts, cash flow statement etc. Accordingly, the excess unverifiable deduction claimed by the appellant in the Profit & Loss account of Rs. 12,74,400/- was disallowed u/s 37(1) of the Act.

13. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A) who was pleased to confirm the action of AO by holding as under:-

8.4.1 “During the appellate proceedings, the appellant filed the additional evidence being total vouchers of expenses stated to be incurred by the Directors and reimbursed by the appellant company. The AO has disputed the genuineness of the expenditure in the absence of any receipts/bills. He has also opined that the expenses should have been debited to the specific heads of expenditure rather than to the head of directors’ remuneration.

8.4.2 I have considered the submissions of the appellant and the AO during remand proceedings, carefully gone through the order of the AO, and perused the placed on record in the form of additional evidence. The appellant has filed the vouchers. However, I find that these are not accompanied with any bills/receipts in the absence of which the genuineness of the expenditure cannot be conclusively proved. The vouchers are internally generated documents prepared in identical fashion with the same handwriting and bearing no signature of the preparer. Most of the vouchers bear the signature of one ‘S Desai’ as the recipient. Even where these are signed by the directors, the signatures do not match with the signatures of the respective director when compared with the signatures of the respective director on the certificate given to certify the receipt of amounts by them towards reimbursement of expenses. Most of the vouchers indicate expenses under such heads as miscellaneous, revenue purchased, travelling and conveyance, petrol, hotel expenses, gift expenses, etc. The appellant has not been able to furnish any plausible explanation as to why such expenses could not be debited to the respective heads of expenses in the Profit & Loss account. Further, the contention of the appellant that no bills are available for these expenses is not an acceptable one.

8.4.3 In the light of the above discussion, I am of the opinion that the AO correctly made the disallowance of Rs. 12,74,400/- on account of excess deduction claimed under directors remuneration. Hence, the Grounds of appeal no. 2 is dismissed.”

14. Aggrieved by the aforesaid action of Ld.CIT(A), the assessee is before us.

15. We have heard the both the parties and perused the records. We note that the Ld.CIT(A) confirmed the disallowances as made AO because the assessee was not able to produce any bills pertaining to the expenses claimed to the tune of Rs.12,74,400/- (i.e. expenditure incurred by the directors). Before us also the 8 assessee/Ld.AR could not produce any bills other than the self made vouchers which is riddled with infirmities as pointed out by the Ld.CIT(A). Further we note that the assessee had already claimed expenses on various counts VIZ travelling, fuel expenditure and other expenses separately. And further we note that the directors in their return of income has shown only remuneration at a total of Rs.23,26,200/- and since the excess claim of expenditure on behalf of directors could not be proved/supported by relevant bills, we agree with the impugned action of Ld.CIT(A) on this issue and are inclined to confirm the same.

16. In the result of the appeal of assessee is partly allowed.

Order pronounced in the open court on this 09/11/2022.