Case Law Details
New Consolidated Construction Company Ltd. Vs DCIT (ITAT Mumbai)
The assessee conceded that to buy peace of mind he was ready to accept the percentage as consistently applied by the Tribunal in other cases. When a query was put to the revenue he also fairly agreed for a reasonable percentage.
ITAT held that Profit rate of 12.5% of bogus purchases was to be applied as had been applied by Gujarat High Court in Smith P. Seth’s case. AO was directed to compute the income of all these assessment years accordingly and not the entire bogus purchases were to be added.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
In these five appeals, one by Revenue and rest four by the assessee are arising out of the different order of Commissioner (Appeals)-5, Mumbai, (in short Commissioner (Appeals)) in appeal Nos. IT-270/31/16-17, IT-109/14-15, IT69/13-14/496/14-15, IT-906/13-14 dated 2-5-2016, 15-07-2015,31-03-2015, 19-11. The Assessments were framed by the Deputy Commissioner (OSD) & Addl. Commissioner, Circle-2(2), Circle 2(3), Mumbai (in short DCIT, ACIT) for the assessment years 2008-09, 2009-10, 2010-11, 2011-12 vide orders dated 2-12-2010, 27-12-2011, 28-3-2013, 31-1-2014 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).
2. The first common issue in all these appeals of assessee is as regards to the order of Commissioner (Appeals) confirming the action of the assessing officer in reopening the assessment under section 147 of the Act as well as on merits also holding that the purchases are bogus. For this assessee has raised identical worded grounds in all the years and hence, will take up the facts and ground from assessment year 2008-09 in ITA No. 4688/Mum/2016 i.e. ground No. 1 to 3 reads as under :–
“1. Disallowing a total sum of Rs. 1,25,07,876 in the reassessment order passed under section 143(3) r.w,s 147 of the Income Tax Act in respect of purchases made from the following parties on the alleged ground that genuineness of the said purchases could not be established.
2. That the learned Commissioner (Appeals) ought to have appreciated that your petitioners’ case for the aforesaid yea had gone through a detailed scrutiny and the then assessing officer after satisfying himself with regards to the expenses above S laths passed the order under section 143(3) of the income tax act. Accordingly, the 01(A) ought to have appreciated that the said reopening proceedings are invalid and bad in law on account of the fact :–
a. That there was no ‘reason to believe’ that the income chargeable to tax had escaped assessment and a mere change in opinion cannot be a basis for reopening of the assessment proceedings. December
b. That merely based on information provided by DGIT Investigation which in turn was received from the sales tax department, and not on the basis of independent application of mind by the assessing officer himself, cannot be a basis for reopening.
c. That merely based on general affidavits from above mentioned parties without the name of your petitioners being specifically mentioned cannot be basis to come to a conclusion that there is ‘reason to believe’ that income has escaped assessment.
That the Commissioner (Appeals) ought to have appreciated that your petitioners during the scrutiny proceedings have provided various documentations to justify that the said purchases are genuine and not bogus. The documents provided includes :–
♦ Ledger Account of the all the above mentioned parties in the books of your assesse.
♦ Invoices raised by all the above mentioned parties
♦ Sank statements showing payments made to the above parties
♦ Delivery challans.
♦ Purchase order
Also the TIN Number of the said parties was made available and was also reflected on the purchase invoices which establish the identity of the party and the genuineness of the said purchases.
3. At the outset, the learned Counsel for the assessee fairly conceded that in assessment year 2008-09 and 2009-10, the issue is regarding reopening and under the instructions of the assessee he is not interested in prosecuting the issue of reopening. As the learned Counsel for the assessee has not contested the issue of reopening and fairly conceded, the same can be dismissed as not pressed. Accordingly, we dismiss the issue of reopening as not pressed in these two assessment years.
4. Coming to merits of the case, the assessee had made the following purchases from the following parties :–
| Name of the company | Amount respective to their AYrs | |||
| 2008-09 | 2009-10 | 2010-11 | 2011-12 | |
| Top Bricks & Sand Suppliers | 8,94,791 | 1,23,760 | ||
| DN Enterprises | 28,46,337 | 11,11294 | ||
| Reliance Enterprise | 21,42,222 | 18,05,819 | ||
| Pratik Enterprises | 9,98,566 | |||
| Raj Traders | 33,94,440 | 67,620 | ||
| Ace International | 4,40,445 | |||
| NB Enterprises | 11,33,380 | |||
| Neelam Enterprises | 6,17,915 | |||
| Sagar Enterprises | 39,780 | |||
| Bath Classic | 4,89,172 | |||
| Sampark Steels | 17,53,309 | |||
| Prayan Trading Co. | 16,28,635 | 2,57,865 | ||
| Karma Ispat | 16,56,887 | 8,29,965 | ||
| Total | 1,25,07,876 | 36,92,101 | 50,37,821 | 11,55,450 |
5. In all these years, the assessing officer received information from DGIT investigation Mumbai, who in turn received information from Maharashtra Sales Tax Department that the assessee has obtained bogus purchases from hawala dealers, who without actual sale of goods issuing mere bills and the assessee is obtaining these bills. It was the contention of the Revenue that these bills have been used for obtaining bogus purchase bills, so as to reduce the profit of the assessee and pay lower taxes. The assessing officer recorded this fact in Para 4.2 as under :–
“4.2 Further earlier a Survey under section 133A was conducted at the business premises of the assessee on 17-01-2013 by DDIT (Inv), Unit-III (2), Mumbai. The reason for conducting the survey was that as per the information provided by the Sales Tax Department, the assessee is allegedly involved in debiting bogus expenditure by procuring bogus bills from different parties over a period of three financial year i.e. 2008-09, 2009-10 and 2010-11. These parties are : Top Bricks & Sand Suppliers, DN Enterprises, Reliance Enterprises, Bath Classic, Pratik Enterprises, Sampark Steels, Prayan Trading Company, Raj Traders, Ace International, NB Enterprises, Neelam Enterprises, Sager Enterprises and Karma Ispat Ltd.”
6. The learned Counsel for the assessee stated that no doubt Shri Mahesh M Mudda, executive director and CEO of the company vide his answer to question No. 37 provided invoices for purchase, GRR, Delivery challan, lorry receipts, octroi receipts and weighment slips. But finally, he conceded that he is not interested to claim the purchase and he withdraw the claim vide question No. 56 of his statement and the relevant answer reads as under :–
“Sir, I admit that standard operating procedure has not been followed with respect to purchases made from parties mentioned in Q.No. 52 above. I am not in a position to substantiate the claim of the purchases made from thee parties to the tune of Rs. 2,88,98,036 for all the thee years ad I withdraw my claim of purchases in the respective assessment years and offer it for tax. I will pay the corresponding tax liability at the earliest.”
7. The assessee before Commissioner (Appeals) contended the statement has been retracted but Commissioner (Appeals) has not accepted the contention of the assessee and confirmed the disallowance made by assessing officer of entire purchases. In Similar fashion in other years also, the Commissioner (Appeals) disallowed the purchases. Aggrieved, in all the years now assessee is in appeal before us.
8. We have heard the rival contentions and gone through the facts and circumstances of the case. The learned Counsel for the assessee Shri Nitesh Joshi first of all stated that this statement of CEO & Executive Director Shri Mahesh M Mudda, recorded by Revenue during the course of survey, was retracted vide statement under section 131 of the Act dated 17-01-2013 and 18-01-2013, whereby complete evidences were produced by him. The learned Counsel for the assessee before us now filed paper book for all these years and stated that complete stock tally is available. However, the learned Counsel conceded that to buy peace of mind he is ready to accept the percentage as consistently applied by the Tribunal in other cases. When a query was put to the learned Sr. Departmental Representative, he also fairly agreed for a reasonable percentage.
9. We find that Hon’ble Gujarat High Court in the case of CIT v. Smith P. Seth (2013) 356 ITR 451 (Guj), wherein it has applied the profit rate at the rate of 12.5% of the bogus purchases in similar circumstances. Accordingly, we also apply the profit rate of 12.5% of the bogus purchase and direct the assessing officer to compute the income of all these AYrs. and not the entire bogus purchases are to be added. Accordingly, we allow these appeals of assessee partly.
10. In regard to another issue of Purchases disallowed by assessing officer of capital asset in assessment year 2010-11 and 2011-12, the same finding will apply and assessing officer will disallow 12.5% of the purchased price of these capital goods and balance will be taken to capital account and accordingly, depreciation will be allowed on the assets. This issue of the assessee’s appeals is partly allowed as indicated above.
11. The next issue in these cross appeals of assessee and that of Revenue inITA No. 3410 and 3784/Mum/2015 for assessment year 2010-11 is as regards to the order of Commissioner (Appeals) restricting the disallowance of expenses relatable to exempt income under section 14A of the Act read with rule 8D of the Income Tax Rules 1962 (herein after the ‘Rules’) amounting to Rs. 29,73,023 out of the total disallowance of Rs. 50,67,085. For this Revenue and assessee has raised following ground:–Assessee
“3. That the learned Commissioner (Appeals) erred in law as well as on the facts of the case in calculating disallowance under section 14A by mechanically applying the provisions of rule 8D in spite of the fact that a clear basis of the disallowance at Rs. 2,26,732 was duly filed forming part of Form 3CD annexure Exhibit V which was duly certified by the statutory auditors.
4. That the Commissioner (Appeals) ought to have appreciated that the provisions of section 14A read with rule 8D(2)(iii) can be invoked only if the assessing officer is not satisfied with the claim of 14A disallowance worked out by the assessee. Accordingly, the learned Commissioner (Appeals) ought to have appreciated that when your petitioners have provided the basis of disallowance under the provisions of section 14A which has been duly certified by the auditors and not rebutted by the assessing officer in his 143(3) order, the question of applying provisions of rule 8D(2)(iii) in calculating the disallowance under section 14A does not arise.”
Revenue
“On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in deleing the disallowance under section 14A read with rule 8D(1)(ii) by admitting fresh evidence in contravention of rule 46A of the Income Tax Rules.”
12. Briefly stated facts are that the assessee has earned dividend income of Rs. 2,35,84,342 and claim the same as exempt under section 10(38) of the Act. The assesseesuo moto has made disallowance of Rs. 2,26,732 under rule 8D of the rules. For this assessee computed 5% of salary to CFO and 50% salary of one accountant executive and 79.1% of bank charges paid to ABN Amro Bank. But the assessing officer, has not accepted the disallowance made by the assessee and computed the disallowance under rule 8D(20(ii) at Rs. 18,67,336 and under rule 8D(2)(iii) at Rs. 31,99,755. Aggrieved, assessee preferred the appeal before Commissioner (Appeals). The Commissioner (Appeals) deleted the disallowance made by assessing officer under rule 8D(20(ii) completely but retain the disallowance under rule 8D(2)(iii) at Rs. 29,73,023 by observing in Para 4.3.1 as under :–
“4.3.1 The issue is considered. As explained, it is noted that assessee had made capital infusion of Rs. 200 crores during the year relevant to assessment year 2009-10 and as a result thereof on 04-2-2009 there remained no overdraft balance in assessee’s bank account. The term loan too was paid off. Therefore, the source of all those investments, which were made prior to that date 104-2-20091 even by utilizing the loan fund, will have to be taken as on 04-2-2009 and onwards as if made out of its own fund. From the balance sheet it is noted that on 31-3-2010 the total share capital and reserves town fund) amounted to Rs. 231.52 crores; the outstanding Loan amounted to Rs. 14.56 crores; and the investment stood at Rs. 81.55 crores. Thus, it is noted that the own fund of the assessee was much higher than the investments. Further, the investment made after 04-2-2009 were either from its current account I or from overdraft account (in Vijaya Bank). But on the dates when it was made from I overdraft account, there was a positive balance and therefore its claim that the disallowance of interest expenditure under section 14.4 could not be made this year is acceptable. In view of these facts, I am of the considered view that disallowance as per Clause (ii) of rule 8D(2) was not called for. However, there is no infirmity in calculating the administrative cost as per Clause (iii) of rule 8D(2). The assessee has already added back the amount of Rs. 2,26,732. Accordingly, the disallowance under section 14A is confirmed to the extent of Rs. 29,73,0231- (i.e. 3199755–226732). The assessee would get relief of Rs. 20,94,062 (1867330 + 2267322).”
Aggrieved, now assessee has challenged the retention of the addition and Revenue has challenged the deletion.
13. We have heard the rival contentions and gone through the facts and circumstances of the case. As regards to the deleting of interest of disallowance under rule 8D(2)(ii), we find that the assessee’s own fund i.e. capital and reserve amounting to Rs. 231.52 crores and investment is at Rs. 81.55 crores. We also have gone through the assessment order and noted that no nexus have been proved by assessing officer or there is no reason given by the assessing officer that this interest bearing funds have been invested in the investments. In such circumstances, the presumption will be that assessee has made investment out of its own funds i.e. capital and reserves which are greater than investments. This view of ours, is supported by the decision of Hon’ble Bombay High Court in the case ofCIT v. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom.) wherein, it is held that the presumption will go in favour of the assessee, that it has made investment out of its own funds which are sufficient to cover the value of investment, in that case, no disallowance of interest is required to be made under section 14A of the Act read with rule 8D(2)(ii) of the rules. When this was confronted to the learned Sr. Departmental Representative, he fairly conceded the position. As the issue is squarely covered in favour of the assessee, respectfully following the Hon’ble Bombay High Court decision in the case of HDFC Bank Ltd. (supra), we confirm the order of Commissioner (Appeals) by deleting the disallowance of interest under rule 8D(2)(ii) of the Income Tax Rules made by the assessing officer. This issue of assessee’s appeal is allowed and that of the Revenue is dismissed.
14. As regards to the retention of disallowance under rule 8D(2)(iii) i.e. administrative expense. Of Rs. 29,73,023, the learned Counsel first of all stated that no satisfaction is recorded by the assessing officer and once satisfaction is not recorded in term of rule 8D of the rules, the disallowance is not permissible. For this he stated that the assessee has calculated the disallowance by calculating 5% of the salary of the CFO, 50 % of the salary of one accounts executive and 79.1% of bank charges paid to ABN Amro Bank through which the investment were routed. Further, the assesseesuo moto has disallowed a sum of Rs. 2,26,732, the expenses relatable to exempt income. The learned counsel took us through the relevant expenditure booked in the profit and loss account and argued that there is no item which can be co-related with the investment giving exempt income. We find force in the arguments of the learned counsel, which is apparent from the records and hence, we delete the disallowance and allow this issue of assessee’s appeal.
15. The next issue in ITA No. 5552/Mum/2015 for assessment year 2011-12 in assessee’s appeal is as regards to the order of Commissioner (Appeals) confirming the disallowance of expenses relatable to exempt income under section 14A of the Act read with rule 8D of the rules amounting to Rs. 36,95,549.
16. At the outset, learned Counsel for the assessee stated that the assessing officer has simply disallowed the expenses relatable to exempt income under rule 8D(2)(iii) of the rules amounting to Rs. 36,95,549 without recording any satisfaction. The assesseesuo moto has disallowed a sum of Rs. 3,54,009 on account of exempt income. The assessee has earned dividend income of Rs. 3,06,90,116 and claim the same as exempt under section 10(38) of the Act. The assessee claimed that it has disallowed 5% of salary of CFO and 50% salary of Accounts executive and further disallowed 71% of bank charges at Rs. 34,609 on the basis that the total transaction relating to investment are routed through current account. The learned counsel took us through the relevant expenditure booked in the profit and loss account and argued that there is no item which can be co-related with the investment giving exempt income. We find force in the arguments of the learned counsel, which is apparent from the records and hence, we delete the disallowance and allow this issue of assessee’s appeal.
17. In the result, the appeal of Revenue is dismissed and all the appeals of assessee are partly allowed.
Order pronounced in the open court on 15-12-2017.
