Reassessment valid as AO formed prima facie opinion for escapement of income

Electrotherm (India) Ltd. Vs DCIT (ITAT Ahmedabad)

Conclusion:  Since AO after applying his mind on information received from VAT Department arrived at the conclusion, based on the reasons to believe that income of assessee had escaped assessment. and at the time of issuing notice under section 148 AO had formed prima facie opinion for escapement of income, therefore, reassessment was sustained as valid.

Held: AO received information from VAT Department that the bogus sale was made by certain entities after charging commission @ 0.05% from assessee. In-fact these impugned entities were not involved in the actual sale and purchase activities. AO reopened assessment and made addition. Assessee contended that proceedings under section 147 were initiated by AO without application of mind and further, there was no disallowance made by AO in the assessment framed under section 147 on account of freight expenses, despite AO had recorded the same in the reasons for escapement of income on account of such expenses. It was held that AO after applying his mind on information received from VAT Department, arrived at the conclusion based on the reasons to believe that income of assessee had escaped assessment. Further, AO at the time of issuing notice under section 148 had to form prima facie opinion for escapement of income rather than to reach to the conclusion that income had escaped assessment. Furthermore, initiation of proceedings could not be held invalid merely on the reasoning that there was no addition made by AO on account of freight expenses though there was mention of such expenses in the reasons recorded because addition on account of bogus purchases had been made by AO and it was sufficient enough for initiating proceedings under section 147. Therefore, reassessment was sustained as valid.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The above appeals have been filed by the Revenue and the assessee against the orders of ld. Commissioner of Income-Tax (Appeals) involving respective assessment years.

First we take Assessee’s appeal bearing ITA No- 2908/Ahd/2016, corresponding to A.Y. 2010-11

2. The assessee has raised following grounds of appeal:

1. That the learned CIT(A) has erred in law and facts by not quashing the reassessment proceedings and therefore the learned AO be directed to accept the returned income.

2. That the learned CIT(A) has erred in law and facts by confirming the addition of ₹ 25,12,43,170/- out of the purchases and therefore the learned AO should be directed to delete the said addition while computing the total income.

3. That the learned CIT(A) has erred in law and facts by confirming the addition of ₹ 1,65,71,352/- of Ld. Counsel Charges and therefore the learned AO should be directed to delete the said addition while computing the total income.

4. That the appellant craves liberty to add, amend alter and delete any grounds of appeal before the final hearing.

3. In the first ground of appeal, the assessee has challenged the validity of the reassessment proceeding framed under section 147 of the Act.

4. The facts to adjudicate the issue on hand are that the assessee is a public limited company and engaged in the business of manufacturing and trading of steel items. The assessee in the year under consideration filed return of income declaring loss which was accepted in assessment framed under section 143(3) of the Act vide order dated 15th March 2013. Subsequently the AO received information from the VAT department, Maharashtra that the entities namely M/s Induja Traders Pvt Ltd and M/s Kotsons Impex Pvt Ltd. were engaged in the activity of issuing the bogus bills of sales on commission basis. The assessee was one of the party to whom bogus sales bill were issued to the extent of ₹ 100,49,72,680/- being ₹ 54,34,97,318/- and ₹ 46,14,75,364/- from the respective entities as aforesaid. The directors of the impugned entities during VAT proceeding accepted on oath that sales shown in the name of the assessee were bogus. As such the bogus sale was made by the aforesaid entities after charging commission @ 0.05% from the assessee. In-fact these impugned entities were not involved in the actual sale and purchase activities.

4.1 The AO further observed that such amount were recorded as purchase of consumables for steel division in the books of accounts of the assessee. In view of the above the AO formed his believe that the income to the extent of ₹ 100,49,72,680/- has escaped assessment and thus he issued notice under section 148 of the Act dated 15th May 2013.

4.2 However the Assessee objected the initiation of the proceedings under section 147 of the Act which was disposed off by the AO by a separate order dated 14th Feb 2014.

4.3 The assessee during appellate proceedings contended that during the assessment proceeding under section 143(3) of the Act, it has furnished all necessary detail regarding purchases. Hence there was no failure on its part in disclosing all the material facts for the assessment. Further the AO has not referred to any document based on which he (the AO) formed opinion that it (the assessee) has recorded bogus purchases in trading and Profit & Loss account. As such, the AO has formed his believe only on the basis of information received from VAT department, Maharashtra which amounts to borrowed satisfaction. As such the AO did not apply his mind on the information gathered from VAT department, Maharashtra. Thus in such a situation, the proceedings under section 147 of the Act are liable to be dismissed.

4.4 However, the learned CIT (A) after considering the facts in totality upheld the validity of reassessment proceedings by observing as under:

2.4 having considered the facts and submission, it is noticed that there was the information available with the AO in the form of statement of the parties and their affidavits submitted before the Sales tax Authority, Mumbai and on the basis of this information after due application of mind the AO recorded the reasons. The reason recorded were enough to reopen the assessment and therefore, the same cannot be held to be bad in law. The appellant has not provided any details and doucments to state that any change of opinion has taken before issue of the notice u/s.148 of the I.T Act. The appellant has not brought anything on record in support of its contention that the issue of purchase and sales to the respective parties was fully examined by the AO in the original assessment proceedings and no adverse view was warranted upon the same.

2.5 In view of the aforesaid discussion, the objections raised by the appellant are found untenable in the eyes of law, and hence the reopening and consequent reassessment completed are found in order.

5. Being aggrieved by the order of the learned CIT-A, the assessee is in appeal before us.

6. The learned AR before us challenged the validity of the reassessment framed under section 147 of the Act on 4 counts. The 1st submission of the learned AR is that the information gathered from the VAT department, Maharashtra was very much available with the AO at the time of the assessment proceedings carried out under section 143(3) of the Act which was concluded on 15th March 2013 whereas the notice under section 148 of the Act was issued dated 15th May 2013 i.e. within a period of two months from the conclusion of assessment under section 143(3) of the Act. As such the AO should have used the information gathered from the VAT department, Maharashtra regarding the bogus purchases made by the assessee, in the assessment proceedings framed under section 143(3) of the Act without resorting to the provisions of section 147 of the Act.

6.1 The 2nd fold of the contention of the learned AR is that it has filed the return in pursuance to the notice issued under section 148 of the Act dated 27th May 2013 whereas the reasons for the reassessment has been provided dated 4th October 2013. As such the reasons for the reopening were provided beyond the period of 60 days. Similarly, the objection raised by the assessee for initiating the proceedings under section 147 of the Act was disposed of very late vide order dated 14th Feb 2014.

6.2 The next contention of the learned AR is that the reopening was made by the AO merely on the basis of the information gathered from the VAT department, Maharashtra and without application of mind. Therefore, such action of the AO for reopening of the assessment is based on the borrowed satisfaction which is unwanted under the provisions of section 147 of the Act. The learned AR in support of his contention relied on the judgment in case of Smt. Shantaben Sanatbhai Patel vs. ITO reported in 282 CTR 74.

6.3 The last contention of the learned AR is that the AO has not made any disallowance towards the freight expenses despite having a reason to believe that such expenses are bogus as per the reasons recorded.

6.4 In view of the above the learned AR before us pleaded that the proceedings initiated under section 147 of the Act are not sustainable and liable to be quashed.

6.5 On the other hand, the learned DR submitted that there is no evidence brought on record by the learned AR for the assessee suggesting that the information gathered from the VAT department, Maharashtra was available with the AO during the proceedings under section 143(3) of the Act. As such the reopening was made under section 147 of the Act on the basis of the information received from outside and after application of the mind on such information by the AO. It was very clearly pointed out by the AO in the reasons recorded that the bogus purchases have been shown under the head consumables stores. As such the AO has not acted in mechanical manner rather he applied his mind on the information gathered from the VAT department, Maharashtra for initiating the proceedings under section 147 of the Act. Thus it cannot be said that the reopening was made based on borrowed satisfaction.

6.6. There is no provision under the Act specifying that the AO is duty-bound to supply the reasons recorded for the reopening of the assessment under section 147 of the Act within a period of 60 days. Furthermore, there is no jurisdictional High Court judgment on this point for supplying the reasons recorded within a period of 60 days. The learned DR vehemently supported the order of the authorities below.

7. We have heard the rival contentions of both the parties and perused the materials available on record. The proceedings initiated under section 147 of the Act, in the case on hand, has been challenged by the assessee on various counts. The 1st basis for challenging the assessment proceedings initiated under section 147 of the Act was that the assessment under section 143(3) of the Act was concluded on 15th March 2013 whereas the proceedings under section 147 of the Act were initiated by issuing a notice dated 15th May 2013. Accordingly, it was contended that the AO while framing the assessment under section 143(3) of the Act should have used the information received from the VAT department, Maharashtra. But the AO has not done so and unnecessary resorted to the provisions of section 147 of the Act which could have been avoided. In this connection, we note that the assessee before us has not brought any documentary evidence suggesting that the information from the VAT department, Maharashtra was available with the AO before the conclusion of the assessment under section 143(3) of the Act. On the contrary, we find that the AO in his reassessment order has given a clear finding that the information from the VAT department, Maharashtra was received upon the conclusion of the assessment under section 143(3) of the Act. The relevant finding of the AO is reproduced as under:

2. After completion of the assessment proceedings, information was received from Sales Tax Department, Mumbai, through DGIT (inv.), Mumbai regarding dealers in Mumbai who were indulged in issuing bogus bills to various entities without actual supply of any material/goods. In this information, it was clearly mentioned that the assessee had carried out its transactions with such companies which were involved an indulged in issuing bogus bills to various entities without actual supply of any material/goods.

7.1 The above finding of the AO has not been controverted by the learned AR for the assessee at the time of hearing. Accordingly we are not impressed with the argument of the learned AR for the assessee.

7.2 The 2nd reason for challenging the validity of the assessment was that the AO has not supplied the reasons recorded to the assessee within the period of 60 days from the date of filing of return in pursuance to section 148 of the Act. In this connection the learned AR heavily relied on the Direction of Hon’ble Gujarat High Court given in the case of Sahakari Khand Udyog Mandal Ltd. v. ACIT (2015) 370 ITR 107 (Guj.)(HC). In the said judgment, the Hon’ble Gujarat High Court has laid certain principles detailed as under:

i. Assessee shall file return within the time prescribed in notice. –

ii. AO shall supply reasons within 30 days of filing Return without waiting for demand of reasons from the assessee.

iii. Assessee should raise his objections within 60 days of receipt of the reasons.

iv. AO shall dispose off the objections within 4 months of receipt of the objections. –

v. The above time limits shall apply to AO where the assessee also adheres to the same. –

vi. The procedure provided in GKN Drive Shafts shall apply notwithstanding whether the above time limit is followed or not. –

vii. The Chief Commissioner of Income -tax and Cadre Controlling Authority of the Gujarat State, shall issue a circular to all the Assessing Officers for scrupulously carrying out the directions contained in this judgment.

7.3 However, it is pertinent to note that the aforesaid judgment was delivered by the Hon’ble Gujarat High Court dated 31st March 2014 whereas the notice under section 148 of the Act was issued by the AO dated 15th May 2013 and objection raised by the assessee was disposed off vide separate order dated 14th February 2014. In other words, the notice under section 148 of the Act was issued and objection was disposed off by the AO much prior to the judgment delivered by the Hon’ble Gujarat High Court. Thus it is concluded that it was not possible for the AO to comply the directions of the Hon’ble Gujarat High Court as discussed above.

7.4 It is also pertinent to note that the principles laid down by the Hon’ble Apex court in the case of GKN Driveshaft (India) Ltd vs. ITO reported in 259 ITR 19 were very much applicable where there was no such time limit for supplying the reasons recorded to the assessee was mentioned. In the judgment of GKN Driveshaft (India) Ltd (supra) the Hon’ble Apex Court has directed to supply the reasons recorded by the AO to the assessee on demand which has been duly complied with by the AO in the case on hand. The relevant part of the judgment of the Hon’ble court reads as under:

There was no justifiable reason to interfere with the order under challenge. However, it was clarified that when a notice under section 148 is issued, the proper course of action for the notice is to file return and if he so desires, to seek reasons for issuing notice. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the notice is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons had been disclosed in the proceedings, the Assessing Officer had to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment.

7.5 In the backdrop of the above stated discussion, we note that there was no violation of the principles laid down by the Hon’ble Gujarat High Court as discussed above. Thus the issue whether the assessment framed under section 147 of the Act in the given facts and circumstances is sustainable in the eyes of law is upheld. Accordingly, we are not impressed with the argument of the learned AR for the assessee.

8. The next controversy arises whether the proceedings under section 147 of the Act were initiated by the AO was merely on the basis of the information received from the VAT department, Maharashtra without application of mind. In this connection, we find that the AO upon receiving the information from the VAT department, Maharashtra verified from the financial statements of the assessee and thereafter found that the assessee has shown creditors in its books in the name of the aforesaid entities on account of purchases of consumables. The amount of consumables purchase from the aforesaid entities shown in the books of accounts was exactly matching with the information received from the VAT department, Maharashtra. Thus what is inferred is this that the AO after application of his mind arrived on the reasons to believe that the income of the assessee has escaped assessment. Furthermore, the AO at the time of issuing notice under section 148 of the Act has to form prima facie opinion for the escapement of income rather than he has to reach to the conclusion that the income has escaped assessment. In this regard we draw support and guidance from the judgment of Hon’ble Allahabad High court in case of Pannala Mahesh Chandra Jewelers vs. DCIT reported in 188 Taxaman 95 where the Hon’ble court observed as under:

The expression ‘reason to believe’in section 147 does not mean purely subjective satisfaction on the part of the Assessing Officer. The belief must be held in good faith; it cannot be merely a pretence.

8.1 In view of the above we are not impressed with the argument of the learned AR for the assessee.

9. The last contention of the learned AR for the assessee was that there was no disallowance made by the AO in the assessment framed under section 147 of the Act on account of freight expenses despite the AO has recorded the same in the reasons for escapement of income on account of such expenses. In this connection, we find that the proceedings were initiated under section 147 of the Act after recording the reasons on two counts namely bogus purchases viz a viz freight expenses on such bogus purchases. Admittedly, the addition on account of bogus purchases has been made by the AO which is sufficient enough for initiating the proceedings under section 147 of the Act. In other words, the initiation of the proceedings cannot be held invalid merely on the reasoning that there was no addition made by the AO on account of freight expenses though there was the mention of such expenses in the reasons recorded. Accordingly, after considering the facts in totality we hold that the initiation of proceedings under section 147 of the Act was within the framework of the law. Accordingly we uphold the same. Thus the ground of appeal of the assessee is hereby dismissed.

10. The 2nd issue raised by the assessee is that the learned CIT (A) erred in partly confirming the addition made by the AO to the extent of ₹ 25,12,43,170/- out of the total addition made by the AO of ₹ 100,49,72,680/- by estimating the profit at the rate of 25% of the purchases.

11. The facts as discussed in ground No. 1, in continuation are that the AO based on the information received from the VAT department, Maharashtra show caused to the assessee to explain the purchases from M/s Induja and M/s Kotson viz a viz transportation expenses incurred in connection with such purchases.

12. The assessee in response to the show cause notice issued by the AO submitted that it has made the purchases from the aforesaid parties and sold the same while the goods were in transit. The transportation cost was born by the suppliers of the goods as discussed above. Regarding the transportation expenses, it was contended that all the invoices have been forfeited by the VAT department and therefore the same cannot be made available for the verification.

12.1 The assessee further submitted that all the purchases and sales were duly recorded in the books of accounts which were subject to audit under VAT/excise but no defect of whatsoever was pointed out by the auditor. None of the transaction was found outside the books of accounts. All the payments for the purchases and sales of the goods were carried out through the banking channel/letter of credit. Accordingly, such transactions of purchase and sales cannot be doubted merely on the basis of the statement, particularly in a situation where such transactions were duly recorded in the books.

12.2 However, the AO found that the assessee has shown sales of the goods to M/s Color Shops Pvt. Ltd. which were purchased from M/s Induja Traders private Ltd. Both the transactions of purchases and sales were recorded on the same day in the books of the assessee. In both these companies, Shri Jitendra Bi Salecha was the common director who accepted before the sales tax officials during search and filed affidavit during Vat proceeding that the assessee has approached to him for discounting the letter of credit by showing the transactions of purchase and sales for a commission at the rate of 0.05%. For this purpose, the assessee itself generated the bogus bills of the purchases and sales in the name of the entities as discussed above.

12.3 Likewise, the director of M/s Kotson also accepted in the statement furnished before the sales tax officials and affidavit filed during VAT proceeding that the company issued bogus invoices against the commission to the assessee.

12.4 The statement recorded by the VAT department, Maharashtra during the search proceedings and affidavit filed were provided to the assessee for its rebuttal but the assessee failed to bring any document on record suggesting that the statements were not correct. Accordingly, the AO held that the directors of both the companies were engaged in the activity of Hawala transactions which is established in the VAT proceedings.

12.5 Similarly, the notice issued under section 133(6) of the Act to the transporter namely M/s Nidhi Roadways were returned as unserved and therefore the authenticity of the transportation expenses of actual movement of goods were not established. Accordingly, the AO rejected the contention of the assessee for the cross-examination of the directors of the companies as discussed above on the reasoning that the assessee failed to furnish any documentary evidence suggesting that the finding of the VAT department was incorrect.

12.6 In view of the above, the AO concluded that the entire amount of purchases shown by the assessee is bogus and therefore there is no question of estimating the profit as alternatively contended by the assessee. Thus the AO made the addition of the entire amount of purchases of ₹ 100,49,72,680/- to the total income of the assessee.

13. Aggrieved assessee preferred an appeal to the learned CIT (A).

13.1 The assessee before the learned CIT (A) besides reiterating the submissions made during the assessment proceedings claimed that once the AO has held that the purchases are bogus then same treatment should also be given to the corresponding sales by holding the same as bogus. But the AO has not done so.

13.2 The assessee also contended that the AO has exceeded his jurisdiction by not providing the opportunity of cross-examination despite making the request for the same. Therefore there cannot be any addition based on the statement of the directors of supplier’s company without providing opportunity of cross examination which is against the principles of natural justice.

14. The learned CIT (A) after considering the submission of the assessee and the assessment order made certain observations as detailed under:

i. The assessee has shown gross profit against the sale and purchase of the companies namely M/s Induja Traders Pvt Ltd and M/s Kotsons Impex Pvt Ltd at ₹ 87,84,167.00 which is 0.866% only whereas the assessee in the earlier year has shown the GP at the rate of 19.82% and 20.03% effectively. In other words, the assessee has shown losses with respect to the transactions with the aforesaid companies after taking into consideration the administrative expenses.

ii. There was no evidence brought on record by the assessee regarding the physical movement of the goods. Therefore simply the payment was made through the banking channel cannot establish the genuineness of the transactions.

iii. Since, the assessee failed to discharge the initial burden by substantiating the genuineness of the transactions based on documentary evidence, the plea of the assessee for providing the cross-examination opportunity cannot be entertained.

iv. There was no doubt raised by the AO about the payments which were made through the account payees cheques.

14.1 In view of the above, the learned CIT (A) was of the opinion that the estimated disallowance at the rate of 25% of the purchases will provide justice to plug the leakage of revenue. Accordingly the learned CIT (A) confirmed the addition in part for an amount of ₹ 25,12,43,170/- and deleted the addition for an amount of ₹ 75,37,29,510/-. Thus the ground of appeal of the assessee was partly allowed.

15. Against the order of the learned CIT (A) both the assessee and Revenue are in appeal before us. The assessee is appeal against the addition sustained for ₹ 25,12,43,170/- whereas the Revenue is in appeal against the deletion of addition up to 75% i.e. ₹ 75,37,29,510/- only. The Revenue in ITA No.3194/Ahd/2016 has raised the following grounds.

1. The Ld.CIT(A) has erred in law and on facts in restricting the addition @ 25% amounting to ₹ 25,12,43,170/- as against ₹ 100,49,72,680/- on account of bogus purchase without properly appreciating the facts of the case and the material brought on record.

2. On the facts and in the circumstances of the case the Ld.CIT(A) ought to have upheld the order of the Assessing Officer.

3. It is, therefore, prayed that the order of the Ld.CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent.

4. The appellant craves leave to amend or later any ground or add a new ground, which may be necessary.

16. The learned AR before us submitted that if the purchases are treated as bogus then the corresponding sales should also be treated as bogus. Accordingly the benefit of sales should be given by reducing the income which was offered to tax.

16.1 The learned AR further contended that all the purchases and sales are recorded in the books of accounts along with the quantity which were subject to audit. But no deficiency has been pointed out by the auditor.

16.2 The transactions for the purchases and sales were carried out through the banking channel and there was no iota of evidence suggesting that the assessee has received money back from the parties.

16.3 The learned AR further contended that the opportunity of cross examination was not provided by the AO and therefore there cannot be any addition in the hands of the assessee by relying on the statement of third party.

17. On the other hand learned DR contended that the assessee failed to produce any documentary evidence for the physical movement of the goods. Furthermore, it has been established during the proceedings before the sales tax department that the aforesaid companies were providing accommodating entries.

17.1 Both the learned AR and the DR vehemently supported the order of the authorities below to the extent favourable to them.

18. We heard the rival contention of both the parties and perused the materials available on record. The facts of the case have already been elaborated in detail in the preceding paragraph. Therefore we are not inclined to repeat the same for the sake of brevity and convenience. The 1st issue that arises for our consideration is whether the transaction of purchase and sales shown by the assessee is bogus in nature. In this regard, we note that the primary onus lies upon the assessee to justify the transaction of the purchase and sales based on the documentary evidence. From the preceding discussion, we note certain undisputed facts as detailed under:

i. The assessee has purchased the goods from the company namely M/s Induja Traders Pvt Ltd for ₹ 54,34,97,318 and sold the same while the goods were in transit in most of the cases on same day to another company namely M/s Color Shop Pvt Ltd. for ₹ 54,49,05,854/- which was controlled and managed by same set of people who were controlling and managing the supplier company i.e. M/s Induja Traders Pvt Ltd. Similarly, the assessee purchased goods from M/s Kotsons Impex Pvt Ltd for ₹ 46,14,75,362/- and sold the same similarly to the sister concern of M/s Kotsons Impex Pvt Ltd namely Priya Exim Pvt Ltd for ₹ 46,88,50,993/-. In this transaction the assessee is earning nominal profit of ₹ 87,84,167/- @ 0.86% which creates doubt why should the management of supplier company sale goods to the assessee and purchase the same from assessee on same day in the name of sister concern.

ii. The assessee has sold the goods on the day of purchase but these purchases were classified in the books of accounts under the head consumables. Thus the assessee has wrongly classified the goods under the head consumables though these goods were purchased for the purpose of the trading.

iii. No documentary evidence was brought on record about the movement of the goods.

iv. The directors of the companies namely M/s Induja Traders Pvt Ltd and M/s Kotsons Impex Pvt Ltd in their respective case have categorically accepted that these companies were engaged in generating of bogus bills.

18.1 In view of the above facts the transactions carried out by the assessee with the companies as discussed above are not free from the doubts. Now it was the onus of the assessee to prove the finding of the AO wrong by bringing tangible material on record. But the assessee failed to do so. Accordingly we hold that the transactions carried out by the assessee with the aforesaid companies was bogus in nature.

18.2 The next controversy arises for our consideration whether the entire bogus purchase should be added to the income of the assessee without considering corresponding sale or only the element of profit embedded in such bogus transaction of purchases and sales ? It is well settled law the income tax can be levied on the real income of the assessee and not on the income merely shown in the papers despite the fact that the assessee has indulged in the bogus activity. In other words, the element of profit embedded in such bogus activity should be brought to tax. In this regard we draw support and guidance from the judgment of Hon’ble Gujarat High Court in case Vijay Trading Co. vs. ITO reported in 76 taxmann.com 366, where the Hon’ble court held as under:

we are of the opinion that the Assessing Officer’s action in treating the purchases as bogus and adding the entire cost of purchases in the assessment ought not to have been restored by the Tribunal. The view taken by the Tribunal in the case of Vijay Proteins Ltd. v. CIT [1996] 58 ITD 428 (Ahd.) has been approved. In that view of the matter, keeping in mind the fact that not the entire amount covered under such purchase, but the profit element embedded therein would be subject to tax, we find that it shall be appropriate to restrict the disallowance made in this regard to 25% of the cost of such purchases in each year.

18.3 In the light of the above stated discussion, now it has to be seen the income which has been generated to the assessee out of such bogus transaction of purchase and sales. There is no standard jacket formula to work-out the income from the bogus activity carried out by the assessee. Some element of guesswork is required to determine the income of the assessee which is embedded in the bogus activities carried out by the assessee. In deciding the element of income, we find that Hon’ble Gujarat High Court in the case of Vijay Trading Co. (supra) has taken 25% of the purchase cost as income of the assessee. Respectfully following the same we hold that there is no infirmity in the order of the learned CIT (A).

18.4 The third question arises for the adjudication whether it is sine qua non for providing cross examination opportunity to the assessee. Admittedly, the entire addition was based predominantly on the information received from the VAT department, Maharashtra. It was alleged by the VAT department, Maharashtra that the entities namely M/s. Induja Traders Pvt Ltd. and M/s. Kotsons Impex Pvt. Ltd. were engaged in providing bogus bills against the commission. The above facts were also accepted by the Director of respective entities in their statement furnished and affidavit filed before the VAT authority. The statement of the directors of such entities collected by the VAT department, Maharashtra and affidavit furnished by them were handed over to the AO of the assessee. These statement were provided by the AO to the assessee for the rebuttal. However the assessee has demanded for the cross examination of the directors of the companies/entities as discussed above which was not provided either by the AO or by the learned CIT (A). Accordingly the learned AR before us contended that the addition made in this fact will become void as the principle of natural justice got violated herein.

18.5 In this regard we find cross examination is the sine qua non of due process of taking evidence. No adverse inference can be drawn against a party unless the party is put on notice of the case made out against him. He must be supplied the contents of all such evidences, both oral and documentary, so that he can prepare the case against him. This necessarily also postulates that he should cross examine the witness on whose statement AO relied to make such addition against the assessee. Now the question arise whether not providing the opportunity of cross examination will make the order or the addition void in the given facts and circumstances?

18.6 Coming to fact of the case on hand we find that the AO during assessment proceeding has provided the documentary evidences collected by the VAT department of Maharashtra along with copy of statement furnished and affidavit filed by the directors of the respective parties. The assessee was asked to substantiate the physical movement of goods and genuineness of the goods purchased and corresponding sales made to sister concern of suppliers. But the assessee failed to controvert the same based on documentary evidence, but demanded for cross examination of the directors. From the facts as elaborated above what is inferred is that the AO not only relied on the statement of directors made during search proceeding carried out by the Maharashtra VAT officials for holding the purchase as bogus but also he had other evidences which were not rebutted by the Assessee. In such facts and circumstances in our considered view the action of the AO is not void though providing cross examination of witness is an important part of the judicial proceedings. In this regard we find that the Hon’ble Supreme Court in case of Andaman Timber Industries vs. Commissioner of Central Excise Kolkata reported in 62 taxmann.com 3, where the Hon’ble Apex Court has held that it is necessary where addition is solely based on the statement of third party. The relevant finding of the Hon’ble Apex Court reads as under:

Not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected. It is to be borne in mind that the order of the Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the assessee disputed the correctness of the statements and wanted to cross-examine, the Adjudicating Authority did not grant this opportunity to the assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority.

18.7 But here in the case of assessee it is not the situation that the action of AO is solely based on statement of directors of alleged supplier of bogus bill rather it was based on the other evidences. Therefore we hold that the order of the AO cannot be held as void on account of no opportunity of being heard was granted. In view of the above we deem it fit to uphold the finding of the authorities below insofar the opportunity for cross examination not provided to the assessee.

18.8 Hence the ground of appeal of the assessee and the Revenue are dismissed.

19. The last issue raised by the assessee is that learned CIT (A) erred in confirming the addition for ₹ 1,65,71,352/- on account of disallowances of letter of credit charges.

20. Fact in brief is that the assessee incurred letter of credit (LC) charges against the payment made to M/s Induja Traders Pvt. Ltd and M/s Kotsons Impex Pvt Ltd for ₹ 90,97,613 and ₹ 74,37,739/- only. As the purchase from the impugned party was held as bogus. Therefore the AO treated the LC charges as expenses not related to business under the provision of section 37 of the Act. Accordingly the AO made addition of ₹ 1,65,71,352/- total income of the assessee.

21. The above action of the AO came to be confirmed by the learned CIT (A) by observing as under.

Since the purchases made from aforesaid two parties have been held to non genuine and bogus as has been held in the preceding paras of this order, and therefore, the LC charges pertaining to the said alleged bogus purchases cannot be allowed as deduction against the business income of the other business activities. Thus, the claim cannot be said to be allowable u/s.37(1) of the I.T. Act as the same is not incurred wholly and exclusively for the genuine other business activities of the appellant. Therefore, disallowance made by the AO is found correct and justified and hence, the same is confirmed.

22. Being aggrieved by the order of ld. CIT (A), the assessee is in appeal before us.

23. The Learned AR before us contended that the LC charges were incurred in the course of the business. These charges were paid to the bank and therefore the genuineness of such expenses cannot be doubted.

23.1 The learned AR alternatively contended that major part of the purchases have been admitted by the learned CIT (A), therefore if any disallowance needs to be made, then the same should be in proportion to the purchases disallowed by the learned CIT (A).

24. On the contrary, the Learned DR vehemently supported the order of the authorities below.

25. We have heard the rival contentions of both the parties and perused the materials available on record. As we have already given a finding that the assessee carried out bogus transactions of purchase and sales, thus in our considered view such charges are not eligible for the deduction. It is because the assessee was not carrying out the bogus transactions. Hence, we do not find any reason to interfere in the finding of the authorities below. Thus the ground of appeal of the assessee is dismissed.

25.1 In the result the appeal of the assessee is dismissed.

Coming ITA No- 3194/Ahd/16 of Revenue’s appeal for A.Y. 2010-11

26. The Revenue has raised following grounds of appeal:

1. The Ld.CIT(A) has erred in law and on facts in restricting the addition @ 25% amounting to ₹ 25,12,43,170/- as against ₹ 100,49,72,680/- on account of bogus purchase without properly appreciating the facts of the case and the material brought on record.

2. On the facts and in the circumstances of the case the Ld.CIT(A) ought to have upheld the order of the Assessing Officer.

3. It is, therefore, prayed that the order of the Ld.CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent.

4. The appellant craves leave to amend or later any ground or add a new ground, which may be necessary.

27. At the outset we note that the grounds of appeal raised by the Revenue has already been adjudicated by us along with appeal of the assessee in ITA No. 2908/AHD/2016 vide Paragraph No.18 of this order. For the detailed discussion please refer the relevant paragraph. Thus the ground of appeal of the Revenue is dismissed.

27.1 In the result the appeal of the Revenue is dismissed.

Coming to ITA No- 2915/Ahd/16 of Assessee’s appeal for A.Y. 2011-12

28. The assessee has raised following grounds of appeal:

1. That the order passed by the learned CIT(A) is bad in law and against the facts of the case and therefore the learned AO be directed to accept the returned income.

2. That the learned CIT(A) has erred in law and facts by not directing to delete the disallowance of foreign commission expenses of ₹ 32,27,452/- and therefore the learned AO should be directed to allow said expenses while computing the total income.

3. That the learned CIT(A) has erred in law and facts by confirming the addition of ₹ 8,69,374/-of late payment of Employees contribution to Provident Fund and therefore the learned AO should be directed to delete the addition while computing the total income.

4. That the learned CIT(A) has erred in law and facts by directing not directing to allow the expense of ₹ 2,32,22,722/- disallowed under section 14A of the Act and therefore the learned AO should be directed to delete the addition while computing the total income.

5. That the learned CIT(A) has erred in law and facts by confirming the addition of ₹ 56,94,49,965/- out of the purchases and therefore the learned AO should be directed to delete the addition while computing the total income.

6. That the learned CIT(A) has erred in law and facts by confirming the addition of ₹ 2,50,28,509/-of advertisement expanses and therefore the learned AO should be directed to delete the addition while computing the total income.

7. That the learned CIT(A) has erred in law and facts by confirming the disallowance of ₹ 3,19,231/- of additional depreciation and therefore the learned AO should be directed to allow the said allowance while computing the total income.

8. That the learned CIT(A) has erred in law and facts by confirming the disallowance of claim of ₹ 3, 63,06,857/- made under section 35D of the Act and therefore the learned AO should be directed to allow the said c aim while computing the total income.

9. That the appellant craves liberty to add, amend, alter and delete any grounds of appea l before the final hearing.

29. The first issue raised by the assessee is that the learned CIT (A) erred in confirming the disallowances of commission paid to foreign agent on account of non-deduction of TDS under section 195 of the Act.

30. The facts in brief are that in the year under consideration the assessee paid certain amounts as commission to its agents in USA and UAE. But the assessee did not deduct taxes under section 195 of the Act. The assessee was of the view that the impugned agent operates in their respective country having no business establishment in India and further the payment made to them in their own country directly was without involving any agent in India. Hence the income of the agent did not accrue or arise in India. Therefore it was not liable to deduct the tax.

30.1 However the AO disregarded the contention of the assessee by observing that the impugned income of commission accrued or arisen to the commission agents from the business connection in India. Therefore such income is chargeable to tax in India and therefore the assessee was under the obligation to deduct the taxes under section 195 of the Act.

30.2 It was also pointed out by the AO that the CBDT circular, relied by the assessee bearing number 786 dated 07/02/2000 has been withdrawn by the CBDT vide circular no- 07/2009 dated 22nd October 2009. Accordingly, the AO held that no reference can be made to such circular. In view of the above the AO disallowed the claim of the assessee on account of non-deduction of taxes under section 195 of the Act.

31. Aggrieved assessee preferred an appeal to the learned CIT (A).

31.1 The assessee before learned CIT (A) reiterated its submission that the agent to whom commission was paid has no establishment India. Similarly the commission agents have provided services outside India and payments were also made in abroad. Therefore such receipt of the foreign agent cannot be said to have accrued or arisen in India. Further it has submitted form 15CA and 15CB to the department at the time of making payment in which no tax liability was calculated. Thus it has no liability to deduct tax on such payment. The assessee in this regard also placed reliance on the order of the co-ordinate bench of this ITAT in ITA No 3065/Ahd/2010 of Pankaj A. Shah vs. ITO.

32. Further the Assessee submitted that the Double Taxation Avoidance Agreement stipulate where there is DTA Agreement between India and resident country of party to whom payment made then such income will be taxed in India only in the case such party is having permanent establishment India. Accordingly the assessee submitted that there is tax treaty between India and UAE which has been notified vide notification number GSR 356(E) dated 21-04-1995. Therefore it was not liable to deduct tax on such payment of commission.

33. The learned CIT (A) after considering the facts in totality directed the AO to verify nature of services received and allow the claim accordingly by observing as under:

It is the submission of the appellant before the AO that the agents do not have permanent establishment in India . It is also admitted facts as noted by AO in Para 4.2 of the assessment order that the appellant has claimed to have paid export commission to the foreign parties USA, UAE which is said to have been made for utilization of their services for procuring orders from overseas companies and services were said to have been offered to procure export sales orders However, the nature of actual services rendered seems to have not been examined by the AO. If the commission is paid to foreign agents for services rendered outside India merely for procuring sales orders and the agents do not have any PE in India, the ratio of said decision of ITAT in the case of Pankaj A. Shah will be applicable as such income of nonresident agents would not then be taxable in India. However, if there is any managerial or technical services rendered for which commission s paid, then the provisions for tax deduction will be applicable. Considering this aspect I direct the AO to verify the nature of services rendered by the three parties and allow the deduction o f commission if he finds that the actual services rendered by them is towards procurement o f orders outside India and had no PE in India. If however, he finds that the services are o f the nature of managerial, consultancy or technical nature, then the failure to make TDS form such payment vvili attract section 195 of the Act and consequent disallowance under section 40ia)(i) will be sustained This ground is thus disposed off accordingly.

34. Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.

35. The learned AR before us contended that the agents do not have any establishment in India and their services were rendered outside India. Therefore there cannot be any question of making any disallowance on account of non-deduction of taxes.

36. On the contrary, the learned DR before us vehemently supported the order of the authorities below.

37. We have heard the rival contention and perused the material available on record. Admittedly the assessee during the year under consideration have paid commission to its agent based in USA and UAE without deducting taxes under the provision of section 195 of the Act, therefore the same was disallowed by the AO under section 40(a)(i) r.w.s. 195 of the Act. The assessee pleaded before the learned CIT (A) that tax was not deducted because such income was not liable to be taxed in India. It was submitted that the commission paid to foreign agents for providing services outside India and they were not having permanent establishment or business connection in India. Therefore such payment is not income accruing or arising in India within the meaning of section 9 of the IT Act. It was also explained that non-residents were not chargeable to tax in India due to Double Taxation Avoidance Agreements. However, the learned CIT (A) observed that the nature of services were not explained by the assessee. Accordingly the learned CIT (A) directed the AO to verify the nature of services and allow the claim if commissions were paid for procurement of sales otherwise disallow the same if commission paid for services provided in nature of managerial or technical know-how as provided under section 9 of the Act.

38. At the outset we note the assessee before authorities below only contended that the agents have no establishment or business connection in India and payments were made outside India. As such the assessee has not substantiated the nature of services provided by the foreign agent. Accordingly we direct the assessee to provide the details of the services obtained from the commission agents to the AO.

Therefore in such circumstances we do not find any infirmity in the order of the learned CIT (A). Hence the ground of appeal of the assessee is allowed subject to verification.

39. Next issue raised by the assessee is that the learned CIT (A) erred in confirming addition of ₹ 8,69,374/- on account late payment of EPF.

40. The AO during the assessment proceeding observed that the assessee has made delayed payment of Employee contribution to the PF account to the tune of ₹ 8,69,374/-. Accordingly the AO, in view of the provision of section 36(1)(va) read with section 2(24)(x) treated the same as income of the assessee and added to the total income. Subsequently the learned CIT (A) also confirmed the same.

41. Being aggrieved by the order of the ld. CIT(A), the assessee in appeal before us.

42. At the outset, we note that the issue is covered against the assessee by the judgment of Hon’ble Gujarat High Court in the case of CIT vs. GSTRC reported in 41 taxmann.com 100 where it was held as under:

In view of the above and considering section 36(1)(va), read with sub-clause (x) of clause (24) of section 2, it is to be held that with respect to the sum received by the assessee from any of his employees to which provisions of sub-clause (x) of clause (24) of section 2 applies, the assessee shall be entitled to deduction in computing the income referred to in section 28 with respect to such sum credited by the assessee to the employees account in the relevant fund or funds on or before the ‘due date’ mentioned in Explanation to section 36(1)(va). Consequently, it is held that the Tribunal has erred in deleting respective disallowances being employees’ contribution to PF Account/ESI Account made by the Assessing Officer as, as such, such sums were not credited by the respective assessee to the employees ‘accounts in the relevant fund or funds on or before the due date as per the Explanation to section 36(1)(va) of the Act i.e. date by which the concerned assessee was required as an employer to credit employees’ contribution to the employees account in the Provident Fund under the Provident Fund Act and/or in the ESI Fund under the ESI Act.

42.1 Therefore, respectfully following the above judgment of Hon’ble jurisdictional High Court we dismiss the ground of appeal of the assessee.

43. The next issue raised by the assessee is that the learned CIT (A) erred in not directing the AO to delete the addition of ₹ 2,32,22,722/- under section 14A of the Act.

44. Briefly stated fact is that the AO found that the assessee during the year made investment in share and mutual funds and also incurring interest expenses but did not offer any disallowances of expenses. The assessee also failed to substantiate that the investment were made out of own fund available with it. Thus the AO held that the disallowances under sectionn14A of the Act was mandatory on account of expenses incurred for earning income not forming part of total income irrespective of the fact that such income is earned or not in year under consideration. Accordingly the AO computed the amount of disallowances under section 14A(2) read with rule 8D of income tax rule to the tune of ₹ 2,32,22,722/-being ₹ 2,0342,997 on account of interest expenses and ₹ 28,90,725/- on account of administrative expenses.

45. Aggrieved assessee preferred an appeal to the learned CIT (A).

46. The Assessee before the learned CIT (A) submitted that it had sufficient interest free fund to the tune of ₹ 10308.49 million in the form of shares, reserve & surplus and accumulated depreciation whereas the amount of investment stands as ₹ 72.69 million. Therefore no disallowances for interest expenses can be made. The assessee also submitted that the disallowances of administrative expenses can only be made @ 0.5% of the averages investment from which exempted income was earned. However, during the year it has not earned any dividend income on any of the investment. The assessee further contended that the disallowances under section 14A cannot be made over and above the exempt income. Hence disallowances in its case is not required as no exempt income was earned. The assessee in this regard placed its reliance on various case laws which are placed on record.

47. The learned CIT (A) after considering the facts in totality restricted the disallowances to the extent of exempt income earned in view decision of this ITAT in case of Madhusudan Industries Limited in ITA No-1715/Ahd/2011.

48. Being aggrieved by the order of the learned CIT (A), both the assessee and the Revenue are in appeal before us. The assessee is appeal for not directing to delete the entire addition whereas the Revenue is in appeal against relief provided by the learned CIT (A) in ITA No 3195/Ahd/2016. The corresponding ground no-1 of appeal raised by the Revenue reads as under:

1. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance made u/s.14A r.w. Rule 8D amounting to ₹ 2,32,22,622/- without properly appreciating the facts o f the case and the material brought on record.

49. Both the Learned AR and DR before us supported the order of the authority below to the extent favorable to them.

50. We heard the rival contention of the both parties and perused the materials available on record before us. The facts of the case have already been elaborated in previous paragraph, hence for the sake of brevity we are not inclined to repeat the same. At the outset we note that the AO has made the addition on two fold i.e. on account of interest expenses and on account of administrative expenses. For the purpose of decree we decided to adjudicate both fold of addition independently.

50.1 Coming to the addition made on account of interest expenses we note that the assessee before learned CIT (A) has claimed that it has sufficient interest free fund of ₹ 10308.49 million to meet the amount of investment of ₹ 72.69 million. The assessee in support of its claim has also submitted copy of balance sheet before the learned CIT (A). We find that the claim of the assessee was not controverted by the learned CIT (A) or by the learned DR. At the outset we note that it has been now settled position of law by the various courts that where own interest free fund of the assessee is sufficient enough to meet the investment then no any disallowances is warranted under section 14A r.w.r. 8D of the Act on account of interest expenses. In this respect we draw support from the judgment of Hon’ble jurisdictional high court in the case of CIT vs. Torrent Power Ltd reported in 363 ITR 474 where it was held as under:

It was noted from records that the assessee was having share holding funds to the extent of 2607.18 crores and the investment made by it was to the extent of`Rs.195.10 crores. In other words, the assessee had sufficient funds for making the investments and it had not used the borrowed funds for such purpose. This aspect of huge surplus funds is not disputed by the revenue which earned it the interest on bonds and dividend income. [Para 7]

50.2 Respectfully following the same we direct to the AO delete the addition made on the account of interest expenses.

50.3 Coming to the second fold of addition i.e. addition on account of administrative expenses. In this regard we note that the AR contended that during the year under consideration the assessee has not earned any exempt income. Therefore in absence of exempt income no such disallowances can be made. At the outset we note that the issue on hand has been covered by the order of the coordinate bench of this ITAT in case of Madhusudhan Industries Limited in ITA No-1715/Ahd/2011 where it was held by the coordinate bench that the disallowances of expenses under section 14A r.w.r 8D of the Act cannot be made over and above the exempt income earned by the assessee. Respectfully following the same we do not find any infirmity in the order of the learned CIT (A). In the result the ground of appeal of the assessee is allowed whereas the ground of appeal of the Revenue is dismissed.

51. Next issue raised by the assessee is that the learned CIT (A) erred in confirming the part disallowances for ₹ 56,94,49,965/- on account of bogus purchases.

52. We also find that the Revenue is also in appeal on the very same issue against the relief provided by the learned CIT (A) to the tune of 75% in ITA no. 3195/Ahd/2016. The corresponding ground number 2 of the revenue appeal reads as under:

The ”Ld.CIT (A)”has erred in law and on facts in restricting the addition @ 25% amounting to ₹ 56,94,49,965/- as against ₹ 227,77,99,860/- on account of bogus purchases without properly appreciating the facts of the case and the material brought on record.

53. At the outset we note that very same issue has been decided by us in previous paragraph of this order in ITA No- 2908/Ahd/2016 of assessee’s appeal and ITA No-3194/Ahd/2016 of revenue’s appeal corresponding to assessment year 2010-11. For detailed discussion, please refer to the relevant paragraph number 18 of this order. Thus the ground of appeal of the assessee and the Revenue are dismissed.

54. Next issue raised by assessee vide ground number 6 is that the learned CIT (A) erred in confirming the addition of ₹ 2,50,28,509/- on account of advertisement expenses.

55. The necessary fact for deciding the issue on hand is that, the assessee during the year incurred certain advertisement expenses. Out of the same an amount of ₹ 2,50,28,509/- deferred by the assessee in the books of account maintained under Companies Act for the reason that the benefit of same will arise in future. But the assessee while computing the income under the Act claimed the same as allowable expenses being the expenses incurred in the year under consideration.

55.1 However the AO disallowed the same by holding that the assessee failed to establish that the impugned amount was incurred for business purposes. The assessee also failed to provide the details such as name, address, PAN of the person to whom such amount was paid.

56. Aggrieved assessee carried the matter to the learned CIT (A) who sustained the addition by observing as under:

The appellant submitted that payment of certain expenses are affected, benefit o f which will be available over a period of time and accordingly, the said expenses are deferred over the period of benefit in books of accounts to match marketing concept. The explanation given by the appellant is very vague. It has not been properly explained about the business requirement of incurring the expenditure benefit to business of the appellant on incurring such expenditure, payment details and details of recipient of such expenditure was not satisfactory explained by the appellant during the assessment proceedings as well as during the appellate proceedings. Therefore, the additions made by the AO are found justified hence confirmed.

57. Being aggrieved by the order of ld. CIT-A, the assessee is in appeal before us.

58. The learned AR before us submitted that part of the advertisement expenses were admitted by the AO and part of the advertisement expenses which were treated as deferred revenue expenses by the assessee were disallowed. As per the learned AR the AO cannot give different treatment of the same expenses merely on the reasoning that some of the expenses was shown as deferred revenue expenses in the balance sheet prepared under the companies Act but the same was claimed as deduction in the computation of income while determining the taxable income of the assessee. However, the learned AR before us prayed to restore the issue to the file of the AO for fresh adjudication as per the provisions of law. The learned AR also assured to file the requisite details to the AO.

59. On the other hand, the learned DR did not object on restoration of the issue to the file of the AO for fresh adjudication as per the provisions of law.

60. We have heard the rival contentions of both the parties and perused the materials available on record. First of all, we note that the facts as recorded in the order of the authorities below are not complete. There is no information about the total advertisement expenses incurred by the assessee in the order of the authorities below. As such the assessee out of total advertisement expenses, has treated part of such expenses as deferred revenue expenses under the companies Act but the same was claimed in the computation of income by the assessee on the reasoning that there is no concept of deferred revenue expenses under the Act. As such there was no doubt raised by the AO about the advertisement expenses claimed by the assessee in the profit and loss account. What was doubted the advertisement expenses which were treated as deferred revenue expenditure and therefore the same was disallowed. The question arises, can the AO made the disallowance of part of the expenses on the reasoning that the assessee failed to furnish the business purpose viz a viz the identity of the party. The answer stands in negative provided part of the expenses were allowed by the AO and part of the expenses which were disallowed by the AO were pertaining to the same parties. However, such facts are not arising from the order of the authorities below. In such a situation, we are inclined to restore the issue to the file of the AO for de-novo adjudication as per the provisions of law. It is also directed to the assessee that it shall cooperate in the set-aside proceedings before the AO and liberty is also granted to it for filing the necessary evidences in support of its claim. Hence the ground of appeal of the assessee is allowed for the statistical purposes.

61. Next issue raised by the assessee vide ground no- 7 is that the learned CIT (A) erred in confirming the disallowances of additional depreciation for ₹ 13,19,231/-only.

62. At the outset, the learned AR for the assessee submitted that he has been instructed by the assessee not to press this ground of appeal. Accordingly we dismiss the same as not pressed.

63. The last issue raised by the assessee vide ground no. 8 is that the learned CIT (A) erred in confirming the addition of ₹ 3,63,06,857/- on account of claim made under section 35D of the Act.

64. The AO observed that the assessee in computation of income claimed deferred revenue expenses amounting to ₹ 3,63,06,857/- under section 35D of the Act. Accordingly the assessee was asked for explanation.

64.1 The assessee submitted that during the year it has claimed preliminary expenses of ₹ 4,11,16,813/- only and out of the same, an amount of ₹ 3,63,06,857/- pertain to earlier years. The assessee also submitted that these expenses were incurred with respect to Hybrid Bus T-cab project development. The assessee further claimed that in scrutiny assessment under section 143(3) of earlier years, these expenses were allowed.

64.2 However the AO observed that only limited expenditure qualify under the provision of section 35D of the Act which are as follow.

• Legal charges for drafting any agreement between the assessee and any other persons relating to the setting up of the business of assessee.
• Legal charges for drafting the memorandum and articles of association if tax payers is a company.
• Printing expenses of the expenses of the memorandum and articles of association if the tax payer is a company.
• Registration fees of a company under the provisions of the Companies Act
• Expenses in connection with the public issue of shares or debentures of a company underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus.
• Any other expenditure which is prescribed (nothing is prescribed so far).

64.3 The AO further observed that in the statement 3 of annexure form 3CD filed by the assessee, it has claimed 5 different amount for 5 different years but never provided details of any project during assessment proceedings. The amount shown in annexure filed are as under:

Total Preliminary expenses incurred
Product Development cost	2,40,49,779
1/5th of Preliminary Expenses incurred [as per section 35D(1)]		48,09,956
Admissible Preliminary Expenses
Exp for the FY 2010-11 (AY 2011-12)	48,09,956
Exp for the FY 2009-10 (AY 2010-11)	55,36,984
Exp for the AY 2008-09(AY 2009-10)	88,19,793
Exp for the FY 2007-08(AY 2008-09)	1,51,11,916
Exp for the FY 2006-07 (AY 2007-06)	68,38,164
	4,11,16,813

64.4 The AO further observed that the assessee in annexure to form 3CD as sated above has claimed project development cost for ₹ 2,40,49,956/- and claimed 1/5 of the same for ₹ 48,09,965/- but the same was not claimed in the statement of income. Thus the assessee has taken contradictory stand. Further the assessee also not provided the detail of expenses despite given various opportunities.

64.5 The AO also found that claim of deferred revenue expenses under section 35D were not examined by the revenue in the assessment proceedings of previous years. Accordingly the AO, in view of the above disallowed the claim of the assessee for ₹ 3,63,06,857/- and added the same to the total income of the assessee

65. Aggrieved assessee carried the matter before learned CIT(A) who also confirmed the disallowances made by the AO by observing as under:

The submission filed by the appellant during assessment proceedings were considered by the AO, but did not find satisfactory for the reasons given in the assessment order. During the appellant proceedings, the appellant stated that this expenditure has been allowed while passing assessment order u/s.143(3) of the Act. The contention of the appellant is found factually incorrect, as this is the first order u/s.143(3). There is no previous order passed u/s.143(3) of the Act for this assessment year. Therefore, contention of the appellant is rejected, the additions made by the AO are found justified, hence confirmed. This ground of appeal dismissed.

66. Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.

67. The learned AR before us submitted that the deduction claimed under section 35D of the Act in the year under consideration amounting to ₹ 3,63,06,857/- relates to the expenses incurred in the earlier years which were admitted as deferred revenue expenses in the assessment framed under section 143(3) of the Act. Accordingly, the learned AR contended that the question of allowability of such expenses cannot arise in the year under consideration without disturbing the year in which such expenses were incurred by the assessee.

68. On the other hand the learned DR vehemently supported the order of the authorities below.

69. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion we find that the genuineness of expenses incurred by the assessee in the earlier year which were treated as deferred revenue expenditure and the same were accepted by the revenue in the assessment framed under section 143(3) of the Act cannot be doubted in the year under consideration. It is because the expenses were not incurred in the year under consideration. But the deduction was claimed in the year under consideration as the same was treated as deferred revenue expenses in the earlier assessment year and that fact was also admitted by the revenue. Accordingly we are of the view that such expenses cannot be disallowed in the year under consideration without disturbing the year to which such expenses relate. Accordingly, we are not impressed with the finding of the authorities below. However, in the interest of justice and fair play, we direct the AO to verify before allowing the deduction of such expenses whether these expenses were treated as deferred revenue expenditure in the earlier assessment years and the same were accepted in the assessment framed under section 143(3) of the Act. Accordingly, with this direction we allow the claim of the assessee. Thus the ground of appeal of the assessee is allowed in terms of above.

69.1 In the result the appeal of the Assessee is partly allowed for the statistical purposes.

Coming to ITA No 3195/Ahd/2016 of Revenue’s appeal for A.Y. 2011-12

70. The Revenue has raised following ground of appeal:

1. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance made u/s.14A r.w. Rule 8D amounting to ₹ 2,32,22,622/- without properly appreciating the facts o f the case and the material brought on record.

2. The ”Ld.CIT (A)” has erred in law and on facts in restricting the addition @ 25% amounting to ₹ 56,94,49,965/- as against ₹ 227,77,99,860/- on account of bogus purchases without properly appreciating the facts of the case and the material brought on record.

3. On the facts and in the circumstances of the case, the ”Ld.CIT (A)”ought to have upheld the order of the Assessing Officer.

4. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.

71. The first issue raised by the Revenue is that the learned CIT (A) has erred in deleting the addition of ₹ 2,32,22,622/- made under section 14A of the Act read with rule 8D of Income Tax Rule.

72. At the outset we note that the issue raised by the Revenue has been decided along with the Assessee’s appeal in ITA No. 2915/Ahd/2016 vide ground no-4 of assessee appeal. For detail discussion please refer the paragraph no. 50 of this order. Accordingly we hold that the same is not required to adjudicate separately again. Thus the ground of appeal of the Revenue is dismissed.

73. The second issue raised the Revenue is that the learned CIT (A) erred in restricting the addition upto 25% made on account of bogus purchased of ₹ 227,77,99,860/-

74. At the outset we note that the issue raised by the Revenue has been decided along the Assessee appeal in ITA No. 2915/Ahd/2016 vide ground no-5 of assessee appeal. For detail discussion please refer the paragraph no.53 of this order. Accordingly we dismiss the ground of appeal of the Revenue.

75. Issues raised in ground no 3, 4 and 5 by the revenue are of general nature. Hence the same are dismissed as infructuous.

75.1 In the result the Revenue’s appeal is dismissed.

Coming to ITA No 319/Ahd/2018 of Assessee’s appeal for A.Y. 2012-13

76. The assessee has raised the following grounds of appeal:

1. That the learned CIT(A) has erred in law and facts by confirming the addition of late payment of Employees Contribution to Provident fund and employee’s State Insurance u/s.36(1)(va) of ₹ 16,05,476/- and therefore the learned AO should be directed to delete the said addition while computing the total income.

2. That the learned CIT(A) has erred in law and facts by confirming the disallowance of ₹ 4,35,75,893/- and therefore the learned AO should be directed to allow the said claim of ₹ 4,35,75,893/- while computing the total income.

3. The learned CIT(A) has erred by not directing the learned AO to drop the penalty proceedings initiated under section 271(1)(c) of the Act.

4. That the appellant craves liberty to add, amend, alter and delete any grounds of appea l before the final hearing.

77. The first issue raised by the assessee is that the learned CIT (A) erred in upholding the addition made on account of late payment of EPF contribution for ₹ 16,05,476/-.

78. At the outset we note that the similar ground raised by the assessee in ITA no. 2915/Ahd/2016 corresponding to A.Y. 2011-12 which is decided against the assessee vide paragraph no. 42 of this order. For detail discussion, please refer the above mentioned paragraph. Accordingly, we dismiss the ground of appeal of the assessee.

79. The second issue raised by the assessee is that the learned CIT (A) erred in confirming the addition of ₹ 4,35,75,893/- on account of claim made under section 35D of the Act.

80. At the outset we note that the similar ground raised by the assessee in ITA no. 2915/Ahd/2016 corresponding to A.Y. 2011-12 which is decided in favour of the assessee subject to the verification vide paragraph no. 69 of this order. For detail discussion, please refer the above mentioned paragraph. Accordingly we allow the ground of the assessee subject to verification.

81. The issues raised in ground 3 and 4 by the assessee in its appeal are either premature to decide or consequential. Therefore we dismiss the same.

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

Coming to ITA No 942/Ahd/2018 of Revenue’s appeal for A.Y. 2012-13

82. The Revenue has raised following grounds of appeal:

1. The Ld.CIT(A) has erred in law and on facts in deleting the addition made on account of disallowance u/s.40(a)(ia) of the Act for non deduction of tax on commission payable to foreign parties.

2. The Ld.CIT(A) has erred in law and on fact in deleting the disallowance of ₹ 4,52,04,552/- made u/s.14A r.w.r 8D by the Assessing Officer.

2.1 The Ld.CIT(A) has failed to appreciate that the onus lies on the assessee to demonstrate that it has interest free funds available with it for making such investment and not other way around.

2.2 The Ld.CIT(A) has failed to appreciate that as per Section 106 of Evidence Act, when any fact is especially within the knowledge of any person, the burden of providing the fact is upon him.

3. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.

83. The first issue raised by the revenue is that the learned CIT (A) erred in deleting the disallowances of commission expenses ₹ 1,17,85,923/- under section 40(a)(i) of the Act.

84. At the outset we note that the similar ground raised by the assessee in ITA no. 2915/Ahd/2016 corresponding to A.Y. 2011-12 which is decided in favour of the assessee vide paragraph No. 37 to 38 of this order. For detail discussion, please refer the above mentioned paragraph. Accordingly we dismiss the ground of Revenue’s appeal.

85. The second issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition of ₹ 4,52,04,552/- under section 14A r.w.r. 8D of Income Tax rule.

86. At the outset we note that the similar ground raised by the Revenue in ITA no. 3195/Ahd/2016 corresponding to A.Y. 2011-12 which is decided against the Revenue vide paragraph no. 72 of this order. For detail discussion, please refer the above mentioned paragraph. Accordingly we dismiss the ground of Revenue’s appeal.

86.1 In the result the appeal of the Revenue is dismissed.

Coming to ITA No 337/Ahd/2018 of Assessee’s appeal for A.Y. 2013-14

87. The assessee has raised following grounds of appeal:

1. That the learned CIT(A) has erred in law and facts by confirming the addition of late payment of employees contribution to Provident Fund and Employees State Insurance u/s.36(1)(va) of ₹ 20,22,968/- and therefore the learned AO should be directed to delete the said addition while computing the total income.

2. That the learned CIT(A) has erred in law and facts by confirming the disallowance on account of Deferred tax Expense u/s.35D of the Act of ₹ 2,92,40,917/- and therefore the learned AO should be directed to allow the said claim of ₹ 2,92,40,917/- while computing the tota l income.

3. The learned AO be directed to drop the penalty proceedings initiated under section 271(1)(c) of the Act.

4. That the appellant craves liberty to add, amend, alter and delete any grounds of appea l before the final hearing.

88. The first issue raised by the assessee is that the learned CIT (A) erred in upholding the addition made on account of late payment of EPF contribution for ₹ 20,22,968/-.

89. At the outset we note that the similar ground raised by the assessee in ITA no. 2915/Ahd/2016 corresponding to A.Y. 2011-12 which is decided against the assessee vide paragraph no. 42 of this order. For detail discussion, please refer the above mentioned paragraph. Accordingly the ground of appeal of the assessee is dismissed.

90. The second issue raised by the assessee is that the learned CIT (A) erred in confirming the addition of ₹ 2,92,40,917/- on account claim made under section 35D of the Act.

91. At the outset we note that the similar ground raised by the assessee in ITA no. 2915/Ahd/2016 corresponding to A.Y. 2011-12 which is decided in favour of the assessee vide paragraph no 69 of this order subject to verification. For detailed discussion, please refer the above mentioned paragraph. Accordingly we allow the ground of the assessee here in this case also subject to verification.

92. The issues raised in ground 3 and 4 by the assessee in its appeal either are premature to decide or consequential. Therefore we dismiss the same.

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

Coming to ITA No 943/Ahd/2018 of Revenue’s appeal for A.Y. 2013-14

94. The Revenue has raised following grounds of appeal:

1. The Ld. CIT(A) has erred in law and on facts in deleting the addition made on account of disallowance u/s. 40(a)(ia) of the Act for non deduction of tax on commission payable to foreign parties of ₹ 1,33,28,210/-.

2. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of ₹ 5,13,80,020/-made u/s. 14A r.w.r. 8D by the Assessing Officer.

2.1 The Ld. CIT(A) has failed to appreciate that the onus lies on the assessee to demonstrate that it had interest free funds available with it for making such investment and not other way around.

2.2 The Ld. CIT(A) has failed to appreciate that as per Section 106 of Evidence Act, when any fact is especially within the knowledge of any person, the burden of proving the fact is upon him.

3. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.

95. The first issue raised by the Revenue is that the learned CIT (A) erred in deleting the disallowance of commission expenses of ₹ 1,33,28,210/- under section 40(a)(i) of the Act.

96. At the outset we note that the similar ground raised by the assessee in ITA no. 2915/Ahd/2016 corresponding to A.Y. 2011-12 which is decided in favour of the assessee vide paragraph no 37 to 38 of this order. For detail discussion, please refer the above mentioned paragraph. Accordingly we dismiss the ground of the revenue’s appeal.

97. The second issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition of ₹ 5,13,80,020/- under section 14A r.w.r. 8D of Income Tax Rule.

98. At the outset we note that the similar ground raised by the Revenue in ITA no. 3195/Ahd/2016 corresponding to A.Y. 2011-12 where we have decided the issue against the Revenue vide paragraph no 72 of this order. For detail discussion refer the above mentioned paragraph. Accordingly we dismiss the ground of the revenue appeal.

98.1 In the result the appeal of the Revenue is dismissed.

Coming to ITA No 320/Ahd/2018 of Assessee’s appeal for A.Y. 2014-15

99. The assessee has raised following grounds of appeal:

1. That the learned CIT(A) has erred in law and facts by confirming the addition of Employees Contribution to PF and ESI u/s 36(l)(va) of ₹ 52,93,615/- and therefore the learned AO should be directed to allow the said claim of ₹ 52,93,615/-

2. That the learned CIT(A) has erred in law and facts by confirming the disallowance o f claim u/s 35D of ₹ 2,04,21,124/- and therefore the learned AO should be directed to allow the said claim of ₹ 2,04,21,124/-

3. That the learned CIT(A) has erred in law and facts by confirming the addition of undisclosed income of ₹ 2,50,965/-on the basis of TDS reflected in 26AS and therefore the learned AO should be directed to allow the said claim of ₹ 2,50.965/-

4. The learned CIT(A) has erred by not dropping the penalty proceedings initiated under section 271(l)(c)of the Act.

5. That the appellant craves liberty to add, amend, alter and delete any grounds of appea l before the final hearing.

100. The first issue raised by the assessee is that the learned CIT (A) erred in upholding the addition made on account of late payment of EPF contribution for ₹ 52,93,615/-.

101. At the outset we note that the similar ground raised by the assessee in ITA no. 2915/Ahd/2016 corresponding to A.Y. 2011-12 which is decided against the assessee vide paragraph no 42 of this order. For detail discussion, please refer the above mentioned paragraph. Accordingly we dismiss the ground of the assessee’s appeal.

102. The second issue raised by the assessee is that the learned CIT (A) erred in confirming the addition of ₹ 2,04,21,124/- on account claim made under section 35D of the Act.

103. At the outset we note that the similar ground raised by the assessee in ITA no. 2915/Ahd/2016 corresponding to A.Y. 2011-12 which is decided in favour of the assessee vide paragraph no. 69 of this order subject to verification. For the detailed discussion, please refer the above mentioned paragraph. Accordingly we allow the ground of the assessee’s appeal subject to the verification.

104. The 3rd issue raised by the assessee is that the learned CIT (A) erred in upholding the addition made by the AO for ₹ 2,50,965/- on account of mismatch in the amount of income disclosed in the books of accounts viz a viz reflected in the form 26 AS.

105. The AO during the assessment proceedings found that the assessee has not shown certain income in its books of accounts whereas there was the income in the form 26AS. The details of the same is reproduced as under:

Sr. No.	Name of the party	TDS amount as per 26AS	Income as per 26AS
1.	Chanchal Agarwal	2022	101124
2.	Piyush Finehold Pvt. Ltd.	1685	84270
3.	Subhadra ERngs Pvt. Ltd.	1124	56180
4.	Directorate of purchase and stores	1200	60000
5.	Rajesh     Prabhulal Detroai	1456	72810
6.	Narayan Steel	20851	208512
	TOTAL	28338	582896

105.1 Accordingly, the AO was of the view that the assessee has not shown an income of ₹ 5,82,896/- in its books of accounts. Thus, the AO added the same to the total income of the assessee.

106. Aggrieved assessee preferred an appeal to the learned CIT (A).

107. The assessee before the learned CIT (A) furnished the details with respect to certain parties and contended that the income has already been shown in the books of accounts. The details of the same stands as under:

1.	Naryan Steel	₹1,87,661/-
2.	Piyush Finhold Pvt Ltd	₹ 84,270/-
3.	Directorate of Purchase and Store	₹ 60,000/-

107.1 The assessee with respect to the other parties contended that the above income does not belong to it and therefore it was not shown in the books of accounts.

108. However, the learned CIT (A) after considering the submission of the assessee deleted the addition made by the AO in part by observing as under:

As the income of Rs.1,87,661/- in respect of Narayan Steel Rs.84,270/- from Piyush Finhold Pvt. Ltd. and 60,000/- in respect of Directorate of purchase and stores are reflected in the books of account and show as income the addition will amount to double addition, and therefore is deleted. As the balance amount of Rs.2,50,965/- which is not shown by the appellant as income is confirmed.

109. Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.

110. The learned AR before us submitted that the income from the aforesaid parties do not belong to the assessee. Therefore, the same cannot be added to the total income of the assessee. The learned AR further prayed to restore the issue to the file of the AO for fresh adjudication.

111. On the other hand the learned DR raised no objection if the matter is set aside to the file of the AO for fresh adjudication as per the provisions of law.

112. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, the onus lies upon the assessee to furnish the necessary details as desired by the AO during the assessment proceedings. However, in the case on hand, the revenue before rejecting the contention of the assessee should have verified the fact from the aforesaid parties whether they have paid any income to the assessee. It is for the reason that the form 26AS is generated by the income tax Department on the basis of information furnished in the TDS returns by various parties. Accordingly, in the interest of justice and fair play, we restore the issue to the file of the AO for fresh adjudication as per the provisions of law. It is also pertinent to note that the assessee shall cooperate in the assessment proceedings and it will be at liberty to file the necessary details in support of its contention. Hence the ground of appeal of the assessee is allowed for the statistical purposes.

113. The issues raised in ground 4 and 5 by the assessee in its appeal either are premature or consequential. Therefore the same are dismissed.

114. In the result the appeal of the assessee is partly allowed for the statistical purposes.

Coming to ITA No. 944/Ahd/2018, an appeal by the Revenue for A.Y. 2014-15

115. The Revenue has raised the following grounds of appeal:

1. The Ld. CIT(A) has erred in law and on facts in deleting the addition of ₹ 2,22,91,3287-made on account of disallowance u/s. 40(a)(ia) of the Act for non deduction of tax on commission payable to foreign parties.

2. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of ₹ 13,58,8187-made u/s. 14A r.w.r. 8D by the Assessing Officer.

2.1 The Ld. CIT(A) has failed to appreciate that the onus lies on the assessee to demonstrate that it had interest free funds available with it for making such investment and not other way around.

2.2 The Ld. CIT(A) has failed to appreciate that as per Section 106 of Evidence Act, when any fact is especially within the knowledge of any person, the burden of proving the fact is upon him.

3. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.

116. The first issue raised by the Revenue is that the learned CIT (A) erred in deleting the disallowances of commission expenses for ₹ 2,22,91,328/- under section 40(a)(i) of the Act.

117. At the outset we note that the similar ground raised by the assessee in ITA no. 2915/Ahd/2016 corresponding to A.Y. 2011-12, which is decided in favour of the assessee vide paragraph no 37 to 38 of this order. For the detailed discussion, please refer the above mentioned paragraph. Accordingly we dismiss the ground of the revenue’s appeal.

118. The second issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition of ₹ 13,58,818/- under section 14A r.w.r. 8D of Income Tax rule.

119. At the outset we note that the similar ground raised by the Revenue in ITA no. 3195/Ahd/2016 corresponding to A.Y. 2011-12 where we have decided the issue against the Revenue vide paragraph no 72 of this order. For detail discussion refer the above mentioned paragraph. Accordingly we dismiss the ground of the revenue appeal.

119.1 In the result the appeal of the Revenue is dismissed.

Coming to ITA No 1679/Ahd/2018, an appeal filed by the Assessee for A.Y. 2015-16

120. The assessee has raised following grounds of appeal:

1. That the learned Commissioner of Income Tax (Appeals) has erred in law and facts by confirming the addition of ₹ 36,629/- being the employee to ESI under section 36(1)(va) and therefore the learned AO should be directed to delete the said addition in full.

2. That the leaned Commissioner of Income Tax (Appeal) has erred in law and facts by disallowing claim under section 35D of ₹ 1,48,84,140/- and therefore the learned AO should be directed to allow the said claim while computing total income.

3. That the appellant craves liberty to add, amend, alter and delete any grounds of appeal before the final hearing.

121. The first issue raised by the assessee is that the learned CIT (A) erred in upholding the addition made by the AO on account of late payment of EPF contribution for ₹ 36,629/- only.

122. At the outset we note that the similar ground raised by the assessee in ITA No. 2915/Ahd/2016 corresponding to A.Y. 2011-12, which is decided against the assessee vide paragraph no. 42 of this order. For the detailed discussion, please refer the above mentioned paragraph. Accordingly we dismiss the ground of the assessee’s appeal.

123. The second issue raised by the assessee is that the learned CIT (A) erred in confirming the addition of ₹ 1,48,84,140/- on account of the claim made under section 35D of the Act.

124. At the outset we note that the similar ground raised by the assessee in ITA no. 2915/Ahd/2016 corresponding to A.Y. 2011-12, which is decided in favour the assessee vide paragraph no. 69 of this order subject to verification. For the detail discussion, please refer the above mentioned paragraph. Accordingly we allow the ground of the assessee’s appeal subject to verification.

124.1 In the result, the appeal of the assessee is partly allowed.

125. The combined results of the appeals are as follows:

ITA No.	A.Y	Appeal By	Result
2908/Ahd/2016	2010-11	Assessee	Dismissed
3194/Ahd/2016	2010-11	Revenue	Dismissed
3195/Ahd/2016	2011-12	Revenue	Dismissed
2915/Ahd/2016	2011-12	Assessee	Partly allowed for statistical purpose
319/Ahd/2018	2012-13	Assessee	Partly allowed
942/Ahd/2018	2012-13	Revenue	Dismissed
337/Ahd/2018	2013-14	Assessee	Partly allowed
320/Ahd/2018	2014-15	Assessee	Partly allowed for statistical purpose
943/Ahd/2018	2013-14	Revenue	Dismissed
944/Ahd/2018	2014-15	Revenue	Dismissed
1679/Ahd/2018	2015-16	Assessee	Partly allowed

Order pronounced in the Court on 29/07/2021 at Ahmedabad.