KARAMTARA ENGINEERING LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX- CENTRAL CIRCLE 8(1), MUMBAI

The brief facts of the case are that the assessee is a company engaged in the business of manufacturing, fabrication, galvanizing, erection and commissioning of telecom and transmission towers. The assessee filed its return of income for the Assessment Year 2010-11 on 15.10.2010 declaring a total income of ₹12,72,72,988/-. The assessment (original) was completed under section 143(3) of the Income-tax Act, 1961 (“the Act”) on 19.12.2013 assessing the total income at ₹15,09,78,440/-. During the original assessment proceedings, the Assessing Officer made an addition towards bogus purchases amounting to ₹1,19,76,329/- from five parties being M/s. KC Enterprises, M/s. Arihant Traders, M/s. Om Corporation, M/s. Shubham Enterprises and M/s. Hiten Enterprises. In further appeal, the Income Tax Appellate Tribunal, Mumbai vide order dated 10.03.2017, restricted the disallowance to 5% of the bogus purchases.

Subsequently, the Assessing Officer received information that the assessee had obtained accommodation purchase bills from ten entities who were hawala dealers and who had issued bogus invoices without physical delivery of goods. During the reassessment proceedings, the Assessing Officer observed that the assessee had made purchases amounting to ₹3,31,90,109/- from ten parties, viz. M/s. KC Enterprises (₹59,31,958/-), M/s. Arihant Traders (₹25,99,999/-), M/s. Om Corporation (₹65,000/-), M/s. Rajshree Enterprises (₹56,87,500/-), M/s. Shubham Enterprises (₹72,61,852/-), M/s. Hiten Enterprises (₹57,37,500/-), M/s. R.K. Enterprises (₹26,00,000/-), M/s. Shree Enterprises (₹15,63,024/-), M/s. Seva Enterprises (₹3,14,438/-) and M/s. Bombay Mercantile Corporation (₹14,28,838/-), amounting to ₹3,31,90,109/-. According to the Assessing Officer, these concerns were listed by the Maharashtra Sales Tax Department as hawala dealers issuing accommodation bills without actually supplying goods and, therefore, the purchases were bogus in nature.

In response to the show cause notice, the assessee submitted that the issue relating to purchases from five parties viz. M/s. KC Enterprises, M/s. Arihant Traders, M/s. Om Corporation, M/s. Shubham Enterprises and M/s. Hiten Enterprises for purchases of ₹1,19,76,329/-, had already been examined in the original assessment proceedings conducted under section 143(3) of the Act. The assessee submitted that although additions were made in the original assessment, the Income Tax Appellate Tribunal had restricted the addition to only 5% of the bogus purchases. The assessee also submitted before the Assessing Officer that 4 no transactions whatsoever had been undertaken during the relevant year with M/s. Shree Enterprises, M/s. Seva Enterprises and M/s. Bombay Mercantile Corporation and pointed out certain discrepancies in the figures taken by the Investigation Wing. The assessee further submitted that all payments had been made through normal banking channels and the invoices gave complete particulars such as VAT registration numbers, addresses, description of goods, quantity and rates. The assessee contended that the Assessing Officer had relied upon third-party information received from the Sales Tax Department and the Investigation Wing without carrying out any independent enquiry and without granting the assessee an opportunity to cross- examine the persons whose statements had been taken. According to the assessee, once the sales declared by the assessee had been accepted, the corresponding purchases could not be treated as bogus in the absence of any evidence showing suppression of sales or artificial inflation of expenditure.

The Assessing Officer, however, rejected the assessee's explanation. He observed that the earlier assessment had already covered purchases of ₹1,19,76,329/- from five parties and, therefore, only the balance amount of ₹2,12,13,780/- was required to be added in the reassessment proceedings. Accordingly, the Assessing Officer treated the balance purchases as unexplained expenditure under section 69C of the Act and added the same to the total income. The Assessing Officer also noted that M/s. Karamtara Steel Pvt. Ltd. and M/s. Karamtara Fasteners Pvt. Ltd. had amalgamated with the assessee with effect from 01.04.2012 pursuant to the scheme approved by the Hon'ble Delhi High Court. Since these amalgamating companies had made bogus purchases of ₹3,16,000/- and ₹81,59,600/- respectively, the Assessing Officer made a further protective addition of ₹84,75,600/- in the hands of the assessee. Accordingly, the Assessing Officer computed the income at ₹18,06,67,420/- after making additions of ₹2,12,13,780/- on account of bogus purchases and ₹84,75,600/- on protective basis.

In appeal, the learned CIT(A) dismissed the appeal and confirmed the reassessment order. The learned CIT(A) held that the Assessing Officer had correctly relied upon information received from the Investigation Wing and the Maharashtra Sales Tax Department that the suppliers were hawala dealers. The CIT(Appeals) observed that the documents given by the assessee did not prove actual physical delivery of goods and the assessee had failed to produce any evidence to show the transportation or physical movement of goods. Accordingly, CIT(Appeals) confirmed the addition of ₹2,12,13,780/- under section 69C of the Act and also confirmed the protective addition of ₹84,75,600/- made by the Assessing Officer in the hands of the assessee. The learned CIT(A) also did not restrict the addition to 5% as directed by the Tribunal in the original assessment proceedings on the ground that each assessment year is a separate year.

We have heard the rival contentions and perused the material on record. With respect to Ground Number 2 (Addition amounting to Rs. 2,96,88,980/-u/s 69C of the Act is bad in law), during the course of hearing, the learned Counsel for the assessee drew our attention to a detailed chart placed on record and pointed out various factual discrepancies in the reassessment order. The Counsel for the assessee submitted that the Assessing Officer was wrong in treating purchases from M/s. Shree Enterprise, M/s. Seva Enterprise and M/s. Bombay Mercantile Corporation as bogus purchases, since the assessee had not entered into any transactions with these three parties during the relevant assessment year. The learned Counsel drew our attention to the ledger accounts at pages 179, 181 and 184 of the Paper Book to show that no transactions took place with these parties during impugned assessment year. The Counsel for the assessee further submitted that in the case of M/s. Rajshree Enterprise, the Assessing Officer has taken the figure of purchases at ₹56.87 lakhs, whereas the actual purchases were only ₹43.50 lakhs (at page 178 of Paper-Book). The learned Counsel also drew our attention to page 19 of the Paper Book to point out that there were discrepancies with respect to other parties and submitted that all details had been duly submitted before the Assessing Officer during the assessment proceedings.

On perusal of the chart and the documents placed before us, we are of the considered view that these facts require proper verification by the Assessing Officer. Since these factual aspects go to the root of the addition made by the Assessing Officer, we deem it appropriate, in the interest of justice, to set aside the matter to the file of the Assessing Officer for de novo consideration. The Assessing Officer shall, after affording adequate opportunity of hearing to the assessee, verify (i) whether any transactions were actually undertaken by the assessee with M/s. Shree Enterprise, M/s. Seva Enterprise and M/s. Bombay Mercantile Corporation during the relevant assessment year; (ii) to check the correct quantum of purchases from M/s. Rajshree Enterprise and other enterprises as pointed by the Counsel for the assessee at Column 4 of the Table. The Assessing Officer is directed to give adequate opportunity of hearing to the assessee and then decide the issue in accordance with law.

Accordingly, Ground No. 2 of the assessee's appeal is allowed for statistical purposes.

With respect to Ground No. 3 relating to the protective addition of ₹81,59,600/- on account of alleged bogus purchases of M/s. Karamtara Fasteners Private Limited and ₹3,16,000/- on account of bogus purchases of M/s. Karamtara Steel Private Limited, the learned Counsel drew our attention to page 841 of the Paper Book and submitted that the additions in respect of the aforesaid bogus purchases have already been made on a substantive basis in the hands of the respective amalgamating companies. It was pointed out that in the case of M/s. Karamtara Fasteners Private Limited, the learned CIT(A) has restricted the substantive addition to 5% of the bogus purchases, whereas in the case of M/s. Karamtara Steel Private Limited, the learned CIT(A) has sustained the addition to the extent of 16.82%. Thus, the taxability of the impugned purchases has already been made substantively in the hands of the respective entities who had made the purchases. Once the substantive addition has been made and confirmed in the hands of the concerned entities by ld. CIT(A), the very basis for sustaining a protective addition in the hands of the assessee ceases to exist. A protective addition is made only as a precaution where there is uncertainty regarding the person in whose hands a particular income is assessable. However, once such uncertainty stands resolved by confirmation of the substantive additions in the hands of M/s. Karamtara Fasteners Private Limited and M/s. Karamtara Steel Private Limited, there remains no justification for continuing with the protective addition in the hands of the assessee merely because the said companies were subsequently amalgamated with it. In these circumstances, we hold that the protective addition of ₹84,75,600/- cannot be sustained and accordingly direct the Assessing Officer to delete the same. Ground No. 3 raised by the assessee is allowed.

We are not adjudicating the alternate contention raised by the Counsel for the assessee in ground No. 11 since the primary matter has been restored to the file of the Assessing Officer for de-novo consideration.

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