MAKERS LABORATORIES LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX-CC 4(3)(1), MUMBAI

First, we take up Ground No. 3, which challenges the substantive addition of Rs. 59,25,227/- made on account of the alleged inflated value of purchases.

Briefly stated, the facts of the case are that the assessee e-filed its original return of income for the assessment year under consideration on 27.09.2011, declaring a total income of Rs. 4,50,27,180/-. The case was selected for scrutiny, and an assessment order under section 143(3) of the Act was completed on 04.02.2014, accepting the returned income.

Subsequently, on 23.12.2014, search and seizure operations under section 132 of the Act were carried out in the case of M/s. IPCA Laboratories Group. Simultaneously, survey proceedings under section 133A of the Act were carried out at the premises of the assessee at Kandivali (West), Mumbai, during which purchase-related documents were impounded.

In addition, a survey under section 133A of the Act was conducted in the case of one supplier concern, M/s. Reynolds Petro Chem Ltd., on 16.04.2015. 2

Based on the statements recorded during the search and survey proceedings, specifically those of Shri Manoj Suresh Jayawant, an employee of M/s. IPCA Laboratories Ltd., and Shri Jagdish Chandra Somani, alleged to be controlling M/s. Reynolds Petro Chem Ltd., the Assessing Officer (AO) inferred that the assessee company had indulged in over-invoicing of purchases of the raw material "MAPA" (Methyl Amino Propyl Amine) from M/s. Reynolds Petro Chem Ltd.

The AO concluded that the purchase rate was inflated by Rs. 73/- per kg and that the alleged excess payment was returned in cash. Multiplying the alleged inflation of Rs. 73/- per kg by the total quantity of 81,167.5 kg purchased by the assessee, the AO made an addition of Rs. 59,25,227/- on account of inflated purchases.

On appeal, the Ld. CIT(A) confirmed the addition. Aggrieved, the assessee is in appeal before the Tribunal.

The Ld. AR for the assessee submitted that the addition is founded purely on third-party statements, conjectures and surmises, without any independent incriminating evidence unearthed against the assessee.

During the survey proceedings conducted under section 133A at the assessee's business premises, no incriminating diary, loose paper, cash ledger or unaccounted cash was found. The impounded documents comprised regular books, invoices, delivery challans and ledgers supporting the genuineness of the purchases. Moreover, no statement of any director or employee of the assessee was recorded admitting to any inflation of purchases.

With respect to the statement of Shri Manoj Suresh Jayawant, it was submitted that he was an employee of M/s. IPCA Laboratories Ltd., a separate corporate entity with distinct business premises, management and staff. His statement was subsequently retracted by way of a sworn affidavit explaining that it was recorded under duress. The Ld. AR relied on the decisions in Pullangode Rubber Produce Co. Ltd. v. State of Kerala (91 ITR 18) (SC), Vinod Solanki v. Union of India (92 SCL 157) (SC), and M. Narayanan & Bros. v. ACIT (339 ITR 192) (Mad). Furthermore, Shri Jayawant's statement was factually untenable: he presumed the invoice rate to be Rs. 420/- per kg and the market rate to be Rs. 347/- per kg, yielding a difference of Rs. 73/- per kg, whereas the assessee's actual average purchase price for the year stood at Rs. 335/- per kg.

Regarding the statement of Shri Jagdish Chandra Somani recorded during the survey at M/s. Reynolds Petro Chem Ltd., it was pointed out that:

The assessee also submitted regular invoices, transport documents, delivery challans and proof of payments through banking channels. However, none of these primary records were found to be defective or non- genuine. Moreover, AO completely failed to unearth any cash trail indicating that money was returned to the assessee.

We also noticed that the assessee also demonstrated consistent and healthy financial performance for the past three years, i.e., AY 2009-10 to AY 2011-12, with operating margins (EBITDA) improving from 10.06% to 11.95% and Net Profit ratios maintained around 9.47% to 10.02%, negating the hypothesis of profit suppression through inflated purchases.

Whereas on the contrary, Ld. DR strongly supported the orders of the lower authorities. The Ld. DR submitted that the search on the IPCA Laboratories Group and the survey on M/s. Reynolds Petro Chem Ltd. clearly exposed the modus operandi of over-invoicing of raw materials and receiving cash kickbacks. He contended that the AO had validly quantified the inflated purchase element based on specific admissions and field enquiries and prayed that the order of the Ld. CIT(A) be sustained.

We have heard the counsel for both parties at length, perused the material available on record and also considered the judicial precedents cited. As per the facts of the case, the dispute centres on whether the AO was justified in making an addition of Rs. 59,25,227/- as alleged inflated purchases of MAPA from M/s. Reynolds Petro Chem Ltd.

A perusal of the record reveals that the entire foundation of the addition rests upon statements recorded during search/survey actions in third-party concerns, namely, Shri Manoj Suresh Jayawant, an employee of M/s. IPCA Laboratories Ltd., and Shri Jagdish Chandra Somani, connected with M/s. Reynolds Petro Chem Ltd.

Although a survey under section 133A was conducted at the assessee's Kandivali premises, the Revenue could not lay its hands on any incriminating document, secret cash ledger or trail demonstrating that the purchase prices were inflated or that any portion of the invoice payments flowed back in cash to the assessee. The impounded documents merely comprised purchase bills, delivery challans and regular accounts.

The assessee made written representations dated 21.11.2017 and 08.12.2017 seeking cross-examination of Shri Jagdish Chandra Somani. The AO denied this opportunity while utilizing his adverse statement against the assessee. It is a well-settled principle of law that relying on an adverse third- party statement without granting an opportunity of cross-examination violates the principles of natural justice. In Andaman Timber Industries v. CCE [2015] 281 CTR 241 (SC), the Hon'ble Supreme Court held:

The statement of Shri Jagdish Chandra Somani was recorded under section 133A of the Act. The Hon'ble Apex Court in CIT v. S. Khader Khan Son [2013] 352 ITR 480 (SC) held that section 133A does not empower any Income-tax authority to record a statement on oath, and such a statement lacks standalone evidentiary value without independent corroboration. In the present case, there is no corroborative material showing any cash refund to the assessee.

The statement of Shri Manoj Suresh Jayawant was subsequently retracted by way of a sworn affidavit explaining that it was rendered under pressure. Even on merits, his computation of Rs. 73/- per kg, being the difference between Rs. 420/- and Rs. 347/-, is at total variance with the assessee's actual average purchase price of Rs. 335/- per kg for the relevant year. The AO could not extrapolate an isolated instance or an unverified formula across 56 separate transactions without considering market dynamics, bulk discounts and quality terms.

The purchases were supported by delivery challans, tax invoices and payments through banking channels, none of which were demonstrated to be bogus or non-existent. Furthermore, the assessee reported robust profits with an EBITDA of 11.95% and Net Profit of 9.47% on a turnover of Rs. 54.21 crores, higher than the preceding years.

In view of the absence of independent incriminating material, the denial of cross-examination, the failure to establish any cash trail and the full substantiation of the purchases through regular banking channels, the addition of Rs. 59,25,227/- cannot be sustained in law. The addition made by the AO and confirmed by the Ld. CIT(A) is, accordingly, deleted. Accordingly, Ground No. 3 raised by the assessee is allowed.

Ground Nos. 1 and 2 challenge the validity of the reopening of the assessment under sections 147 and 148 of the Act. Since the addition has been deleted on merits under Ground No. 3, the legal grounds challenging the validity of the reopening have become academic in nature and are dismissed as rendered infructuous.

In the result, the appeal filed by the assessee is allowed.