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Income Tax Appellate Tribunal, “A”, BENCH KOLKATA
Before: SHRI S.S.GODARA, JM &DR. A.L.SAINI, AM
Per Dr. A.L. Saini, AM:
The captioned cross appeals filed by the assessee as well as revenue , pertaining to assessment year 2011-12, are directed against the common order passed by the Commissioner of Income Tax (Appeal)-6, Kolkata, in appeal no. CIT(A), Kol-6/10098/2017-18, which in turn arises out of common assessment order passed by the Assessing officer u/s 143(3) of the Income Tax Act, 1961 (in short the “Act”) dated 31.03.2014.
First, we shall take assessee’s appeal in ITA No. 952/Kol/2018 for A.Y. 2011- 12 wherein the grounds of appeal raised by the assessee are as follows:
For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the disallowance made in assessment of the prior period expenses of Rs. 60,509/- debited in the Audited P & L a/c as per the details filed on a wrong notion that according to the mercantile system of accounting followed by the assessee company the expenses can be allowed only in the year in which it pertains irrespective of the date & year of finalization and receipt of the bill amounts payable. 2. For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the disallowance of aforesaid prior period expenses of Rs. 60,509/- without considering the facts on record that the expenditure, though related to earlier years, were crystalised and settled during the year under assessment only upon receipt of the respective bills from the concerned parties during the year and bill amounts also cleared and paid during the year justifying the legality and validity of the assessee’s claim of deduction of the said prior period expenses in A.Y 2011-12. 3. For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the disallowance on a/c of purchase of raw materials i.e. M.S Waste & Scrap worth Rs. 2,19,75,602/- & Rs. 3,82,65,967/- made from M/s IRO Steel Corporation & M/s Ganapati Udyog respectively by treating them as bogus purchases, relying blindly on the Central Excise Deptt’s Report dt. 20.06.2012 and a later Report of the I.Tax Inspector dt. Jan, 2014 alleging their non-existence at their given addresses, without at all considering the facts and the merit of the case. 4. For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the disallowance of bogus purchase of Page | 2
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 raw materials worth Rs. 6,02,41,569/- in the aggregate ( Rs. 2,19,75,602/- + Rs. 3,82,65,967/-) mainly because of the alleged non-availability of those two parties without at all considering the facts explained by the assessee with supporting documents that the purchases made and the prices paid by a/c payee cheques, duly recorded in its books of a/c e.g the purchase / stock / production Registers, were all genuine and that the raw materials purchased were consumed for production of excisable goods.
Without prejudice to the Gr. Nos. 3 & 4 above and without in any way accepting the addition of such sums as bogus purchases, the addition so made is bad in law since the sale of finished excisable goods manufactured out of the consumption of the raw materials so purchased has not been doubted and hence it may kindly be held accordingly.
For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the disallowance of purchase of raw materials i.e. M.S. Waste & Scrap worth Rs. 2,60,44,477/- made from another party M/s Kalimata Vyapar Pvt. Ltd. by treating it as bogus purchase merely on assumption and presumption owing to the alleged non-compliance of that party to the A.O’s summons u/s 131 of the I. Tax Act without at all considering the facts and merit of the case. The disallowance so made and confirmed is bad in law and should be deleted.
For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the disallowance of bogus purchase of raw materials worth Rs. 2,60,44,477/- made from the said party without at all considering the facts explained by the assessee with supporting documents that the purchases made and the prices paid by a/c payee cheques, duly recorded in its books of a/c e.g the purchase / stock / production Registers, were all genuine and that the raw materials purchased were consumed for production of excisable goods.
Without prejudice to the Gr. Nos. 6 & 7 above and without in any way accepting the addition of the said sum as bogus purchase, the addition so made is bad in law since the sale of finished excisable goods manufactured out of the consumption of the raw materials so purchased has not been doubted and hence it may kindly be held accordingly.
For that your petitioner craves the right to put additional grounds and / or to alter / amend / modify the present grounds before or at the time of hearing.
Now, we shall adjudicate these grounds one by one. 3. Ground Nos. 1 and 2 pertaining to disallowance of prior period expenses of Rs. 60,509/-.
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 4. Brief facts qua the issue are that during the assessment proceedings, the assessing officer noticed that from the Profit and Loss Account as well as scheduleNo. 22(b) of Tax Audit Report, the assessee company has incurred expenses of Rs. 60,309/- related to earlier years. The ASSESSING OFFICER was of the view that as per accounting standard, prior period expenses are not eligible for deduction. Hence, no expenditure related to the earlier period is eligible for deduction u/s. 37 of the Income Tax Act.In view of the above, Rs. 60,309/- was disallowed as expenditure and added back to the total income of the assessee company.
Aggrieved by the order of the Assessing officer, the assessee carried the matter in appeal before the ld. CIT(A) who has confirmed the addition made by the Assessing officer observing the following:
“I have gone through the submission of the assessee as well as the contention of the Assessing officer and also perused the material placed before me and on a perusal of the same. I find that the impugned expenses pertains to bills and vouchers which were not received by assessee in time and hence they were debited by the assessee in the year under consideration. However, the fact of the matter is that assessee is following mercantile system of accounts and hence such expenses can be allowed only in year to which it pertains irrespective of date of receipt of the bills etc. In the background of the aforesaid finding I find that the assessee is not entitled to the claim of deduction on such sum of Rs. 60,509/- in this year and hence this ground of the assessee is dismissed.”
Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.
The ld Counsel submits before the Bench that the bills relating to prior period expenses were received in the assessment year 2011-12, that is, the expenses crystalized during the assessment year 2011-12, hence these expenses should be allowed during the assessment year 2011-12.
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 8.On the other hand, the ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity.
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other material available on record. We note thatall such expenditure though relating to earlier year but having materialized during the year and in respect of which bills were received during the year therefore, the entire amount having been paid during the year, the whole of the amount is allowable during the assessment year 2011-12. Hence, we direct the assessing officer to allow Rs. 60,509/- on account of prior period expenses which has been crystallized during the assessment year 2011-12.
10.Ground Nos. 3 to 8 raised by the assessee relate to addition made by assessing officer on account of bogus purchases from three entities, namely M/s IRO Steel Corporation Rs. 2,19,75,602/-, M/s Ganapati Udyog Rs. 3,82,65,967/- and M/s Kalimata Vyapar Pvt. Ltd. Rs. 2,60,44,477/-.
Facts of the case which can be stated quite shortly are as follows: The assessing officer noticed during the scrutiny proceedings that assessee had fraudulently availed CENVAT credit on the basis of fake Central Excise invoices issued by three fictitious registered dealers namely:(i) M/s IRO Steel Corporation, Howrah Amta Road, Bargachia, Sandhya Bazar, Jagatballavpur, Howrah- 711404, (ii) M/s. Ganpati Udyog, Kaliatala, Balitikuri, Howrah-711 113 and (iii) M/s Kalimata Vyapar Pvt Ltd.
In view of the above, an enquiry was carried out by deputing inspector of Income Tax in respect of the actual existence and nature of business of above three parties.
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 This issue was discussed with assessee and explanation was sought. The assessee has submitted explanation vide its letter dated 21.03.2013, the relevant portion of which is reproduced as under:
“With reference to your queries as to why raw materials purchases from (i) IRO Steel Corporation, Howrah, Amta Road, Bargachta, Sandhya Bazar, Jagathballavpur, Howrah- 711404 (II) M/s. Gapapatt Udyog, Kalitala, Baltikuri, Howrah-711113 and in ourBamunari not being of the nature of bogus purchases as stated by you should not be added back In the total Income returned and also as to why the CENVAT Credit of Rs.4,56,78,181/- claimed In respect of the aforesaid purchases should not disallowed. In this connection and under Instructions of our client, we have to submit that as under:- a) As you are well aware and as will be apparent from the records that the company is engaged in manufacturing of excisable goods namely Railway Parts & Articles of Iron and Steel and in such manufacturing M.S. Waste & Scrap are used as raw materials. b) The company has maintained day-to-day Stock Registers in respect of raw material i.e., M.S. Waste and Scrap showing receipts of raw materials as well as issuing of the same for consumption of raw materials. All the purchases of raw materials are supported by computer printed weighment slips, challans and bills for purchases etc c) All the payments in respect of each and every purchase of raw materials from several persons including the aforesaid three persons are by Account Payee Cheques only and in support of the same we produce herewith our bank statement and such payment have been credited In the Bank Accounts of all such payees. d) Quality Management System at our factory ensures quality control at all levels and Commercial documents arc well examined at plant on receipt of supply and as stated above all the payments for purchases of raw materials are be Account Payee Cheques only. e) In respect of raw materials purchased, chemicals tests are carried out in respect of purchases of Bazar Scrap, Sponge Iron, Nickel, Magnesium etc. f) ………………………………. g) Purchase from all the aforesaid three persons are at the same rate or lower rate at which similar raw materials have been purchased from other suppliers other than the aforesaid three persons and It Is not a case of the Department that the prices paid to the aforesaid three persons for purchases of raw materials were excessive or unreasonable as compared to payments to other for purchases of such raw materials.
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 h) Quantitative-wise Stock Register has been maintained for purchases of raw materials, consumption of raw materials and sale of finished goods. AH the raw materials purchased from the aforesaid three persons are duly accounted for In such Stock Register and all such raw materials purchased from the aforesaid three persons have been consumed during the year and finished goods have been received on consumption of such raw materials and which have been sold to the Railways. It will be appreciated by your goodself that there could no production without consumption of raw materials and If the company has manufactured certain quantity of goods and those have been supplied to Railways, such production could not have been possible had such raw materials purchased from the aforesaid three persons not consumed In respect of such production and hence, It proves beyond any doubt that such raw materials had been purchased from the aforesaid three persons also In addition to purchase from other suppliers. i) ………………………. …………………………. ………………………………… ………………………………….. j) in this connection it may not be out of place to mention that none of the aforesaid persons from whom such purchases were made arc In anyway related and/or connected to the Directors of Company or any Executives of the Company and the only relation with the aforesaid persons Is business relation i.e. Supply of raw materials to your appellant-company. …………………… ………………. (s) ……………………….
As regards disallowances/additions of CENVAT Credit of Rs.4,56,78,181/-, this is to submit that as already been explained in detail above since the purchases were not bogus andsince the purchases are fully supported by delivery challans, weighment slips etc. and the payment have been made by 'Account Payee Cheques, question of such additions/disallowances should not and cannot arise. Moreover, CENVAT Credit having been taken In the books are to that extent books having been already credited by that amount and hence even otherwise also the question of any addition or disallowance did not arise. Moreover, the entire amount of Excise Dusty paid having been realized from the Railways and credited In P&L A/a, question of any disallowance or addition on this account did not arise as no amount can be said to have claimed as expenditure. Moreover, the excess credit for CENVAT Credit, If any, will be refundable to the Excise Department and It has nothing to do with the Income Tax Department and hence the question of any addition or disallowance of the aforesaid amount did not arise. Moreover, the whole of such amount does not relate to this year.
In view of the aforesaid facts and circumstances, the matter 'may kindly be considered sympathetically and Judiciously and a decision in the matter may kindly be taken accordingly.”
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 However, the Assessing officer rejected the written submissions of the assessee and held that contention of the assessee was mostly based on the premises that proper paper documentation are there to support their transaction. Mere completing the paper formality will not make a transaction genuine while the surrounding circumstances suggest otherwise. Theassessing officer was of the view that assessee had made accommodation adjustments in respect of some of the parties. In view of the above findings, it was held by assessing officer that the purchases made during the financial year 2010-11 from these three parties amounting to Rs. 8,62,86,046/- is bogus therefore he made addition to the tune of Rs.8,62,86,046/-.
Aggrieved by the order of the Assessing officer the assessee carried the matter in appeal before the ld. CIT(A) who has confirmed the addition made by the Assessing officer observing the following:
“Such grounds are regarding addition of Rs. 8,62,86,046/- on account of bogus purchase. In such respect, the assessing officer has relied mainly on the enquires conducted by the Excise Department. The assessing officer had also attempted to verify the parties involved from whom the purchases is alleged to have been made. However, the parties could not be traced at such addresses as given by assessee. The assessee on it part has contended that the entire addition has been made without considering the day-to-day stock, production register etc. The assessee has also furnished the consumption of scrap before me and has contended that the production and the corresponding sales which is to railways only have not been doubted by the assessing officerand the entire focus and the reliance by the assessing officer is on Excise report. Assessee has contended that such report itself is pending adjudication before CEGAT Tribunal. The assessee also contended that the payment to the impugned parties were made through cheque and mere non verification of the parties in person cannot be a ground for addition. I have considered the relevant material so placed before me and I find that the assessee has miserably failed to appreciate that the findings by the Excise Department are enough by itself and as such the assessing officer has rightly relied upon the report of Excise Department. As far as the assessee’s contention that the day-to-day stock, production register etc. has not been verified I do not find any substance in such respect and as such the addition so made by the assessing officer of Rs. 8,62,86,046/- is affirmed. Hence the grounds No. 4 & 5 are dismissed.” 13. Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 14. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that the Assessing officer has disallowed purchase of raw material from following three concerns namely: i) M/s IRO Steel Corporation Rs. 2,19,75,602/- ii) M/s Ganapati Udyog Rs. 3,82,64,967/- iii) M/s Kalimata Vyapaar Pvt. Ltd. Rs. 2,60,44,477/-
We note that assessing officerfor making such addition has merely relied on the enquiry by the Excise Department and has not made any attempt to enquiry about such transaction or consumption in respect of such raw material. As regards item (iii) assessing officer has merely added it since the party didn’t respond to notice u/s 133(6) of the Act. Learned Counsel submitted before us that no enquiry was conducted even by Excise Department in respect of item No. (iii) being Kalimata Vyapaar Pvt. Ltd. The assessing officerin the order has mentioned that it had issued notice u/s 133(6) to all such parties but they could not be traced and after that Inspector was also deputed who also failed to find the whereabouts of such parties and hence these additions were made by the assessing officer. The assessing officer failed to take cognizance of other evidences so placed by assessee. The Ld. CIT(A) merely reiterated the contention so made by the assessing officer and he has not given any separate finding vis-a-vis the contention raised before it by the assessee in the appellate proceedings especially with regard to payment through banking channel, stock of raw material having been duly received and also production (having been accepted byassessing officer) and also subsequent sale of finished goods (not disputed by assessing officer). We note that ldCIT(A) failed to address these issues.Since, sales and production were not challenged by assessing officer no addition could have been made in respect of purchases of input raw material.
We note that complete documentary evidences were furnished before the assessing officer i.e. the bill for purchases, the receipt of material, the payments by Page | 9
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 cheque, the entry made in the stock register & production register and vis-a-vis all such documents, no adverse finding has been made by the assessing officer. Hence, assessing officer’s contention is merely based on Excise Department’s allegation which is wholly unjustified. The assessing officer ought to verify the bill for purchases, the receipt of material, the payments by cheque, the entry made in the stock register & production register etc.
We note that assessing officer has not raised any doubt about the production so made by the assessee and since such raw material has been consumed, its purchases cannot be denied in any manner nor its consumption can be denied. The assessee also submits that the consumption of M.S. Scrap which is one of the main ingredients and has been procured mainly from these three parties and without which production couldn’t have been achieved. If these three parties are excluded, production of finished goods is not possible. The product manufactured and subsequent sales which is mainly to Govt, body i.e. Railways has been accepted by the assessing officer and hence purchase of raw material cannot be denied in any manner. The assessing officer’s contention regarding such purchases being bogus is not at all acceptable, since the manufacture and the sales has not been doubted, the purchase of raw material and its consumption cannot be doubted in any manner and hence the addition is bad in law.
We note that the entire addition has been made by assessing officer without any proper examination in the matter and merely on materials allegedly collected by Excise Department hence the assessing officer’s addition is bad in law. For that assessee relied on the Judgment of the Hon`ble Supreme Court in the case of CIT v. Odeon Builders Pvt Ltd. (2019) 418 ITR 315 (SC) wherein it was held as follows:
“2. We have perused the review petition and find that the tax effect in this case is above Rs. 1 crore, that is, Rs. 6,59,27,298/-. Ordinarily, therefore, we would have recalled our order dated 17th September, 2018, since the order was passed only on the basis that the tax effect in this case is less than Rs. 1 crore. 3. However, on going through the judgments of the CIT, ITAT and the High Court, we find that on merits a disallowance of Rs.19,39,60,866/- was based solely on third party
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 information, which was not subjected to any further scrutiny. Thus, the CIT (Appeals) allowed the appeal of the assessee stating: "Thus, the entire disallowance in this case is based on third party information gathered by the Investigation Wing of the Department, which have not been independently subjected to further verification by the AO who has not provided the copy of such statements to the appellant, thus denying opportunity of cross examination to the appellant, who has prima facie discharged the initial burden of substantiating the purchases through various documentation including purchase bills, transportation bills, confirmed copy of accounts and the fact of payment through cheques, & VAT Registration of the sellers & their Income Tax Return. In view of the above discussion in totality, the purchases made by the appellant from M/s Padmesh Realtors Pvt. Ltd. is found to be acceptable and the consequent disallowance resulting in addition to income made for Rs. 19,39,60,866/-, is directed to be deleted." 4. The ITAT by its judgment dated 16th May, 2014 relied on the self-same reasoning and dismissed the appeal of the revenue. Likewise, the High Court by the impugned judgment dated 5th July, 2017, affirmed the judgments of the CIT and ITAT as concurrent factual findings, which have not been shown to be perverse and, therefore, dismissed the appeal stating that no substantial question of law arises from the impugned order of the ITAT. 5. In these circumstances, the Review Petitions are dismissed.”
16.The assessing officer has treated the purchases as bogus without rejecting the books of account u/s 145(3) and hence assessing officer’s action is bad in law.We note that the Revenue has failed to furnish any evidence that the money has been recycled back to the assessee and in absence of such finding, the addition cannot be made by the assessing officer and for that assessee has relied on the judgment of the Hon`ble Supreme Court in the case of PCIT v. TejuaRohitkumar Kapadia (2018) 94 taxmann.com 325 (SC), wherein it was held as follows:
“Where purchases made by assessee-trader were duly supported by bills and payments were made by account payee cheque, seller also confirmed transaction and there was no evidence to show that amount was recycled back to assessee, Assessing Officer was not justified in treating said purchases as bogus under section 69C of the Act. SLP dismissed”
We note that in any event if the assessing officer wants to make addition on account of bogus purchases, he may make addition only percentage based on gross profit of preceding years, for that assessee relied on the judgment of the Hon`ble Calcutta High Court in the case of PCIT v. Subarna Rice Mills (2018) 96 taxmann.com 286 (Cal), wherein it was held as follows: Page | 11
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 “4. The assessee's appeal before the Commissioner (Appeals) failed and by an order of August 25, 2014, the assessment order of March 28, 2013 was upheld. The Commissioner looked into the facts, the statements made by or on behalf of the assessee and the books of the assessee that had been looked into at the time of survey which the assessee subsequently claimed had been lost or destroyed and, in respect whereof, no complaint had been lodged by the assessee. On facts, the Commissioner (Appeals) found no grounds to interfere with the quantum of excess stocks discovered by the assessing officer in course of the survey. The Commissioner also agreed with the assessing officer as to the quantum of income which had escaped assessment. 5. There are two aspects to the order impugned dated June 30, 2015 passed by the Appellate Tribunal: the factual findings of the Commissioner (Appeals) as appear to have been interfered with by the Appellate Tribunal; and, the direction given for taking sales of rice and bran into account before arriving at the additional income which could be said to have escaped assessment. 6. Before the Commissioner (Appeals), the assessee had relied on a document signed by an official of the Food Corporation of India that evidenced the stock figures at the relevant point of time. The Commissioner (Appeals) dealt with such aspect of the matter in great detail and by referring to the admitted statements of the representatives of the assessee, which were not sought to be controverted at any point of time on behalf of the assessee, concluded that it was the physical verification of the stocks undertaken by the Assessing Officer in course of the survey operation that was to be given primacy. Indeed, the Commissioner (Appeals) found that there was no evidence that the FCI official who had issued the certificate had undertaken any physical verification of the stock at the rice mill of the assessee and the document appeared to have been filled up by the assessee and merely signed by the FCI official. Such part of the order of the Commissioner (Appeals) was unexceptionable and could not have been interfered with by the Appellate Tribunal. Indeed, no reasons have been furnished by the Appellate Tribunal in disregarding the physical verification of the stocks carried out by the Assessing Officer. Further, the area of the godown as indicated in the FCI certificate was of no consequence since the Assessing Officer found stocks piled outside the godown at the time of the survey. 7. Accordingly, to the extent that the Appellate Tribunal accepted the quantum of additional stocks on the basis of the certificate issued by the concerned FCI official, such order is unacceptable and is set aside. The order of the Commissioner (Appeals) in such regard is restored. The additional quantum as discovered during the course of the survey operation will fasten to the assessee. 8. However, the other aspect of the matter was dealt with by the Appellate Tribunal on a point of principle and such matter does not call for any interference. 9. According to the Appellate Tribunal the value of the entire quantity of additional stocks that were discovered in course of the survey operation could not be regarded as the additional income of the assessee and amenable to tax. There was a specific ground taken before the Appellate Tribunal, which was a legal question, as to whether the undisclosed purchase could be taken as the additional income without reference to the possible sale of the paddy when converted. 10. The assessee refers to a judgment of the Gujarat High Court Vijay Trading v. ITO [2016] 388 ITR 377/76 taxmann.com 366. The principle enunciated in such judgment is that when undisclosed purchases of such nature are discovered, it is only the profit embedded in the transaction which can be added to the total income. The Gujarat High Court relied on some of its previous judgments to hold that "not the entire purchase Page | 12
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 price but only the profit element embedded in such purchases can be added to the income of the assessee." 11. In the circumstances and particularly since the factual findings rendered by the Commissioner (Appeals) as to the quantum of additional stocks have now been restored, the order impugned on the methodology for the ascertainment of the income which escaped assessment would pass muster. The Appellate Tribunal merely directed the gross profit that the additional purchase was capable of generating to be regarded as the additional income for tax to be assessed on such basis. Such view of the Appellate Tribunal does not call for any interference. 12. Accordingly, ITAT No.196 of 2015 and GA No.4047 of 2015 are disposed of by modifying the judgment and order of the Appellate Tribunal dated June 30, 2015 as indicated.”
In sum and substance, we would like to state that complete documentary evidences were furnished before the assessing officer i.e. the bill for purchases, the receipt of material, the payments by cheque, the entry made in the stock register & production register and vis-a-vis all such documents, no adverse finding has been made by the assessing officer.When the sales figures shown by the assessee has been accepted in totality, the entire purchases made by the assessee cannot be held it to be bogus since it is common knowledge that sales of goods cannot taken place without purchase of goods in the first place. So, therefore, in the light of the evidences adduced to prove the genuineness of the transactions and when the fact remains that the sales has been accepted by the Assessing Officer in totality, the action of the Assessing Officer to disallow the entire purchases is not justifiable.We note that the assessee did purchases, manufactures the goods and sell the finished goods. In that view of the matter, as natural corollary, not the entire amount covered under such purchase, but the profit element embedded therein would be subject to tax. Considering the facts narrated above and to cover the small misgivings we restrict the addition @4% of purchases, that is, Rs. 34,51,441/- ( 4% of Rs.8,62,86,046) and balance amount of Rs. 8,28,34,605/- (Rs.8,62,86,046-Rs.34,51,441) is directed to be deleted.
Now we shall take revenue’s appeal in ITA No. 1059/Kol/2018 for A.Y. 2011- 12 wherein the grievances raised by the revenue are as follows:
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 1. The CIT(A) erred in allowing the belated payment of Employees Contribution to ESI without appreciating that the amendment to section 43B of I.T. Act is regarding Employer's Contribution and not Employee's Contribution . 2. The CIT(A) did not appreciate that the amendment was made only in Sec. 43B and not in Sec 36(1) (va) and therefore the amendment to Sec. 43B should be confined to Sec. 43B alone. 3. The CIT(A) erred in deleting the addition of provision of wealth tax and provision of gratuity and leave encashment in the book profit without appreciating the fact correctly that these provisions are unascertained liability and is to be added in the book profit as per clause (c) of Explanation 1 of Section 115JB of the Act. 4. The CIT(A) order is perverse as the CIT(A) had not followed the BIFR r/w AAIFR order in totality, where the BIFR had categorically stated in para 15.8g of its order that accumulated losses including lapsed losses and unabsorbed depreciation of the merging company are to be set off in the manner provided in section 72A of the I.T. Act.
The CIT(A) order was not correct in allowing accumulated losses including lapsed losses and unabsorbed depreciation of the merging company where there are clear violations of section 72A of the I.T. Act r/w Rule 9C of the I.T. Rules and where BIFR had allowed such benefit to the assessee in the manner provided by section 72A of the I.T. Act. and the AAIFR verdict lends credence to the fact that BIFR had allowed such benefit as per provisions of section 72A of the I.T. Act. 6. The CIT(A) order was incorrect in allowing accumulated losses including lapsed losses and unabsorbed depreciation of the merging company where there are clear violations of section 72A of the I.T. Act as directed by BIFR and upheld by AAIFR.
That the assessee craves leave to add to and/or alter, amend, modify or rescind the grounds hereinabove before or hearing of this appeal.
Ground Nos. 1 and 2 raised by the Revenue relate to disallowance of Rs. 3,03,447/- u/s 43B read with Section 36(1)(va) and 2(24)(x) of the Act.
23.Brief facts qua the issue are that during the scrutiny proceedings, the assessing officer noticed that employees` contribution collected by the employer is deemed to be his income u/s 2(24)(x) of the Act and is allowable as a deduction under section 36(1)(va) only if it is paid to the relevant fund by the due date as prescribed in the relevant legislation. Since the assessee has failed to deposit the
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 same within the prescribed time therefore, the assessing officer disallowed Rs.3,03,447/- under section 36(1)(va) of the Act.
Aggrieved by the order of the Assessing officer the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the addition made by the Assessing officer observing the following:
“ It is in respect of disallowance of PF / ESI dues which has been added by the Assessing officer by invoking the provisions of section 36(1)(va) read with Section 2(24)(x) and the same involved is Rs. 3,03,447/-. The assessee has placed the relevant materials in such respect and has brought to my attention that there is some delay in the payment of PF / ESI dues. However, the same has been paid within the grace period allowed as per relevant Act. The assessee has brought to my attention the judgment of Jurisdictional High Court in the case of Arambag Hatcheries Ltd. (supra) & Vijay Shree Jute Mills (supra) wherein the High Court has settled the issue in favour of the assessee. Hence, following such judgment of Jurisdictional High Court, this ground of the assessee is allowed.”
Aggrieved by the order of the ld. CIT(A) the revenue is in appeal before us.
The ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity and on the other hand the ld. Counsel for the assessee has relied on the order of theld CIT(A).
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that issue raised by the Revenue in ground No. 1 and 2 is no longer res integra, it is covered by the judgment of the Hon`ble Calcutta High Court in the case of CIT vs. Vijayshree Ltd. (ITAT No. 245 of 2011- GA No. 2607 of 2011 dated 6.9.2011).We note that employees` contribution has been paid/deposited by the assessee much before the due date of filing the return of income, thus the same is clearly allowable in view of the judgment of jurisdictional High Court in the case of CIT vs. Vijayshree Ltd(supra). Therefore, we find no infirmity in the order passed by the ld. CIT(A) . Page | 15
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 That being so, we decline to interfere in the order of ld. CIT(A), his order on this issue is hereby upheld and the ground nos. 1 and 2 raised by the revenue are dismissed.
Ground No. 3 raised by the revenue reads as follows:
“The CIT(A) erred in deleting the addition of provision of wealth tax and provision of gratuity and leave encashment in the book profit without appreciating the fact correctly that these provisions are unascertained liability and is to be added in the book profit as per clause (c) of Explanation 1 of Section 115JB of the Act.”
Brief facts qua the issue are that the assessing officer made addition on account of provision for wealth tax and provision for gratuity and leave encashment while computing book profit u/s 115JB of the Act. The Book profit computed by the assessing officer under section 115JB, is as follows:
Aggrieved by the order of the Assessing officer the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the addition made by the Assessing officer observing the following: “Such ground is in respect of addition of Rs. 2,50,000/- for provision of wealth tax liability in the computation of book profit. I find merit in the submission so made by the assessee. Since the adjustment as allowed in the relevant provision i.e. 115JB refers only to Income Tax and it does not refer to Wealth tax or any other tax and hence Assessing officer is incorrect in adding the same to book profit. Hence this ground of the assessee is allowed.
Such ground is regarding addition of Rs. 4,79,83,865/- and Rs. 1,24,78,157/- being provision for ascertained liability for gratuity and the leave encashment as deductible in the computation book profit u/s 115JB. I find that the Assessing Page | 16
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 officer has not given any reason for such treatment and how such items are not required to be allowed as per the provision of Section 115JB. Such sums i.e. provision for gratuity and provision for leave encashment are based on actuarial valuation and the provision for the same cannot be held as unascertained liability / contingent liability and the assessee’s contention is held as correct. Hence this ground of the assessee is allowed.
Aggrieved by the order of the ld. CIT(A) the revenue is in appeal before us.
Learned DR for the Revenue has primarily reiterated the stand taken by the Assessing officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity and on the other hand, the ld. Counsel for the assessee has relied on the order of the ld CIT(A).
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. We note that the issues raised by the Revenue in ground No. 3 is no longer res-integra. We note that Wealth-tax has not been mentioned under prohibited item in the Explanation – lto Sec. 115JB of the Act, and only Income-tax has been prohibited and as such Wealth-tax is clearly allowable. Besides, the Provision for Gratuity and Leave Encashment are ascertained liability and hence cannot be added back in book profit.Therefore, we find no infirmity in the order passed by the ld. CIT(A). That being so, we decline to interfere in the order of ld. CIT(A), his order on this issue is hereby upheld and the ground no.3 raised by the revenue are dismissed.
Ground Nos. 4, 5 and 6 raised by the revenue relate to accumulated losses including lapsed losses and unabsorbed depreciation of the merging company to be set off in the manner provided in section 72A of the Income Tax Act.
Brief facts qua the issue are that during the scrutiny proceedings the assessing officer noted that as per section 72 of the Income Tax Act, business loss can not be carried forward beyond eight years from the end of the assessment year in which Page | 17
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 the loss incurred. Hence, the set-off of brought forward loss of Rs.58,17,10,822/- was disallowed by assessing officer.
Aggrieved by the order of the Assessing officer the assessee carried the matter in appeal before the ld. CIT(A) who has followed the co-ordinate bench’s decision while disposing the appeal and allowed the appeal of the assessee observing as follows: “73 In respect of the unabsorbed losses, the assessing officer was of the opinion that it includes ‘lapsed losses” of AY 2000-01 and 2001-02 of Rs. 48.74 crores and the same cannot be considered as per the provisions of Act beyond eight years. The carry forward of unabsorbed losses as noted above, is governed by the special provision i.e. section 72A of the Act. So, when a special provision relating to carry forward and set off of accumulated loss on amalgamation is stipulated in section 72A of the Act, it will override the general provisions in respect of carry forward of losses given in section 72 of the Act. As per section 72A of the Act relevant to the present case, the law is that where there has been amalgamation of a company owning an industrial undertaking (M/s MSL) with another company (the assessee M/s. HEIL) then notwithstanding anything contained in any other provisions of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company (M/s. MSL) shall be deemed to be the loss of the amalgamated company (the assessee M/s. HEIL) for the previous year in which the amalgamation was affected and other provisions of this Act relating to set off of carry forward loss shall apply accordingly. So, by this deeming fiction the accumulated loss of the amalgamating company i.e. M/s. MSL shall be deemed to be the loss of the accumulated company i.e. HEIL (Assessee). So, when the assessee in this case before us, in A.Y 2010-11 claimed the accumulated loss from AY 2010-11 onwards after amalgamation took effectfrom 01.04.2009 and consequently in the present assessment year in 2012-13 by virtue of sec.72A(1), the accumulated loss of MSL shall be deemed to be the loss of the assessee company in the previous year in which the amalgamation was effected i.e. AY 2010-11 onwards. As per the definition of accumulated loss given u/s. 72A of the Act, the accumulated loss of M/s. MSL in this case has to be so much of loss of amalgamating company i.e. M/s. MSL, computed under the head “Profit & Gain of Business”, which such amalgamating company i.e. M/s. MSL would have been entitled to carry forward and set of under the provision of sec.72 of the Act, as if the amalgamation has not taken place. As per sec. 72 of the Act, where for any assessment year, the net result of the computation under the head profit and gains of business is a loss to the assessee (not loss sustained in a speculation business) and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of sec.71, so much of the loss as has not been so set off or where the assessee has no income under any other head, the whole loss shall subject to the other provisions of this chapter be carried forward to the following assessment year and it shall be set off against the profit and gains if any of any business of profession carried on by the assessee and assessable for that assessment year. And if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. However, we note that sub-sec.(3) of Sec.72 of the Act prescribes a Page | 18
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 limitation period of 8 assessment years immediately succeeding the assessment year for which the loss was first computed. In other words, there is an outer limit of 8 years for carry forward of losses from the first year loss was computed under this section. Since the definition of ‘accumulated losses’ u/s. 72A of the Act, which is the special provision for carry forward of losses of amalgamated companies, incorporates the amalgamating company’s accumulated loss which is entitled to carry forward and set off as per the provision of Sec.72 of the Act, sub clause (3) of section 72 of the Act prescribes a cap of eight assessment years immediately succeeding assessment year for which the loss was first computed. The assessing officer while giving effect to the BIFR order did not understand the binding nature of the CBDT circular and has not given effect to the sub-clause (a) of 15.8 wherein para (a) the BIFR has asked CBDT to consider exempt/grant relief to the company from the provisions of section72A(2), 72(3), 79, 80 read with sec. 139 etc. Since the department’s view has been considered by the BIFR before passing the sanctioned scheme as per CBDT circular, the assessing officer was duty bound to give effect to the recommendation made by the BIFR. So, when the BIFR schemes consider, relief u/s. 72(3), means the limitation period prescribed u/s. 72(3) of the Act i.e. 8 years has to be lifted and assessing officer has to give effect to it and carry forward of loss has to be given more than 8 years. Moreover, we note that clause (b) para 15.8 of the BIFR Scheme recommends CBDTto exempt the company from Sec.72 and 32 of the Income Tax Act, so as to allow the company to carry forward its accumulated loss and allowance beyond the period of eight years till it is fully adjusted against profit of the company in the subsequent years. This recommendation also becomes directory in nature as per the CBDT in the facts and circumstances of the case discussed above and the assessing officer is duty bound to give effect to it as such. It should be remembered that BIFR Scheme can override the Income Tax Act as held by jurisdictional High Court in J.K. Corporation Ltd. (supra). Morover, we note that by clause (h) the BIFR recommends to allow depreciation on plant and machinery of MSL unit of Malanpur Steel Ltd. for the period when the steel plan was under suspension of operation/closed/shut down (From October 1998 to the date of restart) also becomes directory in the light of the CBDT circular since the department’s view has been considered by the BIFR before sanctioned scheme was passed. Therefore, the intent of the BIFR is very clear and the assessing officer was duty bound to give effect to the order of BIFR since the circular passed by the CBDT is binding on the Income Tax authorities and as held by the Hon’ble jurisdictional High Court that the SICA Act overrides all other statutes except Foreign Exchange Regulation Act, 1973 and Urban Land Ceiling & Regulation) Act, 1976. Therefore, the assessing officer was duty bound to give effect to the order passed by the BIFR and the accumulated loss and the unabsorbed depreciation needs to be granted.
74 We also take note that the special provision in case of amalgamated companies i.e. sec. 72A(1) is subject to sec. 72A(2). There are certain conditions which have been prescribed u/s. 72A(2) which the amalgamating company as well as the amalgamated company has to fulfill then only the accumulated loss as well as unabsorbed depreciation will be allowed u/s. 72A(1) of the Act. However, as we stated above as per the latest CBDT circular (supra), since in this case the department’s views/objections were duly considered by the BIFR, before passing the sanctioned scheme, the assessing officer has to give effect to even the recommendation given by it for consideration to the CBDT. In fact, as stated Page | 19
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 above, assessing officer has given to scheme and, allowed unabsorbed losses though in part. So, the BIFR recommendation given in sub-clause (a) to (h) of para 15.8 of the sanctioned scheme is to be given effect to by the assessing officer, since circular of CBDT is binding on him. We note that as per the sanctioned scheme sub para (a) of para 15.8, the BIFR has recommended CBDT to exempt/give relief of u/s. 72A(2) of the Act. Since the CBDT’s objections were considered by the BIFR, before passing the sanctioned scheme, the recommendation/for consideration to CBDT has to be treated as mandatory by the assessing officer and has to be given effect. Resultantly, the sub para (a) to (h) has to be given effect it includes to exempt/grant relief u/s 72A(2) of the Act, which implies, the pre-conditions stipulated in section 72A(2) of the Act for invoking section 72A(1) of the Act, needsto be exempted and becomes in-operative and necessarily has to be overlooked and so, in effect the assessing officer has to give effect to Sec. 72A(1) without looking into the conditions laid in sec. 72A(2) of the Act.” The Hon’ble Tribunal in its order has categorically directed for allowance of the losses so claimed by the assessee. Hence the Assessing officer is directed to allow the claim of unabsorbed depreciation, depreciation and brought forward losses aggregating to Rs. 58,17,10,822/- accordingly. Hence, this additional ground of the assessee is allowed.”
Aggrieved by the order of the ld. CIT(A) the revenue is in appeal before us.
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. Since the ld CIT(A) allowed the appeal of the assessee based on the judgment of Co-ordinate Bench in assessee’s own case in ITA Nos. 142 to 152/Kol/2017 dated 24.01.2018, for A.Y. 2009-10 to 2015-16 therefore the issue is squarely covered in favour of the assessee by the decision of the coordinate bench, in assessee`s own case and there is no change in facts and law and the Revenue is unable to produce any material to controvert the aforesaid findings of the Coordinate Bench (supra). We find no reason to interfere in the said order of the Coordinate Bench, hence, respectfully following the judgment of the Coordinate Bench the ld CIT(A) allowed the appeal of the assessee.
M/s Hindusthan Engineering & Industries Ltd. ITA Nos. 952 & 1059/Kol/2018 Assessment Year:2011-12 Therefore, we find no infirmity in the order passed by the ld. CIT(A). That being so, we decline to interfere in the order of ld. CIT(A), his order on this issue is hereby upheld and the ground nos. 4,5 and 6 raised by the revenue are dismissed.
Before parting, it is noted that the order is being pronounced after 90 days of hearing. However, taking note of the extraordinary situation in the light of the Covid-19 pandemic and lockdown, the period of lockdown days need to be excluded. For coming to such a conclusion, we rely upon the decision of the Co- ordinate Bench of the Mumbai Tribunal in the case of DCIT vs JCB Limited in ITA No 6264/Mum/2018 and ITA No. 6103/Mum/2018 for A.Y. 2013-14 order dated 14.05.2020.
In the result, the appeal of the assessee is partly allowed and the appeal of the revenue is dismissed.
Order pronounced in the Court on 28.07.2020
Sd/- Sd/- (S.S.GODARA) (A.L.SAINI) �या�यकसद�य / JUDICIAL MEMBER लेखासद�य / ACCOUNTANT MEMBER
कोलकाता /Kolkata; �दनांक/ Date: 28/07/2020 (SB, Sr.PS) Copy of the order forwarded to: 1. M/s Hindusthan Engineering & Industries Ltd. 2. DCIT, Circle-5, Kolkata 3. C.I.T(A)- 4. C.I.T.- Kolkata. 5. CIT(DR), KolkataBenches, Kolkata. 6. Guard File.