JT. CIT -(OSD),CC- 6(3), MUMBAI vs. KROSSLINK INFRASTRUCTURE LTD., MUMBAI

Brief facts of the case are that the assessee is a company engaged in construction and development, filed its original return of income on 31-10-2005 declaring total income at Nil. The assessment on this return of income was completed under section (u/s) 143(3) on 28-12- 2007 determining total income at Rs.19,04,92,024/- . Subsequently on the basis of information from ADIT(Inv), Unit-VII (1) & (2), Mumbai that during the course of search and seizure action u/s 132 of the Income-tax Act, 1961 carried out in the case of Pipav Shipyard group on 12-10-2011 and that the business premises of Krosslink Infrastructure Ltd (assessee) was also covered u/s 133A of the Act. It was informed that during the course of search / survey proceedings M/20 18, C.O. 134/ M /2019 & ITA 3863/ M/2018 M/s Krosslink Infrastructure Ltd. and post search enquiries it was revealed from the ledger accounts that sub-contract work to the tune of Rs.76,36,75,929/- was claimed to have been undertaken by a concern in the name & style of M/s Khodiyar Industries Ltd. However, from local enquiries and statement of Shri Somil Mukesh Parikh, the Finance in charge of M/s Khodiyar Industries Ltd, it was prove that M/s Khodiyar Industries Ltd was involved in issuing bogus bills and accommodation entries and that no activity like earth filling etc, was done by assessee as admitted by Shri Somil Mukesh Parikh. The Modus operandi was also explained by S. Parikh that cheques were taken from assessee and thereafter money was routed back to it. On this basis, the assessing officer invoked provisions of section 147 and a notice u/s 148 dated 15-03-2012 was issued.

In response to the notice under section 148, the assessee filed return of income on 09-05-2012 declaring total income of Rs.19,04,92,024/- . In response to statutory notices u/s 143(2) and 142(1), the assessee, vide letter dated 10-05-2012 sought for reasons recorded for reopening of the case. The assessing officer vide letter dated 28-05- 2012 has intimated the reasons to the assessee, which are as under:-

On receipt of the reasons recorded, the assessee filed application before assessing officer dated 19-06-2012 seeking statement of Shri Somil Mukesh Parekh, which was provided by the assessing officer, vide letter dated 21-06-2012. In response to providing of reasons for reopening as given to the assessee and a show cause notice dated 27- 11-2012 as to why the income should not be enhanced as per reasons recorded for issue of re-opening notice, the assessee vide letter dated 22-01-2013 objected the reopening by raising the objection as follows:-

The Assessing Officer not accepted the contention of assessee holding as under:-

The assessee further submitted certain bills raised by assessee on M/s.

The assessee again vide its letter dated 05/02/2013 stated as under :-

Thereafter, in response to show cause notice to disallow its bogus purchases to M/s. Khodiyar Industries Ltd., the assessee vide letter dated 22/03/2013 stated as under:-

Since the transactions were business transactions duly entered for the contracts given & corresponding sales bills raised to the principal; these are duly recorded in the books of accounts. However, the internal scrutiny by the auditors as well as management revealed that the adequate & appropriate supporting for these transactions are difficult to obtain under the circumstances & therefore, as elaborated in Para 4 of letter dtd. 22.01.2013, a voluntary decision was taken to reduce the claim of expenses by the amount of Rs.75,29,60,000/-, as a prudent policy to avoid any procrastinating controversy, litigation, conflict with the Department. Further even the corresponding sales to the principal amounting to Rs.83.42 crores, (as per submission dated 05.02.2013 & its enclosures) were written back. While writing back corresponding sales, only the cost has been reduced leaving the gross margin of Rs.8.13 crores unaffected & thereby have duly been considered in the total income. It was also demonstrated by submitting the copies of audited accounts & the copies of earlier unaudited accounts that against original turnover of Rs. 143.18 crores, only expenditure on sub contract was only Rs. 75.29 crores. Therefore, against the turnover, as per audited balance sheet of Rs. 67.89 crores (before stock variation of Rs.38.46 crores) only debit is for purchases of Rs. 1 7 Lacs. As such, your proposal of recasting accounts by considering the sates as genuine & purchases of bogus to the tune of Rs. 75.296 crores, is completely out of place, not supported by facts & legally untenable. The proposed recasting, if done, will show he turnover of Rs. 143.18 crores & expenses of only Rs. 17 lacs, which is completely ridiculous &.has no substance it is impossible to have turnover of that quantum without any inputs on the debit side.

The action of the Investigation Wing of the Department has got certain things on record with respect to the transactions with Khodiyar Industries Ltd. However, the business compulsions on these transactions were explained. The assessee company has never accepted that the work reflected in the bills on Khodiyar was not carried out. The only genuine, circumstantial difficulty was of getting work supporting documents from the sub- M/20 18, C.O. 134/ M /2019 & ITA 3863/ M/2018 M/s Krosslink Infrastructure Ltd.

The contention of the assessee was not accepted by the assessing officer holding that the assessee has not submitted correct books of account as per acceptable accounting principle and has considered the particulars of one sales transaction and also one payment made to Khodiyar Industries Ltd. claiming it as a purchase transaction. No accounting principle followed mandates a journal entry in the books to offset such transaction with each other and that such transaction 11 M/20 18, C.O. 134/ M /2019 & ITA 3863/ M/2018 M/s Krosslink Infrastructure Ltd. being not to be reflected in the profit and loss account. The assessing officer rejected the books of account of the assessee by invoking the provision of section 145(3) of the Income tax Act. The assessing officer also recorded the following reasons for not accepting the submission of assessee;  The assessee has not brought on record any proof that the purchased expenses claimed by the assessee were paid to KIL of ₹ 75.29 Crore is genuine.  The assessee claimed that even the principal company has not claimed such an amount paid to the assessee as expenses is legally false. The assessee has done work for PDOECL worth more than Rs. 143.18 crore as claimed during the year. In AY 2005-06, PDOECL has not written off or squared off any expenses in its books pertaining to the assessee and this is a finding of fact. Even in the later years, PDOECL has write off/ squared off any expenses pertaining to the assessee then it is not proved that it is this Rs.75.20 Crore /- (or even Rs.143.18 Crore) which is treated as bogus by PDOECL. No such document is brought on record by the assessee.  In view of the above, it is an undisputed fact that assessee has received money equivalent to the sales to PDOECL shown at ₹143.18 crore and not just ₹ 67.89 crore and that it is genuine receipt from PDOECL by the assessee. On the other hand, it is proved that assessee has not incurred expenses of ₹ 75.29 crore alleged to be paid to KIL. Thus, the assessee’s contention that they are recasting books to reflect the above transaction has no substance is wrong and baseless. 12 ITA No. 3122/ M/20 18, C.O. 134/ M /2019 & ITA 3863/ M/2018 M/s Krosslink Infrastructure Ltd.

On the basis of above observation and on the basis of statement recorded by investigation wing the expenses of ₹ 75.29 crore was treated by assessing officer as bogus and disallowed as known allowable expenditure in the assessment order passed under section 143(3) rws 147 of the Act dated 30.03.2013.

Aggrieved by the additions in the re-assessment order, the assessee filed appeal before the CIT(A), challenging the validity of reopening as well as additions on account of alleged unexplained expenditure /bogus expenditure. Before the learned CIT(A), the assessee filed details written submission which has been recorded by learned M/20 18, C.O. 134/ M /2019 & ITA 3863/ M/2018 M/s Krosslink Infrastructure Ltd. CIT(A) in the impugned order. After considering the submission of assessee, the learned CIT(A) upheld the reopening by making reliance on the decision of Hon’ble Supreme Court in case of ACIT V/s Rajesh Jhaveri Stock Brokers Private Limited (291 ITR 500) wherein it was held that if the assessing officer for whatever reasons, has reasons to believe that income has escaped assessment, it confers the jurisdiction to reopen the assessment, where the case is not covered by the proviso to section 147, intimation under section 143 (1) cannot be treated to be in order of assessment, as there been no assessment order section 143(1) the question of change of open does not arise. However, on quantum addition the learned CIT(A) restricted the addition to the extent of 30% of the total purchases of ₹ 75.29 crores. The learned CIT(A) is while restricting the addition to the extent of 30% followed the decision of Hon’ble Gujarat High Court in case of Vijay Proteins Ltd. V/s CIT (2015) 58 Taxmann.com 44 Gujarat and CIT V/s Simith P. Sheth (2013) 356 ITR 451 (Guj).

The learned AR of the assessee explained that PDOEL was developing a modern shipyard at Port Pipavav at Gujarat. Port Pipavava was developed by SKIL Infrastructure Ltd, which is the promoter company of PDOECL. After successful construction of the port, the group started developing the shipyard. The location of shipyard is oddly located and commuting to the place was also a cumbersome process. After the port was started, the place becomes the prominent and amongst others it caught attention of the local leaders and other pressure groups. The massive contracts involved in the development of shipyard were given to the assessee company, considering its track record and experience in the development of port. In the above circumstances, it was invited well and almost mandatory, taking into account the compulsive, commercial and practical considerations that certain part of contract is given to the 17 ITA No. 3122/ M/20 18, C.O. 134/ M /2019 & ITA 3863/ M/2018 M/s Krosslink Infrastructure Ltd. recommendation of local leaders and pressure groups. One has to appreciate that without considering such a request, it is practically impossible to carry out the project were smoothly. Under these circumstances, certain contracts were given by the company to such contractors, who have been on the recommendation of local leaders and pressure groups. The assessee company could not have made the payment to such contractor, due to the obvious constraints on cash payments, coupled with refusal of these contractors to take cheque payments, which left the company no other alternative but to comply with their requirement with some commercial arrangement. In this process Koatex Industries Ltd. (Koatex) routed the payment to these contractors through Khodiyar Industries Ltd. as a matter of sheer convenience.

The ld AR for the assessee submits that all these submissions were made by assessee vide its letter dated 22 January 2013 and the assessee furnished copy of bills dated July 2004 for ₹ 110.59 crore, copy of bills dated November 2004 for Rs.32.59 crore, making total of ₹ 143.18 crore, copy of draft balance sheet (before finalisation), a set of which is also available in seized record in which the turnover recorded is ₹ 143.18 crore and expenditure on sub-contract in Schedule 14 recorded at Rs. 75.29 crores. Before learned CIT (A), the M/20 18, C.O. 134/ M /2019 & ITA 3863/ M/2018 M/s Krosslink Infrastructure Ltd. assessee vide its submission dated 29th May 2017 furnish the following documents:  survey report of total area of paper above shipyard Ltd,  valuation report of land, civil work, plant and machinery at post Ucchaiya via Rajula, District Amreli Gujrat,  completion certificate for the shipbreaking project under the contract agreement dated 12 June 1997,  certificate by Mazoomdar associates private limited, valuer’s and lenders, independent engineers appointed by the consortium of lenders for the ship-breaking facilities of the company, certifying the valuation report and survey report.

The learned AR further submit that assessee executed the work as per contract taken from Gujarat Pipava Port Ltd of ₹ 143.19 crore and booked the sales on account of contact receipt of ₹ 143.19 crore. Against the said sales, assessee company has booked the total expenses of ₹ 114.18 crore in its profit and loss account which includes ₹ 75.29 crore paid to Khodiyar Industry Ltd as sub-contract charges in respect of work taken by them of Earth filling, Land levelling and on account of development of land. There is no other receipt or expenses incurred during the year. Against the said receipt of ₹ 143.19 crore, the assessee company has incurred total expenses ITA No. 3122/ M/20 18, C.O. 134/ M /2019 & ITA 3863/ M/2018 M/s Krosslink Infrastructure Ltd. of ₹ 114.18 crore and declared the gross profit of ₹ 29.01 crore. The gross profit ratio on total receipts comes to 20.26%.

The revenue in its grounds of appeal has relied on the decision of Hon’ble Supreme Court in case of N.K. Proteins Ltd. The learned AR for assessee submits that ratio of decision and said case is not applicable to the present case even on after far-fetched imagination.

The ld. AR for the assessee further submits that it is completely incorrect notion on the facts that customer of the assessee has treated the sale of assessee as non-est. The party to whom sales were made has still in its books of account, these assets reflect as a part of total asset. The only conceded by Pipava Shipyard Limited (PSL) that during search operation to avoid prolonged litigation PLS will not claimed deprecation thereon. This is clear from the statement of Bhavesh Gandhi, Managing Director of PDOEL (now PSL) as recorded in para-7.3 of ld. CIT(A)’s order. No stretch of imagination it cannot be claimed that the sale of assessee and purchase by PSL as non-est. Once, sale is established the purchases cannot be taken as 20 M/20 18, C.O. 134/ M /2019 & ITA 3863/ M/2018 M/s Krosslink Infrastructure Ltd. nil. The allegation which is based on the statement of S. Parikh of Khodiyar Industries Ltd. that cash of Rs. 70 to 80 crore against the sub-contract bills, has per se not been contested by the assessee. The assessee has clearly proved with the impeachable evidence that entire work was executed as per running bills. However, considering the commercial circumstances and local compulsions, the work had to be got done from local parties, from whom bills, receipt and other supporting documents could not have been obtained. All running bills containing full details of items and their measurement of work were finished to the lower authorities. The certificate issued by Site Engineers, Ledger Accounts, Independent third party survey report, valuation report and certificate from Government approved Registered Valuer, which was third party expert appointed by lenders consortium for the valuation of work carried out at the site, which proved actual work done at site. The assessee declared gross profit for year 2005-06 of Rs. 29.01 crore, which is 20.26%.

There is no evidence on record brought by revenue, which can lead to an inference that GP declared by assessee is understated. The additional disallowance of 30% of the total purchases of Rs. 75.29 crore added/ restricted by ld. CIT(A) would make the GP at 36.04%, which is completely unrealistic and as also unsubstantiated. The ITA No. 3122/ M/20 18, C.O. 134/ M /2019 & ITA 3863/ M/2018 M/s Krosslink Infrastructure Ltd.

The ld. AR of the assessee submits that the disallowance restricted to 30% by ld. CIT(A) is on a very higher side. The assessee has already declared GP at 20.26%. The GP for preceding year were ranging from 11.08% to 15.30%, if disallowance if restricted to 30%, the GP of assessee would be unrealistic, which is not possible in the business of assessee.

The ld. AR further submits that, though the assessee has challenged the validity of reopening in additional ground of appeal

We have considered the submission of both the parties and perused the order of lower authorities. We have noted that initially assessment was completed under section 143(3) on 28.12.2007. The case was re- opened on the basis of information received from ADIT (Investigation), Unit-VII (1) & (2) that during the course of search and seizure action on Pipavav Shipyard Group on 12.10.2011 and simultaneously survey under section 133A on assessee. During the course of survey enquiry was also made against Khodiyar Industries M/20 18, C.O. 134/ M /2019 & ITA 3863/ M/2018 M/s Krosslink Infrastructure Ltd. Ltd. On the basis of enquiries on Khodiyar Industries Ltd. statement of Somail Mukesh Parikh, it was revealed that assessee-company availed accommodation entries from Khodiyar Industries Ltd. which were routed through Koatex Industries Ltd. On the basis of such information, which were sent to the Assessing Officer, the assessment/case of assessee for the year under consideration was re- opened. We may note here that, we are not discussing the merit/validity of re-opening at this stage.

During the re-assessment proceeding, the assessee filed detailed reply, explaining the circumstances that due to commercial expediency and compulsive circumstances certain part of contracts was given to the recommendees of local leaders and pressure group for smooth completion of project. In such circumstances, certain contracts were given to the local person, the payments could not have made directly to such contractors in cash, coupled with the refusal by those contractor to take cheque payments. The assessee-company made payment through Koatex Industries Ltd. The assessee also furnished the copy of various bills substantiating the contention that work was completed at the site as per contract from Gujarat Pipava Port Ltd. The assessee also explained that against the said execution of work (sales), the assessee company booked total expenses of Rs. 114.18 crore, which includes Rs. 75.29 crore paid to Khodiyar 24 ITA No. 3122/ M/20 18, C.O. 134/ M /2019 & ITA 3863/ M/2018 M/s Krosslink Infrastructure Ltd. Industries Ltd., who undertook of earth filling, land levelling and development of said land. The assessee declared Gross Profit of Rs. 29.01 crore and the Gross Profit at 20.26%. The explanation furnished by assessee was not accepted by Assessing Officer. The Assessing Officer discarded the explanation of assessee by taking view, which we have mentioned in para-12 (supra). The Assessing Officer disallowed the entire payment/expenses of Rs. 75.29 crore paid to Khodiyar Industries Ltd. by treating it as non-genuine.

We have noted that the Assessing Officer has not rejected the books of account. The assessee claimed that the work was executed at site as per contract. The assessee furnished the copy of valuation report of independent valuer. No investigation or inquiry about the scope of work was conducted by Assessing Officer. The assessee also furnished the certificate of Mazoodmdar Associates Pvt. Ltd., independent engineers appointed by consortium of lenders for ship breaking facility of the assessee-company certifying the valuation report of survey report. No enquiry from Mazoodmdar Associates Pvt. Ltd. was conducted by Assessing Officer. We have noted that valuation report of land, civil work, plant & machinery at Post Ucchaya Via Rajula, District-Amreli, Gujarat is on record at page no. 215 to 267. The completion certificate for ship breaking project under the contract agreement is available at page no. 268 of Paper Book. 25 M/20 18, C.O. 134/ M /2019 & ITA 3863/ M/2018 M/s Krosslink Infrastructure Ltd. Further, the certificate of Mazoomdar Associates Pvt. Ltd., independent engineers appointed by consortium of lenders for ship breaking facility, certifying the valuation report is also placed on record. No comments of any kind on the aforesaid reports were made by Assessing Officer while disallowing the expenses paid to Khodiyar Industries Ltd.

Before the ld. CIT(A), the assessee challenged the validity of re- opening as well as disallowance of expenses. The assessee filed detailed written submission/explanation repeating the same submission, which is duly recorded by ld. CIT(A) from para-5.1 to 7.1 of the impugned order. Besides the factual submission, the assessee contended that the Assessing Officer has added the entire expenses without considering the fact that work was executed on site.

The ld. AR of the assessee vehemently argued that the assessee has already shown Gross Profit of 20.26% for the year under consideration, the average Gross Profit for four preceding year were 13.01% and in case the disallowance restricted by ld. CIT(A) is upheld, the Gross Profit rate would increase to 36.04%, which is unrealistic in the business undertaken by assessee during the relevant period. The Hon’ble Bombay High Court in Mohammad Haji Adam & Co. (supra) held that purchase cannot be rejected without disturbing the sale and the addition in respect of bogus purchases is to be limited to the extent of bringing the gross profit rate on such purchases at the same rate as of other genuine purchases. It was further held that decision of Gujarat High Court in case of N.K.

We are of the considered opinion that under Income Tax Act only real income can be taxed by the Revenue. We may further note that even if the transaction is not fully verifiable, due to any circumstances beyond the control of the assessee, the only taxable is the taxable income component. And in order to fulfill the gap of revenue leakage the disallowance of reasonable percentage of such purchases can meet the end of justice. Similar view was taken by Hon’ble Bombay High Court in CIT Vs Hariram Bhambhani in ITA No. 313 of 2013 decided on 04.2.2015, that revenue is not entitled to brought the entire sales consideration to tax, but only the profit attributable on the total unrecorded sales consideration alone can be subject to income tax.

Considering the aforesaid factual and legal discussion and the submission of ld. AR of the assessee that average Gross Profit for four preceding year declared by assessee were 13.01%. For the year under consideration, the assessee has declared Gross Profit at 20.26%, if the further disallowance @ 30% of the total purchases/expenses is upheld, the Gross Profit of assessee would be increased drastically i.e. more than 36%, which is unrealistic.

The ratio of decision relied by ld. DR for the revenue relied on the decision of Hon’ble Bombay High Court in Shoreline Hotel Pvt Ltd. Vs CIT (supra) is not applicable on the facts of the present case, as the facts of this case is at variation. In the said case information was received from Sales Tax Department in relation to certain parties who were engaged in providing bogus purchase bills and that assessee was also one of beneficiaries of hawala bills given by such parties. The issued show cause why this entire amount/bogus purchases should not be assessed as non-genuine purchases. The assessee with a view to buy peace and to avoid unending litigation, assessee offered that gross profit rate of said purchases might be assessed as income - Accordingly, Assessing Officer held 15 per cent of said purchases to be assessed as income of assessee. However, in the present case the assessee has categorically submitted the work executed through the assessee is in accordance with the scope of work awarded and the same is duly approved by the independent Valuer, which is not examined by the assessing officer.

In the result, the appeal of assessee is partly allowed and the appeal of revenue is dismissed. 30 ITA No. 3122/ M/20 18, C.O. 134/ M /2019 & ITA 3863/ M/2018 M/s Krosslink Infrastructure Ltd.

As we have noted above that the ld. AR of the assessee while making his submission, submitted at bar that in case disallowance is restricted to a reasonable basis, he would not press the validity of re- opening as well as other grounds and the cross objections. Taking the fact in consideration, that we have restricted the disallowance on reasonable basis, therefore, the other grounds of appeal and cross objection filed by assessee are treated as not pressed. In the result, cross objection filed by assessee is also dismissed as not pressed.

In the result, appeal of the assessee is partly allowed, appeal of revenue and cross objection of assessee are dismissed.