MAHENDRAKUMAR DANMAL MUTHA,MUMBAI vs. INCOME TAX OFFICER 19(2)(2), MUMBAI

The learned Departmental Representative objected to the condonation of delay on the ground that the delay is substantial and extends to almost one year.

We have considered the rival submissions and perused the affidavit filed by the assessee. It is evident that the appeal before the first appellate authority had remained pending for an inordinately long period. The explanation furnished by the assessee that the order was delivered electronically and remained unnoticed in the spam folder, and that he acted promptly upon gaining knowledge of the order, has not been controverted by any material on record. There is nothing to indicate that the delay was deliberate or that the assessee stood to gain by postponing the filing of the appeal. The explanation, in our considered view, constitutes a reasonable and sufficient cause within the meaning of law.

Considering the totality of facts and circumstances of the case, and in order to advance substantial justice, we condone the delay of 356 days in filing the present appeal and admit the same for adjudication on merits. Facts of the Case Mahendrakumar Danmal Mutha 6. The assessee is an individual engaged in the business of trading in iron and steel in the proprietary concern M/s Apollo Metal Industries. For the year under consideration, the assessee filed his return of income on 15.10.2010 declaring total income of Rs. 10,92,237/-. The case was selected for scrutiny through CASS. During the course of assessment proceedings, the assessee furnished copies of purchase bills, ledger accounts, bank statements, stock register, quantitative details of purchases and sales and other supporting documents. The Assessing Officer noted that the assessee had shown total purchases of Rs. 10,46,98,687/- and had also claimed commission expenses of Rs. 14,18,330/- 7. In order to verify the purchases, the Assessing Officer issued notices under section 133(6) to certain parties from whom purchases were claimed to have been made. In respect of three parties, namely M/s Nisha Enterprises (Rs.4,223/-), M/s Reliable Metal (India) (Rs.8,03,712/-) and M/s Siddhi Enterprises (Rs.26,01,031/-), the notices were either returned unserved with the remark “Left” or remained uncompiled. The total purchases from these three parties aggregated to Rs. 34,08,966/-. The Assessing Officer further referred to information available on the website of the Maharashtra Sales Tax Department, wherein the above parties were stated to be listed as hawala dealers issuing accommodation entries.

According to the Assessing Officer, the assessee failed to produce the said parties, failed to furnish transport receipts or Mahendrakumar Danmal Mutha proof of delivery of goods and failed to establish actual transfer of ownership of goods. It was observed that mere payment through banking channels would not, by itself, establish genuineness of the purchases. On this basis, the Assessing Officer treated purchases of Rs. 34,08,966/- as non-genuine and added the same to the total income.

The Assessing Officer also disallowed commission expenses of Rs. 14,18,330/- holding that the assessee had failed to establish business expediency and genuineness of the payments. Accordingly, the assessment was completed under section 143(3) at a total income of Rs. 59,19,533/- as against returned income of Rs. 10,92,237/- 10. Aggrieved, the assessee preferred an appeal before the CIT(A). Before the appellate authority, the assessee reiterated that all purchases were duly recorded in the books of account, quantitative details were maintained, sales corresponding to such purchases were accepted, and payments were made through banking channels. It was submitted that confirmations were obtained from one of the parties along with supporting documents including bank statements and income tax acknowledgements. It was further contended that no opportunity of cross-examination was granted and that the addition was made solely on the basis of information from the Sales Tax Department without independent enquiry. With regard to commission expenses, it was submitted that confirmations, ledger extracts, TDS details, bank statements and other Mahendrakumar Danmal Mutha supporting evidences had been furnished to demonstrate that the commission was paid wholly and exclusively for the purposes of business.

The CIT(A), after considering the submissions of the assessee and perusing the assessment order, recorded that out of total purchases of Rs. 10,46,98,687/-, the Assessing Officer had added Rs. 34,08,966/- on account of non-compliance from three creditors and unsatisfactory explanation furnished by the assessee. The CIT(A) observed that the Assessing Officer had carried out enquiry by issuing notices under section 133(6) and that the parties were identified by the Sales Tax Department as bogus dealers. The appellate authority held that the assessee had failed to substantiate actual transfer of ownership of goods and had not furnished satisfactory evidence regarding delivery of goods. The CIT(A) further held that the assessee had failed to establish business expediency in respect of commission expenditure of Rs. 14,18,330/-. Accordingly, the CIT(A) confirmed the addition of Rs. 34,08,966/- towards non-genuine purchases and disallowance of Rs. 14,18,330/- towards commission expenses and dismissed the appeal.

The assessee is now in appeal before us raising the following grounds of appeal:

On the facts and circumstances of the case and in law, the Ld. CIT (A) failed to consider that the Ld. A.O did not carry out any verification with respect to the subsequent sale of goods, the purchases of which have been alleged to be non-genuine. Therefore, the sustained addition of bogus purchases would be tantamount to a dual addition which is not permissible.

On the facts and circumstances of the case, and in law, the Ld. CIT (A) erred in sustaining disallowance of Rs. 14,18,330 towards commission expenses paid by concluding that there was no business expediency, despite the appellant furnishing confirmations, TDS details and the nature of services rendered.

On the facts and circumstances of the case and in Law, the Ld. CIT(A) erred in disregarding the appellant evidence regarding rendering of services by the commission agents and further failed to appreciate that the addition has been made by the AO without establishing that the payments were bogus and not incurred wholly and exclusively for the purpose of business.

The appellant reserves the right to add, amend, alter and/or withdraw any of the above grounds at the time of hearing.

The learned Authorised Representative(AR) reiterated the factual background of the case and invited our attention to the factual paper book filed before us. It was submitted that the assessee is engaged in the business of trading in iron and steel for several years and has been regularly assessed to tax. For the year under consideration, the total purchases amounted to Rs. 10,46,98,687/-, out of which purchases aggregating to Rs. 34,08,966/- have been treated as non-genuine. It was emphasised that the alleged non-genuine purchases constitute only a very small fraction of the total purchases and the books of account have not been rejected.

With regard to purchases from M/s Siddhi Enterprise, M/s Reliable Metal (India) and M/s Nisha Enterprise, the learned AR drew attention to the ledger accounts, purchase invoices, delivery challans wherever available, and bank statements in the assessee’s books evidencing payments through banking channels. In the case of Siddhi Enterprise, confirmation of ledger account from the supplier, copy of its bank statement and ITR-V of the proprietor were also placed in the paper book. It was submitted that the identity of the parties was established, transactions were routed through banking channels and corresponding entries were reflected in the books of account.

It was further submitted that the Assessing Officer has primarily relied upon information from the Sales Tax Department website and alleged affidavits of the concerned parties. However, certified copies of such statements or affidavits were never furnished to the assessee and no opportunity of cross- examination was granted. It was argued that the addition has Mahendrakumar Danmal Mutha been made on the basis of third-party information without confronting the assessee with the underlying material.

The learned AR also contended that no evidence has been brought on record to show that the payments made to the suppliers have come back to the assessee in any manner. All payments were made through account payee cheques and are reflected in the bank statements. There is no finding that the sales corresponding to the purchases were bogus. In fact, the sales have been accepted and the gross profit declared by the assessee has not been disturbed. It was argued that when sales are accepted and quantitative records are maintained, the entire purchases cannot be disallowed, as that would amount to taxing gross receipts without allowing the corresponding cost.

Without prejudice to the primary contention that the purchases are genuine and duly supported by documentary evidences, the learned AR submitted an alternative argument. It was contended that even if the parties in whose cases notices issued under section 133(6) were returned unserved are treated as non-responsive or not traceable, the entire purchases from such parties cannot be disallowed. The learned AR submitted that the assessee has disclosed a gross profit rate of approximately 6.5% during the year, which has not been disturbed by the Assessing Officer. The sales corresponding to the purchases have been accepted and no defect has been pointed out in the quantitative details or stock records. In such circumstances, at the highest, only the profit element embedded Mahendrakumar Danmal Mutha in the purchases from the said parties can be brought to tax and not the entire purchase amount.

With regard to the disallowance of commission expenses amounting to Rs. 14,18,330/-, the learned AR referred to the documents placed in the paper book under the head “Regarding Brokerage & Commission”. It was submitted that details of brokerage paid were filed before the Assessing Officer. Statement of brokerage paid containing names, addresses, PAN, amount paid and TDS deducted was furnished. Ledger account of “TDS on Commission” and “Brokerage and Commission” were also placed on record. Copies of brokerage bills, bank statements evidencing payment and supporting documents in respect of each broker were produced. It was contended that the recipients of commission were identifiable persons carrying on business as brokers in the metal market. Payments were made through banking channels after deduction of tax at source. The fact of deduction of TDS and filing of details establishes that the transactions were duly accounted for and not fictitious. The Assessing Officer has treated the commission as unverifiable without pointing out any specific defect in the documents produced. It was submitted that once the assessee has furnished primary evidence in support of the expenditure and the payments are through banking channels, the burden shifts and the disallowance cannot be sustained merely on suspicion.

The learned Departmental Representative(DR), strongly supporting the assessment order, submitted that the Assessing Mahendrakumar Danmal Mutha Officer has passed a well-reasoned order after granting sufficient opportunity to the assessee. Inviting our attention to paragraphs 5.4 to 5.8 of the assessment order, it was contended that the Assessing Officer has elaborately dealt with the submissions made by the assessee and has recorded specific findings as to why the purchases and commission expenses were held to be non-genuine. The learned DR submitted that, as recorded by the Assessing Officer, the assessee had merely filed photocopies of purchase bills, copies of delivery challans and bank extracts reflecting payments. However, no documentary evidence was furnished to establish actual delivery of goods, transportation of goods, payment of freight or transport charges or any other corroborative evidence demonstrating physical movement of goods. It was pointed out that the Assessing Officer has specifically observed that the assessee remained silent on the finding of the postal authorities that the parties were not available at the addresses furnished by the assessee.It was further submitted that notices issued under section 133(6) to the concerned parties were either returned unserved or remained uncomplied with. According to the learned DR, the Assessing Officer has categorically recorded that the existence of the parties was not proved at all and that the purchases were not verifiable. The assessee failed to produce the parties despite being given specific opportunity and did not file transport receipts or proof of delivery of goods. The Assessing Officer has also noted that the assessee, who is best placed to explain the affairs of his own Mahendrakumar Danmal Mutha business, did not furnish complete and verifiable details on crucial aspects such as transportation and delivery of goods.

The learned DR further submitted that the issue of bogus purchases is no longer res integra and that several judicial pronouncements of the Hon’ble Jurisdictional High Court have upheld addition of the entire amount of purchases in cases where the assessee has failed to establish the genuineness of the transactions.

In respect of commission expenses, the learned DR submitted that the Assessing Officer has recorded that apart from ledger accounts, bills and payment details, no independent supporting evidence was furnished to establish the genuineness and business expediency of the commission payments. It was argued that mere deduction of tax at source and payment through banking channels would not, by itself, establish that the expenditure was wholly and exclusively incurred for the purposes of business.

We have given our thoughtful consideration to the rival submissions and perused the material placed on record. The controversy before us is confined to the addition of Rs. 34,08,966/- on account of purchases from three parties and the consequential plea of the assessee that, in any case, only the profit element embedded therein can be brought to tax.

It is an undisputed position that the assessee is engaged in the business of trading in iron and steel. The books of account Mahendrakumar Danmal Mutha have not been rejected. The quantitative details of purchases and sales have been maintained and no discrepancy therein has been pointed out by the Assessing Officer. The sales corresponding to the impugned purchases have been accepted and the declared turnover has not been disturbed. The gross profit rate declared by the assessee during the year is approximately 6.5% and the same has not been found to be abnormal or inconsistent with past results.

The addition has been made primarily on the ground that notices issued under section 133(6) to the concerned parties were returned unserved or remained uncomplied with and that the names of the parties appeared in the list of suspicious dealers published by the Sales Tax Department. The assessee could not produce the said parties and no transport receipts were furnished. At the same time, the assessee has placed on record purchase invoices, ledger accounts and bank statements evidencing payments made through banking channels. There is no material brought on record to demonstrate that the payments made to the suppliers have returned to the assessee in cash or through any circuitous route. No cash trail has been established by the Revenue.

In our considered view, the totality of circumstances indicates that while the genuineness of the specific parties may remain doubtful, the purchases as such cannot be treated as wholly non-existent. The business of the assessee is not in dispute. The sales have been accepted. It would be incongruous Mahendrakumar Danmal Mutha to hold that sales have been effected without any corresponding purchases. When the turnover is accepted and quantitative details are maintained, disallowance of the entire purchase amount would result in taxing gross receipts without allowing the cost of goods sold, which would distort the true profits of the business.

The addition, therefore, has to be restricted to the possible profit element embedded in such purchases. In cases where purchases are held to be not fully verifiable but the corresponding sales are accepted, the consistent approach is to estimate the profit attributable to possible inflation of purchase price or suppression of profit and not to disallow the entire amount.

The learned DR has relied upon certain judicial precedents of the Hon’ble Jurisdictional High Court wherein full addition has been upheld. However, on a careful consideration, we find that those decisions turn on their own peculiar facts where either the purchases were found to be completely sham, the books of account were rejected, or there was clinching material establishing accommodation entries including evidence of cash trail. In the present case, there is no such material demonstrating that the entire purchase amount has come back to the assessee or that no goods were received at all. The facts herein are distinguishable and do not warrant sustaining the entire addition.

In the peculiar facts of the case, such estimation at 6.5% would reasonably account for the possible profit element embedded in the purchases from the said two parties and the likelihood of inflation in purchase price, without resulting in an unjust taxation of the entire purchase value.

Accordingly, the Assessing Officer is directed to restrict the addition to 6.5% of the purchases aggregating to Rs. 8,07,935/- made from M/s Nisha Enterprises (Rs. 4,223/-) and M/s Reliable Metal (India) (Rs. 8,03,712/-) and delete the balance addition.

We now advert to the disallowance of commission and brokerage expenditure amounting to Rs. 14,18,330/-.The Assessing Officer has disallowed the entire commission expenditure on the ground that the assessee failed to establish the genuineness and business expediency of the payments. The primary reasons recorded are that except for ledger accounts, Mahendrakumar Danmal Mutha bills and bank payment details, no independent supporting evidence was furnished and that the assessee did not produce the commission agents for verification.

On a careful perusal of the material placed before us, it is noticed that the assessee had furnished before the Assessing Officer details of brokerage paid to five parties along with names, addresses and PAN. Ledger accounts of “Brokerage and Commission” and “TDS on Commission” were produced. The payments were made through banking channels after deduction of tax at source. Bank statements evidencing such payments were also placed on record. In certain cases, copies of brokerage bills and income details of the recipients were filed.

It is an admitted position that the books of account have not been rejected. The turnover has been accepted. The assessee is engaged in trading in iron and steel where brokerage is a normal incident of business. There is no material brought on record to show that the commission payments have returned to the assessee in any form or that the recipients are fictitious. The disallowance has been made primarily on the basis that the assessee could not further substantiate the rendering of services beyond the documentary evidence produced.

In our considered view, once the assessee has furnished primary evidence such as ledger accounts, brokerage bills, bank statements and proof of deduction of tax at source, the onus stands substantially discharged. The Assessing Officer has not Mahendrakumar Danmal Mutha carried out any independent enquiry with the recipients nor has any adverse material been brought on record to demonstrate that the payments were sham or bogus. Mere non-production of the parties, in the absence of any contrary evidence, cannot by itself justify disallowance of the entire expenditure.

It is also pertinent to note that the commission expenditure constitutes a small percentage of the turnover and is not shown to be excessive or disproportionate. The Revenue has not established that the expenditure was not incurred wholly and exclusively for the purposes of business.

In these circumstances, we find no justification for sustaining the disallowance of the entire commission and brokerage expenditure of Rs. 14,18,330/-. The same is directed to be deleted. Accordingly, the ground of appeal