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Income Tax Appellate Tribunal, MUMBAI BENCHES “D”, MUMBAI
Before: Shri G. MANJUNATHA & Shri RAVISH SOOD,
सुनवाई क� तार�ख / Date of Hearing : 28/02/2019 30/04/2019 आदेश क� तार�ख /Date of Order: आदेश / O R D E R Per G. Manjunatha (Accountant Member) This appeal filed by the Revenue and Cross Objection by the assessee is directed against order of the Ld. CIT(A)-21, Mumbai, dated 16/06/2017 and they pertains to AY 2011-12.
Since, facts are identical and issues are common, for the sake of convince, the appeal of the Revenue as well as cross objection of the assessee were heard together and are disposed of by this consolidated order.
The Revenue has filed following grounds of appeal:-
“1.Whether on the facts and the circumstances of the case and in law, the Ld. Cit(A) has erred in deleting the addition of Rs.2,38,78,468/- out of total addition of Rs.2,65,31,631/- made on account of bogus sub-contract expenses, ignoring the fact that the said sub-contract expenses could not be proved genuine by the assessee even after giving sufficient opportunity.” 3. The brief, facts of the case are that the assessee, partnership firm is engaged in the business of civil work contractor & security service provider, filed its return of income for AY 2011-12 on 05/09/2011, declaring total income at 147 of the Income Tax Act, 1961 (hereinafter the Act) for reasons recorded, as per which income chargeable to tax had been escaped assessment on account of inflation of purchases by booking bogus entries and also bogus consultancy charges.
Accordingly, notice u/s 148 dated 09/01/2015 was served on the assessee. In response, to the notice, the assessee has filed letter dated 03/02/2015 and stated that the return of income filed on 07/09/2011 declaring total income of Rs.5,00,25,440/- may be treated as return filed in response to notice u/s 148 of the act. Thereafter, the case was selected for scrutiny and notice u/s 143(2) and 142(1) were issued to the assessee. In response, the Authorised Representative of the assessee appeared from time to time and filed various details as called for. During the course of assessment proceedings, in order to verify the correctness of the consultancy charges and also sub- contract charges, the AO called upon to file necessary details in view of specific information received from DDIT(Inv.), where it was found that during the course of search in the case of BVG India Ltd. the assessee was one of the beneficiary of bogus booked in order to inflate expenditure and reduce profits. In response, the assessee has filed complete details of consultancy charges as well as sub-contract payment made to seven parties at listed by AO in its assessment order at para-6. The assessee further stated that the payment for above expenditure have been paid through proper banking channel after deducting TDS as applicable from time to time. Therefore, there is no reason to doubt genuineness of above expenditure on the basis of search conducted in third party. The AO, during the course of assessment proceeding, in order to verify the claim of the assessee, issued notice u/s 133(6) to all parties and such notices were returned un-served by the postal authority with remark “left” and “not known”. Therefore, the AO, based o the information received from Maharashtra Sales Tax Department and also evidence gathered during the course of assessment proceedings, came to the conclusion that sub-contract charges debited in the name of seven parties is not proved conclusively with necessary evidences. The AO further observed that although the assessee has filed certain basic details including further evidences in the backdrop of clear findings from Maharashtra Sales Tax Department, where, it was found that these parties were involved in providing bogus bills without there being any business activity. Accordingly, he opined that sub-contract charges to above parties are bogus in nature and hence made addition of Rs.2,65,31,631/- to the returned of income of the assessee. Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A).
Before the Ld. CIT(A), the assessee has filed elaborate written submissions, which has been reproduced at para 6.6 of the pages 7 to 14 of the Ld. CIT(A)’s order. The sum and substance of argument of the assessee before the Ld. CIT(A) are that in respect of each party, the assessee has filed complete details and also explained the nature of work under taken by the parties in light of civil works executed by the assessee for M/s BVG India Ltd. The assessee further contended that it has declared gross profit of 35.27% and net profit of 7.2%. If the gross profit as well as net profit declared for the year compared to other cases, where similar nature of work is carried out, average, therefore merely for the reason of certain parties are listed in the list of Hawala dealers, genuine purchases from the above parties cannot be considered as bogus expenditure.
The Ld. CIT(A), after considering the relevant submissions of the assessee and also relied upon plethora of judicial precedence held that although the AO has brought out various reasons for disbelieving sub-contract charges debited in the profit & loss account in the name of seven parties, but fact remains that the assessee has filed complete details in respect of above parties including confirmations from the parties to prove genuineness of sub-contract payments. The Ld. CIT(A) further observed that even though necessary details has been filed before the AO, but fact remains that when the AO called upon the assessee to produce the parties in person, assessee could not do so, in fact, 133(6) notices were also returned un- served. Accordingly, taking into account, over all facts and also profit declared by the assessee, sustained 10% of additions made by the AO towards bogus sub-contract payment and deleted 90% on the ground that if 10% is sustained, the net profit for the year goes up to 11%, which is more than normal profit in this kind of business. The relevant observations of the Ld. CIT(A) are as under:-
“6.7. I have gone through the assessment order very carefully and also perused the paper book and submission of the appellant. It is noted that one of the points on which the assessment was reopened was in respect of consultancy expenses of Rs 10,00,00,000/- considered to be bogus. However after allowing opportunity to the appellant, the transaction was held to be genuine and no disallowance is made by the assessing officer. 6.8 In respect of sub-contract expenses considered as bogus, the main contention of the Assessing Officer was that purchase of goods payment were effected to various parties which are appearing in the list of suspicious dealers enlisted by Sales Tax Department, Government of Maharashtra. Further, notices issued to these parties were retuned back by Postal Authorities with remarks "Left". These parties had admitted before the sales tax authorities that they had not done any such transactions with the appellant. Further, as per the AO, the appellant could not produce these parties. On the basis of these combined reasons, the AO held that purchases made from these parties are not genuine and accordingly, made additions of Rs. 2,65,31,631/-, out of purchases. 6.9 To summarize, addition was made on the ground that parties from whom purchases were made and labour charges paid were enlisted on sales tax website as suspicious hawala dealers and notices issued to these parties were either not served upon or no reply were received. 6.10 As against the above two analogy of the Assessing Officer, the assessee has; submitted following documentary evidenccs:- a) Ledger Account confirmation of all the parties alongwith sample copies of invoices issued; b) Proof of payment made by account payee cheque; c) Copies of TDS certificates in respect of all the payments made to sub-contractor; and d) Confirmation of the parties. 6.11. The books of accounts of the appellant were audited by a Chartered Accountant Firm and no deficiencies have been reported. It is also an undisputed fact that whatever purchases and sub-contract charges were disallowed, corresponding sales thereof was accepted, recognized as sales and credited in Profit & Loss Account. The payments of purchases were made by account payee cheque only.
6.12 I also find that the appellant has effected total turnover of Rs. 69,54,47,180. Break-up of the turnover, cost of sales, gross profit and gross profit rate of all the five segments reported are as under:- Particulars Assessment Years 2011-12 Turnover 69,54,47,180 Less: Direct Cost 45,01,89,180 Gross Profit 24,52158,000 Gross Profit Ratio 35.27% Net Profit before tax 5,00,23,333 Net Profit Ratio 7.20%
6.13 A reference to the above would show that the appellant has earned Gross Profit Ratio of 35.27% which is extremely high on any given parameter and net profit ratio 7.20% is also close to the norms of 8% in presumptive provisions of taxation. This is after payment of Rs 10 crores as professional fees to partners. The appellant has paid taxes of Rs1,54,62,540/-. 6.14 Details of contracts and nature of work carried out was called. It was submitted by the Ld. AR that M/s BVG Crystal {JC} had obtained a contract from BMC. The contract was for Protection of Water Trunk Mains and adjoining MCGM land, reservoirs and pumping stations lands by constructing compound wall/fencing, development and maintaining afforestation etc. Copy of work order was submitted. The contract was assigned to the appellant. It was submitted that these contracts are large and where the appellant does not have the requisite expertise, it sub- contracts the same to various parties. 6.15. The projects and payments by EMC is audited. It cannot be that services were not provided to BMC. Certain decisions cited by the appellant does support the arguments of the appellant as is discussed next. 6.16. The Hon'ble Jurisdictional High Court in the case of CIT, Mumbai vs. Nikunj Eximp 'Enterprises Pvt. Ltd. (Income Tax .-ppeal No. g604 of 2010) held that "the Tribunal has deleted the additions on account of bogus purchases not only on the basis of stock statement i.e. reconciliation statement, but also in view of the other facts. The Tribunal records that the Books of Accounts of the respondent-assessee have not been rejected. Similarly, the sales have not been doubted and it is an admitLed position that substantial amount of sales have been made to the Government Department i.e. Defence Research and Development Laboratory, Hyderabad. Further, there were confirmation letters filed by the suppliers, copies of invoices for purchases as well as copies of bank statement all of which would indicate that the purchases were infact made. In our view, merely because the suppliers have not appeared before the Assessing Officer or the CIT(A), one cannot conclude that the purchases were not made by the respondentassessee."
6.17 In case of the assessee also sales have been effected to Government Department which has not been doubted. The assessee has submitted confirmation letters, bank statement, TDS Certificate, payment by account payee cheques etc., sales is not challenged and work is executed. 6.18. The books of the appellant are audited by a Chartered Accountants Firm and no adverse comments were made by the auditors on the books of accounts in their Audit Report. The assessing officer has not brought on record any evidence which proves that the assessed has made payment to parties and received money or money's worth back. Without proving that money has been received back, such addtion/disallowance is not permitted as held in the following cases:- (i) Dhakeshwari Cotton Mills Vs. CIT [1954] 26 ITR 775 (SC) (ii) Umacharan Shaw & Bros. VS. CIT [1959] 37 ITR 271 (SC) (iii) Laichand Bhagat Ambica Ram vs. CIT [199] 37 ITR 288 (SC) 6.19. The assessing officer has referred to but not quoted the statements denying transactions with the appellant by the impugned parties. It is also not mentioned whether such statements were provided to the appellant. The appellant has argued that the main reason behind the parties denying such transactions can be non-payment of VAT, however, only on this basis, it cannot be presumed that the said parties are solely engaged in the business of providing hawala entries and not doing any genuine business of purchase and sale of goods. This is also clearly evident from the [act that the parties have confirmed the transactions with the appellant and such confirmations are in place. However, such confirmations cannot be verified if the parties are not traceable. It is on record and proved that the appellant made the payment by account payee cheques. When payments are made by account payee cheques, nobody can deny the existence of the parties. Further, the A.O. has not brought any material on record to suggest that the payments made to purchase parties were received back in cash by the appellant. 6.20 Further, nowhere in the assessment order, the A.O. has thrown light on the fact that when the purchases have been found to be bogus by him, how the corresponding sales can be held to be genuine. Since beginning till the end of the assessment order, the A.O. has focused on the information received from sales tax department and report of DIT inv) and non-service of notices and non-appearance of parties to hold the purchases made by the appellant as non-genuine. However, the A.O. did not put efforts to verify the genuineness of sales corresponding to such purchases and simply accepted the sales as shown by the appellant in his Profit and Loss Account. The A.O. did not appreciate the fact that a transaction of purchase is a part of transaction of sale and that no sales can be conceived without purchases. 6.21 It is a well settled principle of law that one who approbates cannot reprobate. The hon'ble Supreme Court decided maxim of "qui approbat non reprobate" in case of Shyam Telelink Ltd. Now Sistema Shyam. Teleservices Ltd. vs. UO1 (2010) 10 SCC 165. The same view has also been taken by the Hon'ble Supreme Court in the case of R. N. Goswain vs. Yashpal Dhir AIR 1993 SC 352 wherein it has been held that "law does not permit a person to both approbate and reprobate. This principle is based on the doctrine of election which postulates that no party can accept and reject the same instrument and that a person cannot say at one time that a transaction is valid and thereby obtain some advantage, to which he could only be entitled on the footing that it is valid and then turn around and say it is void for the purpose of securing some other advantage." Therefore, if the A.O. accepts the sales then fie has to accept the corresponding purchases. Thus, if A.O. treated purchases as bogus, then sales is also required to be treated as bogus. Thus, the corresponding sales is required to be deducted from income which will entitle the appellant to a relief rather than addition. Thus, the action of the A.O. to disallow the entire purchases cannot be accepted. 6,22 In CIT vs. Kashiram Textile Mills (P) Ltd. (2006) 284 ITR 61 (Guj), the Hon'ble Gujarat High Court held that the Tribunal has taken note of the fact that Revenue has not disputed the details of the closing stock. Therefore, the Tribunal has found, that in the facts and circumstances of the case, the existence of the raw materials purchased cannot be doubted, and if that is the situation, there could be no case for disputing the purchases. The Tribunal has further recorded that there was no material on record to conclude that in addition to the alleged fictitious purchases there were also some other purchases for the same material under different invoices which could be reflected in the closing stock. It is further recorded by the Tribunal that to the contrary, from the details submitted, even if such a doubt existed regarding existence of some purchases over and above the alleged fictitious purchases, the doubt on this aspect was also removed. For this purpose the Tribunal has by way of illustration analyzed the account of one of the items, and come to the irresistible conclusion that quantity remaining in the closing stock is only out of the purchases effected by the assessee. It is in light of the aforesaid findings that the Tribunal has held that no addition was warranted on account of alleged fictitious purchases. Similarly, in relation to the rate of purchases, the Tribunal has recorded that in absence of any material to show that the purchase price shown in the invoices was inflated, it was not possible to sustain the addition on the said ground. The Tribunal has further recorded that there was no evidence to show that a part of the amount paid to the suppliers had come back to the assessee and, therefore, also there was no case for any addition in respect of such purchases. It has further been found by the Tribunal that purchases as such are deductible while computing profits and hence even if some higher purchase price had been paid that would be no ground for making or sustaining any addition, in absence of any evidence to show what was the prevailing market price. Thus, on reading the impugned order of Tribunal as a whole it is apparent that it is solely based on an appreciation of evidence and records finding of fact in light of the evidence which was led before the Tribunal. In the circumstances, there is no reason to take any other view of the matter.
6.23 The Hon'ble Bombay High Court in the case of Babulal C. Borana vs. ITO (282 ITR 251) held that where identity of person from whom goods have been purchased and source of investment in such goods had been explained by assessee and it was established that amounts paid by the assessee by cheque for those goods had been received and further, books maintained by the assessee had not been rejected by A.O. and in fact addition was based on entries made in those books it could be said that transaction was genuine. 6.24 In the case of Jitendra Harshadlkumar Textiles vs. ITO (ITAT, Mumbai)(ITA No.771 & 2211/Mum/2011 for A.Y.2007-08) dated 21.11.2012, a survey action was undertaine on the ground concerns of Shri Rakesh Kumar Gupta and his family and on the basis of statement given by Shri. Rakesh Kumar Gupta during such survey, purchases made by the assessee from his group concerns were treated as bogus and thus, addition of Rs. 15,38,792/- was made. On appeal by the assessee to CIT(A), such addition was restricted to Rs. 3,72,079/- on the ground that entire purchases cannot be added back as unexplained as the assessee has already shown the sale proceeds against alleged purchases. The Hon'ble ITAT deleted the entire addition and held that 'There is no material on record to say that the purchases made by the assessee from the said concern were bogus except the general statement recorded by the department in the case of Shri Rakesh Kumar Gupta, which was later on retracted. In absence of any material brought on record against the submissions made by Shri Rakesh Kumar Gupta in his letter dated 20/1212009 filed before the AO of the assessee, the addition, if any, made in the case of the assessee will be based on presumption only and it cannot be sustained in the eyes of law. As against that assessee has submitted various evidences to show that the actual delivery of goods was received by the assessee from the sczd party which has not been discarded by the AO. The addition sustained by Lci. CIT(A) is also on presumption basis. Therefore, keeping in view the facts and circumstances of the case, we are of the opinion that additions made by the AO deserves to be deleted in its entirety." The above ruling of ITAT, Mumbai was also followed by it in the case of M/s; C. Chotalal & Co. vs. ITO in to 3967/Mum/2012 dated 24.09.2013 and M/s. Pramit Textiles vs. ITO in ITA Nos. 3948 to 3953/Mum! 2012 dated 01.10.2013. 6.25. On the other hand the fact remains that the parties are not produced and remain untraceable. Their confirmations cannot be verified. This is not a case of trading concern where there is one to one correspondence between expenses and sales. However, looking to the facts that various parties were enlisted by sales tax department as "suspicious hawala dealers' and notices issued were either returned or compliance not made, the possibility of some inflated purchases/cost can not be ruled out, even while accepting the sales. The appellant has failed to furnish the delivery challan evidencing proof of receipt of goods. The appellant has failed to produce the parties before the ld Assessing Officer. The net profit shown is 7.20 % which is lower than the normative 8% in such business. The assessing officer has disallowed 100010 of the purchase/expense from 12 CO No.325/Mum/2018 M/s Middle Earth Enterprises the impugned parties, based on which the net profit goes up to 11%. In view of the above, 10% of the bogus purchases made by the id Assessing Officer amounting to Rs 26,53,163/- is confirmed. Thus, the appellant is entitled to relief of Rs 2,38,78,468/-. These grounds of appeals are thus, partly allowed."
The Ld. DR submitted that the Ld. CIT(A) was erred in deleting 90% sub-contract expenses ignoring the fact that such sub-contract expenses cannot be proved to be genuine by the assessee even sufficient opportunity was given. The Ld. DR further submitted that filing confirmation and other details would not sufficient enough to prove genuineness, when information gathered during the course of assessment proceedings, clearly proves that the assessee is a beneficiary of accommodation bills provided by Hawala dealers.
The Ld. AR for the assessee, on the other hand, strongly supporting the order of the Ld. CIT(A) submitted that assessee has filed complete details including confirmations from all parties along with sample copies of invoices, TDS certificates, copies of workout, issued by MCGM and also payments certificate for having done the work were also furnished. The AO has accepted books of account of the assessee. All payments made to the sub-contractors through proper banking assessee has declared substantial income for the year under consideration which works out to 7.2% of total turnover. If payment of royalty to partnership added back then net profit declared for the year works out to 21.57% which is more than the industry average. The Ld. CIT(A) considering all these aspects, had rightly deleted 90% of expenses disallowed by the AO, hence, his order should be upheld.
We have heard both parties, perused the material available on record and gone through the orders of authorities below. The sole basis for making additions towards sub- contract expenses is report of DGIT(Inv.) which was further supported by Maharashtra Sales Tax Department report, where, it was noticed that certain parties were involved in providing accommodation entries without there being any actual business activity. The AO further taken note of information gathered during the course of search in the case of BVG Group. The AO came to the conclusion that sub-contract charges paid to seven parties as listed in assessment order at para 6 are bogus in nature, which are not supported by proper of report of Maharashtra Sales Tax Department and further coupled with the fact that parties never responded to 133(6) notices. It is an admitted fact that the assessee has also filed complete details including confirmations form the parties and also worksheet issued by the MCGM to prove nature of work carried out by the assessee and sub-contractors. The assessee has also filed payment certificates issued by MCGM for having done work at site. All payments are made to the parties through proper banking channel after deducting applicable TDS. It is an admitted fact that the assessee has declared substantial net profit which is 21.57% of gross turnover of the year before the payment of royalty to partners. When we compare to financial result for year under consideration to the nature of business carried out by the assessee, we find that profit declared by the assessee is much better than the profit normally declared in this kind of business. The Ld. CIT(A) after considering all these aspects and also taken note of fact that the parties could not be produced before the AO at the time of assessment proceedings, made a reasonable estimate of 10% disallowance towards bogus arguments in light of facts brought out by the AO to argue that the assessee could not prove the genuineness of transactions but fail to make out a case with any other further evidences to contradict findings of fact recorded by Ld. CIT(A). On the other hand, the assessee has filed complete details which has been rightly accepted by the Ld. CIT(A). Therefore, we are of the considered view that there is no error in the findings recorded by the Ld. CIT(A) while reducing disallowances made by the AO towards alleged bogus sub-contract payments to the extent of 10% of such expenses, accordingly, we are inclined to uphold the findings of the Ld. CIT(A) and dismissed the appeal filed by the Revenue.
The assessee has filed cross objection challenging the validity of reopening of assessment. The Ld. AR for the assessee, at the time of hearing, submitted that if the department’s appeal is dismissed, then he does not want to press cross objection filed by the assessee challenging the validity of reopening of assessee. Since, we have already uphold the findings of the Ld. CIT(A) and dismissed appeal filed by the reopening of assessment is dismissed as not pressed.
In the result, appeal filed by the Revenue as well as cross objection filed by the assessee is dismissed.
Order pronounced in the open court on 30/04/2019.
Sd/- Sd/- (Ravish Sood) (G. Manjunatha) �या�यक सद�य /JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER मुंबई Mumbai; �दनांक Dated :30/04/2019 f{x~{tÜ? P.S //.�न.स. आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant (Respective assessee) 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT, Mumbai. 4. आयकर आयु�त / CIT(A)- , Mumbai, 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,