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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
These cross appeals are arising out of the order of Commissioner of Income Tax (Appeals)-3, Mumbai [in short CIT(A)], in appeal No. 306/13- 14, vide dated 25.08.2015. The Assessment was framed by the Joint Commissioner of Income Tax, Circle-2, Kalyan (in short ‘JCIT’/ AO) for the A.Y. 2010-11 vide order dated 28.03.2013 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
2. The first issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of interest on late payment of TDS amounting to ₹ 81,634/-. For this assessee has raised the following ground No.1: -
1. The Learned CIT(A) has erred in confirming the disallowance of the interest on late payment of TDS amounting to Rs. 81,634/- U/s. 37(1) of the Act, 1961.”
We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the assessee has made late payment of interest on TDS on amounting to ₹ 81,634/- and claimed the same as deduction under section 37(1) of the Act. The AO and CIT(A) disallowed the same this being penal in nature. We find that this interest on TDS is Penal in nature and cannot be allowed as deduction under section 37 of the Act because it has no relation with the business of the assessee. There is no commercial expediency in the same. Hence, we affirm the orders of the lower authorities and this issue of assessee’s appeal is dismissed. ,5235/Mum/2015 4. The next issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of repair and maintenance expenses of software license. For this assessee has raised the following ground No. 2: -
2. The Learned ClT(A) has erred in confirming the disallowance of repairs and maintenance amounting to Rs. 1,02,924/-, being the charges paid to Cadtech Consultants Private Limited and MIs. Hewlett Packaging towards annual maintenance of software license and considering the same as pre expenses.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee has claimed the expenses to the tune of ₹ 11,06,713/- under the head of repair and maintenance. This includes an amount of ₹ 4,13,074/- being charges paid to Cadtech consultants Pvt. Ltd. towards the annual maintenance of software license. The AO noted that as per the agreement for maintenance of software license from 01.06.2009 to 31.05.2010 the assessee has paid these expenses and hence, he disallowed the expenses relating to the period of 01.04.2010 to 31.05.2010. Accordingly, he disallowed a sum of ₹ 1,02,924/-. The CIT(A) also confirmed the action of the Assessing Officer. Aggrieved, assessee is in appeal before the Tribunal. We find that the above expenditure is paid in the year for the relevant assessment and assessee is following this method consistently and claim the same consistent in the year of payments. Accordingly, we allow this claim of the assessee as business expenses. This issue of assessee’s appeal is allowed.
The next issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of expenses relatable to internet ,5235/Mum/2015 charges amounting to ₹ 74,732/-. For this assessee has raised the following ground No. 3: -
3. The Learned CIT(A) has erred in confirming the disallowance of internet Charges amounting to Rs. 74,732/-, as considered by the AO as prepaid expenses.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee has claimed the total internet charges of ₹ 4,36,780/- for internet connection of office at factory. But the AO also noted that the assessee has claimed the expenses relating to internet charges paid for the month of April 2010 to June 2010 i.e. amounting to ₹ 74,732/-. According to AO, these expenses related to next year and hence, he has disallowed. The CIT(A) also confirmed the action of the Assessing Officer. We find from the above fact that these payments are for the month of April to June 2010 and the bills raised is for the month of February 2010. These are advance payment as prepaid expenses not allowable in this year. But the AO can allow these expenses in AY 2011-12. For this assessee has to move rectification application and AO will consider the same. This issue of the assessee’s appeal is dismissed.
The next issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of consultancy charges. For this assessee has raised the following ground No.5: -
5. The Ld. ClT(A) has erred in confirming the disallowance of consultancy charges amounting to Rs. 7,500/-.”
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee has paid consultancy charges to NK Poddar and Co. for excise and service tax ,5235/Mum/2015 matters for FY 2008-09 and according to AO the same cannot be allowed as expenses in AY 2010-11. We find that this payment is made in the relevant assessment year although it is pertain to FY 2008-09. We are of the view that this is allowable and we direct the AO accordingly.
The next issue in this appeal of assessee is against the order of CIT(A) confirming the adhoc disallowance of bogus purchases 20%. For deletion revenue is in appeal. The assessee has raised the following ground No. 4: - ““a) The Ld. CIT(A) has erred in directing the AD. to make adhoc addition of 20% as inflated purchases amounting to Rs. 5,49,868/- (being 20% of Rs. 27,49,338/-), from the below stated parties and treating the same as not genuine purchase of materials, which were used in the fabrication of equipment's supplied to the customers of appellant and treating the same as Bogus Purchases, on the basis of inference and assumptions and the same is not based on any adverse evidence or detection of accounting ei1ries in the books of accounts of the Appellant.
Particulars Amount of Purchases Disallowed MIs. Pooja Steel & Alloys 19,78,240/- MIs. Navratan Impex 7,71,098/- Total 27,49,338 b) The Ld. CIT(A) has erred in directing the A.O. to disallow and to make the addition towards the inflated purchases amounting to Rs. 5,49,868/- (being 20% of Rs. 27,49,338/-), disregarding completely the fact that the equipment fabricated out of the purchase of material from MIs. Pooja Steel & Alloys and MIs. Navratan Impex, at the ,5235/Mum/2015 manufacturing unit of the appellant is liable to excise duty and the captioned equipment fabricated at the factory of the appellant was delivered to the customer only after payment of excise duty and the same is recorded in statutory. excise and other records maintained by the appellant.”
Revenue has raised the following ground No. 1 and 2: -
1. On the facts and in the circumstances of the case and in law, the Ld. CIT (A)-3, Thane has erred in deleting the addition of Rs. 21,99,470/- out of total addition of Rs. 2749,338/- made on account of bogus purchases, despite holding that the purchases were not genuine and the assessee failed to prove the genuinen4s of the transactions.
2. On the facts and in the circums4cesof the case and in law, the Ld. CIT (A)-3, Thane erred in deleting the above addition despite1he fact that the assessee failed to discharge her onus of proving the purchases.”
2. Briefly stated facts are that the assessee engaged in the business of manufacturing of fabricating equipments. The AO received information from DGIT (Investigation), who in turn received information from Sales Tax Department, Mumbai that the assessee has made purchases from hawala parties, as listed in hawala dealers by the Maharashtra Sales Tax Department who are providing bogus bills of purchase amounting to Rs. 27,49,338/- as admitted hawala dealers in their deposition before the authorities. The following are details of bogus purchase: - “Sl Name of party Amount No. 1. Pooja Steel & Aloys 19,78,240 ,5235/Mum/2015 2. Navratam Impex 7,71,098 3. Total 27,49,338/- 11. According to information received the name of this party was appearing in the list of hawala entry operators as supplied by sales Tax Department of Maharashtra. The hawala traders admitting before the sales tax authorities in their deposition that they were providing only accommodation purchase bills on commission basis without being actual purchase/ sale of goods. The AO during the course of scrutiny assessment proceedings required the assessee to file the details of purchase. The assessee filed copies of purchase bills from the above said parties, copies of ledger extract and copies of bank statements to prove the payments by cheque. The AO required the assessee to produce these parties for verification but assessee expressed his inability to do so. According to the AO, the assessee failed to establish the genuineness of the purchase and accordingly, he made addition of unproved purchase at ₹ 27,49,338/- to the return income of the assessee. Aggrieved, assessee preferred the appeal before CIT(A), who restricted the disallowance at 20% of the bogus purchases by observing in para 10.0 observing as under: - “10.0 Ground No.4 is directed against addition of Rs.27,49,338/- as bogus purchases.
(i) I have carefully considered the submissions of the appellant, the observations of the AO in the assessment order, case laws relied upon by the appellant and the facts of the case, and therefore, I proceed to decide the appeal of the appellant.
(ii) Considering the totality of the facts of the case, I am of the considered opinion that, It would be reasonable to disallow 20% as Inflated purchases on the total alleged bogus purchases. ,5235/Mum/2015 (iii) The entire addition of the so-called bogus purchases made by the AO is not justified as against the alleged bogus purchases there were corresponding sales and the closing stock has also been accepted; the rate of GP, NP and percentage of consumption are almost the same with immediate preceding year, and therefore, the entire purchases cannot be disallowed, however, the element of inflated purchases cannot be ruled out.
(iv) The so-called bogus purchases were made through brokers whereas other purchases were made through direct dealers, therefore, question arises as to why these purchases were made through brokers, which shows that an element of inflated purchases and purchases from grey market cannot be ruled out.
(v) The hawala dealers have admitted before the sales tax department that goods were not supplied but neither Sales tax Department nor the AO have not really proved that the purchases were found bogus. Therefore, it shows that goods were supplied but the supplied through Hawala parties by inflating the purchases.
(vi) Even though the AO has relied upon on the information from Sales tax Department, however, the AO has not made further enquiries, just simply relying on the information will not justify to the make the whole purchases from hawala dealers as bogus.
(vii) The hawala dealers are absconding or not traceable, may be they have evaded sales tax but from income tax angle, so far no investigation was carried out against the so-called hawala traders. ,5235/Mum/2015 (viii) Various judicial decisions have adopted the percentage of inflated purchases from 12% to 30% depending on the facts of the case. Therefore, In this case, 20% is adapted as inflated purchases and the A.R. of the appellant has also agreed, vide letter dated 25.08.2015.
(xii) In view of the above stated facts, the addition on account of inflated purchases on alleged bogus purchases works out to Rs. (27,49,338/20%) Rs.5,49,868/- and the same is added to the total income of the appellant. The appellant get relief of Rs.(27,49,338 - 5,49,868) = Rs.21,99,470/-. Therefore, the addition is confirmed to the extent of Rs.5,49,868/-.”
We have considered the issue and gone through the facts and circumstances of the case. We find from the facts of the case and argument of both the sides, that the CIT(A) has applied the profit rate at the rate of 20%, which according to us is on higher side going by the nature of business of the assessee i.e. manufacturing of fabricating equipments. We are in full agreement with the argument of the learned Counsel for the assessee and according to me a profit rate of 12.5% will meet the end of justice in view of the decision of Hon’ble Gujarat High Court in the case of CIT vs. Smith P. Seth (2013) 356 ITR 451 (Guj) Hence, we direct the AO to recompute the income after applying profit rate at the rate of 12.5%. The appeal of the assessee is partly allowed and the appeal of Revenue is dismissed.
One issue remains in the Revenue’s appeal is as regards to the order of CIT(A) deleting the disallowance of exhibition expense. For this Revenue has raised the following ground No. 3: - ,5235/Mum/2015
3. On the facts and in the circumstances of the case and in law, the Ld. ClT(A)-3. Thane erred in deleting the disallowance of Rs. 707587/- made out of exhibition expenses without passing a speaking order and not appreciating the fact that the said expenses was allowable in A.Y. 2009-10 and not in AY.2010-11.”
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the CIT(A) has allowed the claim by observing that the assessee has debited a sum of ₹ 7,08,587/- in the relevant AY 2010-11 and also deducted the TDS. For this CIT(A) observed in Para 9 as under: - “9.0 Ground No.6 is directed against disallowance of Rs.7,07,587/- as the invoice is dated 13.02.2009 pertaining to A.Y.2009-10.
(I) I have carefully considered the submissions of the appellant, the observations of the AO in the assessment order and the facts of the case, and therefore, I proceed to decide the appeal of the appellant.
(ii) In this regard, the appellant has given a written submission along with documentary evidences that even though the bill amounting to Rs.8,32,587/- was raised in Feb 2009 & paid an advance of Rs.1,25,000/- and the same was debited in F.Y.2008-09. The balance amount of Rs.7,08,587/- debited.in the aforesaid year as exhibition was carried out in the aforesaid year relevant to A.Y.2010-11 and TDS has also been deducted, therefore, the appeal of the appellant on ,5235/Mum/2015 this ground is allowed and the disallowance made by the AO is deleted.”
We find that no infirmity in the order of CIT(A) and hence, the appeal of the Revenue is dismissed.
In the Result, the appeal of assessee is partly allowed and the appeal of Revenue is dismissed.
Order pronounced in the open court on 24-08-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 24-08-2018 kao kI ga[- .