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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
The only common issue in this three appeals of assessee is against the order of CIT(A) confirming the action of the AO in disallowing the entire bogus purchases merely on the basis of list of suspicious dealers provided by Maharashtra Sales Tax Department i.e. in AY 2010- 11 amounts of ₹ 4,59,25,643/-, in AY 2011-12 amount of ₹ 7,52,77,374/- and in AY 2012-13 an amount of ₹ 2,64,43,393/-. In all the three years the facts and circumstances are exactly identical and issue is common and hence we will take the facts from AY 2010-11 in and will decide the issue. The ground raised
by assessee in AY 2010-11 reads as under: -
1. The learned CIT(A) erred in confirming the disallowance of Rs.4,59,25,643/- merely on the basis of list of suspicious parties by Sales tax Department without appreciating the fact that the goods were actually purchased and hence, the disallowance of the entire amount aggregating to & 226/Mum/2016, 4225/Mum/2017 Rs.4,59,25.643/- is without any justification and liable to be deleted.
2. The ld. CIT(A) further failed to appreciate that there is no estoppel against the statute and that the statement recorded of the Director in the course of survey proceedings had no evidentiary value and could not be relied upon solely for sustaining the disallowance made by the AO without appreciating that in course of survey action, no material or evidence was found even remotely suggesting any non-genuine purchases and hence, the disallowance sustained merely on the basis of statement of Director is without any justification and liable to be deleted.
3. The Ld. CIT(A) failed to appreciate that the AO had not proved with any material evidence that the purchases made from parties listed by Sales tax Department were in fact non-genuine purchases and neither any investigation was carried out by AO proving that the funds have come back to the coffers of the appellant / its directors; nor copy of statement recorded, (if any, by Sales tax Department) of any of the purchase parties (as observed by AO in assessment order) was furnished to the appellant nor the CIT(A) gave opportunity of cross- examination of any of the purchase parties and hence, the disallowance sustained without adhering to the principles of natural justice is without any justification and liable to be deleted.
4. The learned CIT(A) further failed to appreciate that purchases made to the extent of & 226/Mum/2016, 4225/Mum/2017 Rs.1,97,14,945/- were capitalized in the books of account and only depreciation thereon was claimed, which fact the Ld. CIT(A) ought to have verified and deleted the disallowance instead of directing the AO to verify and allow the claim if found correct and hence, the disallowance of Rs. 1,97,14,945/- is unjustified and liable to be deleted.
5. The ld. CIT(A) further failed to appreciate that amount of ₹ 2.20 cr. was paid only as advance to the party in AY 2010-11 and was reflected in the balance sheet as such and was claimed as expense in the profit and loss account only in AY 2011-12 and disallowance thereof was already made in AY 2011-12, which fact the Ld. CIT(A) ought to have verified and deleted the disallowance instead of directing the AO to verify and allow the claim if found correct and hence, the disallowance of ₹ 2.20 crore is unjustified and liable to be deleted.”
Briefly stated facts are that the assessee is engaged in manufacturing and/or marketing of bulk drugs and formulation and also in trading activity whereby formulation purchases from other companies are resold. The AO noticed during the course of assessment proceedings on the basis of information received from Maharashtra Sales Tax department Mumbai that the assessee is making purchase from Hawala parties/issuing bills without delivery of goods or articles and assessee being one of the beneficiaries of the hawala entries during the assessment year 2010-11 and 2011-12 and 2012-13 from the following & 226/Mum/2016, 4225/Mum/2017 parties.
Admittedly, these above parties are declared as hawala parties by Maharashtra Sales Tax Department and these parties have admitted that they were issuing merely bills/ accommodation entries after receiving payment through cheque and non-delivery of actual goods. This was admitted before Maharashtra Sales Tax Department, Mumbai by these parties. In the meantime, a survey under section 133A of the Act was conducted by the investigation wing of the Income Tax Department on assessee’s premises on 15.01.2013 and assessee voluntarily admitted bogus purchases/ receiving hawala bill without receiving in goods.
4. The AO added the entire bogus purchase of ₹ 8,76,40,588/- by observing in Para 12.10 and 12.11 as under:-
“12.10. I have carefully considered all the contentions of the assessee as aforesaid and have also pursued all the details and data placed on record including the report from the survey team of & 226/Mum/2016, 4225/Mum/2017 the Department on the Survey u/s. 133A carried out at the assessee's premises on 15/01/2013. However, in view of the declarations filed by the above suppliers with the Sales Tax Department, Mumbai stating that they have not supplied any goods to the assessee under the relevant Purchase invoices and the fact that the suppliers have also not paid any sales tax on the bills raised on the assessee and the fact that the bills issued by these suppliers are not genuine and that the assessee failed to produce any other documents to establish genuineness except the purchase bills and ledger accounts and considering the assessee's own statement in the course of survey proceedings u/s. 133A and going by its own admission of income on this account as per its aforesaid letters, the assessee's contentions as to genuineness of the above purchases are not found to be acceptable and therefore, the entire purchases aggregating to Rs.6,56,40,588/made on capital as well as on revenue account and an amount of Rs.2.20 crores paid as advance to the said MIs. Jay Corporation for purchase of goods in A.Y.2010-1 1 (as detailed and admitted by the assessee as per its letter dated 28.01.20 13 read with letter dated 08.02.2013 and referred to in Annexure I to this assessment order) are disallowed as non-genuine Purchases and added to the assessee’s income in A.Y.2010-11, u/s. 37(l)of the I.T. Act.
12.11. As the purchases on capital account are also not confirmed by the suppliers and that the assessee continues to claim depreciation on the relevant capital assets in the subsequent years, the & 226/Mum/2016, 4225/Mum/2017 entire purchases of such capital asset and not just the depreciation thereon for AY 2010-11 are disallowed."
Aggrieved, now assessee preferred the appeal before CIT(A), who also confirmed the action of the AO by observing as under: - “careful perusal of the above referred statement, it is very clear that the appellant has itself offered the additional income. The Department has not asked him to offer any income. It is the appellant who has failed to substantiate its claim of purchases and requested the department not to levy penalty. Hence the appellant's submission that the AO relied only on the statement recorded by the Maharashtra VAT Department is absolutely on wrong foot.
The appellant, during survey proceedings has itself failed to substantiate its purchases and also faded to substantiate the same said purchases during assessment proceedings. The appellant has also filed a letter offering the same as its income and hence the Department has not investigated deep into the matter. Appellant's subsequent retraction on account of initiation of penalty proceedings by the AO is not worth to be noted.
If the appellant has made genuine purchases, then the appellant has to prove it at the time of survey proceeding. It could not be proved also at the time of assessment proceedings. The offering of income on theses two occasions has itself proved that there is no evidence of actual purchase of material. Purchase cannot be proved by itself on the mere production of bills and payment by cheque. There & 226/Mum/2016, 4225/Mum/2017 has to be more reliable evidence that the material is actually delivered. Hence there is no force in the submission of the appellant. The decision referred to by the appellant is of no value here as it is on different fact and circumstances. In the present case, the appellant has itself failed to substantiate its claim of purchase and the addition is not made merely on suspicion. There is both non substantiation of proof of purchase and appellants is itself offering the same as its income on two occasions.
The appellant further submitted that it would like to cross-examine all persons whose statement are recorded by the VAT Department, once the copies of the same are furnished to the appellant.
On perusal of the assessment order, it is seen that the appellant has not requested for cross examination of any person. Even the appellant has itself offered the income for tax as it failed to substantiate the claim of the impugned purchase. It is also pertinent to mention here that the appellant itself stated that as the assessing officer has initiated penalty proceedings, the appellant is consisting the disallowance. The initiation of penalty proceedings is itself premature at this state.
The Apex Court has correctly laid down the rules with sufficient elasticity and amplitude that to stake the right depends on the terms of the statute, the nature of the proceedings or of the function exercised and also the conduct of the party and the circumstances of the case. & 226/Mum/2016, 4225/Mum/2017 The Hon'ble Bombay High Court in the case of GTC Industries Ltd. reported in 65 ITD 380, held that "where statements of witnesses were only secondary and of subordinate material used to buttress main matter connected with amount of additions, it had to be held that there was no denial of principles of natural justice if witnesses were not allowed to be cross-examined by assessee."
Hence, in my opinion, whether the right to cross examine has to be granted or not depends solely upon the facts and circumstances of a particular case. In this case I do not find any merit that the appellant has to be given the right to cross examine.
The principal has been laid down clearly in several cases that Evidence Act does not apply to the proceedings under the Income Tax Act and further that the artificial or technical rules of evidence are not applicable to Income tax proceedings. This aspect of the matter has received carefully consideration by the Hon'ble Supreme Court in Chuharnal V/s CIT 172 ITR 250. It has been held in various cases that the statement given by the assessee at the time of survey I search action is binding on it and any retraction made by him has no meaning at all. The various judicial decisions in this regard areas follows 1 Hiralal Maganlal & Co V/s DOT 96 lTD 113 MUM.
2 Rameshchandra & Co V/s CIT 168 ITR 375 (BOM) & 226/Mum/2016, 4225/Mum/2017 3. Hotel Kiran v/s Assistant Commissioner of Income-tax 82 lTD 453
Video Master V/S Joint Commissioner of Income- tax 83 ITD 102 It is pertinent to mention here that Hon'ble Supreme Court in the case of Pullangodo Rubber Produce co Ltd. V/s State of Kerala 1792 CTYR (SC) 253 has held that, an admission is an extremely important piece of evidence though it is not conclusive. Therefore, statement made voluntarily by the assessee could form the basis of the assessment. The burden lies on the assessee to establish that the admission made in the statement at the time of survey was wrong.
The Hon'ble ITAT in the case of Carpenters Classic (EXim) Pvt. Ltd. V/s DCIT ITAT, Bangalore reported in 108 lTD 142), held that when statement was made voluntarily and was not alleged to have been obtained wider threat or coercion, onus was on the assessee to provide that the said declaration was made under any misconception of facts. Since assessee had not taken any steps to rectify its declaration before authorities before whom such declaration was made, there was not valid reason for retraction of the same.
In the present case, the authorized person of the appellant company, has himself given the statement that the appellant is unable to justify the actual delivery of the goods. He has stated that the purchase bills were never supported by any evidence either at the time of purchase nor & 226/Mum/2016, 4225/Mum/2017 subsequently during recording of statement (Question and Answer to No.42 & 43). Accordingly, the appellant has voluntarily offered the unverifiable purchases for taxation both during survey and at assessment time.
But, at the same time there is some force in the submission of the appellant that purchases of Rs 1,97,14,945/- is of capital nature and accordingly depreciation should only be disallowed. Similarly, purchase of sales promotions items of Rs 2.20 Cr is debited to the profit and loss account in A.Y. 2011- 12. Hence, it should be disallowed for A.Y. 2011-12.
In view of the above, the AC) is directed to verify from records whether the appellant has capitalized the purchases of Rs 1.97 crores and taken depreciation thereof. U the same is true then A.O. has to disallow the same and also rectify the subsequent assessment order. AO is also directed to verify the sale promotion expenses debited to profit and loss account of A.Y. 2011-12. If it is debited to profit and loss account of A.Y. 2011-12 then disallowance should be made from A.Y. 2011- 12 only. Accordingly, Grounds of Appeal No. 1 to 8 are dismissed for A.Y. 2010-2011."
Aggrieved, now assessee is in appeal before Tribunal.
Before us, the learned Counsel for the assessee filed details of purchase made and payment made by account payee cheques. The learned Counsel for the assessee also filed complete stock register and stated that the AO has not doubted the sales executed by the assessee on account of purchase disclose from hawala parties. The learned & 226/Mum/2016, 4225/Mum/2017 Counsel for the assessee stated that the complete Vat was paid to the Sales Tax Department of Maharashtra on these bogus purchases. At last, the learned Counsel for the assessee before us filed copy of Tribunals order in assessee’s sisters concern case in the case of DCIT vs. Laboratories Griffon Pvt. Ltd. dtd. 11.04.2018 for AY 2011-12, wherein Tribunal has restricted the disallowance at 30% of the bogus purchase by observing that the assessee might have made purchase from grey market and obtained bogus purchase bills from hawala parties just to avoid VAT and other regulatory procedures. The Tribunal in Para 19 held as under: -
19. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee company claimed to have disbursed gift articles for an amount of Rs.20,97,900/- to the distributors/dealers for promotion of the pharmaceuticals products which it manufactures and trades in. The claim of the assessee was not acceptable for the AO for the reason that the 98.18% of the total sale of the pharmaceutical products of the assessee company was sold through the consignee M/s. Franco Indian Pharmaceuticals Pvt. Ltd. and in this assessment year the turnover has been less and, therefore the AO was not satisfied with the claim of the assessee. Moreover, he took note of the fact that of an internal information he received from the survey/search conducted at the business premises of M/s. Subhlakshmi Enterprises of Mumbai confirmed that they were providing accommodation entries and, therefore, the assessee company’s claim that it had purchased gift material (SS dinner sets) from M/s. Subhlakshmi Enterprises worth Rs.20,97,900/- is & 226/Mum/2016, 4225/Mum/2017 not real and so is a bogus entry. In the light of the said statement of the seller of the gift material, the AO concluded that the assessee is only a beneficiary of the bogus entry given by the accommodation provider and thus, he disallowed the claim of the assessee. On appeal, the Ld. CIT(A) confirmed the action of the AO. Aggrieved, the assessee is before us has assailed the decision of the Ld. CIT(A) on the ground that the internal communication of the seller of the gift material M/s. Subhlakshmi Enterprises has never been confronted with the assessee company and they were kept in dark of the said statement which has been recorded behind the back of the assessee company and has been relied on for forming adverse conclusion which has raised suspicion in the mind of the AO/CIT(A). According to the Ld. AR, if the AO comes across any adverse material and if he decides to use it against the assessee, then first of all the copy of the adverse material should be handed over to the assessee and thereafter, the assessee should be given an opportunity to cross examine the person who has given adverse material/evidence/deposed against it. For the said proposition, the assessee has relied on the decision of Hon’ble Supreme Court in the case of Andaman Timber Industries Vs. Commissioner of Central Excise 62 Taxman.com 3, wherein their Lordships have held that the failure to give the assessee the right to crossexamine witnesses whose statements are relied upon results in breach of Natural Justice and it is a serious flaw which renders the order a Nullity. It has also been brought to our notice that in the earlier years, the & 226/Mum/2016, 4225/Mum/2017 very same practice followed by the assessee company to disburse the gift material to the dealer/distributor has always been allowed and, therefore, on the ground of consistency, the claim has to be allowed and for that has relied on the decision of Hon’ble Supreme Court in the case of Radhasomy Satsang vs CIT 193 ITR 321 (SC) wherein it was held that when the facts and the law permeating in the earlier years are the same, then a divergent view should not be taken and consistency must be followed. We find considerable force in the aforesaid contention of the assessee on this issue. However, we take note of the fact that the assessees have failed to give the list of the recipients of the gift material or confirmation from them when called upon by the AO/Ld. CIT(A). When a claim of expenditure is claimed the assessee is duty bound to produce the vouchers/bills as well as material to show the genuineness of the claim. Here in this case, the assessee has purchased the material through banking channel from M/s. Subhalakshmi Enterprises. Though in another proceeding (survey/search) which happened in respect to the seller M/s. Subhalakshmi Enterprises of gift items, wherein the seller has given a statement that it is providing accommodation entries cannot be the only material which can make the claim of the assessee that it has purchased the SS Dinner set from them as bogus. Since the assessee has produced bills and invoices for purchase of the SS Dinner set from M/s. Subhalakshmi Enterprises and has made the payment through banking channel, the purchases cannot be disbelieved on a & 226/Mum/2016, 4225/Mum/2017 statement recorded behind the back of the assessee and without confronting the assessee company with the adverse material and unless the assessee had an opportunity to cross examine the person who has deposed on behalf of M/s. Subhalakshmi Enterprise, the internal communication received by the AO cannot be a ground to find fault with the veracity of the claim/invoices/bills/bank statement etc. produced by the assessee to discharge the onus to show that it has purchased the gift (SS Dinner set) from M/s. Subhalakshmi Enterprise. Having said so, we note that the assessee has not given the list of recipients of gifts i.e. distributors/dealers when asked for by the Ld. CIT(A)/AO, therefore, we are inclined to disallow 30% of the claim. The AO is directed to restrict the claim to 30% of its claim and the assessee gets partial relief. Accordingly, this ground of cross objection of assessee is partly allowed.
The learned Counsel for the assessee filed copies of CIT(A)’s order in Appeal No. CIT(A)-13/DCIT-7(3)(2)/885/2015-16 for AY 2010-11 and CIT(A)-13/ITO-7(3)(3)/284/2015-16 for AY 2011-12 vide order dated 26-09-2016 wherein complete disallowance by the AO was deleted. On the other hand, the learned Sr. Departmental Representative urged the Bench to confirm the order of CIT(A) and that of the Assessing Officer.
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 AO & CIT(A) has disallowed 100% of unverifiable purchases. We have noticed from the assessment order and the order of CIT(A) that the sales are not at all doubted. Only purchases are not genuine but in regard to these purchases the assessee has made
16 & 226/Mum/2016, 4225/Mum/2017 payment by account payee cheque and also included the goods in the stock register. Only the assessee could not prove the movement of goods that is transportation of goods. Once, the sales are not doubted it is presumed that the assessee might have made purchases from grey market and obtained these bogus bills to save on account of VAT and purchases from grey market are made at a lower rate. Hence, we are in full agreement with the coordinate bench decision in the case of assessee’s sister concern in the case of DCIT vs. Laboratories Griffon Pvt. Ltd. dtd. 11.04.2018 for AY 2011-12, wherein Tribunal has restricted the disallowance at 30% of the bogus purchase. Further, Hon’ble Gujarat High Court in the case of CIT vs. Smith P. Seth (2013) 356 ITR 451 (Guj) in similar circumstances has applied profit rate of 12.5%. But in the present case the issue is covered by assessee’s sister concern’s case of co-ordinate Bench of this Tribunal and hence, according to us profit rate of 30% will meet the end of justice. This issue of assessee’s appeals is partly allowed.
In the result, these three appeals of assessee are partly allowed.
Order pronounced in the open court on 08-06-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 08.06.2018 kao kI ga[- .