ASST CIT 25(2), MUMBAI vs. MANGALSINGH M RATHOD, MUMBAI

We have heard the parties and perused the record. The assessee is a civil contractor and is proprietor of M/s. Mudara Enterprises. He undertakes civil work of Municipal Corporation. The first issue relates to the disallowance of purchases. The Revenue received information from the Sales Tax Department of Maharashtra that certain parties are indulging in providing only accommodation bills, without actually supplying material. The Assessing Officer noticed that the assessee has purchased material aggregating to ` 280.29 lakhs from persons listed out as suspicious dealers by the Government of Maharashtra. The Assessing Officer noticed that these parties have admitted before the Sales Tax Department that they have not supplied material but 2 Shri Mangalsingh M. Rathod provided only accommodation bills. They have also stated that the payments received by them against bills issued, have been returned back to the customers in cash after deducting small commission. In view of the above, the Assessing Officer asked the assessee to prove the genuineness of the purchases made from the above said suspicious dealers. The Assessing Officer also supplied copies of the statements, affidavits etc. given by impugned suppliers to the Sales Tax Department. Subsequently, the Assessing Officer also issued notices u/s. 133(6) of the Act to all the suppliers but most of the notices were returned back by the Postal Authorities with the remarks “left” or “not known”. Some parties did not respond to the notice issued by the Assessing Officer. The assessee simply stated that the purchases were genuine and payments have been made by way of account payee cheques. The Assessing Officer also noticed that the assessee could not produce any delivery challans, lorry receipts, mode of transport of goods, evidence for payment of octroi, stock register etc., in order to prove the genuineness of purchases. Accordingly, the Assessing Officer treated the above said purchases as bogus and disallowed a sum of ` 280.29 lakhs referred above. The Assessing Officer also placed reliance on the decision rendered by Hon'ble Delhi High Court in the case of CIT Vs. La Medica (250 ITR 575).

The assessee preferred appeal before the learned CIT(A), who deleted the addition by observing that the assessee has furnished various evidences to prove the genuineness of purchases. The revenue is aggrieved by the decision rendered by Ld CIT(A) on this issue.

The Learned Departmental Representative submitted that the assessee has failed to prove the genuineness of purchases by not furnishing delivery challans, lorry receipts, mode of transport of goods, payment of octroi. The assessee also failed to prove consumption of materials by furnishing stock register. He further submitted that the assessee has also failed to rebut the confessions made by the impugned suppliers. Accordingly, the learned Departmental Representative submitted that the learned CIT(A) was not 3 Shri Mangalsingh M. Rathod justified in observing that the assessee has furnished all evidences before the Assessing Officer. He further submitted that all the suppliers have admitted before the Sales Tax authority that they have not supplied materials to the assessee. Further, notices issued by the Assessing Officer u/s. 133(6) of the Act have been returned back unserved or in some cases, there was no response to the notices issued. The assessee has failed to furnish any confirmation letter obtained from the suppliers and also did not produce any of the suppliers before the Assessing Officer. Accordingly, the learned Departmental Representative submitted that the learned CIT(A) was not justified in deleting the disallowance and accordingly prayed that the order passed by the learned CIT(A) on this issue should be reversed.

On the contrary, the learned AR submitted that the assessee has executed contract works awarded by various Municipal Corporations. She submitted that the work so executed is subjected to scrutiny by the Municipal authorities and they have not found fault with the quality of work executed by the assessee. She further submitted that the assessee could not have executed work without actually using the materials at right quantity. Accordingly she submitted that the AO was not correct in presuming that the materials were not purchased at all by the assessee. She submitted that the impugned suppliers have failed to pay VAT to the Sales tax department and hence they have been caught. In order to escape from the VAT liability, they have given self serving statements before the Sales tax authorities. She further submitted that the assessee has paid the VAT tax liability of those dealers in the subsequent years, in order to avoid disputes. Accordingly she submitted that the statements given them before Sales tax authorities cannot be placed reliance to suspect the purchase transactions of the assessee. She submitted that the assessee has furnished copies of bills and also details of payments, which prove the genuineness of the purchases. She further submitted that identical issue came before the ITAT in the case of assessee’s brother named Shri Ratansingh M. Rathod and the Tribunal, vide its order dated 13.1.2015 passed in & 5297/Mum/2013, has deleted the disallowance of 4 Shri Mangalsingh M. Rathod purchases made by the Assessing Officer in his hands. Accordingly, the learned AR submitted that the order passed by the learned CIT(A) on this issue does not call for any interference.

We have heard rival contentions and perused the record. We notice that the assessee has furnished copies of bills and payment details in order to prove the genuineness of purchases. On the contrary, the AO has placed reliance on the statement and affidavits given by the impugned suppliers before the Sales tax authorities, wherein they have categorically stated that they have not supplied the materials. Even though the assessee contends that he could not have executed the contract works without actually purchasing the materials, yet the fact remains that the assessee has failed to prove that the materials were, in fact, purchased from these dealers only, i.e., the physical movement of materials from the above said dealers to the site of the assessee was not proved. The assessee could not furnish copies of delivery challans, evidences for transportation of materials like lorry receipts, weighment slips, octroi payments etc.

We notice that the assessing officer has also made independent enquiries by sending notices u/s 133(6) of the Act to the suppliers. But most of the notices were returned back un-served and the remaining suppliers did not respond. The assessee also could not furnish confirmation letters obtained from the suppliers nor could he produce the suppliers before the assessing officer. Under these set of facts, we are of the view that the assessee cannot be said to have proved the genuineness of purchases conclusively. Hence we are unable to agree with the view taken by Ld CIT(A) on this issue.

At the same time, there is merit in the contentions of the Ld A.R that the assessee could not have executed contract works without actually purchasing the materials. The Ld A.R has also contended that the contract work executed by the assessee has been examined and certified by the municipal authorities. These facts show that the assessee would have purchased materials. Since the 5 Shri Mangalsingh M. Rathod suppliers have denied supplies and since the assessee has also failed to prove the transportation and consumption of materials, the possibility could be that the assessee might have purchased materials from grey market and sourced the bills from the above said suppliers. In this process, the assessee might have saved VAT and also might have purchased materials at a lower rate. Hence, in the facts and circumstances of the case, we are of the view that the addition on account of purchases should be restricted to the profit element involved in the purchases. The Ld A.R placed her reliance on the decision rendered by the co-ordinate bench in the case of brother of the assessee. But, the issue before us being factual, we are of the view that the assessee cannot derive support from that decision.

In view of foregoing discussions, in our view, the profit element involved in the purchases may be estimated at 12.50% of the value of impugned purchases. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to sustain addition on this issue to the extent of 12.50% of the value of purchases made from the suspicious dealers. We order accordingly.

The next issue contested by the revenue relates to the disallowance of sub-contract payments of Rs.38.41 lakhs made to M/s Ranjeetsingh Deora HUF and Shri Ranjeetsingh Deora. Both these parties have undertaken some work from the assessee on sub-contract basis. The assessee has claimed the sub-contract payments made to them as deduction. The AO noticed from the bank accounts of the above said two parties that they have withdrawn money immediately after receipt of cheque from the assessee. The AO also observed that the contract receipts shown by them were lower than that paid by the assessee. Hence the AO entertained the view that they have not actually executed the contract works. Accordingly he disallowed the claim of sub- contract payment of Rs.38.41 lakhs. The Ld CIT(A), however, allowed the claim and hence the revenue is in appeal.

We heard the parties on this issue. Before us, the Ld A.R demonstrated from the copies of income tax returns filed by the above said two contractees that the receipts shown by them were not less than the amount received from the assessee. She further submitted that the assessee has made payments by way of cheques and TDS was also deducted there from. She further submitted that the AO has made the disallowance only on presumptions.

On the contrary, the Ld D.R submitted that the contractees have immediately withdrawn cash from their bank accounts after receipt of cheques from the assessee.

Having heard rival submissions, we are of the view that the decision taken by Ld CIT(A) on this issue does not call for any interference. We notice that the Ld A.R has demonstrated that the observations made by the AO with regard to quantum of receipts were wrong. We also notice that the AO has not brought on record any evidence to show that the money withdrawn by the contractees have flown to the assessee. The AO has also not brought on record any material to show that these sub-contractors have not actually executed the work. Under these set of facts, we are of the view that there is merit in the contentions of Ld A.R that the AO has disallowed the claim of sub- contract payments only on surmises and conjectures. Accordingly we uphold the decision taken by Ld CIT(A) on this issue for the reasons discussed above.

In the result, the appeal of the revenue is partly allowed.