ASST CIR 32(3), MUMBAI vs. SHREE SWASTIK DEVELOPERS, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “I” MUMBAI BEFORE SHRI D.T. GARASIA (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA No. 1102/MUM/2016 Assessment Year: 2011-12

ACIT-32(3), M/s Shree Swastik Room No. 108, 1st floor, Vs. Developers 3,Guruprasad, Bldg. No. C-11, Carter Road, No. 3 Pratyakshakar Bhavan Borivali East, BKC, Bandra (E) Mumbai-400066 Mumbai-400051 PAN No. AAVFS8876P Appellant Respondent C.O. No. 235/MUM/2017 Assessment Year: 2011-12

M/s Shree Swastik ACIT-32(3), Developers Vs. Room No. 108, 1st floor, 3,Guruprasad, Carter Bldg. No. C-11, Road, No. 3 Borivali Pratyakshakar Bhavan East, BKC, Bandra (E) Mumbai-400066 Mumbai-400051 PAN No. AAVFS8876P Appellant Respondent

Revenue by : Mr. Saurabh Kumar Rai. DR Assessee by : Ms. Keyuri Desai, AR Date of Hearing : 14/09/2017 Date of pronouncement : 29/11/2017

M/s Shree Swastik Developers 2 ITA No 1102/Mum/2016 ORDER PER N.K. PRADHAN, A.M. The appeal by the Revenue and the cross objection by the assessee are directed against the order of the Commissioner of Income Tax (Appeals)-44, Mumbai and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’). 2. The grounds of appeal filed by the Revenue read as under: 1. On the facts and in the circumstances of the case and in law, the ld.CIT(A) erred in restricting addition to Rs.53,50,738/- (28.4% of Rs.1,88,40,628/-) u/s 69C of the I.T. Act on account of bogus purchases as against addition of Rs1,88,40,628/- made by the AO without appreciating that the assessee has not produced any cogent evidence to substantiate the fact that it had taken actual delivery of goods purchased from the parties and that the notices u/s (6) issued to the parties from whom alleged bills were received were returned undelivered by the postal authorities with the remark "not available at this address' and the assessee has also failed to produce the purchase parties before the AO. 2. On the facts and in the circumstances of the case and in law, the ld.CIT (A) erred in relying upon judgment in the case of CIT vs. Nikun Enterprises 373 ITR 619 and Saraswathi Oil Traders vs. CIT 254 ITR 259 (SC) without appreciating that the facts involved in the appellant's case are different from the facts of the above case laws. 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the addition made on account of disallowance out of excess remuneration to Rs1,20,000/- as against addition made by the AO of Rs47,44,065/- without appreciating that the AO has rightly disallowed the excess remuneration partners’s stipulated in section 40b(ii) of the IT Act. 4. On facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs37,34,907/- made u/s 41(1) of the IT Act.

M/s Shree Swastik Developers 3 ITA No 1102/Mum/2016 3. There has been a delay of 34 days on the part of the assessee to file the cross objection. In this regard the assessee has filed an affidavit narrating the reasons for delay in filing the cross objection. Having gone through the contends of the affidavit, we find that there was genuine and bona fide reasons on the part of the assessee to file the said cross objection with a delay of 34 days. That being so, we condone the above delay. 4. In the cross objection the assessee has raised that (i) the Ld. CIT(A) failed to appreciate that the case of the assessee did not fall u/s 69C; the assessee had discharged its onus, if any, under the Act; (ii) the Ld. CIT(A) erred in confirming the addition on account of the alleged unexplained expenditure u/s 69C as made by the AO to the extent of Rs.53,50,738/- being 28.4% of such purchases amounting to Rs.1,88,40,628/-, (iii) the Ld. CIT(A) erred in dismissing ground no. 3 by the assessee that the AO erred in considering the depreciation rate on Pollution Control Equipment @ 15% instead of 100%, without providing any opportunity of hearing and (iv) the Ld. CIT(A) erred in dismissing ground no. 4 raised by the assessee that the AO erred in considering the nature of penalty paid to BMC as disallowable u/s 37(1) without giving any opportunity of being heard. 5. We begin with the 1st & 2nd ground of appeal of the Revenue and the 1st cross objection filed by the assessee. Briefly stated the facts of the case are that the Assessing Officer (AO) found that certain purchases made by the assessee amounting to Rs.1,88,40,628/- were bogus as the VAT and the name of such parties appeared in the ‘Hawala Dealers List’ given by the Sales Tax Department, Government of Maharashtra. The details are as under:

M/s Shree Swastik Developers 4 ITA No 1102/Mum/2016

S. No. TIN No. Name of the Amount (Rs.) Total Party Amount (Rs.) 1. 2720055789V R.R. Traders 70,62,832 2. 27060536519V S.V. Traders 28,52,304 3. 27550544543V R.B. Enterprises 89,25,492 1,88,40,628/- In order to verify the genuineness of purchases, the AO issued notice u/s 133(6) to the above parties. However, the said notices were returned as unserved by the postal authorities. Therefore, the AO asked the assessee by issuing a show cause notice dated 30.03.2014 to file necessary documents/details and also to produce the above parties for verification. In compliance to it, the assessee vide its letter dated 24.03.2014 filed copy of the purchase bills, statement of account and bank transaction details. The assessee submitted before the AO that the said purchases were genuine and payments had been made to the parties through account payee cheques. However, the AO noted that the assessee failed to provide documentary evidence like copies of delivery challans, lorry receipt, mode of transport of goods, payment of octroi, if any. The assessee also failed to produce the above parties before the AO for examination. Referring to case laws, the AO observed that mere payment by account cheque is not sufficient proof for claiming any expenditure. In view of the above, the AO made an addition of Rs.1,88,40,628/- u/s 69C. 5.1 Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) held that (i) if the assessee has fulfilled its onus of making the payments by cheque and has supplied the address of the sellers, then it cannot be presumed that the sellers

M/s Shree Swastik Developers 5 ITA No 1102/Mum/2016 were bogus simply because the sellers were not found at the given address; however, at the same time it cannot be said that the information provided by the Sales Tax Department should not be taken cognizance by the AO, (ii) as held in the decision in Saraswathi Oil Traders vs. CIT 254 ITR 259 (SC), it is the profit element on the total component in dispute which needs to be added to the income of the assessee. As the assessee had shown gross profit rate of 28.4%, the Ld. CIT(A) estimated the profit on the bogus purchases of Rs.1,88,40,628/- at the same GP rate and estimated the disallowance at Rs.53,50,738/-. Thereby the Ld. CIT(A) restricted the disallowance to Rs.53,70,738/- in place of Rs.1,88,40,628/- made by the AO. 5.2 Before us, the Ld. DR submits that the Ld. CIT(A) has failed to appreciate that the assessee had not produced before the AO any cogent evidence to substantiate the fact that it had taken actual delivery of goods purchased from the parties. He also submits that the Ld. CIT(A) failed to appreciate that the notices u/s 133(6) issued to the parties from whom alleged bills were received were returned undelivered by the postal authorities with the remark ‘not available at this address’. Also it is stated by him that the assessee failed to produce the said parties before the AO for examination. 5.3 On the other hand, the Ld. counsel of the assessee files a copy of tax invoices, delivery challan, bank statements highlighting payments made. It is stated by her that the purchases are genuine and the same have been utilized for the construction work carried out at the project side. The construction work could not be carried out unless materials have been utilized for the same. Accordingly, purchase value needs to

M/s Shree Swastik Developers 6 ITA No 1102/Mum/2016 be considered so as to justify to construction made. It is stated by her that the assessee has made purchases from various parties, however, in absence of proper bills, the said parties could have taken the bills from hawala parties. The assessee has confirmed the validity of VAT numbers from the Sales Tax Department, which they now declare as hawala. The assessee, in bona fide belief, has accepted the same and accordingly made purchases and made payments for the same. It was later that the Sales Tax Department have investigated the erring dealers and declared them as hawala. Accordingly, the Ld. counsel submits that it does not mean that the assessee has not made genuine purchases. 5.4 We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions on the above ground of appeal are as under. We find that similar issue arose before ITAT ‘E’ Bench, Mumbai in the case of the assessee for the immediate previous assessment year 2010-11in ITA No. 2559/Mum/2014. The Tribunal upheld the disallowance @ 15% of the bogus purchases made by the Ld. CIT(A). Facts being similar, we direct the AO to estimate the profit @ 15% on the bogus purchases of Rs.1,88,40,628/- in place of 28.4% made by the Ld. CIT(A) and make the addition accordingly. 5.5 Thus the 1st & 2nd ground of appeal of the Revenue and the 1st cross objection by the assessee are partly allowed. 6. Now we move to the 3rd ground of appeal raised by the Revenue. The AO, during the course of assessment proceedings, found from the profit and loss account that the assessee has debited a total

M/s Shree Swastik Developers 7 ITA No 1102/Mum/2016 remuneration of Rs.1,38,72,199/- paid to the partners. However, he found from the supplementary deed the following: “book profit shall be calculated on the basis as shown by the books and computed as provided in S 28 to S 44D (Chapter IV-D) of the Income Tax Act without deducting the remuneration paid or payable to the partners for relevant accounting year” The AO found that in the instant case, since the book profit is Rs.2,29,70,332/- which is more than Rs.1,50,000/-, the condition as mentioned above shall apply. He further found that the remuneration paid to the partners is an excess of the said criteria. As per him, the details are as under:

Name of the As per the above Actual Excess Partner criteria (X% of the Remuneration Paid balance book profit if it exceeds Rs.1,50,000/-) Ulhas Kadam Rs.22,82,033/- Rs.34,68,049/- Rs.11,86,016/- (X= 10%) Rajesh Kadam Rs.22,82,033/- Rs.34,68,049/- Rs.11,86,016/- (X= 10%) Renjeet Singh Rs.45,64,066/-) Rs.69,36,099/- 23,72,033/- Gohit (X=20%) Total Rs.47,44,065/-

Thus the AO made a disallowance of Rs.47,44,065/- u/s 40b(ii). 6.1 In appeal, the Ld. CIT(A) has observed that as per the partnership deed dated 22.05.2003, remuneration to the working partners has been authorized to be paid in accordance with the computation provided in section 40(b). The AO has not doubted that the partners receiving the remuneration are not working partners. His only concern is that the computation of book profit is not in

M/s Shree Swastik Developers 8 ITA No 1102/Mum/2016 accordance with the partnership deed. For the assessment year 2011- 12, the remuneration payable as per section 40(b) to the working partners is as follows: “On the first Rs.3,00,000/- of the book profit Rs.1,50,000/- or at the rate of 90% of the book profit, whichever is more, On the balance of the book profit at the rate of 60%.” The Ld. CIT(A) thus took into account the amended provision of section 40(b) relevant for the impugned assessment year and held as under: “Since the book profit of the appellant is Rs.2,29,70,332/- the allowable remuneration will be Rs.1,50,000/- for the first three lacs of the book profit added with 60% of the remaining amount of book profit which comes to Rs.1,36,02,199/-. Therefore, the allowable remuneration to the working partners will be Rs.1,37,52,199/. Since the remuneration paid by the appellant is Rs.1,38,72,199/- it is obvious that the excess remuneration is only to the extent of Rs.1,20,000/- (Rs.1,38,72,199- Rs.1,37,52,199). The addition under this head is accordingly restricted to Rs.1,20,000/- and the balance is deleted.” 6.2 Before us, the Ld. DR supports the order passed by the AO whereas the Ld. counsel of the assessee relies on the order passed by the Ld. CIT(A). 6.3 We have heard the rival submissions and perused the relevant materials on record. Indisputably, as per the partnership deed dated 22.05.2003, remuneration to the working partners has been authorized to be paid in accordance with the computation provided in section 40(b). We find that the AO has not taken into account the amended provision of section 40(b) for the impugned assessment year.

M/s Shree Swastik Developers 9 ITA No 1102/Mum/2016 The Ld. CIT(A) has rightly taken into account the said amended provision and then restricted the disallowance to Rs.1,20,000/-. Accordingly, we uphold the order of the Ld. CIT(A) on the above ground of appeal. 6.4 Thus the 3rd ground of appeal filed by the Revenue is dismissed. 7. We now turn to the 4th ground of appeal filed by the Revenue. The AO observed that 13 creditors were existing from the financial year 2008-09 relevant to the assessment year 2009-10 and the assessee has not paid the same till the end of the impugned assessment year. Therefore, he made an addition of Rs.37,34,907/- u/s 41(1) of the Act. 7.1 In appeal, the Ld. CIT(A) held that (i) the AO has not conducted any inquiry to ascertain the nature of credit of the said creditors, (ii) the AO has not made any attempt to know whether the liabilities against these creditors were paid in the subsequent years or not, (ii) the creditors are not very old. The Ld. CIT(A) relied on the judgment of the Hon’ble Gujarat High Court in Matru Prasad C. Pandey 59 taxmann.com 428 (2015) wherein it is held that addition u/s 41(1) cannot be made unless and until it is found that there was remission and/or cessation of liability, that too during the relevant assessment year. As the AO failed to give any cogent reason, the Ld. CIT(A) deleted the addition of Rs.37,34,907/- made by the AO u/s 41(1). 7.2 Before us, the Ld. DR relies on the order of the AO whereas the Ld. counsel of the assessee supports the order passed by the Ld. CIT(A).

M/s Shree Swastik Developers 10 ITA No 1102/Mum/2016 7.3 We have heard the rival submissions and perused the relevant materials on record. We find that the findings of the Ld. CIT(A) delineated at para 7.1 hereinbefore are based on facts. There is no dispute on the above. As the AO has failed to give elementary reasons, we uphold the order of the Ld. CIT(A). 7.4 Thus the 3rd ground of appeal filed by the Revenue is dismissed. 8. In the result, the appeal filed by the Revenue is partly allowed. 9. We now turn to the 2nd cross objection raised by the assessee. During the course of assessment proceedings the AO noticed that the assessee has debited pollution control equipment expenses of Rs.2,31,000/-. He found the said expenses as capital in nature. The assessee should have added the said expenditure in the fixed assets. However, the assessee has debited the same from the profit and loss account. Therefore, the AO disallowed the claim of pollution control equipment expenses and capitalized the same after allowing depreciation @ 15% for six months. Thus the AO, after allowing depreciation of Rs.17,325/- made an addition of Rs.2,13,675/-. 9.1 In appeal, the Ld. CIT(A) held as under: “It is a fact that the depreciation on pollution control equipment is allowable at the rate of hundred percent. However, this does not mean that such expenditure would become revenue is nature. Since this is a capital expenditure it has to be included in the block of assets. By debiting this expense to the P&L account the appellant has clearly taken advantage of extra debit in its profit and loss account by which its net profit has been reduced. The AR has also not been able to establish that the amount of the depreciation has not been included in the overall depreciation charged to

M/s Shree Swastik Developers 11 ITA No 1102/Mum/2016 profit and loss account. In this situation the addition made by the AO is confirmed and ground of appeal number 3 is accordingly dismissed.” 9.2 We have heard the rival submissions and perused the relevant materials on record. We find that the AO failed to give a single opportunity to the assessee to explain its case on the above issue. A proper hearing must always include a fair opportunity to those who are parties in the controversy for correcting or contradicting anything prejudicial to their view. In view of the above, we set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to decide the issue afresh after giving an opportunity of being heard to the assessee. We direct the assessee to file the relevant documents/evidence before the AO. 9.3 Thus the 2nd cross objection of the assessee is allowed for statistical purposes. 10. Finally we come to the 3rd cross objection raised by the assessee. During the course of assessment proceedings, the AO noticed that the assessee has paid Rs.1,43,000/- to MCGM towards unauthorized occupation penalty. As it was penal in nature, the AO made a disallowance of it u/s 37. 10.1 In appeal, the Ld. CIT(A) upheld the above disallowance of Rs.1,43,000/- made by the AO. 10.2 Before us, the Ld. counsel submits that it was compensatory in nature, therefore, the same should not be disallowed u/s 37. On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 10.3 We have heard the rival submissions and perused the relevant materials on record. We find from the ledger account that cheque no.

M/s Shree Swastik Developers 12 ITA No 1102/Mum/2016 163966 has been paid towards MCGM unauthorized occupation penalty. As this is purely penal in nature, we uphold the order of the Ld. CIT(A) and dismiss the 3rd cross objection raised by the assessee. 11. In the result, the cross objection raised by the assessee is partly allowed. 12. To sum up, the appeal filed by the Revenue and cross objection by the assessee are partly allowed. Order pronounced in the open Court on 29/11/2017. Sd/- Sd/- (D.T. GARASIA) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 29/11/2017 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai