DCIT 14(3)(2), MUMBAI vs. STANDARD GREASES & SEPCIALITES P.LTD, MUMBAI

आदेश / O R D E R

PER RAVISH SOOD, JUDICIAL MEMBER

P a g e | DCIT Vs. M/s Standard Greases of the Income Tax Act, 1961 (in short ‘the Act’), dated 11.03.2014. The revenue had assailed the order of the CIT(A) on the following grounds of appeal before us:

1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in restricting the addition of Rs. 20,36,775/- made on account of bogus/unproved purchases to the extent of only the profit of 12.5% on the said purchases.

at any time before or at the time of hearing of appeal.

6. The appellant prays that the order of CIT(A) on the above ground be set-aside and that of the assessing officer be restored.

2. Briefly stated, the facts of the case are that the assessee company which is engaged in the business of manufacturing of lubricants had filed its return of income for AY: 2011-12 on 28.09.2011, declaring total income of Rs. 52,87,15,475/-. The return of income was processed as such u/s 143(1) of the ‘Act’. The case of the assessee was thereafter taken up for scrutiny assessment and a notice u/s 143(2) was issued. That during the course of the assessment proceedings the A.O made the following disallowances/additions in the hands of the assessee:- (i) Bogus purchases 2036775 (ii) Disallowance u/s 14A 2059811 40,96,586

P a g e | DCIT Vs. M/s Standard Greases The assessee being aggrieved with the assessment framed by the A.O u/s 143(3), carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions of the assessee in the backdrop of the facts of the case, therein dealt with the respective additions/disallowances which had been assailed by the assessee before him, as under:-

(i) Disallowance u/s 14A: The CIT(A) referring to the facts pertaining to the issue under consideration in the backdrop of which a disallowance of Rs.20,59,811/- was made by the A.O u/s 14A in the hands of the assessee, deleted the disallowance by observing as under:- “6.3 I have considered the facts and circumstances of the case. The Assessing Officer's observation that the appellant had not shown any expenditure incurred for earning of dividend income claimed as exempt was based on wrong appreciation of facts. The appellant had itself disallowed an amount of Rs. 1,50,820/- u/s 14A in its return of income. This fact was reiterated in the submissions made before the Assessing Officer vide its letter dated 20/12/2013. It is also apparent from para 5.8 of the assessment order where the Assessing Officer writes: “Since the assessee itself has itself disallowed an amount of Rs. 1,50,720/- u/s 14A of the Act, the balance amount of Rs. 20,59,811/- and is hence disallowed u/s 14A of the Income-tax Act, 1961.” 6.4 Sub- section (2) of section 14A of the Income-tax Act, 1961 reads as under: “The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.” A plain reading of the above provision of section 14A makes it clear that the Assessing Officer shall determine the disallowance u/s 14A as per prescribed method only if he is not satisfied with the correctness of the expenditure shown by the assessee in relation to exempt income. It follows as a corollary that the reasons for such satisf action would have to be recorded computing disallowance under rule 8D presc ribed.

P a g e | DCIT Vs. M/s Standard Greases 6.5 I find that the Assessing Officer had proceeded on the assumption that the appellant had not shown any expenditure incurred for earning of exempt dividend income which is contrary to facts on record. No reasons have been given as to why the expenditure relating to exempt income shown by the appellant is not satisfactory. The Hon’ble Jurisdictional Tribunal has held in various cases cited above (supra) that before applying formula under Rule 8D for disallowance u/s. 14A Assessing Officer has to show his dissatisfaction against computation made by the assessee. This view has also been affirmed by the Hon’ble Delhi High Court in the case of CIT vs. I.P. Support Services India (P) Ltd. (2015). In view of the provisions of section 14A (2) and the decisions of the various Courts on this issue, the disallowance made by the Assessing Officer u/s 14A over and above the amount disallowed by the appellant is deleted. The appellant's grounds of appeal on this issue are allowed.

(ii) Bogus Purchases: The CIT(A) dealing with the disallowance/addition of Rs. 20,34,775/- made by the A.O in respect of certain bogus purchases which were alleged to have been made by the assessee, deleted the same after perusing the contentions raised by the assessee and observing as under:-

“5.5 I have considered the facts and circumstances of the case. The assessing officer had received information from Sales Tax Department Wing wherein it was seen that the appellant had made purchases totaling Rs.20,34,775/- from two hawala bill racketeers. The assessing Officer considering the information from Sales Tax Department disallowed the purchases made by the appellant from these two parties as the explanation given by the appellant in respect of purchases from these parties was not found satisfactory. In assessment proceedings the appellant had given details of purchase such as copy of invoices, delivery challans, GRN, ledger account, etc. and also bank statements to show that payments were made by account payee cheques. As against the denial by the aforesaid two parties of making actual sales to the appellant, the appellant has furnished the aforementioned details in support of the genuineness of the purchases made from these parties. The Hon’ble Gujarat High Court had considered such similar case in the case of CIT Vs. Simit P. Sheth (2013) 356 ITR 451(Guj) and held as under: “We are broadly in agreement with the reasoning adopted by the Commissioner (Appeals) with respect to the nature of disputed purchases of steel. It may be that the three suppliers from whom the assessee claimed to have purchased the steel did not own up to such sales. However, the vital question while considering whether the entire amount of purchases should be added back to the income of the assessee or only the profit element embedded therein was to ascertain whether the purchases themselves were completely bogus and non-existent or that the P a g e | DCIT Vs. M/s Standard Greases purchases were actually made but not from the parties from whom it was claimed to have been made and instead may have been purchased from grey market without proper billing or documentation. In the present case, the Commissioner of Income-tax (Appeals) believed that when as a trader in steel the assessee sold certain quantity of steel, he would have purchased the same quantity from some source. When the total sale is accepted by the Assessing Officer, he could not have questioned the very basis of the purchases. In essence, therefore, the Commissioner (Appeals) believed the assessee's theory that the purchases were not bogus but were made from the parties other than those mentioned in the books of account. That being the position, not the entire purchase price but only the profit element embedded in such purchases can be added to the income of the assessee. So much is clear by the decision of this court. In particular, the court has also taken a similar view in the case of CIT v. Vijay M. Mistry Construction Ltd. vide order dated January 10, 2011 passed in Tax Appeal No. 1090 of 2009-since reported in [2013] 355 ITR 498 (Guj) and in the case of CIT v. Bholanath Poly Fab P. Ltd. vide order dated October 23, 2012, passed in Tax Appeal No. 63 of 2012-since reported in [2013] 355 ITR 290 (Guj). The view taken by the Tribunal in the case of Vijay Proteins Ltd. v. Asst. CIT [1996] 58 ITD 428 (Ahd) came to be approved. If the entire purchases were wholly bogus and there was a finding of fact on record that no purchases were made at all, counsel for the Revenue would be justified in arguing that the entire amount of such bogus purchases should be added back to the income of the assessee. Such were the facts in the case of Asst. (CIT) (OSC) Vs. Rawanraj B. Bokadia (supra). This being the position, the only question that survives is what should be the fair profit rate out of the bogus purchases which should be added back to the income of the assessee. The Commissioner adopted the ratio of 30 per cent. of such total sales. The Tribunal, however, scaled down to 12.5 per cent. We may notice that in the immediately preceding year to the assessment year under consideration the assessee had declared the gross profit at 3.56 per cent of the total turnover. If the yardstick of 30 per cent., as adopted by the Commissioner (Appeals), is accepted the gross profit rate will be much higher. In essence, the Tribunal only estimated the possible profit out of purchases made through non-genuine parties. No question of law in such estimation would arise. The estimation of rate of profit return must necessarily van,' with the nature of business and no uniform yardstick can be adopted.” Following the above decision of the Hon'ble Gujarat High Court that “not the entire purchase price but only the profit element embedded in such purchases can be added to the income of the assessee,” the addition of Rs. 20,34,775/- made by the Assessing Officer on account of bogus purchases is confirmed to the extent of P a g e | DCIT Vs. M/s Standard Greases 12.5% which will sufficiently cover the profit element embedded in such purchases and subsequent manufacturing and sales. The appellant’s grounds of appeal on this issue are partly allowed.

3. The revenue being aggrieved with the order of the CIT(A) had carried the matter in appeal before us. We have perused the facts emerging from the issue under consideration, viz. addition towards bogus purchases and disallowance of expenses u/s 14A of the ‘Act’. We find that the CIT(A) while deliberating on the issue of bogus purchases observed that the assessee had during the course of the assessment proceedings given details of purchases along with supporting documentary evidences, viz. copy of invoices, delivery challans, GRN, ledger account etc., along with the copy of his bank statements, which revealed that the payments to the respective suppliers were made vide account payee cheques. The aforementioned details were furnished by the assessee to rebut the allegations raised by the supplier parties, viz. (i) Sushmita International and (ii) Siddivinayak Corporation, from whom the assessee had claimed to have made purchases of Rs.5,31,150/-and Rs.15,05,625/-, respectively, that no sales were carried out by them to the assessee concern. The CIT(A) in the backdrop of the aforesaid facts observed that now when the assessee had given documentary evidence in support of the purchases, viz. copy of invoices, delivery challans, GRN, ledger account etc., and also bank statements to show that payments were made by account payee cheques, therefore, the claim of the assessee that the goods under consideration were purchased by it could not be scrapped only for the reason that the aforementioned hawala bill racketeers had denied of making actual sales to the assessee. That as can be safely gathered, the CIT(A) being of the view that though it remained as a matter of fact that the assessee had purchased the goods under consideration, but the same must have P a g e | DCIT Vs. M/s Standard Greases been purchased not from the aforementioned hawala parties, but from the open/grey market. Thus, on the basis of his aforesaid observations, the CIT(A) following the judgment of the Hon’ble High Court of Gujarat in the case of CIT Vs. Simit P. Sheth (2013) 356 ITR 451 (Guj) restricted the disallowance in the hands of the assessee to the extent of 12.5% of the total amount of bogus purchases.

5. We have further deliberated on the disallowance of Rs.20,59,811/- made by the A.O under Section 14A, which we find had thereafter been deleted by the CIT(A). We find that the CIT(A) had rightly observed that the A.O was in error in taking a view that the assessee had in its return of income not disallowed any part of expenditure as regards earning of the exempt dividend income. We

P a g e | DCIT Vs. M/s Standard Greases find that the CIT(A) had rightly observed that now when the assessee had on its own offered a disallowance of Rs.1,50,720/- u/s 14A, therefore, the aforesaid finding of the A.O was not only perverse, but rather, contrary to his own observations in the assessment order that the assessee had in its return of income disallowed an amount of Rs.1,50,720/- u/s 14A. That still further, the CIT(A) observed that as the A.O had failed to give any reasons as to why the expenditure relating to exempt income shown by the assessee was not to his satisfaction, and as such was liable to be disallowed, therefore, in the absence of proper recording of satisfaction on his part, the disallowance made u/s 14A was not liable to be sustained.

P a g e | DCIT Vs. M/s Standard Greases as it now stands settled by the Hon’ble Supreme Court that the A.O while dislodging and rejecting the claim of the assessee in respect of the expenditure claimed by him to have been incurred in earning of the exempt income, remains under a statutory obligation to record a satisfaction that having regard to the accounts of the assessee, as placed before him, it was not possible for him to generate the requisite satisfaction with regard to the correctness of the said claim. The Hon’ble Supreme Court in the aforementioned case of Godrej & Boyce Manufacturing Company Limited (supra) had observed as under:- “Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.”

We thus, find ourselves to be in agreement with the view of the CIT(A) that in the absence of recording of any satisfaction on his part, the claim of the assessee in respect of disallowance of Rs.1,50,820/- under Sec. 14A was not liable to dislodged and thus the further disallowance of Rs.22,10,351/- made by the Assessing officer under Sec. 14A, could not have been made in the hands of the assessee. We thus uphold the order of the CIT(A) on the aforesaid issue. The Ground of appeal no. 4 raised by the revenue before us is dismissed.

7. That as the Ground of appeal no. 5 and 6 are general in nature, therefore, they are dismissed as not pressed.

P a g e | DCIT Vs. M/s Standard Greases 8. The appeal of the revenue is dismissed. Order pronounced in the open court on 25.09.2017