M/S. DREAM LOGISTICS COMPANY LIMITED ,YALLAPUR vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(1) , BANGALORE
Facts
The assessee's business premises were searched, and the assessment was completed. It was later reopened under section 147 based on a statement alleging no supply of iron ore to the assessee, leading the AO to treat purchases as bogus and bring expenditure to tax under section 41(1). The assessee contended that purchases were genuine, payments were made through banking channels, and the seller declared sales and paid taxes. The CIT(A) dismissed the appeal, holding the AO's assessment correct.
Held
The Tribunal held that for section 41(1) to apply, there must be an expenditure/liability and subsequent receipt of cash or benefit by way of remission/cessation. In this case, the purchases were made, and payment was remitted via cheque, which was encashed. There was no evidence of remission or cessation of liability. The reopening under section 147 was also flawed due to the lack of an opportunity for the assessee to cross-examine the third-party deponent.
Key Issues
Whether the assessment reopened under section 147 and additions made under section 41(1) for alleged bogus purchases are sustainable when payments were made through banking channels and there was no cessation of liability, and if the assessee was denied the opportunity to cross-examine the third-party witness.
Sections Cited
143(3), 147, 41(1), 144A, 234A, 234B, 234C, 131, 148
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B’’ BENCH: BANGALORE
Before: SHRI WASEEM AHMED & SHRI SOUNDARARAJAN K.
PER SOUNDARARAJAN K., JUDICIAL MEMBER:
This is an appeal filed by the assessee challenging the order of CIT(A)-11 Bengaluru dated 9.3.2024 in respect of the assessment year 2011-12. 2. The brief facts of the case are that the assessee’s business premises was searched on 15.02.2011 and thereafter based on the ROI filed on 26.3.2012, the assessment was completed u/s 143(3) of the Act. Again, the assessment was reopened u/s 147 of the Act on the basis of statement given before the ADIT(Inv), Ballari by one Sri Irrana Sankarappa Baddur, Proprietor of M/s. Megha Minerals in which he had deposed that he has not made any supply of iron ore to the assessee during the assessment year 2010-11. On that basis, the AO alleged that the assessee had claimed bogus expenditure
ITA No.526/Bang/2024 M/s. Dream Logistics Company Limited, Yellapur Page 2 of 8 during the assessment year 2010-11 and therefore, the same was not allowable. The assessee contended before the AO that the said transactions are not bogus since the assessee had paid the entire consideration through the banking channels which was also encashed by the supplier M/S Megha Minerals. The assessee also filed an application before the Additional CIT (Central Range)-1, Bangalore u/s 144A of the Act and the Additional CIT also without considering the facts properly had issued directions to the AO to tax the sum of Rs 2,60,00,000/ as cessation of liability u/s 41(1) of the Act during the A/Y 2011-12. Therefore, the AO had treated the purchases as bogus purchases and the payments as bogus payments and brought to tax the expenditure u/s 41(1) of the Act. The assessee challenged the above said proceedings before the ld. CIT(A) on the ground that the purchases are genuine purchases for which the payments were also made through the bank and further contended that the seller M/s. Megha Minerals also declared the said sales in their VAT returns and also paid the tax dues by way of DD to their AO. Alternatively, the assessee also contended that the transactions are made during the assessment year 2010-11 and therefore, the revision made u/s 147 of the Act for the assessment year 2011-12 is not correct. The ld. CIT(A) after extracting the grounds raised by the assessee, and the detailed written arguments filed by the assessee had dismissed the appeal on the ground that the AO had correctly made the assessment since the seller M/S Megha Minerals had denied the said sales. As against the orders of the ld. CIT(A), the assessee is filing this present appeal before this Tribunal by raising the following grounds of appeal: 1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2. The order of re-assessment is bad in law and void-ab-initio for want of requisite jurisdiction especially, the mandatory requirements to assume jurisdiction u/s 148 of the Act did not exist and have not been complied with and consequently, the re-assessment requires to be cancelled.
ITA No.526/Bang/2024 M/s. Dream Logistics Company Limited, Yellapur Page 3 of 8
Without prejudice to the, the learned CIT(A) is not justified in upholding the addition/disallowance of a sum of Rs.2,60,00,000/- us 41(1) of the Act, without appreciating that the provisions of section 41(1) of the Act are wholly inapplicable to the case of the appellant for the year under appeal under the facts and in the circumstances of the appellant’s case. 4. Without prejudice to the right to seek waiver with the Hon’ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s 234A, 234B and 234C of the Act, which under the facts and in the circumstances of 'the appellant's case deserves to be cancelled. 5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.”
At the time of hearing, the ld. A.R. filed a paper book comprising the various documents and the financial statements and the copy of the written submissions filed before the ld. CIT(A) along with the list of citations relied upon by them and prayed to allow the appeal. The ld. A.R. also contended that the findings of the AO that the assessee had not effected the purchases is not correct since the assessee had shown the said purchases in the trading and P&L account of the assessment year 2010-11 and shown the dues as liabilities in the balance sheet and the payment was also made during the year 2011-12. The ld. A.R. further contended that since the payments were made during the assessment year 2011-12, that too by way of cheque, which was also encashed by the seller M/s. Megha Minerals, the matter ends there in so far as the assessee is concerned. The other facts stated by the Proprietor of M/S Megha Minerals is not within the knowledge of the assessee and once the payment was made to the sellers, the assessee’s responsibility ends there. The ld. A.R. further contended that to invoke section 41(1) of the Act, there is no cessation or remission of any liability and therefore, invoking the said provision is also not correct. The ld. A.R. also relied on the various judgements of the jurisdictional High Court
ITA No.526/Bang/2024 M/s. Dream Logistics Company Limited, Yellapur Page 4 of 8 and other High Courts in support of his arguments and prayed to allow the appeal. 4. The ld. D.R. relied on the orders of the lower authorities and also filed written submissions and relevant documents and contended that purchases are bogus purchases and therefore, the claim made by the assessee is not correct and prayed to dismiss the appeal. 5. We have heard the rival submissions and perused the materials available on record. It is an admitted fact that the assessee had purchased the iron ore during the AY 2010-11 from M/S Megha Minerals and the said expenses were also duly recorded in the books of accounts and while preparing the financial statements, the said sum was shown as expenses in the P&L a/c and the dues were shown as liabilities in the balance sheet in the AY 2010-11. Further, as seen from the records the said due was paid by the assessee on 21.04.2010 i.e. during the A/Y 2011-12 by way of cheque which was also encashed by the seller M/s. Megha Minerals. Now the department has contended that based on the statement given by the proprietor of M/S Megha Minerals, there was no actual sale of iron ore to the assessee vide invoice dated 20.01.2010. On the above basis, the AO treated the said purchases as bogus and came to the conclusion that the assessee had wrongly claimed the expenditure and therefore, the same is not eligible for deduction. 5.1 We have also perused the assessment order dated 26.12.2018 in which the method of accounting was clearly mentioned as “Mercantile” basis and therefore, the expenditure claimed by the assessee during the assessment year 2010-11 should be allowed or disallowed during that assessment year itself. The AO and ld. CIT(A) without considering the basic thing, had confirmed the assessment made u/s 147 of the Act in respect of the assessment year 2011-12. We find that the ld. Addl. CIT also without considering the said facts, had directed the AO to make the assessment u/s 41(1) of the Act on
ITA No.526/Bang/2024 M/s. Dream Logistics Company Limited, Yellapur Page 5 of 8 the ground that there is a cessation of liability. Before proceeding further, let us have a look on the above said provision: Section 41: [(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,- (a)the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or
(b)the successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous year.
5.2 As seen from the above said provision under which the AO had made the assessment, we find that the provision will apply in respect of the expenditure or trading liability incurred by the assessee and subsequently if the assessee had obtained cash in respect of such expenditure or some benefit in respect of such trading liability by way of remission or cessation, the amount obtained by the assessee would be treated as profit & gains of business or profession of that year. In order to attract the above provision, the AO should establish that there was an expenditure or liability and towards that liability or expenditure the assessee had received cash or some benefit and thereby the liability or expenditure ceased to exist and, in those circumstances, only it can be treated as remission or cessation and the amount or benefit received by the assessee can be treated as income under the head “profits and gains of business or profession”. In the present case, the assessee had a liability of Rs.2,60,00,000/-
ITA No.526/Bang/2024 M/s. Dream Logistics Company Limited, Yellapur Page 6 of 8 being the amount payable to M/s. Megha Minerals towards the purchase of the minerals and the said due was also repaid by the assessee by way of cheque during the assessment year 2011-12 and therefore, there is no logic in applying the above said provision to the facts and circumstances of the case. Further, in this case, there is no evidence to show that the assessee had received cash towards that expenditure /liability and therefore there is no cessation or remission of any liability as alleged by the authorities. In fact, we find from the records that the assessee had remitted the entire bill amount by way of cheque and the seller also declared the said sales in their VAT returns and also paid the tax dues thereon by way of DD. There is no evidence to show that the seller had paid any amount to the assessee so that the seller had waived or gave remission or cessation against the liabilities and therefore, applying the said provision to the facts and circumstances of the case is not correct. 5.3 The AO mainly relied on the statement given by the proprietor of M/s. Megha Minerals from whom the assessee has effected the purchases of iron ore to show that there was no sale of iron ore to the assessee. Even in the said statement, the seller had not deposed anything about the payment made to the assessee towards the liability and in fact he had deposed that the cheque amount deposited in the bank was withdrawn by him and handed over to the owner Sri Prabhakar M Devadiga of Om Logistics Private Limited, who was his boss earlier. Therefore, there is no averment connecting the assessee and the withdrawal and the handing over of the money to the owner of M/s. Om Logistics Pvt. Ltd. except the connection that one of the Director of the assessee company Sri Prakash Hegde is also a partner in Om Logistics Pvt. Ltd. Therefore, unless and until it is proved that the said withdrawals were made and handed over to the assessee company, there is no point in alleging that the transactions are bogus and the payment also bogus and consequently making the assessment u/s 41 (1) of the Act.
ITA No.526/Bang/2024 M/s. Dream Logistics Company Limited, Yellapur Page 7 of 8 5.4 Further, we have also seen that the AO had relied on the third- party statement for reopening the assessment u/s 147 of the Act, that too without affording an opportunity to cross examine the said third party M/S Megha Minerals. We are of the opinion that any statement recorded behind the back of the assessee could not be a reason for reopening the assessment unless and until the assessee was provided an opportunity to cross examine the deponent. In this case no such opportunity was granted to the assessee and therefore the entire proceedings are bad in law. 5.5 We also find that the assessee filed an application before the Addl. CIT u/s 144A of the Act and the said ld. Addl. CIT by his proceedings dated 24.12.2018 had directed the AO to make the assessment u/s 41(1) of the Act for the assessment year 2011-12. The ld Addl. CIT on the wrong presumption that the cheque worth Rs 2,60,00,000/ issued by M/S Megha Minerals was encashed by one person related to one of the Director of the Assessee Company which proves the nexus of the assessee with M/S Megha Minerals to provide an accommodation entry. We failed to understand how such a finding has been given by the Ld. Addl. CIT when there is no evidence available in the records to show that the assessee had received the money as alleged by the Ld. Addl. CIT. We also find no such allegation was made by the Partner of M/s Megha Minerals in his sworn statement made u/s 131 of the Act. We have also perused the various documents filed by the assessee and satisfied ourselves that there is no iota of evidence to prove the fact that the assessee had received the money. In this case no money was received by the assessee towards the liability and therefore no assessment could be made u/s 41 (1) of the Act. 5.6 We also find that the AO had not accepted the transaction as genuine and treated the expenditure as bogus. In that circumstances the AO can reopen the assessment for 2010-11 and disallow the bogus expenditure claimed during that year which the AO failed to
ITA No.526/Bang/2024 M/s. Dream Logistics Company Limited, Yellapur Page 8 of 8 do so. In these circumstances we have no other option except to set aside the orders of the lower authorities. 5.7 In view of the above said findings given on merits, we allow ground no.3 raised by the assessee. The ground no.2 raised by the assessee becomes infructuous. With regard to ground No.4, charging of interest u/s 234A, 234B & 234C, they are only consequential in nature and therefore we are not adjudicating the same. 6. In the result, appeal of the assessee is allowed. Order pronounced in the open court on 13th Sept, 2024
Sd/- Sd/- (Waseem Ahmed) (Soundararajan K.) Accountant Member Judicial Member
Bangalore, Dated 13th Sept, 2024. VG/SPS
Copy to:
The Applicant 2. The Respondent 3. The CIT 4. The DR, ITAT, Bangalore. 5 Guard file By order
Asst. Registrar, ITAT, Bangalore.
