KRISHMA CONCHEM PRODUCTS P.LTD,MUMBAI vs. DCIT 6(2), MUMBAI

The grounds of appeal no.1(i) to (iv) are inter-related and grounds No.1 is against the confirmation of addition of Rs.9,36,000/- by the ld CIT(A) as made by the AO on account of bogus purchases from M/s Sumukh Corporation. The issue raised in ground No.3 is against the confirmation of application of GP rate

Facts of the case in brief are that during the course of assessment proceedings, on random checking of the books of accounts, it was observed that the assessee had purchased goods from M/s Sumukh Corporation which were not appearing in the details of parties/suppliers from whom the purchases were made by the assessee. Accordingly, the AO called upon the assessee to prove the genuineness of the transactions, produce bills/challans of transporters, which were not produced. Moreover, these purchases were made on credit basis. Accordingly, a show cause notice was issued as to why these purchases should not be treated as accommodation entries and brought to tax u/s 68 of the Act. The AO rejected the books of account u/s 145(3) of the Act and also applied GP rate at the rate of 2% on Rs.9,36,000/- and worked out the disallowance to Rs.18,720/-. Aggrieved assessee filed appeal before the ld.CIT(A), who after considering the submissions of the assessee sustained both the additions by observing and holding as under : “3.2 Findings and decision On careful consideration of facts stated in the impugned order vis-a-vis submission of the Ld. A.R., it immensely transpires that the grievance of the assessee lacks merits: As stated by the A.O., the assessee could not furnish necessary evidences in support of claim made by it. As per the bills produced by the assessee, purchases were in relation to a chemical i.e. to say 300 kg chloro-4 Niro Benzo Phenone on 3 different dates of first week of March 2010. No thorough evidence were furnished during the course of 3 the assessment proceedings. Even during the course of appellate proceedings also, the Id. A.R was asked whether he would provide latest confirmation of the party or produce it before the A.O. The Ld. A.R. fairly informed that it was riot possible to produce latest confirmation or to produce the concerned party before the A.O The indifference of not producing the party which issued the bill is indicative of truth. The AO was not doubting all the purchase but doubting only selected purchases for which he had doubt or information as the case may be. The evidence in respect of identity of person responsible for issuing purchase bills was within the knowledge of the assessee or with its employees as subsequently the payments must have been made. The A.G. had specifically mentioned that the said purchases were credit purchases. The bill indicate terms and conditions as 45 days and the bill also states that interest will be charged @ 24% p.a., if the bill is not paid on presentation. There is no evidence that payment was made within 45 days and if it was made subsequent thereof, any interest was paid as per this stipulation laid down in the bill. If the payment is made subsequently to say after a reasonable period, it implies that assessee had fiduciary relationship because no prudent person would like to sell to an unknown person on credit for a long period. In given circumstances, the assessee should produce such person or produce latest confirmation from such seller. The assessee had failed on all counts. The bills itself reveals certain suspicious features. As per tax invoice issued by the seller, column as to 'buyer's order no.' states 'ON TELE', whereas assessee relies on its purchase order which states as '256 - W' and date as 26.2.2010. The seller's invoice reveals no date of purchase order. The seller's address is of Borivali whereas assessee's destination is at village Nare, Tal. Wada which requires transportation and that too for chemical. There are no evidence of transportation. In given facts and circumstances, the claim for impugned purchases did not inspire any credence and I find no reason to interfere with the order of the A.O. making an addition of Rs. 9,36,0001- as bogus purchases. Accordingly, impugned addition of Rs.9,36,000/- is confirmed”. ……. 5.1 During the course of appellate proceedings, the Ld. A.R. had submitted written submission which contained arguments on above mentioned two disallowances adjudicated here above. However, there W1S no explanation objection against this disallowance either in written submission or oral submissions. Even otherwise having regard to the overall facts of the case, I find no reason to interfere with the order of the AO of the issue in dispute and in result impugned addition made by the AO stands confirmed.

We have carefully considered the rival contentions, perused the material placed before us including the orders of authorities below and case law relied upon by the parties. We find that the FAA upheld the addition made by the AO on account of bogus purchases that the assessee could not produce the bills, transport receipts, details of the said purchases, whereas, on the other hand the ld.AR submitted that the total purchases of the assessee during the year were Rs.8,23,42,226/- and the sales were to the extent of Rs.1,32,99,36,208/-. The ld. AR submitted that the payments were made through banking channels and by account payee cheques, the materials were duly received and entered in the books of account including the stock register of the assessee. The ld. AR argued that the AO has not doubted the sales of the assessee as the materials received has been duly sold. We find that when the AO not doubting the sales cannot disallow the entire purchases without giving detailed findings. At the most GP on the said purchases could be brought to tax which has already been done by applying 2% of the amount of total alleged bogus purchases. Accordingly, we are of the considered view that the order of the ld.CIT(A) upholding the entire purchases which according to the facts on records were duly entered in the stock register and subsequently sold cannot be sustained. We, therefore, inclined to set aside the order of ld.CIT(A) on this issue and direct the AO to delete the addition on account of bogus purchases, whereas the disallowance made on account of GP is sustained to cover possible leakage of revenue.

The issue in ground no.2 is against the confirmation of disallowance of Rs.1,84,741/- by the ld.CIT(A) as made by the AO under section 14A of the Act read with rule 8D(2) of the Rules comprising of Rs.1,36,539/- on account of disallowance of interest under rule 8D(2)(ii) of the Rules and Rs.48,202/- towards disallowance of expenditure at the rate of 0.5% of the average investment u/s 14A of the Act read with rule 8D(2)(iii) of the Rules.

The ld. AR vehemently submitted before us that the FAA uphold the order of the AO on this issue by following the decision of the Jurisdictional High Court in the case of „Godrej & Boyce Manufacturing Co. Ltd.‟ 328 ITR 81(Bom) and other decisions that the provisions of section 14A r.w.r.8D was clearly applicable to the case of the assessee and the disallowance was rightly made and accordingly upheld. The ld. AR vehemently submitted before us that the FAA has grossly erred in sustaining the addition of Rs.1,84,741/- without going into the facts on records. The ld. AR argued that the assessee deployed its own funds which were far more than the investments made in shares and securities on which the assessee earned dividend during the year of Rs.3,87,611/-. The ld. AR further argued that since the assessee‟s own funds were far more than the investments made in shares therefore no disallowance of Rs.1,36,539/- is called for u/s 14A of the Act r.w.r 8D(2)(ii) of the Rules and should be deleted. In support of this submissions the ld.AR strongly placed reliance on the 6 decisions of Jurisdictional High Court in the case of CIT V/s RELIANCE UTILITIES AND POWER LTD. [2009] 313 ITR 340 (Bom) and CIT V/s HDFC BANK LTD. [2014] 366 ITR 505 (Bom). So far as the disallowance u/s 14A read with rule 8D(2)(iii) is concerned, the ld.AR admitted that the same was required to be sustained.

The ld. DR, on the other hand, strongly objected to the plea put forth by the ld.AR and submitted that the provisions of section 14A of the Act read with rule 8D of the Rules were clearly applicable to the case of the assessee and hence rightly disallowed by the AO and confirmed by the FAA. The ld. DR prayed before the Bench that in view of the facts of the assessee‟s case the plea of the assessee should be dismissed.

We have carefully considered the rival submissions and perused the material placed before us including the orders of authorities below and the case law relied upon by the assessee. We find that the assessee‟s own funds were Rs.3,89,28,953/- whereas the investments made by the assessee in shares and securities were Rs.1,25,15,918/- as per the balance sheet as on 31.3.2010 filed at page 8 of the paper book. We, therefore, are of the considered view that in view of the ratio laid down in the case of HDFC Ltd (supra) and Reliance Utilities(supra), wherein the Hon‟ble Jurisdictional High Court has clearly held that the when the assessee own funds are more than the investments made in the shares and securities made out of own funds, there is no need to disallow