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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI D.T. GARASIA, JM & SHRI RAJESH KUMAR, AM
O R D E R PER D. T. GARASIA, JM:
This appeal is filed by the Assessee against the order of CIT(A)-21 Mumbai, dated 19/03/2015 arising out of order of Asst. CIT-6(3) Mumbai dated 03/01/2014 passed u/s 143(3) of the Income Tax Act, 1961 for the Assessment Year 2011-12.
2 Metropolitan Eximchem Ltd. The following grounds are raised by the assessee 1) The Learned CIT (A) has erred in retaining the addition of Rs 2,32,328/- on account of so called bogus purchases effected by the petitioner. 2) The Learned CIT(A) has erred in confirming and retaining the addition of Rs.8,15,231/- on account of capitalization of interest in respect of capital expenses incurred by our petitioner during the year ended 31.03.2011. 3) The Learned CIT (A) has erred in retaining and sustaining for amount of Rs.5,21,358/- being portion of expenses which according to Assessing authority was requiring to capitalized
2. The short facts of the case are as under: The Assessing Officer has made the addition of Rs.18,58,622/- as unexplained investment in purchases shown from three parties. According to the Assessing Officer, the assessee has made purchases of Rs.9,08,250/- from Sunico Traders Pvt. Ltd., of Rs.5,372/- from Atlantic Traders, and Rs. 9,45,000/- from Shah Industries, totalling to Rs.18,58,622/-. The assessee was asked to prove the genuineness of such purchases and produce these parties with their books of account and bills for examination. However, the assessee failed to produce the said parties. According to the Assessing Officer, the assessee has not discharged his onus. Mere production of copies of invoices does not prove the genuineness of the transactions. Similarly, mere that payment has been made by account payee cheque does not make purchase genuineness until and unless and until the recipient of the payment confirm the payment for the purpose which it was taken. The assessee does not produce the parties hence veracity of claim could not be established. Moreover, these parties appeals in the list of bogus dealers provided by Sales Tax Department. Thus according to the Assessing Officer, the assessee did not produce the parties and he has 3 Metropolitan Eximchem Ltd. ITA No. 2935/M/2015 accepted that gross profit of such purchases can be added not entire purchases prise and he has added entire purchase price of the three parties to the total income of the assessee.
3. The matter carried to CIT(A) and CIT(A) has partly allowed the appeal by observing as under:
“Therefore, such facts and circumstances demands reasonable and convincing approach. Recently Hon'ble Gujarat High Court in the case of CIT vs. Bholanath PolyFab Pvt. Ltd. (2013) 355 ITR 290 and thereafter in the case of CIT vs. Simit P. Sheth ( 2013) 219 Taxman 85 (Gui) has held that in such facts and circumstances, not entire purchase price but only profit element embedded in such purchases can be added. The finding of the Hon'ble Gujarat High Court in the case of CIT vs. Simit P. Seth is 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 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 4 Metropolitan Eximchem Ltd. 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. [2013] 355 ITR 498 (Guj) and in the case of CIT v. Bholanath Poly Fab (P.) Ltd. [2013] 355 ITR 290 (Guj). The view taken by the Tribunal in the case of Vijay Proteins Ltd. v. Asstt. 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 Pawanraj 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 5 Metropolitan Eximchem Ltd. 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 vary with the nature of business and no uniform yardstick can be adopted." Further, it is important to note that recently Hon’ble Hon'ble Bombay High Court has also, in the case of CIT-8 vs. Hariram Bambhani, I.T.A.No.313 /2013 order dated 4.2.2015 has approved the net profit @4% on unaccounted sales, confirmed by the CIT(A). Thus, it is very obvious that in respect of such unestablished purchases or sales, a profit element embedded to such transactions can be ascertained. Of course, while doing so the decision has to be case specific. In this case, it is very evident that assessee is a manufacturer, hence profit margin is definitely higher than simple trader of such goods, hence considering the nature of business of the assessee, the profit element embedded in such business and related to such purchases as observed by the Hon’ble Gujarat High. While approving the adoption of 12.5% of profit, the same profit ratio is taken in this case and accordingly, the addition of Rs.2,32,328/- is confirmed and balance amount of Rs.16,26,294/- is deleted.”
The Ld. A.R. submitted that the entire purchase cannot be added to the income of the assessee. The assessee has submitted purchase invoices of three parties, ledger account copies of the bank statement showing the payment of purchases to above parties transport receipts, receipt and entry of the material in stock register. Therefore, the assessee had made purchases and made payment through proper channel. The assessee did not produce the parties, but payments have been made by the crossed account payee cheque back by transport receipt and capital payment. They are all made by agent of purchaser. The Ld. A.R. submitted that the assessee has made purchases from the parties and as per the 6 Metropolitan Eximchem Ltd. decision Supreme Court in the case of CIT vs. J.M.D. Computers & Communications Pvt. Ltd., S.I.P. (C) of No.28961 of 2009, the assessee must be given opportunity of cross-examination. In the case of CIT vs. M.K. Brothers (163 ITR 249) it was not proved that part of fund given by the assessee to this party had come back to the assessee in any form. The Ld. AR submitted that all the purchases are recorded and all payments have been reflected in books of account and also quantity details of purchases have been reflected in the stock register. Therefore, as per the decision of the Tribunal in the case of Sri Rupesh Chimanlal Savla vs. ITO, Income Tax Appeal No. 6179-6182/Mum/2016 dated 30/12/2016 wherein the Tribunal has disallowed 2% of the purchases to meet the anomalies. Moreover, in this case the assessee had made the purchases but the assessee could not produce the parties from whom the purchases havd been made, therefore, addition may be reduced to 2%.
The Ld. D.R. relied upon the order of Revenue Authority and he relied upon the decision of Hon’ble Gujarat High Court in the case of CIT vs. Simit P. Sheth (2013) 219 Taxman 85 (Guj) and submitted that the CIT(A) has rightly adopted 12.5% of total profit.
Having heard both the parties. Looking to the facts and circumstances of the case, we find that the CIT(A) has considered the submission and he was of the view that the assessee has made purchases from three parties and these three parties were declared as bogus Hawala dealers and the assessee was unable to produce these three parties before the Assessing Officer. The assessee has made payment by cheque to these parties and thus the purchases have been made by the assessee. Moreover, the assessee has sold this much goods which he has purchased from the above parties therefore, it is rightly concluded that the purchases shown by the assessee is not in doubt, but the assessee might have not purchased from these parties who he might have purchased it from the grey market. Therefore, we are of the view that entire purchases cannot be added to 7 Metropolitan Eximchem Ltd. the total income of the assessee and CIT(A) has rightly relied upon the decision of the Hon’ble Gujarat High Court in the case of CIT(A) vs. Simit Seth (supra) and our interference is not allowed. In the result, ground No. 1 of appeal of the assessee is dismissed.
Second ground is against the Assessing Officer noticed that the interest bearing fund was utilised for capital work in progress. The opening capital work in progress as on 01/04/2010 was of Rs. 0.16 crore whereas closing capital work in progress as on 31/03/2011 was Rs. 3.48 crores. Similarly, secured loan was increased from Rs. 50 lakh to 4.49 crores. Similarly, unsecured loan have been increased from 1.50 crores to 3.44 crores . Therefore, the assessee was asked to explain why the corresponding interest expenditure to capital work in progress should not be capitalized. The assessee contended that the assessee’s sales have gone up and most of the sales are export sales and entire credit loan was utilized for financing the overseas export sales. The cash credit has been utilized for purpose of assessee’s day to day business. Therefore, entire amount was use for the business purpose and at the most, expenditure of Rs.6,96,075/- may be capitalized.
On the other hand the Ld. D.R. relied upon the order of the Revenue Authorities below.
We have heard the rival contention of both the parties it is seen from the record that credit obtained by the assessee firm Canara Bank has been utilized for financing overseas export. Similarly, cash credit facility of Rs. 36 lakh have been utilized for day to day business. Therefore, the entire interest expenditure cannot be disallowed. The assessee himself has capitalized the expenditure of Rs.6,96,075/- as per the working given by the assessee. The CIT(A) has not pointed out any defect in the working given before CIT(A) therefore, we direct 8 Metropolitan Eximchem Ltd. the AO to capitalize interest expenditure of Rs.6,96,075/- in the result ground No.2 of assessee’s appeal is allowed. The third ground:- 9. The Assessing Officer asked the assessee to furnish the details of expenses related to work in progress as the Assessing Officer noticed that some of the expenses debited under the head administration and selling expenses, like travelling, salary are definitely related to work in progress. However, he disallowed Rs.10 lakh and capitalized work in progress. Therefore, he disallowed.
The matter carried to CIT(A) and CIT(A) has partly allowed the appeal on the ground that 10% of such expenses can be treated as capital expenditure. Therefore, he sustained the addition of Rs.5,21,358/-.
The Ld. AR submitted that the total administration expenses for the year ended on 31/03/2010 were Rs.1,60,40,916/-. This year the expenditure has gone up to Rs.1,75,71,545/-. The total expenditure has also been increased by 10%. As against this, sales have increased by 72.93%. All the major expenses under the head ‘Administration and Selling expenses’ are closely related to increase in the turnover. Therefore, there is no scope of estimating in heading on ad-hoc basis.
The Ld. DR relied upon the orders of Revenue Authorities below.
We have heard the rival contention of both the parties. Looking to the facts and circumstances of the case, we find that the total administrative expenses for the year ended 31/03/2010 was Rs.1,60,40,916/-. This year the expenditure has increased. The total expenditure had increased by 10% as against this sales have increased by 72.93%. All the major expenses have been shown under the heading ‘Administration and selling expenses’. Such expenses 9 Metropolitan Eximchem Ltd. ITA No. 2935/M/2015 are advertisement and sales promotion freight on sales, freight and other commission on sales. Thus we are of the view that there is no scope of estimating the expenditure, therefore, we deleted the same.
In the result, ground No 3 in assessee’s appeal is allowed.
In the result, appeal of the assessee is partly allowed. Judgment pronounced in open court on 29th March, 2017.