ASST CIT 14(1)(1), MUMBAI vs. BATLIBOI ENVIRONMENTAL ENGINNERING LTD, MUMBAI

These cross appeals by the assessee and Revenue are directed against the order of the CIT(A)-22, Mumbai dated 16.03.2015. 2. The facts of the case, briefly stated, are as under: - 2.1 The assessee company, engaged in the business of designing, engineering, procuring, supplying of equipments, construction, testing and commissioning of sewage, water and affluent plants, filed its return of income for A.Y. 2011-12 on 17.09.2011 declaring loss of (-)

2 & 3482/Mum/2015 Batliboi Environmental Engineering Ltd. `2,73,21,124/-. The return was processed under section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. Subsequently, information was received from Sales Tax Department, Government of Maharashtra by the Assessing Officer (AO) that certain bogus parties have provided accommodation entries by issuing bills for bogus purchases to a large number of taxpayers without actual supply of goods. One of such parties, was the assessee in the case on hand, who obtained bogus purchase bills amounting to `28,07,050/- from M/s. Chirag Steel Centre in the year under consideration, as per statements given before Sales Tax Department. The AO treated M/s. Chirag Steel Centre as a bogus dealer, providing accommodation bills. Observing that this party was not an approved vendor and that payments were made nine months after issue of bills, the AO came to the view that the assessee has failed to establish the genuineness of the said purchases of `28,07,058/- from M/s. Chirag Steel Centre with any corroborative evidence and brought the same to tax in the assessee’s hands. Further additions/disallowances were also made in respect of bad debts written off, prior period expenses, internet expenditure and cessation of liabilities. The assessment was completed under section 143(3) of the Act vide order dated 15.02.2014 wherein the net loss of the assessee was determined at (-) `74,63,700/- in view of the following additions/disallowances: - ` 28,07,058/- (i) Non genuine purchases (ii) Cessation of liability under section 41(1) `1,52,29,070/- (iii) Prior period expenses ` 12,66,805/- (iv) Bad Debts written off ` 5,21,491/- ` (v) Interest expenditure 33,000/- 2.2 Aggrieved by the order of assessment dated 15.02.2014 for A.Y. 2011-12, the assessee preferred an appeal before the CIT(A)-22, Mumbai. The learned CIT(A) disposed off the appeal vide the impugned order dated 16.03.2015 allowing the assessee partial relief, by deleting the additions/ disallowances at S.Nos. (ii), (iii) and (v) listed in para 2.1 (supra), upholding the disallowance at (iii) (supra) and partly sustaining the addition at (i).

3 & 3482/Mum/2015 Batliboi Environmental Engineering Ltd. 3. Aggrieved by the order of the CIT(A)-22, Mumbai dated 16.03.2015 for A.Y. 2011-12 both the Revenue and the assessee have filed cross appeals. 3.1 The grounds raised by the assessee are as under: - “(1) On the facts and in the circumstances of the case and in law, Ld. CIT (Appeals) erred in disallowing 12.5% of the purchases as being bogus in nature. (2) Appellant craves leave to amend or alter the existing ground or add further grounds at the time of hearing.” 3.2 The grounds raised in Revenue’s appeal are as under: - “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the addition on account of Bogus Purchases of Rs.28,07,058/- to Rs.3,50,882/-.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.1,52,29,070/- made by the AO u/s 41(1) on account of cessation of liability ignoring the AO’s finding that the said liabilities were not payable as they stood barred by limitation.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.12,66,805/- on account of prior period expenses.

4. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal.

5. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be resorted.”

4. Ground Nos. 1 & 2 of Revenue and Ground No. 1 of Assessee – Bogus Purchases 4.1 These grounds (supra) being interconnected are taken up together for adjudication. 4.2 In its ground (supra), Revenue has assailed the order of the learned CIT(A) as being erroneous in deleting the addition of `28,07,058/- on account of bogus purchases. The learned D.R. was heard and (i) placed strong reliance on the AO’s view in making the said addition in the order of assessment and (ii) alternatively prayed for upholding the addition of `3,50,882/- of profit on bogus purchases @ 12.5% thereof. 4.3 4.3 The learned A.R. of the assessee, while submitting that the decision of the learned CIT(A) in deleting the addition of `28,07,058/- 4 & 3482/Mum/2015 Batliboi Environmental Engineering Ltd. made by the AO on account of bogus purchases was in order, assailed the impugned order of the learned CIT(A) in holding that addition of 12.5% of the bogus purchases should be added back to the income of the assessee as profit thereon. According to the learned A.R., the learned CIT(A) failed to appreciate that the material purchased during the year were fully recorded in the assessee’s books of account, which were not rejected by the AO and evidence regarding purchase orders, ledgers, copies of invoices, payment details with bank entries which are paid through bank cheques, details of receipts and transportation, i.e. lorry receipts, gate pass records, octroi receipts, delivery challans, details of utilisation of materials, etc. were filed. It is submitted that such an estimation of profits on bogus purchases @12.5% is unjustified and is to be deleted since the basis for the said estimation was certain information received from the Sales Tax Department, Government of Maharashtra without providing the assessee opportunity to cross examine the persons on whose statements adverse inference were drawn. Reliance in this regard was placed on, inter alia, the following judicial pronouncements: - (i) Imperial Imp & Exp. (ITA No. 5427/Mum/2015 dated 18.03.2016) (ii) Jaybharat Textiles & Real Estate Ltd. (ITA NO. 5163/Mum/2013 dated 24.02.2016) (iii) Mahesh K. Shah (ITA No. 5194/Mum/2016 dated 31.01.2017) (iv) Vaman International P. Ltd. (ITA No. 794/Mum/2015 dated 16.11.2016) 4.4.1 We have heard the rival contentions and perused and carefully considered the material on record and the judicial pronouncements cited. We have carefully perused the cases cited above by the assessee (supra) and with due respect are of the view that none of them would come to the rescue of the assessee. While it is true that the controversy generated in all the cited cases (supra) and that of the assessee in the case on hand, are a result of certain information obtained from the Sales Tax Department, Government of Maharashtra by the Income Tax Department, the facts and facets of each case to some extent is unique. In the case of Mahesh K. Shah (supra) and Vaman International P. Ltd. (supra) the additions on 5 & 3482/Mum/2015 Batliboi Environmental Engineering Ltd. account of bogus purchases made under section 69C of the Act as unexplained expenditure were deleted because apart from filing details to establish the said purchases were made, the consequent sales of such materials was not doubted by the AO and therefore it was concluded that without purchases being made, corresponding sales could not have been effected by the assessee. In the case on hand, however, the assessee has not established that the said material has been sold or even if it was utilised, what is the profit element embedded therein that has been offered to tax. The decision in the case of Jaybharat Textiles and Real Estate Ltd. (supra) would also not come to the rescue of the assessee being factually different as in the cited case the said suppliers of material accepted that they have effected the sales and therefore the purchases could not be held to be non-genuine. The decision in the case of Imperial Imp Exp. (supra) is also factually different from that of the case on hand and also would not come to the assessee’s rescue as in the cited case the entire sales were by way of exports and therefore there was no liability towards sales tax in respect of the purchases affected by it. Further the sales were never doubted by the AO and therefore it was concluded that the sales could not have been effected if the purchases were not made. The fact situation is not so in the case on hand. 4.4.2 We find that the learned CIT(A) has addressed the issue of bogus purchases in detail and after considering the assessee’s submissions, the AO’s findings and the judicial pronouncements on this issue, in similar factual matrix the learned CIT(A) deleted the addition of `28,07,058/- on account of bogus purchases. However, following the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Simit P. Sheth (2013) 356 ITR 451 (Guj), the learned CIT(A) has held that since the direct one to one relationship between purchase of the said materials and the utilisation thereof have not been established, bringing the profit element embedded in the impugned purchases @12.5% thereof to tax in the assessee’s hands would be reasonable. The learned CIT(A) at paras 3.3 to 3.6 of the impugned order has held as under: - 6 & 3482/Mum/2015 Batliboi Environmental Engineering Ltd. “3.3. I have considered the appellant’s submissions and the AO’s order. The appellant had purchased the material through M/s. Chirag Steel Centre for Rs.28,07,056/-. The Sales tax department had treated MIs. Chirag Steel Centre as a provider of accommodation bills without supplying the material. This information was received from the Investigation department. As appellant was not a regular approved vendor with the appellant and no corrugated evidence was filed, the AU disallowed the purchases made through M/s. Chirag Steel Centre for Rs. 28,07,058/- and treated these purchases as bogus in nature and added the income of the appellant. 3.4 The appellant during the submissions stated that appellant had submitted the evidence regarding Purchase order, ledgers, copies of invoices, payment details with bank entries which are paid through bank cheques, details of receipt and transportation such as LR/RR receipt, vehicle number, gate pass records, octroi receipts, GRN, delivery challans, weighment slips, details of issue& utilization of the alleged purchase. 3.5 During the appellate proceedings, the appellant also explained where this material was provided for further process. On similar issue the decision of the Gujarat HC in the in the case of CIT Vs Simit P. Sheth (2013) 356 1TR451 (Gui) is held as under: “We are broadly in agreement with the reasoning adopted by the 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, CIT 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 assessee's theory that the purchases were not bogus but were made from the parties other than those mentioned in the books of accounts. That being the position, not the entire purchase price but only profit element embedded in such purchases can be added to the income of the assessee. So much is clear by decision of this Court. In particular, Court has also taken a similar view in case of Commissioner of Income Tax- IV vs. Vijay M Mistry Construction Ltd. vide order dated 10.01.2011 passed in Tax Appeal No. 1090 of 2009 and in case of Commissioner of Income Tax-I vs. Bholanath Poly Fab Pvt. Ltd. vide order dated 23.10.2012 passed in Tax Appeal No. 63 of 2012. The view taken by the Tribunal in case of Vijay Proteins Pvt. Ltd. Vs. CIT reported in 58 ITD 428 came to be approved.

7 & 3482/Mum/2015 Batliboi Environmental Engineering Ltd. If the entire purchases were wholly bogus and there was finding of fact on record that no purchase 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 case of ACIT (OSC) Ward 5(3) Nadiad Vs. 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 ratio of 30% of such total sales. The Tribunal, however, scaled down to 12.5%. We may notice that in the immediately preceding year to the assessment year under consideration the assessee had declared gross profit @ 3.56% of the total turnover. If the yardstick of 30%, as adopted by the Commissioner, is accepted GP rate will be much higher. In essence, the Tribunal only estimated the possible profit out of purchases made through non-genuine parties. No question 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, 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 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. 3.6 Following the above decision of the Gujarat HC, AO is directed to disallow 12.5% of the purchases as bogus in nature and on this 12.5% of the amount of purchase as income of the appellant. Hence ground of appeal is partly allowed.” 4.4.1 On an appreciation of the facts on record and the findings rendered by the learned CIT(A) (supra), we find that the assessee has failed to place on record any material evidence to controvert the findings of the learned CIT(A). In this view of the matter, we uphold the order of the CIT(A) on these issues of deleting the addition of `27,08,058/- made on account of consideration for bogus purchases and in bringing to tax in the assessee’s hands the profits embedded in the bogus purchases @ of 12.5% of the cost of the said purchases amounting to `28,07,058/- since the direct one to one relationship /nexus between the said purchases and utilisation thereof have not been established by the assessee either before us or the learned CIT(A). Consequently, ground Nos. 2 & 2 of Revenue’s appeal and ground No. 1 of assessee’s appeal are dismissed.

8 & 3482/Mum/2015 Batliboi Environmental Engineering Ltd.

is allowed. 5.3.3. In the case on hand, admittedly there were 25 creditors of the assessee to whom `1,52,29,070/- was outstanding for more than three years and in some cases 8-9 years. According to the assessee, it was unable to pay these creditors due to certain liquidity problems, but the said amounts were undoubtedly acknowledged by the assessee as payable to these parties as reflected in its Balance Sheet as on 31.03.2011. It is seen that many of the creditors had also initiated legal proceedings for recovery of their outstanding amounts and in some cases there was disputes as to the amounts payable/receivable. In our view, in this factual matrix of the case on hand it is clear that it was neither a case of cessation nor remission of liability and therefore the AO had wrongly invoked the provisions of section 41(1) of the Act. In coming to this view, we draw support from the decisions of the Hon'ble Gujarat High Court in the case of G.K. Patel & Co. (212 Taxman 384) and Hon'ble Delhi High Court in the case of Jain Exports P. Ltd. (89 DTR 265) which are on similar facts and were held in favour of the assessee. In this factual and legal matrix of the case, we uphold the order of the learned CIT(A) in deleting the addition of `1,52,29,070/- made by the AO as cessation of liability under section 41(1) of the Act. Consequently, ground No. 2 of Revenue’s appeal is dismissed.

6. Ground No. 3 – Prior period expenses 6.1 In this ground, Revenue assails the order of the learned CIT(A), as being erroneous in deleting the disallowance of `12,66,805/- on account of prior period expenses. The learned D.R. for Revenue vehemently supported and placed strong reliance on the AO’s finding rendered in the order of assessment on this issue.

11 & 3482/Mum/2015 Batliboi Environmental Engineering Ltd. 6.2 Per contra, the learned A.R. of the assessee submitted that the direction of the learned CIT(A) deleting the disallowance of `12,66,805/- on account of prior period expenses was in order and is to be upheld. 6.3.1 We have heard the rival contentions and perused and carefully considered the material on record. On an appreciation of the facts on record the AO, on noticing that the tax audit report mentioned that an amount of `12,66,805/-, being prior period expenses, was debited to the Profit & Loss account, disallowed the said expenditure for the reason that it did ot pertain to the year under consideration. On appeal, it was submitted by the assessee that as the assessee’s business of construction was executed at several on-site jobs; there were delays in receipt of bills and therefore at the end of the accounting year some bills will be pending and spill over to the next year when it will be settled. This was normal business practice of the assessee, which was accepted by the AO’s in the past. The learned CIT(A) allowed the assessee’s claim of prior period expenses following the decisions of the Hon'ble Delhi High Court in the case of Jagatjit Industries Ltd. (194 Taxman 158) (Delhi) and SMCC Construction (India) Ltd. (220 Taxman 354) (Delhi), on the ground that these decisions were rendered on similar facts and held as under at paras 5.3 to 5.5 of the impugned order: - “5.3 I have considered the appellant's submission. In the tax audit report of the appellant, an amount of Rs. 12,66,805/:- was mentioned prior period items and same was debited to- the Profit and loss account which is in the nature of expenditure of prior period. 5.4 During the appellate proceedings, appellant had submitted that as the business of appellant is in construction and execution of business operating, several on-site jobs are carried on. There is always delay in the receipt of bills and therefore when the accounting year closes and certain bills will be pending till end of the closing year are treated as in the next year. As details of the expenses-show that many of the bills are dated as far as 2007 and it is not clear as to how and why the appellant not made payment for the incurred expenditure and liability towards the same has been crystallized in those years itself. The appellant's business of construction and this has to be treated as normal business practice which appellant was following in the earlier years. The appellant further relied on the Delhi HC's decision in the case of Commissioner of Income Tax us. Jaqatjit Industries Ltd. (194 Taxman 158) (Delhi.) and SMCC Construction India Ltd. vs. Asstt.