ELECTROLAB,MUMBAI vs. JCIT CIR 16(1), MUMBAI

Per PawanSingh, Judicial Member:

3. Brief facts of the case are that assessee is a partnership firm engaged in the business of manufacturing and supply of laboratory equipments for pharmaceutical industries in India as well as abroad, filed its return of income for relevant assessment year on 29.09.10 declaring total income of Rs.4,64,07,330/-. The assessment was completed under section 143(3) 2 M/s. Electrolab on 14.02.13. The AO, while framing assessment order, besides the other addition/disallowance, disallowed a sum of Rs.34,59,518/- on account of bogus purchases, disallowed the claim under section 80G of Rs.30 lakhs and further disallowed an interest of Rs.60,000/- paid to partners. On appeal before Ld. CIT (A), all the disallowances/additions were sustained. Further aggrieved by the order of Ld. CIT(A), the assessee filed present appeal before us.

4. We have heard the Ld. A.R. of the assessee and the D.R. for Revenue and perused the material available on record. Ground No.1 relates to disallowance of Rs.34,59,518/- on account of bogus purchases. The Ld. A.R. of the assessee argued that assessee firm during the year under consideration purchased certain material required for manufacturing process from market. During the assessment when AO required information from the assessee to prove the genuineness of such purchases the assessee filed their invoices, delivery challan, and confirmation letters from the vendors. Despite the fact that assessee has provided complete information, the AO disallowed the entire amount of purchases only on the basis of information received from Sales Tax Department. The Ld. CIT(A) also not considered the evidence furnished before him, despite calling remand report of AO, and sustained the order of AO. On the other hand the Ld. D.R. for the Revenue supported the order of the authorities below and argued that Ld. CIT (A) has given reason to discard the additional evidence, which was filed for the first time before him during the first appellate stage only.

5. We have considered the rival contentions of the parties and perused the orders of authorities below. During the assessment proceedings the AO noticed that the assessee purchased material from the parties who were tainted as per the details available on the website of Sale tax department Government of Maharashtra. The assessee purchased the maximum quantity of material form following parties. (i) M/s. Vitarag Trading 3 M/s. Electrolab Company,(ii) M/s. Sampark Steels,(iii) M/s Bhagwati Trading Company, (iv) M/s. Prayan Trading Company and(v) M/s. Om Corporation.

6. The AO deputed the Inspector for verification of the parties and purchases and to serve the summon under section 131. The Inspector after investigation reported that at the address of M/s. Vitarag Trading Company at 1/15, Anil Anand Estate, Village Road, Bhandup (w) Mumbai, is a part of chawl. The person residing on the address confirmed that M/s. Vitarag Trading Company is not existed at that address and there is a grocery shop in the name of Ketan Store. About M/s Sampark Steels at B-3, Kothari Estate, B.P.Cross Road No.1. Muland (w) Mumabai, the inspector reported that address of the said firm is a residential flat, which is lying closed for a long period. About M/s. Bhagwati Trading Company, C/604, Plot No.42/43, Bhumi Raj Meadows, Sector-19, Airoli, Navi Mumbai, was reported that it was also a residential premise in the name of Shri Taranath K. Swarna and the watchman express his ignorance regarding the company in the name of Bhagwati Trading Company, if existed on that premises. At the address of M/s Prayan Trading Company,127 Central facility Building, Sector 19 Vashi Navi Mumbai, the building was lying closed and no name of company was mentioned. In response to the notice, Shri Shailesh Buch, partner of M/s Sampark Steel attended the office of AO and furnished details of sale made to assessee during the year and in support of sale he furnished copy of bank account reflecting payment, copy of sales tax return and income tax return. However, no evidence with regard to delivery record was furnished. The AO gathered information from him that he is also partner in M/s. Vitarag Trading Company and in M/s. Prayan Trading Company. However, he failed to file similar detail of those two firms. Thus, on the basis of details of purchases made viz. the purchases of Rs.8,16,244/- from Sampark Steel, Rs.6,94,824/- from M/s. 4 M/s. Electrolab Prayan Trading Company and Rs.11,82,230/- from M/s. Vitarag Trading Company and on the basis of information gathered from Sales Tax Authority, the AO disallowed the entire purchases of aggregate amount of Rs.26,93,298/-. The AO, on the basis of affidavit dated 23.05.11 furnished to Maharashtra Sales Tax Department by Shri Manoj Anantrai Buch, partner of M/s. Bhagwati Trading Company that he has not made any genuine business of sale or purchase of any kind of goods such as M.S. Round, Aluminum sheets, M.S. Seamless, Copper Strips etc. and that he had issued only bills without giving delivery of goods to the selling parties, disallowed Rs.7,66,220/-. The assessee was asked shown the purchases from M/s. Om Corporation of Rs.31,656/-. The AO asked the assessee to file the confirmation form M/s Om Corporation. The assessee failed to file the confirmation from said party. As assessee failed to file any confirmation the AO disallowed Rs.31,656/-. During first appellate proceeding before ld CIT(A), asked the assessee to furnish evidence for the use of material in the manufacturing and the stock register. As per the direction of ld CIT(A) assessee filed copy of stock register, and other related evidences. The assessee also seeks permission to file additional evidence consisting of details of quality of machine purchase manufactured and sold, reconciliation of material etc. The evidences filed by assessee were forwarded to the AO for his comment and report. The AO furnished his report dated 22.01.14. In the remand report the AO contended that no stock register was and no day to day purchases in consumption has been maintained by assessee. The AO objected for the admission of additional evidence. The report of AO was forwarded to the assessee for his reply / objections. The assessee filed its objection, in objection the assessee contended that no opportunity was given to the assessee to cross examine the vendors. The assessee further contended that he submitted a letter dated 21.01.14 and 22.01.14 and the AO overlooked the documents while furnishing the 5 M/s. Electrolab remand report. After considering the contention of the assessee and remand report the Ld. CIT (A) rejected the admission of additional evidence. Though the ld CIT(A) himself directed the assessee to file certain evidences. The ld CIT (A) not considered the evidences which was filed in compliance of his direction. We are of the considered opinion that ld CIT(A) wrongly rejected the admission of additional evidence. Hence, we admit the additional evidences filed by the assessee and remand this ground of appeal to the file of AO to consider the issue afresh and pass order in accordance with law. Needless, to order the AO shall grant sufficient opportunity of hearing the assessee before passing the order. In the result this ground of appeal is allowed for statistical purpose.

7. Ground No.2 relates to disallowance under section 80G of Rs.30 lakhs. The Ld. A.R. of the assessee argued that assessee firm voluntarily made the donation of Rs.30.00 lakhs to Dr. D.Y. Patil University. The donation was made by account payee cheque. The donation was paid to the approved institution having valid certificate of exemption by Director of Income Tax. The donation made voluntarily cannot be disallowed by the Revenue Authorities. The Ld. A.R. of the assessee further argued that assessee has placed on record the certificate issued to Dr. D.Y. Patil University under section 80G which was valid from 01.04.08 to 31.03.11. The AO disallowed the claim of assessee and doubted the genuineness of donation holding that donation was not voluntary and was an expense incurred by partner of firm for securing the admission of her son in Postgraduate Medical course in Dr. D.Y. Patil University. On the other hand, the Ld. D.R. for Revenue supported the order of authorities below.

8. We have considered the rival contention of the parties and perused the material available on record. The AO while framing the assessment order noticed that assessee has claimed deduction under section 80G of 6 M/s. Electrolab Rs.15 lakhs against donation of Rs.30 lakhs to Dr. D.Y. Patil University. The assessee was asked to give the details of donation by all family members and associate concern during the relevant financial year to Dr. D.Y. Patil University. Assessee vide reply dated 26.12.12 contended that Shri Anik Marfatia, son of Mrs. Amita Marfatia one of partners, has taken admission for MD course in Padmashree Dr. D.Y. Patil University. The total donation of 60 lakhs has been made i.e. Rs.30 lakhs from the firm and Rs.30 lakhs from associate firm i.e. M/s. Electropharma in which Mr. Amit Marfatia, husband of Mrs. Amita Marfatia are partners. On the basis of the reply furnished by assessee, the AO concluded that the donation was not voluntary but is an expense incurred by partner for securing admission of her son for Postgraduate Medical course and accordingly disallowed the donation of Rs.30 lakhs. The Ld. CIT(A) during the appellate proceeding concluded that the motto of assessee was to derive peculiar benefit by diverting the funds of the firm and claiming deduction under section 80G. The Ld. CIT(A) held that the assessee has made the device to create subterfuge so as to hoodwink the department of its due taxes and accordingly confirmed the disallowance. We have noticed that neither the AO nor the Ld. CIT(A) disputed and doubted the payment of money to Dr. D.Y. Patil University. The Ld. CIT(A) drawn his conclusion from the receipt dated 01.02.10 that the university has not struck off the important words whether it was required donation or it was corpus fund. We have seen the assessee’s letter dated 29.01.10 while giving the cheque of donation. The assessee has clearly mentioned that the donation may be treated as donation to the corpus fund/interest. The donation was made during the validity of certificate under section 80G in favour of Dr. D.Y. Patil University. We have perused the provisions of section 80G of the Act. On perusal, we do not find any condition wherein the donor may be held disentitled for the benefit of section 80G in case his relative or 7 M/s. Electrolab dependent is getting education in the institution where the donation is made. In our view, the AO wrongly made his conclusion that expenses was made by partner for securing admission of his son and was claimed as a deduction by showing the amount as donation. Thus, we delete the disallowance made under section 80G of the Act. In the result, ground No.2 of the appeal is allowed.

9. Ground No.3 relates to disallowance of interest expenses of Rs.60,000/- paid to partner. The Ld. A.R. of the assessee argued that AO disallowed the proportionate interest paid on the credit balance of partner. The Ld. A.R. of the assessee further argued that the donation made to the university was lawful and the assessee was entitled to claim deduction, moreover the drawing was not a personal drawing of the partner concerned. On the other hand, the Ld. D.R. for the Revenue supported the order of the authorities below.

10. We have considered the rival contention of the parties and considered the orders of authorities below. The AO disallowed the interest holding that payment of Rs.30 lakhs paid on account of gift represents the personal expenses of partner as the same was disallowed by him. Since the amount of gift was disallowed, therefore the interest for two month on Rs.30 lakhs which was worked out at Rs.60,000/- was disallowed. The Ld. CIT(A) confirmed the disallowance of interest holding that the claim of 80G is sustained in appeal and thus it was not a personal drawing of the partner. As we have already allowed the claim of deduction under section 80G and reversed the finding of AO that drawing of Rs.30 lakhs was not personal expenses of the partner, thus the disallowance of interest expenses is also deleted. Hence, the ground No.3 raised in the appeal is allowed.

11. In the result, the appeal of the assessee is allowed.