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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI R.C. SHARMA & SHRI AMIT SHUKLA
Per Amit Shukla, Judicial Member:
The aforesaid appeal has been filed by the assessee against final assessment order dated 21.01.16, passed by Ld. DCIT-3(3)(2), Mumbai (hereinafter referred to as the AO) under section 143(3) r.w.s. 144C(13) in pursuance of direction given by the Dispute Resolution Panel (DRP) under section 144C(5) vide order dated 23.12.15. In various grounds of appeal, the assessee has raised following issues: i) Transfer pricing adjustment of Rs.46,94,26,016/- in respect of ‘Guarantee Commission’ and ‘Fee for Letter of Undertaking’ (Ground No.1.1 to 1.4). ii) Disallowance of sum of Rs.110,33,96,481/- made under section 14A read with rule 8D (Ground No.2.1 to 2.5) iii) Addition on account of disallowance under section 14A while computing the book profit under section 115JB (Ground No.3.1 and 3.2). iv) Disallowance on account of alleged bogus purchases comprised of following:-
Utilization of Amount (Rs.) Treatment in material as- Accounts Plant & 23,79,82,268 Addition to Plant and Machinery/Moulds Machinery Trail Run 13,94,92,838 Charged to Capital WIP account Trail Production 6,83,99,170 Charged to Capital WIP account Machinery Spares 14,97,74,663 Shown as Inventory in Balance Sheet Raw Material & 3,50,24,425 Charged to Profit and Consumables Loss account 63,06,73,365 (Ground No.4.1 to 4.6) v) Credit of TDS amounting to Rs.51,00,532/- (Ground No.5) vi) Short period for advance tax amounting to Rs.15 crore (Ground No.6) vii) Charging of interest under section 234B and 234C (Ground Nos.7 & 8) viii) Initiation of penalty proceedings under section 271(1)(c) (Ground No.9)
2. The assessee company is engaged in the business of manufacturing and trading of consumer electronics and home appliances, exploration crude oil and gas, investment in shares, securities and properties, lease and finance and other incidental activities.
The brief facts qua the issue relating to transfer pricing adjustment of Rs.45,45,85,468/- in respect of ‘guarantee commission’
3 M/s. Videcon Industries Ltd. and Rs.1,48,45,548/- in respect of ‘fee for letter of undertaking’ are that, the assessee company has given guarantee/letter of undertaking for credit facilities availed by its AEs and recovered guarantee commission from its AE in the following manner:-
Name of the Guarantee in From To Guarantee Proportion For the AE INR Commission Guarantee period after commission 31st March upto 31st 2011 in INR March 2011 in INR Videocon 1/4/2010 17/9/2010 84,63,750 84,63,750 - Global 6,77,10,00,000 Energy Holding Limited Corporate Guarantee Venus 13,54,20,00,000 1/4/2010 31/3/2012 6,77,10,000 3,38,55,000 3,38,55,000 Corporation Corporate Guarantee) Videocon 18,05,60,00,000 7/3/2011 6/3/2012 4,51,40,000 30,91,781 4,20,48,219 Hydrocar -bon Holding Limited (Letter of undertaking 12,13,13,750 4,54,10,531 7,59,03,219
4. Out of the total amount of guarantee commission recovered of Rs.12,13,13,750/-, the assessee pointed out that the guarantee commission income charged by the assessee covers the period beyond 31.03.11 and therefore, the guarantee commission was allocated on time proposition basis. The sum of Rs.4,54,10,531/- was the guarantee commission relatable to assessment year 2011-12 and the balance amount of Rs.7,59,03,219/- was the guarantee commission relatable to the assessment year 2012-13. The assessee had, thus, disclosed the guarantee commission of Rs.0.25%. The Ld. TPO, issued a show cause notice to the assessee as to why transfer pricing adjustment in respect of guarantee commission should not be done at the rate of 3% and also why the same rate should not be charged in case of letter of undertaking given by Videocon Industry Ltd. To 4 M/s. Videcon Industries Ltd. Standard Chartered Bank in respect of secured term loan facility to Videocon Hydrocarbon Holdings Ltd. In response, the assessee submitted and stated as under: “VIL has given Corporate Guarantees to the Financial Institutions/ Banks/ Lending Institutions in respect of loans or credit facilities extended by them to the Associated Enterprises of VIL for which VIL has recovered 0.25% guarantee commission.
Provision of Guarantee was not international transaction. However, out of abundant caution assessee company has recovered 0.25% as guarantee commission from its AEs which has been offered to the tax.
As submitted earlier in the immediately preceding assessment year, the corporate guarantee provided by the VIL does not fall within the definition of international transaction as per the definition of International Transaction prevailing at the time of providing corporate guarantee. However, TPO in earlier years has taken a view that the Finance Act 2012 introduced Explanation to Sec 92B with retrospective effect from 01.04.2002 and as per the Explanation Corporate Guarantee is a type of capital financing transaction and within the meaning of definition of international transactions under 92B.”
Apart from that the assessee also submitted a detailed analysis and reasoning to justify firstly; it is not an international transaction and therefore no bench marking is required; secondly, the rate of 3% as guarantee commission is not correct on the facts of the case; and lastly, charging of 0.25% of guarantee commission is justified from internal CUP. However, the Ld. TPO, after detailed analysis and discussion, held that the arms length guarantee commission/fee should be calculated at the rate of 3%. The relevant observations in the finding of the TPO are appearing from pages 29 to 32 of his order. The calculation of 3% was applied by the TPO in the following manner:-
5 M/s. Videcon Industries Ltd. “Uncontrolled Price: As discussed above and as given in the show cause notice, the guarantee fee is calculated at a rate of 3% p.a. on amount based on the number of days the guarantee was outstanding during the FY 2010-11.
Computation of Arm’s Length Price: Total fees to be charged Outstanding Guarantee Amount Amount of Rs.902.80 outstanding for 38,06,60,054 342 days @ 3% Amount of Rs.902.80 outstanding for 1,70,66,630 23 days @ 3% Arms Length Guarantee Fee Rs.39,77,26,684 Based on this calculation TPO calculated the arm’s length price in the case of Venus Corporation Ltd. in the following manner:
“The assessee has recovered guarantee fees for two years upfront at 0.25% per annum of Rs.6,77,10,000. Accordingly, 50% of said guarantee fees charged by assessee is adjusted against Arm’s Length Price calculated above. Balance 50% of guarantee commission charged by assessee will be carried forward next year and will be adjusted against next year’s ALP of Guarantee Fee. Hence the difference between ALP of guarantee commission and commission actually charged is to be adjusted as computed below:
Arm’s Length Guarantee Fee Rs.39,77,26,684 Guarantee Fee received Rs.3,38,55,000/- Difference between arm’s length Rs.36,38,71,684/- price and price charged by the assessee Thus, the above amount of Rs.36,38,71,684/- is treated as transfer pricing adjustment being the difference between the arm’s length guarantee fee receivable and the actual guarantee fee received by the assessee from its AE, Venus Corporation Limited for the FY 2010-11.”
In the case of Videocon Global Energy Ltd. the decision was made in the following manner:
“Receipt of Guarantee Fees (Rs.84,63,750) from Videocon Global Energy Holdings Ltd, British Virgin Islands (VGEHL)
Outstanding Guarantee Amount Rs.7098.00 as on 1/4/2010 Million No. of days the guarantee is 170 days outstanding during the FY 2010- 11 (01-04-2010 to 17-09-2010) Arm’s Length Guarantee 3% p.a. Commission/Fee Arm’s Length Guarantee Fee @ Rs.9,91,77,534/- 3% p.a on the outstanding corporate guarantee for 170 days Price Received vis-à-vis the Arms Length Price: The guarantee fee charged by the assessee to the AE is Rs.8463,750. Hence the difference between ALP of guarantee commission and commission actually charged is to be adjusted as computed below:
Arm’s Length Guarantee Fee Rs.9,91,77,534/- calculated above Guarantee Fee received Rs.84,63,750/- Difference between arm’s Rs.9,07,13,784/- length price and price charged by the assessee Thus, the above amount of Rs.9,07,13,784/- is treated as transfer pricing adjustment being the difference between the arm’s length guarantee fee receivable and the actual guarantee fee received by the assessee from its AE, Videocon Global Energy Holdings Ltd, British Virgin Islands for the FY 2010-11.”
7 M/s. Videcon Industries Ltd. 6. As regards the letter of undertaking in the case of Videocon Hydrocarbon Holdings Ltd., commission allowance, the adjustment was made in the following manner:
Outstanding Guarantee Amount Rs.18,056.00 Million No. of days the guarantee is 25 days outstanding during the FY 2010-11 (07-03-2011 to 31.3.2011) Arm’s Length Guarantee 1.5% p.a. Commission/Fee Arms Length Guarantee Fee @ 1,78,08,658 2.0497% p.a. on the outstanding corporate guarantee for 24 days Price Received vis-à-vis the Arms Length Price:
The guarantee fee charged by the assessee to the AE is Rs.451,40,000 for full year. Assessee has given said undertaking on 7th March 2011 and accordingly charged guarantee fees for the period 7th March 2011 to 6th March 2012. Guarantee Fees for 25 days charged by assessee will be adjusted against ALP guarantee fees calculated above and balance Rs.420,48,219/- will be carried forward to next year.
Accordingly, hence no adjustment is required in this case.
Arm’s Length Guarantee Rs.1,78,08,658/- Fee Guarantee Fee received Rs.29,68,110/- (proportionate) Difference between arm’s Rs.1,48,40,548/- length price and price charged by the assessee Thus, the above amount of Rs.1,48,40,548/- is treated as transfer pricing adjustment being the difference between the arm’s length guarantee fee receivable and the actual guarantee fee received by the [Adjustment of Rs.1,48,40,548/-]”
7. The aforesaid adjustments aggregating to Rs. 46,94,26,016/- has been confirmed by the Ld. DRP also.
8. Before us, Ld. Counsel Mr. Arvind Sonde reiterating the same submission made by the assessee before the TPO as well as before the DRP, submitted that in this case the assessee has already recovered 0.25% of guarantee commission from its AE despite the fact that assessee has been contending that no guarantee commission was actually payable by the AE and also that providing corporate guarantee or letter of credit does not fall within the ambit of international transaction prevailing at the time of providing corporate guarantee. Here in this case, the loan on which the assessee has given guarantee to its AE were primarily covered by pledged securities, hypothecation or debtors’ balances and other associates of the AE which is evident from the details of loan vis a vis the securities thereof apart from corporate guarantees provided by the assessee. To demonstrate this point, the details provided were as under:- Particulars Amount in million rupees Security Charge on present and future assets of the AE 8958.03 (assets net off current liabilities as on 31.3.2011 @ 45.14) Hypothecation of receivables of AE 6217.63 Approximate value of security (excluding 15,175.66 Guarantee given) Loan for which Guarantee Given (Amount in 9028.00 million rupees) by Assessee as on 31.3.2011 Value of security covering Loan 1.68 times Videocon Global Energy Holding Ltd. – Guarantee of USD 150 Million
Particulars Amount in million rupees Security
9 M/s. Videcon Industries Ltd. Margin Deposit of USD 30 Million @ 46.44 1393.20 (as on 1.9.2010) Loans and advance (joint venture interest as 10722.53 on 1.9.2010) (230.89 millions) Approximate value of security (excluding 12,115.73 Guarantee given) Loan for which Guarantee Given 150 million 6966.00 at 46.44 as on 1/9/2010rupees) by Assessee as on 31.3.2011 Value of security covering Loan 1.739 times Regarding letter of undertaking given to Videocon Hydro Carbon Ltd., he pointed out that State Bank of India has charged bank guarantee commission by giving 50% concession to assessee (i.e. 50% of 1.75%) which comes to 0.875%. If adjustment on account of entity risk, currency risk and country risk is given then it comes down approximately 0.44%. Thus, at the most the corporate guarantee commission can be taken at 0.4% to 0.5%. In support of this contention, he has relied on various decisions wherein this Tribunal has held that guarantee commission rate of 0.5% can be accepted as ALP. The list of such decisions is as under: (i) Hindalco Industries Ltd. Vs. Addl. CIT 62 Taxman.com 181 (Mum ITAT) (ii) Manugraph India Ltd. Vs. DCIT 62 Taxmann.com 347 Mum ITAT) (iii) Aditya Birla Mincas Worldwide Ltd. vs. DCIT 56 Taxmann.com 317 (Mum ITAT) (iv) Mylan Laboratories Ltd. Vs. ACIT 155 ITD 1123 (Hyd ITAT) (v) Everest Kanto Cylinder Ltd. Vs. ACIT (LTU) Mumbai 56 Taxmann.com 361 (Mum ITAT) (vi) ACIT Vs. Nimbus Communication 145 ITD 582 (Mum ITAT) (vii) Cox & Kings Ltd. Vs. DCIT, (Mum ITAT) and (viii) Arshiya International Limited Vs. DCIT, ITA No. 659/Mum/2013 (Mum ITAT).
He pointed out that in the earlier decision of Everest Kanto Cylinder Ltd. Vs. ACIT reported in (2012) 34 Taxmann 19, this 10 M/s. Videcon Industries Ltd. Tribunal has upheld the guarantee commission rate of 0.5% which now stands confirmed by the Hon'ble Bombay High Court. Thus, at the most even an adjustment is called for the same should be between 0.25% and 0.50%.
On the other hand, the Ld. CIT, DR Shri N. K. Chand has given a detail written submissions and a note on concept of ‘corporate guarantee’ and as to why it falls within the ambit and scope of the definition of ‘International Transaction’ as defined in terms of section 92B. He even tried to distinguish the decision of ITAT, Delhi Bench in the case of Bharti Airtel Ltd. Vs. ACIT 161 TTJ 428 (ITAT Del.) and other decisions wherein it has been followed. In a very painstaking manner he has highlighted the infirmities in the said decision and as to why this decision does not have binding precedence at all. He also pointed out that the ITAT, Mumbai Bench in the case of Everest Kanto Cylinder Ltd., (supra) has categorically held that it is an ‘International Transaction’ and in the assessee’s own case the assessee has treated it as ‘International Transaction’.
10. However, we are not entering into semantics of this argument as to whether corporate guarantee is an ‘International Transaction’ or not, because before us, the Ld. counsel Mr. Sonde has mainly raised the issue that, benchmarking if at all is required to be done, then same should be done by taking the corporate guarantee commission rate between 0.25% and 0.50% and in support of which he relied on various decisions. He has not stressed on this issue, whether corporate guarantee is an international transaction or not. Whence assessee before us is not pursuing the matter, we are also not inclined to adjudicate the issue. On merits, Ld. CIT DR tried to justify the charging of 11 M/s. Videcon Industries Ltd. corporate guarantee commission @ 3% and submitted that there are various decisions wherein corporate guarantee commission of 2% to 3% have been accepted.
After considering the rival submissions and on perusal of the impugned orders, we find that it is an undisputed fact that the assessee has given corporate guarantees to financial institution/banks in respect of loan or credit facilities extended to its two AEs and letter of undertaking to the lenders in the case of another AE. For providing such corporate guarantee it has recovered 0.25% as guarantee commission. In support of charging of 0.25%, the assessee, first of all, contended that the loans for which the assessee has given guarantee are primarily covered by pledged securities, hypothecation of debtors’ balances and other assets of the AE, therefore, it cannot be said that the entire security of the loan was based on corporate guarantee given by the assessee. The details of loans vis-à-vis the security thereof had already been reproduced above. It has also been brought on record that State Bank of India has charged bank guarantee commission to assessee by giving 50% concession on the rate of 1.75% which works out to approximately 0.875%. If various factors and risk involved are evaluated which is quite normal under the foreign guarantee like, country risk, currency risk and entity risk etc., then charging of corporate guarantee commission would fall down below 0.5%. Thus, this constitutes a kind of internal CUP available to the assessee to benchmark the transaction of giving corporate guarantee/letter of undertaking. Moreover, there are catena of decisions wherein this Tribunal has held that corporate guarantee commission around 0.50% can be accepted as ALP. Accordingly, we hold that the corporate guarantee commission fee which is to be recovered from AE should be 0.50% which would meet the arms
12 M/s. Videcon Industries Ltd. length requirement. Thus, under the facts and circumstances of the case, we direct the TPO/Assessing Officer to take the corporate guarantee fee @ 0.50% and make the adjustment accordingly. Thus, the issue of corporate guarantee as raised vide ground nos. 1.1 to 1.5 is treated as partly allowed. As stated above, we are not deciding the issue, whether the transaction of corporate guarantee is an ‘International Transaction’ or not because the Ld. Counsel for the assessee had only harped upon the issue on merits and hence the various contentions raised by the CIT DR are left open.
The next issue relates to disallowance of Rs. 110.34 cr. made u/s. 14A read with rule 8D.
The brief facts qua the disallowance made u/s. 14A read with rule 8D are that, the assessee had earned dividend income of Rs.49,14,724/- from various investments made. The Assessing Officer noted that though the assessee had earned exempt income in the form of dividend, however it has not claimed such income as exempt from tax and has been shown as miscellaneous income. Despite the fact that no exempt income has been claimed, the ld. Assessing Officer issued show cause notice as to why the dividend income should not be considered as exempt and expenditure attributable for earning of such exempt income should not be computed in accordance with section 14A read with rule 8D. In response to the said show cause notice, the assessee had submitted as under: “II. Dividend Income of Rs.49,14,724/- has been shown in the Investment Division. Our investments as per Sch. 6 of our Balance Sheet are of Rs.39,66,70,91,020. Our share capital of Rs.347,95,82,540 and Reserves & Surplus of Rs.79,65,27,57,457 total up to Rs.83,13,23,39,997/- which amount is more than our investments.
13 M/s. Videcon Industries Ltd. Hence, it is submitted that provisions of Sec. 14A of the I. T. Act, 1961, are not applicable in our case as held by B'bay H.C. in Reliance Utilities & Power Ltd., 313 ITR 340 (Bom) & followed in Godrej & Boyce Ltd., ITAT, Mum, No. 1629/MUM/09.
We have inadvertently not claimed exemption u/s 10(34) of the Act, in respect of Dividend Income of Rs. 49,14,724/- included in accounts of our Investment Division. You are requested kindly allow the same and oblige.”
However, the Assessing Officer rejected the assessee’s contention and held that, since assessee itself has not claimed dividend income as exempt and has included as part of miscellaneous income, therefore, it will not be treated as exempt. He was of the opinion that, since the assessee has made investments, therefore, disallowance u/s 14A r.w. rule 8D has to be made. Further assessee has led no evidence before him to show that own funds have been utilized for purchase of shares. He after referring to the decision of Hon'ble Bombay High Court in the case of Godrej & Boycee Manufacturing Co. reported in 328 ITR 81 worked out the disallowance at Rs.110,83,11,205/- which was made in the following manner: i. Expenses directly attributable to exempt Rs. 19,76,756 income (STT) ii. A:Expenses not directly related to exempt Rs. 95,22,81,872 income (interest) i.e. 7510159874 (i.e. 7530354322 – 20194448 = 7510159874 B: Average value of investment on the opening and closing day of the previous year i.e. (31384435959 + 30236594717)/2=30810515338
C: Average value of assets on the opening and closing day of the previous year i.e. (219551428554 +266422110872)/2=242986769713 7510159874 x30810515338 242986769713
14 M/s. Videcon Industries Ltd. = 952281872 iii. 0.5% of average value of investment on the Rs.15,40,52,577 opening and closing day of the previous year i.e. 0.5% of B-154052577 Aggregate of I+INTEREST INCOME+III Rs.110,83,11,205 From the said disallowance he reduced the amount of dividend income shown by the assessee under the head miscellaneous income of Rs.49,14,724/- and net addition of Rs.110,33,96,481/- was made and similar disallowance was made to the computation of book profit/s. 115JB. This disallowance has been confirmed by the DRP also.
Before us the Ld. Counsel, Shri Arvind Sonde submitted that first of all, when there is no exempt income i.e. when the assessee has not claimed any exempt income and Assessing Officer has also not allowed/accepted any exempt income, then there is no question of any disallowance u/s. 14A in relation to that income. In support, he relied on the following decisions: i) CIT vs. Delite Enterprises (Bombay HC); ii) Cheminvest Limited vs. CIT (ITA No. 749/2014) 378 ITR 33 (Delhi HC); iii) CIT vs. Corrtech Energy Pvt. Ltd 223 Taxman 130 (Gujarat HC); iv) CIT (11) Kanpur vs. M/s. Shivam Motors (P) Ltd. 272 CTR 277 (Allahabad HC); v) CIT v. Lakhani Marketing lnc. [2014] 272 CTR 265 (Punjab and Haryana HC); vi.) CIT vs. Winsome Textile Industries Ltd. 319 ITR 204 (Punjab and Haryana HC); vii) CIT-IV vs. Holcim India Private Limited ITA No. 486/2014 & ITA No. 299/2014] (Mumbai ITAT) viii) Avshesh Mercantile P. Ltd. vs. ACIT [ITA No. 5779/Mum/2006] 148 TTJ 607 ix) Jindal Steel & Alloys Ltd. vs. ACIT [ITA No. 9611Mum/2009] Mumbai ITAT)
That apart, he pointed out that the assessee had huge surplus fund in the form of ‘share capital’ and ‘reserve and surplus’ which aggregated to Rs.8313,23,39,997/- which is far excess than the investments made which stood at Rs.3966,70,91,020/-. Thus, in view of the decision of Hon’ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom); CIT Vs. HDFC Bank Ltd. 366 ITR 505 (Bom); and again in HDFC Bank Vs. DCIT reported in (2016) 67 Taxman.com 42 (Bom), if assessee has surplus funds which far exceeds the investments, then no disallowance u/s 14A can be made. Regarding disallowance of indirect expenses, he pointed out that the assessee had huge strategic investments both on domestic investment as well as foreign investment which were purely for the business purpose. Apart from that, there were certain investments on which no tax free income was received. Thus, out of total investment of Rs.3966,70,91,020/- the investments aggregating to Rs.3946,46,16,195/- were either strategic investments or were capable of earning taxable income; and only the investment to the tune of Rs.20.25 cr. (approx.) were left where tax free dividend were received. If disallowance has to be worked out under rule 8D(2)(iii), then it will come down to approx. Rs. 5,12,943/-. In support of this, he has filed the summary of investments and working of disallowance separately. Further, in support of the contention that no disallowance u/s. 14A should be made in respect of strategic investment. He relied on the following case laws:
16 M/s. Videcon Industries Ltd. i) M/s JM Financial Limited ITA No.4521/M/2012 (Mum ITAT); ii.) Garware Wall Ropes Limited ITA No. 5408/Mum/2012 (Mum ITAT); iii) Interglobe Enterprises Ltd vs DCIT ITA Nos, 1362/De1/2013, 1032/Del/2013 and 1580/De1/2013 (Delhi ITAT); iv) M/s. Binani Industries Limited ITA No.l44/Ko1/2013 (Kol ITAT); v) EIH Associated Hotels Limited ITA No.1503 & 1624/Mds/2012 (Madras ITAT);
On the other hand, the Ld. CIT DR, Shri N. K. Chand has given a detailed write up and note wherein he has highlighted the intention and purpose of section 14A and Memorandum of Understanding as provided in Finance Bill 2001 by which section 14A was inserted w.r.e.f. and host of various proposition that the intention and purpose of section 14A was to enlarge the scope of apportionment of various expenditure irrespective of the fact whether the business or activities of assessee is divisible or indivisible. In his detailed write up he has highlighted the concept and the scope of section 14A and how the disallowance gets triggered wherever investments are made which are capable of earning exempt income. On the issue of strategic investment also he has relied on certain decisions of the Tribunal, some of which are earlier to the decision relied upon by the assessee.
17. After considering the rival submissions and on perusal of the relevant material placed on record as well as the finding given in the impugned order, at the outset we are of the opinion that the basic premise on which the disallowance under sec. 14A gets triggered is that, there has to be an income to the assessee which does not form part of the total income and assessee claims any deduction in respect of expenditure attributable to earning of such income. If assessee has not claimed any exempt income or has made it part of total income liable for tax, then provisions of sec
17 M/s. Videcon Industries Ltd. 14A does not get triggered. This basic postulate is not satisfied in the present case, because neither the assessee has claimed it as exempt income nor Assessing Officer has allowed any exempt income which was in the form of dividend income of Rs.49,14,724/-. Once the revenue itself has treated the exempt income as part of the total income which has been held to be taxable, then the disallowance of expenditure under sec. 14A does not gets triggered, especially in light of the judgments of various High Courts as referred to above especially in the case of Cheminvest Limited, (supra); Corrtech Energy Pvt. Ltd, (supra); CIT Vs. Shivam Motors Pvt. Ltd, (supra); Lakhani Marketing lnc, (supra); and Holcim India Private Limited, (supra). Even if we ignore this proposition completely, on merits also, as pointed by the Ld. Counsel for the assessee here in this case no disallowance of interest expenditure u/r 8D(2)(ii) can be made because, assessee had huge surplus funds of more than Rs.8313 crores in the form of ‘reserves & surplus’ and ‘share capital’ as compared to investment of Rs.3966 crores made by the assessee. The ratio and the principle laid down by the Hon'ble Bombay High Court in the case of Reliance Utilities Ltd., (supra) and HDFC Bank, (supra) are clearly applicable, wherein their Lordships have reiterated several times that if the assessee has surplus funds in the form of reserves & surplus or share capital, then presumption is that investment would have been made from surplus funds/interest free funds and not from the borrowed funds. Accordingly, we direct the AO to delete the disallowance of interest expenditure as worked out under rule 8D (2)(ii). Now coming to issue of disallowance of indirect expenditure u/r 8D (2)(iii), we agree with Ld. Counsel that the investments from where income is taxable or the investments which are for business or strategic reasons need
18 M/s. Videcon Industries Ltd. to be removed from the working of the average value of investments as contemplated in rule 8D(2)(iii). The later proposition has been consistently held in catena of cases by this Tribunal as referred to by ld. Counsel before us. Thus, respectfully following the ratio we also hold accordingly. Further ld. Counsel has given the working of disallowance under rule 8D (2)(iii) in light of various judicial decisions and propositions which needs verification. Accordingly, we direct the AO to examine the same and compute the disallowance of indirect expenditure. Since our decision on disallowance of interest is based on direct Jurisdictional High Court decisions, therefore, we do not deem fit to go into the various propositions made by the Ld. CIT, DR in his written notes which is more on intention and purpose for insertion of section 14A. On the issue of indirect expenditure also, we are following the decisions of the coordinate decisions as relied upon before us. Accordingly, ground no. 2.1 to 2.5 is treated as allowed. The alternative grounds taken vide ground nos. 2.4 and 2.5 have become purely academic and therefore, no separate adjudication is required.
18. As regards the issue raised in ground nos. 3.1 and 3.2 that disallowance u/s. 14A should be added as part of the book profit, the same too is now a settled proposition that if any disallowance under sec. 14A is made in the normal computation, then the same would be added to the book profit u/s. 115 JB. Accordingly, we order that, whatever disallowance is made under rule 8D, the same should be added to the book profit.
19. The next issue relates to various additions made on account of purchases from certain dealers which has been treated
The relevant facts and background qua this issue are that, an information was received to the Assessing Officer vide letter dated 15.05.2014 from the Assistant Director of Income-tax (Inv.), Unit-Ill, Kolhapur, allegedly indicating that certain concerns from whom purchases has been shown did not actually sell material but only issued bills, that is, were providing accommodation entries. Based on the report of the ADIT (Inv.), Unit Ill, Kolhapur, the AO observed that during enquiries conducted by the ADIT (Inv), Unit-Ill, Kolhapur in the case of M/s. Jagdish Trading Co. and M/s. Mahalaxmi Distributors, it was gathered that these two entities and certain other entities based at Sangli were instrumental in providing accommodation entries to various business houses / industries /small businessmen spread all across Maharashtra. Shri Suresh Amrutlal Parekh, Proprietor of M/s. Jagdish Trading Company, resident of 542, Vishwas Bunglow, Ambedkar Road, Sangli was the master mind behind these hawala transactions run from Sangli and Shri Dinesh Amritlal Parekh, the younger brother of Shri Suresh Amrutlal Parekh and Proprietor of M/s. Unnati Enterprises, and Shri Sushant Rajendra Ladda, Partner of M/s. Mahalaxmi Distributors were also involved in providing accommodation entries from Sangli. The issue of transaction with these dealers had also come under consideration in the AYs 2009-10 and 2010-11 in the assessee’s own case which was based on survey action u/s. 133A conducted on 22.01.2013 by DDIT (Inv.), Unit-1(3), Mumbai, wherein it was reported about modus operandi of the hawala dealers, that whenever a businessman was in need of any accommodation entry in their books of account, they used to 20 M/s. Videcon Industries Ltd. communicate with these dealers and send money through banking channels, i.e., through RTGS/cheques in the name of one or more entities operated by these hawala operators. These operators then used to withdraw the money from the bank and after charging their commission sent back the cash to such businessman. The bills of corresponding amount of RTGS/cheques etc. were then issued by these dealers in the name of such party without supply of any goods or material. It was further mentioned that Shri Suresh A. Parekh, Shri Dinesh Parekh and Shri Sushant Laddda with the help of their allies and using different bank accounts in the names of different entities, provided accommodation entries to various persons. The details of entities used along with the details of proprietors/partners have been illustrated at page 29 of the assessment order. During the year under consideration, the assessee had carried out similar transaction with following hawala dealers: (i) Puram Trading Company (ii) Mahalaxmi Distributors (iii) Swastik Enterprises (iv) Suresh Light House (v) Jagdish Trading Company (vi) Manek Enterprises (vii) G.M. Traders (viii) Sarvesh Enterprises (ix) Trishul Enterprises (x) Sai Enterprises (xi) Crystal Enterprises
Before us, Ld. CIT DR, Shri N.K. Chand for the assistance of the Bench has filed written submission along with copy of statement of the key person, Mr. Suresh A. Parekh which was recorded by the DIT (Inv.) and also made reference to the cross examination of Suresh A. Parekh in pursuance of Tribunal order in the AY 2009-10. He pointed out that the Assessing Officer in his
21 M/s. Videcon Industries Ltd. order has referred to statement of Shri Suresh A. Parekh recorded on 28.03.2014 by DDIT (Inv.), Kolhapur and in his specific reply to question no.12, he admitted that he is in the business of providing accommodation bills without delivery of goods and this activity was being carried out by him from Sangli. He also referred to question No. 13 and 14 which was appearing at pages 32 and 33 of the assessment order. The relevant questions for the sake of ready reference are reproduced hereunder: “Q.12. As admitted by you on earlier occasions, you were indulged in providing of accommodation bills/ entries to various business houses/ business concerns/ entities/persons without actual delivery of the goods by charging your commission. In this regard, during the course of present enquiries you were requested to provide complete details of the other persons who were with you in providing of accommodation. bills/entries, complete names, and bank account details of various entities from which such accommodation bills were given, total turnover of such accommodation bills provided etc. Accordingly, you have furnished such details, please explain the details submitted.
Ans. At the outset, I admit that I had indulged in the activity of providing accommodation bills/entries to various business houses/ business concerns/ entities /persons spread all over Maharastra without delivery of the goods. I used to run such activities from Sangli. For this purpose various bank accounts in the names of different persons i.e. friends, their employees, their family members etc. were opened and utilized. My younger brother Shri Dinesh Amrutlal Parekh and one Shri Sushant Rajendra Ladda had also worked with me. In addition to in the activity of providing accommodation entries together with me, these persons have independently also carried out such activities. As such the total quantum (turnover) of providing accommodation entries by me and my allies includes my own turnover, turnover of Shri Dinesh Parekh, turnover of Shri Susnant Ladda. At this juncture, I submit that all the details provided by me are prepared with the help of Shri Dinesh Parekh and Shri Sushant Ladda and the statement given by me is also given 'with their consent, in their presence and as such it is equally binding on them. I
22 M/s. Videcon Industries Ltd. am submitting a separate list as per Annexure ‘A’ giving the details of entities their proprietor/partner/director etc, bank accounts and total turnover of accommodation bills provided through such entities.
Q. 13. Please explain through which entities / common entities the business of providing accommodation bills was carried out by you, Shri Dinesh Parekh and Shri Sushant Ladda.
Ans. I am submitting herewith the entity wise/common entity wise & person wise bifurcation as per Annexure 'B'.
Q.14. On the basis of your above statement, please submit details of entity wise & financial year wise bifurcation of the turnover between you and the other two persons.
Ans. Sir, I would like to clarify here that we have tried hard to work out the beneficiary wise details of accommodation bills /entities provided by us through each bank account held by each entity. However, since the matter is very old, we could ascertain certain entries and as such these entries have been shown by us as suspense entries. We are still working on the same so as to give you the complete beneficiary wise list of accommodation entries provided by us. We assure you that such list of beneficiaries will be submitted at the earliest by clearing the entire suspense entries. Meanwhile, in order to work out the details of turnover of accommodation entries achieved by each one of us either independently or in common, we have agreed to accept the following basis:
The turnover of accommodation bills independently carried out by each person has been identified and the same has to be taken separately.
2. The turnover of accommodation bills carried out in common between me and Shri Dinesh Parekh and where beneficiaries have been identified, such turnover has to be shared by me and my younger brother Shri Dinesh Parekh in the ratio of 50:50.
23 M/s. Videcon Industries Ltd. 3. The turnover of accommodation bills carried out in common between me and Shri Dinesh Parekh and where beneficiaries have not been identified, such turnover of suspense entries has to be shared by me and my younger brother Shri Dinesh Parekh in the ratio of 75:25.
The turnover of accommodation bills carried out by Shri Sushant Ladda in M/s. Param Trading Company and M/s. Swastik Enterprises has been identified. The turnover which has independently carried out by him is taken as his turnover and the turnover which has independently carried out by me is taken as my turnover, there is no common turnover in order to share the same. The turnover of M/s. Param Trading Company and Swastik Enterprises carried out by Shri Sushant from Dena Bank Itwari Branch, Nagpur is purely of Sushant Ladda. Me and my brother, Shri Dinesh has not given any accommodation bills from Nagpur. Further, the turnover of M/s. Mohalaxmi Distributor and M/s. Sarvesh Enterprises is purely of Sushant Ladda.
5. The turnover of accommodation bills carried out by Shri Sushant Ladda in respect of the entities M/s. Rheem Tradelink Pvt. Ltd, M/s. Samarth Enterprises and M/s. Vidhi Enterprises from Dena Bank Itwari Branch, Nagpur is purely of Sushant Ladda. The turnover in respect of these three entities other than from Nagpur is purely of Shri Dinesh Parekh.
Based on the above lines, I am submitting herewith the requisite details showing the turnover achieved by me, Shri Dinesh Parekh and Shri Sushant Ladda, which is as per Annexure 'C' (Pages 1-3).”
Further, in reply to question nos. 15 and 16 he explained the modus operandi adopted by him for giving accommodation bill and also his commission thereon. The relevant question nos. 15 and 16 for the sake of ready reference is reproduced hereunder: “Q.15. Vide question number 11, your attention was brought to various statements given by you and others on earlier occasions before the DDs IT(INV). You are once again requested to explain the procedure/modus operendi of Ans. For giving an accommodation bill of Rs.100/- to a businessman, I would provide the bill of Rs.100/- to such businessman either directly from the entities under my control or from entities controlled by my allies. The said businessman would then book bogus purchase for Rs.100/- and he would then pay Rs.100/- in the account of the Hawala party (such as Param, Swastik etc.) through RTGS. Then after withdrawing the payment on the same day or at times, the next day, keeping my commission and the commission of my allies, if any, I used to return the balance amount in cash to such businessman.
Q.16. Does this mean that the beneficiaries to whom you have provided accommodation bills have booked bogus purchases to the extent of amount of accommodation entries provided by you and your allies?
Yes, these are only accommodation entries in the books of the beneficiaries as in respect of such bills neither me nor my allies had sold any goods to them nor was there any physical movement of goods.”
Based on such reply, the Assessing Officer had concluded that Shri Suresh A. Parekh had received the cheques/RTGS from the corporate houses in the respective bank account maintained in the names of various entities and after the receipt of RTGS/clearance of cheque, cash was withdrawn and handed over to the respective corporate houses after deducting their commission. During the course of assessment proceedings, the assessee was asked to provide complete details of transaction with the abovementioned parties and the fitment in the books of account was also asked to reconcile. Further, the assessee was also show caused as to why the purchases made from these hawala dealers should not be treated as bogus and added to the total income. In response, the 25 M/s. Videcon Industries Ltd. assessee submitted full item wise details of purchases, details of utilization of these purchases, treatment or these purchases in the books or account, confirmation or Shri Suresh Amritlal Parekh dated 7/1/2013 and affidavit dated 8/1/2013 confirming supply of these materials and submitted that it had received materials as per the invoices of the parties and had made the payments by cheque/RTGS for the same. Summary of materials used by assessee during F.Y. 2010-11 along with the treatment in the books of accounts was as follows: Utilisation of material as - Amount (Rs.) Treatment in Accounts Plant & Machinery/Moulds 23,79,82,268 Addition to Plant and Machinery Trial Run 13,94,92,838 Charged to Capital WIP account Trial Production 6,83,99,170 Charged to Capital WIP account Machinery Spares 14,97,74,663 Shown as Inventory in Balance Sheet Raw Material & Consumables 3,50,24,425 Charged to Profit & Loss account. ------------------- 63,06,73,365 The AO did not accept the submissions of appellant and held that the argument of the appellant that it has received material from the aforesaid parties was not acceptable on the basis of the investigation carried out by the Sales Tax Department, Pune; Investigation Wing of Mumbai; and also the Investigation carried out by the ADIT (Inv.), Kolhapur. He was of the opinion that the aforesaid entities were wholly and exclusively involved in providing the accommodation entries and no physical goods as claimed by the assessee were supplied to any corporate houses including the assessee company.
It has been brought on record before us that in the assessee’s own case for the AYs. 2009-10 and 2010-11, similar
26 M/s. Videcon Industries Ltd. issue had come up for consideration wherein the Tribunal vide order dated 06.02.2015, had set aside the addition/disallowance on account of purchases made from the said dealers with a clear direction to adjudicate the issue afresh after giving cross examination of Shri Suresh A. Parekh. In pursuance thereof, a fresh statement of Shri Suresh A. Parekh was recorded on 12.03.2015 after summons were issued to him u/s. 131 by the AO and assessee was given opportunity to cross examine him in the presence of senior officers of the assessee company. In his statement before the Assessing Officer, Shri Suresh A. Parekh first of all admitted to the modus operandi of his business/transaction but stated that he had sourced the material from grey market from the dealers where he did not get the bill. It is after the material has been supplied to M/s. Videocon Industries Ltd., Aurangabad (assessee) by the suppliers of the grey market that bills are prepared in the names of various entities controlled by him. He also confirmed before the Assessing Officer that proprietors of the said concerns were his family members and friends. Thus, he categorically admitted that he had actually procured the material from grey market without sale bill and the said material procured from the grey market was supplied to M/s. Videocon Industries Ltd. along with the sale invoices of his concerns in various years. When the material was supplied to the assessee, he has received the payments by way of cheque/RTGS in the names of respective parties and after the clearing of cheques/RTGS in the respective bank accounts, cash has been withdrawn and the payment has been made subsequently to the grey market suppliers from whom he had duly procured /purchased the goods. In his reply, Shri Suresh A. Parekh had stated that he has received oral orders for supply of material from Videocon Industries Ltd., Aurangabad and 27 M/s. Videcon Industries Ltd. as per their requirement he supplied material from grey market. However, the Assessing Officer noted that there is no specific written purchase order by the assessee company specifying the type of material, quantity, price etc. He further observed that assessee being a registered company has made substantial payments to the entities managed and controlled by Shri Suresh A. Parekh for which no documentary evidence has been maintained by the assessee while placing purchase orders. The Assessing Officer also made comparison of the documentation and procedures followed by the assessee company in respect of hawala dealers and that of the other concerns which have not been doubted by the Assessing Officer, i.e., the purchases from whom have been accepted. The Assessing Officer has also elaborately discussed and commented upon the lack of proper documentation in the case pertaining to hawala dealers and noted that there are no details of mode of transportation of vehicle nos. etc. on the documents in relation to the hawala entities. In fact, as per the Assessing Officer there is a pattern in the evidence in the form of entry which is made at the time of gate pass. His main conclusion was that neither Shri Suresh A. Parekh has substantiated the delivery of goods in question nor the assessee company has been able to adduce any credible evidence of the actual receipt of goods. A reference has also been made on the statement of Managing Director recorded on 23.01.2013 wherein he stated that he is unable to verify the things as the records were in Aurangabad factory. He also referred to the statement of Accounts Manager of the assessee company, Shri Rajesh Methi who was unable to explain the discrepancy as pointed out by the investigation party on the pattern of evidence made in respect of hawala entities. In the written submission, the Ld. CIT, DR has also pointed out to 28 M/s. Videcon Industries Ltd. the various discrepancies which has been raised by the Assessing Officer, which for the sake of ready reference his submissions on this aspect is reproduced herein below: “16. On perusal of invoices submitted for supply of goods in the name of aforesaid parties are in bulk quantity of various items and on analysis it is that The Primary details of Purchase order & Date are not mentioned in the Tax Invoice. Also there is no mention in respect of ‘Transportation details' i.e., delivery terms. All the invoices produced before have no proper seals of the assessee company evidencing that the material has really been received in the factory premises. More importantly, certain delivery challans have also been attached to the bills, however, one of the delivery challans have acknowledgment of receipt of material either of the company or the supplier. More so there are materials of various specifications, however, no such supporting evidences of specific specification for supply of material has been attached to the bills / delivery challans. There is no single initial/ stamp showing date and time of receipt, etc. From the statement of Shri Rajesh Methi, Accounts Manager of M/s. Videocon Industries Ltd., it is seen that in respect of purchases shown from other than hawala parties, there are proper documentary evidences viz., Tax Invoice, Delivery Challan, Gate Entry Stamp (i.e. stamp of the Guard on duty, date of challan, Challan No., Entry No., Time in, S.I on Duty, Reg. No.
16.1 In this regard, attention is invited to the discussion by the Assessing Officer in para 8.17 at pages 56 onwards in the assessment order. The Assessing Officer has analyzed nature of documentation in respect of a number of hawala entities. A.O has also given comments in respect of the documentation. Thereafter, at page 61 and 62 of the assessment order, he has pointed out that what is missing and why the bills do not appear to be genuine considering the case of a big company which is expected to have standing operating procedure relating to purchases and documentation thereof.
16.2 During the course of survey at Aurangabad, certain documents were impounded as per Annexure A, which were confronted vide questionnaire dt. 11/11/2014. The A.O has 29 M/s. Videcon Industries Ltd. discussed the same in page 71 onwards of the assessment order. A number of documents have been commented upon in the tables at pages 71 onwards upto 84 pages. They relate to Annexure A/1 (pages 1 to 660), Annexure A/2 (pages 1 to 666) and Annexure A-3 (pages 1 to 664) and Annexure A-4 (Pages 1 to 623). The A.O has clearly brought out abysmal lack of documentation. It may be noted that quantity in respect of goods is 10 Metric Tonnes (page 74 of the assessment order). Similar description is found at the other pages. However, there are no evidence of vehicle numbers which carried this much material.
16.3 The Assessing Officer subsequently at page 84 of the assessment order discusses Annexure A-6 which is purchase made from other than the hawala dealers at pages 85, 85, 86, the Assessing Officer has demonstrated that the documentation in respect of the parties other than the hawala parties appears to be complete and proper. Thus he has pointed out a stark contrast in the nature of documentation and has clearly pointed out that the documentation in respect of hawala parties is not in the normal course of business. He has Blade inferences on impounded material at pages 86-87 of the assessment order. The Assessing Officer has made conclusions in para 8.17 and 8.18. In para 9, at page 89 of the assessment order, he has tabulated non- genuine purchases in respect of 8 concerns amounting to Rs.63.06 crores. In para 10 to 14 he has classified the various transactions into different categories.
16.4 In para 15 (part of para 9.1 of the final assessment order), the Assessing Officer has worked out the disallowance depending upon the nature of purchases and disallowances to be made.
Therefore, the fact of admission of non-supply of goods by the proprietors / partners of the aforesaid entities in the deposition given before the Sale-tax authorities have been proved that they never supplied the goods but only issued sale bins for commission. Importantly, this fact was brought to the notice of Shri Suresh A. Parekh, while recording his statement on oath (Q.No.13) for which he has simply stated that he has procured the material from grey market and 30 M/s. Videcon Industries Ltd. material was supplied to the company in the name of aforesaid hawala parties. However, in support of purchase of goods Shri Parekh has not submitted any evidences. This demonstrates that he has not purchased any material, but issued bogus sales bills without supply of material. Hence, there is no mention in receipt of receipt of material by the assessee company. It is also important to mention that the assessee company has also not been able to show evidences of receipt of goods at the factory premises. It is common knowledge that the transporters carry multiple copies of goods being transported through the carrier and one copy is meant for the party receiving the goods. In this case, the assessee company has failed to show any credible evidence relating to transportation of material or receipt at the factory.
During the course of recording of the statement (March 2015) of Shri Suresh A. Parekh, the Principal Officer of the assessee company i.e., M/s. Videocon Industries Ltd., was also present and he has been allowed to cross examine the reply Shri Suresh A. Parekh for supply of goods, for which Shri C.P. Saroj, Principal Officer of the company, simply stated that the company has received the material and after verification of the same payments have been made. However, he has not demonstrated with any evidences how the supply has been made by those bogus entities and what supporting documents the company is maintaining for placing the orders and the receipt of goods at the factory/ business premises. The only explanation given by him is that the company has procured material through Shri Suresh A. Parekh, Sangli and they never doubted about the accommodation entries in the name of the aforesaid parties as in the bills provided contain the sale-tax registrations. Though the Principal Officer argued that it has received the material, no evidence to demonstrate the same has been filed except details of sale invoices and the payment details. No documentary evidences to justify the purchase order details i.e., the name and designation of the employees of the company, who placed the purchase orders with supporting documents i.e., quotation, market enquiry conducted for procurement, etc. details of gate passes evidencing the receipt of material i.e., date and time, place, stamps and seals on such invoices, etc have been filed.
In view of the above discussion, it can be summarized as under;
(i) the assessee has not received any material against the tax invoices received from Hawala Dealers managed and controlled by Shri Suresh A. Parekh, Sangli.
(ii) The above fact has been accepted at various stages, by the hawala party that it was providing only accommodation entry and not doing any real business.
(iii) The statement of the hawala party that it has supplied goods to the assessee company is not supported by any documentary evidences or substantiated with proper books. Therefore as per the preponderance of the probability the contention of the hawala party and the assessee company cannot be accepted that the material has been supplied.
(iv) The impounded material regarding vouchers and other documents pertaining to purchase clearly shows the difference and discrepancies between the genuine purchase and bogus purchase as has been observed above.
(v) Further, no single evidence of delivery has been submitted at any point of time by either the haw ala party or the assessee company even though specifically been asked for. Even during the course of survey no evidence was found at the premises of the assessee, whereas in other genuine purchases, all such evidences were found or submitted by the assessee.”
In view of the aforesaid finding the Assessing Officer made following additions/disallowances on account of bogus purchases: (i) disallowance of Rs.8,98,22,987/- on account of depreciation on plant and machinery and moulds;
(ii) reduced written down value of plant and machinery and moulds by Rs. 33,20,80,461/- by holding that the assessee does not have evidence in respect of purchase of said plant
(iii) a sum of Rs.20,78,92,008 was reduced from the book value of capital work-in-progress by holding that the assessee could not produce cogent evidence to substantiate the claim or purchases accounted under "capital work-in- progress on account or trial run and trial production";
(iv) disallowance or Rs. 3,50,24,425 on account or raw material and consumables purchased and debited to P&L Account on the ground that these purchases were bogus;
(v) reduced the value of inventory to the tune of Rs. 14,97,74,663 by treating it as suspicious non genuine purchases from these dealers.
Before us the Ld. Counsel, Mr. Sonde after referring to the various observations made by the Assessing Officer, submitted that the most crucial point which needs to be appreciated here in this case is the statement of Shri Suresh A. Parekh in the second round of proceedings, i.e., when his statement was recorded by the AO and was cross examined in pursuance of the direction given by the Tribunal in the earlier years. He pointed out that it is an undisputed fact that he has categorically admitted that the assessee company has placed order to Shri Suresh A. Parekh who was in this business of supplying of electronic items for last twenty years. He has also admitted that he has sourced the material from the grey market and after procuring the said material, the same were sent to the factories of the assessee company by the suppliers of grey market directly and once the bill was received the payment was made through account payee cheques/RTGS. Further, during his cross examination, Suresh Parekh confirmed that he deals in electronic items i.e., Cable, AV, LCD, Monitor, PC, Corrugated Sheet Ply, ABS, Master Batch., Polypropylene, etc., in bulk
33 M/s. Videcon Industries Ltd. and that there is a huge demand in the market for supply of the aforesaid items. He supplied the aforesaid, items through the concerns like Swastik Enterprises, G M Traders, Param Trading Co., Sarvesh Enterprises, Mahalaxmi Distributors, Suresh Light House, Jagdish Trading Co Ltd, Manek Enterprises etc. to various corporate houses including M/s. Videocon Industries Ltd., Aurangabad, Maharashtra. He further stated that since he is having huge experience of more than 20 years in acquisition and supply of above mentioned items to various corporate houses, therefore, he use to receive telephonic or oral orders from the purchase departments of the factories, specifying the specifications of the products and their quantity required urgently. According to their requirement, he sourced the suppliers from the grey market and supplied the items as per their requirement along with the bills of the aforesaid concerns and accordingly, received the payments. The parties from whom he purchased the materials in grey market do not provide any sale bill; therefore, he has regularized the said supply of those goods by raising invoices through the aforesaid concerns against which the payments have been received, by cheques/RTGS. By utilizing the payments received, from the corporate houses, he pays, the supplier, who supplied the goods in grey market without bill. With regard to the transportation cost and other related expenditure for delivering the goods at site or desired place of the Corporate Houses, Suresh Parekh clarified that the transportation costs were to be borne by the suppliers as the order was placed at a fixed rate, which included the overhead expenses from source to destination. He had submitted that the practice of purchasing materials from grey market is not uncommon and is prevalent since long. It is followed across cotton market, cloth market, sand market and so on. He emphasized that just because someone does not use or prepare written purchase order while purchasing the materials, it does not make relevant
With regard to the specific contention of the Assessing Officer as raised in the assessment order and counter submissions/rebuttal of the assessee as placed before us are reproduced hereunder for better appreciation of facts:- “1. Contention of the AO The AO has stated that in the statement recorded on oath u/s. 131of the Act on 1803-2014 before ADIT (Inv.) Kolhapur, Shri Suresh Amritlal Parekh has categorically admitted that he only issued bogus purchase bills and has not supplied any material to any business house and that the cash has been withdrawn and has been handed over to the beneficiaries after deducting their commission. (Page No. 29 and Q. 12 on Page No. 32 of the Assessment Order)
Submission of the Appellant While setting aside the matter to the file of AO for AY 2009-10 & 2010- 11, Hon'ble ITAT directed the AO to give opportunity of cross examining Shri Suresh Parekh to Principal Officer of the Appellant Company. Accordingly, AO had summoned Mr. Suresh A. Parekh and recorded his statement u/s. 131 of the Income Tax Act 1961 on 12/3/2015, wherein he has explained /clarified his earlier statement before ADIT (Inv.). In the statement before ADIT, Mr. Suresh A. Parekh had stated that he had provided accommodation bills to various entities without delivery of goods.
This statement was specifically confronted by AO on 12.03.2015 (Q. No. 8 & 9 on Page No. 45 and 46 of the Assessment Order), wherein he has explained and clarified that the statement given on 18.03.2014 was correct as all the concerns mentioned therein had issued only bills and not supplied any material. He has clearly explained that the material was procured and delivered from grey market suppliers who did not issue sale bills. Mr. Suresh A. Parikh had, in the certificate dated 07.01.2013 and affidavit dated OR.01.2013, even before his statement before ADIT Kolhapur on 18.03.2014 confirmed supply of material and in Q.No.11 in statement dated 12.03.2015 before the AO, he has again reiterated and reconfirmed the said certificate dated 07.01.2013 and explained the modus operandi of his activities. From above, it is very clear that he procured material from grey market and gave bills of other
35 M/s. Videcon Industries Ltd. parties who had not supplied any material. He also confirmed that he had huge experience in acquisition and supply of electronic materials and in response to oral purchase orders and as per requirement, he sources the supplier in the grey market who supplies the items and receives the payments via the entities controlled by him.
(Refer to Question no. 8 and 9 of statement u/s. 131 of the Act on 12/3/2015 Page No. 45 - 46).
Contention of the AO The AO has stated that in reply to Q. Nos. 15 & 16, in statement dated 18-03-2014, Suresh Parekh had categorically explained the modus operandi adopted by him for giving accommodation bills and also his commission thereon. According to the AO, from the reply of Shri Suresh Parekh, it is amply clear that he had received the cheques/RTGS from the corporate houses, in the respective bank accounts maintained in the name of hawala entities and after receipt of RTGS/clearance of cheque, cash was withdrawn and handed over to the respective corporate house after deducting their commission. This according to the AO clearly establishes that no deliveries of physical goods were made. (Page No.36 of the Assessment Order)
Submission of the Appellant Mr. Suresh Parekh has confirmed before AO on 12.3.2015 that he deals with a number of corporate houses. In certain instances as per the client requirement no goods have been supplied, where he had merely received RTGS/cheque and returned cash after deducting commission. As regards the supplies to Videocon Group i.e., M/s. Videocon Industries Ltd., M/s. Value Industries Ltd., and M/s. Videocon Realty Infrastructure Pvt. Ltd., he has confirmed that physical goods were supplied which were procured from grey market and bills were from parties other than the actual suppliers. This fact, was first confirmed by him in the affidavit given, on 08-03-2013 and reiterated in his statements dated 12.03.2015 before the AO. As regards, the details of suppliers from whom Mr. Suresh Amritlal Parekh had purchased the material in the grey market, he could not give such details as by then the papers had been seized by the Sales Tax Department/Income Tax Department during their inquiry in the year 2012 & 2014. The Question No 15 & 16 were again confronted by the AO vide' Q. 17 dated 12.03.2015 wherein his earlier statement was explained without As appellant had received material, which is confirmed by Suresh Parekh in his affidavit as well as in statement u/s 131 before the AO, and also by Mr. Rajesh Methi, Accountant at the factory during survey proceedings, the question of receiving any cash does not arise.
3. Contention of the AO: The AO has stated that the assessee company has shown huge volume of transactions with the entities managed and controlled by Shri Suresh Amritlal Parekh, proprietor of M/s. Jagdish Trading Company. (Page No 38 of the Assessment Order)
Submission of the Appellant: It is submitted that total purchases of Rs.63.07 crores from these entities is only 0.79% of total purchases of Rs. 7996.14 crores during FY 2010-11. It consist of various items, the details and utilization of whir-h have been duly submitted to the survey party as well as to the AO. Analysis or purchase transactions/bills from concerns managed by Shri Suresh A Parekh made by the AO: (Page No. 57 of the Assessment Order).
4. Contention of AO: The Primary details of Purchase order & Date are not mentioned in the Tax Invoice. (Pg. 57 of the Assessment Order).
Submission of the Appellant: It is clarified by Suresh Parekh that he has received oral/verbal purchase order. Total Purchases made by the Appellant during FY 2010- 1 1 were Rs. 7996.14 crores. It is not the case of the AO that there are purchase orders in each and every purchase other than the purchases of Rs. 63.07 crores. There are number of instances other than these purchases of Rs. 63.07 crores, where appellant has purchased material with oral orders and material has been received. The mere absence of a purchase order does not make genuine purchases made by the appellant as bogus.
5. Contention of the AO There are no details of 'Transportation'.
Submission of the Appellant: Mr. Suresh Parekh has admitted and explained that the transportation
37 M/s. Videcon Industries Ltd. costs and other related expenditure for delivering the goods at the delivery station was to be borne by the supplier as the order is placed at a fixed rate, which included all the overhead expenses from source to destination. Therefore, there are no transportation details available on the bills which were taken from the concerns other than the actual supplier. The details were obviously not put as the delivery was made by the grey market suppliers and not the providers of the bills. (Refer Reply to Question nos. 6 and 14 (Page No. 45 and 51 of the Assessment Order)
Rajesh Methi Accountant of appellant company has also confirmed during survey proceedings at the factory on 22.03.2013 that the appellant's purchases are on FOR (Free on Road, Chitegaon) basis and therefore appellant did not maintain lorry receipts for goods received.
Refer Question No. 13 during survey on 221 1/20 I] at Page 63 assessment Order).
Contention of the AO All the invoices produced have no proper seals of the assessee company evidencing that the material has really been received in the factory premises. Certain delivery challans have also been attached to the bills, which have no acknowledgment of receipt of material either of the company or the supplier.
Submission of the Appellant With regard to evidence for supply of material, the appellant has already submitted the copies of invoices having reference of Delivery challans, Gate Stamp etc which were impounded by the survey party. Thus all the invoices, delivery challans have stamps of the Gatekeeper which has been verified by the survey party also. It is not the case of the AO that there is only one stamp of the gate keeper on all the purchases. Having more than one stamp and different stamps on different bills on different days is normal practice and does not make a purchase bogus. Further, material utilization details of the said purchases have already been submitted by the appellant.
Contention of the AO The AO stated that Mr. Suresh A Parekh has simply stated that he has procured the material from grey market and material was supplied to the company in the name of aforesaid hawala parties. However, in support of purchase of goods Mr. Suresh A Parekh has not submitted any evidences.
Submission of the Appellant As regards, the details of suppliers from whom he had purchased the material in the grey market, Mr. Suresh A Parekh stated that he did not have such details as the same were taken by the Sales Tax Department/Income Tax Department during their inquiry in the year 2012 & 2014. As regards transportation cost and evidence in respect of supply or materials, he explained that expenditure on delivery or goods are borne by actual suppliers in grey market to whom he had paid cash.
(Refer Reply to Question nos. 14 and 17 (wrongly mentioned (IS 16) on Page No. 51 and 54 of the Assessment Order).
Contention of the AO The AO has stated that a perusal of the purchase bills submitted from the various dealers indicate the use of same gate entry stamp i.e. stamp having only challan number and signature of a person. While in other purchases, the gate entry stamp is different and more elaborate and is having various fields. (Page No. 66 of the Assessment Order)
Submission of the Appellant The Appellant generally maintains 2 to 3 sets of gate entry stamps in order to handle contingencies of emergency or number of consignment entering the premises at the same time. It is not the case of the assessing officer that in all other cases one single gate entry stamp was used.
9. Contention of the AO: The AO stated that there is no evidence regarding receipt of material other than the affidavit filed by Shri Suresh A. Parekh in support of supply of goods. (Page No. 71 and 75 of the Assessment Order)
Submission of the Appellant The Appellant has submitted the written confirmation and affidavit of Suresh Parekh to the effect that he has supplied material to Appellant. Mr. .Suresh Parekh also confirmed before the AO in his statement u/s. 131 dated 12.03.2015, that materials were purchased from grey market and delivered by those suppliers to the Appellant. However bills of different parties (other than actual suppliers) were given as the suppliers of grey market did not give sale bills and hence, the other
39 M/s. Videcon Industries Ltd. details were not available on these bills. Appellant also submitted to the AO, the party wise details of nature of material purchased, copies of ledger accounts, payment details etc. The appellant also submitted material utilization, item wise details of purchases made from the concerns of Mr. Suresh Parekh. The invoices/bills have been taken/ impounded by survey party on 22.03.2013 at the factory premise of the appellant.
As regards, the details of suppliers of parties from whom Mr. Suresh A. Parekh had purchased the material in the grey market, the details of these purchases were seized by the Sales Tax Department / Income Tax Department during their inquiry in the year 2012 & 2014.
(Refer Reply to Question nos. 17 (wrongly mentioned as 16) (Page No. 54 of the Assessment Order).
Contention of the AO The AO has stated that the discrepancies, in the bills of various dealers with that of other bills, were also shown by the Survey Team while recording the statement of Shri Rajesh H. Methi, Accounts Manager at the Aurangabad Factory, however no convincing reply to explain the discrepancies was given. This fact was duly confronted to Shri Venugopal N. Dhoot, Chairman & Managing Director of the Company in the survey proceedings at Fort Office, Mumbai. No explanation in this regard was given. (Page No. 87 of the Assessment Order)
Submission of the Appellant In this regard, Mr. C.P Saroj, the Principal officer, clarified that a survey action U/s.133A of the Act was carried out at the factory premises at Aurangabad as well as at the office premises in Mumbai. The statement of Shri Venugopal N. Dhoot was recorded at the office premises Mumbai and in those proceedings at that point of time, Mr. C.P Saroj was also present. In the statement, various questions were put by the department in respect of the aforesaid purchase- transactions made by the assessee company. At that point of time the requisite details were not available at the office premises in Mumbai where the statement of Shri V. N. Dhoot was recorded as the same were maintained at factory premises at Aurangabad. Therefore, the Managing Director has stated, that the transactions with the aforesaid, parties are not immediately verifiable. The necessary details as called for have been duly reconciled with necessary supporting and submitted before Investigation Wing as well as in the assessment proceedings.
Therefore, the purchases shown from the aforesaid parties are genuine, the material of which have been received through Shri Suresh Parekh, along with the bills of these parties and payment for which have been made by cheques/RTGS by the appellant company.” Apart from above rebuttal, reliance was placed on following judgments:
(i) Ramesh Kumar & Co. Vs. ACIT, (ii) ACIT Vs. Ramila Pravin Shah, ITA No. 5246/Mum/2013; (iii) Ganpatraj A Sanghavi Vs. ACIT, ITA No. 2826/Mum/2013; (iv) Hiralal Chunilal Jain Vs. ITO, ITA No.4547/Mum/2014; (v) CIT Vs. Nikunj Eximp Enterprises (P) Ltd. 35 Taxmann.com 384 (Bom) (vi) ACIT Vs. M/s. G. V. Sons, ITA No. 2238, 2239 & 2240 of 2012 (ITAT Mum); (vii) DCIT Vs. Rajeev G. Kalathil 67 SOT 52 (ITAT Mum); (viii) Balaji Textile Industries (P) Ltd. Vs. Third ITO 49 ITD 177 (ITAT Mum); He also made distinction of various decisions which was relied by the Ld. DR.
We have carefully considered the entire gamut of facts, perused the relevant finding given in the impugned orders as well as the rival submissions made by the parties before us vis-a-vis the material placed on record. The assessee company is one of the leading manufacturing and trading company of consumer electronics, home appliances and other white goods etc. During the FY 2010-11 the assessee had made purchases to the tune of approximately Rs. 8000 crores. Out of which purchases aggregating to Rs.63.07 crores have been added by the AO on the ground that these are bogus purchases made from hawala dealers especially from Suresh A. Parekh. It is an admitted fact, which is borne out from the various invoices and 41 M/s. Videcon Industries Ltd. information received that Shri Suresh A. Parekh along with his family members had made various entities through which he is providing accommodation bills. During the course of initial investigation by the Sales Tax Department as well as by the Investigation Wing of the Income-tax Department, he had admitted that he is providing bogus bills and accommodation entries for purchase of various materials and also explained the modus operandi of his business transaction. Since the statement was taken on the back of the assessee, the Tribunal had directed the Department/AO to record fresh statement of Shri Suresh A. Parekh wherein he was given opportunity to be cross examined by the assessee. During the course of fresh statement/ cross examination by the AO in the impugned assessment proceedings as discussed above, Shri Suresh A. Parekh had categorically confirmed that he deals in various electronic items in bulk and that there is huge demand in the market for supply of the aforesaid items. He had also given the name of concerns through which he had supplied various items to various corporate houses including M/s. Videocon Industries Ltd., Aurangabad. In his statement, he has stated that on telephonic or oral orders he used to source the suppliers in the grey market as per the specification of the products and direction of the purchase department of the assessee company and the suppliers from the grey market supplied these items directly to the assessee company. Since these suppliers operate in grey market, therefore, to regularize the same, he used to give sale bills to the assessee company by raising invoices through his concerns against which the payment was received by him and the same has been distributed to the suppliers of the material in the grey market. In his cross examination he has also explained and clarified his earlier statement and admitted that what has been said is correct but he admitted and clarified that material has been actually procured and delivered from the grey market to the assessee company.
42 M/s. Videcon Industries Ltd. In the earlier statement also he has confirmed the supply of material in his sworn affidavit dated 08.01.2013 filed before ADIT, Kolhapur. He has also admitted to deal in number of corporate houses and he is in the business of supply of electronic items and material for several years. However, when confronted to specific supplies made to Videocon Industries group, he duly confirmed that physical goods were actually supplied which were procured from grey market and bills for purchases other than actual suppliers were given to the assessee. This aspect of the matter has been confirmed by him twice, once in his affidavit dated 08.03.2013 and other in his statement before the AO on 12.03.2015. The assessee to prove the genuineness of the purchases, that is, the purchase of materials have actually been supplied to the assessee had given the item wise details and utilisation of such materials in the manufacturing and how the same has been inventorised in the books of account. It has been pointed out that the assessee had also made purchases based on oral orders from other parties also and when material has been received and once the material purchased from any supplier enters the gate premise of the factory, gate pass is prepared and entries in regular books of account have been made. Mr. Suresh A. Parikh has also admitted that the transportation goods and other related expenditure for delivering the goods at delivery site has been drawn by the suppliers as the order is placed at a fixed rate which is evident from the bills, copy of invoices supplied by Shri Suresh A. Parekh. The material proof for supply of material is by reference to copy of invoices which mentions delivery challans and then there is gate pass stamp when it enters the factory premises and this gate pass stamp has been impounded by the survey party which has been referred to by the AO. It has also been brought on record that more than once, stamp on different bills on different dates has been placed which is normal practice and no adverse
43 M/s. Videcon Industries Ltd. inference can be made that these purchases are bogus qua the assessee. Apart from that, the assessee has given the details of nature of material purchased, copy of ledger account, payment details, material utilisation of the item wise details of purchases made from the concerns of Shri Suresh A. Parekh. The revenue is harping greatly on the first statement of Shri Suresh A. Parekh wherein he has admitted that he is providing accommodation bills and charging commission on them without actual supply of goods; and neither Shri Suresh A. Parekh nor the assessee could adduce any evidence that actually material has been supplied to the assessee. From the records as well as the heads under which addition has been made by the AO it is seen that the addition on account of alleged bogus purchases has been made on the utilisation of following materials and the treatment in accounts:
Utilization of material Amount (Rs.) Treatment in Accounts as- Plant & Machinery/ 23,79,82,268 Addition to Plant and Moulds Machinery Trail Run 13,94,92,838 Charged to Capital WIP account Trail Production 6,83,99,170 Charged to Capital WIP account Machinery Spares 14,97,74,663 Shown as Inventory in Balance Sheet Raw Material & 3,50,24,425 Charged to Profit and Consumables Loss account Total 63,06,73,365
From the aforesaid additions it is quite ostensible that firstly it has been accounted for in the books of account and majority of the material purchased are either part of addition to the plant and machinery or it has been charged to capital WIP account or shown as inventory in the Balance Sheet. There is no immediate effect on inflation of expenditure which can lead to an impression that assessee
44 M/s. Videcon Industries Ltd. has tried to suppress its profit by entering into alleged bogus transactions with hawala dealers, which is generally resorted to by traders and such suppression of profit is often offset by applying some GP rate to factor in the profit element. The revenue cannot resort to approbate and reprobate on the statement of Shri Suresh A. Parekh, that is, it cannot chose to rely upon the first set of statements recorded in the year 2013/2014 and ignored his sworn affidavit and the second statement on oath which was recorded post direction of the Tribunal and cross examination conducted by the AO himself in the course of the assessment proceedings. Even if we agree that purchases have been made by the assessee through Shri Suresh A. Parekh who has arranged the supply of material from grey market and have issued accommodation bill, but in that case also so far as the assessee is concerned, the purchases cannot be treated as bogus, because the assessee had made the payment through cheques in lieu of which material has been supplied to the assessee. The supply of material is evidenced firstly, from the invoices/bills and stamped gate passes and secondly, which is most important that the manufacturing and consumption details of the item wise material purchased from Shri Suresh A. Parekh have been duly entered in the books of account and consumption of the same has neither been disturbed nor doubted. There could be some discrepancy about the transportation bills from the suppliers of grey market or transportation cannot be proved by documentary evidence by Shri Suresh A. Parekh, however, the other evidences showing the material purchased has been duly recorded in the books of account and also the details of material utilisation used for manufacturing, plant and machinery and inventory etc. has not be discarded or doubted, only goes to show that material has been purchased and utilized, albeit through rotation mode done by Shri Suresh A. Parekh. He has categorically stated in his statement that 45 M/s. Videcon Industries Ltd. expenditure on delivering of goods are borne by the actual suppliers in grey market then onus is not on the assessee, because, when the material purchased has been recorded by the assessee it its books of account and neither the manufacturing account nor the other entries made in the books of account have not been rejected, then these items shown in the books of account cannot be discarded. AO has not brought on record that the details of items purchased from Shri Suresh A. Parekh is not appearing in the books of account when the assessee has specifically raised this issue before the AO. Either the entire statement of Shri Suresh A. Parekh should be accepted or it should be discarded in its entirety. Only one part of the statement given at initial stage cannot be solely relied upon for making the addition and the second part of the statement which has been made before the AO himself during the course of the assessment proceedings when it was subject to cross examination cannot be disregarded or rejected by the revenue. As stated earlier, here, in this case, unlike in the other cases of bogus purchases the assessee’s trading account is not affected directly because the material purchased have been utilised for addition to the plant and machinery and has been charged to capital WIP account and only a part of it has been shown as inventory in the Balance Sheet and raw material consumables which has been charged to the P&L Account. There is no direct impact of suppression of profit, at least on the amount which has been charged to capital WIP account or addition made to plant and machinery. Thus, we are of the opinion that the entire purchase cannot be disallowed by the department solely on the basis of first statement of Shri Suresh A. Parekh. As regards the submission and contention of the Ld. CIT, DR that there is lack of documentation in respect of purchases made from the hawala operators because supply of goods could not be proved, in this regard, one has to see the other attended facts and circumstances
46 M/s. Videcon Industries Ltd. also which are that, the purchase of materials are backed by firstly, entry in the gate pass at factory premises; and secondly, entry in the books of account and manufacturing account showing item wise material purchase, material consumed, addition in the plant and machinery, inventory of parts etc. Once the factum of material consumed in the manufacturing or inventory is not disputed then no addition of purchases can be made even if the material have been purchased through the hawala operator. The crucial point to see here is that, the source of purchases have gone through books of account and in lieu of payments made material has been purchased which are proven from item wise inventory prepared and entered in the books of account and is reflected from material consumed in manufacturing or credited to capital WIP, etc.,( which stands unrebutted or undisputed), then no adverse inference qua the purchases can be made, because instead of registered dealers assessee has made purchase from grey market.
As regard the other discrepancies as highlighted by ld. CIT DR by referring to AO’s order qua the delivery part, the same loses its credibility whence it has been shown that material purchases are appearing in the books of account and consumption of the same has not been doubted. AO should have carried further this information to examine the entries in the books of account and the consumption details. As reiterated above at various places, the factum of purchase so far as the assessee is concerned cannot be disputed when the hawala person himself had admitted that he had arranged the purchases from grey market and got them supplied. This statement before the AO cannot be discarded at all. Thus, in the totality of the facts and circumstances of the case, we hold that the addition on account of so called alleged bogus purchases cannot be added as
So far as the issue relating to non-granting of credit of taxes or short credit of TDS/advance tax, we direct the AO to examine the matter and after verifying the records grant the credit of TDS/advance tax properly.
As regards the charging of interest u/s. 234B and 234C are concerned, the same are admitted to be consequential and hence, same are dismissed.
The last ground relating to initiation of penalty proceeding is again premature and, therefore, it seems to be infructuous and the same is dismissed.
In the result assessee’s appeal is partly allowed.
Order pronounced in the open court on 24.02.2017.