DCIT 5(3)(1), MUMBAI vs. ALLIED BLENDERS & DISTILLERS P.LTD, MUMBAI

Accordingly to the Assessing Officer, the notification issued by the Sales Tax Department, Government of Maharashtra all these parties were involved in hawala operations of issuing bogus bills on commission basis without supplying actual material which was affirmed by these parties in an affidavit –cum-declaration filed before the Sales Tax Department, GOM that they were engaged in issuing invoices only. The AO also observed that these hawala parties were issuing bogus bills on receipt of cheques and latter on cash used to be withdrawn and after deduction of commission the balance amount used to be returned to the persons who took hawala entries. According to the Assessing Officer, the statement as referred to above of the alleged hawala operators was available on the website of the GOM and the same was treated as evidence to justify the disallowance of bogus purchases by the assessee. Accordingly, a show cause notice dated 19.3.2013 was given to the assessee informing that notices under section 133(6) of the Act issued to the said suppliers/hawala parties could not be served as these parties were not available on their given addresses and in view of the non-service of notice, the assessee was called upon to show cause as to why the purchases amounting to Rs.4,92,43,370/- should not be treated as undisclosed income and be added to the total income of the assessee. The assessee replied before the AO vide letter dated 20.3.2013 stating therein that the assessee has purchased from these parties various gift articles for promoting its sales and a few Xerox copies of photographs taken during the promotional activity were also filed. The assessee also filed a copy of stock register, evidencing the receipt and issue of gift articles besides copies of confirmations from shopkeepers etc which as per the AO were self made without PAN and without any descriptions of items or goods and quantity distributed to the customers. Ultimately, the assessment was completed under section 143(3) vide assessment order dated 28.3.2013 assessing the income at Rs.14,20,47,620/- by making various additions inter alia of bogus purchase of Rs.4,92,43,370/-.

Aggrieved by the order of the AO, the assessee preferred an appeal before the ld.CIT(A) who, after considering the submissions of the assessee as has been incorporated at pages 9 and 10 of the appeal order concerning the issue of purchases, decided the issue of bogus purchases against the assessee by observing and holding as under : “5.4. Ground Nos.6 to 8 are regarding the addition on account of bogus purchases from three parties amounting to Rs.4,92,43,370/- which has been proved a hawala entry provider by the enquiries of the Sales Tax Authorities, the investigation wing of Income Tax Department and the inquiry of the AO. It is noted that the appellant during the assessment proceedings could not provide any documentary evidence of actual delivery of material allegedly purchased from said party. During the appeal proceedings also the appellant could not file any documentary evidence at all regarding the allegedly bogus invoices, which could show that it has actually purchased any material from the said party. Under these circumstances, prime facie such purchases does not appear genuine. Though the appellant has tried to take shelter of the fact that payments to these parties was made through cheque, it is wroth nothing that in the case of Sumati Dayal (214 ITR 801), the Hon‟ble Apex Court has also held that one has to consider all surrounding circumstances for accepting the genuineness of a transaction. Further, in the case of P Mohankala 291 ITR 278, also after considering the entirety of surrounding circumstances the Hon'ble Supreme Court has not accepted the genuineness of cash credits even though the same were received through banking channels. In the instant case, it is an undisputed fact that detailed inquiries by Sales Tax Department and LT. Department revealed that the three worth Rs.4,92,43,370j- does not appears in position to actually supply the material to the assessee as they do not have any infrastructure and capacity and only exist on paper. Under these circumstances, it is quite clear that neither there is any evidence which could prove the capacity of the said party for supplying huge material to the assessee nor the assessee has filed any convincing documentary evidence of actual receipt of material from these parties, as there has been no mention of mode of delivery (transport) on the bills of the party in question, whereas in respect of genuine purchases, the concerned parties mention the details of mode of transport. When the A.O has clinching evidence to show that there have not been any actual purchases from such parties, under these circumstances, the assessee is required to prove otherwise. Neither at the time of assessment stage nor at the appeal proceedings, the appellant could produce any of the party nor was any evidence in support of actual purchase put forward by the appellant. Under these circumstances, it is clear that the appellant has inflated the expenses on account of the above referred bogus purchases shown from the three hawala entry providers. Such purchase has resulted in reduction of actual income of appellant; accordingly, the addition made by the AO is upheld.

The ld. AR of the assessee vehemently submitted before us that the order passed by the AO and confirmed by the ld.CIT(A) were made without considering the facts on record as produced before them. The ld AR argued before us that the primary reasons for treating the purchases as bogus and fictitious were on the ground that non service of notice under section 133(6) of the Act to the suppliers/parties. While drawing our attention to the copies of the written submissions made before the assessing officer dated 20.3.2013 filed at pages no.79 to 81 of the paper book, the ld. Counsel argued that bills and vouchers pertaining to the corroborated by the photographs taken during the promotional activities. The ld. Counsel argued that stock register showing various gifts purchased from these parties and issued for promotional activities were duly maintained and were also produced before the authorities below. Further, the ld. AR in support of the contentions brought to the notice of the bench the delivery challans filed before the AO at page 2 of the written submissions which was forming part of paper book at page 80. The ld. AR drew our attention to the gift articles purchased for the sales promotion as per details belw:- 1.OCW glasses 2.OCW Steel jar 3.OCW T-Shirts 4.OCW Key chain 5.Ice Box with Company Logo. 6.Crystal glass & bowls. 7.Plastic jars with Company logo. 8.Wall Clock. 9. Wrist Watches. 10. Pen sets 11. Key chains 12. OCW plates The promotional scheme offered by the assessee are as under:- - On pack offer in retail shops - On purchase of750 ml bottle get 3 crystal Glasses Free -On purchase of375 ml bottle get 2 Glasses Free. -On purchase of 180 ml bottle get 1 Glass Free.”

Per contra, the ld. DR relied heavily relied on the orders of the authorities below and submitted that since the action of the AO was based upon the evidences which were in the form of statements recorded before the sales tax authorities in which the said parties have made candid and clear admission of having engaged in hawala operations of issuing bills and invoices without actually supplying the material. Ld DR further submitted that the assessee was found to be beneficiaries of these hawala transactions. The ld DR submitted before the bench that the statements of hawala dealers before VAT authorities were sufficient materials to disallow the bogus purchases and prayed that the order of FAA be upheld and confirmed.

We have carefully considered the rival contentions, perused the material placed before us during the course of hearing including the orders of the authorities below as also the decisions relied upon by the parties. The assessee was engaged in the business of manufacturing of Indian made foreign liquor primarily Officers Choice Whisky. During the year the assessee purchased various gift items such as OCW glasses,OCW Steel jar,OCW T-Shirts,OCW Key chain,Ice Box with Company Logo,Crystal glass & bowls,Plastic jars with Company logo,Wall Clock, Wrist Watches, Pen sets,Key chains and OCW plates which used in the promotional scheme offered by the assessee such as on purchase of750 ml bottle get 3 crystal Glasses Free,on purchase of375 ml bottle get 2 Glasses Free and on purchase of 180 ml bottle get 1 Glass Free etc. The materials were purchased from three suppliers to the tune of Rs.4,92,43,370/- as per the details given above. The AO, on the basis of information from DGIT (Inv), Mumbai and on the basis of notification issued by the sales tax department GOM declaring that these suppliers as hawala operators, made the addition of the total purchases from these parties by treating the same as bogus for the reasons that notices sent under section 133(6) to these hawala parties were returned un-served. The assessee filed before the AO complete books of accounts, items wise stock register evidencing the receipts of gift materials and issue thereof as attached in the paper book page 56 to 78. In order to prove the use of gift items in the promotional activities, photographs of the functions and promotional activities and also confirmations from the shop keepers were also produced before the AO which were disbelieved by the AO on the confirming the consumptions of gift materials. The assessee has also produced copies of bank statements of Punjab National Bank and Axis Bank evidencing the payments through banking channels by account payee cheques to the suppliers filed at pages no. 32 to 51 of the paper book. Having considered all these facts which were before the AO as well as FAA, we find that the assessee has discharged its onus by producing the books of accounts, stock register, stock tally and also filing various documentary evidences such as statements of banks etc, confirmations and photographs of the promotional events before us. In our opinion the assessee has discharged the onus cast upon it. Once the assessee filed all the documents and evidences corroborating the purchases and consumption thereof, the onus of further verification shifts to the AO who has not conducted any independent inquiry or further verification of the records produced before him and proceeded to disallow the purchases merely on the basis of information DG(IT), Mumbai and information published on the website of the Sales Tax Department of Maharashtra Government. In our opinion, the purchase made by the assessee could not be disbelieved merely on the basis of information received from the third party without carrying out any meaningful enquiry and further verification on the various records and information filed during the course of assessment proceedings. We are not in agreement with conclusion drawn by the FAA upholding the action of the AO. The case of the assessee is also supported by M/s MPIL Steel Structures Ltd (supra), wherein the AO on the basis of information received from the Sales Tax Department on the website disallowed the purchases made from eight parties and the co-ordinate bench of the tribunal deleted the addition reversing the order of FAA by holding as under : “7. We have carefully considered the rival submissions and perused the record placed before us including the orders of authorities below and case law relied upon by the parties. We find that the AO made the addition of Rs.7,48,31,548/- which was reduced to Rs.63,29,735/- by the ld. CIT(A) on the basis of remand report called for during the appellate proceedings which was furnished by the AO vide letter dated 31.7.2014. We find that the assessee submitted the copies of ledger account, copies of bank statements, copies of purchase bills, material delivery challans in order to substantiate the purchases made from those parties. Besides the assessee also produced stock register in which the entries of material received and consumed for production in order to prove the case of assessee and ultimately sold all the finished goods for which no doubts were raised by the tax authority. We also note that the books of account were not rejected by the AO and only the purchases were doubted which were reduced by the ld. CIT(A) substantially. Now, the question before us is whether the purchases as made by the assessee were bogus despite the facts that the material was received with supporting bills and vouchers and payments were made through banking channels and all the material received was also consumed as shown in the stock register and ultimately sold by the assessee which were not doubted at all. The remand report reveals that the purchases were doubted primarily for the reasons such as non services of notices u/s 133(6), non production of supplies before the tax authorities, non-filing of the confirmation letters from the suppliers, non furnishing of bank statements, return of income, financial suspicious hawala dealer. Looking to the facts and circumstances of case in totality, we are of the considered opinion that when material were purchased and payment were made through banking channel and the material consumed in the manufacturing process which was not at all in doubt then the tax authorities are not justified in treating the purchase as bogus. The books of accounts were rejected by the AO. The case of the assessee also finds supports from the following decisions: In the case of YFC Projects (P) Ltd (supra), it has been held as under : “The assessee had achieved a turnover of Rs. 884.81 lakhs. It had shown net profit of Rs. 79.11 lakhs. Its net profit in terms of percentage was almost double than the previous year. The Assessing Officer was unable to point out a single defect in its books of account. Merely due to non-filing of confirmation from the supplier, it could not be held that the assessee had not received the goods from „S‟ and that the credit balance in the shape of sundry credit appearing in the books of account was unaccounted money of the assessee. The assessee had filed a certificate from the bank indicating the fact that cheque issued by it were cleared. The Assessing Officer was harping upon only one aspect that the notice issued to „S‟ had returned back with a remark „not known‟, thereafter, he did not take any steps to procure the presence of this person. According to the assessee, notice did not contain the father‟s name of „S‟, that might have been the reason for the return of the notice, otherwise on the bills raised by „S‟ his mobile number was available. He could have been contacted on this mobile number. [Para 10] In view of the above, it was to be held that the Assessing Officer was not justified in making the disallowance of purchases made by the assessee. [Para 11] In the result, the appeal filed by the assessee was to be allowed. [Para 12]”

The issue raised by the assessee is against the sustenance and upholding the addition on account of bogus purchases from hawala dealers. Since we have already decided the identical issue raised in assessment year 2010-11 in favour of the assessee. The facts and issue in this appeal are identical, therefore our decision in ITA No 2573/Mum/2015 would, mutatis mutandis, apply to this appeal as well and accordingly we set aside the order of CIT(A) on this issue and direct the AO to delete the addition. In result the appeal of the assessee is allowed.

The grounds of appeal

The ld. CIT(A) allowed the appeal of the assessee on this ground after considering the contention and submissions as made by the ld.AR during the course of appellate proceedings by observing and holding as under:- : The AO has disallowed an expenditure of Rs.13,05,410/- in respect of provisions for Auditors fees under the head "Legal & Profession expenses which is payable to two parties of Mumbai for tax audit report and valuation of gratuity and leave encashment. The AO has disallowed the said sums on the ground that it is a contingent liability which is not allowable u/s 37(1) of the IT. Act. On the other hand, it was the plea of the appellant before the AO as well as during the appeal that such expenses are regular routine expenditure year after year and since the expenditure in question is in respect of the current financial year, therefore, in the mercantile system of accounting followed by the appellant it is an allowable deduction. After considering the rival submissions, I agree with the contention of the appellant that in mercantile system the appellant has to debit all expenses pertaining to the current year in its P&L account. Further, the provision is made on the basis of similar expenditure incurred in earlier year, therefore, it cannot be said to be , mere guess work or adhoc in nature as it is based on a figure of similar expenses in earlier year, therefore, under these circumstances, it becomes an ascertained liability which is a deductible expenditure during the year under consideration. The AO is accordingly directed to delete the disallowance.”

We have carefully considered the rival contentions, perused the material placed before us during the course of hearing including the decisions of authorities below as also the decisions relied upon by the parties. We find that the assessee has debited a sum o f Rs.12,45,410/- on account of yearly provisions for internal audit and tax audit fee and Rs.60,000/- as legal and professional charges payable to Mr.K A Pandit for “Actuarial valuation for determining gratuity and leave encashment provision for staff” . The said expenses are in the nature of routine and regular expenses which are incurred and provided at the end of each year and were accordingly accounted for by the assessee on the basis of mercantile system of accounting. Further, the FAA has rightly came to the conclusion that the assessee has rightly accounted for these expenses by following the mercantile system of accounting and the same could not be disallowed by treating as provision for expenses and in the nature of contingent expenses. The FAA also noted that the said expenses are not based upon the guess work or adhoc and were provided in the same manner as in the earlier years on the basis of mercantile system of accounting. Moreover, the liability was very much ascertained and foreseeable due to regular nature of expenses. We are, therefore, inclined not to interfere with the reasoned order of the ld.CIT(A) on this issue and accordingly uphold the same by dismissing the ground raised

Since we have decided the identical issue in the assessment year 2010-11 in favour of the assessee. The facts and issue in this appeal are identical, therefore our decision in ITA No 2447/Mum/2015 would , mutatis mutandis, apply to this appeal as well. Accordingly, the appeal of the revenue is dismissed.

In the result, the appeal of the assessee stands allowed and that of revenue are dismissed.