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Income Tax Appellate Tribunal, “B”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI RAM LAL NEGI, JM
आदेश / O R D E R PER R.C.SHARMA (A.M): This is an appeal filed by the Revenue against the order of CIT(A) for the Assessment year 2010-11 in the matter of order passed u/s.143(3) of the IT Act. 2. The revenue has taken the following grounds in its appeal. 1. "On the facts and in the circumstances of the case and in law, the Id.CIT (A) erred in deleting the addition of Rs.40,19,776/- which was made by invoking the provisions of section 69C of the LT. Act by treating the purchase are genuine.
2. "On the facts and in the circumstances of the case and in law, the Id.CIT (A) erred in deleting the addition of Rs.90,38,769/- which was made by treating the sale of scrap as unaccounted sales.
3. "On the facts and in the circumstances of the case and in law, the Id.CIT (A) erred in deleting the addition of Rs.
M/s. Metcraft Engineering Corporation 3,49,424/- which was made on account of disallowance of expenditure incurred in relation to exempt income u/s 14A." 4. "On the facts and in the circumstances of the case and in law, the Id.CIT(A) erred in relying upon judgments of the CIT vs. Nikunj Eximp Enterprises Pvt. Ltd. without appreciating that the facts involved in the of the appellant's case are different from the facts of the above case laws." 5. "On the facts and in the circumstances of the case and in law, the Ld CIT (A) has grossly erred in not appreciating the' fact that notice u/,~ 133(6) issued to the parties from whom alleged bills were received were returned undelivered by the postal authorities and inspector of this circle." 6. "On the facts and in the circumstances of the case and in law, the Ld CIT(A) has grossly erred in not appreciating the fact that assessee was not able to produce the parties, from whom alleged bills were received despite many opportunities were accorded to him." 7. "On the facts and in the circumstances of the case and in law, the Ld CIT (A) has grossly erred in not appreciating the fact that assessee failed to rebut findings of sales tax department vis-a-vis bogus purchases despite reasonable opportunity was accorded to him." 8. "On the facts and in the circumstances of the case and in law, the Ld CIT (A) has grossly erred in accepting the misleading submissions made by the assessee that the department didn't make available the information, provided by sales tax department." 9. "On the facts and in the circumstances of the case and in law, the Ld CIT (A) has further erred in not appreciating the findings of the Assessing officer regarding the non genuine purchase transactions made by the assessee." 10. "The appellant prays that the order of the Ld.CIT(A) on the above grounds be set aside and that of the A.O be restored."
The appellant craves leave to amend or alter any ground or add a new ground.
Rival contentions have been heard and record perused.
4. Facts in brief are that assessee is engaged in manufacturing of M.S. galvanised structural Sections. During the course of scrutiny assessment AO made addition on account of purchases of machinery amounting to M/s. Metcraft Engineering Corporation Rs.40,19,776/- alleged to be not genuine by invoking provisions of Section 69C. 5. By the impugned Order CIT(A) deleted the same after observing as under:- 6.3.2. I have considered the observations of the Assessing Officer in making additions of Rs. 40,19,776/- and the reply of the appellant in this regard. During the course of hearing the authorised representative submitted that the Rolling Mill 'was purchased, It was installed on 24th January 2011 and production was started in January, 2011 and 1,038 Metric Tons of C.R. coils were produced in financial year 2010-2011. The said production was recorded in the Excise Register R. G 23, consumption of electricity also increased and payments were made from Cash Credit A/c maintained with the Karnataka Bank. Therefore, there is no reason to disbelieve the purchases of Rolling Mill from M/s. Siddhivinayak Steels. On the other hand" the Assessing Officer his disallowed the said payments on the basis of statement of the Proprietor of Siddhivinayak Steels which was made before the Sales Tax Department stating that he has issued hawala Bills to various parties. In the respect the authorized representative of the appellant has strongly argued that a general statement without specifying the name of the appellant should not come in the way of purchases made by the appellant; I have gone through the order of the Assessing Officer and found that no where the Assessing', Officer has, stated the list of hawala givers by M/s.Siddhivinayak Steels and,' no where the, name of the appellant was specifically appearing in the hawala list given'. In this respect the appellants authorised representative' have relied on the decision, of the Gujarat High Curt in the case CIT vs. M.K: Brothers 163ITR Page 249 where the Gujarat High Court held as under.:- "During the accounting year relating to assessment year 1971-72, the assessee had' made, purchases of the total value of Rs.52,254/- from certain parties. The Income Tax Officer required, the assessee to produce evidence regarding the purchases. In the mean time, the said parties had admitted to the Sales Tax Authorities that they had issued bogus vouchers. The Income Tax Officer held, that the purchases were not genuine and assessed .the amount of Rs. 52,254/- as income of the assessee from undisclosed sources. The Tribunal found that there was no evidence to show that the bogus vouchers M/s. Metcraft Engineering Corporation had been issued to the assessee" that nothing had been shown to indicate that any part of the funds given by the assessee to these parties came back to the assessee in any form, and that the assessee had made its payment by cheque. The Tribunal deleted the addition. On a reference: Held, that the conclusion arrived at by the Tribunal was , supported by the' evidence on' record. The amount of Rs. 52,254/- was not assessable as income from undisclosed sources and the Tribunal was justified in deleting the addition." 6.3.3. The appellant has also relied on the decision of the Bombay High Court in the case of the Babulal C Borana v. Third Income Tax Officer and others and the Delhi High Court in the case of the Commissioner of Income Tax h. M/s. Radhika Creation. 6.3.4. I have further considered the following decisions: (1) Babulal C Borana V ITO (282 ITR 251) (2) Vijay Proteins vs ACIT (1996) 55 DJ 76 (Ahm) (3) Nikunj Eximp Enterprises Pvt Ltd Vs CIT-1 Mumbai (Bombay High Court) Income tax Section 260A- Whether disallowance regarding purchases made, can be made merely on the basis that the suppliers and other relating evidences are not produced before the assessing authority or before the first appellate authority. Revenue’s appeal dismissed. Bombay High Court. (4) The Hon'ble Gujarat High 'Court in the case of CIT v M.K.Brothers reported at 163 ITR 249 (5) Delhi High Court in the case of CIT Vs Radhika Creations (ITA No.692/2009) The Hon'ble ITAT, Jodhpur Bench in the case of ITO v Permanand ' reported at 107 TTJ 395 The Hon'ble Calcutta High Court in the case of Diagnostics v CIT reported; at 334 ITR 111 The Hon'ble ITAT, Delhi Bench in the case of YFC Project Pvt Ltd vs Deputy Commissioner of Income Tax reported in 46 DTR 496 / 134 TTJ 167 (Delhi)
M/s. Metcraft Engineering Corporation The Hon'ble ITAT, Mumbai Bench in the case of Free India Assurance Services Ltd v DCIT reported at 62 DTR 349/(2011) 12 Taxman.com 424 (Mum) ; The Hon'ble ITAT, PuneBench in the case of Rajmal Lakhichand v ACIT reported at 79,ITD 84 ' : The Hon'ble ITAT, Jaipur Bench in case of ITO v. Kanchanwala Gems reported in 122 TTJ 854 In the case of ITO vs. Permanand, the Hon'ble ITAT, Jodhpur Bench reported in 107 TTJ 395 ' , In the case of R.K.Synthetics vs. ITO reported at 81 TTJ 909; the Hon'ble ITAT, Jcdhpur Bench Hon'ble Chandigarh IT,AT in the case of ITO v. Arora Alloys Ltd. (2012)[12 ITR (trib) 26.3], Rajmal Lakhichand v. Asstt. CIT [2001] 79 ITD 84 (Pune) . Western India Bakers (P,.) Ltd. v. Dy. CIT [2003] 87'ITD 607 (Mum.) Sharma Associates v. Asstt. CIT [1996] 217 ITR (AT) 1/[1995] 55 ITD~ 171 (Pune) (TM) , : Glorious Hospitlaity Pvt. Ltd. Vs Department of Income Tax ITAT Delhi Bench 'C' ITA No.2124/Del./2012 6.3.5. The addition by the A.O. cannot be accepted in view of judicial pronouncements. 'In this regard, I would like to refer and rely on the judgments below since the facts and circumstances of these judgements are similar to the present case and the ratio of judgments of these cases are applicable to the present case of the appellant. These are as under:- (i)The Hon'ble Gujarat High Court in the case of CIT v M.K.Brothers reported at 163 HR 249 has held that" It was clear from the Tribunal’s order that whether the said transactions were bogus or not was a question of fact. The assessee was given credit, facilities for, a short duration and the payments were given by cheques. When that was so, it could not be said that the entries for the purchases of the goods made in the books of the account were bogus entries. Thus, the conclusion arrived, at by the Tribunal was not against the weight of evidence. The, M/s. Metcraft Engineering Corporation Tribunal was, therefore, justified in deleting the addition to the income of the assessee." In this case, "during the assessment proceedings it came to the' notice of the ITO that in the relevant assessment year the assessee had made certain purchases from some parties, who were not available to cross-examine for the genuineness of the above purchases. It was found by the ITO that though the purchases were claimed to have been made on credit basis,' the payments were shown to have been made after substantial lapse, of time after the date of purchase. The ITO held that the transactions relating to those purchases were bogus and, therefore, treated the' amount allegedly 'paid for those purchases as income of the assessee.' On ,second, 'appeal;' the Tribunal,' found that there was no evidence anywhere that those concerns gave bogus vouchers to the assessee and further there was nothing to indicate that any part of the fund given by the assessee, to those parties came back to the assessee in any form. He, thus, held that the evidence was not adequate to conclude that the purchases made were bogus, and, therefore, 'deleted, the aforesaid 'addition to the income of the assessee." (ii) The Hon'ble ITAT, Jodhpur Bench In the case of ITO v Perrnanand reported at 107 TTJ 395 has held that "In the instant case; the addition rested mainly only on the observation of the Sales-tax Department. The assessee was never associated with the enquiries made by the Sales-tax Department to that 'extent. The satisfaction of the Assessing Officer himself is of prime importance while making assessment of an income and these duties cannot be performed by substituting satisfaction or someone else,. The assessee did pay for the purchases he' made from the above two parties through cheque as was evident from the record. The statements, or, even 'the affidavits of the sellers could "not be' utilized against the assessee, 'unless an opportunity was given to him to confront the said statement by way of cross- examination, etc. Admittedly, no such opportunity was given' to the assessee to confront the above sellers in the instant case. 'Further, the assessee had also discharged the primary onus cast on him by section 69 by showing the purchases, their entries in the books of account, payments by way of account payee cheque and producing the vouchers of sales of the goods. The Assessing Officer had miserably failed to bring on record any clinching evidence to prove that these alleged purchases were bogus and not genuine. Further, the Assessing M/s. Metcraft Engineering Corporation officer did not make requisite investigation against the two sellers. Therefore, the Commissioner (Appeals) had rightly held that the addition made by the Assessing Officer merely on the basis of observations of sales-tax department, without conducting independent enquiries was not justified. Since the purchase in question had been held as genuine purchase, addition of Rs. 55,632 could not be made to the income of the assessee. Hence, the revenue's appeal was liable to be dismissed" In this case, "the assessee was trading in narma, kapas, foodgrains and also derived income from commission. The Assessing Officer on the basis of information received from the sales-tax department held that the assessee had made bogus purchases from two parties and, therefore, he made certain addition to the income of the assessee under section 69. He also made an addition of Rs. 55,632 to the income of the assessee holding that the assessee did not pay any sales-tax or mandi tax on the purchases made from the above two parties and, thus, made extra profit. On appeal, the Commissioner (Appeals), held that the Assessing Officer had made addition merely on the basis of observation made. bv Sales-tax Department, without conducting independent enquiries. He, therefore, deleted the addition." (iii) The Hon'ble Calcutta High Court in the case of Diagnostics v CIT reported at 334 ITR 111 has held that - " However, as regards the payments made to M/s. Selvas Photographic are concerned amounting to Rs. 3,12,302, we find that those have been made by account payee cheques and those have been encashed through the bankers of M/s.Selvas Photographic. It appears that according to the appellant, at the time of assessment, the appellant had no business transaction with M/s. Selvas Photographic and consequently, the said party did not co-operate with the Assessing Officer. However, the transaction having taken place through account payee. cheques, we are unable to accept the contention of Mr. Agarwal, the learned advocate appearing for the Revenue that the transaction was a non-existent one. If an assessee took care to purchase materials for his business by way of account payee cheques from a third party and subsequently, three years after the purchase, the said third party does not appear before the Assessing Officer pursuant to the notice or even has stopped the business, the claim of the assessee on that account cannot be discarded as non-existent. In the case before us, the Revenue has not put forward any other ground, such as, it was not, a genuine transaction for other reasons but M/s. Metcraft Engineering Corporation has simply rejected the claim on the ground as if there was no such transaction.
The transaction having taken place through payment by account payee cheques, such plea is not tenable and in such circumstances, the Tribunal below erred in law in revering the finding arrived at by the Commissioner of Income-tax (Appeals) accepting the said transaction as a genuine transaction.” 6.3.6. On going through the assessment order, nowhere it was stated that the reports and papers received from the Sales-tax Department was put to 'the 'appellant for his rebuttal arid cross examination except one copy of affidavit and statement of the seller filed before sales tax Officer which is in general nature.. ' In this regard I would like, to refer and rely on the decision of supreme Court in the case Kishinchand Chellaram vs CIT reported in 125ITR 713 where it was held , "1. The letters dated 14-2-1955 and 9-3-1959, did not constitute any material evidence which the Tribunal could legitimately take Into account for the purpose of arriving at the finding that the amount of Rs.1,07,350 was remitted by the assessee from its Madras Office, and if these two letters were, eliminated from consideration, there was no material evidence at all before the Tribunal which could support its finding. What the manager of the, bank wrote in his letters could not possibly be based on, his personal knowledge but was based on here say. 'The revenue authorities ought to, have called upon the manager to produce the documents and papers On the basis of which he made the statement and confronted' the 'assessee with those documents and papers. No explanation' has, been furnished by the revenue as to what happened when the manager appeared in obedience to the summons and what statement he made.
It was not possible to hold, in the face of the .application for remittance signed in the name of T, that amount was remitted by the assessee and the finding to, that effect reached by the Tribunal must be held to be unreasonable and perverse. Even assuming that these letters were to be taken' into account, those letters would at the highest establish that T, an employee remitted the 'amount from Madras and N, another employee, received It at Bombay. From this it did not follow that the remittance was made at Madras and received at Bombay on behalf of the assessee. The burden was on the department to show that the money belonged to the assessee by bringing proper evidence on record and the assessee could not be expected to call T ,and N, who left the service at the time when M/s. Metcraft Engineering Corporation the assessment was reopened, in evidence to help the department to discharge the burden that lay upon it. , 3. Therefore, there was no evidence on the basis of which the Tribunal could come to the finding that the impugned amount as remitted by the assessee and that it represented its undisclosed income.” Following the principles laid down by the Hon’ble Supreme Court in the case of Kishanchand Chellaram vs. CIT (125 ITR 713), the Appellant should have been naturally confronted with the evidences on which the department places its reliance. This is a question of affording natural justice to the Assessee. Since no such opportunity has been granted to the appellant, the addition on account of purchases cannot be justified at all. Since the Appellant has been denied natural justice in the manner as stated above, the addition made on account of the above stated purchases will not stand the test of law. 6.3.7. The 'information at www.mahavat.gov.in does not prove that after receiving the money by cheque, the said party returned back the money in cash to the appellant and the appellant made any net profit out of the same. "In this regard, reference is made and reliance is placed on the following judgments: i) The Hon'ble ITAT, Jaipur Bench in case of ITO v. Kanchanwela Gems reported in 122, TTJ 854 has held under: "The assessee had 'furnished all necessary information including name, address, PAN, ,RST/CST numbers and telephone numbers of the suppliers, supported with documents which was expected from a prudent " purchaser to establish the genuineness of claimed transaction; besides the payments had been made through account-payee cheques and goods purchased from the four parties had been exported by the assessee in the same shape,' size and weight, duly verified by the customs authorities, The Assessing Officer was not justified in doubting the genuineness of the claimed purchases made by the assessee from the four suppliers and making addition merely on basis that on subsequent occasion the parties were not found on the given addresses or in some other cases some connected person to the supplier had stated that they were only issuing bills without supplying goods or that the money paid by the 'assessee against the purchases was withdrawn, by those parties. Undisputedly, after completion of transaction a purchaser cannot have any control over the suppliers and suppliers are always at liberty to use the money paid to them M/s. Metcraft Engineering Corporation against the goods sold 'by them. Thus, in the absence of any positive evidence that the goods were not purchased from the above parties but from some named person or that the money paid by the assessee against the goods was ultimately' returned to the assessee by the' suppliers, there was no occasion before the Assessing Officer to deny the claimed purchases, especially when the genuineness of the export of those goods by the assessee had been accepted by the Assessing Officer. The Commissioner (Appeals) had, thus, rightly deleted the addition" ii) In the case of ITO vs. Permanand, the Hon’ble ITAT, Jodhpur Bench reported in 107 TTJ 395 has held: “In the instant case, the addition rested mainly only on the observation of the Sales-Tax Department. The assessee was never associated with the enquiries made by the Sales-tax Department to that extent. The satisfaction of the Assessing Officer himself is of prime importance while making assessment of an income and these' duties cannot be performed by substituting satisfaction of someone else. The assessee did pay for the purchase she made from the above two parties through cheque as was evident from the record, The' statements or even the affidavits of the sellers, could' not be utillzed against the assessee, unless an opportunity was given to him to confront' the said' statement by way of cross examination, etc; Admittedly, no such opportunity was given to the assessee to confront the above sellers in the instant case. Further the assessee had also discharged the primary onus cast on him by section 69 by showing the purchases, their entries in the books of account, payments by way of account payee cheque and' producing the vouchers of sales of the goods; The Assessing Officer had miserably failed to bring on record any clinching evidence to prove that these alleged purchases were bogus and not genuine. Further, the Assessing Officer did not make requisite investigation against the two sellers. Therefore, the Commissioner(Appeals) had rightly held that the addition made by the Assessing Officer merely on the basis of observations of sales-tax department, without conducting independent enquiries was not justified. Since the purchase in question had been held as genuine purchase, addition of Rs.55,632 could not be made to the income of the assessee. Hence, the revenue's appeal was liable to be dismissed.” iii)' . In the case of R.K.Synthetics vs.ITO reported at 81 TTJ 909, the Hon'ble ITAT, Jodhpur Bench has held. "It' was an undeniable fact that the addition in question under section 69 had been made on the sole basis of the statement of M/s. Metcraft Engineering Corporation the partner of the assessee-firm recorded by the Central Excise authorities. That was also an undeniable fact that· the Assessing Officer never recorded any further statement of the said 'partner or anybody else. A copy of the statement recorded by' the Central Excise authorities was never provided' to the assessee. No independent investigation was carried out by the Assessing Officer even though he proposed to make an addition under section 69 in the hands of the assessee. There was no evidence of suppressed sales, as the sales declared by the assessee had been accepted fully by the Assessing Officer and no action had been taken' by the Sales Tax Department despite there being information regarding the fact that the statement made by the said partner had been retracted in the very next opportunity immediately after making of the statement. The assessee had been maintaining complete financial and quantitative records at all stages of production and no specific defects had been pointed out by the authorities below. The Commissioner (Appeals had categorically mentioned that the Assessing Officer had not pointed out any defects in the books of account: nor brought any on record and that the Assessing Officer was not justified in rejecting the books of account against which the department had' not come in second. appeal. In the circumstances the totality of the facts and circumstances did not justify additions under section 69 merely on the basis of the statement of the said partner without any further supporting evidence being on record. [Para 10] In the result, the appeal was allowed. [Para 12]" 6.3.8. Further, the AO cannot make any additions just on the basis of presumption. Suspicion, however strong cannot take place of proof. This principle is reflected in the following judicial principles: • Urnacharan Shaw& Bros v. GIT (37 ITR 271)(SC) • Dhakeshwari Cotton Mills v CIT (26 ITR 775)(SC) • SheoNaralnDuli Chand v CIT (72 ITR 766)(AII.) The, whole case of the A.O. is built up, on appearance of certain purchase parties on the Website of Maharashtra Sales Tax Department and the appellant's failure to produce these parties before the AO. Department's effort to verify the genuineness of purchases in respect of seller party did not make any progress as the notices issued could be served. In my opinion the mere appearance of a purchase party on the website or state Government does not turn a genuine purchase M/s. Metcraft Engineering Corporation into a non genuine purchase. This fact only raises' a' question mark and allowance of purchase' expenses of appellant has to be necessarily decided taking into view the totality of the circumstances of the claim. It is also to be kept in view that once a name of the party appears on the Website of the State Government even if the party has made genuine sales to the appellant 'he would make himself unavailable and would be most reluctant to co-operate with the Department for the verification of purchases. The appellant has already filed a number of Court/ ITAT decisions which are on the point. In the case of M.K. Brothers supra the Hon'ble Gujarat High Court held that in that case the tribunal had found that there was no evidence to show that bogus' vouchers' had been issued to the appellant and that nothing had been shown to indicate that any part of funds given by the appellant to these parties came back to the appellant ,in. any form and the appellant had ,made payments by cheques. The Hon'ble Court therefore, held that' the Tribunal was justified in deleting the addition. In the case of the appellant as well as the Department does not assert that the suspicious dealers have specifically claimed that the supplies to the appellant are bogus. The purchase payments have been made by the appellant by cheque and there is no evidence not even a suggestion that the funds given by the appellant as purchase price were received back by the appellant. This judgment of the Hon'ble Gujarat High Court would therefore be squarely applicable to the appellant's' case.' Similarly Hon'ble Calcutta High Court in case of Diagnostics supra has held that where payments have been made" by account payee cheques adverse view cannot be taken if subsequently the dealers do. not' .co-operate with the A.O. for verification of the purchases: In this regard, I have already' referred to various decision of the Hon'ble Courts and placed reliance on the same. 6.3.9. However, in the case of the Appellant, the AO has neither established that the' sellers are incapable of making the sales nor that any of the sellers were employees of the Appellant. The ledger accounts of the aforesaid parties were produced and explained the same with reference to date of payment, Cheque No. etc .. In this regard, I would like to refer to the under mentioned judicial pronouncements and' place reliance on the same. (i) Reliance is placed on the decision of the Bombay High Court in the case of Babulal C. Borana v. ITO [282 ITR 251], wherein it has been held that where identity of person from whom goods had been purchased and source of investment In such goods M/s. Metcraft Engineering Corporation had been explained by assessee, and it was established that amounts paid by assessee by cheque' for those goods had been received, and further, books maintained by assessee had not been rejected by Assessing officer and in fact addition was based entries made in those books it could be said that transaction was genuine. (ii) In the case of the Appellant too, it can be seen that the identity has been established, source of investment and bank payments have been proved and 'the books ,of accounts have not been rejected by the AO. Assessee has produced copy of bank statements for verification and even books of accounts are audited ujs,44AB. On the basis of the aforesaid' the Appellant prays that the addition ought to be deleted. (iii) Further, reliance is 'placed, on the decision of the Hon'ble Chandigarh ITAT in the case of ITO v. Arora Alloys Ltd. [2012][12 ITR (trib) 263] wherein addition made of unexplained expenses on sole basis of information received from Central Excise' department was held not be justified. 6.3.10. In making the disallowance the AO over looked the fact that the genuineness' of the purchases cannot be held against the assessee merely on the ground that the appellant failed to produce the purchase party (the name of the supplier was included in the list of suspicious dealers in the list of State Government). It has been recently held by the Hon'ble jurisdictional High Court of Bombay-' in the case of THE COMMISSIONER OF INCOME TAX-I Vs. M/s. NIKUNJ EXIMP ENTERPRISES PVT LTD as reported 2013-TIOL(Tax India Online.com)-04-HC- MUM-IT in the judgement dated December 17,2012- "Whether disallowance regarding purchases made, can be made merely on the basis that' the suppliers and other relating evidences are not produced before the assessing authority or before' the first appellate authority. In this case the Assessee company had filed its ROI for the AY 2001-02 declaring a total· income of Rs.42.08 lacs. During assessment, the AO disallowed an expenditure on account of non-genuine purchases alongwith other disallowances. On appeal, CIT(A) upheld the order of the AO. On further appeal, Tribunal observed that the respondent-assessee had filed letters of confirmation of suppliers, copies of bank statement showing entries of payment through Account Payee cheques to the suppliers, copies of invoices for purchases and stock M/s. Metcraft Engineering Corporation statement. This reconciliation statement gave' complete details with regard to opening stock, purchases, sales and closing stock and no fault with regard to lt was found. Besides, substantial amount of sales made by the assessee was to Government Department and such sales could not be bogus. Also, the books of account of the assessee had not been rejected. Thus, Tribunal deleted the. disallowance of RS.1.33 crores by holding that the purchases were not bogus. In this case the' following question of law has been formulated for consideration of the Hon'ble Bombay High Court . "Whether on the facts in the circumstances of the case and in law the Tribunal was right in deleting the addition made by the Assessing Officer of Rs.1,33,41,917/- towards bogus purchases even though the suppliers were nonexistent end one of the parties had categorically denied having any business dealings with the Assessee Company?" In this case; The Hon'ble Bombay High Court held as under: : "++ from the order of the Tribunal, we find that the Tribunal has deleted the additions on account of bogus purchases not only on the basis of stock statement i.e. reconciliation statement, but also in view of the other facts. The Tribunal records that the Books of Accounts of the assessee have not been rejected. Similarly, the sales have not been doubted and it is an admitted position that substantial amount of sale have been made to the Government Department. Further, there were confirmation letters filed by' the suppliers, copies of invoices for purchases as well as copies of bank statement all of which would indicate' that the purchases were infact made. In our view, merely because the suppliers have not appeared before the AO or the CIT(A),one cannot conclude that the purchases were not made by the assessee. The AO as well as CIT(A) have disallowed the deduction on account of purchase merely on the basis of suspicion because the sellers and the canvassing agents have not been produced before them. We find that the order of the Tribunal is well a' 'reasoned order taking into account all the facts before concluding that the purchase was not bogus. No fault can be found with the order of the Tribunal. In view of the above, we find that question as formulated is not a substantial question of law". "2. The following question of law has been' formulated for consideration of this court.
M/s. Metcraft Engineering Corporation "Whether on the facts and in the circumstances of the case and in law the Tribunal was right in deleting the addition made by the Assessing Officer of Rs.1,33,41,917/- towards bogus purchases even though the suppliers were nonexistent and one of the parties had categorically denied having any business dealings with the Assessee Company?"
3. The respondent-assessee had filed its return of income for the Assessment Year.2001-02 declaring a total income of Rs.42.08 lacs. The Assessing Officer interalia disallowed an expenditure of Rs.1.33.crores on account of nongenuine purchases from 7 parties. alonqwith other disallowances. The Assessing Officer by order dated 25.03.2004 assessed the respondent assessee to an income of Rs.1.87 crores.
Being aggrieved an appeal was filed by the respondent- assessee with the Commissioner of Income Fax (Appeals) ('CIT(A)'). By an order dated 19.08.2004, the CIT(A) upheld the order of the Assessing Officer interalia to the extent RS.1.33 crores disallowed as bogus purchases.
Being aggrieved by the order dated 19.08.2004 of the CIT(A), the respondent-assessee preferred an appeal to the Tribunal. The Tribunal in the impugned order dated 30.04.2010 while allowing the appeal records that the respondent-assessee had filed letters of confirmation of suppliers, copies of bank statement showing entries' of payment through Account Payee cheques to the suppliers, copies of invoices for purchases and stock statement i.e. stock reconciliation statement. This reconciliation statement gave, complete details with regard to opening stock,' purchases, sales and closing stock and no fault With regard to it was found. Besides, substantial amount of- sales made by the respondent assessee was to Government Department i.e. Defence Research and Development Laboratory, Hyderabad and such sales could not be bogus. Besides the Books of Account of the respondent-assessee have not been rejected. In view of the above, 'by order dated 30.04.2010 the Tribunal' deleted the disallowance of Rs.1.33 crores by holding that the purchases were not bogus.
Mr. Vimal Gupta,. Senior Counsel appearing in support of the appeal submits that the Tribunal could not have relied only upon the stock statement i.e.' the reconciliation statement to conclude that the purchases were genuine. Therefore, he submits that the question formulated is a substantial question of law and needs ·to be decided by this court.
M/s. Metcraft Engineering Corporation 7. We have considered the submission on behalf of the revenue. However, from the order of the Tribunal dated 30.04.2010, we find that the Tribunal has deleted the additions on account of bogus purchases not only on the basis of stock statement i.e. reconciliation statement, but also In View of the other facts. The Tribunal records that the Books of Accounts of the respondent-assessee have not been rejected. Similarly, the sales have not been doubted and it is an admitted position that substantial amount of sales have been made to the Government Department i.e.. Defence Research and Development' Laboratory, Hyderabad. Further,' there' were confirmation letters filed by the suppliers, copies of invoices for" purchases as well as copies of bank statement all of which would indicate that the purchases were infact made. In our View, merely because the suppliers have not appeared before the Assessing Officer or the CIT(A), one cannot conclude that the purchases were not made by the respondent-assessee. The Assessing Officer as well as CIT(A) have disallowed the deduction of Rs.1.33 crores on account of purchases merely on the basis of suspicion because the sellers and the canvassing agents have not been produced before them. We find that the order of the Tribunal is well a reasoned order taking into acccount all the facts before concluding that the purchases of Rs.1.33 crores as not bogus. No fault can be found with the order dated 30.04.2010 of the Tribunal.
In view of the above, we find that question as formulated is not a substantial question of law. Therefore, the appeal is dismissed with no order as to costs. 6.3.11. I have also gone through the above cited cases, more particularly the case of the jurisdictional High Court where the Bombay High Court more clearly held that Section 69C, can be applied if there is, an . unexplained expenditure; and the source of payment is not proved. In this respect the appellant's authorised representative in the above reply has stated that the purchaser the Rolling Mill was not Claimed as' expenditure and the source of payment was fully explained for which there was no dispute. He has further narrated that the facts of the case which were produced at Para 2 of the reply submitted by the authorised representative. I have carefully considered the observations of the Assessing Officer in making the additions and the reply of the authorised representative' and found that the provision of the section 69C cannot be applied in the above case because 'the assessee has not claimed any expenditure in respect of the investments made in the Rolling Mill and further he has fully explained the source of the payment which was made from the Cash Credit Limit of the Karnataka Bank.
M/s. Metcraft Engineering Corporation Therefore there is nothing to disallow and nothing to make addition as deemed income. The other aspect of the Assessing Officer where the Assessing Officer has relied the statement of Shri Pramod Kumar Singh, proprietor of M/s Siddhivinayak Steel which was given before the, Sales Tax Department. It was the duty of the Assessing Officer that if he wants to rely on the statement given to some other authorities then he was duty bound to summon the party take this statement nor section 131 of the Income Tax Act,1961 and to allow the cross examination to the appellant; This procedure has not been followed by the Assessing Officer and the authorised representative has strongly argued that the statement of Shri Prarnod Kumar Singh is not reliable, As the appellant proved from various documents that Rolling Mill was purchased and that the payment was made by the account payee cheque, the production was started by the said Rolling Mill in the subsequent year, on which the excise duty were paid and sales were accounted. Also, the entries were duly recorded in the books of accounts and the said. books of accounts were not rejected by the Assessing Officer. All these evidences proved beyond any doubt that Rolling Mill was purchased from M/s.Siddhivinayak Steel. I have gone through the reply of the authorised representative and found that the authorised representative has explained the source of payment of the Rolling Mill and the aid Rolling Mill was set up subsequently and wa fulIy operational, on which the excise duty were also paid on production. Therefore the purchase of the Rolling Mill cannot be doubted and the additions cannot be made merely on the basis of the statement of Shri. Pramod Kumar Singh, the proprietor of M/s. Siddhivinayak Steel which too was made before the sales Tax Department. I therefore direct the Assessing Officer to delete the addition of Rs. 40,19,776/- in respect of unexplained expenditure under section 69C. In the result this ground of Appeal is allowed.
6. We have considered rival contentions and found that the Assessing Officer has discussed the issue in para 7.1 to para 7.8 of his order and disallowed Rs.40,19,776/- as unexplained expenditure u/s.69C on account of purchases of Rolling Mill from M/s. Siddhivinyak Steel (Proprietor Shri Pramod Kumar Singh). We found that these purchases were not reflected as expenditure in the purchase account so maintained M/s. Metcraft Engineering Corporation by the assessee. Actually the assessee firm had purchased capital goods from M/s.Siddhivinayak Steel. Further, it is noticed from the details that the assessee had shown to have made purchases of capital goods of Rs.40,19,776/- from the party. The TIN Number and amount of transaction of the said party is as under:- Sl.No. Name of the TIN Amount Date purchase parties (1) M/s.Siddhivinayak 27050389521V 40,19,776 Steels
7. The Rolling Mill so purchased from M/s. Siddhivinayak Steel was installed on 24/01/2011 was started in January 2011 and 1038 M/ts. CR polls were also produced during the year under consideration. We found that said provduction was also found to be recorded in Excise Register RG-23, consumption of electricity also increased and payments were made from bank account maintained with Karnataka Bank. However, the AO has disallowed the purchase of machinery only on the basis of statement of Proprietor of Siddhivinayak Steel which was made before the Sales Tax Department. However, it was general statement without specifying the name of the assessee. After relying on the decision of Jurisdictional High Court in the case of Nikunj Eximp Pvt Ltd., 2013- TIOL(Tax India Online.com)-04-HC-MUM-IT in the judgement dated December 17,2012 wherein Hon’ble High Court held that Section 69C can be applied if there is an unexplained expenditure and the source of M/s. Metcraft Engineering Corporation payment is not proved. We found that purchase of Rolling Mill was not claimed as expenditure and the source of payment was fully explained for which there was no dispute. The CIT(A) has recorded a categoric finding to the effect that since assessee has not claimed any expenditure in respect of investments made in Rolling Mill and he has fully explained the source of payment which was made from the cash credit account of Karnataka Bank, there is no reason to disallow the same. The CIT(A) also observed that neither AO has recorded the statement of Siddhi Vinayak Steel u/s.131 nor has allowed the cross examination to the assessee. With regard to genuineness of Rolling mill so purchased, the CIT(A) has also recorded a finding to the effect that said Rolling mill was set up and fully operational on which excise duty were also paid on production. Therefore the purchase of the Rolling Mill cannot be doubted and the additions cannot be made merely on the basis of the statement of Shri. Pramod Kumar Singh, the proprietor of M/s. Siddhivinayak Steel which too was made before the sales Tax Department. After giving detailed finding from para 6.3.2 to 5.3.11, the CIT(A) has deleted the addition. The finding so recorded by CIT(A) are as per material on record. Learned DR has not controverted the finding so recorded by CIT(A). Accordingly, we do not find any reason to interfere in the order of CIT(A) for deleting the disallowance / addition made u/s.69C of the IT Act.
8. AO has also made addition of Rs.90,38,769/- by treating the sale of scrap as unaccounted sales. By the impugned order CIT(A) deleted the same after observing as under:-
M/s. Metcraft Engineering Corporation 5' 3.1 have considered the stand .of the Assessing Officer and reply filed by the representative of the appellant. It is also' noted that there is no dispute over the generation of scrap at the rate of 4.88 % equivalent to 234.84 metric tons. As per the appellant representative, the said quantity was generated as scrap & sold at Rs.33,93,426/- which was reflected in the sales. Therefore the question of' any addition 'did not arise. While the, Assessing Officer has assumed that the sale of scrap shown by the assessee was in fact sale' of finished goods, he adopted the value of scrap sale of 234.84 metric tons, by the assessee, at .the price of finished goods @Rs.52,939/- per metric ton, total amounting to Rs.1,24,32,195/- out of which the sale of scrap shown by the assessee amounting to Rs.33,93,426/- was reduced & thereafter made the addition of Rs. 90,38,769/- on account of the difference in the value of sale of scrap. On going through the submission and record, it is found that similar type of scrap were generated in earlier years and the sale value have been accepted by the department. The Assessing Officer has not given any reason for taking the value of the scrap sale at the price on which finished goods were sold, since the appellant agreed that there is no dispute over quantity of scrap sold which is already appearing in the sales. Therefore, it was argued that there is no reason to make any addition in respect of sale of scrap which is already accounted. The appellant has also submitted that the scrap generated is usual s per norms prescribed by the Director General of Foreign Trade, Standard Input / Output Norms as per Sl.No.C692 as notified by DGFT in the handbook (Vol.2) 2002-07. The relevant portion of item no.C692 of DGFT handbook is reproduced hereunder:- Sl.No Export Item Quantity Import Item Qty. . Allowed C692 Items 1 Kg GP sheets / 1.050 manufactured out Coils / kg. of GP Sheets Secondary On the basis of above, it was submitted that, the normal scrap allowed is 5% while the scrap of the appellant was 4.88%, which is within the limit as mentioned here. It was further submitted that in respect of sale of scrap the appellant is required to maintain proper records in RG 1 which is verified by the Excise Department. Considering all the above facts, more particularly the fact that the sales of scrap have already been accounted by the assessee, the addition made is not justified. Similar issue arose before me in the assessment year 2009-2010 where after careful consideration of the facts, it was found that there was no justification for the additions made. Following the reasons as stated in the Appeal Order of M/s. Metcraft Engineering Corporation assessment year 2009-2010, I, therefore direct the Assessing Officer to delete the addition of Rs.90,38,769/- on account of unaccounted sales. In the result this Ground of Appeal is allowed.
9. We have considered rival contentions and found that the Assessing Officer has made additions in respect of sale of scrap considering the sale of 234.84 metric tons of scrap as per the value of finished goods at the rate of 52,939/- per metric ton which works out to Rs.1,24,32,195/-. Since the assessee has already shown sales (scrap) of Rs.33,93,426/-, therefore, the difference of Rs.90,38,769/- was added back to the total income of the assessee. From the record, we also found that during the year under reference, there were scrap generation of 4.88% which is 234.84 metric tons. The said scrap was sold at Rs.33,93,426/- for which the complete details were given to Assessing Officer along with details of sale of finished goods. The facts of scrap sale have also been stated in the Tax Audit Report. Even there is no dispute with the Department over the generation of scrap at 4.88%.
10. The CIT(A) also recorded the categorical finding to the effect that generation of scrap was @4.88% equivalent to 234.84 M/Ts. The said quantity was developed as scrap and sold at Rs.33,93,42/- which was reflected in sales. Therefore, the question of any addition did not arise. However, the AO has wrongly taken the sale price of scrap at the rate of finished goods which was Rs.52,939/- M/T. The CIT(A) had also recorded a finding to the effect that similar type of scrap was developed in earlier years and the sale value have been accepted by the department. However, AO M/s. Metcraft Engineering Corporation has not given any reason for taking the value of scrap and sale at the rate on which finished goods were sold. We also found that during the year scrap generated was as per norms prescribed by Director General of Foreign Trade, standard input / output norms as per survey No.C-692 has notified by DGFT in the handbook (Volume-2) 2002-07. According to this notification scrap sale is allowed at 5%, however, scrap of the assessee was 4.88% which is within the limit as mentioned in the above notification. The CIT(A) has also recorded a finding to the effect that sale of scrap has been recorded in RG-1 which has also been verified by the excise department. Detailed finding so recorded by CIT(A) at para 5.3 have not been controverted by learned DR by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the finding so recorded by CIT(A) which is as per material on record. Accordingly ground taken by Revenue is dismissed.
11. The AO has also disallowed expenditure u/s.14A amounting Rs.3,49,424/- which was deleted by CIT(A) after observing as under:- I have carefully considered the reply given by the appellant, perused the order of the Assessing Officer. It is noticed that the Assessing Officer has disallowed Rs.3,49,424/- u/s 14A as per Rule 8D in the said working at Para 8.3. The Assessing Officer has considered the interest payment of Rs.1,30,10,812/- in the calculation of disallowances as per the said calculation the disallowances of interest worked out to Rs. 3,25,224/- and in the said working on the basis of 0.5% of the average Investment it comes to Rs.24,200/-. The authorized representative of the Appellant has argued that the Interest can be considered if it is established that any part of borrowed fund were utilised in investment of shares. He argued that the total Investment in shares were Rs.48,40,000/- which were made out of own capital and accumulated profits and therefore no interest should be considered for disallowances purposes. Further in respect of M/s. Metcraft Engineering Corporation disallowances of Rs.24,200/-. It was argued that no expenses were incurred for earning any exempt income therefore no disallowance is called for. I have gone through the Assessment Order and found that the Assessment Officer has made disallowances as per rule 8D but no where he has stated that the borrowed funds were utilized for investment in shares. I am therefore of the opinion" that the payment" of interest" should not be considered "in working of the disallowances u/s "14A. Accordingly, I direct the Assessing Officer to delete the additions of Rs. 3,25,224/.," out of the addition of Rs. 3,49,424/- the balance addition made of Rs. 24,200/- is hereby confirmed which is taken as 0 5% of the average investment. In the result this ground of Appeal is allowed.