IDCIT 23(3), MUMBAI vs. SHARAD V SHAH, MUMBAI

“The second proviso to Section 40(a) (ia) was inserted by the Finance Act 2012 with effect from 1st April 2013. The effect of the said proviso is to introduce a legal fiction where an Assessee fails to deduct tax in accordance with the provisions of Chapter XVII B. Where such Assessee is deemed not to be an assessee in default in terms of the first proviso to sub-Section (1) of Section 201 of the Act, then, in such event, “it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso”. The first proviso to Section 201 (1) of the Act has been inserted to benefit the Assessee. It also states that where a person fails to deduct tax at source on the sum paid to a resident or on the sum credited to the account of a resident such person shall not be deemed to be an assessee in default in respect of such tax if such resident has furnished his return of income under Section 139 of the Act. No doubt, there is a mandatory requirement under Section 201 to deduct tax at source under certain contingencies, but the intention of the legislature is not to treat the Assessee as a person in default subject to the fulfillment of the conditions as stipulated in the first proviso to Section 201(1). The insertion of the second proviso to Section 40(a) (ia) also requires to be viewed in the same manner. This again is a proviso intended to benefit the Assessee. The effect of the legal fiction created thereby is to treat the Assessee as a person not in default of deducting tax at source under certain contingencies. What is common to both the provisos to Section 40 (a) (ia) and Section 210 (1) of the Act is that the as long as the payee/resident (which in this case is ALIP) has filed its return of income disclosing the payment received by and in which the income earned by it is embedded and has also paid tax on such income, the Assessee would not be treated as a person in default. As far as the present case is concerned, it is not disputed by the Revenue that the payee has filed returns and offered the sum received to tax.

3. Prayan Trading Company 4. Vitarag Trading Company 5. Sampark Steels.

6. Shukan Steel Corporation 7. Sun Enterprises 5 Sharad V. Shah 8. M.R. Corporation 9. Vinay Trading Company 10. Samarth Trading Company 11. S.M. Enterprises The assessing officer asked the assessee to produce the parties along with their books of accounts, purchase bills, senseless, bank accounts for the relevant financial year relevant to assessment year vide notice dated 21.01. 2013. In reply to the said notice the assessee contended that some of the supplier have closed down their business and ask for further time to produce the parties. The assessee instead of producing the parties filed details of this of the parties payments made aware and contended that they are not in a position to produce the parties after more than five years from the date of purchase. The AO made the enquiries through Ward Inspector, who reported that none of the parties mentioned in the list are available on the address mentioned in the bills. The AO after examining the details of each of the parties and their outstanding as on 31st March 2007 added a sum of Rs. 58,26,358/-as well as made the addition of a entire aggregate of purchases under section 69C of the Act. During the first appellate proceeding similar arguments were made before Commissioner (Appeals). The assessee further filed evidences in the form of paper book containing reconciliation the statement, utilization / consumption of RAM material purchased from all 11 parties, ratio of consumption as compared to the preceding years, comparison of gross profit ratio of the current year and the preceding years, Bank statements showing the details of payment made to the parties, transport bills, delivery challans, laboratory tests attribute, comparative statement of three years showing the material consumption during the three years. The additional evidence of the assessee was forwarded to the assessing officer for ascertaining the veracity of the facts and verification of the evidences by the Assessing Officer. The Assessing Officer submitted his report vide report dated 1 August 2014. After considering the remand report with regard to the disallowance of alleged bogus purchases of Rs.2,04,85,861/- and considering the other material available on record the ld CIT(A) passed the following order; “4.4 I have considered the assessment order, submission made by the appellant, the AO’s remand report and the counter comments of the appellant thereon, on appreciation of the facts, it is not in dispute that appellant had purchased the 6 Sharad V. Shah material and actually used for the purpose of manufacturing, the fact has not been denied by AO. It is also found from the facts that gross profit ratio of the appellant has increased since the year under consideration as against the preceding previous year and therefore, prime facie it is not a case where appellant has introduced purchases to reduce his income. The appellant has also produced various details before the AO in remand proceeding showing material used in manufacturing. It is also not in dispute that the material has been received and consumed by assessee for his own manufacturing. It is also not in dispute that the material has been received and consumed by assessee for his own manufacturing. The only reason for disallowance according to AO is that the parties from the assessee had purchased the goods were appearing in the list of suspicious hawala dealers in the website of MVAT site. I am unable to see to the AO’s action in assessment of disallowing the entire claim merely on the suspicious based in the list of dealers appearing in the MVAT site. It is well established and settled law that suspicious dealers would may it be cannot partake the character of evidence. It is also undisputed fact that appellant had made all payments through account payee cheques or RTGS and had there been any doubt about such payments, the AO could have carried the matter further to find out from the bankers about the genuineness of the transaction, which the AO has not done. Very recently the Honorable ITAT Mumbai in case of Rajeev Kalahathi ( ITA No. 6727/ Mum/2012 vide order dated 23 August 2014 has held on a similar set of facts that went the transportation of goods are not in doubt or the conjunction of metal is not in doubt addition cannot be made merely on the basis of the supplier one hawala dealers. In the instant case assessee has shown product wise consumption of raw material indicating the receipt and consumption of material. I do not find any reason to sustain the addition made by the AO. Therefore, considering the above facts and more so the remand report of the AO addition made by the AO is deleted. This ground is allowed.”