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

Order u/s.254(1)of the Income-tax Act,1961(Act) Per Pawan Singh, J.M. �या�यक सद�य iou iou iou �संह के अनुसार: iou 1. This appeal by Revenue under section 253 of the Income Tax Act (‘Act’) is directed against the order of Commissioner of Income-Tax (Appeals)-33, Mumbai dated 20.08.2014 for Assessment Year (AY) 2007-08. The Revenue has raised the following grounds of appeal:

2. The Ld. CIT(A) has erred on facts and in law in deleting the disallowance of Rs.16,63,444/- made by the AO u/s 40(a)(ia) of the act without appreciating the fact that the amendment brought in by the finance act 2010-11 has prospective effect and not retrospective effect.

3. The Ld. CIT(A) has erred on facts and in law in deleting the disallowance made by AO u/s 69(c) of the act of Rs. 2,04,85,861/- without appreciating the fact that the assessee has failed to prove the genuineness of the .purchases by not producing purchase parties for verification.

4. The Ld. CIT(A) has erred on facts and in law in deleting the disallowance made by AO U/S 69(c) of the act of Rs. 2,04,85,861/- without appreciating the fact that the parties have been declared as bogus hawala provider by the Sales Tax department on the basis of the corroborative evidence available with them and inference based on the finding of such agencies cannot be constituted as suspicion.

2. The brief facts of the case are that assessee is individual and proprietor of M/s Paras Engineering Company. The assessee is engaged in the business of fabrication of engineering parts. The assessee filed return of income for relevant AY on 31.10.2007 declaring total income of Rs. 54,58,981/-. Subsequently, during the assessment 2 Sharad V. Shah proceeding, the assessee filed revised return of income of Rs. 89,30,387/-. The assessment was completed u/s 143(3) of the Act on 18.05.2009 assessing the total income of Rs. 92,07,480/-. The assessment order was set-aside in revision proceedings by ld. CIT(A) u/s 263 of the Act on 15.03.2012. In the order u/s 263 dated 15.03.2012, the ld. CIT(A) passed the following direction: (a) To verify the sundry 'creditors. (b) The unsecured loans have been, taken by the assessee from 47 persons during the year. Out of the above, confirmations letters of 8 persons only has been submitted by the assessee. The confirmations letters of the balance amount was not submitted. The.AO did not send intimation letters to the AO’s of lenders also. (c) As per the Annexure VII of Audit Report filed with the return of income, the assessee had to pay Rs. 14,00,780/- to M/s. Micratek International Ready and Rs. 75,408/- to M/s Metal Tube and Rolling Mills and deducted tax u/s. 194C but the same was not deposited in govt. treasury within the time allowed. Hence, Rs. 14,76,188/- should have been disallowed u/s 40(a)(ia) of the I.T. Act but the same has not been disallowed. (d) The assessee introduced capital of Rs. 11,00,000/- in his proprietary concern viz. Paras Engg. Co. The same was stated to have been introduced out of gift received by him. However, the names of the donors, their relationship with the assessee were not enquired by the AO. The above gift should have been disallowed u/s. 56(1)(vi) of the I.T. Act. (e) The assessee sold 500 shares of M/s. Orient Cont. Co. on 31.03.2006 and earned the S.T. Capital Gain of Rs. 22,520/-. However, the same has not been included in the income of A.Y. 2006-07. As per the direction of ld. CIT, the Assessing Officer (AO) issued notice to the assessee u/s 143(2) and u/s 142(1) of the Act for fresh assessment. While making fresh assessment, the AO besides other addition and disallowance, disallowed a sum of Rs. 16,63,444/- u/s 40(a)(ia) , disallowed a sum of Rs. 2,04,85,861/- u/s 69C of the Act in assessment order dated 11.03.2013 passed under section u/s 143(3) r.w.s. 263 of the Act. On appeal before CIT(A) both the disallowance i.e. u/s 40(a)(ia) and 69C was deleted. Thus, Aggrieved by the order of CIT(AO) the Revenue has filed the present appeal before us.

“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.”