ITO 29(1)92), MUMBAI vs. CHIRAG C PUJARA, MUMBAI

This is an appeal filed by the revenue and it is directed against the order dated 14.10.2014 passed by the Ld. CIT(A)-33, Mumbai for the assessment year 2010-12.

The issue raised in grounds of appeal

The ld. DR submitted before us that the ld.CIT(A) has erred in deleting the addition as there was sufficient proof with the AO to substantiate the purchases to be bogus. The ld. DR argued that all these parties from whom the assessee alleged did purchase transactions were displayed on the Website of the Sale Tax Department, Government of Maharashtra and according to the survey conducted by the said Deptt. These parties were providing bogus accommodation entries without supplying actual materials and therefore prayed that the order of the ld.CIT(A) be set aside and that of AO be restored.

On the other hand the ld.AR supported and relied heavily upon the order of ld.CIT(A) by submitting that goods were actually purchased , received and were recorded in the books of accounts. Ld AR also submitted that corresponding sales were also made and duly recorded in the books of accounts. The ld.AR also submitted that the goods so purchased from these parties were exported which was the finding of the facts as recorded by the ld. CIT(A) while deciding the appeal of the assessee by examining after examining the corroborative evidences such as export invoices, airway bills and shipping bill for the export issued by custom authorities. Whereas, on the other hand, the AO simply relied on the information received from the Sales Tax Department, Government of Maharashtra. The ld argued that the through account payee cheques/RTGS. The ld counsel of the assessee argued that once the assessee has furnished the necessary documentary evidences then the onus will be shifted to the AO to verify the said record and documents by carrying out necessary verification and investigation. However, in his case, the AO simply proceeded to form opinion that the purchases were bogus on the basis of information received from the Sales Tax Department of Government of Maharashtra which was wrong and against the facts of the case. Finally, the ld. AR prayed that the order of the ld.CIT(A) be upheld as the same was passed after considering all the factual and legal aspect of the case.

We have carefully considered the rival contention, pursued the material placed on record including orders of authorities below. We find that the AO made addition on the basis of information from the Sales Tax Department of Maharashtra Government that certain parties were engaged in providing accommodation entries. Thereafter the AO found during the assessment proceedings that the assessee has made purchases from three hawala parties amounting to Rs.11,47,180/- and the assessee was asked to produce the necessary records and evidences to prove his case. We find the assessee furnished before the AO copies of purchase bills and sales books, bank account to prove the genuineness of the purchases from these parties. We also find that the assessee also exported the goods for which the necessary evidences issued by the custom deptt. were furnished before the AO. The AO simply proceeded to make the addition by doubting the purchases from those parties without carrying out any verification of the evidences as filed by the Assessee before the AO or investigating the matter further. The ld. CIT(A) during the course of appellant proceedings considered all these evidences and recorded finding of the facts that the assessee has actually received goods from those parties and were duly entered in the books of account of the assessee and the stock register as well as the payment were made through banking channels. Further, we find that assessee also exported goods and relevant records have been placed before AO as well as during the course of hearing before us such as export invoices, airway bills and shipping bill for the export issued by custom authorities. These documents were examined and after taking into account all these evidences, the ld. CIT(A) deleted the addition. In view of the facts hereinabove, we are of the view that the order of ld.CIT(A) is a reasoned order which does not require any interference from our side whereas the AO has simply relied on the information from the Sales Tax Deptt , Govt of Maharashtra thereby not discharging the onus which shifted on him after the assessee filed necessary evidences before him to further inquire and verify the evidences. Accordingly, we are inclined to uphold the order of the ld. CIT(A) by dismissing the appeal of the revenue on this ground.

The second issue raised in the grounds of appeal no.5 to 8 is against the deletion of addition made by the ld. CIT(A) of Rs.44,89,670/- with regard to commission payment as disallowed by the AO on the ground that these payments were made to the related parties at the exorbitant rates in order to reduce the profit of the assessee.

During the course of assessment proceedings, the AO found that the assessee has booked commission amounting to Rs.44,89,670/- which was shown as payable on 31.3.2010 and the said amount was paid after 31.3.2010. The assessee submitted before the AO that commission was paid to seven parties by furnishing Permanent Account Number, addresses of the recipients and bank statements. The AO finally disallowed and added the said amount of commission of Rs. 44,89,670/- to the total income of the assessee on the ground that the commission was paid to the related parties in violation of provisions of section 40A(2)(b) of the Act at exorbitant rates. During the appellate proceedings, the ld. CIT(A) after considering the reply of the assessee allowed the appeal of the assessee on this issue by observing and holding as under : “5.14 Lastly, the AO has invoked the provisions of section 40A(2)(b) for disallowing the commission. The commission was paid by the proprietary concern, M/s Chirag Corporation, of which the appellant is the proprietary. As explained by the AR of the appellant, out of seven persons to whom the commission was paid , only one person i.e. Darshana Pujara was covered by the provisions of section 40A(2)(b) of the Act as she is the sister of the appellant. The other six individuals were not at all relative of the appellant. They were relatives of some other persons namely, Rakesh Jain, Rajesh Jain and Kalpesh Shah who became the partners of the appellant in succeeding year as noted by the AO. It has been submitted by the AR of the appellant that they were not the partners of the appellant in the year under consideration. For disallowing any expenses u/s 40A(2)(b), the relationship as existing in the year under consideration has to be seen and not the relationship in any of the past years or future yeas. In the absence of any relationship between the appellant and those six persons (Ramila Jain, Rajni Jain, Darshana Jain, Sapna Shah, Ratan Jain and Kalpesh Shah) falling under the provisions of section 40A(2)(b). I am of the view that the commission paid to them cannot be disallowed under those provisions.”

The ld. DR argued before us that the commission was accounted for and shown payable at the end of the year to 7 parties to who were covered in the definition of relatives under the provisions of section 40A(2)(b) of the Act. The Dr argued that whole exercise was undertaken to suppress the profit of the assessee. This has been proved by the inquiry conducted by the Inspector who deputed by the AO who found and observed that all these recipients were related to each other and therefore the provisions of section 40A(2)(b) were clearly attracted. Moreover the commission was outstanding at the year end and was paid subsequently. Therefore, the AO has rightly made the addition and in view of the facts as narrated above, the ld. DR prayed that the order of ld. CIT(A) be set aside and that of AO be restored.

The ld. AR strongly objected to the arguments advanced by the ld.DR that all the recipients of commission were related parties whereas as a matter of fact only only one party viz Mrs.Darshna Champaklal Thakur was related and covered by provisions of section 40A(2)(b) and other parties were not at all related. The AR submitted that the AO wrongly presumed and acted on the basis of presumptions and conjectures that all 7 parties were related to the assessee. In fact in the next year when the assessee’s proprietary concern was converted into partnership firm , they become covered under the definition of related parties. The ld. AR also submitted that for invoking the provisions of section 40A(2)(b), the AO has to bring on record material to prove that the payments by way of commission were excessive and unreasonable vis a vis market rates for the similar services. However, no such exercise was done by the AO. Finally, the ld. AR relied on the order of ld. CIT(A) and prayed for upholding the same.

We have carefully considered the rival contentions and perused the material placed before us including the orders of authorities below on the subject. We find that the AO has disallowed the commission payment on the presumption and surmises that all the seven parties to whom the commission was shown to be payable in the accounts at the year end were related and therefore covered by the provisions of section 40A(2)(b) of the Act. We find that the ld. CIT(A) has recorded the findings of facts that only one person out of 7 persons namely Ms.Darshna Champaklal Thakur was covered under the provision of section 40A(2)(b) as she was sister of the appellant assessee and other six persons were not related to the assessee. He ld. CIT(A) further observed that no defects were found in the books of account and commission paid to Ms.Darshna Champaklal Thakur was at the rate of Rs.321 per unit vis a vis highest rate being Rs.343 per unit and accordingly, the ld. CIT(A) partly deleted the addition. We find that the ld. CIT(A) has considered all the facts and material on records and also analyzed the commission paid to Ms.Darshna Champaklal Thakur and other payees and thereby deleted the addition to the extent of Rs.44,47,827/- which in our opinion is very much reasonable and justified as duly supported with reasoning as to the excessive and unreasonableness of the payment of commission. We, therefore are in agreement with the findings and conclusion drawn by the ld.CIT(A) that the commission payment to the extent of Rs.44,47,827/- were genuine and deserved to be allowed. Accordingly, we dismiss the appeal of the revenue on this ground also.