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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
Before: SHRI D.KARUNAKARA RAO
Date of Hearing : 28.06.2016 Date of Pronouncement : 25.08.2016 O R D E R D.KARUNAKARA RAO, AM: 1. There are six appeals under consideration of this order involving three Assessment Years (AYs) namely AY-2007-08, 2008-09 and 2010-11 respectively. The issues involved on this appeals are the same.
Considering the nexus of the issues and commonality of the arguments of both the parties, we clubbed all the six appeal and are being adjudicated in this composite order. For the sake of reference, we extract the Grounds raised by the assessee and the Revenue in the appeals for the AY 2007-08. The same read as under:
“On the facts and in the circumstances of the case and in the law, the Ld. CIT(A) erred in deleting the additions of Rs. 49,97,154/- towards interest expenditure attributable to bogus purchases without appreciating the fact that interest paid on loans taken, which is attributable to these bogus purchases, has to be reduced from CWIP”.
The Grounds raised by the assessee are as under:
“On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the additions made by the AO of Rs. 18,61,137/- u/s. 69C on account of commission paid. The appellant prays that the same may kindly be deleted”.
The background facts useful for all this group of appeals include that the assessee is engaged in the business of Development of Commercial/Retail and Entertainment Complex. There was search action u/s. 132 of the Act in February 2008 and therefore, there was search assessments in this case. Subsequently, there was also survey action u/s. 133A of the Act on 05/06.07.2012 on the assessee, M/s Phoenix Mills Ltd. and its group companies. During the survey action, the survey team found and impounded certain loose papers and on bills involving unsubstantiated/bogus purchases. The survey team came to the conclusion that the assessee is engaged in inflating the purchases and deflating the profits. The survey team recorded the sworn statements of Shri Haresh Morajkar, the Director of the assessee-company, Shri Pradumna Kanodia, Director Finance of M/s Phoenix Mills Ltd. and Shri Atul Ruia, MD of the M/s Phoenix Mills Ltd. In these proceedings, the assessee offered certain purchases as unverifiable one involving AYs 2007-08, 2008-09 and 2010-11. The quantum of such bogus purchases are Rs. 9,30,56,867/-, Rs. 20,94,07,870/- and Rs. 12,31,14,311/- for the AYs 2007-08, 2008-09 and 2010-11 respectively. In the statements, the assessee offered to reduce the Capital Work in Progress (CWIP) by the above amounts in the year of completion of the project i.e. AY 2012-13.
The assessments for all these three AYs were re-opened by issuing notice u/s. 147 of the Act. The reasons were recorded before issuing the said notices and the details are given in the orders of the Revenue. However, during the re-assessment proceedings, the AO notices that the CWIP was not adjusted to the extent of unverifiable (bogus purchases). Accordingly, after due verification, enquiries into the accounts, the AO held as under:
“7.3 The submission of the assessee has been perused. At the time of survey, the assessee had suo-moto withdrawn purchases, with specified parties amounting to Rs. 9,30,56,866/- pertaining to A.Y. 2007-08, which were not reconciled with the proper supporting documents. The assessee was given the opportunity to produce those parties during the assessment proceedings. But assessee could not produce the same. Hence, purchases amounting to Rs. 9,30,56,866/- is reduced from the CWIP”.
Further on finding that the assessee debited huge interest expenditure to the CWIP Account amounting to Rs. 16,36,91,138/- On observing that part of this interest is relatable to the loans utilized for the above-said bogus/unverifiable purchases, the AO recomputed the disallowable interest relatable to the said purchases withdrawn by the assessee and determined such disallowance for all the three years under consideration. The AO proposed for disallowance of Rs. 49,97,154/- for the AY 2007-08, Rs. 1,13,23,965/- for the AY 2008-09 and Rs. 89,87,345/- for AY 2010-11 respectively. It is the finding of the AO that the above disallowance should be reduced from the CWIP. Considering the fact, the above two additions i.e. purchases and interest claims relates to the adjustments to the CWIP Account, the AO did not make any formal addition in the assessments.
Further, the AO inferred that the assessee would have incurred commission expenditure @ 2% of the bogus/unverifiable purchases for all the three years under consideration and not shown in the books of accounts. On finding that the such commission expenditure were not recorded in the books of accounts in any of the years under consideration, the AO proposed to make the addition by way of estimation @ 2% of the bogus purchases. On this account, the AO made the addition u/s. 69C of the Act amounting to Rs. 18,61,137/-, Rs. 41,88,157/- and Rs. 24,62,286/- for the AY 2007-08, 2008-09 and 2010- 11 respectively. So far as, the additions on account of bogus purchases, which was already offered by the assessee in the survey proceedings, there is no dispute from the assessee side before the CIT(A) or before us. Otherwise, aggrieved with the AO’s decision in adjusting the CWIP on account of interest expenditure and also in connection with the addition on account of commission expenditure u/s. 69C of the Act, the assessee is in appeal for all the three AYs before the CIT(A).
In connection with the issue relating to interest disallowance, it is the submission of the assessee that the assessee has adequate interest free funds in the system for accounting the investments in such bogus purchases and relied heavily on the binding jurisdictional High Court’s judgment in the case of Reliance Utilities & Power Ltd. Relying on the same, it is the submission of the assessee that assessee has common funds for both the interest free/O.D. loans, then a presumption would arise that investments into such bogus purchases would be out of interest free funds available with the company. On considering the above submissions of the assessee, the CIT(A) granted the relief as per the discussion given in para-8.1 of the order of CIT(A).
Regarding the addition on account of commission expenditure u/s. 69C of the Act, assessee submitted that without prejudice to the offere in the 133A proceedings, the purchases in question are genuine and the offer for reduction of CWIP was made only to avoid protracted litigation and to buy the peace with the department. As such Revenue has no evidence to substantiate that the commission expenditure was incurred by the assessee and the commission payment was made @ 2% of the purchases bill value. The assessee also was critical of AO’s decision in invoking the provisions of section 69C of the Act. He also submitted that by making u/s 69C of the Act, the AO entered into Maze double addition in respect of commission expenses.
On considering the said submissions of the assessee, the CIT(A) dismissed the assessee’s argument that the commission payment is embedded in the value mentioned in the bogus invoices and CIT(A) is of the opinion that the payment of commission is necessary event in buying bogus invoices from the suppliers of the bills which is a part of business of providing accommodation entries. Eventually, the CIT(A) dismissed the related Grounds of the assessee by mentioning the following:
“11.0 The facts of the case, the grounds of appeal, the stand taken by the AO in the assessment order and the written submissions filed by the appellant have been carefully considered. It is a established fact that the appellant obtained bogus bills from accommodation entry providers and as stated by the AO such services do not come free of cost and appellant ought to have incurred some expenses for the same and therefore disallowance of 2% commission on such bogus purchases is reasonable. The appellant's submission that the commission payment is imbedded in the bogus invoice has not been proved. In fact the addition has been made u/s 69C of the Act holding that the source of such payment is unexplained. 11.1 Further, with reference to the appellant’s submission that there is no explanation in the assessment order to the fact that to whom the commission was paid and how was it paid, it is hereby clarified that it is but obvious that such commission was paid to those entry providers from whom the bogus bills have been obtained. In the assessment order these parties are identified which is also reproduced in this order vide para 6 above. The appellant also admitted the name of the parties as well as the figures in the written submissions filed. Therefore the appellant now feigning ignorance about the names of the parties, to whom the commission was paid, is not acceptable. Moreover such payments are also made only by cash, and therefore the appellants submission that in the assessment order there is no explanation as to how the commission was paid, is also not acceptable. Further the appellant also contends that the addition cannot be made u/s 69C of the Act. In my view, the addition is correctly made u/s 69C of the Act because the source of such payments have not been explained. In view of the above, the addition on account of commission payment of Rs.18,61,137/- for AY 2007-08 and Rs. 41,88,157/- for AY 2008- 09 and Rs. 24,62,286/- for AY. 2010-11 are hereby confirmed. The quantum confirmed for the AY. 2008-09 is subject to the discussion in para 14 below if there is a mistake in the figures stated.”
9. Aggrieved with the relief granted by the CIT(A) in respect of proportionate interest disallowance/adjustment to the CWIP Account, the Revenue is in appeal with the solitary ground raised in all the three AYs.
Further, aggrieved with the confirmation of the addition made u/s. 69C of the Act in connection with the commission expenditure in all the three AYs, the assessee has raised the solitary ground in their three appeals for the three AYs.
To start with, we shall now take up the Ground raised by the Revenue in their appeals.
Ld. DR for the Revenue namely Shri Ajay argued and red out from the order of the AO relating to the addition on account of interest disallowances. He brought our attention to para-8.3 and reasoned that when the bogus purchases had to be reduced from the CWIP Account.
Similar adjustment is required qua the interest expenditure attributable to the invested on said bogus purchases/offered by the assessee in all three years. As such, the assessee did not respond to the show-cause- notice issued by the AO. As per the Ld. DR, merely relying on the judgment in the case of Reliance Utilities and Power Ltd. (Supra), and without giving the details on the availability of funds at the relevant point of time and date, the assessee cannot be given any relief. Therefore, Ld. DR submitted that the CIT(A) has erred in not passing a speaking order on this issue and also erred in giving relief merely relying on the said judgment. The contents of para 8.1 is very cryptic and relied heavily on the cited judgment which was not delivered in the context of bogus purchases. It was the delivered in the context of loans. Ld. CIT(DR) is critical of the analogy of facts of that case to the one under consideration. Ld. DR for Revenue is of the view that the matter should be remanded to the file of AO with the direction to the assessee to substantiate the availability of excess funds on one side and utilization of the interest free funds towards the investment/utilization in the bogus purchases.
On the other hand, Ld. Counsel for assessee relied heavily in the order of the CIT(A), the submissions made before the Revenue Authorities and the binding judgment in the case of Reliance Utilities and Power Ltd. (Supra).
We have heard both the parties on this issue, we find that the contents of para 8.1 of the CIT(A) lacks discussion on the relevant facts.
His decision granting relief to the assessee on this interest issue is centred around the cited judgment. In our view, the CIT(A) is not justified in granting relief. CIT(A) did not appreciate the fact that the assessee surrendered all the bogus purchases for all three years, which implies that the purchases are mere case of buying the accommodation entries for Commission Payment and pocketing the cash after necessary deductions if any. In the case, we cannot understand how the judgment in the case of Reliance Utilities & Power Ltd. (supra) is relevant to the facts of the case. By this relief by CIT(A), in our opinion, the pocketing of cash by the assessee for non-business activities in effect, is approved by the CIT(A). The same is not approved by us. Alternatively, the confusions are differed, if the assessee demonstrates that the said cash, instead of pocketing, if is expended in the purchases from the gray market without bills. But this is the case, the assessee surrendered/offered before the survey team and also before the AO and there is not change in that stand of the assessee till now. It means that the assessee deemed these such purchases as accommodation entries-centric purchases implying the pocketing of cash purchases. Assessee is taken the stand in favour of CWIP account at the time of allocating expenses at the end of completion of project. There is no clarity, if the said adjustment is done in the years under consideration. If the purchases under consideration is bogus and generated out of accommodation entries for purpose of reducing the profits, in real sense, there is flow of funds into the said purchase, the cash is generated. To that extent, profits of the assessee is taken out of the system. But the point is that the CIT(A) failed to pass proper/speaking order considering all the above angles relating to the accommodation entries as per the provision of section 250(6) of the Act.
We cannot approve the relief granted by him and the manner mentioned in para 8.1 of the order of the CIT(A). Revenue has to decide and deliberate on the facts relating to the impugned purchased, if they constitutes a case of bogus or genuine or accommodation entries or pocketing of cash by the persons of vested interests.
In our view, we need to remand this issue to the file of the CIT(A) for fresh adjudication after considering the issues/aspects discussed above. CIT(A) shall grant reasonable opportunity of being heard to the assessee in the remand proceedings. Accordingly, the relevant Grounds of the Revenue’s appeal is allowed for statistical purpose.
In the result, all the appeals of the Revenue are allowed for statistical purpose.
We shall now take up the assessee’s appeal that revolves around confirming of addition u/s 69C of the Act on account of commission @ 2% paid to the suppliers of the accommodation entries/bogus bills.
Before us, Ld. Counsel for the assessee submitted that the unverifiable bogus purchases were already offered during the survey action u/s. 133A of the Act and it is the stand of the assessee that the CWIP will be adjusted at the time of allocation at the end of completion of the project.
Further, without prejudice to the above, it is the stand of the assessee that the said purchases are genuine and therefore, the payment of commission @ 2% of the purchase value to the suppliers of the bogus purchase bills, does not arise. It is the submission of the assessee that the said commission was never incurred/paid by the assessee and the Revenue does not have any incriminating material to substantiate the said allegation that the sources for the commission payment was not explained. Ld. Counsel is also of the view that the provisions of section 69C of the Act are wrongly invoked since the transactions of payment of commission never had any entry in the books of accounts of the assessee and it is the creation of the AO based on surmises. Criticizing the conclusions of the CIT(A) drawn in para 11 and 11.1 of the order of the CIT(A). Ld. AR for the assessee submitted that order of CIT(A) is deficient on the facts regarding the relevant entries in the books of accounts. The CIT(A) did not understand the provisions of section 69C of the Act properly and ignored the following expression, ‘assesse has incurred any expenditure and he offers no explanation about the sources of such expenditure are part thereof….’. There is a need for existence of transaction relating to incurring of any expenditure which is not there in the instant case. AO has no evidence of any kind to suggest such expenditure was ever incurred at any point of time.
Per contra, ld. DR for the Revenue explained that the events relating to purchase of bogus bills by way of accommodation entries and mentioned that the businessmen of such business do charges an amount by way of commission. It is the source of income for such business persons. So long as the bogus purchases by way of accommodation entries is the fact in this case, the supplier of the such bills earn in case, the absence of evidence does not rule out the fact of payment of commission. Applying a wrong section 69C in another issue, which is not raised before us. Infact, as per the DR for Revenue, the onus is on the assessee to demonstrate that such commission payment was never made to the suppliers of such bogus bills. Further, Ld. DR mentioned that it is the principle of probability that the payment of commission by the assessee was real and therefore, order of the CIT(A) on this issue is fair and reasonable and the same is required to be confirmed.
We heard both the parties, on hearing both the parties on this issue of Commission Payment @ 2%, we find that there is need for finding of fact on if the purchase bills/invoices are bogus purchases or not. It is the case of the assessee that they are genuine purchases and without prejudice, he offered the same as unverifiable purchases in order to avoid the protracted litigation. If they constitute genuine purchases, as argued by the assessee’s counsel, there is no need for purchase of accommodation entries against Commission Payment. There is need for exploring the facts from the market, if the payment of cash for Commission Payment is involved over and above the amount given in the bogus invoices. Alternatively, i.e. if they are bogus purchases, assessee is under commercial need to make payment for purchase of the said bogus bills from the suppliers and against the Payment of Commission. Without prejudice; it is case of the Ld. AR that the said amount appearing on the bogus bill constitutes entire amount including the Commission Payment. Therefore, we are of the view that the AO needs to bring on record the facts gathered by the survey team on this issue and record the questions/answers if any explaining the issue of Commission Payment made to the suppliers.
AO shall note that unless relevant facts are brought on the records after garnering the statements of the persons cited above, materials gathered in survey action to suggest that assessee incurred any expenditure, as specified in the provision of section 69C validly invoked by the AO, AO is not justified in invoking these provisions, Therefore, AO should also deal with the argument that the amount mentioned in bogus purchases/invoice includes the Commission Payment too.
With the above, we remand all the appeals of the assessee to the file of the AO. AO shall re-adjudicate after granting reasonable opportunity of being heard to the assessee.
In the result, all the three appeals of the assessee are allowed for statistical purpose.
Order pronounced in the open court on this 25th day of August, 2016.