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Income Tax Appellate Tribunal, MUMBAI BENCHES “F”, MUMBAI
Before: Shri Amit Shukla, & Shri Ashwani Taneja
आदेश / O R D E R Per Ashwani Taneja (Accountant Member): These appeals pertain to same assessee involving identical issues and therefore these were heard together and 2 Firdosh Moshir A. being disposed of by this common order for the sake of convenience.
2. During the course of hearing, arguments were made by Shri Neel Khandelwal, Authorised Representatives (AR) on behalf of the Assessee and by Shri A.K. Dhondial, Departmental Representative (DR) on behalf of the Revenue.
The solitary issue raise in both the appeals is with regard to disallowance of Rs.8,60,000/- in each year made by the AO on account of compensation paid to M/s. Mihir Agencies Pvt. Ltd. on account of breach of contract. 3.1. The brief facts and background of the issue as culled out from the orders of the lower authorities are that during the course of assessment proceedings it was noted by the AO that assessee had paid an amount of Rs.8,60,000/- under the head compensation accordingly. The AO asked the assessee to justify the payment of the above compensation paid. In response to the same the assessee stated that the said competition of Rs. 8,60,000/- has been paid to M/s Mihir Agencies Pvt. Ltd for non-fulfillment of a contract between the assessee and M/s Mihir Agencies Pvt. Ltd. On perusal of the contract between the above two parties, it was noticed by the AG that M/s Mihir Agencies Pvt. Ltd had entered into an agreement with the assessee to supply fitness training machineries worth Rs. 43,00,000/-. As per clause 6 of the said agreement, if the supplier i.e. assessee failed to supply the material within 10 months from the date of execution of the agreement i.e. 31/03/2008, then the supplier shall unconditionally pay the purchaser a sum
3 Firdosh Moshir A. of Rs. 17,20,000/-, being 40% of the total order value as penalty/liquidated damages for non supply of the equipment and breach of the terms of the agreement. The assessee contended that as he had failed to meet the deadline fixed by M/s Mihir Agencies Pvt. Ltd for supply of the material, he was liable for penalty of Rs. 17,20,000!- being 40% of Rs. 43,00,000!-. According to assessee, in order to avoid litigation, he paid an amount of Rs. 8,60,000/- during the period under consideration and balance amount was paid in the next year. In support of the above arguments the assessee supplied the copy of the agreement and the related correspondence between him and M/s Mihir Agencies Pvt. Ltd for payment of compensation. In order to verify the above facts, the AO issued letter to M/s Mihir Agencies Pvt. Ltd under section 133(6) and requested to supply the return of income filed by them for the A.Y. 2009-10 along with its annexures and the details of the agreement entered with the assessee. In response to the same, M/s Mihir Agencies Pvt. Ltd supplied the copy of agreement entered into between them and the assessee and no copy of return of income for the A. Y. 2009-10 was filed. It is stated by the AO that in the meantime, information was received from the Additional Director of Income Tax (investigation) Mumbai reporting that M/s Mihir Agencies Pvt. Ltd. is a company floated by Mr. Mukesh Chokshi, and a search and seizure operation at the premises of Mr. Mukesh Chokshi revealed that he had floated 36 companies which were engaged in the 4 Firdosh Moshir A. business of issuing the bogus bills to various entities on commission basis and M/s Mihir Agencies Pvt. Ltd was one of such companies of Mukesh Chokshi group.In the light of the above facts, the AO issued show cause notice to the assessee proposing to disallow the claim of compensation paid to MIs Mihir Agencies Pvt. Ltd amounting to Rs. 8,60,000/- being non-genuine. As per assessment order, in response to the show cause notice the assessee did not give any explanation except the copy of the agreement and copy of the bank statement showing the payment of Rs. 8,60,000/- to M/s Mihir Agencies Pvt. Ltd. Thus, in these facts it was concluded by the AO that the alleged payment of compensation by the assessee to M/s Mihir Agencies Pvt. Ltd was bogus and non genuine and therefore the AO disallowed an amount of Rs.8,60,000/- debited to the profit and loss account shown as payment of compensation and added back this amount to the income of the assessee for the year under consideration. 3.2. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A) and submitted that the disallowance made by the AO was contrary to law and facts. The relevant parts of the submissions made before the Ld. CIT(A) are reproduced hereunder for the sake of ready reference: "a) Admittedly the nature of Compensation paid to "Mihir" was for non-fulfillment of a contract between the Appellant and "Mihir". In consequence to the Agreement dated 1-6-2007 "Mihir" was interested to have modern, effective and ergonomic fitness training machines designed and manufactured for 5 Firdosh Moshir A. them for trading and distributing in the local market where your appellant agreed to supply such fitness training equipments and machines within the stipulated time. However, your Appellant could not supply the equipments within the stipulated time due to technical and financial difficulties faced by him in connection with the manufacture of fitness equipments. It is submitted that in the course of the assessment proceedings "Mihir" submitted a letter dated 21-10-- 2011 in pursuance to notice u/s. 133(6) and confirmed the transactions of Compensation. We submit herewith copy of letter dated 21-10-2011 of "Mihir" marked "Exhibit D". Your Appellant vide letter dated 18-11- 2011 also submitted the following evidences :- i) Copy of Debit Note. Copy Ledger Extract. ii) Copy of Bank Statement showing payment of Rs. iii) 8,60, 000/-. iv ) Copy of Agreement & correspondence Letters against compensation. We submit herewith copy of letter dated 18-11- 2011 marked "Exhibit E". It is settled law that deductions expressly mentioned in the Act are not exhaustive and the profit and gains which are liable to be taxed u/s.28 are what are understood to be such according to ordinary commercial principles. So the business losses are allowable even if there is no provision for the allowance under the Act, based on the ordinary commercial principle, because what are taxable are not notional receipts but real profits. An assessee in business may be liable for Compensation either for breach of law or breach of contract. If it were for breach of law, it is not allowable as a deduction especially after amendment to section 37(1), which specifically bars such deduction. But where the assessee is obliged to pay Compensation in the course of business, because of breach of contract on his part, such payment will not partake the character of penalty, even if it were so described,so that it cannot be 6 Firdosh Moshir A. disallowed. The law on this point is well-settled as decided in CIT V. Amalgamated Development Ltd. 65 ITR 395(SC). The Compensation paid 'y your Appellant was result of breach of contract only. Even where there is such breach merely to take advantage of the ruling market condition, the Compensation may have to be allowed as decided in South India Viscose Ltd. v. CIT 135 ITR 206'Mad). The Supreme Court itself in Prakash Cotton Mills P. Ltd. v. CT 201 ITR 684(SC) had held, that even where penalty Is levied, it may not always be a punitive one, so that where it is compensatory, it may well have to be allowed. The Punjab and Haryana High Court, therefore, allowed a claim for compensation for breach of contractual obligation in CIT v. S.A. Builders P.Ltd. 299 ITR 88(P&H) after review of the case law on the subject and following its own decision in CIT v. Murari Lal Ahuja and Sons 177 ITR 228(P&H) and CIT v. Indo Asian Switch- Gears P.Ltd. 222 ITR 772(P&H). Similar view was also taken by a Full Bench of Punjab & Haryana High Court in Famna Auto Industries v. CIT 299 ITR 92 (P&H) in respect of damages paid for breach of contract, because the assessee was unable to obtain import licence for import of goods agreed to be purchased. The Full Bench after discussion of the case law on the subject pointed out the difference between compensation for breach of contract and the penalty for infringement of law. The difference is so fundamental, that such decision of the Tribunal allowing the relief should not have come up to the High Court as it did in these two decisions before the High Court. b) The basic reason for making the addition in the hands of the Appellant is the so called information received from the Addl. Director of Income Tax (Inv), Unit-I, Mumbai in which it was observed that Shri Mukesh M. Chokshi, a Chartered Accountant by profession had floated 36 Companies at his office at Shree Sadashiv CHS, Santacruz, Mumbai and "Mihir" was one among those companies who was found to be issuing bogus sale bills to various entities and in turn it get commission. In the matter we submit that all
7 Firdosh Moshir A. these observations are without any evidence since nothing has been brought on record by the ld. AO in support of such illfounded allegations. The Id. AO failed to demonstrate in which mannar the payment of Compensation was bogus. The ld. AO failed to name any legitimate material from where a reasonable inference could be drawn except to rely on information of provided by the ADIT (Inv.). It is submitted that the Id. AC acted mechanically on the information claimed to have been possessed by the 4DIT (Inv.) without applying his own mind on the issue involved. The initial burden of finding such material, however slight, is on the AC and not on the assessee. In fact the observations of the Id. AC are based on suspicion and guess work and no nexus has been established by the Id. A.O. We further submit that "Mihir" is a witness of the Department and as such it was duty of the id. AC to produce him before the Appellant for cross examination to find out the true facts of the case. However, neither copy of any statement of "Mihir" or Shri Mukesh M. Choksi was provided to the Appellant nor any opportunity was allowed to the Appellant to cross examine "Mihir" or Shri Mukesh M. Choksi. It is an accepted principle of law that if an AO is relying on a statement and/or books of account of a third party, the assessee is entitled to receive copy of all material which have been collected at the back of an assessee along with statement which is being referred, relied upon and considered and to allow an opportunity to cross-examine such third parties. In the case of your Appellant no such materials were provided nor any opportunity was allowed to cross-examine "Mihir" or Shri Mukesh M. Chokshi. Principles of natural justice require that before charging a person with financial liability, he should be informed of the material on which the charge was going to be imposed and the assessee must be given an opportunity to rebut the effect of the material, if he can. It has to be emphasised that this is so, even when the material used is within the knowledge of the person proceeded against. It has further to be emphasised that the assessee must be told that it would be used against him, for unless he is so informed, he
8 Firdosh Moshir A. would have no opportunity of offering his explanation for meeting the inference that the authority seeks to draw fro; it. The opportunity contemplated under the law which required to be provided to the assessee must be a reasonable opportunity and not an idle formality [New Vishwakarma Engineering Works v. Commissioner of Trade Tax, (1998) 110 STC 412,416 (All)]. The supreme Court in the case of State of Kerala V/s. K. T. Shaduli Yusuff 39 Sales Fax Cases 478 observed that one of the rules which constitutes a part of the principles of natural justice is the rule of audi alteram partem which requires that no man should be condemned unheard. It is indeed a requirement of the duty to act fairly, which lies on all judicial authorities, and this duty has been extended also to the authorities holding administrative enquiries involving civil consequences or affecting rights of parties. This rule which requires an opportunity to be heard to be given to a person likely to be affected by a decision is also, like the genus of which it is specie not an inflexible rule having a fixed connotation. The Supreme Court in the case of Kishan Chand Chellaram v/s. CIT 125 ITR 713 held that the information to be used against the assessee must be provided to the assessee and an opportunity to confront should have been given to an assessee in any case the so called confessional statement of "Mihir" or Shri Mukesh M. Chokshi cannot be used against your Appellant in this connection, we draw kind attention of your goodself to the following judicial pronouncements:-
1. 1. CIT V/s. Eastern Commercial Exp. 210 ITR 103. 111 "If an assessing authority is relying on the testimony of a witness, the assessee is to be afforded an opportunity to cross examine him".
2. Mukund Singh V/s. Presiding Officer, Sales Tax Tribunal (1997) 107 STC 300, 304(Punj) "In cases where an assessing authority has collected some information from a third party, then the assessee is entitled to apply for cross-examination of such person for the purpose of eliciting the truth or for proving that the information furnished by such person is not genuine." 3.State of Kerala V/s. K.T. Shaduli Yusuf 39 STC 478(SC)
9 Firdosh Moshir A. "An assessment cannot be based on the entries in the books of account of a third party without giving the assessee an opportunity of cross-examining that party with reference to those books, if so required."
Chamanlal Dhinqra V/s. CIT 212 ITR(St.)365-366 (SC) "An assessment made on the basis of records of an outside party, without giving the assessee an opportunity to cross- examine the said outside party, has been held as violating the principles of natural justice and the same was not valid and was liable to be quashed." In the case of your Appellant neither the relevant materials nor any opportunity was allowed by the Id. AO and therefore the addition is liable to be annulled on that count alone. It is quite relevant to note that nothing has been brought on record that the money has exchanged hands on issue of cheque by your Appellant. C) On the facts of the case we submit that the Appellant has produced the following documents before the Id. AO:- Copy of Debit Note.
Copy Ledger Extract.
2. Copy of Bank Statement showing payment of Rs. 3. 8,60,000/-. Copy of Agreement & correspondence Letters against 4. compensation. Thus, your Appellant has prima fade established the genuineness of the Compensation paid by him. The initial onus of proving genuineness of Compensation has been established on the basis of the various legitimate documents produced before the Id. AO. It is quite relevant to note that after submitting the various documents the Department has not made any attempt to verify the correctness of the materials placed before the Id. AO. On the contra' the Id. AO straightway went further in making the addition by ignoring and brushing aside the vital evidences placed on record without establishing the same to be false. Your Appellant furnished sufficient materials before the id. AO and as such your Appellant has prima fade discharged his onus to prove the genuineness of the 10 Firdosh Moshir A. compensation paid to "Mihir". It is weli established proposition of the law that in making the assessment u/s.143(3), the Assessing Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than bare suspicion to support the assessment u/s. 143(3) (Dhakeshwari Cotton Mills Limited V/s. CIT 26 ITR, 775, 782 - SC). In other words, the assessment of any particular year must not be based on mere suspicion or bare guess work but on legitimate material from which reasonable inference of the income having been earned during the accounting year could be drawn and that initial burden of finding such material, however slight, is on the Income. Tax Authorities and not on the Appellant (Banshidhar Onkarmall V/s. CIT 23 ITR 353, 361-Orissa). An assessment based on mere conjecture, surmise or suspicion or irrelevant and inadmissible evidence and material is invalid and unsustainable in law. d) Even presuming (without admitting) "Mihir" might have carried out certain accommodatory entries with certain persons but it does not establish that it had provided accommodatory entries to your Appellant also. The claim of the Id. AO is based on enquiries in a different case and is in general without any specific nexus and coreation with the transactions of the Appellant. It is quite relevant to note that nothing has been brought on record by the Id. AO suggesting the transactions of the Appellant to be accomodatory nature. Hence there cannot be any addition on the basis of suspicion and guess work. It is submitted that the AO has to prove on the basis of evidence or material as available with him that the assessee had carried out these transactions as accomodation as claimed by him. Additions cannot be made without corroborating evidence is support thereof e) On the facts and in the circumstances, the impugned transactions of compensation cannot be treated as bogus as the same were carried out during normal course of business and are duly supported by sufficient materials and circumstantial evidences. The word "bogus" according to Oxford Dictionary mean 'sham",
11 Firdosh Moshir A. "fictitious", "spurious". In this case there was no such case, in fact the transactions are bonafide entered into regular course of business and therefore the same should not be treated as bogus transaction. In the context of determining whether a transaction is a bogus or illusory transaction or a devise, the AO must bring concrete materials on record. It is only if and when there are solid materials to hold taint of collusion or shamness or on genuineness that the Assessing Officer can disregard the terms of document and decide the matter on the basis of concrete materials. f) The ordinary rule is that apparent state of affairs is real unless contrary is proved and the burden of proving contrary lies on the person who asserts it. On the facts and in the circumstances of the case we submit that Id. AO has grossly failed to establish his finding with any positive and concrete evidence.
3.4. Ld. CIT(A) considers the submissions of the assessee but was not satisfied with the same and therefore upheld action of the AO with following observations: “The AO also carried out independent investigation by issuing letter u/s 133(6) to M/s Mihir Agencies Pvt. Ltd asking specifically to supply the copy of return of income filed by them along with the annexures to see as to whether the compensation received by them is shown in the return ' income and offered for taxation but no such copy of the re-urn was supplied by M/s Mihir Agencies Pvt. Ltd, which clearly indicate that it was an accommodation entry and not shown by them in the return of income filed for the year under consideration.
The above facts were further fortified by the information received from the Investigation wing, Mumbai that search and seizure at the pemises of Shri. Mukesh Chokshi revealed that he had floated 36 companies and he categorically admitted in the statement recorded u/s 132(4) that these companies were engaged in providing the bogus accommodation entries by issuing non-genuine bills etc to various entities. M/s Mihir Agencies Pvt. Ltd is one such company floated by Shri Mukesh Chokshi engaged 12 Firdosh Moshir A. in the business of providing the bogus accommodation entries. These facts were admitted by the Shri. Mukesh Chokshi, who was operating this company i.e. M/s Mihir Agencies Pvt. Ltd. When all these above mentioned facts are already on record and proved beyond doubt in the search conducted on Shri. Mukesh Chokshi as well as on M/s Mihir Agencies Pvt. Ltd., the AO need not prove anything beyond the facts mentioned above. The onus is on the appellant to prove that the compensation paid was genuine business expenditure, which he failed to prove. Therefore, the Assessing Officer rightly added back the amount to the income of the appellant as neither the appellant could prove that the payment was genuine nor the receiver of the payment M/s Mihir Agencies Pvt. Ltd. could prove that they had received the alleged payment and offered the same for taxation.
Merely making of the payment by cheque is not enough to prove the genuineness of the compensation paid. As there are two parties involve in the said transaction, it is equiry important to proved further that such compensation has been received by the other party, which the assessee again failed to prove. M/s. Mihir Agencies have not confirmed that they have received the amount of compensation and this income is part of their profit and loss account for the period under consideration.
In view of the facts stated above, I do not find any reason to interfere with the decision of the AO disallowing the compensation paid amounting to Rs. 8,60,000/- to M/s Mihir Agencies Pvt. Ltd. during the year under consideration. The decision of the AO is in order and hence the addition made is confirmed.
3.5. During the course of hearing before us it has been submitted by the Ld. Counsel of the assessee that though overwhelming evidences were submitted by the assessee before the lower authorities in support of its claim but without rejecting the same claim of the assessee has been rejected by disbelieving the transactions and that too without bringing any contrary material on record. It was also submitted that 13 Firdosh Moshir A. there were no basis to whole that transactions done by the assessee was part of accommodation entries business of one Shri Mukesh Choksi. No evidences in this regard were brought on record by the AO and entire order has been passed by both authorities merely on the basis of suspicion and after making surmises and conjecture.
3.6. Per contra, Ld. DR through supported the order of the lower authorities, but in response to our query to show any evidences which was brought on record by the lower authorities to controvert the evidences submitted by the assessee and to show any type of investment of the assessee in alleged accommodation business stated to be carried out aforesaid Shri Mukesh Choksi, Ld. DR was not able to bring anything or draw our attention or any such material which was brought on record by the lower authorities in this regard.
3.7. We have gone through the submissions made by both the sides as well as evidences brought on record by the assessee. Admitted facts on record are that the assessee was engaged in the business of providing fitness training equipments and fitness consultancy services apart from being sales agent for supply of fitness and training equipments and accessories. This fact is also on record that assessee had entered into an agreement with M/s. Mihir Agencies Pvt. Ltd. for supply of fitness and training equipments. One of the terms of the agreement was that in case of failure on the part of the assessee in supplying the credit material, the assessee would be liable to pay damages for the breach of contract for an 14 Firdosh Moshir A. aggregate amount of Rs.17,20,000/-. It was contended that since the assessee could not supply the desired equipments due to certain reasons, therefore, the said company raised debit note upon the assessee for recovery of damages. The assessee, keeping in view its business interest as well as social image preferred to avoid any litigation and chose to pay damages aggregate to Rs.17,20,000/- (i.e. sum of Rs.8,60,000/- in each in A.Ys. 2008-09 & 2009-10). Thus, as per assessee, the decision to pay out the damages was taken by the assessee keeping in view commercial expediency. It is also brought to our notice that entire transaction has been completed through banking channel. The AO has doubted these transactions on the basis of his suspicion arising on account of any information claimed to have been received by the AO from the investigation wing that aforesaid company i.e. M/s. Mihir Agencies Pvt. Ltd. was alleged involved in accommodation entries business. In our view the information so received could have certainly triggered further inquiries on the part of the AO but that information alone was not sufficient to convert the suspicion arising in the mind of the AO into a valid proof, especially when the assessee had submitted requisite evidences in support of his claim. But, unfortunately, the AO chose to complete the assessment on the basis of his suspicion only. Nothing was brought on record to show involvement of the assessee in the alleged accommodation business done by said Mr. Mukesh Choksi. Further, nothing was brought on record to negate the evidences submitted by the assessee. But, it is well settled
15 Firdosh Moshir A. fundamental principles of jurisprudence followed in our country that ‘suspicion howsoever strength cannot take place of evidence’. Under these circumstances, we find that action of lower authorities in disallowing the claim of the assessee merely on the basis of suspicion and without rejecting the evidences brought on record by the assessee and that too without bringing any adverse material on record is not sustainable on facts or law. Thus, disallowance made by the AO is directed to be deleted. The appeals of the assessee for both assessment years i.e. 2008-09 & 2009-10 are allowed on merits.
3.8. The other grounds taken by the assessee including ground with respect to reopening of the assessment are not being adjudicated as these have become academic in nature in view of the fact that assessee has been given relief on merits.
In the result, these appeals filed by the Assessee are partly allowed.
Order pronounced in the open court on 11th August, 2016.