ACIT 32(1), MUMBAI vs. AMRUTLAL P. SHAH, MUMBAI

This is an appeal filed by the revenue and is directed against the order of the Ld. CIT(A)-35, Mumbai dated 24.9.2014 pertaining to A.Y.2010-11

The sole issue raised in the grounds of appeal is against the deletion of addition of Rs.56,77,987/- by the ld.CIT(A) as made by the AO under section 69C of the Income Tax Act, 1961 (hereinafter referred to the Act) on account of unexplained expenditure as the assessee has failed to discharge the onus cast upon him to prove the genuineness of transaction and the ld. CIT(A) further erred in relying on the decision in the case of CIT V/s Nikunj

Facts of the case are that the assessee filed his return of income on 23.9.2010 declaring total income at Rs.1,50,59,350/- which was processed u/s 143(1) of the Act. Thereafter, scrutiny proceedings were imitated against the assessee and statutory notices under section 143(2) and 142(1) were issued and served upon the assessee. During the course of assessment proceedings, the AO found that the assessee has made purchases from certain suppliers who were declared suspicious dealers by the Sales Tax Department, Government of Maharashtra as they were involved in accommodation entries and hawala transactions. The AO issued show cause notice to the assessee as to why the purchases from these five parties as stated in para 4.1 of the Assessment order from whom the assessee purchased goods amounting to Rs.56,77,987/- should not be treated as unexplained expenditure. The AO also issued notice u/s 133(6) to these parties which were duly served but no replies were received. The assessee replied and submitted before the AO that he was BMC road contractor and purchased material from these parties in the ordinary course of business which was duly recorded in the stock register and also consumed in the construction of road work which was also shown in stock register. It was also submitted by the assessee that the payment of the material purchased from those parties were made through banking channel and therefore, it would not be fair to treat the purchase as unexplained expenditure. However, the AO not agreeing with the submissions added the said purchases Rs.56,77,987/- as unexplained expenditure under section 69C of the Act by framing assessment u/s 143(3) vide order dated 25.2.2013 by assessing the income at Rs.2,07,37,337/-. Aggrieved by the order o f AO, the assessee filed an appeal before the ld.CIT(A) who allowed the appeal of the assessee by observing and holding as under : “5. I have gone-through the findings made by the AO which are largely based on the list up by the Sales Tax Department of the suspicious dealers and the returned unserved notices u/s 133(6) of the IT Act, 1961. On the other, hand the, appellant has submitted very detailed documents maintained for the inventory management and the consumption registers none of these have been doubted by the AO at any stage. The profitability ratios of, the appellant for four years has also been studied and no reason to-doubt-the same has been noticed by the AO. It is relevant to note that the Hon’ble Mumbai ITAT in a recent decision in the case of DCIT s Rajeev G Kalathil decided the matter in favour of the appellant in light of the, facts that where the appellant had all the factors to substantiate his onus of having actual materials and used them and also had the evidence making the payments then it could not be said that there was sufficient evidence to hold the transaction as bogus. Part of the decision is being reproduced for kind reference : “2.4.We have heard the rival submissions and perused the material before us. We find that AO had made the addition as one of the supplier was declared a hawala dealer by the VAT Department. We agree that it was a good starting point for making further investigation and take it to logical end. But, he left the job at initial point itself. Suspicion of highest degree cannot take place of evidence. He could have called for the details of the bank accounts of the suppliers to find out as whether there was any immediate cash withdrawal from their account. We find that no such exercise was done. Transportation of good to the site is one of the deciding factor to be considered for resolving the issue. The FAA has given a finding of fact that part of the goods received by the assessee was forming part of closing stock. As far as the case of Western Extrusion Industries (supra) is concerned, supplier and there was no evidence of movement of goods. But, in the case before us, there is nothing, in the order of the AO, about the cash trail. Secondly, proof of movement of goods is not in doubt. Therefore, considering the peculiar facts of the FAA does not suffer from any legal infirmity and there are not sufficient evidence on file to endorse the view taken by the AO. So, confirming the order of the FAA, we decide ground no.1 against the AO. The decision of the Hon’ble Bombay High Court in the case of Nikunj Exemp Enterprises referred to supra in the submissions of the appellant also supports the contention of the appellant. Therefore, in the light of the above facts and decisions of jurisdictional High Courts, the addition made on this account is hereby deleted”

The ld. DR submitted before us that the ld. CIT(A) has wrongly deleted the addition made by the AO. The ld. DR also submitted that the five suppliers were declared as suspicious and hawala dealers by the Sales Tax Department, Government of Maharashtra. The AO could not verify the genuineness of purchases as the suppliers were not found at the addresses given by the assessee and therefore the actual deliveries received in the stock register and payment by banking channel has no meaning or relevance and therefore the AO has rightly disallowed and added the said purchases as unexplained purchase under section 60C of the Act. Finally, the ld. DR prayed that the order of the ld. CIT(A) be set aside and that the AO be restored .

On the other hand, the ld. AR submitted before us that the AO had wrongly invoked the provisions of section 69C and accordingly made the addition for unexplained expenditure under section 69C of the Act. Whereas assessee and the source of payment was not in dispute. The second limb of argument was that the material was actually received and purchased from these parties and were duly entered into the stock register which was maintained by the assessee and also the entries of material consumed in the construction work of the BMC road were also recorded, the payments were also remitted by account payee cheques to the suppliers. The mere fact that those suppliers were declared as suspicious dealers by the Government of Maharashtra in no way proved that the purchases made by the assessee were bogus or non genuine. The ld. AR heavily relied on the order of the ld. CIT(A) and prayed for upholding the same.

We have carefully considered the submissions of the parties, perused the material placed before us including the orders of authorities below. We are in agreement with the ld.AR that the provisions of section 69C of the Acthas been invoked wrongly as the provisions of section 69C of the Act can only be invoked where the sources of expenditures is not proved. For the sake of convenience, section 69C is reproduced below: “69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year : expenditure was not explained and otherwise proved. In the present case before us, the source of expenditure/purchases were from the banks duly disclosed by the assessee in the books of accounts and were accepted by the AO. Whereas the dispute was with regard to purchases from the suspicious and hawala dealers. We, therefore, are of the opinion that the addition as made by the AO cannot be sustained only on this application of the provision of section 69C of the Act which in our opinion were wrongly invoked by the AO. In view of the above facts we are inclined not to interfere in the order of CIT(A) who has decided the issue on merit after taking into account various aspects of the matter. Accordingly, we upheld the order of the ld. CIT(A) by dismissing the appeal of the revenue. Accordingly, we dismiss the appeal of the revenue.