DCIT C.C. 3(2) , MUMBAI V. M/S. VIRAJ PROFILES LTD, MUMBAI

ITA 2213/MUM/2021

AI Insights

The case involves cross appeals by Viraj Profiles Limited and the Deputy Commissioner of Income Tax (DCIT), Circle 3(2), Mumbai, concerning the assessment years 2014-15 and 2015-16. The primary issues in the appeals included the addition made on account of alleged bogus purchases, disallowance of expenses under section 37 of the Income Tax Act, and the transfer pricing adjustment related to the commission on corporate guarantees provided to associated enterprises. The Tribunal examined the evidences and arguments presented by both parties, including the findings of the CIT(A) and the statements and affidavits of various individuals involved. The Tribunal's decision was influenced by the manufacturing loss and gross profit rate declared by the assessee, which were found to be within acceptable limits compared to industry standards.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 136425 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: J
• Next Hearing Date: 15-03-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 29-11-2021
• Other Referred Cases: Suman Gupta vs. ACIT, Geolife Organis, Timex Art D\u00e9cor P Ltd, Rishabhdev Technocable Ltd, Everst Canto Cylinders Ltd
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Bogus purchase; Gross profit estimation; Transfer pricing; Business expenditure; Search and seizure; International transaction; Retraction; TDS; Set aside
• Section: 131; 37; 143(3); 153A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI ‘J’ BENCH, MUMBAI. Before Shri B.R. Baskaran (AM) & Shri Pavan Kumar Gadale (JM) I.T.A. No. 1774/Mum/2021 (A.Y. 2014-15) I.T.A. No. 1775/Mum/2021 (A.Y. 2015-16) Viraj Profiles Limited Ground and First Floor Viraj Towers, Near Western Express Highway Metro Station, Andheri East Mumbai-400 069. Vs. DCIT, Circle 3(2) Room No. 1923 19 th Floor Air India Building Nariman Point Mumbai-400 021. (Appellant) (Respondent) I.T.A. No. 2213/Mum/2021 (A.Y. 2014-15) I.T.A. No. 2214/Mum/2021 (A.Y. 2015-16) DCIT, Circle 3(2) Room No. 1923 19 th Floor Air India Building Nariman Point Mumbai-400 021. Vs. Viraj Profiles Limited Ground and First Floor Viraj Towers, Near Western Express Highway Metro Station, Andheri East Mumbai-400 069. (Appellant) (Respondent) PAN : AABCV1740N Assessee by Shri Pratik Jain Department by Shri Manoj Kumar Date of Hearing 16.03.2023 Date of Pronouncement 26.04.2023 O R D E R PER BENCH :- These cross appeals filed by both the parties relate to AY 2012-13 to 2013-14. All the appeals are directed against the orders passed by Ld CIT(A)- 51, Mumbai. All these appeals were heard together and are being disposed of by this common order, for the sake of convenience. 2. The facts relating to the case are discussed in brief. The assessee is engaged in the business of manufacture and sale of stainless steel products. Viraj Profiles Limited 2 A search and seizure action was carried in the hands of the assessee and its associates on 13.7.2017. Consequent thereto, the assessments of the year under consideration were completed by the AO u/s 153A r.w.s 143(3) of the Act. 2.1. In the appellate proceedings, the Ld CIT(A) allowed the appeals of the assessee in part. Hence both the parties have filed these appeals before the Tribunal. 3.0 We shall now take up the appeals filed by both the parties for AY 2014- 15 and 2015-16. Certain common issues are urged in these appeals. Following issues are urged in the appeals of the assessee:- (a) Partial confirmation of addition relating to alleged bogus purchases. (b) Disallowance of expenses u/s 37 of the Act. (c) Partial confirmation of addition relating to Corporate Guarantee commission. 4. The revenue is in appeal on the relief granted by Ld CIT(A) in respect of additions relating to alleged bogus purchases and Corporate Guarantee Commission in both the years. 5. The first common issue in both these years relates to the addition made on account of alleged bogus purchases. Since the Ld CIT(A) has given partial relief, both the parties are in appeal before us on this issue. 5.1 During the course of search proceedings, it was noticed that the assessee has purchased goods from M/s Samnik General Trading Company, M/s GSP International, M/s Ankit International, M/s SPA Heights P Ltd, M/s Godwin Metal Trade P Ltd, M/s Saj Trading Company, M/s Rashmi Steels, M/s Kshemkari Steel and M/s Manohar Manak Alloys P Ltd. The revenue carried out enquiries from these parties either u/s 131 of the Act or by taking survey and search operations u/s 133A/132 of the Act. From the result of Viraj Profiles Limited 3 these investigations, the revenue came to the conclusion that these entities have provided only accommodation bills without actually supplying materials. In this regard, the AO placed reliance on the statements given by some of the suppliers and also statement given by the employees of the assessee concern. Accordingly, the AO disallowed entire purchases made from these parties. The details of disallowances made by the AO in various years are given below:- ASST. YEAR PURCHASE AMOUNT 2014-15 74,48,00,895 2015-16 36,85,43,350 5.2 In the appellate proceedings, the Ld CIT(A) restricted the addition to 6% of the value of above said purchases and hence both the parties are in appeal before us on this issue. While the revenue is objecting to the reduction, the assessee is aggrieved with the decision of Ld CIT(A) in restricting the addition to 6% of value of alleged bogus purchases. 5.3 The Ld A.R submitted that the AO has disallowed the purchases presuming that they are bogus. In this regard, he has placed reliance on the statements given by some of the suppliers, financial profiles of suppliers, use of outstation vehicles for transportation of goods, survey findings of two parties. He also relied upon the statement given by an employee named Shri P Nandakumar, who has stated that the various suppliers have given only bills to the assessee. However, the AO did not give credence to the enquiry conducted by DGCEI on identical allegations of providing accommodation bills and the examination by him with some of the suppliers. The DGCEI has given a finding that the assessee has actually procured the materials. The ld A.R further submitted that the AO himself has observed that the assessee could have procured materials from other sources and have got accommodation bills from these suppliers. This observation of the AO shows that the receipt of materials by the assessee was not doubted by him. Viraj Profiles Limited 4 5.4 The Ld A.R further submitted the Ld CIT(A) held that the entire purchases could be disallowed only when the materials have not been received by the assessee. Accordingly the Ld CIT(A) has held that, if the assessee could prove the receipt of materials, then only the incremental gross profit should be added. The Ld CIT(A) further observed that the manufacturing loss disclosed by the assessee would prove whether the materials have been received or not, i..e, if the materials have not been actually received, the assessee would be showing more manufacturing loss in order to tally the quantity details. He submitted that the Ld CIT(A) has given a finding that the manufacturing loss declared by the assessee is within the prescribed limit of Standard Input Output Norms (SION) published by the DGFT, Government of India. The Ld CIT(A) also relied upon the findings of DGCEI, wherein it was found during the search conducted by them that the assessee has received materials from other parties, while the bills were issued by different parties. Under these set of facts, the Ld CIT(A) restricted the addition to 6% of the value of purchases in all the above said years. 5.5 The Ld A.R further submitted that the assessee has furnished all the details to prove the genuineness of purchases. He further submitted that the statement given by the employee was general in nature and not with regard to any specific bills and his statement has been denied by the CMD Shri Neeraj Raja Kochhar. He further submitted that the AO has also relied upon a statement given by a person named Shri Chandra Shekar Nair, which has later been retracted by him. Hence his statement cannot be relied upon. In any case, the above said person was not director in any of the suppliers concerns when he made the statement. He further submitted that the search team could not find any material to show that the cheque payments made towards alleged bogus purchases have been flowed back to the assessee in the form of cash. He further submitted that the Excise department, which examines the production details of the assessee, did not find fault with the books of accounts of the assessee. Accordingly, the Ld A.R contended that Viraj Profiles Limited 5 the entire disallowance made by the AO should have been deleted by the Ld CIT(A). 5.6 In the alternative, the Ld A.R submitted that the AO himself has observed that the assessee has received materials from one source and obtained bills from others. In this kind of situation, as observed by Ld CIT(A), only incremental profit should be added. He submitted that the incremental profit rate of 6% estimated by Ld CIT(A) is very much on the higher side. He submitted that the assessee has shown gross profit rate of 17% during these years and the said profit rate has been accepted by the Transfer pricing officer under Transactional Net Margin Method, since the said profit rate is at par with the rate of profit declared by the comparable companies. He submitted that, in the following cases, the Tribunal has restricted the addition to 2% of the value of purchases:- (a) Suman Gupta vs. ACIT (ITA No.4774/Mum/2014 dated 23.8.2017). In this case, this assessee was engaged in Steel business. (b) Geolife Organis (ITA No.3699/Mum/2016 dated 05-05-2017). In this case, this assessee was engaged in metal business. (c) Timex Art Décor P Ltd (ITA No.7293 & 7294/Mum/2017 dated 18- 10-2019). Accordingly, in the alternative, the assessee pleaded that the addition may be restricted to 2% of the value of purchases. 5.7 The Ld D.R, on the contrary, supported the orders passed by the assessing officer. He submitted that the Ld CIT(A) has relied upon the report given by DGCEI regarding consumption of materials, but did not examine the quantity details. He further submitted that the assessee has claimed that lorries registered in other states have been used for transportation of materials, which is not permitted. Hence transportation of materials has not been proved. The assessee has not furnished the details of octroi payments. Accordingly, he submitted that the purchases made from the accommodation bill providers cannot be said to have been proved by the assessee. Viraj Profiles Limited 6 Accordingly, he submitted that the AO has rightly disallowed entire amount of purchases and the same should be retained and the orders passed by Ld CIT(A) on this issue should be reversed. 5.8 In the rejoinder, the Ld A.R placed his reliance on his written submissions. 5.9 We have heard rival contentions on this issue and perused the record. The assessee is engaged in the business of manufacture and sale of Stainless Steel Products. In the manufacturing of products, the materials purchased by it is melted and converted into the finished products. In the case of trading of goods, the sales quantity could be reconciled with the purchase quantity. However, in the case of manufacturing of goods and when the raw materials is converted into other type of finished goods, the receipt of material can be judged on comparing the manufacturing loss. The gross profit rate declared by the assessee vis-à-vis other comparable companies is another measure to judge the genuineness of purchases. If an assessee has introduced bogus bills without actually receiving the materials, then the natural tendency is to show higher manufacturing loss in order to adjust the quantity details and the same would result in showing lower gross profit rate. 5.10 The submissions made by the assessee with regard to the observations made by the AO are summarized below:- “a. The assessee has submitted the entire documentary evidences such invoices, purchase order, Goods receipt note, stock register showing receipt, bank statement, etc. to establish the genuineness of the purchases and no doubt raised by the AO. b. The acceptance of employee of Mr. P Nandkumar is general in nature without any reference to any material found during the search and the same was duly denied by the CMD Mr. Neeraj Raja Kocchar. c. Reliance on statement of one Mr. Chandra Shekhar Nair who allegedly was carrying out business of certain suppliers is incorrect since he was not a director in any of the said suppliers at the time of search and he has duly retracted the same before AO. Similarly, other Viraj Profiles Limited 7 suppliers have nowhere given clear statement that they are engaged in providing accommodation entry. d. No evidence of any cash payments/receipts were found at the premises of the suppliers as well as assessee. e. Allegation of use of outside state vehicle may be violation, of Motor Vehicle Rules; however, same has no bearing on income tax. f. Further, the suppliers were called for cross examination and all have confirmed to have supplied material before AO- para 12 of assessment order. g. Second layer investigation into supplier of supplier is not futile since it constitute hardly negligible part of total purchases made by the assessee's supplier. h. Material accepted from above parties accepted by excise from 2013 till 2018. i. Thus, the allegation of AO that parties are not genuine is incorrect. j. Further, it is submitted that the entire raw material has been actually received by the assessee and the same has been consumed by the assessee for manufacturing purpose. Details of the consumption have been duly submitted before AO during assessment proceedings. The manufactured goods have been further exported by the assessee. The assessee has submitted the entire evidence to support the receipt of material, consumption of the same and its output which has been exported. Further, the assessee has also submitted the input output ratio wherein the average manufacturing/burning loss in respect of main product 'billets' is 7.14% as against standard of 10% prescribed by DGFT. The same is placed at page no. 75 of the paperbook. AO has mechanically rejected the same on the ground that no one to one correlation has been submitted by the assessee. It is important to note that in assessee's business where measurement of input and output units is same, the extent of use of raw material can be seen from the quantitative chart showing purchase of raw material and its consumption without going into one to one correlation. Therefore, in such case, input output ratio needs to be accepted. k. Accordingly, the receipt of material and its consumption in the manufacture cannot be doubted. This is more-so when the AO has himself stated that the material has been received by the assessee from open market in para 17 of the assessment order. l. Further it is also submitted that the majority of the suppliers have appears before the Id, AO and confirmed that they have supplied the material to the appellant. Viraj Profiles Limited 8 m. Further, we also rely on the findings of the DGCEI in the assessee's own case wherein after extensive search, they have concluded that the material has been duly received by the assessee. Kindly refer to conclusion of the DGCEI at page 136 of the C1T (A) order. n. Thus, it is submitted that assessee has duly purchased material from the suppliers. It is possible that the suppliers have themselves procured the material from open market and the same has been supplied to assessee. However, the said fact cannot lead to a conclusion that the purchases are bogus.” 5.11 We notice that the AO himself has observed at paragraph 17 of the assessment order that the purchases have been made from open market against the bills obtained from entry providers. We also notice that the assessee has furnished all the relevant documents to prove the purchases, which are narrated in point (a) in the preceding paragraph. As observed earlier, the manufacturing loss declared by the assessee is a relevant factor to determine whether the assessee has received materials or not. We notice that the Ld CIT(A) has given a finding that the manufacturing loss declared by the assessee was within the prescribed limit of SION published by DGFT, Government of India. We also notice that the DGCEI has also conducted search in order to find out whether the assessee has actually received material against the alleged accommodation bills and he has given his opinion that the materials have been received. 5.12 We notice that the assessee has furnished gross profit rate chart before Ld CIT(A) as under:- A.Y G.P rate 2013-14 17.47% 2014-15 17.37% 2015-16 17.43% 2016-17 18.80% 2017-18 17.77% 2018-19 17.16% The average rate of gross profit declared by the assessee is more than 17%, which was stated to be more than the industry average. The Ld A.R submitted that the above said contention is evidenced by the Transfer Pricing Viraj Profiles Limited 9 Study conducted by the assessee, wherein the international transactions have been bench marked under TNM method. It is stated that the Transfer pricing officer has accepted the T.P study, meaning thereby, the TPO has accepted the gross profit margin of the assessee to be at par or more than the industry average. Under these set of facts, we are of the view that the Ld CIT(A) was justified in holding that the assessee has actually received materials and hence disallowance of entire amount of purchases is not justified. When the receipt of materials is accepted, the AO’s reliance on the statements given by the suppliers or employee/other persons shall become insignificant. 5.13 We notice that the Ld CIT(A), having held so, has proceeded to hold that the assessee would have made profits in purchasing materials from other suppliers. In this regard, the Ld CIT(A) has taken support from the decision rendered by Hon’ble jurisdictional Bombay High Court rendered in the case of Rishabhdev Technocable Ltd (2020)(115 taxmann.com 333)(Bom), wherein it was held by the High Court that in a case where the parties from whom such purchases allegedly made were bogus but the purchases in themselves were not bogus, only a gross profit ratio could be added to the income of an assessee. We notice that the Ld CIT(A) has estimated the said incremental profit @ 6% of the value of purchases, but did not give any basis for arriving at the above said rate of 6%. 5.14 It is the contention of the assessee that, in the facts and circumstances of the case, no disallowance of purchases is warranted, since the manufacturing loss and the gross profit rate declared by the assessee compares well with industry standards. The assessee itself, in the alternative, has submitted that the addition towards incremental gross profit may be restricted to 2% of the value of purchases. In support of this contention, the Ld A.R also relied upon certain case laws (referred supra). Viraj Profiles Limited 10 5.15 We find merit in the said contentions under the facts of the present case. We noticed earlier that the manufacturing loss declared by the assessee was less than the SION standards prescribed by DGFT. The gross profit rate declared by the assessee was more than the industry average. Hence, in the normal circumstances, no disallowance of purchases is called for. However, since some of the suppliers have stated that they have not supplied the materials and since the AO & DGCEI has opined that the assessee might have procured materials from others, it is possible that the assessee could have made some profit in such an exercise. Hence, in order to take care of revenue leakages, if any, some addition is called for. We notice that the addition has been restricted to 2% in the following cases:- (a) Suman Gupta vs. ACIT (ITA No.4774/Mum/2014 dated 23.8.2017). In this case, this assessee was engaged in Steel business. (b) Geolife Organis (ITA No.3699/Mum/2016 dated 05-05-2017). In this case, this assessee was engaged in metal business. (c) Timex Art Décor P Ltd (ITA No.7293 & 7294/Mum/2017 dated 18- 10-2019). Accordingly, we modify the order passed by Ld CIT(A) in all these years and direct the AO to restrict the addition on account of non-genuine purchases to 2% of the value of alleged bogus purchases in both the years., i.e., AY 2014- 15 and 2015-16. 6. The next common issue urged by both the parties relate to the transfer pricing adjustment in respect of Commission on Corporate Guarantee given to the Associated Enterprises by the assessee. 6.1 The assessee had provided Corporate Guarantee to its Associated Enterprises for the loan taken by them. The assessee contended before TPO that the same is a Share holder activity and hence it cannot be considered as an International Transaction. The TPO did not accept the contentions of the assessee. By considered the commission charged by State Bank of India, the Viraj Profiles Limited 11 TPO made transfer pricing adjustment @ 1.50% of the Guarantee amount given by the assessee. 6.2 The ld CIT(A) noticed that an identical TP adjustment made in the assessee’s own case in AY 2010-11 has been adjudicated by the Tribunal and the Guarantee Commission was restricted to 0.50% following the decision rendered by the Hon’ble Bombay High Court in the case of Everst Canto Cylinders Ltd (2015)(58 taxmann.com 254; 378 ITR 57)(Bom). Following the said order, the Ld CIT(A) directed the AO to restrict the Commission on Corporate Guarantee given by the assessee @ 0.50% of actual value of loan taken by the Associated Enterprises. Both the parties are aggrieved. While the assessee seeks further reduction, the revenue contends that the guarantee commission should be retained @ 1.50%. 6.3 We have heard rival contentions on this issue and perused the record. We notice that the co-ordinate bench of Tribunal has examined an identical issue in the assessee’s own case in AY 2010-11 and the Tribunal has restricted the rate of commission at 0.50% of the value of loan actually availed by the Associated Enterprises. In this regard, the Tribunal has followed the decision rendered by the jurisdictional Hon’ble Bombay High Court in the case of Everest Canto Cylinders Ltd (supra). Since the decision rendered by Ld CIT(A) on this issue is covered by the decision rendered by the jurisdictional High Court and the Tribunal, we do not find any reason to interfere with the decision so taken by Ld CIT(A) on this issue. Accordingly we uphold the same. 7. The next common issue urged by the assessee relates to the disallowance made u/s 37 of the Act. 7.1 The AO noticed that the assessee has paid salary/professional fees to three persons related to the CFO of the assessee company, viz., Shri Raman Kumar Jain, i.e., the payments have been made to Ms. Ramita Jain Viraj Profiles Limited 12 (daughter); Mrs. Sangitha Jain (wife) during these two years. The details of payments made to these three persons are tabulated below:- Asst. Year Ms Ramita Jain Mrs. Sangitha Jain Ms. Shubam Jain Total 2014-15 33,09,002 8,00,000 ------ 41,09,002 2015-16 ---- 10,00,000 ----- 10,00,000 7.2 During the course of search proceedings, Statement under Oath was taken from the above said two persons. On the basis of above said statements, the AO came to the conclusion that there is no association between these two persons and the assessee company. The assessee contended that these persons have retracted their statement stating that the statement was taken under pressure. The AO, however, rejected the said contention by observing that the retraction has been made in November, 2019, i.e., after lapse of more than two years and hence it is an afterthought. He also expressed the view that the payment made to Ms Ramita Jain and Mrs Sangitha Jain are part of remuneration payable to Shri Raman Kumar Jain and the purpose of splitting up the payment is to reduce the tax in the hands of Shri Raman Kumar Jain. Accordingly, the AO disallowed the above said expenditure u/s 37 of the Act. The Ld CIT(A) also confirmed the same. 7.3 The Ld A.R submitted that the payments to these two persons have been given through banking channels after deducting TDS and they have also duly disclosed the same in their hands. He further submitted that the statements were given by them during the course of search due to continuous pressure from search officials. Hence, these persons have filed affidavits explaining the nature of services rendered by them to the assessee company. He submitted that (a) Ms. Ramita Jain is an engineering graduate and is running her own concern named M/s Su Parshuanath Enterprises from her home, which was providing financial advisory services. She has also disclosed her income details in the sworn statement. Hence it is not correct to suspect the professional fees paid to her. Viraj Profiles Limited 13 (b) Ms Sangita Jain has admitted that she has worked for the assessee herein. She was handling sales and business promotion and she has also recalled name of a customer. He further submitted that Shri Raman Kumar has affirmed that these two persons have provided services to the assessee company. He further submitted that the search officials or AO did not verify their contentions made in the retraction affidavits by making enquiries with other employees. Accordingly, the Ld A.R contended that the AO could not have placed reliance on the retracted statements for making the above said additions. 7.4 The Ld D.R, however, supported the orders passed by the AO and submitted that these two persons have admitted that they have no connection with the assessee company. 7.5 We have heard rival contentions on this issue and perused the record. We noticed that the above said two persons have given statements u/s 132(4) of the Act during the course of search and in the statements, they have stated that they do not have connection with the assessee herein. However, both of them have retracted statements by filing affidavits in November, 2019, i.e., after two years from the date of search. We also notice that the retraction is not based on any evidence. It is well settled proposition that the retraction of the statement, if alleged to have been taken forcibly, should be made at the earliest possible opportunity. Hence, we are of the view that much importance cannot be given on the retraction, i.e., relief cannot be granted to the assessee only on the basis of affidavit filed for retraction of the earlier statement. 7.6 At the same time, we notice that Ms Ramita Jain is a qualified engineer. She is running her own concern providing financial consultancy. Smt Sangitha Jain also could explain the certain services rendered by her to the assessee company. Hence, disallowance of entire payments is not justified. Viraj Profiles Limited 14 7.7 This issue could be looked from another angle. The AO has also stated that the salary payable to Shri Raman Kumar Jain has been split and paid to Ms Ramita Jain and Mrs Sangitha Jain in order to reduce the tax liability in the hands of Shri Raman Kumar Jain. If the payments made to both Ms Ramita Jain and Mrs Sangitha Jain were considered as part of salary payment to Shri Raman Kumar Jain, then such payments should be considered as having been incurred for the purposes of business only, i.e., all the payments, if clubbed with the salary payable to Shri Raman Kumar Jain, is allowable as business expenditure. Hence, we do not find any necessity to disallow the professional payments booked in the names of Ms Ramita Jain and Mrs Sangitha Jain. Accordingly, we set aside the orders passed by Ld CIT(A) in respect of disallowances of professional fee paid to Ms Ramita Jain and Mrs Sangitha Jain and direct the AO to allow the expenses in all the years under consideration. 8. In the result, both the appeals of the assessee are partly allowed and both the appeals of the revenue are dismissed. Pronounced in the open court on 26.4.2023. Sd/- Sd/- (PAVAN KUMAR GADALE) (B.R. BASKARAN) Judicial Member Accountant Member Mumbai; Dated : 26/04/2023 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(Judicial) 4. PCIT 5. DR, ITAT, Mumbai 6. Guard File. BY ORDER, //True Copy// (Assistant Registrar) PS ITAT, Mumbai