BATLIBOI INVIORNMENTAL ENGINEERING LTD, KALYAN V. DCIT 14(1)(1), MUMBAI

ITA 2840/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 7802 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-03-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 13-05-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: V MOHAN
• Keywords: Bogus purchase; Unexplained expenditure; Business expenditure; Rule of consistency; Bad and doubtful debts
• Section: 69C; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'I' BENCH, MUMBAI BEFORE SHRI JASON P. BOAZ, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ITA NO. 2840/MUM/2015 (ASSESSMENT YEAR: 2011-12) M/S. BATLIBOI ENVIRONMENTAL VS. D C I T 14(1)(1) ENGINEERING LTD. 25/26, DEONAR ANCILLARY INDL. ESTATE. DEONAR, GOVANDI (W) MUMBAI 400043 5 TH FLOOR, AAYAKAR BHAVAN M.K. ROAD, MUMBAI 400020 PAN AAACH1091B APPELLANT RESPONDENT ITA NO. 3482/MUM/2015 (ASSESSMENT YEAR: 2011-12) A C I T 14(1)(1) VS. M/S. BATLIBOI ENVIRONMENTAL ROOM NO. 460, 4 TH FLOOR AAYAKAR BHAVAN, M.K. ROAD MUMBAI 400020 ENGINEERING LTD. 25/26, DEONAR ANCILLARY INDL. ESTATE. DEONAR, GOVANDI (W) MUMBAI 400043 PAN AAACH1091B APPELLANT RESPONDENT ASSESSEE BY: SHRI V. MOHAN REVENUE BY: SHRI SAURABH KUMAR RAI DATE OF HEARING: 27.02.2017 DATE OF PRONOUNCEMENT: 15.03.2017 O R D E R PER BENCH THESE CROSS APPEALS BY THE ASSESSEE AND REVENUE ARE DIRECTED AGAINST THE ORDER OF THE CIT(A)-22, MUMBAI DATED 16.03.2015 . 2. THE FACTS OF THE CASE, BRIEFLY STATED, ARE AS UN DER: - 2.1 THE ASSESSEE COMPANY, ENGAGED IN THE BUSINESS O F DESIGNING, ENGINEERING, PROCURING, SUPPLYING OF EQUIPMENTS, CO NSTRUCTION, TESTING AND COMMISSIONING OF SEWAGE, WATER AND AFFLUENT PLANTS, FILED ITS RETURN OF INCOME FOR A.Y. 2011-12 ON 17.09.2011 DECLARING LO SS OF (-) ITA NOS. 2840 & 3482/MUM/2015 BATLIBOI ENVIRONMENTAL ENGINEERING LTD. 2 ` 2,73,21,124/-. THE RETURN WAS PROCESSED UNDER SECTI ON 143(1) OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') AND THE C ASE WAS SUBSEQUENTLY TAKEN UP FOR SCRUTINY. SUBSEQUENTLY, INFORMATION WA S RECEIVED FROM SALES TAX DEPARTMENT, GOVERNMENT OF MAHARASHTRA BY THE AS SESSING OFFICER (AO) THAT CERTAIN BOGUS PARTIES HAVE PROVIDED ACCOMMODAT ION ENTRIES BY ISSUING BILLS FOR BOGUS PURCHASES TO A LARGE NUMBER OF TAXP AYERS WITHOUT ACTUAL SUPPLY OF GOODS. ONE OF SUCH PARTIES, WAS THE ASSES SEE IN THE CASE ON HAND, WHO OBTAINED BOGUS PURCHASE BILLS AMOUNTING T O ` 28,07,050/- FROM M/S. CHIRAG STEEL CENTRE IN THE YEAR UNDER CONSIDER ATION, AS PER STATEMENTS GIVEN BEFORE SALES TAX DEPARTMENT. THE A O TREATED M/S. CHIRAG STEEL CENTRE AS A BOGUS DEALER, PROVIDING AC COMMODATION BILLS. OBSERVING THAT THIS PARTY WAS NOT AN APPROVED VENDO R AND THAT PAYMENTS WERE MADE NINE MONTHS AFTER ISSUE OF BILLS, THE AO CAME TO THE VIEW THAT THE ASSESSEE HAS FAILED TO ESTABLISH THE GENUINENES S OF THE SAID PURCHASES OF ` 28,07,058/- FROM M/S. CHIRAG STEEL CENTRE WITH ANY CORROBORATIVE EVIDENCE AND BROUGHT THE SAME TO TAX IN THE ASSESSE ES HANDS. FURTHER ADDITIONS/DISALLOWANCES WERE ALSO MADE IN RESPECT O F BAD DEBTS WRITTEN OFF, PRIOR PERIOD EXPENSES, INTERNET EXPENDITURE AND CES SATION OF LIABILITIES. THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF TH E ACT VIDE ORDER DATED 15.02.2014 WHEREIN THE NET LOSS OF THE ASSESSEE WAS DETERMINED AT (-) ` 74,63,700/- IN VIEW OF THE FOLLOWING ADDITIONS/DISA LLOWANCES: - (I) NON GENUINE PURCHASES ` 28,07,058/- (II) CESSATION OF LIABILITY UNDER SECTION 41(1) ` 1,52,29,070/- (III) PRIOR PERIOD EXPENSES ` 12,66,805/- (IV) BAD DEBTS WRITTEN OFF ` 5,21,491/- (V) INTEREST EXPENDITURE ` 33,000/- 2.2 AGGRIEVED BY THE ORDER OF ASSESSMENT DATED 15.0 2.2014 FOR A.Y. 2011-12, THE ASSESSEE PREFERRED AN APPEAL BEFORE TH E CIT(A)-22, MUMBAI. THE LEARNED CIT(A) DISPOSED OFF THE APPEAL VIDE THE IMPUGNED ORDER DATED 16.03.2015 ALLOWING THE ASSESSEE PARTIAL RELIEF, BY DELETING THE ADDITIONS/ DISALLOWANCES AT S.NOS. (II), (III) AND (V) LISTED IN PARA 2.1 (SUPRA), UPHOLDING THE DISALLOWANCE AT (III) (SUPRA) AND PARTLY SUSTAI NING THE ADDITION AT (I). ITA NOS. 2840 & 3482/MUM/2015 BATLIBOI ENVIRONMENTAL ENGINEERING LTD. 3 3. AGGRIEVED BY THE ORDER OF THE CIT(A)-22, MUMBAI DAT ED 16.03.2015 FOR A.Y. 2011-12 BOTH THE REVENUE AND THE ASSESSEE HAVE FILED CROSS APPEALS. 3.1 THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER : - (1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, LD. CIT (APPEALS) ERRED IN DISALLOWING 12.5% OF THE PUR CHASES AS BEING BOGUS IN NATURE. (2) APPELLANT CRAVES LEAVE TO AMEND OR ALTER THE EX ISTING GROUND OR ADD FURTHER GROUNDS AT THE TIME OF HEARING. 3.2 THE GROUNDS RAISED IN REVENUES APPEAL ARE AS U NDER: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN RESTRICTING THE ADDITION ON ACC OUNT OF BOGUS PURCHASES OF RS.28,07,058/- TO RS.3,50,882/-. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS .1,52,29,070/- MADE BY THE AO U/S 41(1) ON ACCOUNT OF CESSATION OF LIABILITY IGNORING THE AOS FINDING THAT THE SAID LIABILITIES WERE NOT PAYABLE AS THEY STOOD BARRED BY LIMITATION. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS .12,66,805/- ON ACCOUNT OF PRIOR PERIOD EXPENSES. 4. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, VARY, OMIT OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS OF APPEAL A T ANY TIME BEFORE OR AT THE TIME OF HEARING OF APPEAL. 5. THE APPELLANT PRAYS THAT THE ORDER OF CIT(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE R ESORTED. 4. GROUND NOS. 1 & 2 OF REVENUE AND GROUND NO. 1 OF AS SESSEE BOGUS PURCHASES 4.1 THESE GROUNDS (SUPRA) BEING INTERCONNECTED ARE TAKE N UP TOGETHER FOR ADJUDICATION. 4.2 IN ITS GROUND (SUPRA), REVENUE HAS ASSAILED THE ORD ER OF THE LEARNED CIT(A) AS BEING ERRONEOUS IN DELETING THE ADDITION OF ` 28,07,058/- ON ACCOUNT OF BOGUS PURCHASES. THE LEARNED D.R. WAS HE ARD AND (I) PLACED STRONG RELIANCE ON THE AOS VIEW IN MAKING THE SAID ADDITION IN THE ORDER OF ASSESSMENT AND (II) ALTERNATIVELY PRAYED FOR UPHOLD ING THE ADDITION OF ` 3,50,882/- OF PROFIT ON BOGUS PURCHASES @ 12.5% THE REOF. 4.3 4.3 THE LEARNED A.R. OF THE ASSESSEE, WHILE SUBMITT ING THAT THE DECISION OF THE LEARNED CIT(A) IN DELETING THE ADDI TION OF ` 28,07,058/- ITA NOS. 2840 & 3482/MUM/2015 BATLIBOI ENVIRONMENTAL ENGINEERING LTD. 4 MADE BY THE AO ON ACCOUNT OF BOGUS PURCHASES WAS IN ORDER, ASSAILED THE IMPUGNED ORDER OF THE LEARNED CIT(A) IN HOLDING THA T ADDITION OF 12.5% OF THE BOGUS PURCHASES SHOULD BE ADDED BACK TO THE INC OME OF THE ASSESSEE AS PROFIT THEREON. ACCORDING TO THE LEARNED A.R., T HE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE MATERIAL PURCHASED DURING THE Y EAR WERE FULLY RECORDED IN THE ASSESSEES BOOKS OF ACCOUNT, WHICH WERE NOT REJECTED BY THE AO AND EVIDENCE REGARDING PURCHASE ORDERS, LEDGERS, COPIES OF INVOICES, PAYMENT DETAILS WITH BANK ENTRIES WHICH ARE PAID THROUGH BA NK CHEQUES, DETAILS OF RECEIPTS AND TRANSPORTATION, I.E. LORRY RECEIPTS, G ATE PASS RECORDS, OCTROI RECEIPTS, DELIVERY CHALLANS, DETAILS OF UTILISATION OF MATERIALS, ETC. WERE FILED. IT IS SUBMITTED THAT SUCH AN ESTIMATION OF PROFITS ON BOGUS PURCHASES @12.5% IS UNJUSTIFIED AND IS TO BE DELETED SINCE TH E BASIS FOR THE SAID ESTIMATION WAS CERTAIN INFORMATION RECEIVED FROM TH E SALES TAX DEPARTMENT, GOVERNMENT OF MAHARASHTRA WITHOUT PROVI DING THE ASSESSEE OPPORTUNITY TO CROSS EXAMINE THE PERSONS ON WHOSE S TATEMENTS ADVERSE INFERENCE WERE DRAWN. RELIANCE IN THIS REGARD WAS P LACED ON, INTER ALIA, THE FOLLOWING JUDICIAL PRONOUNCEMENTS: - (I) IMPERIAL IMP & EXP. (ITA NO. 5427/MUM/2015 DATE D 18.03.2016) (II) JAYBHARAT TEXTILES & REAL ESTATE LTD. (ITA NO. 5163/MUM/2013 DATED 24.02.2016) (III) MAHESH K. SHAH (ITA NO. 5194/MUM/2016 DATED 3 1.01.2017) (IV) VAMAN INTERNATIONAL P. LTD. (ITA NO. 794/MUM/2 015 DATED 16.11.2016) 4.4.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD AND THE JUDICIAL PRONOUNCEMENTS CITED. WE HAVE CAREFULLY PERUSED THE CASES CITED ABOVE BY THE ASSESSEE (SUPRA) AND WITH DUE RESPECT ARE OF THE VIEW THAT NONE OF T HEM WOULD COME TO THE RESCUE OF THE ASSESSEE. WHILE IT IS TRUE THAT THE C ONTROVERSY GENERATED IN ALL THE CITED CASES (SUPRA) AND THAT OF THE ASSESSEE IN THE CASE ON HAND, ARE A RESULT OF CERTAIN INFORMATION OBTAINED FROM THE SAL ES TAX DEPARTMENT, GOVERNMENT OF MAHARASHTRA BY THE INCOME TAX DEPARTM ENT, THE FACTS AND FACETS OF EACH CASE TO SOME EXTENT IS UNIQUE. IN TH E CASE OF MAHESH K. SHAH (SUPRA) AND VAMAN INTERNATIONAL P. LTD. (SUPRA ) THE ADDITIONS ON ITA NOS. 2840 & 3482/MUM/2015 BATLIBOI ENVIRONMENTAL ENGINEERING LTD. 5 ACCOUNT OF BOGUS PURCHASES MADE UNDER SECTION 69C O F THE ACT AS UNEXPLAINED EXPENDITURE WERE DELETED BECAUSE APART FROM FILING DETAILS TO ESTABLISH THE SAID PURCHASES WERE MADE, THE CONSEQU ENT SALES OF SUCH MATERIALS WAS NOT DOUBTED BY THE AO AND THEREFORE I T WAS CONCLUDED THAT WITHOUT PURCHASES BEING MADE, CORRESPONDING SALES C OULD NOT HAVE BEEN EFFECTED BY THE ASSESSEE. IN THE CASE ON HAND, HOWE VER, THE ASSESSEE HAS NOT ESTABLISHED THAT THE SAID MATERIAL HAS BEEN SOL D OR EVEN IF IT WAS UTILISED, WHAT IS THE PROFIT ELEMENT EMBEDDED THERE IN THAT HAS BEEN OFFERED TO TAX. THE DECISION IN THE CASE OF JAYBHARAT TEXTI LES AND REAL ESTATE LTD. (SUPRA) WOULD ALSO NOT COME TO THE RESCUE OF THE AS SESSEE BEING FACTUALLY DIFFERENT AS IN THE CITED CASE THE SAID SUPPLIERS O F MATERIAL ACCEPTED THAT THEY HAVE EFFECTED THE SALES AND THEREFORE THE PURC HASES COULD NOT BE HELD TO BE NON-GENUINE. THE DECISION IN THE CASE OF IMPE RIAL IMP EXP. (SUPRA) IS ALSO FACTUALLY DIFFERENT FROM THAT OF THE CASE ON H AND AND ALSO WOULD NOT COME TO THE ASSESSEES RESCUE AS IN THE CITED CASE THE ENTIRE SALES WERE BY WAY OF EXPORTS AND THEREFORE THERE WAS NO LIABILITY TOWARDS SALES TAX IN RESPECT OF THE PURCHASES AFFECTED BY IT. FURTHER TH E SALES WERE NEVER DOUBTED BY THE AO AND THEREFORE IT WAS CONCLUDED TH AT THE SALES COULD NOT HAVE BEEN EFFECTED IF THE PURCHASES WERE NOT MADE. THE FACT SITUATION IS NOT SO IN THE CASE ON HAND. 4.4.2 WE FIND THAT THE LEARNED CIT(A) HAS ADDRESSED THE ISSUE OF BOGUS PURCHASES IN DETAIL AND AFTER CONSIDERING THE ASSES SEES SUBMISSIONS, THE AOS FINDINGS AND THE JUDICIAL PRONOUNCEMENTS ON TH IS ISSUE, IN SIMILAR FACTUAL MATRIX THE LEARNED CIT(A) DELETED THE ADDIT ION OF ` 28,07,058/- ON ACCOUNT OF BOGUS PURCHASES. HOWEVER, FOLLOWING THE DECISION OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. SIMIT P. SHETH (2013) 356 ITR 451 (GUJ), THE LEARNED CIT(A) HAS HELD THAT SINCE T HE DIRECT ONE TO ONE RELATIONSHIP BETWEEN PURCHASE OF THE SAID MATERIALS AND THE UTILISATION THEREOF HAVE NOT BEEN ESTABLISHED, BRINGING THE PRO FIT ELEMENT EMBEDDED IN THE IMPUGNED PURCHASES @12.5% THEREOF TO TAX IN THE ASSESSEES HANDS WOULD BE REASONABLE. THE LEARNED CIT(A) AT PARAS 3. 3 TO 3.6 OF THE IMPUGNED ORDER HAS HELD AS UNDER: - ITA NOS. 2840 & 3482/MUM/2015 BATLIBOI ENVIRONMENTAL ENGINEERING LTD. 6 3.3. I HAVE CONSIDERED THE APPELLANTS SUBMISSIONS AND THE AOS ORDER. THE APPELLANT HAD PURCHASED THE MATERIAL THR OUGH M/S. CHIRAG STEEL CENTRE FOR RS.28,07,056/-. THE SALES TAX DEPA RTMENT HAD TREATED MIS. CHIRAG STEEL CENTRE AS A PROVIDER OF A CCOMMODATION BILLS WITHOUT SUPPLYING THE MATERIAL. THIS INFORMATION WA S RECEIVED FROM THE INVESTIGATION DEPARTMENT. AS APPELLANT WAS NOT A REGULAR APPROVED VENDOR WITH THE APPELLANT AND NO CORRUGATE D EVIDENCE WAS FILED, THE AU DISALLOWED THE PURCHASES MADE THR OUGH M/S. CHIRAG STEEL CENTRE FOR RS. 28,07,058/- AND TREATED THESE PURCHASES AS BOGUS IN NATURE AND ADDED THE INCOME O F THE APPELLANT. 3.4 THE APPELLANT DURING THE SUBMISSIONS STATED THA T APPELLANT HAD SUBMITTED THE EVIDENCE REGARDING PURC HASE ORDER, LEDGERS, COPIES OF INVOICES, PAYMENT DETAILS WITH BANK ENTRIES WHICH ARE PAID THROUGH BANK CHEQUES, DETAIL S OF RECEIPT AND TRANSPORTATION SUCH AS LR/RR RECEIPT, VEHICLE N UMBER, GATE PASS RECORDS, OCTROI RECEIPTS, GRN, DELIVERY CHALLA NS, WEIGHMENT SLIPS, DETAILS OF ISSUE& UTILIZATION OF THE ALLEGED PURCHA SE. 3.5 DURING THE APPELLATE PROCEEDINGS, THE APPELLANT ALSO EXPLAINED WHERE THIS MATERIAL WAS PROVIDED FOR FURTHER PROCES S. ON SIMILAR ISSUE THE DECISION OF THE GUJARAT HC IN THE IN THE CASE OF CIT VS SIMIT P. SHETH (2013) 356 1TR451 (GUI) IS HELD AS U NDER: WE ARE BROADLY IN AGREEMENT WITH THE REASONING ADO PTED BY THE WHETHER THE PURCHASES THEMSELVES WERE COMPLETELY BO GUS AND NON EXISTENT OR THAT THE PURCHASES WERE ACTUALLY MA DE BUT NOT FROM THE PARTIES FROM WHOM IT WAS CLAIMED TO HAVE B EEN MADE AND INSTEAD MAY HAVE BEEN PURCHASED FROM GREY MARKE T WITHOUT PROPER BILLING OR DOCUMENTATION. IN THE PRESENT CASE, CIT BELIEVED THAT WHEN AS A TR ADER IN STEEL THE ASSESSEE SOLD CERTAIN QUANTITY OF STEEL, HE WOU LD HAVE PURCHASED THE SAME QUANTITY FROM SOME SOURCE. WHEN THE TOTAL SALE IS ACCEPTED BY THE ASSESSING OFFICER, HE COULD NOT HAVE QUESTIONED THE VERY BASIS OF THE PURCHASES. IN ESSE NCE THEREFORE, THE COMMISSIONER (APPEALS) BELIEVED ASSESSEE'S THEO RY THAT THE PURCHASES WERE NOT BOGUS BUT WERE MADE FROM THE PAR TIES OTHER THAN THOSE MENTIONED IN THE BOOKS OF ACCOUNTS. THAT BEING THE POSITION, NOT THE ENTIRE PURCHASE PR ICE BUT ONLY PROFIT ELEMENT EMBEDDED IN SUCH PURCHASES CAN BE AD DED TO THE INCOME OF THE ASSESSEE. SO MUCH IS CLEAR BY DECISIO N OF THIS COURT. IN PARTICULAR, COURT HAS ALSO TAKEN A SIMILA R VIEW IN CASE OF COMMISSIONER OF INCOME TAX- IV VS. VIJAY M MISTR Y CONSTRUCTION LTD. VIDE ORDER DATED 10.01.2011 PASSE D IN TAX APPEAL NO. 1090 OF 2009 AND IN CASE OF COMMISSIONER OF INCOME TAX-I VS. BHOLANATH POLY FAB PVT. LTD. VIDE ORDER D ATED 23.10.2012 PASSED IN TAX APPEAL NO. 63 OF 2012. THE VIEW TAKEN BY THE TRIBUNAL IN CASE OF VIJAY PROTEINS PVT . LTD. VS. CIT REPORTED IN 58 ITD 428 CAME TO BE APPROVED. ITA NOS. 2840 & 3482/MUM/2015 BATLIBOI ENVIRONMENTAL ENGINEERING LTD. 7 IF THE ENTIRE PURCHASES WERE WHOLLY BOGUS AND THERE WAS FINDING OF FACT ON RECORD THAT NO PURCHASE WERE MADE AT ALL , COUNSEL FOR THE REVENUE WOULD BE JUSTIFIED IN ARGUING THAT THE ENTIRE AMOUNT OF SUCH BOGUS PURCHASES SHOULD BE ADDED BACK TO THE INCOME OF THE ASSESSEE. SUCH WERE THE FACTS IN CASE OF ACIT ( OSC) WARD 5(3) NADIAD VS. PAWANRAJ B BOKADIA (SUPRA). THIS BEING THE POSITION, THE ONLY QUESTION THAT SUR VIVES IS WHAT SHOULD BE THE FAIR PROFIT RATE OUT OF THE BOGUS PUR CHASES WHICH SHOULD BE ADDED BACK TO THE INCOME OF THE ASSESSEE. THE COMMISSIONER ADOPTED RATIO OF 30% OF SUCH TOTAL SAL ES. THE TRIBUNAL, HOWEVER, SCALED DOWN TO 12.5%. WE MAY NOT ICE THAT IN THE IMMEDIATELY PRECEDING YEAR TO THE ASSESSMENT YE AR UNDER CONSIDERATION THE ASSESSEE HAD DECLARED GROSS PROFI T @ 3.56% OF THE TOTAL TURNOVER. IF THE YARDSTICK OF 30%, AS ADO PTED BY THE COMMISSIONER, IS ACCEPTED GP RATE WILL BE MUCH HIGH ER. IN ESSENCE, THE TRIBUNAL ONLY ESTIMATED THE POSSIBLE P ROFIT OUT OF PURCHASES MADE THROUGH NON-GENUINE PARTIES. NO QUES TION COMMISSIONER (APPEALS) WITH RESPECT TO THE NATURE O F DISPUTED PURCHASES OF STEEL. IT MAY BE THAT THE THREE SUPPLI ERS FROM WHOM THE ASSESSEE CLAIMED TO HAVE PURCHASED THE STEEL DI D NOT OWN UP TO SUCH SALES. HOWEVER, VITAL QUESTION WHILE CONSID ERING WHETHER THE ENTIRE AMOUNT OF PURCHASES SHOULD BE ADDED BACK TO THE INCOME OF THE ASSESSEE OR ONLY THE PROFIT ELEMENT E MBEDDED THEREIN WAS TO ASCERTAIN OF LAW IN SUCH ESTIMATION WOULD ARISE. THE ESTIMATION OF RATE OF PROFIT RETURN MUST NECESS ARILY VARY WITH THE NATURE OF BUSINESS AND NO UNIFORM YARDSTICK CAN BE ADOPTED. 3.6 FOLLOWING THE ABOVE DECISION OF THE GUJARAT HC, AO IS DIRECTED TO DISALLOW 12.5% OF THE PURCHASES AS BOGUS IN NATURE AND ON THIS 12.5% OF THE AMOUNT OF PURCHASE AS INCOME OF THE AP PELLANT. HENCE GROUND OF APPEAL IS PARTLY ALLOWED. 4.4.1 ON AN APPRECIATION OF THE FACTS ON RECORD AND THE FINDINGS RENDERED BY THE LEARNED CIT(A) (SUPRA), WE FIND THAT THE ASS ESSEE HAS FAILED TO PLACE ON RECORD ANY MATERIAL EVIDENCE TO CONTROVERT THE FINDINGS OF THE LEARNED CIT(A). IN THIS VIEW OF THE MATTER, WE UPHO LD THE ORDER OF THE CIT(A) ON THESE ISSUES OF DELETING THE ADDITION OF ` 27,08,058/- MADE ON ACCOUNT OF CONSIDERATION FOR BOGUS PURCHASES AND IN BRINGING TO TAX IN THE ASSESSEES HANDS THE PROFITS EMBEDDED IN THE BO GUS PURCHASES @ OF 12.5% OF THE COST OF THE SAID PURCHASES AMOUNTING T O ` 28,07,058/- SINCE THE DIRECT ONE TO ONE RELATIONSHIP /NEXUS BETWEEN T HE SAID PURCHASES AND UTILISATION THEREOF HAVE NOT BEEN ESTABLISHED B Y THE ASSESSEE EITHER BEFORE US OR THE LEARNED CIT(A). CONSEQUENTLY, GROU ND NOS. 2 & 2 OF REVENUES APPEAL AND GROUND NO. 1 OF ASSESSEES AP PEAL ARE DISMISSED. ITA NOS. 2840 & 3482/MUM/2015 BATLIBOI ENVIRONMENTAL ENGINEERING LTD. 8 5. GROUND NO. 2 (REVENUES APPEAL) ADDITION UNDER SE CTION 41(1) OF THE ACT 5.1 IN THIS GROUND REVENUE ASSAILS THE ORDER OF THE LEARNED CIT(A) AS ERRONEOUS IN DELETING THE ADDITION OF ` 1,52,29,070/- MADE UNDER SECTION 41(1) OF THE ACT ON ACCOUNT OF CESSATION OF LIABILI TY, IGNORING THE FACT THAT THEY WERE BARRED BY LIMITATION. THE LEARNED D.R. FO R REVENUE PLACED STRONG RELIANCE ON THE AOS FINDINGS ON THIS ISSUE IN THE ORDER OF ASSESSMENT. 5.2 PER CONTRA, THE LEARNED A.R. OF THE ASSESSEE SU PPORTED THE FINDING RENDERED BY THE LEARNED CIT(A) ON THIS ISSUE; RELIE D ON SUBMISSIONS PUT FORTH BEFORE THE AUTHORITIES BELOW AND PLACED RELIA NCE ON THE DECISIONS OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT V S. G.K. PATEL & CO. (212 TAXMAN 384) AND OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. JAIN EXPORTS PVT. LTD. (89 DTR 265). 5.3.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JU DICIAL PRONOUNCEMENTS CITED. AS PER THE DETAILS THAT EMANATE FROM THE REC ORD, THE AO REQUIRED THE ASSESSEE TO FURNISH DETAILS OF NAME, ADDRESS, NATUR E OF TRANSACTION OF ALL CREDITORS; INCLUDING THOSE OUTSTANDING FOR MORE THA N THREE YEARS AS ON 31.03.2011. AFTER CONSIDERING THE ASSESSEES SUBMIS SIONS/DETAILS FILED, THE AO INVOKED THE PROVISIONS OF SECTION 41(1) OF THE A CT AND EXPLANATION THEREOF INSERTED W.E.F. 01.04.1997 ON THE GROUND TH AT THE LIABILITIES OF 25 PARTIES AMOUNTING TO ` 1,52,28,070/- WERE OUTSTANDING AND REMAINED UNPAID FOR 8-9 YEARS SOLELY BY THE UNILATERAL ACT B Y THE ASSESSEE OF NOT MAKING THE PAYMENT THEREOF TO THE 25 CREDITORS. 5.3.2 ON APPEAL, THE LEARNED CIT(A) FOLLOWING THE D ECISION OF THE HON'BLE GUJARAT HIGH COURT IN G.K. PATEL & CO. (SUPRA) AND OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF JAIN EXPORTS P. LTD (SUPR A) HELD THAT THE ADDITION UNDER SECTION 41(1) OF THE ACT IS UNSUSTAINABLE, AS EVEN IF THE LIABILITY TO CREDITORS HAS BEEN PENDING FOR A LONG TIME, THE PRO VISIONS OF SECTION 41(1) OF THE ACT CANNOT BE INVOKED IN THE CASE ON HAND AS THERE IS NO DECLARATION BY THE ASSESSEE THAT IT DOES NOT INTEND TO HONOUR I TS LIABILITY NOR ANY REMISSION OF LIABILITY BY THE CREDITORS. IN PARAS 4 .3 AND 4.4 OF THE IMPUGNED ITA NOS. 2840 & 3482/MUM/2015 BATLIBOI ENVIRONMENTAL ENGINEERING LTD. 9 ORDER, THE LEARNED CIT(A) DELETED THE ADDITION UNDE R SECTION 41(1) OF THE ACT HOLDING AS UNDER: - 4.3 1 HAVE CONSIDERED THE APPELLANT'S SUBMISSIONS A ND AO'S ORDER. DURING THE ASSESSMENT PROCEEDINGS, AO HAD ASKED FOR THE DETAILS OF WITH NAME AND TRANSACTION WHICH ARE OUTSTANDING FOR MORE THAN THREE YEARS AS ON 31.03.2011. AO FOUND OUT THAT THERE ARE 25 CREDITORS WHOSE PAYMENTS WERE OUTSTANDING FOR MORE THAN 3 YEA RS, THE AMOUNT INVOLVED IS RS. 1,52,29,070/-. AO FURTHER FOUND THA T , IN SOME CASES, APPELLANT HAD NOT PAID THE AMOUNT FOR MORE THAN 8-9 YEARS AND TREATED THEM AS APPELLANT'S INCOME AND ADDED UNDER SEC. 41(1) OF THE ACT. ACCORDING TO APPELLANT, THERE WAS LIQUIDITY PR OBLEM AND ARE UNABLE TO PAY THEIR CREDITORS. MANY OF THE CREDITOR S FOR WHOM LEGAL PROCEEDINGS HAVE BEEN MADE BY THOSE CREDITORS ARE F NC CONSTRUCTION COMPANY, WELLWIN INDUSTRIES, CITADEL INSTRUMENTATIO N. FURTHER APPELLANT STATES THA 1 THERE ARE DISPUTES IN SOME OF THE CASES. HOWEVER, THE APPELLANT ARGUED THAT DUE TO FINANCIAL DIFFICULTIES, THE PAYMENT COULD NOT BE MADE TO CREDITORS . BUT NOW ALSO THE PAYMENT DUE TO THE CREDITORS WOULD BE MADE AS SOON AS THE F INANCIAL POSITION IMPROVES AND REMIT THE AMOUNT TO THEIR ACCOUNTS. FU RTHER THE APPELLANT RELIED ON THE DECISION OF COMMISSIONER OF INCOME TAX VS. G.K. PATEL& CO. (212 TAXMAN 384), HIGH COURT OF GUJ ARAT AND IN THE CASE OF COMMISSIONER OF INCOME TAX VS. JAIN EXPORTS PUT. LTD. (89 DTR 265), HIGH COURT OF DELHI WHEREIN IT IS HELD ASUNDER: REMISSION OR CASSATION OF TRADING LIABILITY - DURI NG THE COURSE OF ASSESSMENT PROCEEDING.AO CALLED UPON THE ASSESSEE T O FURNISH AGEING ANALYSIS OF THE CREDITORS - AO FOUND THAT AS SESSEE HAD NOT PAID MONEY TO MANY OF SUCH CREDITORS FOR YEARS TOGETHER - ASSESSEE FAILED TO FURNISH ANY EVIDENCE EXCEPT THAT THE AMOUNTS WERE STILL PAYABLE BY THE ASSESSEE, AO MADE ADDITOI N UNDER SEC. 41(1) .- CIT(A) RESTRICTED ADDITION - TRIBUNAL HELD THAT .S. 41(1) COULD NOT HAVE BEEN INVOKED IN THE YEAR UNDER CONSI DERATION AS THE EVENT HAD TO BE TRIGGERED EITHER ON THE SIDE OF THE CREDITOR OR THE DEBTOR OR BY LAW - HELD CESSATION OF LIABILITY HAS TO BE EITHER BY REASON OF OPERATION OF LAW, I.E., ON LIABILITY B ECOMING UNENFORCEABLE AT LAW :BY THE CREDITOR AND DEBTOR DE CLARING UNEQUIVOCALLY HIS INTENTION NOT TO HONOUR HIS LIABI LITY WHEN PAYMENT IS DEMANDED BY CREDITOR, OR A CONTRACT BETW EEN PARTIES, OR BY DISCHARGE OF DEBT -`THE DEBTOR MAKING PAYMENT THEREOF TO HIS CREDITOR - IN THE INSTANT CASE THERE WAS NO DEC LARATION BY ASSESSEE THAT IT DOES NOT INTEND TO HONOUR ITS LIAB ILITIES NOR WAS THERE ANY DISCHARGE OF DEBT - AS NO EVENT HAD TAKEN PLACE IN THE YEAR UNDER, CONSIDERATION TO INDICATE REMISSION OR CESSION OF THE LIABILITIES IN QUESTION, S. 41(1) COULD NOT HAVE BE EN INVOKED - REASONING ADOPTED BY TRIBUNAL WHILE HOLDING THAT S. 41(1) WOULD NOT BE APPLICABLE TO THE FACTS OF THE PRESENT CASE WAS IN LINE WITH THE PRINCIPLES ENUNCIATED IN THE DECISION OF APEX C OURT IN CIT V. SUGAULI SUGAR WORKS (P.) LTD. - TRIBUNAL, THEREFORE, COMMITTED NO ITA NOS. 2840 & 3482/MUM/2015 BATLIBOI ENVIRONMENTAL ENGINEERING LTD. 10 LEGAL ERROR - APPEAL FILED BY REVENUE DISMISSED.' 4.4 ON PERUSAL OF THE ABOVE CASES,, HC HAVE HELD T HAT IF THE LIABILITY IS PENDING FOR MORE THAN 3 YEARS, IT CANNOT BE TREA TED AS CESSATION OF LIABILITY AND IT CANNOT BE DECLARED AS CREDITOR .WI LL NOT HONOR THIS LIABILITY. FURTHER HELD THAT HAD IT BEEN PENDING FO R LONG TIME, IT 'CANNOT BE ADDED AS INCOME OF THE APPELLANT UNDER SEC. 41(1 ) TILL PAYER DOES NOT DISAGREE TO PAY THE AMOUNT. IF WE COMPARE THE F ACTS OF THE SAME, THE FACTS ARE IDENTICAL. HERE ALSO IN THE PRESENT C ASE, CREDITORS ARE :PENDING FOR MORE THAN THREE YEARS SO IN VIEW OF TH E ABOVE HC'S DECISION, AO'S ADDITION UNDER SEC. 41(1) CANNOT BE SUSTAINED. THE ADDITION IS DELETED AN GROUND OF APPEAL IS ALLOWED. 5.3.3. IN THE CASE ON HAND, ADMITTEDLY THERE WERE 2 5 CREDITORS OF THE ASSESSEE TO WHOM ` 1,52,29,070/- WAS OUTSTANDING FOR MORE THAN THREE YEARS AND IN SOME CASES 8-9 YEARS. ACCORDING TO THE ASSESSEE, IT WAS UNABLE TO PAY THESE CREDITORS DUE TO CERTAIN LIQUID ITY PROBLEMS, BUT THE SAID AMOUNTS WERE UNDOUBTEDLY ACKNOWLEDGED BY THE A SSESSEE AS PAYABLE TO THESE PARTIES AS REFLECTED IN ITS BALANCE SHEET AS ON 31.03.2011. IT IS SEEN THAT MANY OF THE CREDITORS HAD ALSO INITIATED LEGAL PROCEEDINGS FOR RECOVERY OF THEIR OUTSTANDING AMOUNTS AND IN SOME C ASES THERE WAS DISPUTES AS TO THE AMOUNTS PAYABLE/RECEIVABLE. IN O UR VIEW, IN THIS FACTUAL MATRIX OF THE CASE ON HAND IT IS CLEAR THAT IT WAS NEITHER A CASE OF CESSATION NOR REMISSION OF LIABILITY AND THEREFORE THE AO HAD WRONGLY INVOKED THE PROVISIONS OF SECTION 41(1) OF THE ACT. IN COMING T O THIS VIEW, WE DRAW SUPPORT FROM THE DECISIONS OF THE HON'BLE GUJARAT H IGH COURT IN THE CASE OF G.K. PATEL & CO. (212 TAXMAN 384) AND HON'BLE DELHI HIGH COURT IN THE CASE OF JAIN EXPORTS P. LTD. (89 DTR 265) WHICH ARE ON SIMILAR FACTS AND WERE HELD IN FAVOUR OF THE ASSESSEE. IN THIS FACTUA L AND LEGAL MATRIX OF THE CASE, WE UPHOLD THE ORDER OF THE LEARNED CIT(A) IN DELETING THE ADDITION OF ` 1,52,29,070/- MADE BY THE AO AS CESSATION OF LIABIL ITY UNDER SECTION 41(1) OF THE ACT. CONSEQUENTLY, GROUND NO. 2 OF REVENUES APPEAL IS DISMISSED. 6. GROUND NO. 3 PRIOR PERIOD EXPENSES 6.1 IN THIS GROUND, REVENUE ASSAILS THE ORDER OF TH E LEARNED CIT(A), AS BEING ERRONEOUS IN DELETING THE DISALLOWANCE OF ` 12,66,805/- ON ACCOUNT OF PRIOR PERIOD EXPENSES. THE LEARNED D.R. FOR REVENUE VEHEMENTLY SUPPORTED AND PLACED STRONG RELIANCE ON THE AOS FINDING REND ERED IN THE ORDER OF ASSESSMENT ON THIS ISSUE. ITA NOS. 2840 & 3482/MUM/2015 BATLIBOI ENVIRONMENTAL ENGINEERING LTD. 11 6.2 PER CONTRA, THE LEARNED A.R. OF THE ASSESSEE SU BMITTED THAT THE DIRECTION OF THE LEARNED CIT(A) DELETING THE DISALL OWANCE OF ` 12,66,805/- ON ACCOUNT OF PRIOR PERIOD EXPENSES WAS IN ORDER AND I S TO BE UPHELD. 6.3.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. ON AN APPRECIATI ON OF THE FACTS ON RECORD THE AO, ON NOTICING THAT THE TAX AUDIT REPOR T MENTIONED THAT AN AMOUNT OF ` 12,66,805/-, BEING PRIOR PERIOD EXPENSES, WAS DEBIT ED TO THE PROFIT & LOSS ACCOUNT, DISALLOWED THE SAID EXPENDIT URE FOR THE REASON THAT IT DID OT PERTAIN TO THE YEAR UNDER CONSIDERATION. ON APPEAL, IT WAS SUBMITTED BY THE ASSESSEE THAT AS THE ASSESSEES BU SINESS OF CONSTRUCTION WAS EXECUTED AT SEVERAL ON-SITE JOBS; THERE WERE DE LAYS IN RECEIPT OF BILLS AND THEREFORE AT THE END OF THE ACCOUNTING YEAR SOM E BILLS WILL BE PENDING AND SPILL OVER TO THE NEXT YEAR WHEN IT WILL BE SET TLED. THIS WAS NORMAL BUSINESS PRACTICE OF THE ASSESSEE, WHICH WAS ACCEPT ED BY THE AOS IN THE PAST. THE LEARNED CIT(A) ALLOWED THE ASSESSEES CLA IM OF PRIOR PERIOD EXPENSES FOLLOWING THE DECISIONS OF THE HON'BLE DEL HI HIGH COURT IN THE CASE OF JAGATJIT INDUSTRIES LTD. (194 TAXMAN 158) ( DELHI) AND SMCC CONSTRUCTION (INDIA) LTD. (220 TAXMAN 354) (DELHI), ON THE GROUND THAT THESE DECISIONS WERE RENDERED ON SIMILAR FACTS AND HELD AS UNDER AT PARAS 5.3 TO 5.5 OF THE IMPUGNED ORDER: - 5.3 I HAVE CONSIDERED THE APPELLANT'S SUBMISSION. IN THE TAX AUDIT REPORT OF THE APPELLANT, AN AMOUNT OF RS. 12,66,805 /:- WAS MENTIONED PRIOR PERIOD ITEMS AND SAME WAS DEBITED TO- THE PRO FIT AND LOSS ACCOUNT WHICH IS IN THE NATURE OF EXPENDITURE OF PR IOR PERIOD. 5.4 DURING THE APPELLATE PROCEEDINGS, APPELLANT HAD SUBMITTED THAT AS THE BUSINESS OF APPELLANT IS IN CONSTRUCTION AND EX ECUTION OF BUSINESS OPERATING, SEVERAL ON-SITE JOBS ARE CARRIED ON. THE RE IS ALWAYS DELAY IN THE RECEIPT OF BILLS AND THEREFORE WHEN THE ACCO UNTING YEAR CLOSES AND CERTAIN BILLS WILL BE PENDING TILL END OF THE C LOSING YEAR ARE TREATED AS IN THE NEXT YEAR. AS DETAILS OF THE EXPENSES-SHO W THAT MANY OF THE BILLS ARE DATED AS FAR AS 2007 AND IT IS NOT CLEAR AS TO HOW AND WHY THE APPELLANT NOT MADE PAYMENT FOR THE INCURRED EXP ENDITURE AND LIABILITY TOWARDS THE SAME HAS BEEN CRYSTALLIZED IN THOSE YEARS ITSELF. THE APPELLANT'S BUSINESS OF CONSTRUCTION AND THIS H AS TO BE TREATED AS NORMAL BUSINESS PRACTICE WHICH APPELLANT WAS FOLLOW ING IN THE EARLIER YEARS. THE APPELLANT FURTHER RELIED ON THE DELHI HC 'S DECISION IN THE CASE OF COMMISSIONER OF INCOME TAX US. JAQATJIT IND USTRI ES LTD. (194 TAXMAN 158) (DELHI.) AND SMCC CONSTRUCTION INDIA LT D. VS. ASSTT. ITA NOS. 2840 & 3482/MUM/2015 BATLIBOI ENVIRONMENTAL ENGINEERING LTD. 12 COMMISSIONER OF INCOME TAX (220 TAXMAN 354) (DELHI) WHEREIN IT IS HELD AS UNDER: BUSINESS EXPENDITURE - YEAR OF ALLOWABILITY - PRIO R PERIOD EXPENSES VIS-A-VIS RULE OF CONSISTENCY - ASSESSEE H AD BRANCH OFFICES THROUGH THE COUNTRY AND HAS BEEN DEBITING . THE EXPENDITURE SPILL OVER TO THE SUBSEQUENT YEARS AND THE AO HAD BEEN ALLOWING THE SAME - IF A PARTICULAR ACCOUNTING SYSTEM HAS BEEN FOLLOWED AND ACCEPTED AND THERE IS NO ACCEPTAB LE REASON TO DIFFER WITH THE SAME, THE DOCTRINE OF CONSISTENCY W OULD COME INTO PLAY NOTHING HAS BEEN BROUGHT ON RECORD TO SHOW TH AT THERE HAS BEEN DISTORTION OF PROFIT - THERE WAS THUS. NO JUSTIFICATION TO DEPART FROM THE PREVIOUS YEARS - DISALLOWANCE ON TH E GROUND THAT EXPENSES HAD OCCURRED AND CRYSTALLIZED DURING THE E ARLIER YEARS WAS NOT THEREFORE SUSTAINABLE,' 5.5 IF WE APPLY THE FACTS OF THE CASE TO THE PRESEN T CASE, DELHI HC'S CASE BANKING OFFICES ARE LOCATED THROUGHOUT THE COU NTRY AND ASSESSMENT SUBSEQUENT YEARS AND AO HAD EARLIER IN T HE SUBSEQUENT YEARS. AS THE FACTS ARE IDENTICAL TO OUR CASE, FOLL OWING DELHI HC'S DECISION, THE APPELLANT'S CLAIM IS ALLOWED. AO'S AD DITION IS DELETED AND GROUND OF APPEAL IS ALLOWED. 6.3.2 BEFORE US, REVENUE HAS FAILED TO CONTROVERT T HE AFORESAID DECISION OF THE LEARNED CIT(A). IN OUR VIEW IN THE FACTUAL MATR IX OF THE CASE AS DISCUSSED ABOVE, WE SEE NO REASON TO INTERFERE WITH THE FINDING RENDERED BY THE LEARNED CIT(A) IN ALLOWING THE ASSESSEES CLAIM FOR ALLOWING ITS CLAIM OF PRIOR PERIOD EXPENSES AMOUNTING TO ` 12,66,805/- (SUPRA) AND THEREFORE UPHOLD THE SAME. CONSEQUENTLY, GROUND NO. 3 OF THE REVENUES APPEAL IS DISMISSED. 7. GROUNDS 4 & 5 OF REVENUES APPEAL ARE GENERAL IN NATURE AND THEREFORE NO ADJUDICATION IS CALLED FOR THEREON. 8. IN THE RESULT, BOTH THE APPEALS OF REVENUE AND T HAT OF THE ASSESSEE FOR A.Y. 2011-12 ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH MARCH, 2017. SD/ - SD/ - (SANJAY GARG) (JASON P. BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 15 TH MARCH, 2017 ITA NOS. 2840 & 3482/MUM/2015 BATLIBOI ENVIRONMENTAL ENGINEERING LTD. 13 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) -22, MUMBAI 4. THE CIT - 14, MUMBAI 5. THE DR, F BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.