ITO 9(1)(4), MUMBAI V. DHANESH WEAVING P. LTD, MUMBAI

ITA 3897/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54878 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2006-2007
• Appeal Filed On: 13-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KUBAL
• Assessee Lawyers: B P PUROHIT
• Keywords: Bogus purchase

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH D : MUMBAI BEFORE SHRI R.V. EASWAR, (PRESIDENT) AND SHRI RAJENDRA SINGH,(ACCOUNTANT MEMBER) ITA NO.3897/MUM/2010 ASSESSMENT YEAR : 2006-07 INCOME TAX OFFICER-9(1)(4) ROOM NO.294, AAYAKAR BHAVAN MUMBAI-400 020. ..( APPELLANT ) VS. M/S. DHANESH WEAVING PVT. LTD. GR. FLOOR, VISHWESHWAR COMPOUND OFF AAREY ROAD GOREGAON (E) MUMBAI-400 063. ..( RESPONDENT ) P.A. NO. (AACCD 1092J) APPELLANT BY : SHRI M.R. KUBAL RESPONDENT BY : SHRI B. P. PUROHIT DATE OF HEARING : 28.7.2011 DATE OF PRONOUNCEMENT : 12 TH AUGUST, 2011 O R D E R PER RAJENDRA SINGH (AM). THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER DATED 18.3.2010 OF CIT(A) FOR THE ASSESSMENT YEAR 2006-07. THE REVENUE IN THIS APPEAL HAS RAISED DISPUTES ON THREE DIFFERENT GROUNDS. 2. THE FIRST DISPUTE IS REGARDING DISALLOWANCE OF MACHINE HIRE CHARGES PAID BY THE ASSESSEE TO RELATED CONCERNS UNDER SECTION 40A(2)(B) OF THE INCOME TAX ACT, 1961 (THE ACT). THE AO NOTED THAT ITA NO.3897/M/10 A.Y:06-07 2 THE ASSESSEE HAD INCURRED AN EXPENDITURE OF RS.76,56,000 /- ON ACCOUNT OF MACHINE HIRE CHARGES PAID TO FOUR RELATED CONCE RNS OF THE ASSESSEE. THE AO THEREFORE, ASKED THE ASSESSEE TO EXPLAIN A S TO WHY EXPENSES SHOULD NOT BE DISALLOWED UNDER SECTION 40A(2)(B) OF THE ACT. THE ASSESSEE SUBMITTED THAT THE PAYMENTS HAD BEEN MADE AS PER AGREEMENT AND WERE AS PER MARKET RATES. THE AO HOWEV ER OBSERVED THAT THE ASSESSEE COULD NOT SUPPORT THE CLAIM BY CORROBORA TIVE EVIDENCE BY GIVING THE DETAILS SUCH AS AGE AND MAKE OF MACHINE ETC. THE AO DID NOT BELIEVE THE AGREEMENT AS THIS WAS BETWE EN RELATED PARTIES. IT WAS OBSERVED BY HIM THAT THE ASSESSEE PRODUCED NO DOCUMENTARY EVIDENCE TO SHOW THAT RATES WERE COMMENSURATE WITH MARKET RATES. HE, THEREFORE ALLOWED 20% OF THE MACHIN ERY HIRE CHARGES PAID AMOUNTING TO RS.15,31,200/- UNDER SECTION 4 0A(2)(B). 2.1 IN APPEAL THE ASSESSEE SUBMITTED THAT THE AO NEVER ASKED FOR DETAILS SUCH AS AGE, AND MAKE OF MACHINE, GENUINENESS, CA PACITY ETC. NOR MADE ANY ENQUIRY OR GATHERED ANY ADVERSE MATERIA L TO SHOW THAT THE PAYMENTS MADE BY THE ASSESSEE WERE EXCESSIVE. THE CIT( A) WAS SATISFIED BY THE EXPLANATION GIVEN. IT WAS OBSERVED BY HIM THAT THE AO HAD GIVEN NO FINDING THAT THE PAYMENTS MADE BY TH E ASSESSEE WERE UNREASONABLE COMPARED TO MARKET VALUATION AND, T HEREFORE, ITA NO.3897/M/10 A.Y:06-07 3 DISALLOWANCE WAS NOT UPHELD AND ADDITION WAS DELETED. A GGRIEVED, BY THE SAID DECISION, THE REVENUE IS IN APPEAL. 2.2 BEFORE US THE LD. AR SUBMITTED THAT THE ASSESSEE HAD GIVEN COMPLETE DETAILS AND JUSTIFICATION OF RATE OF HIRE CHAR GES IN ADDITION TO THE AGREEMENT AS WAS CLEAR FROM THE LETTER PLACED AT PA GE-1 OF THE PAPER BOOK. THE AO HAD NO MATERIAL TO HOLD THAT T HE PAYMENTS WERE EXCESSIVE COMPARED TO MARKET VALUE. THE LD. DR ON THE OTHER HAND SUPPORTED THE ORDER OF THE AO AND PLACED RELIANCE ON T HE FINDINGS GIVEN THEREIN. 2.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING DISAL LOWANCE OF MACHINERY HIRE CHARGES PAID BY THE ASSESSEE TO RELATED CON CERNS UNDER SECTION 40A(2)(B) OF THE ACT. THE SAID SECTION EMPOWERS T HE AO TO MADE DISALLOWANCE OF EXPENSES INCURRED ON ACCOUNT OF RELA TED CONCERNS IN CASE THE SAME IS FOUND EXCESSIVE COMPARED TO MARKE T VALUE. IN THIS CASE, ASSESSEE HAD INCURRED MACHINERY HIRE CH ARGES ON ACCOUNT OF RELATED CONCERNS AND THE PAYMENTS HAD BEEN MA DE AS PER AGREEMENT. THE ASSESSEE VIDE LETTER DATED 14.11.2008 COPY OF WHICH HAS BEEN PLACED IN THE PAPER BOOK HAD ALSO GIVEN DETAI LS AND JUSTIFICATION FOR THE MACHINERY HIRE CHARGES WHICH WERE A S UNDER :- ITA NO.3897/M/10 A.Y:06-07 4 A) MANISH SILK MILLS RENT PAID RS.10,000/- PER MONT H FOR 2 INDUSTRIAL GALAS. THE RENT PER GALA COMES TO RS.5,000/- PER MONTH ONLY WHICH IS F ULLY JUSTIFIABLE FOR INDUSTRIAL GALAS IN VASAI. LOAN RENT FO 26 LOOMS AT VASAI AND 24 LOOMS AT GOREGAON AT THE RATE OF RS.600/- PER LOOM PER MONTH. B) VIKAS SILK MILLS RENT OF RS.10,000/- PER MONTH FOR TWO INDUSTRIAL GALAS AT VASAI I.E. RS.5,000/- PER GALA PER MONTH. LOOM RENT FOR 28 LOO MS AT RS.600/- PER MONTH PER LOOM , LOOM RENT FOR ELEVEN RAPIER LOOMS AT RS.23,000 /- PER LOOM PER MONTH FOR A LOOM WHICH COSTS MORE THAN RS.20.00 LACS. SIMILARLY LOOM RENT AT RS.15,000/- PER LOOM PER MONTH FOR A LOOM WHICH COSTS MORE THAN RS.12,50 ,000/-. C) SANJAY SILK MILLS-RENT RS.25,000/- PER MONTH FOR FO UR GALAS AT VASAI AND OTHER GALAS AT BHIWANDI, RENT OF RS.600/- PER LOOM PER MONTH FO R 24 LOOMS FOR PLAIN LOOMS. D) DHANESH INDUSTRIES RENT RS.600/- PER LOOM PER MONTH F OR PLAIN LOOMS AND RS.15,000/- PER MONTH PER LOOM FOR 12 SULZER LOOMS. E) MANEESH S. NARANG RENT RS.7,000/- PER MONTH FOR TWO GALAS AT BHIWANDI. F) VIKAS S. NARANG-RENT RS.7,000/- PER MONTH FOR TWO GAL AS AT BHIWANDI G) ATMARAM DWARKADAS VERY EXPERIENCED TEXTILE BUSINESSMAN W ITH MORE THAN 50 YEARS EXPERIENCE IS PAID SALARY OF RS.1,08,000/- FOR THE ENTI RE YEAR WHICH WORKS OUT TO RS.9,000/- PER MONTH. H) DIRECTORS REMUNERATION RS.1,50,000/- IN ALL PAID TO TW O DIRECTORS FOR ENTIRE YEAR. 2.4 THE AO HAD NOT CONDUCTED ANY ENQUIRY NOR MADE ANY VERIFICATION TO ARRIVE AT THE CONCLUSION THAT PAYMENT MADE BY THE A SSESSEE WERE EXCESSIVE COMPARED TO MARKET VALUE. THE CLAIM OF THE ASSE SSEE THAT THE AO DID NOT CALL FOR ANY FURTHER DETAILS HAS ALSO N OT BEEN CONTROVERTED BEFORE US. UNDER THESE CIRCUMSTANCES DISALLOW ANCE ON ADHOC BASIS @ 20% OF ENTIRE EXPENSES IS NOT JUSTIFIED. T HERE IS NO MATERIAL TO SUPPORT SUCH DISALLOWANCE. WE, THEREFORE, SEE NO INFIRMITY IN THE ORDER OF THE CIT(A) DELETING THE ADDITION MA DE BY THE AO AND SAME IS THEREFORE, UPHELD. 3. THE SECOND DISPUTE IS REGARDING THE ADDITIONS MADE ON ACCOUNT OF BOGUS PURCHASES. THE AO NOTED THAT THE ASSESSEE HAD MADE ITA NO.3897/M/10 A.Y:06-07 5 PURCHASES OF RS.1,63,48,163/- FROM M/S. DHANESH INDUSTRIES WHICH WAS ITS SISTER CONCERN. BUT ON VERIFICATION OF ACCOUNT OF M /S. DHANESH INDUSTRIES, THE AO NOTED THAT THE SALES MADE BY THE SAI D PARTS WERE ONLY TO THE TUNE OF RS.1,55,32,071/- THE AO OBSERVED THAT EVEN IF IT WAS ASSUMED THAT ENTIRE SALES BY M/S. DHANESH INDUSTRIES WE RE TO THE ASSESSEE, THERE WAS DIFFERENCE OF RS.8,16,092/- WHICH REMAI NED UN- RECONCILED. HE, THEREFORE, ADDED THE SAME TO THE TOTAL INCOME. IN APPEAL THE ASSESSEE SUBMITTED THAT AO NEVER ASKED THE ASSESSE E TO RECONCILE THE DIFFERENCE. IT WAS SUBMITTED THAT FROM SA LES MADE TO THE ASSESSEE M/S. DHANESH INDUSTRIES HAD DEDUCTED BROKERAGE OF RS.2,456/-; CLAIMS OF RS.3,88,582/-; DISCOUNT OF RS.34,24 5/-; RATE DIFFERENCE OF RS.67,421/- AND GOODS RETURNED RS.3,48,53 5/- TOTALING TO RS.8,41,339/- WHICH ALL RELATED TO ASSESSMENT YEAR 2005- 06 AND THUS HAD NO IMPACT ON THE SALES OF THE PARTY IN THE CURRENT YEAR WHICH WERE RS.1,63,48,164/- AS SHOWN BY THE ASSESSEE. THE CIT(A) RE MANDED THE MATTER TO THE AO AND IN THE REMAND REPORT DATED 17.2.2010 THE AO SUBMITTED THAT THE ASSESSEE HAD NOT GIVEN ANY SUPPORTI NG EVIDENCE TO SUBSTANTIATE THE CLAIM AND THEREFORE, ADDITION MADE IN THE ASSESSMENT WAS CORRECT. THE CT(A) HOWEVER, OBSERVED THAT T HE SPECIFIC AVERMENTS MADE BY THE ASSESSEE HAD NOT BEEN DISPU TED OR FOUND TO BE FALSE IN THE REMAND REPORT. HE PARTICULAR LY NOTED THAT THE DISCOUNT PERTAINED TO THE PURCHASE MADE IN ASSESSMENT YEAR 2005-06. ITA NO.3897/M/10 A.Y:06-07 6 HE ACCORDINGLY DELETED THE ADDITION MADE BY THE AO. A GGRIEVED BY THE SAID DECISION, THE REVENUE IS IN APPEAL. 3.1 BEFORE US, THE LD. DR ASSAILED THE ORDER OF THE C IT(A) AND SUBMITTED THAT THE CIT(A) HAD GIVEN RELIEF EVEN WHEN THE CLAIMS MADE BY THE ASSESSEE WERE NOT SUBSTANTIATED WHEREAS THE LD. AR FOR THE ASSESSEE SUBMITTED THAT THE ORDER OF CIT(A) WAS REASONABLE AND SHOULD BE ACCEPTED. 3.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTE R CAREFULLY. THE DISPUTE IS REGARDING ADDITION MADE ON ACCOUNT OF DIFFERENCE IN FIGURE OF PURCHASE MADE BY THE ASSESSEE COMP ARED TO CORRESPONDING SALES SHOWN BY THE SELLER. THE CASE OF THE A SSESSEE IS THAT THE SELLER IN THE BOOKS HAD SHOWN NET FIGURE OF SA LES AFTER MAKING ADJUSTMENTS ON ACCOUNT OF BROKERAGE (RS.2,456/-), CLAIMS OF (RS.3,88,582/-), DISCOUNT (RS.34,245/-), RATE DIFFERENCE OF (RS.67,421/-) AND GOODS RETURNED (RS.3,48,535/-). SINCE THESE ADJUSTMENTS WERE ON ACCOUNT OF ASSESSMENT YEAR 2005-06, T HESE DID NOT AFFECT THE SALES FOR THE CURRENT YEAR WHICH WAS THE SAME AS THE PURCHASES SHOWN BY THE ASSESSEE. THE AO IN THE REMAND REPOR T POINTED OUT THAT THE CLAIM OF THE ASSESSEE WAS NOT SUBSTANT IATED BY ANY EVIDENCE. CIT(A) HOWEVER, ACCEPTED THE CLAIM OF THE ASSESSEE AND ALLOWED RELIEF ON THE GROUND THAT THE AO HAD NO MAT ERIAL TO PROVE THAT ITA NO.3897/M/10 A.Y:06-07 7 THE CLAIM WAS FALSE. IN OUR VIEW THE ORDER OF CIT(A) CANNOT BE UPHELD AS IT WAS FOR THE ASSESSEE TO SUBSTANTIATE THE CLAIM BY PROD UCING NECESSARY EVIDENCE. MOREOVER CIT(A) HAS NOT GIVEN CLEAR FINDING WHETHER GOODS RETURNED AMOUNTING TO RS.3,48,535/- REL ATED TO ASSESSMENT YEAR 2005-06. THE CIT(A) HAS GIVEN SPECIFIC FI NDING ONLY RELATION TO DISCOUNT WHICH ACCORDING TO HIM RELATED TO A SSESSMENT YEAR 2005-06. GOODS RETURNED HAVE A DIRECT BEARING ON THE SALES MADE BY THE PARTY AND THEREFORE, IT WAS REQUIRED TO BE SEEN W HETHER THE SAME RELATED TO THE ASSESSMENT YEAR UNDER REFERENCE OR NOT WH ICH HAS NOT BEEN DONE. WE THEREFORE, SET ASIDE THE ORDER OF CIT( A) AND RESTORE THE MATTER TO THE AO FOR PASSING A FRESH ORDER AFTER N ECESSARY EXAMINATION IN THE LIGHT OF OUR OBSERVATIONS AND AFTE R ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 4. THE THIRD DISPUTE IS REGARDING ADHOC DISALLOWANCE O F RS.21,11,937/- OUT OF EXPENSES CHARGED TO P&L ACCOUNT AMO UNTING TO RS.2,11,19,368/- ON ACCOUNT OF PURCHASES, CARRIAGE INWARD S, DIESEL CHARGES, STORES & SPARES, WAGES AND BONUS, MAINTENANCE, GENE RAL EXPENSES, MISCELLANEOUS EXPENSES, SAMPLING EXPENSES, EXPENSES O N TRANSPORTATION AND VEHICLE EXPENSES. THE AO OBSERVED TH AT THESE EXPENSES WERE NOT SUPPORTED BY DETAIL OF BILLS AND VOUCH ERS. HE, THEREFORE, DISALLOWED 10% OF THESE EXPENSES AMOUNTING T O RS.21,11,937/-. IN APPEAL THE ASSESSEE SUBMITTED THAT D ISALLOWANCE ITA NO.3897/M/10 A.Y:06-07 8 HAD BEEN MADE PURELY ON GUESS WORK BASIS WITHOUT SHOWIN G ANY INTENTION OF DISALLOWANCE AT THE TIME OF ASSESSMENT. THE CIT(A) AGREED WITH THE SUBMISSION OF THE ASSESSEE THAT DISALLOWANCE HAD BEEN MADE BASED ON CONJECTURES AND SURMISES WITHOUT GIVING ANY PROPE R BASIS. HE, THEREFORE, DELETED THE ADDITION, AGGRIEVED BY WH ICH REVENUE IS IN APPEAL. 4.1 BEFORE US THE LD. AR FOR THE ASSESSEE REITERATED THE SAME SUBMISSIONS MADE BEFORE THE CIT(A), WHEREAS THE LD. DR PLACED RELIANCE ON THE ORDER OF THE AO. 4.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTE R CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OUT O F EXPENSES UNDER VARIOUS HEADS. THE AO HAS MADE DISALLOWANCE ON THE GROU ND THAT DETAILS OF BILLS AND VOUCHERS WERE NOT AVAILABLE. TH E CLAIM OF THE ASSESSEE THAT NO NOTICE WAS GIVEN BY AO INTENDING TO MAKE DISALLOWANCE IS NOT CONTROVERTED BEFORE US. EVEN IF SOME VOUCHERS WERE NOT AVAILABLE AO IS REQUIRED TO GIVE SOME BASIS FO R MAKING THE ESTIMATED DISALLOWANCE. NO BASIS OF DISALLOWANCE HAS BEEN GIVEN. THERE IS ALSO NO MATERIAL ON RECORD SHOWING THAT EXPENSE S WERE EXCESSIVE COMPARED TO EARLIER YEAR. THEREFORE, ESTIMATE D DISALLOWANCE @ 10% WITHOUT GIVING ANY PROPER BASIS CANNOT BE UPHELD . WE SEE NO ITA NO.3897/M/10 A.Y:06-07 9 INFIRMITY IN THE ORDER OF CIT(A) DELETING THE ADDIT ION AND THE SAME IS, THEREFORE, UPHELD. 5. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 12.8.2011. SD/- SD/- (R.V. EASWAR) (RAJENDRA SINGH ) PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATED: 12.8.2011. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.