ACIT 17(3), MUMBAI V. VIPIN B SHAH, MUMBAI

ITA 6821/MUM/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 2004 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-11-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2010-2011
• Appeal Filed On: 10-11-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RANATIR GUPTA
• Keywords: Bogus purchase; Fair market value
• Section: 69C; 143(3); 69

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'F' BENCH, MUMBAI BEFORE SHRI JASON P. BOAZ, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH , JUDICIAL MEMBER ITA NO. 6821/MUM/2014 (ASSESSMENT YEAR: 2010-11) A C I T 17(3) VS. SHRI VIPIN B. SHAH ROOM NO. 614, 6 TH FLOOR PIRAMAL CHAMBERS, PAREL MUMBAI 400012 206, AMIT INDUSTRIAL PREMISES CO.OP SOCIETY LTD. 61 DR. S.S. ROAD, PAREL (E) MUMBAI 400012 PAN ALIPS2377R APPELLANT RESPONDENT ITA NO. 6381/MUM/2014 (ASSESSMENT YEAR: 2010-11) SHRI VIPIN B. SHAH VS. A C I T 17(3) 206, AMIT INDUSTRIAL PREMISES CO.OP SOCIETY LTD. 61 DR. S.S. ROAD, PAREL (E) MUMBAI 400012 ROOM NO. 614, 6 TH FLOOR PIRAMAL CHAMBERS, PAREL MUMBAI 400012 PAN ALIPS2377R APPELLANT RESPONDENT REVENUE BY: SHRI RANATIR GUPTA ASSESSEE BY: SHRI SANJAY PARIKH DATE OF HEARING: 02.11.2016 DATE OF PRONOUNCEMENT: 16.11.2016 O R D E R PER JASON P. BOAZ, A.M. THESE ARE CROSS APPEALS, ONE BY REVENUE AND THE OTH ER BY THE ASSESSEE, DIRECTED AGAINST THE ORDER OF THE CIT(A)- 29, MUMBAI DATED 22.08.2014 FOR A.Y. 2010-11. 2. THE FACTS OF THE CASE, BRIEFLY, ARE AS UNDER: - 2.1 THE ASSESSEE, PROPRIETOR OF VIPIN SHAH AND ASSO CIATES, ENGAGED IN BUSINESS AS CIVIL CONTRACTORS, FILED THE RETURN OF INCOME FOR A.Y. 2010-11 ON 15.10.2010 DECLARING TOTAL INCOME OF ` 62,40,310/-. THE RETURN WAS ITA NOS. 6821&6381/MUM/2014 SHRI VIPIN B. SHAH 2 PROCESSED UNDER SECTION 143(1) OF THE INCOME TAX AC T, 1961 (IN SHORT 'THE ACT') AND THE CASE WAS SUBSEQUENTLY TAKEN UP FOR SC RUTINY. THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE ACT VIDE ORDER DATED 25.03.2013; WHEREIN THE INCOME OF THE ASSESSEE WAS DETERMINED AT ` 2,02,24,470/- IN VIEW OF THE FOLLOWING ADDITIONS/DI SALLOWANCES: - (I) 20% DISALLOWANCE OUT OF MOTOR CAR EXPENSES ` 79,063/ - (II) DISALLOWANCE OUT OF TELEPHONE EXPENSES (15%) ` 36,663/ - (III) DISALLOWANCE OUT OF LABOUR CHARGES ` 1,05,58,905/ - (IV) BOGUS PURCHASE UNDER SECTION 69C ` 33,09,526/ - 2.2 AGGRIEVED BY THE ORDER OF ASSESSMENT FOR A.Y. 2 010-11 DATED 25.03.2013, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A)-29, MUMBAI. THE APPEAL WAS DISPOSED OFF BY THE LEARNED CIT(A) VIDE ORDER DATED 22.08.2014 ALLOWING THE ASSESSEE PARTIAL RELI EF. THE LEARNED CIT(A): (I) SUSTAINED THE DISALLOWANCE OUT OF MOTOR CAR EXP ENSES AND TELEPHONE EXPENSES TO THE EXTENT OF 5% THEREOF; (II) SUSTAINED 25% DISALLOWANCE UNDER SECTION 40A(2 )(B) OUT OF TOTAL LABOUR CHARGES PAID TO THREE SISTER CONCERNS; I.E. DISALLOWANCE TO THE EXTENT OF ` 26,39,726/- WAS SUSTAINED. (III) PROFIT @12.64% ON BOGUS PURCHASES. 3. BOTH REVENUE AND THE ASSESSEE, BEING AGGRIEVED BY THE IMPUGNED ORDER OF THE LEARNED CIT(A)-29, MUMBAI DATED 22.08. 2014 FOR A.Y. 2010- 11, HAVE PREFERRED CROSS APPEALS IN RESPECT OF ISSU ES HELD AGAINST THEM. 3.1 THE GROUNDS RAISED BY THE ASSESSEE IN ITS APPEA L ARE AS UNDER: - THE HONOURABLE COMMISSIONER OF INCOME TAX (APPEALS ) HAS ERRED IN CONFIRMING AD-HOC 25% ADDITION OF THE DISALLOWED LA BOUR CHARGES OF RS. 1,05,58,905/- BY THE LEARNED ASSESSING OFFICER WITH OUT CONSIDERING THE FACT AND MERITS OF THE CASE. THE HON'BLE CIT (APPEALS) HAS ALSO ERRED IN CONFIRM ING AD-HOC 12.64% ADDITION OF THE DISALLOWED ALLEGED BOGUS PURCHASES OF RS. 33,09,526/- BY THE LEARNED ASSESSING OFFICER WITHOUT CONSIDERIN G THE FACT AND MERITS OF THE CASE. THE HON'BLE CIT (APPEALS) HAS ALSO ERRED IN NOT CON SIDERING THE FACT THAT PURCHASES TO THE EXTENT OF RS. 29,90,240/- OUT OF THE ABOVE ALLEGED ITA NOS. 6821&6381/MUM/2014 SHRI VIPIN B. SHAH 3 BOGUS PURCHASE WERE WRITTEN BACK / REVERSED IN THE SUBSEQUENT YEAR ON DEFECTS FINDING IN THE MATERIAL SUPPLIED, WITHOU T CONSIDERING THE FACT AND MERITS OF THE CASE. THE HON'BLE CIT (APPEALS) HAS ALSO ERRED IN NOT CON SIDERING THE FURTHER PAYMENTS OF RS. 9,31,950/- OUT OF THE DISALLOWED BO GUS PURCHASE, ALLOWABLE ON THE GROUND OF PAID PORTION FROM THE AL LEGED BOGUS PURCHASE WERE ALLOWED IN THE ASSESSMENT U/S. 143(3) WITHOUT CONSIDERING THE FACT AND MERITS OF THE CASE. THE APPELLANT CRAVES LEAVE TO SUBMIT AT THE TIME OF HEARING SUCH FURTHER FACTS, INFORMATION, CLARIFICATION, DOCUMENT S ETC. AS MAY BE NECESSARY FOR THE PURPOSE OF DECIDING THE ISSUES IN THE APPEAL. 3.2 THE GROUNDS RAISED IN REVENUES APPEAL ARE AS U NDER: - '1. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LD. CIT(A) HAS ERRED IN REDUCING THE DISALLOWANCE THE M OTOR CAR EXPENSES FROM 20% TO 5% WITHOUT APPRECIATING THE FA CT THAT THE ASSESSEE WAS NOT MAINTAINING ANY LOG BOOK FOR MOTOR CAR AND USE OF MOTOR CAR FOR PERSONAL PURPOSES CANNOT BE RULED OUT . 2. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) HAS ERRED IN REDUCING THE DISALLOWANCE OF TE LEPHONE EXPENSES FROM 15% TO 5% WITHOUT APPRECIATING THE FA CT THAT THE USE OF TELEPHONE EXPENSES FOR PERSONAL PURPOSES CANNOT BE RULED OUT. 3. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) HAS FAILED TO APPRECIATE THAT THE DISALLOWAN CE OF LABOUR CHARGES OF RS. 1,05,58,905/- WAS MADE OUT OF PAYMEN TS PAYABLE TO SISTER CONCERNS OF THE ASSESSEE WHICH WERE COVERED U/S 40A(2)(B) OF THE I T ACT, AND MAJOR PAYMENT OF RS. 90,04,748/- W AS SHOWN AS OUTSTANDING AT THE END OF THE YEAR AND THE PARTIES CONCERNED DID NOT HAVE ANY SOURCE TO JUSTIFY THE EXPENDITURE MADE AS SHOWN IN RETURN OF INCOME. FURTHER, ON THE FACT AND IN THE C IRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) HAS FAILED TO AP PRECIATE THAT THE ASSESSEE WAS NOT ABLE TO PLACE ANY EVIDENCE TO PROV E THAT THE SUB- CONTRACT WERE CARRIED OUT BY THE SISTER CONCERNS WI TH THEIR OWN FUNDS. 4. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) HAS FAILED TO APPRECIATE THAT THE PEAK METHO D OF DISALLOWANCE AS HELD IN THE CASE OF M/S VIJAY PROTE INS LTD. (1996 58 LTD 428 AHD) WAS CORRECT METHOD FROM MAKING DISALLOWANCE OUT OF PURCHASES TREATED AS BOGUS PURCHASES AND HAS ERRED IN DIRECTING THE AO TO TREAT THE GP OF 12.64% AS DISAL LOWANCE OUT OF BOGUS PURCHASES.' 4. GROUND NO. 1 OF ASSESSEES APPEAL & GROUND NO. 3 OF REVENUES APPEAL DISALLOWANCE OF LABOUR CHARGES 4.1 THE FACTS OF THE MATTER ON THIS ISSUE AS PER TH E RECORDS ARE THAT IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER (AO) NOTICED ITA NOS. 6821&6381/MUM/2014 SHRI VIPIN B. SHAH 4 THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF ` 2,44,32,298/- IN THE PROFIT & LOSS ACCOUNT ON ACCOUNT OF LABOUR CHARGES PAID TO D IFFERENT SUB- CONTRACTORS ON THE CIVIL CONTRACTS UNDERTAKEN BY HI M. OUT OF THESE, AMOUNTS TOTALLING TO ` 1,05,58,905/- HAD BEEN PAID TO THE FOLLOWING RELATE D CONCERNS (HEREINAFTER REFERRED TO AS RELATED PARIT IES): - (I) M/S. BHAIRAV CONSTRUCTIONS ` 37,22,876/ - (II) JAIN INFRASTRUCTURE ` 34,34,207/ - (III) NAKODA DEVELOPERS ` 34,01,822/ - IT WAS ALSO OBSERVED FROM THE SCHEDULE OF SUNDRY DE BTORS THAT AMOUNTS TOTALLING ` 90,04,748/- WAS SHOWN AS OUTSTANDING TO THESE THREE PARTIES AS ON 31.03.2010. ON BEING QUERIED TO JUSTIFY THE PAYM ENTS MADE TO THESE RELATED PARTIES AS TO WHY NO DISALLOWANCE IS ATTRAC TED IN TERMS OF SECTION 40A(2) OF THE ACT, THE ASSESSEE FILED COPIES OF THE RETURNS OF INCOME OF THESE PARTIES STATING THAT THE ABOVE AMOUNTS HAVE BEEN OF FERED TO TAXATION BY THE ABOVE THREE PARTIES. THE AO OBSERVED THAT THE RETUR NS OF INCOME OF THE SAID THREE PARTIES (SUPRA) WERE FILED UNDER SECTION 44AF OF THE ACT, WHICH PERTAINS TO RETAIL TRADING AND DOES NOT COVER THE C ASES OF SUB-CONTRACTORS. THE AO ALSO NOTICED FROM THE RETURNS OF INCOME THAT THESE THREE PARTIES HAD NEITHER RECEIVED ANY MONEY FROM ANY SOURCE OR I NCURRED THEIR OWN FUNDS TO JUSTIFY EXPENDITURE UPTO 95% AS CLAIMED TH EREIN; MORE SO WHEN THE SUB-CONTRACTS SAID TO BE UNDERTAKEN BY THEM IS FOR LABOUR SUPPLY, WHERE PAYMENT TO LABOURERS IS THE BASIC PART OF EXP ENDITURE. IN THE LIGHT OF THE AFORESAID OBSERVATIONS, THE AO WAS OF THE VIEW THAT SINCE THE ABOVE THREE PARTIES HAD NOT ESTABLISHED OR SHOWN THAT THE Y HAD CARRIED OUT ANY SUB-CONTRACTS BUSINESS OR MADE PAYMENTS TO LABOURER S; AND THE ASSESSEE HAD MADE MEAGRE PAYMENTS TO THEM IN THE PERIOD UNDE R CONSIDERATION; THESE TRANSACTIONS BY THE RELATED PARTIES WERE BOGU S AND PROCEEDED TO DISALLOW THE ENTIRE AMOUNT OF ` 1,05,58,905/- SHOWN/DEBITED AS PAYMENTS TO THESE PARTIES. 4.2.1 ON APPEAL, THE LEARNED CIT(A) OBSERVED FROM T HE DETAILS ON RECORD THAT THE ASSESSEE HAD CARRIED OUT CIVIL CONTRACT WO RKS FOR ORGANIZATIONS LIKE RBI, M/S. RELIANCE INFRASTRUCTURE LTD., ETC. AND TH EREFORE RULED OUT THE POSSIBILITY OF THESE CONCERNS MAKING PAYMENTS FOR C IVIL CONTRACTS WITHOUT ITA NOS. 6821&6381/MUM/2014 SHRI VIPIN B. SHAH 5 ANY WORK BEING CARRIED OUT. IT WAS ALSO NOTICED THA T THE AO DID NOT CAUSE ANY INDEPENDENT ENQUIRY TO PROVE THAT EITHER THAT N O WORK WAS CARRIED OUT BY THESE THREE RELATED PARTIES OR THAT THE EXPENDIT URE BOOKED ON ACCOUNT OF LABOUR CHARGES TO THEM WAS TOTALLY BOGUS. THEREFORE , IN THE ABSENCE OF ANY EVIDENCE BEING BROUGHT ON RECORD TO SUBSTANTIATE/PR OVE THE SAME, THE PAYMENTS TO THESE PARTIES CANT BE TERMED AS BOGUS AND THE DISALLOWANCE OF THE ENTIRE PAYMENT OF ENTIRE LABOUR EXPENDITURE, SI NCE THEY WERE INCURRED THROUGH RELATED PARTIES, WAS HELD TO BE UNJUSTIFIED BY THE LEARNED CIT(A). 4.2.2 THE LEARNED CIT(A) OBSERVED FROM THE DETAILS ON RECORD THAT THOUGH THE THREE RELATED PARTIES HAD NOT BEEN PAID ENTIRE AMOUNTS DUE DURING THE PERIOD UNDER CONSIDERATION, SUBSTANTIAL PAYMENTS HA VE BEEN MADE IN THE SUBSEQUENT YEAR AND SINCE THE LABOUR JOBS TO COMPLE TE THE CONTRACT HAVE BEEN CARRIED OUT, THE EXPENDITURE INCURRED THROUGH THE THREE RELATED PARTIES CANNOT BE DOUBTED. AFTER THUS CONCLUDING, T HE LEARNED CIT(A) OBSERVING THAT SINCE THE ASSESSEE HAS NOT PLACED ON RECORD COMPARATIVE EVIDENCE TO SHOW THAT PAYMENTS TO THE RELATED PARTI ES WERE AT PAR WITH LABOUR PAYMENTS TO OTHER CONCERNS PERFORMING SIMILA R JOBS, THE PROVISIONS OF SECTION 40A(2) OF THE ACT ARE ATTRACTED AND CONS EQUENTLY SUSTAINED THE ADDITION TO THE EXTENT OF 20% OF LABOUR CHARGES PAI D TO SELECTED PARTIES, I.E. ` 26,39,726/-. 4.3.1 THE LEARNED A.R. OF THE ASSESSEE REITERATED T HE SUBMISSIONS/ ARGUMENTS PUT FORTH BEFORE THE AO AND LEARNED CIT(A ). ACCORDING TO THE AO, NO CASE WAS MADE OUT BY THE AO TO WARRANT DISALLOWA NCE OF THE ENTIRE EXPENDITURE INCURRED ON LABOUR CHARGES PAID TO THE THREE RELATED PARTIES UNDER SECTION 40A(2) OF THE ACT. IT IS NOT DISPUTED THAT CIVIL CONTRACT WORK WERE, INTER ALIA, CARRIED OUT FOR RBI, RELIANCE INF RASTRUCTURE LTD. ETC. THE FACT THAT NO ENQUIRY WAS CONDUCTED BY THE AO TO PROVE TH AT EITHER NO WORK WAS CARRIED OUT BY THESE RELATED PARTIES OR THAT THE EX PENDITURE BOOKED WAS ENTIRELY BOGUS, WAS NOTED BY THE LEARNED CIT(A), WH O PROCEEDED TO HOLD THAT THE DISALLOWANCE OF THE ENTIRE EXPENDITURE WAS NOT CALLED FOR. THE LEARNED A.R. OF THE ASSESSEE FURTHER CONTENDS THAT AFTER HOLDING THUS, THE ACTION OF THE LEARNED CIT(A) HIMSELF TO THEN PROCEED TO INVOKE TH E PROVISIONS OF SECTION ITA NOS. 6821&6381/MUM/2014 SHRI VIPIN B. SHAH 6 40A(2) OF THE ACT TO MAKE AN ADHOC DISALLOWANCE OF 25% OF THE EXPENDITURE INCURRED ON LABOUR CHARGES TO THREE RELATED PARTIES , WITHOUT POINTING OUT ANY PARTICULAR EXPENDITURE WHICH ACCORDING TO HIM IS EX CESSIVE OR UNREASONABLE THEREUNDER IS NOT SUSTAINABLE. IN SUPPORT OF THE PR OPOSITION, THAT NO ADHOC DISALLOWANCE CAN BE MADE UNDER SECTION 40A(2) OF TH E ACT, THE LEARNED A.R. OF THE ASSESSEE PLACED RELIANCE ON THE FOLLOWING DECIS IONS:- (I) CISCO SYSTEMS CAPITAL (I) LTD. VS. ADDL. CIT (2 015) 37 ITR (TRIB) 343 (BANGALORE) (II) SAYAJI IRON AND ENGG. CO. VS. CIT (2002) 253 I TR 749 (GUJ.) (III) JOHNSON AND JOHNSON LTD. VS. ACIT (ITA NO. 32 89 AND 9437/MUM/2014) (IV) GOLDCREST EXPORTS VS. ITO (ITA NO. 442/MUM/200 9) 4.3.2 IT IS ALSO CONTENDED THAT EXPENDITURE INCURRE D ON LABOUR CHARGES PAID TO THE SAME THREE RELATED PARTIES WAS ACCEPTED BY THE DEPARTMENT AND NO DISALLOWANCE UNDER SECTION 40A(2) OF THE ACT WAS MADE IN SCRUTINY ASSESSMENT PROCEEDINGS FOR A.Y. 2009-10 (COPY PLACE D AT PG. 34-38 OF PAPER BOOK). 4.4 THE LEARNED D.R. FOR REVENUE WAS HEARD IN SUPPO RT OF THE GROUNDS RAISED AND PLACED RELIANCE ON THE ORDER OF THE AO. IT WAS PLEADED THAT THE ORDER OF THE LEARNED CIT(A) ON THIS ISSUE BE REVERSED AND THAT OF THE SO RESTORED. 4.5 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD, INCLUDING THE JU DICIAL PRONOUNCEMENTS CITED. FROM THE FACTS OF THE CASE ON THIS ISSUE, TH E OBSERVATIONS AND FINDINGS OF THE AUTHORITIES BELOW, AS DISCUSSED IN PARAS 4.1 TO 4.4 (SUPRA) IT IS SEEN FROM A PERUSAL OF THE IMPUGNED ORDER OF THE LEARNED CIT(A) THAT AFTER DUE CONSIDERATION OF THE MATERIAL ON RECORD H E NEGATED THE AOS VIEW THAT THE SAID TRANSACTIONS WITH THE THREE RELATED P ARTIES INVOLVING THE INCURRING OF EXPENDITURE FOR LABOUR CHARGES WERE BO GUS AFTER OBSERVING THAT THE SAID EXPENDITURE WAS IN RESPECT OF CIVIL CONTRA CT WORKS CARRIED OUT FOR RBI, RELIANCE INFRASTRUCTURE LTD., WHO WOULD CERTAI NLY HAVE NOT PAID THE ASSESSEE UNLESS THE CIVIL CONTRACT INVOLVED WAS CAR RIED OUT; A VIEW WITH WHICH WE CONCUR. WE ALSO OBSERVE THAT THE AO HAS NO T CAUSED ANY ENQUIRY TO ESTABLISH THAT EITHER NO CONTRACT WORK WAS CARRI ED OUT BY THE THREE ITA NOS. 6821&6381/MUM/2014 SHRI VIPIN B. SHAH 7 RELATED PARTIES OR THAT THE EXPENDITURE BOOKED ON A CCOUNT OF LABOUR CHARGES WAS BOGUS. IN THIS VIEW OF THE MATTER, WE C ONCUR WITH AND UPHOLD THE FINDING OF THE LEARNED CIT(A) THAT IN THE ABSEN CE OF ANY MATERIAL EVIDENCE BEING BROUGHT ON RECORD BY THE AO TO PROVE THAT THE PAYMENTS MADE TO THESE THREE RELATED PARTIES AS BOGUS, THE S AID PAYMENT OF LABOUR CHARGES TO HIM CANNOT BE TERMED AS BOGUS AND THE AC TION OF THE SO TO DISCOVER THE ENTIRE PAYMENT OF LABOUR EXPENDITURE, SINCE THEY WERE INCURRED THROUGH RELATED PARTIES, IS UNJUSTIFIED AN D UNSUSTAINABLE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. CONSEQUENTLY, GROUND NO. 3 OF REVENUES APPEAL IS DISMISSED. 4.6 IN ITS APPEAL IN CONNECTION WITH GROUND NO. 1 T HE ASSESSEES SUBMISSION IS THAT THE LEARNED CIT(A) ORDER SUSTAIN ING AN ADHOC DISALLOWANCE OF 25% OF THE EXPENDITURE INCURRED ON LABOUR CHARGES PAID TO THE THREE RELATED PARTIES WAS UNSUSTAINABLE AS NO A DHOC DISALLOWANCE CAN BE MADE AS PER THE PROVISIONS OF SECTION 40A(2) OF THE ACT. AS RIGHTLY POINTED OUT BY THE LEARNED A.R. OF THE ASSESSEE, THE AO/CIT (A) CANNOT MAKE AN ADHOC DISALLOWANCE UNDER SECTION 40A(2) OF THE ACT. RATHER, HE HAS TO MAKE DISALLOWANCE OF SUCH OF THAT EXPENDITURE THAT IS EX CESS OR UNREASONABLE HAVING REGARD TO THE FMV OF GOODS, SERVICES, ETC. F OR WHICH THE PAYMENT IS MADE. IN OUR CONSIDERED VIEW, THE LEARNED CIT(A) HA S FAILED TO POINT OUT ANY PARTICULAR EXPENDITURE IN RESPECT OF LABOUR CHARGES WHICH ACCORDING TO HIM IS EXCESSIVE OR UNREASONABLE BUT HAS PROCEEDED TO U PHOLD AN ADHOC DISALLOWANCE OF 25% THEREOF, WHICH IS, IN OUR VIEW, UNSUSTAINABLE. IN THIS VIEW OF THE MATTER, WE ARE OF THE OPINION THAT THE ADHOC DISALLOWANCE OF 25% OF EXPENDITURE INCURRED ON LABOUR CHARGES PAID TO R ELATED PARTIES UNDER SECTION 40A(2) OF THE ACT WAS NOT WARRANTED IN THE FACTS AND CIRCUMSTANCES OF THE CASE ON HAND AS DISCUSSED ABOVE AND THEREFOR E DIRECT THE AO TO DELETE THE SAME. CONSEQUENTLY, GROUND NO. 1 OF THE ASSESSE ES APPEAL IS ALLOWED. 5. GROUND NO. 2 TO 4 OF ASSESSEES APPEAL AND GROUND N O. 4 OF REVENUES APPEAL BOGUS PURCHASES UNDER SECTION 69 C 5.1.1 IN THE ORDER OF ASSESSMENT, THE AO OBSERVED T HAT INFORMATION WAS RECEIVED FROM SALES TAX AUTHORITIES THAT CERTAIN PA RTIES HAD ADMITTED BEFORE THEM THAT THEY HAD ISSUED BOGUS BILLS TO VAR IOUS PARTIES WITHOUT ITA NOS. 6821&6381/MUM/2014 SHRI VIPIN B. SHAH 8 SELLING ANY MATERIAL AND THE ASSESSEE IN THE CASE O N HAND HAD MADE SO CALLED PURCHASES AMOUNTING TO ` 41,60,393/- FROM SOME SUCH PARTIES, AS PER THE DETAILS HEREUNDER: - (I) RAMDEV TRADING ` 73,433/ - (II) DHRUV SALE CORPORATION ` 1,77,138/ - (III) SHUBHLAXMI SALES CORPORATION ` 11,28,491/ - (IV) AMBIKA TRADE IMPEX ` 3,42,007/ - (V) OM CORPORATION ` 14,34,864/ - (VI) NATIONAL TRADING CO. ` 1,50,938/ - (VII) UNIVERSAL TRADING CO. ` 2,38,203/ - (VIII) BALAJI TRADERS ` 1,88,434/ - (IX) TRICHIPURAM TRADING P. LTD. ` 4,26,885/ - TOTAL ` `` ` 41,60,393/- 5.1.2 TO ASCERTAIN THE GENUINENESS OF THESE PURCHAS ES (SUPRA) THE AO CALLED UPON THE ASSESSEE TO FURNISH DETAILS TO ESTA BLISH THE SAME. THE ASSESSEE FURNISHED COPIES OF PURCHASE BILLS, DELIVE RY CHALLENS, PROOF PAYMENT THROUGH BANKING CHANNELS, ETC. THE AO FURTH ER REQUIRED THE ASSESSEE TO PRODUCE THE SAID PARTIES TO GIVE EVIDEN CE IN RESPECT OF THE GENUINENESS OF THESE PURCHASES, WHICH HE FAILED TO DO. THE ASSESSEES FAILURE TO DO SO, AND RELYING ON THE INFORMATION OF THE SALES TAX AUTHORITIES THAT THESE PARTIES ADMITTED TO HAVE GIVEN BOGUS BIL LS, THE AO PROCEEDED TO CONCLUDE THAT THE ASSESSEE HAD MADE THE AFORESAID P URCHASES (SUPRA) FROM THE ABOVE PARTIES OUT OF HIS UNDISCLOSED INCOME AND LATER ON OBTAINED THE BOGUS BILLS TO THAT EXTENT FROM THESE PARTIES. IN T HAT VIEW OF THE MATTER, THE AO PROCEEDED TO DISALLOW THE PEAK OF THE ABOVE PURC HASES AT ` 33,09,526/- AND BROUGHT IT TO TAX IN THE ASSESSEES HANDS UNDER SECTION 69C OF THE ACT. 5.1.3 ON APPEAL, THE LEARNED CIT(A) WAS OF THE VIEW THAT WHAT IS TO BE DISALLOWED IN THE CASE OF ALLEGED BOGUS PURCHASES I S ONLY THE PROFIT ELEMENT EMBEDDED IN SUCH PURCHASES SHOWN TO HAVE BEEN MADE FROM NON-EXISTENT PARTIES AND NOT THE PEAK AMOUNT OF ALLEGED BOGUS PU RCHASES AS HELD BY THE AO. IN THAT VIEW OF THE MATTER, THE LEARNED CIT(A) DIRECTED THE SO TO ASSESS THE GROSS PROFIT (GP) ON SUCH BOGUS PURCHASES @12.6 4% WHICH IS THE G.P. SHOWN BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATI ON. ITA NOS. 6821&6381/MUM/2014 SHRI VIPIN B. SHAH 9 5.2 THE LEARNED D.R. WAS HEARD IN SUPPORT OF GROUND NO. 4 RAISED BY REVENUE CHALLENGING THE ACTION OF THE LEARNED CIT(A ) IN DIRECTING THE AO TO ASSESS THE GP OF 12.64% AS THE DISALLOWANCE OUT OF BOGUS PURCHASES. IT WAS PRAYED THAT THE IMPUGNED ORDER OF THE LEARNED C IT(A) BE REVERSED AND THAT OF THE AO BE RESTORED. 5.3.1 THE LEARNED A.R. OF THE ASSESSEE WAS HEARD IN SUPPORT OF THE GROUNDS RAISED AT S. NO. 2 TO 4. IN THESE GROUNDS, THE ASSESSEE CONTENDS THAT THE LEARNED CIT(A) HAS ALSO ERRED IN CONFIRMIN G THE G.P. ADDITION @12.64% OF THE ALLEGED BOGUS PURCHASES OF ` 33,09,526/- WITHOUT CONSIDERING THE FACT THAT FOR THE ABOVE, PURCHASES TO THE EXTENT OF ` 29,90,240/- WERE WRITTEN BACK/REVERSED IN THE SUBSE QUENT YEAR ON FINDING DEFECTS IN THE MATERIAL SUPPLIED. 5.3.2 ACCORDING TO THE LEARNED A.R., THE ASSESSEE I N ORDER OF ESTABLISH THE GENUINENESS OF THE ABOVE PURCHASE TRANSACTION (SUPR A) HAD PRODUCED MATERIAL EVIDENCE IN THE FORM OF COPIES OF PURCHASE BILLS ISSUED BY THE PARTIES, PROOF OF PAYMENT FOR SUCH PURCHASES THROUG H BANKING CHANNELS, DELIVERY CHALLANS, ETC. IT IS CONTENDED THAT, ON TH E CONTRARY, THE AO HAS NEITHER CAUSED ANY INDEPENDENT ENQUIRY NOR BROUGHT ON RECORD EVEN A SHRED OF EVIDENCE TO PROVE THAT THE SAID PURCHASES WERE BOGUS AND IN COMING TO AN ADVERSE FINDING MERELY RELIED ON THE I NFORMATION OF PURCHASE PARTIES LISTED BY THE SALES TAX DEPARTMENT. THE LEA RNED A.R. OF THE ASSESSEE SUBMITTED THAT ON SIMILAR FACTS, THE HON'B LE BOMBAY HIGH COURT AND THE COORDINATE BENCH OF THE TRIBUNAL HAD DELETE D SUCH ADDITIONS MADE UNDER SECTION 69C OF THE ACT IN, INTER ALIA, T HE FOLLOWING CASES: - (I) CIT VS. NIKUNJ EXIMP ENTERPRISES P. LTD. (2015) 372 ITR 619 (BOM); (II) DCIT VS. SRI RAJEEV G. KALATHIL (ITA NO. 6727/ MUM/2012; (III) RAMESH KUMAR & CO. VS ACIT (ITA NO. 2955/MUM/ 2014; (IV) ACIT VS. VISHAL P. MEHTA (ITA NO. 5313/MUM/201 3). 5.4.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JU DICIAL PRONOUNCEMENTS CITED. ON AN APPRECIATION OF THE MATERIAL ON RECORD , IT IS EVIDENT FROM THE ORDER OF THE ASSESSMENT THAT IT IS ON THE BASIS OF INFORMATION FROM THE ITA NOS. 6821&6381/MUM/2014 SHRI VIPIN B. SHAH 10 SALES TAX DEPARTMENT THAT THE ASSESSEE ISSUED NOTIC E TO THE ASSESSEE CALLING UPON HIM TO EXPLAIN THE GENUINENESS OF THE AFORESAID PURCHASES FROM THE SAID PARTIES (SUPRA). AS THE ASSESSEE WAS UNABLE TO PRODUCE THE SAID PARTIES, THE AO PRIMARILY RELYING ON THE INFOR MATION OBTAINED FROM THE SALES TAX DEPARTMENT HELD THE SAID PURCHASES TO BE BOGUS. WHILE IT MAY BE TRUE THAT THE SAID PARTIES FROM WHOM THE SAID PU RCHASES WERE MADE DID NOT APPEAR BEFORE THE AO; HOWEVER, HON'BLE BOMBAY H IGH COURT IN THE CASE OF NIKUNJ EXIMP ENTERPRISES P. LTD. (2005) 372 ITR 619 (BOM) HAS HELD THAT THIS BY ITSELF CANNOT BE A GROUND TO HOLD THE PURCHASES AS BOGUS. APART FROM THIS, THE FACT ALSO REMAINS THAT THE ASS ESSEE ITSELF HAD FILED COPIES OF PURCHASE BILLS, PROOF THAT PAYMENT FOR TH E SAME WERE THROUGH BANKING CHANNELS, DELIVERY CHALLANS, ETC. IN ORDER TO ESTABLISH THE GENUINENESS OF THE SAID PURCHASES. IT IS A FACT ON RECORD THAT THE AO HAS NOT DOUBTED THE CORRESPONDING SALES EFFECTED BY THE ASSESSEE AND THEREFORE IT IS IN ORDER TO CONCLUDE THAT WITHOUT CORRESPONDI NG PURCHASES BEING AFFECTED, THE ASSESSEE COULD NOT HAVE MADE THE SALE S. 5.4.2 WE FIND THAT THE AO HAS NOT BROUGHT ON RECORD ANY MATERIAL EVIDENCE TO CONCLUSIVELY ESTABLISH THAT THE PURCHASES ARE BO GUS. MERE RELIANCE BY THE AO ON INFORMATION OBTAINED FROM THE SALES TAX D EPARTMENT WOULD NOT SUFFICE TO TREAT THE PURCHASES AS BOGUS AND MAKE TH E ADDITION. IF THE AO DOUBTED THE GENUINENESS OF THESE PURCHASES, IT WAS INCUMBENT UPON HIM TO CAUSE ENQUIRIES TO BE CAUSED TO ASCERTAIN THE GE NUINENESS OF OTHERWISE OF THE TRANSACTIONS. WITHOUT CAUSING ANY ENQUIRIES TO BE MADE TO ESTABLISH HIS SUSPICIONS, THE AO CANNOT MAKE THE ADDITION UND ER SECTION 69C OF THE ACT BY MERELY RELYING ON INFORMATION OBTAINED FROM THE SALES TAX DEPARTMENT. IN THE CASE ON HAND, THE AO FAILED TO M AKE ANY ENQUIRY TO ESTABLISH HIS SUSPICIONS. FURTHER, THE CORRESPONDIN G SALES HAVE NOT BEEN QUESTIONED. WE FIND THAT THE ASSESSEE HAS BROUGHT O N RECORD DOCUMENTARY EVIDENCES TO ESTABLISH THE GENUINENESS OF THE PURCH ASE TRANSACTIONS, THE ACTION OF THE AO IN IGNORING THESE EVIDENCES CANNOT BE ACCEPTED. WHEN THE COPIES OF PURCHASE BILLS OF THESE PARTIES, DELIVERY CHALLANS, PROOF OF PAYMENT THROUGH BANKING CHANNELS, ETC., AND THERE I S NO EVIDENCE BROUGHT ON RECORD BY THE AO TO ESTABLISH THAT THE SAID PAYM ENTS WERE ROUTED BACK ITA NOS. 6821&6381/MUM/2014 SHRI VIPIN B. SHAH 11 TO THE ASSESSEE, THE ADDITION MADE BY THE AO UNDER SECTION 69C OF THE ACT IS UNSUSTAINABLE. IN COMING TO THIS VIEW, WE DRAW S UPPORT FROM THE DECISIONS, INTER ALIA, OF THE HON'BLE BOMBAY HIGH C OURT IN THE CASE OF NIKUNJ ENTERPRISES P. LTD. (SUPRA) AND THE COORDINA TE BENCH OF THE TRIBUNAL IN THE CASES OF RAJEEV G. KALATHIL (SUPRA) AND VISHAL MEHTA (SUPRA). IN THIS FACTUAL MATRIX OF THE CASE, WE HOL D THAT THE ADDITION MADE BY THE AO UNDER SECTION 69C OF THE ACT ON ACCOUNT O F PEAK OF ALLEGED BOGUS PURCHASES OF ` 33,09,256/- TO BE UNSUSTAINABLE. CONSEQUENTLY REVENUES GROUND RAISED AT S. NO. 4 IS DISMISSED. 5.5 IN THIS ORDER AT PARAS 5.4.1 TO 5.4.2 (SUPRA) W E HAVE HELD THAT THE AOS ACTION IN MAKING THE ADDITION U/S. 69C OF THE ACT O N ACCOUNT OF ALLEGED BOGUS PURCHASES WAS FACTUALLY UNSUSTAINABLE IN THE LEGAL AND FACTUAL MATRIX OF THE CASE. CONSEQUENTLY, THE FINDING OF THE LEARN ED CIT(A) IN THE IMPUGNED ORDER THAT ADHOC ADDITION OF 12.64% ON ACCOUNT OF A LLEGED BOGUS PURCHASES IS TO BE MADE, WOULD ALSO NOT BE SUSTAINABLE AS THE PROFIT ON SALE THEREOF WOULD ALREADY BE EMBEDDED IN THE ASSESSEES INCOME. WE, THEREFORE, DELETE THIS ADHOC ADDITION OF 12.64% PROFIT ON ALLEGED BOG US PURCHASES. CONSEQUENTLY, GROUNDS 2 TO 4 OF THE ASSESSEES APPE AL ARE ALLOWED. 6. GROUND NO. 5 OF THE ASSESSEES APPEAL THIS GROUND BEING GENERAL IN NATURE, NO ADJUDICATIO N IS CALLED FOR THEREON. 7. GROUND NO. 1 OF REVENUES APPEAL DISALLOWANCE OF MOTOR CAR EXPENSES 7.1 IN THIS GROUND REVENUE CONTENDS THAT THE LEARNE D CIT(A) ERRED IN REDUCING THE DISALLOWANCE OF MOTOR CAR EXPENSES FRO M 20% TO 5%. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFUL LY CONSIDERED THE MATERIAL ON RECORD. IN THE ORDER OF ASSESSMENT, THE AO HAS MADE AN ADHOC DISALLOWANCE OF 20% OF MOTOR CAR EXPENSES AND DEPRE CIATION THEREOF (I.E. ` 79,063/-). ON APPEAL, THE LEARNED CIT(A) SUSTAINED THIS DISALLOWANCE TO THE EXTENT OF 5%. BEFORE US, EXCEPT FOR RAISING THI S GROUND, REVENUE HAS NOT BROUGHT ON RECORD ANY MATERIAL EVIDENCE TO CONT ROVERT THE FINDING OF THE LEARNED CIT(A) AND WARRANT OUR INTERFERENCE THE REIN ON THIS ISSUE. IN ITA NOS. 6821&6381/MUM/2014 SHRI VIPIN B. SHAH 12 THIS VIEW OF THE MATTER, WE UPHOLD THE ORDER OF THE LEARNED CIT(A) ON THIS ISSUE AND CONSEQUENTLY, GROUND NO. 1 OF REVENUES A PPEAL IS DISMISSED. 8. GROUND NO. 2 OF REVENUES APPEAL DISALLOWANCE OF TELEPHONE EXPENSES 8.1 IN THIS GROUND THE REVENUE CHALLENGES THE ACTIO N OF THE LEARNED CIT(A) IN REDUCING THE DISALLOWANCE OF TELEPHONE EX PENSES FROM 15% TO 5%. WE HAVE HEARD THE RIVAL CONTENTIONS PERUSED AND CAR EFULLY CONSIDERED THE MATERIAL ON RECORD. IN THE ORDER OF ASSESSMENT THE AO HAS MADE AN ADHOC DISALLOWANCE OF ` 36,663/-; BEING 15% OF TELEPHONE EXPENSES AMOUNTING TO ` 2,44,423/-. ON APPEAL, THE LEARNED CIT(A) HAS SUSTA INED THE DISALLOWANCE TO THE EXTENT OF 5%. EXCEPT FOR RAISING THE GROUND BEFORE US, REVENUE HAS NOT BROUGHT ON RECORD ANY MATERIAL EVIDENCE TO CONT ROVERT THE IMPUGNED ORDER OF THE CIT(A) AND WARRANT OUR INTERFERENCE TH EREIN ON THIS ISSUE. IN THIS VIEW OF THE MATTER, WE UPHOLD THE ORDER OF THE LEARNED CIT(A) ON THIS ISSUE. CONSEQUENTLY, GROUND NO. 2 OF REVENUES APPE AL IS DISMISSED. 9. IN THE RESULT, REVENUES APPEAL FOR A.Y. 2010-11 IS DISMISSED AND THE ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH NOVEMBER, 2016. SD/ - SD/ - (AMARJIT SINGH) (JASON P. BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 16 TH NOVEMBER, 2016 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) -6, MUMBAI 4. THE CIT - 2, MUMBAI 5. THE DR, F BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.