2011 (5) TMI 370 - AT - Income Tax

Tax appeal decisions: Revenue appeals dismissed, Assessee appeals partly allowed, mixed decisions for 2005-06, 2006-07

ACIT Versus Rochem Separation Systems India (P) Ltd. & others

The appeals of Revenue for the years 2000-01 to 2004-05 were dismissed. The appeals of Assessee for the years 2001-02 to 2004-05 were partly allowed. ... Search and seizure - AO asked the assessee to explain the commission payments made to various parties - From the Financial Years 1998-99 to 2005-06, the assessee paid total commission of Rs.8,38,91,115/- for various financial years - It was on record that commission to the extent of 1.87 crores paid to M/s. Smith Enterprises was accepted by the AO having been confirmed by the said party in the course of Survey u/s.133A.there was no disallowance of the commission paid to the above party - Decided in favor of the assessee Regarding Commission paid to M/s. Buniyad Chemicals Ltd - It is also seen that some of the question being asked by the assessee's director in cross examination was not allowed or not answered by Shri Chokshi as that would incriminate the said person. It is also on record that the bank account of Raigad Sahakari Bank Ltd. was exclusively operated by the Director of the M/s. Buniyad Chemicals Ltd. and as stated,for the transactions those were not recorded in the books of accounts - Appeal is allowed for statistical purpose Regarding bogus purchase - in the course of search proceedings the assessee company director admitted bogus purchases from about 46 parties totaling to about 8 crores - In all, there are 3 statements, extracted by the AO in the assessment order, which indicate that the above named concern affirmed the supplies of the goods in the first two statements and retracted and stated that they are bogus purchases in the last statement - It was the submission of the asssessee that these two parties are regularly supplying specialized material required in its manufacturing activity and there were regular invoices, transportation of goods, excise records and third party evidences that the goods were received by the assessee company, and were used in the manufacturing process - Decided in favor of the assessee Regarding personal expenditure - Held that: No other person was selected for the specific course and since this benefit was extended to the said Shri Prerak Goel, being Son of the Director, the expenditure incurred cannot be allowed as business expenditure u/s. 37(1) of the Act, therefore, the disallowances made by the AO stands confirmed - Decided against the assessee Regarding Business Promotion Expenditure - there is a seized paper at3rd party premises which indicated that the expenditure was for the purpose of marriage reception of Shri Prerak Goel The assessee has not placed on record any other independent evidence that there was a separate reception called for by the Father of Shri Prerak Goel at a separate premises and this was a simple business meeting, like copies of invitation or letters sent for the meeting - Decided against the assessee Regarding Operation and Maintenance Expenses - There is no evidence of such expenditure either during search or immediately thereafter - If the expenditure was genuine and spent for the purposes of business, no one prevented the assessee to record the same in the books of accounts - assessee could have made entries in the books of account in financial year 2005-06 after the search on 10-08-05 if the expenditure was incurred for the purposes of business - Decided against the assessee Issues Involved:1. Payment of Commission2. Commission paid to M/s. Buniyad Chemicals Ltd.3. Addition on Account of Bogus Purchases4. Higher Education Expenses5. Business Promotion Expenditure6. Operation and Maintenance Expenses7. Addition under section 2(24)(iv) in respect of expenses incurred by the company on a business party after the marriage of an individual.Issue No. 1: Payment of Commission:During the assessment proceedings, the AO questioned the commission payments made by the assessee to various parties based on seized documents. The AO disallowed Rs. 3,75,25,609/- paid to 23 parties and Rs. 74,77,583/- paid to other parties, claiming no details were filed. The CIT(A) found that the assessee had furnished the necessary details, including bank accounts, TDS certificates, and confirmations. The CIT(A) deleted the disallowances except for Rs. 1,38,93,196/- paid to M/s. Buniyad Chemicals Ltd. The Tribunal affirmed the CIT(A)'s order, giving relief to the extent of Rs. 4,50,03,192/-.Issue No. 2: Commission paid to M/s. Buniyad Chemicals Ltd.:The AO disallowed the commission payment of Rs. 1,38,93,196/- to M/s. Buniyad Chemicals Ltd., based on a statement from its Director denying any services rendered. The CIT(A) confirmed the disallowance, noting that the fundamental requirement of rendering services was missing. The Tribunal restored the issue to the AO for fresh examination, giving both parties another opportunity to present evidence.Issue No. 3: Addition on Account of Bogus Purchases:The AO disallowed purchases from various parties based on a statement from the assessee's director admitting to bogus purchases. The CIT(A) allowed 90% of the purchases, disallowing 10% as bogus. The Tribunal restored the verification of purchases from M/s. Paras Trading Co. and M/s. Raj Jyothi Metals to the AO for fresh examination, and upheld the CIT(A)'s deletion of disallowances from other parties.Issue No. 4: Higher Education Expenses:The AO disallowed foreign education expenses incurred for Shri Prerak Goel, as he was neither a director nor an employee of the assessee company. The CIT(A) confirmed the disallowance, finding the expenses to be personal in nature. The Tribunal upheld the disallowance, agreeing with the findings of the authorities.Issue No. 5: Business Promotion Expenditure:The AO disallowed Rs. 5,99,985/- claimed as business promotion expenses, finding it to be personal expenditure for a marriage reception. The CIT(A) confirmed the disallowance, and the Tribunal upheld the decision, agreeing that the expenditure was personal and not for business purposes.Issue No. 6: Operation and Maintenance Expenses:The AO disallowed Rs. 87,12,863/- claimed as on-site maintenance expenses, as they were not debited in the books of accounts. The CIT(A) confirmed the disallowance, noting the lack of supporting documents and contemporaneous evidence. The Tribunal upheld the disallowance, agreeing with the findings of the authorities.Issue No. 7: Addition under section 2(24)(iv):The AO added Rs. 6,00,000/- as deemed income under section 2(24)(iv) for expenses incurred by the company on a business party after the marriage of Shri Prerak Goel. The CIT(A) confirmed the addition, and the Tribunal upheld the decision, agreeing that the expenditure was personal and fell under section 2(24)(iv).Outcome:- Appeals of Revenue for the years 2000-01 to 2004-05 were dismissed.- Appeals of Assessee for the years 2001-02 to 2004-05 were partly allowed.- Appeals of both Revenue and Assessee for the years 2005-06 and 2006-07 were partly allowed.- The appeal of Shri Prerak Goel was dismissed.