2024 (2) TMI 276 - AT - Income Tax

ITAT upholds deletion of fuel cost additions after customs authority found insufficient evidence of invoice inflation

DCIT, Circle-14 (1) (2), Mumbai Versus M/s Reliance Infrastructure Ltd, Mumbai

The ITAT Mumbai upheld the CIT(A)'s decision to delete additions made by the AO for disallowance of inflated fuel costs. The case involved coal purchases ... Validity of Reopening of assessment - disallowance of expenditure being the inflated cost of fuels - information from the Directorate of Revenue Intelligence (DRI) relied upon - Assessee has purchased coal from Indonesia originally, which was purchased by intermediary at an inflated rate than the actual value of coal rate - AO considering enquiry report conducted by the DRI, observed that from report it appears that the intermediaries‟ firms were merely invoicing agents for facilitating invoice inflation. - CIT(A) deleted the additions relying upon the decision of CESTAT in customs valuation case. HELD THAT:- The show cause notice of DRI based on the investigation carried out by it, which is the foundation for reopening of the case u/s 147 of the Act and making the addition by the AO, has already been set aside by the Principal Commissioner of Customs (Adjudication) vide his order by holding “that the show cause has not come out with any separate reasons and evidences that the extent of over-valuation alleged in the show cause notice in respect of RNRL & other intermediaries are more or less same, suggestive of the fact that the relationship per se has not affected the transaction value”. Hence considering the peculiar facts and circumstances in totality, in our considered view, the determination made by the AO in any case is un- sustainable being sans foundation/substantive material and thus the impugned order is affirmed and the appeal filed by the Revenue Department is dismissed. Issues Involved:1. Reopening of assessment under Section 147 of the Income-tax Act, 1961.2. Disallowance of coal expenses based on alleged overvaluation.3. Validity of evidence and reliance on DRI's report.4. Relevance of CESTAT and High Court orders in related cases.Reopening of Assessment:The Assessee's case was reopened under Section 147 of the Income-tax Act, 1961, based on the belief that income chargeable to tax had been under-assessed. The reasons included alleged non-genuine subcontract expenditure of Rs. 40 crores and inflated coal expenses of Rs. 16,07,90,522/-.Disallowance of Coal Expenses:The AO disallowed Rs. 16,07,90,522/- on account of inflated coal expenses, alleging that the Assessee purchased coal from intermediaries at inflated rates. The AO relied on a DRI report suggesting overvaluation of coal imported from Indonesia.Validity of Evidence and Reliance on DRI's Report:The Assessee argued that the disallowance was based on a preliminary DRI report without providing the Assessee an opportunity for cross-examination. The Assessee's business is regulated by MERC, and all costs are pass-through, meaning any increase in costs would be reflected in tariffs without affecting profitability. The Assessee also highlighted that the cost of coal had been accepted by MERC.Relevance of CESTAT and High Court Orders:The Ld. Commissioner deleted the addition, citing the CESTAT order in the case of Knowledge Infrastructure Systems Ltd, which set aside a similar order by DRI. The Bombay High Court dismissed the department's appeal as not maintainable, and the Supreme Court allowed the withdrawal of the department's appeal, making the CESTAT order final. The Tribunal in the Assessee's own case for A.Y. 2016-17 also deleted similar additions, relying on the CESTAT order.Conclusion:The Tribunal dismissed the Revenue's appeal, affirming the Ld. Commissioner's order. It held that the AO's reliance on the DRI report was unsustainable as the show cause notice had been set aside by the Principal Commissioner of Customs (Adjudication). The Tribunal also noted that the Assessee's costs were regulated and approved by MERC, and any alleged overvaluation had no impact on the Assessee's tax liability.Order pronounced in the open Court on 24/01/2024.