TaxTMI 
TaxTMI 
TaxTMI 
2016 (7) TMI 1435
X X X X Extracts X X X X
X X X X Extracts X X X X
....e appellant and ignoring the appellant's submissions in this regard. 3. The Learned CIT(A} has erred in upholding the disallowance of Rs. 220,89,67,632/- on the allegations based on surmises and conjectures, and hear-say evidences to the effect that 40% of the business is illegal and therefore explanation (1) to Section 37(1} is attracted without appreciation the fact that the said Explanation is concerned with the nature of expenditure and not that of business, and further that the issue whether the allegation of the illegal mining is true or not is before the Competent Court for a decision and therefore it is premature for the lower authorities to decide this issue on assumptions and presumptions which amounts to assumption of the jurisdiction of the Competent Court. 4. The learned authorities have erred in disallowing Rs. 4,31,80,919/- under the helicopter expenses on hear-say evidences and rumours and gossips without appreciating the fact that the learned AO has not brought on record any evidences to support his conclusion. 5. The Learned Authorities have erred in disallowing Rs. 4,31,80,919/- Rs. 86,60,079/- being entire sale consideration without appreciating the fac....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... holder across the table. It is also noted that 17 bank accounts in the name of 17 different transport concerns had been opened on the same day with HDFC Bank-9 accounts, ING Vysya Bank-4 accounts and Pragrithi Grameena Bank-4 accounts. It is also noted by the AO that the bank account holders of 10 accounts have same mobile numbers. The next objection noted is that bulk cheque leaves were issued to all the account holders. The next objection noted by the AO is that there was third party cheques which were issued by most of the account holders which were withdrawn in cash. The next objection of the AO is this that common names are appearing on the back side of the cheque leaves showing the name of the persons withdrawing the cash and six such names are noted by the AO on page-12 of the assessment order. In our considered opinion, these objections of the AO on the basis of enquiry from various banks can form the basis of making further enquiry regarding the genuineness of the payments. On page-12 of the assessment order, the AO noted that the assessee was asked to explain by letter dated 13-02-2013 and the letter was served on the AR of the assessee Shri Vasudev Vittal Leji on 21-02-....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... genuine, the assessee is engaged in the business of extraction and trading ln Iron ores, the learned Deputy Commissioner has never stated that the assessee has never exported so much quantity of Iron ores, for the purpose of exporting, the iron ores has to be transported from the mines to the ports. So it will be not be fair on the part of Deputy Commissioner to disallow the expenses only where the sale proceeds as returned by the assessee are accepted. The transportation charges incurred by the assessee during the previous year 2009-10 relevant to assessment year 2010-11 are genuine and actuals. These expenses which have been claimed by the assessee are well supported by bills, vouchers, ledger entries and payments are made through cheques drawn on scheduled banks. Further, on the entire amount of the transportation charges incurred by OMCPL, tax has been deducted and paid at source itself at applicable rates under provisions of Income Tax Act. There is no need for the transporter own a vehicle to run the transportation company. The course of business in transportation are run on the hiring of a vehicle by third party who in first turn will hire a vehicle. As we have furnished ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d had opened bank accounts and signed blank cheques and given the same to Sri Gangadhar , who in turn has admitted that he had done the same at the instance of Sri Phani Kishore, CA of M/s OMCPL and its sister concerns. Examination of the bank statements of the alleged transporters showed that the amount deposited in cheques received from the assessee company is immediately withdrawn in cash. Cash has been withdrawn from the bank accounts mainly by the employees of the assessee company and Sri Gangadhar and his employees, who in turn have admitted that such cash was handed over to Sri Phani Kishore, CA of the assessee company and its sister concerns. Each leg of this transaction has been proved with evidence to be false. i) It has been proved by the admission of the alleged transporters that their business concerns have been floated only at the behest of the assessee. ii) IT has been proved by the admission of the alleged transporters that they have never transported the goods of the assessee company. iii) It has been proved by the admission of the alleged transporters that bank accounts have been opened by such concerns only at the behest of the assessee. iv) It ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction genuine. 1.10. On the basis of above discussion. The transportation expenditure claimed against the name of the above parties excluding M/s Narmada Transport amounting to Rs. 168.69,93.902 (Rs.175,36,24,913 - Rs. 6,66,31,011) is disallowed and added back to the assessee's income". 7. From the above paras of the assessment order, it is seen that the reasons given by the AO in para-1.9 reproduced above for not accepting the reply of the assessee are that there is substantial increase in the transportation expenses as compared with the earlier years which is not in proportion to the quantity of iron ore produced and sold during this year. Second reason given by the AO is that the assessee could not produce evidence to show the actual rendering of services and thereafter, the major discussion by the AO in this para is regarding various statements given by the transporter in the statement recorded by the AO u/s 131 of the IT Act and therefore, it is seen that the main basis for this disallowance is statements of the transporters of whom the assessee requested for cross examination but the same was not allowed by the AO. Now, under these facts, we examine the applicabilit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the AO has started in para-2 of the assessment order under the heading 'Illegal Mining" Thereafter, the AO has disallowed 40% of the total expenditure claimed by the assessee by invoking Explanation to 37(1) of the IT Act, 1961. He submitted that when there is no charge of illegal mining in the charge sheet than the basis of the AO's order does not exist and therefore, this disallowance should be deleted on this issue alone. Thereafter, he submitted that copy of the report of three member committee is available on pages -48 to 785 of the paper book and in particular our attention was drawn to page-50 & 51 of the paper book and it was point out that as per this report, there are problems in fixing the boundary leases once the boundary line/stations are disturbed. Thereafter, reliance has been placed on the following judicial pronouncements a) CIT Vs Piara Singh 124 ITR 40(SC) b) CIT Vs S.C.Kothari 82 ITR 794 (SC) c) Badridas Daga Vs CIT 34 ITR 10 (SC) 10. The ld. DR of the revenue supported the orders of the authorities below. 11. We have considered the rival submissions. First of all we reproduce the relevant portion of report of the three member committee on irregul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g provisions of this explanation. " Explanation-1 ..For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure". 13. From the above explanation -1 to sec.37 (1) of the IT Act, it is seen that if any expenditure is made by the assessee for any purpose which is an offence or prohibited by law then it is not incurred for the purpose of business and no deduction or allowance can be made in respect of such expenditure. In the present case, even if this allegation of AO is accepted that the assessee is doing some illegal mining and the production of the assessee to the extent of 40% of production is out of illegal mining, in our considered opinion, expenses incurred for such production does not attract the disallowance under Explanation-1 to sec.37 (1) of the IT Act because, the expenses incurred for mining cannot be considered as offence or prohibited by law in itself and the only objection can be that such mining is not i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... same expenses cannot be considered as expenses for the purpose of offence or unlawful purposes. Hence, this disallowance is not justified. 15. Now we examine the applicability of various judgments cited by the ld. AR of the assessee. The first judgment cited by him is of the Hon'ble Apex Court rendered in the case of CIT Vs Piara Singh(Supra). In this case, it was held that loss arising of confiscation by Customs authorities is deductible from the income derived from smuggling activities. Hence, expenses incurred in course of an illegal business is allowable for computing income from such business but this judgment is prior to introduction of Explanation -1 to sec.37 of the IT Act and therefore, this judgment is not relevant in respect of those expenses which are hit by this explanation and in our considered opinion, the normal mining expenses are not hit by this explanation and hence, this issue is covered in favour of the assessee by this judgment since the explanation to section 37 (1) is not attracted in the facts of the present case. Similarly, the other two judgments of which reliance has been placed by the ld. AR of the assessee are also for the period prior to intro....