TaxTMI 
TaxTMI 
2020 (1) TMI 854
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....w, the ld. CIT(A) has erred in deleting the addition of Rs. 75,29,00,000/-, made on account of bogus purchases. 2. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) failed to appreciate that the decision laid down by the Hon'ble Supreme Court in the case of N.K. Proteins Ltd. is squarely applicable to the present case. 2. The assessee in its cross objections has raised the following grounds of appeal: On facts & circumstances of the case and in law, the learned CIT(A) has erred in sustaining a disallowance of Rs. 22,60,00,000/- on account of alleged bogus purchases. This disallowance of Rs. 22.60 Crores may please be deleted. 3. The assessee in its appeal in ITA No. 3863/Mum/2018, has raised the following grounds of appeal: On facts & circumstances of the case and in law, the learned CIT(A) has erred in sustaining a disallowance of Rs. 22,60,00,000/- on account of alleged bogus purchases. This disallowance of Rs. 22.60 Crores may please be deleted. 4. The assessee vide its application dated 03.10.2016 has raised following additional grounds of appeals; (i) Reopening the case under section 148 of the Inc....
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....ponse to the notice under section 148, the assessee filed return of income on 09-05-2012 declaring total income of Rs. 19,04,92,024/- . In response to statutory notices u/s 143(2) and 142(1), the assessee, vide letter dated 10-05-2012 sought for reasons recorded for reopening of the case. The assessing officer vide letter dated 28-05- 2012 has intimated the reasons to the assessee, which are as under:- "In this case information has been received from ADJT(INV), Unit-VII (]) & (2), Mumbai that during the course of search and seizure action u/s.132 of the Income tax Act, 1961 carried out in the case of Pipavav Shipyard group on 12/10/2011, the business premises of M/s. Krosslink Infrastructure Ltd., was also covered U/S.133A of the Act. During the course of search survey proceeding and post search enquiries it was seen from the ledger that subcontract work to the tune ofRs. 76,36,75,929/- was claimed to have been undertaken by a concern in the name &; style of M/s. Khodiyar industries Ltd. However, from local enquiries and statement of Shri Somil Mukesh Parikh, the Finance in charge of M/s. Khodiyar Industries Ltd. it was proven that M/s. Khodiyar Industries Ltd. was involve....
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....r the Port was started, the place became the prominent & amongst others, it caught attention of local leaders & other pressure groups. The massive contracts in the development of a shipyard were given to the assesses company, considering its track record & experience in development of Pipavav Port. In the above circumstances, it was inevitable & almost mandatory, taking into account the compulsive, commercial & practical considerations that certain part of the contracts is given to the recommends of local leaders & pressure groups. One has to appreciate that without considering such a request, it is practically impossible to carry out the project work smoothly. Under these circumstances, who have been the recommendees of local leaders & pressure groups. The company could not have made payments to such contractors, due to the obvious constraints on cash payments, which left the company no other alternative but to comply with their requirements with some commercial arrangement. In this process, KIL routed the payments to these contractors through Khodiyar Industries Ltd., as a matter of sheer convenience. However, at a later date, while scrutinizing the accounts, it was noti....
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.....18 Crores. (whereas assessee in its P & L A/c. submitted to the department at the time of scrutiny proceedings u/s.143(3) showed sales to PDOECL of only Rs. 67.89 Crores). The assessee further explained that at the time of survey action u/s.133A of the Act conducted on the assessee on 12/10/2011 by ADIT(Inv)-Unit VlI(l), Mumbai at its premises at Mumbai, trail balance of the assessee as on 21/03/2005 during the year was Rs. 143,18,94,129/- and the cost of construction was Rs. 75,29,59,383/-. However, on perusal of audited Balance Sheet & Profit and Loss account of the assessee as submitted by the assessee during scrutiny assessment proceedings u/s. 143(3) it was noticed that the assessee has shown sales of Rs. 67,89,34,000/- only. Thus, there was a clear cut discrepancy. Along with letter dated 22/01/2013, the assessee itself submitted a copy of actual Balance Sheet & Profit and Loss account in which the actua1 transaction was recorded on the basis of acceptable and legal accounting principles. To explain the above discrepancy in actual Balance Sheet as per acceptable and gal accounting principles and the Balance Sheet as submitted by assessee during assessment proceedings, the as....
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.... internal scrutiny by the auditors as well as management revealed that the adequate & appropriate supporting for these transactions are difficult to obtain under the circumstances & therefore, as elaborated in Para 4 of letter dtd. 22.01.2013, a voluntary decision was taken to reduce the claim of expenses by the amount of Rs. 75,29,60,000/-, as a prudent policy to avoid any procrastinating controversy, litigation, conflict with the Department. Further even the corresponding sales to the principal amounting to Rs. 83.42 crores, (as per submission dated 05.02.2013 & its enclosures) were written back. While writing back corresponding sales, only the cost has been reduced leaving the gross margin of Rs. 8.13 crores unaffected & thereby have duly been considered in the total income. It was also demonstrated by submitting the copies of audited accounts & the copies of earlier unaudited accounts that against original turnover of Rs. 143.18 crores, only expenditure on sub contract was only Rs. 75.29 crores. Therefore, against the turnover, as per audited balance sheet of Rs. 67.89 crores (before stock variation of Rs. 38.46 crores) only debit is for purchases of Rs. 1 7 Lacs. As such, your....
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....he disallowance, by first recasting the accounts to introduce the debit for expenses not claimed and again disallowing the as " not claimable". 12. The contention of the assessee was not accepted by the assessing officer holding that the assessee has not submitted correct books of account as per acceptable accounting principle and has considered the particulars of one sales transaction and also one payment made to Khodiyar Industries Ltd. claiming it as a purchase transaction. No accounting principle followed mandates a journal entry in the books to offset such transaction with each other and that such transaction being not to be reflected in the profit and loss account. The assessing officer rejected the books of account of the assessee by invoking the provision of section 145(3) of the Income tax Act. The assessing officer also recorded the following reasons for not accepting the submission of assessee; • The assessee has not brought on record any proof that the purchased expenses claimed by the assessee were paid to KIL of Rs. 75.29 Crore is genuine. • The assessee claimed that even the principal company has not claimed such an amount paid to the ass....
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....account of alleged unexplained expenditure /bogus expenditure. Before the learned CIT(A), the assessee filed details written submission which has been recorded by learned CIT(A) in the impugned order. After considering the submission of assessee, the learned CIT(A) upheld the reopening by making reliance on the decision of Hon'ble Supreme Court in case of ACIT V/s Rajesh Jhaveri Stock Brokers Private Limited (291 ITR 500) wherein it was held that if the assessing officer for whatever reasons, has reasons to believe that income has escaped assessment, it confers the jurisdiction to reopen the assessment, where the case is not covered by the proviso to section 147, intimation under section 143 (1) cannot be treated to be in order of assessment, as there been no assessment order section 143(1) the question of change of open does not arise. However, on quantum addition the learned CIT(A) restricted the addition to the extent of 30% of the total purchases of Rs. 75.29 crores. The learned CIT(A) is while restricting the addition to the extent of 30% followed the decision of Hon'ble Gujarat High Court in case of Vijay Proteins Ltd. V/s CIT (2015) 58 Taxmann.com 44 Gujarat and CIT V/s Simi....
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..... Departmental Representative (DR) for the revenue on merit and perused the material available on record. The learned AR of the assessee submits that initially the assessment was completed under section 143(3) on 28th December 2007. Subsequently, there was a search and seizure action under section 132 in case of Pipavav Defence Offshore & Engineering Co. Ltd. (PDOECL) on 12 October 2011. Simultaneously, survey action under section 133A was also taken on assessee-company on the same day. No incriminating material was found and no statement on behalf of assessee-company was recorded during the course of survey proceedings at the assessee company. The statement of Saumil Mukesh Parikh of Khodiyar Industries Ltd was recorded under section 131 on 15th November 2011, to whom sub-contract was given by the assessee company. On the basis of statement of S. Mukesh Parikh, the assessment of assessee was reopened under section 147 on 15 March 2012. While supplying the reasons recorded, the copy of statement of S Mukesh Parikh was provided to the assessee along with the answer to the question No. 5, 6 and 7, wherein S. Mukesh Parikh contended that Khodiyar Industries Ltd. was involved in issuin....
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.... in which the turnover recorded is Rs. 143.18 crore and expenditure on sub-contract in Schedule 14 recorded at Rs. 75.29 crores. Before learned CIT (A), the assessee vide its submission dated 29th May 2017 furnish the following documents: • survey report of total area of paper above shipyard Ltd, • valuation report of land, civil work, plant and machinery at post Ucchaiya via Rajula, District Amreli Gujrat, • completion certificate for the shipbreaking project under the contract agreement dated 12 June 1997, • certificate by Mazoomdar associates private limited, valuer's and lenders, independent engineers appointed by the consortium of lenders for the ship-breaking facilities of the company, certifying the valuation report and survey report. 20. The learned AR further submit that assessee executed the work as per contract taken from Gujarat Pipava Port Ltd of Rs. 143.19 crore and booked the sales on account of contact receipt of Rs. 143.19 crore. Against the said sales, assessee company has booked the total expenses of Rs. 114.18 crore in its profit and loss account which includes Rs. 75.29 crore paid to Khodiyar Industry Ltd a....
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....ies. The certificate issued by Site Engineers, Ledger Accounts, Independent third party survey report, valuation report and certificate from Government approved Registered Valuer, which was third party expert appointed by lenders consortium for the valuation of work carried out at the site, which proved actual work done at site. The assessee declared gross profit for year 2005-06 of Rs. 29.01 crore, which is 20.26%. 23. There is no evidence on record brought by revenue, which can lead to an inference that GP declared by assessee is understated. The additional disallowance of 30% of the total purchases of Rs. 75.29 crore added/ restricted by ld. CIT(A) would make the GP at 36.04%, which is completely unrealistic and as also unsubstantiated. The average GP of preceding four year is 13.01%. The ld. AR also furnished the details of GP working for four preceding years. 24. The ld. AR of the assessee submits that the disallowance restricted to 30% by ld. CIT(A) is on a very higher side. The assessee has already declared GP at 20.26%. The GP for preceding year were ranging from 11.08% to 15.30%, if disallowance if restricted to 30%, the GP of assessee would be unrealistic, which is ....
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....o made against Khodiyar Industries Ltd. On the basis of enquiries on Khodiyar Industries Ltd. statement of Somail Mukesh Parikh, it was revealed that assessee-company availed accommodation entries from Khodiyar Industries Ltd. which were routed through Koatex Industries Ltd. On the basis of such information, which were sent to the Assessing Officer, the assessment/case of assessee for the year under consideration was reopened. We may note here that, we are not discussing the merit/validity of re-opening at this stage. 29. During the re-assessment proceeding, the assessee filed detailed reply, explaining the circumstances that due to commercial expediency and compulsive circumstances certain part of contracts was given to the recommendees of local leaders and pressure group for smooth completion of project. In such circumstances, certain contracts were given to the local person, the payments could not have made directly to such contractors in cash, coupled with the refusal by those contractor to take cheque payments. The assessee-company made payment through Koatex Industries Ltd. The assessee also furnished the copy of various bills substantiating the contention that work was co....
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....d that the Assessing Officer has added the entire expenses without considering the fact that work was executed on site. The work executed at site is not disputed by the Assessing Officer. The assessee also explained that since the assessee could not substantiate the expenses by documentary evidences, the assessee reduced the sub-contract amount of Rs. 7.29 crore from both income and expenditure side. During the survey at the assessee, no incriminating material was found only unaudited trial balance for the A.Y. 2005-06 was found, wherein the sales proceeds were shown at Rs. 143 crore. The trial balance has a debit of Rs. 75.29 crore which were supposed to have been paid to Khodiyar Industries Ltd. The Assessing Officer relied upon the statement of Somail Mukesh Parikh and treated the trial balance of Rs. 75.29 crore as bogus. It was also explained that in the recast Profit & Loss A/c, the assessee has taken a receipt at Rs. 143.18 crore and had disallowed 75.29 crore which were supposed to have been paid to Khodiyar Industries Ltd. The ld. CIT(A) after considering the submission and facts of the case, and by referring the decision of Hon'ble Gujarat High Court in Vijay Proteins vs.....
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....unts were not reliable, the estimation of net profit at 8% was justified. 34. We are of the considered opinion that under Income Tax Act only real income can be taxed by the Revenue. We may further note that even if the transaction is not fully verifiable, due to any circumstances beyond the control of the assessee, the only taxable is the taxable income component. And in order to fulfill the gap of revenue leakage the disallowance of reasonable percentage of such purchases can meet the end of justice. Similar view was taken by Hon'ble Bombay High Court in CIT Vs Hariram Bhambhani in ITA No. 313 of 2013 decided on 04.2.2015, that revenue is not entitled to brought the entire sales consideration to tax, but only the profit attributable on the total unrecorded sales consideration alone can be subject to income tax. 35. Considering the aforesaid factual and legal discussion and the submission of ld. AR of the assessee that average Gross Profit for four preceding year declared by assessee were 13.01%. For the year under consideration, the assessee has declared Gross Profit at 20.26%, if the further disallowance @ 30% of the total purchases/expenses is upheld, the Gross Profit of ....