In the absence of insufficiency addition is rightly be deleted and late payment of tax is compensatory

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH “A” New Delhi

BEFORE SHRI R.P. TOLANI AND SHRI T.S. KAPOOR

ITA No. 1622/Del/08

A.Yr. 2004-05

DCIT, Cen. Cir. 13,

New Delhi.

(Appellant)

Vs.

Global Busines India Pvt. Ltd.,

Zone H 4/5, 53 & 54 Suvidha Kunj,

Pitam Pura, Delhi.

PAN: AABCG 4576F

 (Respondent)

Appellant by: Shri R.I.S. Gill CIT (DR)

Respondent by: Shri Rajeev Saxena Adv.

O R D E R

PER R.P. TOLANI, J.M::

This is revenue’s appeal challenging deletion of following additions by CIT (A):-

1. Rs. 5,62,17,980/- on account of bogus purchase

2. Rs. 4,50,405/- on account of payment of interest for sales tax deposit.

3. Consideration of interest of FDR of Rs. 6,38,558 for calculating deduction u/s. 80IB.

2. Brief facts are the assessee is engaged in business of manufacturing and trading of perfumery compounds, aromatic chemicals & other oils. Survey operations were carried out in the case of M/s. Surya Vinayak Industries Ltd. (SVIL) and associated concerns including assesses’ (GBIL). The survey operations were carried out in the wake of information received from Investigation Wing of the department that one Sh. Atul Kumar Bansal and his associated concerns were engaged in business of providing accommodation entries by issuing purchase bills which included M/s. Kumar Bansal Traders Pvt. Ltd. and M/s. Varun Trading Company.

According to AO the raw materials used in assessee’s business were available in cash market and it was difficult to purchase them in regular market. To overcome this difficulty, assessee employed a modus operandi of purchasing raw materials in cash and obtaining accommodation bills supported with payments by cheques. Assessee was found to have purchased goods aggregating to Rs. 22,48,71,920/- by the bills issued by M/s. Kumar Bansal Traders Pvt. Ltd. and M/s. Varun Trading Company from these entities operated by Mr. Atul Bansal. Besides many other issues also cropped up during the course of assessment proceedings. The case was sent to Addl. Commissioner of Income Tax, Range – 12, New Delhi for directions under Section 144A of IT Act.

2.1. The Addl. CIT, after hearing the assessee, issued following directions to AO in this behalf: -

(i) The assessee has shown purchases from M/s. Kumar Bansal Trader Pvt. Ltd. And M/s. Varun Trading Company amounting to Rs. 22,48,71,920/- which were found to be bogus in the form of accommodation entries. Therefore, 25% of the purchase price accounted for in books of account through invoices in the name of these two suppliers will not be allowed as expenditure, which will come to Rs. 5,62,17,980/- and will be considered part of total income while computing total income of the assessee company.

(ii) The above disallowance is not in the nature of profit derived, which is eligible or 80IB deduction and, hence while computing 80IB deduction, the above disallowance of Rs. 5,62,17,980/- is not to be considered as forming part of the business profits eligible for 80IB deduction.

(iii) While working out 80IB deduction, the trading profits of Rs. 14,17,500/- are to be excluded from deduction under section 80IB.

(iv) The interest income amounting to Rs. 6,38,558/- is not to be considered for allowing 80IB deduction.

2.2 Accordingly, AO framed the assessment under these directions and as the above concerns were held to be accommodation entities, AO disallowed 25% of the purchases amounting to Rs. 5,62,17,980/- following ITAT judgment in the case of M/s. Vijay Proteins Ltd. Vs. ACIT, reported in 58 ITD 428.

2.3 An amount of Rs. 4,05,405/- paid by the assessee as interest on late deposit of Sales tax was held by the AO to be in the nature of penalty and was disallowed u/s 37 of the IT Act.

2.4 The assessee had earned interest of Rs. 6,38,558/- which according to AO was not attributable to assessee’s business of manufacturing, therefore, the same was excluded in the computation of deduction under section 80IB. 2.5 Some other addition were also made which are not before us.

2.6 Aggrieved assessee preferred first appeal before CIT (A) agitating all these grounds.

3.1 On the first issue CIT (A) deleted the addition by following observations:-

“4.2. From the totality of all the facts and circumstances, I have come to the conclusion that as far as the purchase of raw material are concerned, they are genuine but it is likely that the bills in respect of those purchase have been purchased from the market. My conclusion is drawn on the basis that the purchases have been entered into stock register. Although the linkage of these purchases with the sale is not ascertainable because the purchases of raw material has undergone the various processes before its sale as a finished product. The raw material and finished goods have different entity and cannot have direct link. But its purchases and sales have been accepted by the Excise and Trade department. The other evidence such as, the freight receipts for bringing the goods inside the factory by citing the vehicle no. etc… their entry in stock register, purchases against Form no. ST-38 issued by the Excise and Trade Department of the purchases and sales of the assessee company are the evidences which cannot be ignored. These evidences had clearly shown the authenticity of the purchases. Furthermore, the sale have been accepted expenditure corresponding to it have also to be accepted in view of the simple reason and analogy that the income figure as a result of sales has not been questioned and accepted, the outgo figure in the form of purchases has to be accepted as such unless there is definite material finding on record to establish otherwise.

4.3. In the present case, the AO has not disputed/doubted the genuineness of purchases made by the appellant to the tune o Rs. 22,48,71,920/- of materials for sale. Admittedly the rate of purchases of goods had also been accepted by the AO as that of the prevailing market rate of those days in the case of similar items or materials. The G.P. rate, the net profit as worked out by the appellant in the computation of income as per audited statement and as per its books of accounts has not in dispute here. Similarly, the sale figures and the expenditure incurred by the appellant for earning such income has not been doubted by the AO. Once the sale/income or profit has been accepted, the corresponding expenditure has also to be accepted. The only area doubtful, according to the AO is in the case of the two parties from whom the appellant has made

the said purchases. This cannot be a sufficient and justifiable ground for making the said addition for the simple reason that there can be no sales without corresponding purchases. In the case of Nishant Housing Development Vs. ACIT 52/ITD/103 (Patna Branch) it was specifically held that if any addition is made on the ground of expenditure incurred the source of which is to be treated as unexplained, then similar amount will have to be simultaneously allowed as expenditure to earn that income. Similarly, in the case of Kamal Kumar Sararia vs. CIT reported in 73 Taxman 299 (Gau) it was held that rejection of part to be also accepted. In view of the aforesaid decisions and considering the facts involved, I am of the considered opinion that the addition of Rs. 5,62,17,980/- is not justified as per law and facts of the case and accordingly, the same stands deleted.

3.2 The interest on delayed payment of sales tax was allowed by CIT (A) by following observations:-

“13. I have duly considered the submission of the A/R including the ratio of decisions cited by him to support the instant ground. It is apparent that the AO has added the amount of Rs. 405405/- being interest for late deposit of sales tax, as being penal in nature. However on careful consideration I find the same would not amount to infraction of law and not being penalty in nature. The assessee had paid interest to Haryana Trade Tax & Excise Dept. due to late deposit of sales tax during the year under consideration and I am of the considered view that the same payment would not be penalty in nature. In other words, non-payment of statutory dues like sales tax, income-tax etc… may entail penalty but late payment of the same may not necessarily attract penalty but interest for such delayed payment/deposit. This view has been reinforced by the decisions wherein it was held that interest paid by the assessee to the sales tax department on arrears of sales tax/purchase tax is an admissible deduction (Western India State Motors 167 ITR

395 (Raj)/CIT Vs. Western Indian State Motors 174 ITR 116/(Raj)/CIT vs. Lachhman Das Mathura 124 ITR 411(ALL)/CIT Vs. Chodavaram Co-op Sugars Ltd. 163 ITR 420 (AP)/CIT vs. Shri Sarvaraya Sugars Ltd 163 ITR 429 (AP)/Mahalaxmi Sugar Mills Co. Ltd. Vs. CIT 157 ITR 683 (Del). Moreover, the stated decisions have reinforced the above view in favour of the appellant company. Accordingly the addition of Rs. 405405/- is directed to be deleted.

3.3 Aggrieved revenue is before us.

4. Ground no. 3 raises issue about interest on FDR to be excluded from computation of deduction u/s 80IB is conceded by assessee to be covered against it by Supreme Court Judgment in the case of Liberty India 317 ITR 218, therefore, this ground of the revenue is allowed and not dealt any

further.

5. Ld. DR relied on the order of AO and contents that the AO has rightly relied on ITAT Judgment in the case of Vijay proteins (supra) and disallowed of 25% of the purchase amount from accommodation entities. Consequent to survey the facts emerged that said two concerns i.e. M/s. Kumar Bansal Traders Pvt. Ltd. and M/s. Varun Trading Company were held to be non existing companies. The raw material though is accepted to be purchased by the assessee in cash from market however supporting bills were obtained by way of accommodation bills from these two entities operated by shri Atul Bansal. Thus it was in the hands of the assessee to inflate the purchases prices in the accommodation bills. AO in these circumstances was correct in drawing an analogy from the case of Vijay Protiens (supra) conforming to the directions of Adl. CIT. AO, therefore, following this case disallowed a part of purchase price i.e. 25% of such raw material purchased. CIT (A) without appreciating these facts deleted the addition holding that the cost of purchases debited by the assessee was comparable to market rates.

5.1. Apropos the second issue about disallowance of interest on delayed payment of the sale tax, Ld. DR contends that in the relevant sales tax law the late payment of sales tax dues is termed as penalty, therefore, the amount was rightly disallowed being infraction of law. Order of AO is relied on.

6. Ld. Counsel for the assessee contends that:

6.1. The asseessee fully cooperated in the assessment proceedings. Proper explanations were filed from time to time and its group director Shri Sanjay Jain made a statement before DDI(Inv) unit-III New Delhi as under:

“According to me any transaction running in my bank account in any of my concerns is genuine trade transaction done for the payment of dues created due to purchase of raw material from the four entities mention in Q. No. 20. After all the payments to the above four entities have been made either through A/c payee cheque/ demand draft/ pay order no. cash payment what so ever has been made to the above mention four entities. It is not my duty to look into bank accounts/ financial record of my supplier that after getting the payment from me through the official channel what they are doing in their bank accounts. Neither I can check or ask them that what you have done with the cheque/demand draft which I have given to you.

As far as the purchase of raw material is concerned from them all the material purchased is being sent to Agartala factory from Delhi for which I have fully supporting documents such as sales tax permit, forest transit permit which are enough and self explanatory that the material has really gone from Delhi to my Agartala factory which is around 3,500 K.M. from Delhi. One more thing I want to say is that after August 2003 all the material is being sent from Delhi to Guwati by Indian Railway and from Guwati to Agartala with the help of reputed local transporters which are registered with the Govt. of Assam is fearful that material can be unloaded in Guwati city also. To avoid this they have take bank guarantee equipment to the amount to sales tax for the material in transit from Guwahati to Agartala.

Regarding the ale of finished goods from Agartala I want to explain that for any sale transaction, the mode of transport used is Indian Air Lines which is govt. carrier also all the ales from any of my concerns is made to genuine and established parties which are in this trade for any decades, as far as mode of transport used for sending raw material to Agartala and bringing finished goods from Agartala in M/s Global business India (P) Ltd. it is air transport only for which genuine and

officially recognize proofs are available. This I have explained in detailed just to show that both my sales and purchase are genuine and unchallengeable since they carry lot of documents evidence with them.

In view of the foregoings your honour it is an established fact that the purchases made by the assessee are genuine.”

6.2. Thus it is not the case of the revenue that goods were used at Delhi only, it is important to note they were transported to Agartalla factory. Relevant documents about transportation were produced. Likewise manufactured goods also sold by transporting them by Indian Airlines. The quantities of purchases and sales have been otherwise accepted.

(i) The assessment has been framed only on the directions issued by Adl, CIT which in turn only relied on the basis of information of the investigation wing, there is neither independent investigation nor appreciation of facts.

(ii) Assessee has demonstrated better trading results, sales and other record has been accepted by AO, no other mistake have been found in the books of accounts.

(iii) No enquiry or investigation has been carried out by AO to controvert the statement of Director. Simillarly nothing has been brought on record as to what happened to the survey and subsequent assessments in the cases of Shri Atul Bansal or alleged accommodation entities. Thus the entire basis of additions is only the suspicion raised by information of Investigation Wing, which is apparent from AOs following observations:

“The assessee’s main argument is that the fact of receipt of raw material, is transportation and consumption of raw material has been proved by the assessee and evn if supplier of raw material is ‘Y’ party instead of ‘X’ party, it will not have any effect on profits declared by the assessee company.Looking to peculiar and unique circumstnaecs of assessee’s case and looking to the manner in which accommodation entries have been taken from two concerns controlled by Atul Kumar Bansal, it remains to be decided whether the evidences (on the basis of which assessee has claimed deduction I respect of purchases made, from two suppliers) which have been found to be fabricated as the two concerns ae found to be issuing only purchase bills without supply of any goods to the assessee company, can be relied upon? At the addresses given, the two supplier concerns have not been found that the clinching evidence with the Department is the Investigation Wing report, which says that the two supplier concerns from whom the assessee company is showing purchases of raw material, are in fact accommodation entry providers, who have provided accommodation entry in the form of purchase bills of raw material to the assessee company. Once it has been held by investigation report that the two suppliers are only accommodation entry providers, then the purchases shown from these to suppliers cannot be held to be genuine purchases. Even if raw material, represented by purchase bills issued by two accommodation entry providers, have been actually received by some other supplier and used in production, the assessee will not get full deduction in respect of said purchase amount, as the purchase bills produced by the assessee from said two accommodation entry providers, have been found to be fabricated and fictitious and, therefore, to this extent the books of account maintained by the assessee company to work out true and fair taxable profits of the assessee company.”

Thus only the Investigation wing report has been held to be a clinching evidence to sustain the additions. Similarly it has been alleged that two suppliers were not found at the given address. Without bringing on record type of efforts undertaken to find them, who inquired and what report in this behalf was available on record, nothing has been referred by AO.

iv. Ld DR has neither filed any paper book, evidence nor made any arguments on these infirmities in the assessment proceedings and cross confirmation of additions in the case of said Atul Bansal.

v. Thus the entire basis of additions is on assumptions, some unverified information accepted on face value and by applying an ITAT judgment in the case of Vijay Proteins, which is clearly distinguishable.

vi. Purchases are duly accounted for, entered in regular stock registers maintained on quantitative basis, no objection has been raised on such quantities. Purchases are through account payee cheques, corroborated by transport receipts and other supporting documents.

vii. The reliance on Vijay Proteins case is misplaced as in that case the purchases were not supported by transport receipt and in some cases services were denied by the transporters. In assessee’s case these adverse facts are conspicuously absent.

viii. Thus the impugned additions are summarily made, disallowing 25% of purchases only on an assumption that purchase may be inflated by the assessee. This is belied by CIT (A)’s observations that AO has accepted purchases to be at market rates. Besides goods were purchased against statutory form ST-38 issued by Excise & Trade Department. If the purchases were bogus, there was no necessity to issue such forms. The Excise and Trade Department cross verifies proper utilization of such forms, nothing adverse has been reported in this behalf from such assessments.

ix. CIT(A) held that AO did not dispute the fact that the raw material were purchased by the assessee on prevailing market rates. In these circumstances even if a part of books is in respect of such purchases is rejected; the fact remains on record that raw materials were purchased at market rates and consumed in the production of finished products whose sales are clearly accepted. The quantity and value of sales of finished goods has been fully accepted by AO which

is evident from his order.

x. Even if assesses books are rejected the assessment has to be based on reasonable considerations conforming to a best judgment assessment. It has to be based on a fair estimate and not arbitrary one.

xi. Reliance is placed on - Hon’ble P & Haryana High Court judgment in the case of CIT v. Leader Valves Pvt. Ltd. 285 ITR 435 rendered on the facts similar to assessee i.e addition on account of alleged bogus purchases. It is held that such unverifiable adjustments to gross profit were rightly deleted by ITAT.

xii. AO relied on ITAT judgment in the case of Ahmedabad bench decision in the case of Vijay Proteins however Hon’ble Gujrat High Court on similar type of issue has taken a different view in the case of Dy CIT v. Adinath Industries 252 ITR 476 holding as under:

“It appeared that ‘GI’ was supplying materials not only to the assessee but to others. In case of AI, the amount paid to GI was disallowed. However, the Tribunal on appreciation of evidence deleted the entire disallowance which had been upheld by the High Court and by the Apex Court. In AI, against the decision of the High Court, special leave petition was preferred by the revenue

and the same had been rejected. The Tribunal had considered that aspect also.

In the instant case, details about purchase were furnished. Transactions were through a broker whose bill was produced. All details from the stage of receipt to production were produced. For further verification the assessee produced gate pass, Avak Chithi (receipt note) and weight note. The assessee produced laboratory report and sample report. It pointed out the difference paid or recovered in view of reports. The assessee produced R.G. 4 Form to show the details entered as per Excise Rules. The assessee pointed out the production and purchase of raw materials. The assessee submitted the details about the transaction, truck number, etc. Thus, the assessee produced relevant materials to show purchase of materials and their use in production. The Assessing Officer had accepted the existence of ‘GI’ in case of AI for the assessment year 1985-86. The Tribunal appreciated all these facts in arriving at a conclusion. It clearly appeared that matter had been disposed of on appreciation of evidence and when a matter has been decided by the Tribunal on appreciation of evidence, it cannot be said that that raises a question of law. The Tribunal pointed out that at best it could be inferred that these parties were set up by somebody else and the reasons could be manifold for that. It was very much surprising that in the instant case the Assessing Officer had drawn a presumption that the amount had come back in the assessee’s hands, without any evidence whatsoever merely on the basis of with-drawal of amounts from the account of ‘GI’.

It was required to be noted that the amount had been paid by cheques and the party had withdrawn the amount by bearer cheques. The revenue submitted that from the same bank the amount had been withdrawn. It went without saying that it was within the knowledge of the banker as to who the account holder was and who withdrew the amount from the same bank. The Assessing Officer by due diligence could have unearthed the fact that ‘GI’ was a bogus party by recording statement of the bank manager, accountant or cashier or the party who introduced ‘GI’ to the bank. The matter was in the realm of appreciation of evidence and no interference was called for in the matter. In the circumstances, the appeals were to be dismissed.” It is pleaded that SLP in this case also has been dismissed by Hon’ble Supreme Court.

xiii. It is vehemently argued that the sole basis of addition being a report from Investigation Wing has been arbitrarily held to be a clinching evidence. On the other hand assesses purchases are duly supported by other records and registers including Excise & Trade Departments record and forms, quantity of purchases and sales have been accepted by AO. Even if books of accounts are partly rejected the book results and GP being satisfactory additions cannot be made on these shaky assumptions.

7. We have heard rival contentions and perused the material available on record. As the facts emerge the information of Investigation Wing of the department is held to be clinching evidence by the Adl. CIT whose directions were binding on the AO. In our considered view:

i. An information supplied by an agency of the department cannot be held as clinching evidence without independent inquiry and corroboration. An information may be useful for further investigations or corroboration but on its own, it cannot be held as clinching evidence.

ii. No light has been shed by AO as to what happened in the assessments of Shri Atul Bansal and his accommodation entities. Similarly statement of Director Shri Sanjay Jain stating the facts about  verification of purchases has not been controverted.

iii. Quantities of purchases and sales and value of sales has been accepted by AO, thus to this extent nothing adverse has been found in the books of accounts.\

iv. All the purchases are through account payees cheques, transportation vouchers to Agartalla factory, likewise all the sales are accepted by AO, supported by Indian Airlines transportation vouchers. Purchases are supported by form ST-38 issued by Excise and Trade Department. Nothing adverse has been found in this behalf.

v. AO has relied on the ITAT judgment in the case of Vijay Proteins case (supra) which in our view is distinguishable as in that case there were no transport vouchers and some transporters denied having transported such goods. These adverse facts are conspicuously missing in this case. In our view Hon’ble Gujrat High Court judgment in the case of Adinath Industires and P & H High court in the case of Leader Valves(supra) helps assesses case.

vi. AO has only created a suspicion that purchase rates may have been inflated as it was possible for assessee. In our considered view it amounts to a surmise. In order to bring home his point, some instance of such inflation should have been pointed by AO. Suspicions howsoever strong cannot partake the character of proof.

vii. Even if part rejection of assesses books is upheld the consequent estimate should be just and reasonable. In the absence of any allegation about insufficiency of trading results such addition has been rightly deleted by CIT(A), we uphold his order on this issue. This ground of the revenue is dismissed.

8. Apropos revenue’s ground no. 2 we see no infirmity in the order of CIT(A) as it has not been disputed that that impost is compensatory in nature for late payments of Sales Tax dues. Merely because term penalty is used in the statute will not detract from the actual nature of payment being compensatory in nature. It is trite law that impost occasioned by late payment of taxes is compensatory in nature and cannot be disallowed u/s 37 of the IT Act.

9. Third ground of the revenue has been already allowed.

10. In the result revenue appeal is partly allowed.

Order pronounced in open court on 24-08-2012.

                                                     Sd/-                               Sd/-

                                          (T.S. KAPOOR)              (R.P. TOLANI)

                                 ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 24-08-2012.

MP

Copy to:

1. Assessee

2. AO

3. CIT

4. CIT(A)

5. DR