2022 (1) TMI 228 - AT - Income Tax

Assessment u/s 153A - Bogus purchases - whether statement recorded during search to be treated as incriminating material ? - HELD THAT - Undisputed facts are that on the date of search the assessment for the current assessment year was not pending and therefore it has attained finality and thus it was unabated on the date of search. It was also undisputed that except the statement recorded u/s 132(4) of the Act of director of Karma Ispat Ltd as well as Director of Man Group of Industries there was no incriminating materials which was seized during search to back the additions. Therefore the AO has no jurisdiction to make addition in an unabated assessment year without there being incriminating materials and accordingly the jurisdiction of the AO can not be justified. Further we find merit in the contentions of the ld A.R. that statement recorded during search do not constitute incriminating material as the same can not be said to be found during the course of search but is recorded to elicit more information/explanation of the searched person on the incriminating documents/gold/jewellery found during search. Therefore after perusing the material on record and considering rival contentions and also the decisions cited before us, we are of the considered view that a statement recorded during the course of search can not be considered an incriminating material in order to make addition in an unabated assessment year. Therefore, this is an undisputed position of law that in case of unabated assessment year, no addition can be made in absence of any incriminating material found during the course of search. - Decided in favour of assessee. Profit estimation on On-money - CIT(A) partly upholding the order of AO on the issue of on-money by directing to apply 25% as against the 100% added by the AO - HELD THAT - In view of the profit margin of the assessee from the real estate business, it would meet the ends of justice if a rate of 12.50% is applied on the on money. Accordingly the order of the ld CIT(A) is modified and AO is directed to apply profit rate of 12.50% on the on money. Consequently the ground no 1 in the assessee cross objection is partly allowed. MAT computation u/s 115JB - addition as made by the AO book profits u/s 115JB on account of on money - whether AO has jurisdiction to change the book profits when the books are prepared in accordance with the requirements of Part II and III of Schedule VI of the Companies Act and certified by the statutory auditors with no adverse reporting on any issue? - HELD THAT - Hon ble Apex Court in the case of Appollo Tyres Ltd 2002 (5) TMI 5 - SUPREME COURT wherein it has been held that AO while assessing a company for income-tax under section 115J of the Income-tax Act can not question the correctness of the profit and loss account prepared by the assessee-company which are certified by the statutory auditors of the company as having been prepared in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act. Similarly in the case of Malayala Manorama Co. Ltd. Versus CIT, Trivandrum 2008 (4) TMI 20 - SUPREME COURT has held that in respect of a company consistently charging depreciation in its books of account at the rates prescribed in the Income-tax Rules, the Income Tax Officer has no jurisdiction under section 115J of the Income Tax Act, 1961 to rework net profits by substituting the rates prescribed in Schedule XIV of the Companies Act, 1956 and no addition should be made to book profits u/s 115JB of the Act. It is not out of place to submit that the coordinate bench in the case of Rishiroop Rubber International Ltd 2013 (3) TMI 120 - ITAT MUMBAI has allowed the A.O. to rewrite the book profit under section 115JB of the Act in following two cases namely i) if it is discovered that profit Loss account is not drawn up in accordance with Part II and Part III of Schedule IV to the companies Act, however, the Assessing Officer cannot disturb the Net Profit as shown by the assessee where there are no such allegation, fraud, misrepresentation but only a difference of opinion as to whether particulars amount should be property shown in the profit and loss account or in the Balance sheet, ii) if accounting policies, accounting standards not adopted for preparing such accounts and method, rate of depreciation which have been incorrectly adopted for preparation of profit and loss account laid before the Annual General meeting. In our considered view none of the aforesaid conditions laid down by the tribunal gets fulfilled in the case of the assessee. Therefore we are inclined to uphold the order of ld CIT(A) by dismissing the appeal of the revenue. Addition on protective basis - As argued substantive addition has not yet been confirmed and accepted by the assessee and there is possibility of revenue loss in case substantive addition is deleted by higher authorities - CIT-A deleted the addition - HELD THAT - As perusing the material on records in the appellate order including the charts of on money calculation filed by the assesse, calculated by the AO and reworking thereof by ld CIT(A), we note that the substantive addition has been confirmed @ 12.50% of the on money in the hand Man Global Ltd in AY 2015-16 and thus the protective addition was rightly deleted by the ld CIT(A). We further note that in on money as reworked by ld CIT(A) has been accepted both by the assesse as well as revenue and we have directed the AO to assess the on money @ 12.50%. Therefore we are inclined to uphold the order of ld. CIT(A) by dismissing the appeal of the revenue. Disallowance u/s 14A - Sufficiency of own interest free funds - HELD THAT - We find that the assessee s own interest free funds are far more than the investments in shares and mutual funds and therefore the presumption is that the assessee has made investments out of own funds and not interest bearing funds. The case of the assessee is squarely covered by the decision of jurisdictional High court in the case of CIT v. Reliance Utilities and Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT and HDFC Bank Ltd Vs. DCIT 2016 (3) TMI 755 - BOMBAY HIGH COURT wherein it has been held that where the assessee own funds are more than the investments made in securities yielding exempt income, then the presumption has to be made that assessee has invested in the said securities out of own funds. Therefore the order of ld CIT(A) is set aside on this issue and AO is directed to delete the disallowance. We would like to make it clear that this is ground raised before us and therefore we are allowing relief to the assessee over and above that. Ground no. 3 is allowed. Addition u/s on account of on money - HELD THAT - We find that that the on money recalculated by the ld CIT(A) was accepted by the assessee as well as by the revenue. As per the said working the ld CIT(A) recorded a finding of fact that the said amount has been taxed in the hands of group entity M/S Man global Ltd and any further addition will result in double addition resulting into double taxation which is not permitted under the Act. We have also perused the records before us along with the working of on money done by the ld CIT(A) and do not find any infirmity in the appellate order. We are therefore upholding the order of ld CIT(A) by dismissing the ground no 1 raised by the revenue. Addition on account of commission paid - HELD THAT - Company Law board had specifically held that the Assessee is not involved into any siphoning off the funds and all payment including payments towards the commission alleged by the brother of the Chairman of the assessee company Mr. J. C. Mansukhani was spent for the benefit of the assessee and its business affair. Hence there is no scope to doubt the commission payment on the basis of letter of M/s Kala Gas Company already dealt by CLB in petition of Mr J.C. Mansukhani. As in the year under consideration, the commission was paid for exports made to M/S Abu Dhabi Gas Industries Ltd. and not to Kala Gas Co, however, the A.O. without applying the mind has only referred the letter from Kala Gas Co. without appreciating fact that in AY 2013- 14 there is no sale to Kala Gas Co. The AO on the basis of addition made in AY 2009-10 on alleged letter of Kala Gas Co. also made disallowance in AY 2013-14 without appreciating the facts correctly that there is no export to Kala Gas Co. We note that similar payment of commission has been allowed by the revenue in the earlier years and therefore even on the principal of Consistency, impugned addition on account of Export Commission can not be sustained. - Decided against revenue. Addition on account of Service charges paid - Allowable revenue expenses or not? - HELD THAT - The expression commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The case of the assessee finds support from the decision of Hon ble Apex Court in the case of S.A. Builders Ltd. v. Commissioner of Income-tax (Appeals), Chandigarh 2006 (12) TMI 82 - SUPREME COURT wherein the Hon ble court has held that the AO can not decide what is right for the business and decide what are the expenses to be incurred for the business. We note that ld CIT(A) has dealt with the issue regarding the allowability of service charge in para no. 11 of the appellate order. Considering the provisions of section 37 of the Act and decision of Supreme Court in case of S.A. Builders Ltd and reasoned order of CIT(A) we are inclined to uphold the order of CIT(A) on the issue of service charges by dismissing the ground no.4 of the revenue s appeal. Withholding of tax - CIT(A) allowed the appeal of the assessee by observing that the AO has not disputed the fact that the withholding tax is paid actually paid by the Assessee - HELD THAT - We note that the assessee has redeemed FCCB and paid total premium by grossing up the amount by withholding tax. In other words the TDS deducted and deposited by the assesse on behalf bondholders was treated as part of that. Besides we note that claim was in accordance with section 195A of the Income Tax Act, 1961 as the Company paid withholding tax by the grossing up the amount of premium and paid premium on redemption of FCCB to bondholder - We note that the case of the assessee is squarely covered by the decisions Commissioner of Income Tax V. Standard Polygraph Machines (P) Ltd. 1998 (11) TMI 49 - MADRAS HIGH COURT and ACIT 2(1) V. M/s. BOB Card Ltd. 2013 (5) TMI 532 - ITAT MUMBAI wherein the issue has been decided in favour of the assessee. G.P. addition on Bogus purchase - addition based on statements recorded on oath during the survey - HELD THAT - We find merit in the arguments of the ld AR that statements recorded on oath during the survey cannot be the sole basis for taking adverse view against the assessee and has no evidentiary value as held by the Hon ble Apex Court in the case CIT vs Khader Khan Son 2013 (6) TMI 305 - SC ORDER - Similarly the statement made u/s 132(4) also has no evidentiary value unless some materials is there on the record to corroborate the same - Decided in favour of assessee. Non genuine purchases - Estimation of income - HELD THAT - The only possibility is that though the purchases are held to be bogus but certainly the purchases were made from some other source in the grey market. Such purchases can not be ruled out as the materials were used in the manufacturing process, the inspection report whereof was on the records and stock register showing monthwise receipt and consumption of materials. So under these circumstances it is settled position now that entire alleged bogus purchases can not added to the income of the assessee as it would affect the profits of the assessee unrealistically and unreasonably. Therefore under such circumstances only profit margin on those bogus purchases can at the most be added. Accordingly we set aside the order of ld CIT(A) on this issue and direct the AO to apply a profit rate of 5% on the bogus purchases.

Summary

Issues Involved:
1. Jurisdiction of AO to make additions without incriminating material in an unabated assessment year.
2. Deletion of addition on account of bogus purchases.
3. Deletion of addition on account of on-money receipts.
4. Deletion of addition on account of disallowance under section 14A of the Act.
5. Deletion of addition made to book profits under section 115JB of the Act.
6. Deletion of addition on account of commission paid to M/s Alpine Enterprises LLC.
7. Deletion of addition on account of service charges paid to Man Overseas DMCC.
8. Deletion of addition on account of depreciation claimed on premium.

Detailed Analysis:

1. Jurisdiction of AO to Make Additions without Incriminating Material in an Unabated Assessment Year:
The Tribunal held that the AO has no jurisdiction to make additions in an unabated assessment year without incriminating material found during the search. This decision was based on various judicial precedents, including the case of Commissioner of Income-tax (Central)-III vs. Kabul Chawla, where it was held that no addition can be made in respect of assessments which have become final on the date of search if no incriminating material is found during search. The Tribunal allowed the appeals of the assessee on this jurisdictional issue and directed the AO to delete the additions made without incriminating material.

2. Deletion of Addition on Account of Bogus Purchases:
The Tribunal upheld the CIT(A)'s decision to delete the addition on account of bogus purchases. The CIT(A) had observed that the purchases were recorded in the books and corresponding sales were also recorded, which were not proved to be false. The Tribunal noted that the AO's rejection of the books of accounts was based on presumptions and suspicions, and there was no substantive evidence to prove that the purchases were bogus. Therefore, the addition made by the AO was deleted.

3. Deletion of Addition on Account of On-Money Receipts:
The Tribunal upheld the CIT(A)'s decision to delete the addition on account of on-money receipts. The CIT(A) had reworked the on-money receipts and directed the AO to apply a profit rate of 12.50% on the on-money. The Tribunal noted that the year-wise and entity-wise working of on-money receipts finalized by the CIT(A) was not disputed either by the assessee group or the department. Therefore, the addition made by the AO was deleted.

4. Deletion of Addition on Account of Disallowance under Section 14A of the Act:
The Tribunal upheld the CIT(A)'s decision to delete the addition on account of disallowance under section 14A of the Act. The Tribunal noted that the assessee had sufficient interest-free funds to cover the investments yielding tax-free income, and therefore, no proportionate interest disallowance under section 14A was warranted. The Tribunal relied on various judicial precedents, including the case of CIT v. Reliance Utilities and Power Ltd., where it was held that if the assessee's own funds are more than the investments made in securities yielding exempt income, then the presumption is that the assessee has invested in the said securities out of own funds.

5. Deletion of Addition Made to Book Profits under Section 115JB of the Act:
The Tribunal upheld the CIT(A)'s decision to delete the addition made to book profits under section 115JB of the Act. The Tribunal noted that the accounts of the assessee were prepared in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act and were certified by the statutory auditors. The Tribunal relied on the decision of the Hon'ble Apex Court in the case of Apollo Tyres Ltd. vs. CIT, where it was held that the AO cannot question the correctness of the profit and loss account prepared by the assessee-company and certified by the statutory auditors.

6. Deletion of Addition on Account of Commission Paid to M/s Alpine Enterprises LLC:
The Tribunal upheld the CIT(A)'s decision to delete the addition on account of commission paid to M/s Alpine Enterprises LLC. The Tribunal noted that the commission payment was made for genuine business requirements of arranging exports to UAE and was within the standard norms of the industry. The Tribunal also noted that the Company Law Board had held that the assessee had not siphoned off money by paying these commissions and these were paid for genuine business requirements.

7. Deletion of Addition on Account of Service Charges Paid to Man Overseas DMCC:
The Tribunal upheld the CIT(A)'s decision to delete the addition on account of service charges paid to Man Overseas DMCC. The Tribunal noted that the service charges were paid for rendering miscellaneous services under a service agreement and were made after making compliance with all RBI and FEMA regulations. The Tribunal also noted that there was no evidence to show that the payment of service charges represented only accommodation entry or was only a paper transaction.

8. Deletion of Addition on Account of Depreciation Claimed on Premium:
The Tribunal upheld the CIT(A)'s decision to delete the addition on account of depreciation claimed on premium. The Tribunal noted that the claim was in accordance with section 195A of the Income Tax Act, 1961, and the case of the assessee was squarely covered by the decisions in the case of Commissioner of Income Tax V. Standard Polygraph Machines (P) Ltd. and ACIT 2(1) V. M/s. BOB Card Ltd.

Conclusion:
The Tribunal allowed the cross objections of the assessee and dismissed the appeals of the Revenue, thereby upholding the decisions of the CIT(A) on various issues. The Tribunal directed the AO to delete the additions made without incriminating material in an unabated assessment year and to apply a profit rate of 12.50% on the on-money receipts. The Tribunal also upheld the deletion of additions made on account of bogus purchases, disallowance under section 14A, commission paid to M/s Alpine Enterprises LLC, service charges paid to Man Overseas DMCC, and depreciation claimed on premium.