2019 (2) TMI 655 - HC - Income Tax

Bogus expenses - expenses on shell companies - Held that - Whatever may be the argument of the assessee we cannot be oblivious of the fact that the Rule 9 report accused the appellant of showing the bogus expenses of ₹ 272 crores or thereabouts in their accounts. Four shell companies were identified to which these expenses were made for allegedly procuring material and services to the assessee. Thereafter, the persons were identified as sub-dealers or sub-agents to whom this money was diverted. So much so that the entire bank accounts of these so called shell companies and sub-dealers were drained out. Now, this is not a very simple or usual discovery of facts. The assessee had just shown ₹ 126 crore as expenses. It was its duty to give an account for the rest of the money. It was also the duty of the Settlement Commission to ensure that the assessee did furnish proper accounts. In default adverse inference was drawn against them. The Commission was entitled to pass a best judgment order but doing so on the basis of gross receipts and expenses ratio or profit is not at all the wholly acceptable procedure. Some further enquiry was required. Equally the arbitrary was the method of addition of ₹ 36 crore to the expenses of the assessee. On what basis the Settlement Commission got this figure? Most probably it was using the figure to bring the receipt expenses or profit/expenses ratio of the assessee within the acceptable range. In the case of Ajmera Housing Corporation & Anr. Vs. Commissioner of Income Tax 2010 (8) TMI 35 - SUPREME COURT OF INDIA as clearly tells us that where the settlement commission passed a final order without considering unexplained expenses, loans and surplus etc., the Court of jurisdiction could interfere. Assessment of undisclosed income can only be made following the principle of Brij Lal & Ors. Vs. Commissioner of Income Tax 2010 (10) TMI 8 - SUPREME COURT - decided against assessee.

Summary

Issues:
- Alleged bogus expenses by the appellant
- Search and seizure operations by the Income Tax Department
- Settlement application under Section 245C(1) of the Income Tax Act
- Decision of the Settlement Commission
- Challenge to Settlement Commission's decision
- Arguments before the High Court

Alleged Bogus Expenses by the Appellant:
The Income Tax Department suspected the appellant of inflating expenses to evade taxes. The department found that four shell companies, allegedly providing services to the appellant, were non-existent entities with no equipment or manpower. The expenses claimed were deemed bogus, and the transactions were found to be a facade created by the individuals controlling the appellant. The appellant's attempt to settle the matter by offering a higher income figure was rejected by the Revenue, leading to further investigation and dispute.

Search and Seizure Operations by the Income Tax Department:
In August 2013, the Income Tax Department conducted survey and search operations against the appellant and related individuals. The operations revealed that the shell companies and their alleged suppliers were fictitious, with no actual services or transactions taking place. The department uncovered a complex scheme where expenses were shown but not substantiated by genuine transactions, leading to suspicions of tax evasion.

Settlement Application under Section 245C(1) of the Income Tax Act:
The appellant filed a settlement application under Section 245C(1) for assessment years 2011-12, 2012-13, and 2013-14, offering a higher income figure than previously declared. The Settlement Commission, after considering the application, added a substantial amount to the appellant's income, rejecting the plea for waiver of interest. The Commission's decision was based on the alleged bogus expenses and the lack of evidence supporting the appellant's claims.

Decision of the Settlement Commission:
The Settlement Commission's order added significant amounts to the appellant's income for the relevant assessment years, citing discrepancies in the expenses claimed and the lack of verifiable transactions with the shell companies and sub-contractors. The Commission's decision was challenged by the Revenue, leading to a detailed analysis of the reasoning behind the additional income additions and the overall assessment process.

Challenge to Settlement Commission's Decision:
The Union of India challenged the Settlement Commission's decision in the High Court, arguing that the Commission had not provided sufficient reasons for the income additions made. The Court found the Commission's order lacking in disclosure of reasoning and remanded the settlement application for fresh consideration, emphasizing the need for a more detailed assessment process.

Arguments Before the High Court:
The appellant appealed against the High Court's decision, presenting arguments to justify the Settlement Commission's calculation and the alleged expenses. The appellant's counsel argued for the acceptance of the gross profit rate as a benchmark and highlighted industry standards to support the claimed expenses. However, the High Court upheld the decision, emphasizing the need for proper accounts and a more thorough investigation into the alleged expenses, ultimately dismissing the appeals and affirming the Settlement Commission's order.