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TMI Blog2016 (11) TMI 888X X X X Extracts X X X X X X X X Extracts X X X X ..... f the opinion that the adhoc disallowance of 25% of expenditure incurred on labour charges paid to related parties under section 40A(2) of the Act was not warranted in the facts and circumstances of the case on hand as discussed above and therefore direct the AO to delete the same.- Decided against revenue Bogus purchases under section 69C - Held that:- Without causing any enquiries to be made to establish his suspicions, the AO cannot make the addition under section 69C of the Act by merely relying on information obtained from the Sales Tax Department. In the case on hand, the AO failed to make any enquiry to establish his suspicions. Further, the corresponding sales have not been questioned. We find that the assessee has brought on record documentary evidences to establish the genuineness of the purchase transactions, the action of the AO in ignoring these evidences cannot be accepted. When the copies of purchase bills of these parties, delivery challans, proof of payment through banking channels, etc., and there is no evidence brought on record by the AO to establish that the said payments were routed back to the assessee, the addition made by the AO under section 69C of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rieved by the order of assessment for A.Y. 2010-11 dated 25.03.2013, the assessee preferred an appeal before the CIT(A)-29, Mumbai. The appeal was disposed off by the learned CIT(A) vide order dated 22.08.2014 allowing the assessee partial relief. The learned CIT(A): (i) sustained the disallowance out of motor car expenses and telephone expenses to the extent of 5% thereof; (ii) sustained 25% disallowance under section 40A(2)(b) out of total labour charges paid to three sister concerns; i.e. disallowance to the extent of ₹ 26,39,726/- was sustained. (iii) Profit @12.64% on bogus purchases. 3. Both Revenue and the assessee, being aggrieved by the impugned order of the learned CIT(A)-29, Mumbai dated 22.08.2014 for A.Y. 2010- 11, have preferred cross appeals in respect of issues held against them. 3.1 The grounds raised by the assessee in its appeal are as under: - "The Honourable Commissioner of Income Tax (Appeals) has erred in confirming ad-hoc 25% addition of the disallowed labour charges of ₹ 1,05,58,905/- by the learned assessing officer without considering the fact and merits of the case. The Hon'ble CIT (Appeals) has also erred in confirming ad-ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the fact and in the circumstances of the case and in law the Ld. CIT(A) has failed to appreciate that the peak method of disallowance as held in the case of M/s Vijay Proteins Ltd. (1996 58 lTD 428 Ahd) was correct method from making disallowance out of purchases treated as bogus purchases and has erred in directing the AO to treat the GP of 12.64% as disallowance out of bogus purchases." 4. Ground No. 1 of assessee's appeal & Ground No. 3 of Revenue's appeal - Disallowance of Labour Charges 4.1 The facts of the matter on this issue as per the records are that in the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had debited an amount of ₹ 2,44,32,298/- in the Profit & Loss account on account of labour charges paid to different subcontractors on the civil contracts undertaken by him. Out of these, amounts totalling to ₹ 1,05,58,905/- had been paid to the following related concerns (hereinafter referred to as 'related parities): - (i) M/s. Bhairav constructions ₹ 37,22,876/- (ii) Jain Infrastructure ₹ 34,34,207/- (iii) Nakoda Developers ₹ 34,01,822/- It was also observed from the schedule of sun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the three related parties had not been paid entire amounts due during the period under consideration, substantial payments have been made in the subsequent year and since the labour jobs to complete the contract have been carried out, the expenditure incurred through the three related parties cannot be doubted. After thus concluding, the learned CIT(A) observing that since the assessee has not placed on record comparative evidence to show that payments to the related parties were at par with labour payments to other concerns performing similar jobs, the provisions of section 40A(2) of the Act are attracted and consequently sustained the addition to the extent of 20% of labour charges paid to selected parties, i.e. ₹ 26,39,726/-. 4.3.1 The learned A.R. of the assessee reiterated the submissions/ arguments put forth before the AO and learned CIT(A). According to the AO, no case was made out by the AO to warrant disallowance of the entire expenditure incurred on labour charges paid to the three related parties under section 40A(2) of the Act. It is not disputed that civil contract work were, inter alia, carried out for RBI, Reliance Infrastructure Ltd. etc. The fact that no en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tainly have not paid the assessee unless the civil contract involved was carried out; a view with which we concur. We also observe that the AO has not caused any enquiry to establish that either no contract work was carried out by the three related parties or that the expenditure booked on account of labour charges was bogus. In this view of the matter, we concur with and uphold the finding of the learned CIT(A) that in the absence of any material evidence being brought on record by the AO to prove that the payments made to these three related parties as bogus, the said payment of labour charges to him cannot be termed as bogus and the action of the so to discover the entire payment of labour expenditure, since they were incurred through related parties, is unjustified and unsustainable in the facts and circumstances of the case. Consequently, ground No. 3 of Revenue's appeal is dismissed. 4.6 In its appeal in connection with ground No. 1 the assessee's submission is that the learned CIT(A) order sustaining an adhoc disallowance of 25% of the expenditure incurred on labour charges paid to the three related parties was unsustainable as no adhoc disallowance can be made as per the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure to do so, and relying on the information of the Sales Tax Authorities that these parties admitted to have given bogus bills, the AO proceeded to conclude that the assessee had made the aforesaid purchases (supra) from the above parties out of his undisclosed income and later on obtained the bogus bills to that extent from these parties. In that view of the matter, the AO proceeded to disallow the peak of the above purchases at ₹ 33,09,526/- and brought it to tax in the assessee's hands under section 69C of the Act. 5.1.3 On appeal, the learned CIT(A) was of the view that what is to be disallowed in the case of alleged bogus purchases is only the profit element embedded in such purchases shown to have been made from non-existent parties and not the peak amount of alleged bogus purchases as held by the AO. In that view of the matter, the learned CIT(A) directed the so to assess the gross profit (GP) on such bogus purchases @12.64% which is the G.P. Shown by the assessee in the year under consideration. 5.2 The learned D.R. was heard in support of ground No. 4 raised by Revenue challenging the action of the learned CIT(A) in directing the AO to assess the GP of 12.64% as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om whom the said purchases were made did not appear before the AO; however, Hon'ble Bombay High Court in the case of Nikunj Eximp Enterprises P. Ltd. (2005) 372 ITR 619 (Bom) has held that this by itself cannot be a ground to hold the purchases as bogus. Apart from this, the fact also remains that the assessee itself had filed copies of purchase bills, proof that payment for the same were through banking channels, delivery challans, etc. in order to establish the genuineness of the said purchases. It is a fact on record that the AO has not doubted the corresponding sales effected by the assessee and therefore it is in order to conclude that without corresponding purchases being affected, the assessee could not have made the sales. 5.4.2 We find that the AO has not brought on record any material evidence to conclusively establish that the purchases are bogus. Mere reliance by the AO on information obtained from the Sales Tax Department would not suffice to treat the purchases as bogus and make the addition. If the AO doubted the genuineness of these purchases, it was incumbent upon him to cause enquiries to be caused to ascertain the genuineness of otherwise of the transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l contentions and perused and carefully considered the material on record. In the order of assessment, the AO has made an adhoc disallowance of 20% of motor car expenses and depreciation thereof (i.e. ₹ 79,063/-). On appeal, the learned CIT(A) sustained this disallowance to the extent of 5%. Before us, except for raising this ground, Revenue has not brought on record any material evidence to controvert the finding of the learned CIT(A) and warrant our interference therein on this issue. In this view of the matter, we uphold the order of the learned CIT(A) on this issue and consequently, ground No. 1 of Revenue's appeal is dismissed. 8. Ground No. 2 of Revenue's appeal - Disallowance of Telephone Expenses 8.1 In this ground the Revenue challenges the action of the learned CIT(A) in reducing the disallowance of telephone expenses from 15% to 5%. We have heard the rival contentions perused and carefully considered the material on record. In the order of assessment the AO has made an adhoc disallowance of ₹ 36,663/-; being 15% of telephone expenses amounting to ₹ 2,44,423/-. On appeal, the learned CIT(A) has sustained the disallowance to the extent of 5%. Except for ..... 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