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TMI Blog2020 (1) TMI 854X X X X Extracts X X X X X X X X Extracts X X X X ..... dition 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 Income tax Act. The reopening being bad in law, the same should be annulled. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 involved in issuing bogus bills and accommodation entries and that no activity like earth filling etc. was done ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 noticed by KIL that the various supporting that would be required to prove these transactions to the hilt are not likely to be available due to ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es). 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 assessee vide letter dated 22/01/2013 stated as under:- "The company took a holistic view of the entire situation came to the conclusion that it s better & prudent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orated 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 proposal of recasting accounts by considering the sates as genuine & purchases of bogus to the tune of Rs. 75.296 crores, is completely out of place, not supported by facts & legally untenable. The p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 assessee as expenses is legally false. The assessee has done work for PDOECL worth more than Rs. 143.18 crore as claimed during the year. In AY 2005-06, PDOECL has not written off or squared off any expenses in its books pertaining to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Simith P. Sheth (2013) 356 ITR 451 (Guj). Therefore, aggrieved by the decision of ld. CIT(A) both the parties have filed their respective appeals raising the grounds of appeal as we have recorded above. In addition to filing appeal, the assessee has also filed Cross Objections i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 issuing bogus bills and commission entry, from whom Koatex Industry Ltd. has taken a bogus bills to the tune of Rs. 70 to Rs. 80 crore and factually no such activity was ever undertaken or done by Khodiyar Industry Ltd. On the basis of this statement, the case of assessee was reopene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as sub-contract charges in respect of work taken by them of Earth filling, Land levelling and on account of development of land. There is no other receipt or expenses incurred during the year. Against the said receipt of Rs. 143.19 crore, the assessee company has incurred total expenses of Rs. 114.18 crore and declared t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 not possible in the business of assessee. 25. The ld. AR further submits that, though the assessee has challenged the validity of reopening in additional ground of appeal. The assessee has also raised the ground of appeal in its Cross Objection for deleting the entire addition. The ld. AR for assessee in his without preju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 completed at the site as per contract from Gujarat Pipava Port Ltd. The assessee also explained that against the said execution of work (sales), the assessee company booked total expenses of Rs. 114.18 crore, which includes Rs. 75.29 crore paid to Khodiyar Industries Ltd., who undertook of earth filling, land levelling and development of said land. The assessee declared Gross Profit of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture 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. CIT (58 taxmann.com 44 (Guj.), CIT vs. Simith P. Sheth [356 ITR 451 (Gaj.)] took his view that when purchases cannot be established but the sails have not been doubted, the entire purchases cannot be added as income and only the percentage of the profit involved on these purchases can be brought to tax. The ld. CIT(A) considered that receipt of sales from PDOECL is not disputed. No eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee would be increased drastically i.e. more than 36%, which is unrealistic. Therefore, considering the totality of the facts and to avoid to possibility of revenue leakage, we are of the view that if the disallowance of alleged purchases/expenditure is restricted to 10%, that would meet the end of justice. 36. The ratio of decision relied by ld. DR for the revenue relied on the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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