Calcutta High Court
Emta Coal Limited vs Assistant Commissioner Of Income Tax on 31 January, 2019
Author: Amrita Sinha
Bench: Amrita Sinha
IN THE HIGH COURT AT CALCUTTA
Civil Appellate Jurisdiction
Original Side
Present :- Hon'ble Mr. Justice I. P. Mukerji
Hon'ble Justice Amrita Sinha
APO 73 of 2018
GA 581 of 2018
WP 33 of 2016
with
APO 74 of 2018
GA 582 of 2018
WP 34 of 2016
with
APO 75 of 2018
GA 583 of 2018
WP 35 of 2016
EMTA Coal Limited
VS.
Assistant Commissioner of Income Tax, Central Circle 3(1), Kolkata &
ORS
For the Appellant :- Mr. J. P. Khaitan, Sr. Adv.
Mr. Akhilesh Gupta,
Mr. S. Rudra, Adv.
For the Respondents :- Mr. Kaushik Chanda, Ld.
Additional Solicitor General.
Mr. Prithis Dudheria, Adv.
Judgement On :- 31.01.2019 I.P. MUKERJI, J.:-
Previously the appellant/petitioner was a partnership. On 19th March, 2010 it converted itself into a public limited company. It carries on the business of managing and operating coal mines in West Bengal, Jharkhand and Maharashtra which are for captive use. Henceforth, this organization will be described as EMTA.
The Income Tax department in or about 2009 became suspicious of this company and of the people involved with it. The main cause of this impression was an apparently exaggerated expenditure shown by the appellant in its accounts. According to the Respondent Revenue, this expenditure was spiked up by a cleverly planned business operation. The sole intention was to evade income tax. The assessment years taken into account by the respondent Revenue were 2007-2008, 2008-2009 and 2009-2010. In August, 2013 survey proceedings under Section 133A of the Income Tax Act were carried out against the appellant. On 1st and 2nd August, 2013 search operations were carried out at their office and at the residence of one Mr. Suman Jain having a controlling interest in the company.
The following conclusions were reached by the Revenue from the survey operations under Section 133A of the said Act:
"(i) The four companies namely 1) Bardhaman Excavators Pvt. Ltd. 2) Landmark Excavators Pvt. Ltd. 3) Venus Excavators Pvt. Ltd. and 4) Zoom Transport Pvt. Ltd. are shell companies existing on paper only. They could not be located at the given addresses and their directors also not traceable. (supra 3, 6,7,8,9,10 & 11)
(ii) The said four shell companies did not have the wherewithal by way of equipment or manpower to render any services. (supra 3, 6,7,8,9,10 & 11)
(iii) Elaborate and extensive enquires during the course of search & seizure and survey operation at the mine sites and offices where the services were supposedly rendered by these four shell companies proves beyond doubt that no services were rendered at all. (supra 14, 15, 16 & 17)
(iv) The process of raising, submission and processing of the bills of these four shell companies is different from the rest. The process is designed only with a view to book bogus expenditure. (supra 13, 14 & 17)
(v) The persons from whom these shell companies allegedly bought fuel, spares and other supplies are not traceable and the evidence establishes beyond doubt the fact that no transactions actually took place. (supra 9 & 12)
(vi) All the given addresses of these shell companies, their directors and the alleged suppliers are of premises either owned or rented by the Jains. (supra 8 & 9)
(vii) The money trail or the modus operandi for withdrawal of money paid by the applicant proves that the expenditure booked through the said four companies is bogus. (supra 5, 7, 9 & 12)
(viii) Thus, it would be seen that the Jains have created an elaborate facade of these four shell companies."
These four shell companies had 53 alleged sub suppliers and service providers. They were purported to be paid by cheque by the shell companies. The most intriguing discovery by the Income Tax Department was that these sub contractors were sought to be paid by cheque but, almost immediately, after the credit of those cheque amounts, the entire amount was siphoned off. The department found the addresses, both official and residential of the directors of the shell companies to be erroneous. The identity and address of those 53 individuals from whom the four shell companies had allegedly taken service and supply were found to be non-existent.
A writ application complaining of the search and seizure operations failed before this High Court.
On 24th September, 2013 the appellant filed an application under Section 245C(1) of the Income Tax Act, 1961 before the Settlement Commission for the assessment years 2011-12, 2012-13 and 2013-14. In this application they rejected their books of account offered to be assessed on an income of Rs.366.74 crore as against the returned income of Rs.240.69 crores. It was higher by Rs.126.05 crore. This sum of Rs.366.74 offered for assessment was on the basis that gross profit rate was 41.2%.
The previously assessed gross profit rate was 36%.
The payment made to the shell companies between 2011-12, 2012-13 and 2013-14 was Rs.144.02 crores, Rs.91.97 crores and Rs.27.62 crores respectively aggregating to Rs.263.68/272.15 crores. The Revenue described this alleged expense shown by the appellant as "bogus". Being so, in its opinion the department did not find any compulsion of accepting the offer of 41.205% of the gross profit rate as assessable income as prayed for by the appellant. In the report the said Commissioner of Income Tax, Central circle - 3(1), Kolkata opined that the application for settlement was not genuine and was made to avoid penalty and prosecution.
The appellant filed a reply to the said report.
The Assessment Years before the commission were 2011-2012, 2012-2013 and 2013-2014. The hearing was concluded on 24th April, 2014. The respondent filed an additional report on 21st May, 2014 before the Commission. The Revenue was shell shocked by the order of the Commission pronounced on 10th June, 2014. The Commission added Rs.15 crores for the Assessment Year 2011-2012, Rs.15 crores for the Assessment Year 2012-2013 and Rs.6 crores for the Assessment Year 2013-2014 increasing the income of the appellant by Rs.36 crores. The appellant had offered Rs.126.05 crore in the settlement application. The prayer of the appellant for waiver of interest was rejected. The Commission tried to make a comparison of the subject assessment with the assessment of the appellant for the Assessment Years 2007-2008, 2008-2009, 2009-2010, made after a detailed investigation and enquiry. At this stage it is very important to analyse the reasoning process adopted by the Commission. It referred to the search and seizure made under Section 132(1) of the said Act. It opined that during this action there was no evidence to suggest that the expenses shown by the assessee had been received back by them from the contractors. No amount had been recovered from the appellant or the persons who controlled it or from any person with whom the department thought, the appellant had a connection. The Commission remarked that adding of the entire expenses shown i.e. a further Rs.272.15 crore under Section 245D(4) of the said Act for the assessment year 2011-12, 2012-13 and 2013-14 would produce absurd results. The purpose was to assess taxes on real income. The tribunal noted that the gross profit of the appellant for the assessment year 2007-08 was Rs.106,09,37,772/-, for the assessment year 2008-09 was Rs.132,40,66,799/- and for the assessment year 2009-10 was Rs.164,83,84,582/-. Each of those figures was arrived at by computing the total income of the appellant when deducting direct expenses and depreciation so as to arrive at gross profit.
The Commission made an addition of Rs.15 crore for the assessment year 2011-12, Rs. 15 crore for the assessment year 2012-13 and Rs.6 crore for the assessment year 2013-14, to the income of the appellant. The Revenue was aggrieved by the allegedly arbitrary addition, without any reasons of Rs.15 crore to the income declared by the assessee for each of the year 2011-12 and 2012-13 and Rs.6 crore for the year 2013-14. According to them all the alleged companies were shell companies with no real existence. There was no evidence of any supply made or service rendered by any of these companies. Neither there was any evidence of supply or service from the other sub contractor organisations unearthed by the revenue during the search and search operation. The appellant had to establish the expenditure claimed by them. This kind of a rough and ready expenditure was not permissible on the facts and in circumstances of this case. It was prepared on the basis of conjecture and there is no real scientific justification for it. The Union of India challenged this decision of the Settlement Commission by filing a writ in this Court (WP No.43 of 2016). It came up for consideration before Mr. Justice Basak. His lordship found in the impugned judgment and order dated 15th September, 2017 that the Commission had not disclosed any reasons as to what according to its best judgment were the figures to be added to the income of the assessee. The settlement application was remanded to the settlement commission for fresh consideration.
The aseessee is up in appeal against the said judgment and order. The appeal was made ready very expeditiously. It was extensively argued before us although the argument in appeal was not at much variance with the argument before the trial court. Nevertheless some new elements of law were introduced, some final touches were made to the arguments before the trial court so as to restore the decision of the settlement commission.
Mr. Khaitan for the assessee tried to make a very rational interpretation of the calculation made by the settlement commission, with the view to justify it. He tried to explain the alleged expenses of Rs.272 crores which were termed "bogus" by the revenue. He said the gross profit percentage should be taken as the bench mark. This was done by the Settlement Commission by adding Rs.36 crores. Adding the entire unexplained expenses of Rs.272.15 crores paid by the shell companies would produce an absurd result. If the order of the Settlement Commission arrived at, is not arbitrary or perverse but plausible the court will not interfere with it. (See the Division Bench judgment of the Delhi High Court in Commissioner of Income-Tax Vs. Gopal Gupta reported in (2014) 364 ITR 446 (Delhi).
The second argument was that the ratio of expenses to gross receipts as adjudged by the Settlement Commission is in accordance with the usual ratio for these factors in the trade of coal mine excavation, operation management etc. Therefore, this value ought to be accepted by the Court. The justification for this kind of acceptance is sought to be drawn from various cases on best judgment awards. In fact, it is contended on behalf of the assessee that in the case of organisations doing similar business, the ratio is much higher. The gross profit rate of 41.2% was higher than the previous gross profit rate of 36%, which was even higher than that of Coal India subsidiaries which was in the range of 22% to 38%. Honest guest work is permitted in best judgment assessment (see Commissioner of Sales Tax Vs. H. M. Abdulali reported in (1973) 90 ITR 271 (SC) at pages 275-276, 277, 278. Brij Bhushanlal Parduman Kumar Vs. CIT reported in (1978) 115 ITR 524 (SC), at page 529-
530. 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 Rs.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 Rs.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 Rs.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 reported in (2010) 8 SCC 739, the Supreme Court 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 reported in (2011) 1 SCC 1.
For all those reasons, we do not find any infirmity with the judgment and order under appeal dated 15th September, 2017.
The above appeals are hereby dismissed.
Certified photocopy of this order, if applied for, be supplied to the parties upon compliance with all requisite formalities.
(AMRITA SINHA, J.) (I. P. MUKERJI, J.)