Income Tax Appellate Tribunal - Bangalore
Sringar Enterprises , Bengaluru vs The Deputy Commissioner Of Income Tax - 6 ... on 17 August, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"SMC - C" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER
ITA No.2048/Bang/2018
Assessment year : 2009-10
Sringar Enterprises, Vs. The Deputy Commissioner of
No.20/2, Ganana Lakshmi Krupa, Income Tax,
Near Mysore Hospital, Circle 6(3)(1),
1st Main, 1st Cross, Bengaluru - 560 001.
Goraguntepalya,
Bengaluru - 560 022.
PAN: ABCFS 1119F
APPELLANT RESPONDENT
Appellant by : Shri S. Sukumar, Advocate
Respondent by : Shri K. Dhandapani, Jt.CIT(DR)(ITAT), Bengaluru.
Date of hearing : 18.07.2018
Date of Pronouncement : 17.08.2018
ORDER
This is an appeal by the assessee against the order dated 28.02.2018 of the CIT(Appeals), Bengaluru-6, Bengaluru relating to assessment year 2009-10.
2. The assessee is a partnership firm. The assessee is engaged in the business of carrying out sub-contracts on behalf of M/s. Murudeshwar Ceramics Ltd. For the AY 2009-10, the assessee filed return of income declaring total income of Rs.70,390. The return filed was accepted u/s. 143(1) of the Income-Tax Act, 1961 ["the Act"].
ITA No. 2048/Bang/2018 Page 2 of 123. On 27.03.2014, the AO issued a notice u/s. 148 of the Act for the AY 2009-10 stating that he proposes to reassess the total income of the assessee for the AY 2009-10. The reasons recorded by the AO for initiating proceedings u/s. 148 of the Act was as follows:-
"Reasons for the belief that income has escaped assessment:
As per the information placed on records, since the digital evidence establishes that M/s Murudeshwar Ceramics Ltd. inflated expenses using the assessee's name as under :-
Labour charges paid : Rs.4316170/-
Transport charges paid : Rs. ---
The cash book of the assessee reveal that expenses were incurred in cash and are supported by self-made vouchers only.
Further, during the search, copies of return of income of nine concerns which includes M/S SHRINGAR ENTERPRISES, the assessee, their original PAN cards, blank cheque books signed by partner, rubber stamps were found at the office of M/s Murudeshwar Ceramics Ltd at Murudeshwar Bhavan, 604-B, Gokul Road, Hubli. In his sworn statement Sri.M.I. Myakalmardi confirmed that the said nine concerns were subcontractors of M/s Murudeshwar Ceramics Ltd. He also confirmed that the activities of the said nine concerns are carried out from the office of M/s Murudeshwar Ceramics Ltd. Some of the partners of the nine concerns confirmed that they have not actually carried out any. activities. Thus, this concern received huge amounts from M/s Murudeshwar Ceramics Ltd but not incurred any expenditure. However, for the purpose of filing I.T. returns they have shown bogus expenditure. Thus income taxable has escaped from taxation.
In view of the above facts, the income chargeable to tax has escaped assessment for the AY. 2009-10 within the meaning of Sec.147 of the Act."
4. The assessee challenged the validity of initiation of reassessment proceedings, but could not succeed on the aforesaid plea before the AO ITA No. 2048/Bang/2018 Page 3 of 12 and CIT(Appeals). In the reassessment proceedings, the AO disallowed expenses to the tune of Rs.5,93,323. The case of the revenue for disallowing the expenses was that in the search conducted u/s. 132 of the act in the case of M/s. Murudeshwar Ceramics Ltd., it transpired that the assessee received labour charges and transportation charges from the above company, but did not incur any expenditure as the assessee did not actually carry out any activity for the aforesaid company.
5. Aggrieved by the action of the revenue authorities in making the aforesaid addition and upholding the validity of initiation of proceedings u/s. 148, the assessee has filed the present appeal before the Tribunal.
6. We shall first take up for consideration the issue with regard to validity of initiation of proceedings u/s. 148 of the Act by the AO. At the time of hearing, the ld. counsel for the assessee filed before us a copy of the decision of the Tribunal in the case of M/s. Mookambika Enterprises v. DCIT, ITA Nos.972, 974/Bang/2017 for AYs 2007-08 & 2009-10, order dated 7.7.2017. In the aforesaid order, reassessment proceedings were initiated against the assessee in those appeal by the AO, after recording identical reasons as were recorded in the present case of the assessee. The Tribunal held that initiation of reassessment proceedings was not valid. The following were the relevant observations of the Tribunal:-
"Thus the reasons recorded by the AO for all three years are almost identical and the basic reason for forming the belief that the income assessable to tax has escaped assessment is that M/s. Murudeshwar Ceramics Ltd. inflated expenses using the assessee's name in respect of the labour charges and transportation charges for all these three years as given in the above reasons. Further this belief was formed by the AO that the assessee facilitated the inflated expenses in case of M/s. Murudeshwar Ceramics Ltd. on the basis of statements recorded during the search as well as during the assessment proceedings of M/s. Murudeshwar Ceramics Ltd. It is manifest from the reasons that what persuaded to the AO to form the belief is that during the search copies of return of income of 9 ITA No. 2048/Bang/2018 Page 4 of 12 concerns including the assessee their PAN Card, Cheque books, rubber stamps were found at the office of the M/s. Murudeshwar Ceramics Ltd. and some of the partners of the 9 firms had admitted that no activity was actually carried out by them. However in the reasons recorded the AO has not mentioned that whether the partner of the assessee has accepted this fact of no activity was carried out. Rather the statement of Shri Karunakar Narayan Shetty partner of the assessee firm was recorded on 07.01.2014 in the assessment proceedings of M/s. Murudeshwar Ceramics Ltd. wherein the relevant questions put by the AO and answers given by the partner are reproduced as under:
"14. Please explain the charges for supplying labourers to MCL?
Ans: It can be divided into 4 or 5 categories consisting of the following:
1. Labour unskilled
2. Loading and unloading of tiles
3. Fitters in the machine room
4. Polishers
5. Machine Operators As the factory works 24 hrs in 3 shifts we have to provide labour as and when they require depending on their production. We normally charge margin of 4%.
As there was labour unrest in MCL. The company decided to go for contract labour and we are one of such contractors. We deduct PF, ESI and remit it on a monthly basis. We are also liable for payment of Service Tax which is paid every month and returns are filed with all the authorities. Attendance Register is maintained at the factory where all the labourers sign and for raising a bill on MCL, certified copy of the attendance is produced. In addition, we also supply unskilled labour for digging the quarries and for any other requirement of MCL. We will furnish copies of the returns filed with various authorities and it can be verified from the authorities.
15. Where are the documents referred in the above Q.(6) kept?
Ans: The documents kept only at Murudeshwar Bhawan, Gokul Road, Hubli.ITA No. 2048/Bang/2018 Page 5 of 12
16. Please explain the charges for transportation to MCL?
Ans: The transportation charges consists of the following:
1. Clay is loaded to the tractors in the quarry
2. As the roads are small only tractors can move in those roads
3. The loaded clay is transported to the stockyard of the company
4. It is unloaded there
5. From the stockyard MCL vehicles transports it to the factory.
6. We charge normally a margin of 4%.
17. What are the documentary evidence in support of the above activity referred in the above Q.(8)and where is kept?
Ans: The documentary evidence are:'
1. The amounts paid to the transportors are through vouchers
2. The documents are kept only in Hubli in the premises of Murudeshwar Bhavan as it is convenient for us to keep it in one place as day to day operations are conducted from there.
18. What are the books of accounts maintained in M/s Mookambika Enterprises for the last 6 F.Ys? Ans: Normal books of accounts are maintained (Cash Book, Bank Book & Ledger)for the last 6 F.Ys and Income tax returns have been filed and I am furnishing the copies of the same.
19. Who is maintaining the Books of accounts of M/s Mookambika Enterprises Ans: Sri Mykalmaradi, helps us in maintaining the accounts as it is not a full time job.
20. Who looks after the payment to the labourers? Ans: Sri Mykalmaradi makes the payment to the labourers. Salary goes directly to the respective bank account, for a few people cash is paid as they do not have a bank account.ITA No. 2048/Bang/2018 Page 6 of 12
21. How many labourers do you supply to MCL in a year?
Ans: It depends on the no. of shifts run by MCL it ranges between 50 to 300 per month.
22. Whether the bills & vouchers are being maintained for providing services to M/s. MCL Ans: Yes, bills and vouchers are being maintained for providing services to M/s MCL.
23. I am showing you the sworn statement recorded u/s 132(4) of the IT Act, 1961 from Sri M.I. Mykalmaradi son of Sri Irappa during the course of search proceedings at Murudeshwar Bhavan, Gokul Road, Hubli on 17/2/2012 ?
Ans: In the above statement, regarding the business activities of Mookambika Enterprises, Mr. Mykalmaradi has stated as follows:
" The partners are Sri Uday N Shetty and Sri Karunakar N Shetty.
Even though the address mentioned in the bank accounts and partnership deed is 26, Ashok Nagar, HUBLI no activities are being carried out from that address and all details are available in this office only". ( i.e at Murudeshwar Bhawan, Gokul road, Hubli)"
For the Q.No. 20, regarding the persons makes payment to labours, you have stated that Mr. Mykalmaradi makes the payment to the labourers.
It may be seen from the above reply given by Mr. Mykalmaradi during the course of search, that though the address mentioned in the bank accounts and partnership deed is 26, Ashok Nagar, HUBLI, no activities are being carried out from that address and all details are available in this office only" (i.e at Murudeshwar Bhawan, Gokul road, Hubli)"
In this regard Please furnish your explanation and furnish the actual place and address at which the business activities of M/s. Mookambika Enterprises?ITA No. 2048/Bang/2018 Page 7 of 12
Ans: As explained earlier to Q.No. 6 Business activities is actually carried on at Murudeshwar Bhawan, Gokul Road, Hubli although the registered office of the firm was my earlier residential address at Hubli and present address is 42/A, 1st Floor, Adarsh Nagar, 3rd Cross, Hubli. This is for administrative convenience as the factory situated nearby.
24. I am showing the summary of payments made by Murudeshwar Ceramics Ltd. to M/s. Mookambika Enterprises as per books of account of Murudeshwar Ceramics Sl.No. FY Debit Credit Balance 1,11,83,6
1. 2005-06 1,15,11,246 3,27,632(Cr.) 13
2. 2006-07 1,60,30,067 1,75,70,010 15,39,943(Cr.)
3. 2007-08 1,28,13,244 1,48,77,536 20,64,291(Cr.)
4. 2008-09 4,71,26,575 4,92,81,601 21,55,026(Cr.)
5. 2009-10 6,46,79,281 6,74,83,273 28,03,992(Cr.)
6. 2010-11 6,69,24,735 6,91,25,850 22,01,115(Cr.) 2011-12 (upto
7. 1,96,10,136 2,47,70,405 51,60,269(Cr.) 31.01.2012) When these payments were questioned to Mr. Mykalmaradi it has been stated by him that (Q.No. 13) "All the payments are made by cheques and some of the amounts in the above table include fund transfers apart from expenditure towards contract works. We will give revised working of the correct amount of contract & sub-contract amounts for different Assessment Years after reducing the fund transfer transactions and furnish a written explanation in substantiating the above claim"
In this regard furnish your explanation along with the details of contract work carried out by you and the details of amount received through fund transfers from M/s. MCL.
Also explain the details regarding the revised working of the correct amount of contract & sub-contract amounts for different for the Assessment years mentioned above ITA No. 2048/Bang/2018 Page 8 of 12 after reducing the fund transfer transactions with relevant bank entry or other evidence.
Please furnish the ledger account copies of M/s. MCL for the above transaction as appearing in your books of accounts for the above period.
Ans: I am enclosing the account copy of MCL in our books for the F.Y. 2005-06 to 2011-12.
Q.No. 25: During the search at office premises at Murudeshwar Bhawan, 604-B, Gokul Road, Hubli on 17.02.2012, it was also found that the following documents / and details of various concerns pertains to your concerns were found at premises of Murudeshwar Bhawan a. Several blank and signed cheque leaves b. Acknowledgment for returns of income and Original Form 3 CD reports c. Original PAN Cards, rubber stamp seals, and letter heads of above concerns d. Service tax returns and salary statements e. Various books of accounts pertaining to above concerns (like: cash book, bank book, ledger, journal, vouchers, receipts and bills etc.,) Please explain why the documents mentioned above pertaining to your concern were found at the premises of Murudeshwar Bhawan, 604-B, Gokul road, Hubli though your office address as per your partnership deed is No. 26, Ashok Nagar, Hubli?
Ans: As mentioned earlier, the office at Murudeshwar Bhawan is the administrative office from which the business activities is carried on and hence they were found.
25. Do you have anything else to say?
Ans: The nature of business is carried on with MCL is as per agreement dated 1/4/2005 which has been enclosed to my letter. I reiterate the affidavit filed by me in respect of the firms transaction with MCL which has been filed before your good self. I have answered the ITA No. 2048/Bang/2018 Page 9 of 12 questions from memory other than this, I do not have anything to say."
9. It is clear from the questions and answers thereto in the said statement that the assessee provided labour under various categories as explained in the answer to question no. 14. The assessee also explained that they were normally charging 4% margin in providing the labour. It was specifically pointed out that attendance register is maintained at the factory where all the labours sign and for raising the bill on M/s. Murudeshwar Ceramics Ltd. The certified copy of the attendance register was produced by the partners. The assessee also produced the copies of return filed with various authorities regarding the labour supplied by the assessee to M/s. Murudeshwar Ceramics Ltd. It was also explained that PF and ESI were deducted from the wages / salary of the labourers and remitted on a monthly basis. Service Tax was also paid by the assessee as per the returns filed. Therefore the assessee produced all the relevant documentary evidence regarding the supply of labour, their attendance register, their PF and ESIC deduction and remittance as well as service charges paid. As regards the transportation charges, the assessee explained that the clay is loaded to the tractors in quarry as tracks are small and only tractors can move in those roads and locations. The clay was transported by tractors to the stock yard of M/s. Murudeshwar Ceramics Ltd. The assessee also explained that since the entire activity was carried out at the premises of M/s. Murudeshwar Ceramics Ltd. therefore, the assessee was keeping all the relevant record at the said place though the registered office of the assessee was at Ashok Nagar, Hubli. In the answer to question no. 25 it is stated that the office at Murudeshwar Bhawan is the administrative office from which the business activity is carried out and hence the records were found at that place. It was also explained that the salary payment to the labours were made directly to their bank account and only in case of few people cash was paid. Similar situation was in case of transport expenses. The entire details of debit credit and balances were matching with the books of accounts of the assessee. Therefore it is clear that in the assessment proceedings of M/s. Murudeshwar Ceramics Ltd. the statement of the partners of the assessee was recorded and the entire evidence and record in respect of the business activity of the assessee including payment received and made by the assessee were produced. This evidence and fact was ITA No. 2048/Bang/2018 Page 10 of 12 already available on the record when the notice u/s. 148 were issued by the AO on 27.03.2014. The AO has mentioned specific amounts of inflated expenses claimed by M/s. Murudeshwar Ceramics Ltd. however in the reassessment the AO accepted the entire claim of expenditure incurred through banking channel and only adhoc disallowance of only 15% was made in respect of cash expenditure which amounting to Rs. 8,88,592 for the assessment year 2007-08, Rs. 4,20,978/- for the Assessment Year 2008-09 and Rs. 13,35,824/- for the Assessment Year 2009-10 in comparison to the amounts as recorded by the AO in the reasons recorded in crores of rupees for each Assessment Year. Therefore there is no basis in the reasons recorded by the AO to believe that the amounts mentioned in the reasons were actually income assessable to tax and escaped assessment. The AO himself accepted the entire business activity of the assessee as genuine except the adhoc disallowance of 15% on cash expenditure.
10. It is pertinent to note that there is no new record or fact came to the knowledge of the AO at the time of framing the reassessment but the entire record which was already available with the revenue as produced by the assessee at the time of recording the statement of partner of the assessee prior to the issuing the notice u/s. 148 and therefore if the said record, the facts and details as explained by the assessee are taken into consideration it makes clear that the transactions of business activity of the assessee were duly established and found to be genuine. The Assessing Officer in the reassessment proceedings accepted the genuineness of the business activity of the assessee as against the reasons recorded by the AO for reopening of the assessment. Thus the AO itself on the basis of the same record as it was available at the time of issuing the notice u/s. 148 has negated the very reason and foundation of belief that the activity of the assessee were not in existence and claim of expenditure was bogus and accepted genuineness of the business activity on expenditure which framing the reassessments. Therefore the material on the basis of which the AO formed the belief that there has been escapement of income was not found to be the basis for addition in the reassessment but the AO has made an adhoc disallowance only on the ground that some of the expenditure was incurred by the assessee in cash. Neither the activity nor the claim was held as bogus or excessive but due to the expenditure incurred in cash the AO made the said adhoc disallowance. Keeping in view the nature of activity carried out by the assessee right from ITA No. 2048/Bang/2018 Page 11 of 12 development of quarry, transportation of clay through tractors, loading and unloading charges which is bound to incur some part of the expenditure on these activities in cash as paid to the labourers and tractor owners.
11. Hence in view of the peculiar facts of the case of the assessee the reasons recorded by the Assessing Officer have no direct and live nexus with the belief formed that the income assessable to tax has escaped assessment. A conclusive proof is not required at the stage of forming the belief but there must be some tangible material on the basis of which a reasonable belief can be formed that the income assessable to tax has escaped assessment. Accordingly, when nothing incriminating against the assessee was either found or recorded in the reasons for reopening leading to the formation of opinion that the assessee has not carried out any business activity and the entire claim of expenditure is bogus then the reopening on the basis of a general and vague statement as recorded in the reasons which even does not indicate in whose case the partners have accepted that they have not carried out any activity, the reopening is not sustainable as it does not fulfill the requirement of the direct nexus between the material coming to the notice of the AO and formation of the belief. Accordingly the reopening in this case is not sustainable and accordingly set aside."
7. It is not disputed before us that the facts and circumstances in the case of the assessee and the aforesaid case decided by the Tribunal are identical. In these circumstances, following the view expressed by the Tribunal, I hold that there was no direct or live nexus with the belief formed by the AO that income of the assessee has escaped assessment compared with the material that came to the possession of the AO. In other words, there was nothing incriminating against the assessee found in the course of search, which can lead to a belief that income of assessee chargeable to tax has escaped assessment by reason of assessee claiming bogus expenditure. The statements recorded in this regard are general and vague and admission in the case of person searched cannot be the basis to form such belief. I therefore quash the proceedings u/s. 148 of the Act and allow the appeal of the assessee.
ITA No. 2048/Bang/2018 Page 12 of 128. In view of the above conclusion, the challenge to the addition on merits is not taken up for consideration.
9. In the result, the appeal of the assessee is allowed.
Pronounced in the open court on this 17th day of August, 2018.
Sd/-
( N.V. VASUDEVAN ) Judicial Member Bangalore, Dated, the 17th August, 2018.
/ Desai Smurthy / Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file By order Senior Private Secretary ITAT, Bangalore.