, , , IN INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD, B BENCH [ . . , , . . , . . , , . , BEFORE S/SHRI G.D. AGARWAL, VICE-PRESIDENT AND D.K. TYAGI, JUDICIAL MEMBER) ITA No.3014 and 3015/Ahd/2002 [Asstt.Year : 1992-1993 and 1993-1994] Sandeep Intermediates P. Ltd. /Vs. ITO, Ward-8(1) 204, H.K. House Ahmedabad. Ashram Road Ahmedabad 380 009. ( / Appellant) ( / Respondent) [ / : Shri Sunil H. Talati Assessee by / : Shri Samir Tekriwal Revenue by / O R D E R PER G.D. AGARWAL, VICE-PRESIDENT : These are two appeals by assessee against orders of Commissioner of Income-tax (Appeals)-XIV, Ahmedabad. Since assessee being same and some common issues are raised in both appeals, for sake of convenience, we dispose of both appeals by this common order. 2. First we shall take up ITA No.3014/Ahd/2002 for A.Y.1992-93. 3. This appeal along with appeal no. ITA No.3015/Ahd/2002 for A.Y.1993-94 was adjudicated by ITAT vide order dated 7th June, 2007. However, assessee filed Misc. Application and that ITAT vide order in MA Nos.47 and 48/Ahd/2010 recalled order of ITAT for A.Y.1993-94 and partially recalled order of ITAT for A.Y.1992- 93. relevant findings of ITAT read as under: ITA No.3014 and 3015/Ahd/2002 (B)MA No.47/Ahcl/201() (Out of ITA No.3014/Ahd/02 for A.Y.92-93 4. In this regard, our attention has been drawn on concluding paragraph No.7 of Tribunal for order passed for Assessment Year 1992-93 bearing appeal No.3014/Ahd/2002 dated 07/06/2007, wherein it was pronounced as under: 7. We have through CIT(A) s order for A.Y. 1993-94 also, wherein CIT( A) has categorically stated that assessee neither produced any evidence contra accounts, production of primary production registers of assessee and sister concerns and finding these deficiencies and non-compliance by assessee, addition in A.Y. 1993-94 was made in this behalf in A.Y. 1992-93 also we find that same state of non- compliance and non- production of relevant record is there. In view thereof since assessee could not make out its case, despite several opportunities, we see no infirmity in order of CIT( A) confirming addition made by A.O. Order of CITA) is upheld. 5. Learned Authorised Representative of assessee Mr.Sunil Talati has vehemently contested that requisite evidences were placed during course of hearing, however, alternate plea has also been placed that deduction u/s.37 may be allowed if provisions of section 69 are invoked. As per statement of facts placed through compilation dated 12/02/2007, it was pleaded before Tribunal as follows; relevant paragraph reproduced: Without prejudice to above your appellant submits that appellant is business man. addition made under section 69C for sum of Rs.2072892/- treated as bogus purchase should be allowed as deduction under section 37 as appellant had incurred and recorded said expenditure in its books of accounts. reliance is placed on following judgments. -2- ITA No.3014 and 3015/Ahd/2002 (1) ITO vs. Sunsteel, ITAT Ahmedabad (B Bench) (2005) 92 TTJ (Ahd) 1126, wherein Hon ble have confirmed view of learned CITA) that if A.O. makes addition of unexplained expenses of Rs.2739410/- for incurring such expense. In result figures required to be added would he nil. (2) ACIT vs. Nalanda Housing Dev Ltd. (Rajkot), ITAT (Rajkot Bench) (2005) 98 TTJ 518 wherein it was held that deduction for such unexplained investments, which has been added u/s.69C is to he considered and should he deducted from total income. (3) I.TO. vs. Jagdishchandra Virmani (Del) ITAT Delhi B Bench (2007) 106 TTJ (Del) 287 wherein it was held by Hon ble Tribunal that expenditure incurred by assessee on construction of complex including amount which has been treated as unexplained is his business expenditure and is allowable as deduction. 6. From order of Tribunal, now in question it is evident that aforesaid alternate plea which was legal argument was not adjudicated upon. 7. On hearing both sides, we are of view that this legal argument has to be decided after considering material facts on record. It has been pleaded before us that assessee is in position to furnish material facts with evidences, therefore, income can be re-adjudicated. In respect of said legal plea, case law cited is CIT vs. Hindustan Marble (P) Ltd. (2009) 179 Taxman 289 (Guj.), Ruby Builders vs. ITO (1999) 102 Taxman 114 (Ahd) (Mag.), S.F. Wadia vs. ITO (1986) 19 lTD 306 (Ahd.) and Shri Rajesh P.Soni vs. ACIT in ITA No.898/Ahd/1999 (ITAT bad Bench D). -3- ITA No.3014 and 3015/Ahd/2002 8. Since this aspect has not been taken into account by Respected Co-ordinate Bench, therefore, we deem it proper to re-call that portion of order to be decided de novo as per law as applicable for year under consideration and to decide accordingly. Since order is re-called with certain directions, therefore, MA of assessee is allowed. Therefore, appeal was fixed for limited purpose of adjudicating alternate plea of assessee. alternate plea of assessee reads as under: Without prejudice to Ground No.1 with regard to addition of Rs.20,72,892/- being made u/s.69C of IT Act, your appellant submits that if addition is sustained then appellant be allowed corresponding deduction of such purchases being made wholly and exclusively for purpose of business, which is allowable u/s.37 of Income Tax Act. It is submitted that addition of Rs.20,72,892/- be simultaneously allowed as expenditure u/s.37 of Income Tax Act as consistently held by various High Courts and Tribunals. 4. At time of hearing before us, it is submitted by learned counsel that AO made addition under Section 69C and as per proviso to Section 69C, as it stood at relevant time, expenditure incurred by assessee is to be allowed as deduction under Section 37. proviso to section 69C has been inserted only w.e.f. 1-4-1999. Therefore, above provisio would not be applicable to assessment year under consideration which is assessment year 1992-93. He therefore submitted that expenditure for purchase of material is to be allowed under Section 37. 5. learned DR, on other hand, stated that AO has recorded finding that assessee has not produced any evidence in support of -4- ITA No.3014 and 3015/Ahd/2002 purchase of raw material except invoices for purchase of raw- material. said invoices were also in name of sister concern. In these invoices, after cutting name of sister concern, name of assessee was mentioned. That AO made inquiry from supplier of raw-material and from details gathered from supplier it was proved that these materials were not sold to assessee. assessee has not produced any stock register of raw-material or consumption register of raw-material, so as to establish that above raw-material was actually utilised by assessee. On these facts, AO disallowed expenditure as bogus expenditure/non-genuine expenditure. mention of section 69C while disallowing such expenditure was probably mistake but in substance expenditure was disallowed as it was not genuine. CIT(A) as well as ITAT sustained findings of ITO that expenditure was not genuine. Once expenditure itself is not genuine, deduction for same cannot be allowed under Section 37. 6. In rejoinder, it is stated by learned counsel that ultimate fact remains that AO made addition under Section 69C which was confirmed by CIT(A) as well as ITAT. Therefore, deduction for such expenditure is to be allowed under Section 37(1). In support of this contention, he relied upon decision of Hon ble Gujarat High Court in case of Commissioner of Income-tax v. Hindustan Marble P. Ltd., 179 Taxman 289. 7. We have carefully considered arguments of both sides and perused material placed before us. AO disallowed expenditure with following findings in assessment order: -5- ITA No.3014 and 3015/Ahd/2002 above reply is reproduced hereinabove verbatim which is quite self-explanatory. reply of assessee is viewed with following further observations: (i) Though it had been contended that raw material so shifted from premises of sister-concern(common premises is enjoyed by all sister concerns) including assessee-company) for use in production by assessee-company and it had been entered into production register, no production register or day-to-day consumption register has been produced for verification inspite of specific reminder on this issue. (ii) Tax auditors did not furnish details as required to be furnished against item No.12 of Tax audit Report though stated to be As per enclosed sheet but no sheet has been found to be enclosed with Tax Audit Report. This means that assessee- company has intentionally neglected to get prepared such details at time of Tax Audit Report which further proves that no stock register/production register/day-to-day consumption register was there which can be made available to Tax Auditors. (iii) Mistake is not bona fide as assessee-company is employing well experienced accountant backed with services of Chartered Accountant, it could have consulted CA as to how accounting effect to such shifting of raw material can be given. But it was not done with intention to suppress real production and actual use of raw-material by keeping hotchpotch accounts. (iv) None of sister concerns have also kept any record to show that raw material purchased from M/s.Rishi Sales and Jinal Chem. Pvt. Ltd. in their names has been shifted for use of assessee-company along with date, quantity and value of such raw material. (v) No attempt has been made by assessee-company to adduce corroborative evidence to prove its contention made in letter as during course of proceedings. It is pertinent to note that no credit/debit notes have been raised by either party which could be produced for verification in spite of reminding to produce -6- ITA No.3014 and 3015/Ahd/2002 same. No corroborative entries in books are also made which can be verified. (vi) assessee-company admitted that it incurred huge losses even in past years also, which means that Directors of Company have no interest in looking after business affairs of company for best reasons known to them. There is no statement from Directors as to why they allowed such practice on large scale and for such long period. Considering all these above facts, purchases made from Rishi sales and Jinal Chem Pvt. Ltd., in respect of those bills which were originally prepared in names of sister concerns and then erased and re-written in name of assessee-company are treated as unexplained expenditure by way of bogus/ingenuine purchases and added u/s.69C of IT Act. total addition on this score is worked out as under: (i) Rishi Sales : Rs.11,72,892/- (ii) Jinal Chem. Pvt. Ltd. : Rs. 9,00,000/- Rs.20,72,892/- ========== These additions are made on account of bills actually belonged to other concerns (sister concerns carrying on business in same premises) for which assessee claimed expenditure and created ingenuine liability and remained unproved. 8. CIT(A) also upheld order of AO. On further appeal by assessee to ITAT, order of CIT(A) was sustained with following findings: 2.2 Despite number of opportunities, appellant has not represented its case. However, it is stated in its submission as per grounds of appeal that all purchases are genuine purchases and all raw materials have been through purchase bills. All bills are stated to have been produced though same were originally in name of sister concerns. Sister concerns in question have not recorded said purchases in their books of accounts and accordingly not claimed as expenditure. only mistake -7- ITA No.3014 and 3015/Ahd/2002 committed by appellant that original bills were taken in respect of debit note from sister concerns. It is further submitted that purchases were made genuine by our sister concerns, but later on transferred to appellant without preparing debit note. 2.3 I have considered submissions made by appellant through its grounds of appeal and facts of case are similar to facts of case of A.Y.1993-94 and submissions are also on same lines. In so far as addition u/s.69C is concerned I have given detailed reason for confirming addition made by AO for AY 1993-94. appellant company altogether failed in satisfying queries raised by AO at time of assessment stage, no primary registers were produced before AO to satisfy him about genuineness of purchases by sister concerns or further proving genuineness by consumption of same by appellant. When no primary registers were produced before AO i.e., RG1 & RG 2 and production data, how AO can accept purchases made in name of sister concerns, especially when there was no debit note. appellant has failed to maintain its books of account by following principles of accountancy and further has not been in position to satisfy genuineness of purchase for which deduction is being claimed. In circumstances and in vie of detailed reasons given in asstt.year 1993-94, addition of Rsl20,72,892/- made u/s.69C is confirmed. 9. In Misc. Application, ITAT recalled order for limited purpose of examining whether above expenditure can be allowed under Section 37(1). Section 37(1) reads as under: 37. General.--(1) Any expenditure (not being expenditure of nature described in sections 30 to 36 and not being in nature of capital expenditure or personal expenses of assessee), laid out or expended wholly and exclusively for purposes of business or profession shall be allowed in computing income chargeable under head "Profits and gains of business or profession". -8- ITA No.3014 and 3015/Ahd/2002 From above, it is evident that deduction can be allowed under Section 37(1) only if expenditure was incurred wholly and exclusively for purpose of business of assessee. Onus is upon assessee to establish that expenditure was incurred wholly and exclusively for purpose of assessee s business. In case under appeal before us, assessee claimed to have made purchases from two parties viz. Rishi sales and Jinal Chem Pvt. Ltd. On verification of bills, AO found that certain bills were not in name of assessee but in name of sister concern. seller parties have also disclosed sales in name of sister concerns and not assessee. Thus, onus was upon assessee to establish that above goods were utilised by assessee. If goods purchased by sister concerns were utilised by assessee, sister concern should have issued sale bill in name of assessee. In any case, AO had asked assessee to produce evidence of utilisation of raw-material by assessee. However, assessee did not produce any evidence either in form of production register or day-to-day consumption register of raw-material. He also did not produce any letter or certificate from sister concerns to establish that assessee had utilised those raw-material, therefore, in our opinion, assessee has not fulfilled conditions of Section 37 for allowability of expenditure. That merely because AO or CIT(A) has mentioned section 69C while disallowing expenditure would not mean that assessee will automatically get deduction u/s.37(1) for expenditure. In substance, findings of AO was that expenditure claimed by assessee was bogus/ingenuine. This finding of AO was upheld by CIT(A) as well as ITAT. That facts in case of Hindustan Marbles (supra) of Hon ble -9- ITA No.3014 and 3015/Ahd/2002 jurisdictional High Court relied upon by learned counsel for assessee were altogether different. In that case, there was no dispute that expenditure was incurred for purpose of business. only dispute was with regard to source for meeting this expenditure and addition was made under Section 69C because assessee could not explain source of those unexplained expenditure. On those facts, Hon ble jurisdictional High Court held that assessee would be entitled to deduction for unexplained expenditure, because, there was no dispute that expenditure was incurred for purpose of business. In case of assessee, as we have already noted that entire dispute is with regard to incurring of expenditure. In fact, there is no dispute about source for incurring of such expenditure. expenditure is already debited in assessee s books of accounts but what is held by AO is that expenditure was not actually incurred by assessee. In view of above, in our opinion, above decision of Hon ble jurisdictional High Court will not be applicable to case of assessee. We therefore, find no merit in additional ground of assessee. same is rejected. ITA No.3015/Ahd/2002 : A.Y.1993-94 10. Ground No.1 of assessee s appeal reads as under: 1. ld.CIT(A) erred in confirming addition of Rs.13,70,145/- made by AO by invoking provisions of section 69C considering that appellant made bogus purchases. You appellant submits that this being not case of bogus purchases but mistake in accounting purchases that we directly credited account of supplier instead of our sister concern. Your appeals not submits that on facts and circumstances of case there is no bogus purchases but genuine -10- ITA No.3014 and 3015/Ahd/2002 purchase and therefore there is no justification in making addition of u/s.69C. You appellant submits that it be so deleted now. 11. At time of hearing before us, both parties fairly admitted that this ground is similar to additional ground raised in A.Y.1992-93. We have already discussed this issue while adjudicating assessee s appeal for A.Y.1992-93 and for detailed discussion therein, we find no merit in Ground No.1 of assessee s appeal, same is rejected. 12. Ground No.2 reads as under: 2. ld.CIT(A) erred in confirming disallowance of interest of Rs.42,96,506.82 payable to State Bank of India. Your appellant submits that under fact sand circumstances of case, this interest was rightly debited in year under consideration and therefore same is tally admissible in year under consideration. Without prejudice to above, your appellant submits that it at all said interest is not admissible in year than same should be allowed in year pertains to it. Your appellant submits that it be so held now. 13. facts of case are that on verification of interest account, AO found that during year under consideration, assessee claimed interest amounting to Rs.46,96,506/-. Out of which interest amounting to Rs.42,96,506/- was pertained to financial year ending on 31-3-1989, 31-3-1990 and 31-3-1991, which was relating to A.Y. 1989-90, 1990-91 and 1991-92. Admittedly, assessee is company which is following mercantile system of accounting. assessee could not establish how deduction for liability of interest -11- ITA No.3014 and 3015/Ahd/2002 already accrued in earlier year can be allowed in year under appeal. Therefore, AO disallowed above interest which was upheld by CIT(A). 14. At time of hearing before us also, learned counsel for assessee was unable to explain how above liability can be allowed in year under consideration. We therefore find no justification to interfere with order of lower authorities in this regard. Accordingly, Ground No.2 of assessee s appeal is rejected. 15. Ground No.3 of assessee s appeal reads as under: 3. ld.CIT(A) erred in confirming disallowance of rent of Rs.1,56,000/- paid to its sister concern. Your appellant submits that sister concerns, who had machine now had stopped manufacturing activities and their machineries were lying idle. appellant had taken such machineries on hire and utilising same in his manufacturing activities and in return pays rent. In past years also said expenditure was allowed by AO. Your appellant therefore submits that there is no justification in disallowing rent paid Rs.15,600/- same should be allowed as such your appellant submits that it be so done now. 16. AO disallowed expenditure with following findings: assessee-company has claimed machinery rent of Rs.1,54,000/- in profit & loss account. assessee-company was asked to furnish details of this expenditure and assessee-company has filed details vide his letter dated 1.8.1995 which are as under: Payal Dyes & Chemicals : Rs.9000 x 12 = Rs.1,08,000/- 41, GIDC, Phase-I, Vatva, Ahmedabad. Sonal Associates : Rs.4000 x 12 = Rs. 48,000/- 41, GIDC, Phase-I Rs.1,56,000/- -12- ITA No.3014 and 3015/Ahd/2002 Vatva, Ahmedabad ======== M/s.Sonal Associates and M/s.Payal Dyes & Chemicals both concerns are situated in same premises and debit notes dated 31.3.1993 have been issued in favor of M/s.San Chem Enterprises which are signed on behalf of Shri D.G. Chokshi who is trustee i Zonal Associates and partner in Payable Dyes & Chemicals. No description of machinery used by assessee-company, duration of use or basis of charges debited have been indicated in debit notes. assessee-company was asked to furnish necessary evidences such as full description of machinery used for its business purposes, what was inputs of raw material and what was items of finished goods manufactured through use of these machineries. It is pertinent to note here that premises of both concerns are situated in same premises where assessee- company is manufacturing its goods. Further, these concerns are stated by Tax Auditors persons covered under provisions of sec. 40A(2)(b) of Act. Therefore, expenditure by way of machinery rent of Rs.1,56,000/- is held to be claimed as bogus as no corroborative evidences are filed, such as rent agreement, detailed bifurcation of machineries, their use for purpose of assessee s production, corresponding sale of such finished goods etc. expenditure of Rs.1,56,000/- is also disallowed in view of provisions of sec. 40A(2)(b) of Act as expenditure which has resulted into benefit of specified persons and unreasonable in nature and excessive. Considering above facts, expenditure of Rs.1,56,000/- being machinery rent is disallowed and added to total income of assessee-company. same was upheld by CIT(A). At time of hearing before us, learned was unable to controvert above factual findings recorded by AO. He could not establish which machineries were actually taken on hire from sister concern and how they are utilised for purpose -13- ITA No.3014 and 3015/Ahd/2002 of business. No evidence in this regard is produced. Neither any rent agreement nor even details of machinery were produced. In view of above, we do not find any justification to interfere with order of lower authorities on this point, same is sustained and Ground No.3 of assessee s appeal is rejected. 17. Ground No.4 of assessee s appeal reads as under: 4. ld.CIT(A) erred in confirming disallowance of Rs.236063/- made by AO out of purchases of furnace oil and LDO. Your appellant submits that considering consumption of LDO and FD on monthly basis is highly unjustified. Your appellant submits that on facts and circumstances of se, purchases made are unreasonable and therefore disallowance made should be deleted. Your appellant submits that it be so done now. 18. We have heard both parties and perused material placed before us. AO noticed that purchase of furnace oil and LD oil was disproportionately high in last two months of year. assessee could not explain how consumption of furnace oil and LDO disproportionately increased in last two months and also could not explain closing stock of such oil. He was unable to prove genuineness of purchases. Therefore, AO proportionately disallowed this expenditure which is sustained by CIT(A). At time of hearing before us also, learned counsel for assessee was unable to explain disproportionate increase in consumption of oil in last two months. We therefore do not find any justification to interfere with orders of authorities below in this regard. Accordingly, Ground No.4 of assessee s appeal is rejected. -14- ITA No.3014 and 3015/Ahd/2002 19. Ground No.5 of assessee s appeal reads as under: 5. ld.CIT(A) erred in confirming disallowance of commission of Rs.1,09,939/- made by AO. Your appellant submits that on facts and circumstances of case, disallowance of commission is not justifiable. same should be tally allowed. Your appellant submits that it be so held now. 20. AO after discussion in assessment came to conclusion that out of total commission of Rs.3,10,336/-, commission to extent of Rs.1,09,939/- is excessive which he disallowed. At time of hearing before us, learned counsel for assessee was unable to controvert findings recorded by AO. Therefore, we find no merit in Ground No.5 of assessee s appeal, same is rejected. 21. Ground No.6 of assessee s appeal reads as under: 6. ld.CIT(A) erred in confirming disallowance of Rs.72,024/- made by AO being cost of Drums purchased. Your appellant submits that life of drums is not more than 5-6 months as highly corrosive chemicals are stored in it. This being replacement exp. And therefore there is no justification in disallowing same. Your appellant submits that it be so allowed as such. 22. AO disallowed purchase of steel drums amounting to Rs.72,027/- because assessee could not produce any evidence i.e. purchase bills of such drums. Moreover, how drums were utilised for purpose of business was also not explained. At time of hearing before us also, no argument was advanced by assessee s counsel to controvert findings recorded by AO. Therefore, we find no -15- ITA No.3014 and 3015/Ahd/2002 justification to interfere with order of AO in this regard, same is upheld, Ground No.6 of assessee s appeal is rejected. 23. In result, assessee s appeals are dismissed. Order pronounced in Open Court on 26th August, 2011 Sd/- Sd/- ( . . /D.K. TYAGI) . ( . . G.D. AGARWAL) . . /JUDICIAL MEMBER /VICE-PRESIDENT Place : Ahmedabad Date : 26-08-2011 Copy of order forwarded to: 1) : Appellant 2) : Respondent 3) : CIT(A) 4) : CIT concerned 5) : DR, ITAT. BY ORDER DR/AR, ITAT, AHMEDABAD -16- M/s Sandeep Intermediates P Ltd v. I T O Wd-8(1)